UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From _________ to _________.
Commission file number 0-21638
FFY Financial Corp.
(Exact name of registrant as specified in its charter)
Delaware 34-1735753
(State of Incorporation) (IRS Employer Identification No.)
724 Boardman-Poland Road, Youngstown, Ohio
(Address of principal executive office)
44512
(Zip Code)
(330) 726-3396
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS SHARES OUTSTANDING AT OCTOBER 29, 1999
----- --------------------------------------
common stock, $.01 par value 6,859,236
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition 3
Consolidated Statements of Income 4
Consolidated Statements of Changes in Stockholders'
Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
FFY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
1999 June 30,
(unaudited) 1999
------------- --------
Assets
Cash $ 6,551,538 $ 5,362,745
Interest-bearing deposits 4,936,125 5,245,061
Short-term investments 100,000 865,000
------------------------------
TOTAL CASH AND CASH EQUIVALENTS 11,587,663 11,472,806
Securities available for sale 170,385,494 190,325,599
Loans receivable 460,609,174 453,839,111
Loans available for sale 344,550 441,500
Interest and dividends receivable on
securities 1,910,204 1,953,940
Interest receivable on loans 2,725,924 2,707,846
Federal Home Loan Bank stock, at cost 4,925,600 4,841,200
Office properties and equipment, net 7,480,596 7,218,640
Other assets 2,720,704 2,890,372
------------------------------
TOTAL ASSETS $662,689,909 $675,691,014
==============================
Liabilities and Stockholders' Equity
Liabilities:
Deposits $445,873,034 $457,342,802
Securities sold under agreements to
repurchase:
Short-term 6,615,076 6,617,747
Long-term 51,300,000 51,300,000
Borrowed funds:
Short-term 24,903,000 22,800,000
Long-term 60,000,000 60,000,000
Advance payments by borrowers for
taxes and insurance 1,122,090 2,221,976
Other payables and accrued expenses 6,165,519 5,291,964
------------------------------
TOTAL LIABILITIES 595,978,719 605,574,489
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized 5,000,000 shares; none
outstanding - -
Common stock, $.01 par value:
Authorized 15,000,000 shares; issued
7,589,366 shares, outstanding
6,963,419 shares at September 30,
1999 and 7,121,379 shares at
June 30, 1999 75,894 66,300
Additional paid-in capital 38,283,368 38,092,628
Retained earnings, substantially
restricted 47,348,477 46,243,673
Treasury stock, at cost, 625,947
shares at September 30, 1999 and
467,987 shares at June 30, 1999 (11,511,837) (8,551,484)
Accumulated other comprehensive loss (4,650,255) (2,816,864)
Common stock purchased by:
Employee Stock Ownership and 401(k)
Plan (2,552,667) (2,645,532)
Recognition and Retention Plans (281,790) (281,790)
------------------------------
TOTAL STOCKHOLDERS' EQUITY 66,711,190 70,116,525
------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $662,689,909 $675,691,014
==============================
See accompanying notes to consolidated financial statements
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
FFY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three months ended
September 30,
----------------------------
1999 1998
---- ----
Interest Income
Loans $ 9,526,048 $ 9,969,896
Securities available for sale 2,769,955 2,069,296
Federal Home Loan Bank stock 90,010 83,927
Other interest-earning assets 19,514 38,147
----------------------------
TOTAL INTEREST INCOME 12,405,527 12,161,266
----------------------------
Interest Expense
Deposits 4,861,712 5,213,591
Securities sold under agreements to
repurchase:
Short-term 88,045 147,555
Long-term 747,192 749,624
Borrowed funds:
Short-term 328,287 446,951
Long-term 787,807 153,542
----------------------------
TOTAL INTEREST EXPENSE 6,813,043 6,711,263
NET INTEREST INCOME 5,592,484 5,450,003
Provision for loan losses 101,062 125,417
----------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,491,422 5,324,586
----------------------------
Non-Interest Income
Service charges 255,161 198,202
Gain on sale of securities available
for sale 1,309 64,255
Gain on sale of loans 59,791 94,054
Other 150,351 261,173
----------------------------
TOTAL NON-INTEREST INCOME 466,612 617,684
Non-Interest Expense
Salaries and employee benefits 1,656,457 1,580,558
Net occupancy and equipment 515,550 500,441
Insurance and bonding 115,891 124,419
State and local taxes 250,208 248,624
Other 797,367 672,896
----------------------------
TOTAL NON-INTEREST EXPENSE 3,335,473 3,126,938
----------------------------
INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST 2,622,561 2,815,332
Income taxes 781,000 930,792
Minority interest in loss of consolidated
subsidiaries (1,857) -
----------------------------
NET INCOME $ 1,843,418 $ 1,884,540
============================
BASIC EARNINGS PER SHARE $ 0.28 $ 0.26
============================
DILUTED EARNINGS PER SHARE $ 0.27 $ 0.25
============================
CASH DIVIDENDS DECLARED PER SHARE $ 0.125 $ 0.1125
============================
See accompanying notes to consolidated financial statements
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
FFY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
Three months ended
September 30,
----------------------------
1999 1998
---- ----
Balance at July 1 $70,116,525 $84,215,701
Comprehensive income:
Net income 1,843,418 1,884,540
Change in unrealized holding gain
(loss) on securities available
for sale, net of reclassification
adjustment and tax effect (1,833,391) 592,796
----------------------------
Comprehensive income 10,027 2,477,336
Dividends paid, $.1125 and $.10 per
share, respectively (738,614) (738,996)
Treasury stock purchased (3,092,276) (2,350,715)
Stock options exercised 35,930 176,400
Amortization of KSOP expense 92,865 97,260
Tax benefit related to exercise of stock
options 34,073 38,821
Difference between average fair value per
share and cost per share on KSOP shares
committed to be released 252,660 211,226
----------------------------
Balance at September 30 $66,711,190 $84,127,033
============================
See accompanying notes to consolidated financial statements
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
FFY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended
September 30,
------------------------------
1999 1998
---- ----
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 4,985,879 $ 4,937,461
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of securities available for sale 1,000,000 1,903,169
Proceeds from sales of securities
available for sale 13,820,146 8,012,544
Purchase of securities available for sale (556,813) (44,880,298)
Principal receipts on securities available for sale 2,847,645 9,086,856
Net (increase) decrease in loans (6,692,300) 12,303,503
Purchase of office properties and equipment (526,854) (79,458)
Other, net 85,253 (80,170)
------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 9,977,077 (13,733,854)
------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (11,513,501) 4,508,324
Net decrease short-term securities sold under
agreements to repurchase (2,671) (4,113,758)
Net increase (decrease) in short-term borrowed funds 2,103,000 (4,485,000)
Proceeds from long-term borrowings - 25,000,000
Decrease in advance payments by borrowers for taxes
and insurance (1,099,886) (1,437,106)
Treasury stock purchases (3,092,276) (2,350,715)
Dividends paid (738,614) (738,996)
Proceeds from stock options exercised 35,930 176,400
Other, net (540,081) (145,579)
------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (14,848,099) 16,413,570
------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 114,857 7,617,177
CASH AND CASH EQUIVALENTS
Beginning of period 11,472,806 10,075,182
------------------------------
End of period $ 11,587,663 $ 17,692,359
==============================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments of interest expense $ 5,292,963 $ 4,543,512
Loans originated for sale (4,014,385) (5,383,130)
Proceeds from sales of loans originated for sale 4,171,126 3,752,384
See accompanying notes to consolidated financial statements
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
FFY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation:
The interim consolidated financial statements of the Company include the
accounts of FFY Financial Corp. (the "Company") and its wholly-owned
subsidiaries FFY Bank (formerly known as First Federal Savings Bank of
Youngstown) and FFY Holdings, Inc. The consolidated financial statements
also include the accounts of FFY Insurance (formerly known as Daniel W.
Landers Insurance, Ltd.), an affiliate of FFY Holdings, Inc., through its
two-thirds controlling interest in FFY Insurance. FFY Holdings, Inc.'s
other affiliate, Coldwell Banker FFY Real Estate, is accounted for using the
equity method of accounting and is therefore not consolidated since FFY
Holdings, Inc. has a non-controlling one-third interest in the real estate
company. All significant intercompany balances and transactions have been
eliminated in consolidation.
(b) Basis of Presentation:
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. The financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's 1999 Annual Report to Shareholders incorporated by reference into
the Company's 1999 Annual Report on Form 10-K. The interim consolidated
financial statements include all adjustments (consisting of only normal
recurring items) which, in the opinion of management, are necessary for a
fair presentation of the financial position and results of operations for
the periods presented. The results of operations for the interim periods
disclosed herein are not necessarily indicative of the results that may be
expected for a full year.
(c) Earnings Per Share:
The computation of basic and diluted earnings per share is shown in the
following table.
Three months ended
September 30,
--------------------------
1999 1998
---- ----
Basic earnings per share computation:
Numerator - Net income $1,843,418 $1,884,540
Denominator - Weighted average common
shares outstanding 6,517,822 7,355,484
Basic earnings per share $ 0.28 $ 0.26
==========================
Diluted earnings per share computation:
Numerator - Net income $1,843,418 $1,884,540
Denominator - Weighted average common
shares outstanding 6,517,822 7,355,484
Dilutive effect of stock
options 223,860 248,268
--------------------------
Weighted average common
shares and common stock
equivalents 6,741,682 7,603,752
Diluted earnings per share $ 0.27 $ 0.25
==========================
Weighted average shares in the above table for the three months ended
September 30, 1998 were restated to reflect a 100% stock dividend, effected
in the form of a two-for-one stock split, declared on January 19, 1999.
(d) Reclassifications:
Certain amounts in the prior period consolidated financial statements have
been reclassified to conform with the current period's presentation.
(2) EFFECT OF RECENT FINANCIAL ACCOUNTING STANDARDS
On July 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standard (SFAS) No. 130, Reporting Comprehensive
Income. This statement establishes standards for reporting and display of
comprehensive income and its components. Comprehensive income consists of
net income and other comprehensive income, which for the Company is
comprised entirely of unrealized holding gains and losses on securities
available for sale, net of the related tax effect. As permitted by SFAS No.
130, the Company has elected to disclose the components of comprehensive
income in the Consolidated Statements of Changes in Stockholders' Equity.
Other comprehensive income (loss) for the quarters ended September 30, 1999
and 1998 was ($1,833,391) and $592,796, respectively, net of the related
tax (expense) benefit of $943,000 and ($306,000), respectively.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 requires public business
enterprises to report certain financial and descriptive information about
operating segments. This statement also establishes standards for related
disclosures about products and services, any major customers, and geographic
areas in which an enterprise operates. SFAS No. 131 is effective for
financial statements for periods beginning after December 15, 1997. The
Company determined that the adoption of SFAS No. 131 has no effect on its
consolidated financial statements as the Company's operations are managed
and performance is evaluated on a corporate-wide basis. Accordingly, all of
the Company's operations are considered by management to be aggregated in
one reportable operating segment.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, that was subsequently amended by SFAS
No. 137, which delays the original effective date of SFAS No. 133. This
statement standardizes the accounting for derivative contracts, by requiring
that an entity recognize those items as assets or liabilities in the
statement of financial condition and measure them at fair value. SFAS No.
137 is effective for fiscal years beginning after June 15, 2000. Management
is currently evaluating the effects SFAS No. 137 will have on the Company's
financial condition or results of operations.
In October 1998, the FASB issued SFAS No. 134, Accounting for Mortgage-
Backed Securities Retained after Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise. SFAS No. 134 is an amendment of FASB
Statement No. 65, which established accounting and reporting standards for
certain activities on mortgage banking enterprises and other enterprises
that conduct operations that are substantially similar to the primary
operations of a mortgage banking enterprise. SFAS No. 134 is effective for
the first fiscal quarter beginning after December 15, 1998. Currently, this
statement does not affect the Company, as the Company does not securitize
mortgage loans and hold the resulting securities.
PART I: FINANCIAL INFORMATION
FFY FINANCIAL CORP.
SEPTEMBER 30, 1999
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following analysis discusses changes in the financial condition and
results of operations at and for the three months ended September 30, 1999
for the Company.
Forward-Looking Statements
When used in this Form 10-Q, or, in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will
likely result", "are expected to", "will continue", "is anticipated",
"estimate", "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks
and uncertainties including changes in economic conditions in the Company's
market area, changes in policies by regulatory agencies, fluctuations in
interest rates, demand for loans in the Company's market area and
competition, that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The
Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect
the Company's financial performance and could cause the Company's actual
results for future periods to differ materially from any opinions or
statements expressed with respect to future periods in any current
statements.
The Company does not undertake, and specifically disclaims any obligation,
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or
unanticipated events.
Year 2000
The Company's business is highly dependent on the accuracy of computers and
computer programs. The Year 2000 issue is the result of computer programs
being written using two digits rather than four to define an applicable
year. Any of a company's hardware, date-driven automated equipment, or
computer programs that have date sensitive software could recognize a date
using "00" as the year 1900 rather than the year 2000. This improper
recognition could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions or engage in normal business activities.
The Company's Technology and Facilities Committee is responsible for
monitoring and achieving Year 2000 (Y2K) readiness for the Company and
oversees a Y2K Committee. The Y2K Committee is headed by FFY Bank's Vice
President of Operations and consists of members from FFY Bank's internal
audit, information systems and user departments.
Since 1997, the Company has been addressing the Year 2000 issue. A
significant part of Year 2000 readiness was converting FFY Bank's financial
computer system to a new comprehensive software system to run the core
banking operation. The conversion was successfully completed on April 27,
1998. The new financial computer system has been tested for Year 2000
readiness and the results were successful. Additionally, this new system
allows FFY Bank to enhance its current services. It was determined that FFY
Bank's previous financial computer system would be too costly to make Year
2000 ready and would hinder other program development. Another significant
part of the Company's Year 2000 readiness includes contacting significant
third party vendors who are required to provide evidence of their efforts to
become Year 2000 ready. Management has evaluated each of the Company's
significant vendor's Year 2000 readiness progress and considers them to be
satisfactory. Management plans to have ongoing communications with such
vendors to insure Year 2000 readiness. Although the Company has been
assured of the readiness of its financial computer system and significant
vendors' systems for the Year 2000, the Y2K Committee continues to test such
systems for Year 2000 readiness for further assurance. Of all third-party
vendors and suppliers, perhaps the most difficult assessment of Year 2000
risks are the utility companies. This risk is shared by everyone in any
geographic area and cannot be accurately quantified. The Company's
contingency plan also addresses the loss of electrical power and other
environmental failures. The Company has and will continue to inform
customers and employees regarding Year 2000 readiness. The Company's Year
2000 readiness project is substantially complete; however, continued efforts
such as testing, vendor contacts, customer and employee awareness will
continue throughout the Year 2000.
In addressing Year 2000 issues, the Company has also considered technology
issues beyond its data processing activities. Non-data processing systems
include equipment in use which is not defined as computer hardware or
software such as alarm systems, elevators, keyless entry systems, telephones
and others. Such equipment could result in service or product breakdown if
not Year 2000 ready. Such non-information technology systems have been
tested for Year 2000 readiness, and the results were satisfactory.
The Company has incurred cash outlays of approximately $882,000 through
September 30, 1999, including $429,000 for a new comprehensive software
system, in connection with the Year 2000 readiness project. Management
estimated the total cost of Year 2000 compliance issues would be
approximately $1.0 million, which is being funded through operations. The
total cost of the Year 2000 project is not expected to have a material
impact on the Company's results of operations.
The Company faces several risk factors with respect to the Year 2000. For
example, the ability of FFY Bank's loan customers to repay their obligations
could be adversely affected by business interruptions caused by Year 2000
problems. The potential impact on FFY Bank of such problems has not been
determined, but could be significant. The Company is also vulnerable to its
significant vendors' Year 2000 issues with respect to their major suppliers
and their own Year 2000 issues.
The Company has finalized a written contingency plan and members of the Y2K
Committee have been testing and will continue to test this plan until the
Year 2000. The plan was developed for a general failure of the Company's
internal systems and specific contingency plans have been developed for each
critical application and vendor. The Company currently has contingency
plans to replace significant vendors that may have Year 2000 difficulties in
addition to replacing the other vendors or suppliers the Company cannot
test. The Company's contingency plan includes procedures to return to
automated systems after Year 2000 problems, if any, are rectified.
The Company anticipates that higher liquidity needs could result as it
approaches the end of calendar year 1999 and during the early part of
calendar year 2000. The Company's primary goal with regard to liquidity and
cash contingencies related to Y2K is to have enough cash available to meet
customer cash requirements. This is essential to ensure the continuing
viability of FFY Bank as a financial institution in which our customers have
confidence. The risk of public perception that cash will not be available
is a primary concern and specific issues are related to the level of
anticipated customer withdrawals and the level of loan commitments that will
need to be funded as customers access previously undisbursed lines of
credit. Consequently, FFY Bank preliminarily intends to use the Federal
Reserve Bank and the Federal Home Loan Bank as sources for liquidity.
The dates and costs of the Year 2000 remediation process are based on
management's best estimates. Management believes that the Company's Year
2000 efforts will be resolved on a timely and cost-efficient basis and does
not anticipate that the Company's additional efforts regarding Year 2000
compliance will have a material impact on its financial condition, results
of operations, liquidity and capital resources. There can be no guarantee,
however, that such estimates and assumptions will be achieved and actual
results could differ materially from those estimates.
Financial Condition
General. Total assets at September 30, 1999 were $662.7 million compared to
$675.7 million at June 30, 1999, a decrease of $13.0 million, or 1.9%. The
decrease was primarily attributable to a decline in securities available for
sale, partially offset by an increase in loans receivable. Total
liabilities at September 30, 1999 were $596.0 million compared to $605.6
million at June 30, 1999, a decrease of $9.6 million, or 1.6%. The decrease
was primarily attributable to a decline in deposit accounts.
Securities. The Company's securities portfolio decreased $19.9 million, or
10.5%, during the three months ended September 30, 1999, and totaled $170.4
million at September 30, 1999 compared to $190.3 million at June 30, 1999.
The decrease over the three month period primarily consisted of $13.8
million, $1.0 million and $2.8 million in security sales, maturities and
principal receipts on mortgage-backed securities, respectively.
Additionally, there was an increase in the unrealized loss on securities
available for sale totaling $2.8 million, reflecting an increase in interest
rates. Security purchases totaling $557,000 for the three months ended
September 30, 1999 partially offset the aforementioned decreases.
Loans. Net loans receivable, including loans available for sale, increased
$6.7 million, or 1.5%, during the three months ended September 30, 1999, and
totaled $461.0 million at September 30, 1999 compared to $454.3 million at
June 30, 1999. The increase in loans receivable was largely the result of
an increase in loans originated for FFY Bank's portfolio during the three
months ended September 30, 1999. Loans were retained in FFY Bank's
portfolio as opposed to being sold in the secondary market during the
increasing interest rate environment that existed during the current fiscal
quarter. First mortgage loans secured by one- to four -family residences
represented the largest area of dollar volume growth in FFY Bank's loan
portfolio during the three months ended September 30, 1999.
Loan originations during the three months ended September 30, 1999 totaled
$42.7 million compared to $37.7 million during the three months ended June
30, 1999. Mortgage loans for the purchase, construction or refinance of
one- to four -family homes in FFY Bank's market continued to represent the
largest segment of its loan originations. During the three months ended
September 30, 1999, one- to four -family loan originations, including the
construction of one- to four -family homes were $27.3 million, representing
nearly 64% of total loan originations.
FFY Bank's secondary market mortgage lending operation is designed to
originate and sell qualifying loans to the Federal National Mortgage
Association (Fannie Mae). FFY Bank sold 48 loans during the three months
ended September 30, 1999, resulting in a pre-tax gain of $60,000. This
compares to sales of 51 loans for a pre-tax gain of $94,000 for the three
months ended September 30, 1998. FFY Bank's secondary market mortgage
lending slowed compared the previous three quarters due to an increase in
market interest rates, which is evident by the number of loans sold. The
quarter ended September 30, 1999 sales of 48 loans compares to 144, 104 and
91 loans sold for the three-month periods ended December 31, 1998, March 31,
1999 and June 30, 1999, respectively. However, management expects that the
secondary market mortgage lending program will continue as long as market
conditions allow it to be profitable.
Deposits. Deposits decreased $11.4 million, or 2.5%, during the three
months ended September 30, 1999 and totaled $445.9 million at September 30,
1999 compared to $457.3 million at June 30, 1999. The decline in deposits
was primarily due to certificate and passbook accounts, which declined $9.5
million and $3.0 million, respectively, partially offset by an increase in
money market accounts totaling $1.2 million. NOW and demand accounts
nominally changed during the three months ended September 30, 1999. The
level of deposit flows during any given period is heavily influenced by
factors such as the general level of interest rates as well as alternative
yields that investors may obtain on competing instruments, such as money
market mutual funds or other investments. Net deposit outflows during the
quarter ended September 30, 1999 were funded by the decline in securities
available for sale.
Stockholders' Equity. Total stockholders' equity declined $3.4 million
during the three months ended September 30, 1999 and totaled $66.7 million
at September 30, 1999 compared to $70.1 million at June 30, 1999. This
decline resulted principally from treasury stock repurchases, an increase in
unrealized holding losses on available-for-sale securities and dividends
paid to shareholders totaling $3.1 million, $1.8 million and $739,000,
respectively. These declines were partially offset by net income for the
three months ended September 30, 1999 of $1.8 million. On January 19, 1999,
the Company announced a 100% stock dividend, which is equivalent to a two-
for-one stock split, that was paid on March 5, 1999 to stockholders of
record on February 19, 1999. Accordingly, all share and per share data have
been restated as a result of the stock dividend.
Results of Operations
Comparison of the Three Months Ended September 30, 1999 and 1998
General. The Company recorded net income for the three months ended
September 30, 1999 of $1.8 million, a decrease of $41,000, or 2.0%, from net
income of $1.9 million for the three months ended September 30, 1998. Basic
and diluted earnings per share for the three months ended September 30, 1999
totaled $0.28 per share and $0.27 per share, respectively, compared to $0.26
per share and $0.25 per share for the three months ended September 30, 1998.
This represents an increase in basic and diluted earnings per share of 7.7%
and 8.0%, respectively, over prior period levels. The Company's annualized
return on average equity for the three months ended September 30, 1999 was
10.9% compared to 9.1% for the three months ended September 30, 1998.
Interest Income. Total interest income for the three months ended September
30, 1999 was $12.4 million, an increase of $244,000, or 2.0%, compared to
$12.2 million for the three months ended September 30, 1998. Interest
income from loans decreased $444,000, or 4.5%, and totaled $9.5 million and
$10.0 million, respectively, for the three months ended September 30, 1999
and 1998. The decrease in interest from loans was the result of a 10 basis
point decline in the average yield earned on loans, from 8.45% to 8.35%, and
a $15.6 million decline in the average balance of loans outstanding. The
average yield earned on loans declined due to the decrease in market
interest rates throughout most of the Company's prior fiscal year. Although
the average balance of loans declined comparing the quarters ended September
30, 1999 and 1998, the trend of a declining loan portfolio reversed in the
recent quarter mainly due to retaining loans in FFY Bank's loan portfolio as
opposed to selling them in the secondary market. Interest income from
securities increased $701,000, or 33.9%, and totaled $2.8 million and $2.1
million, respectively, for the three months ended September 30, 1999 and
1998. The increase in interest from securities was primarily the result of
a $39.7 million increase in the average balance of securities comparing the
quarters ended September 30, 1999 and 1998. However, the trend of a growing
securities portfolio reversed during the recent quarter due to proceeds from
securities transactions being used to fund deposit outflows and loan growth.
Interest Expense. Total interest expense for the three months ended
September 30, 1999 was $6.8 million, an increase of $102,000, or 1.5%,
compared to $6.7 million for the three months ended September 30, 1998.
Interest expense on deposits decreased $352,000, or 6.7%, and totaled $4.9
million and $5.2 million, respectively, for the three months ended September
30, 1999 and 1998. The decrease in interest expense is attributable to a 31
basis point decline in average cost of deposit accounts, from 4.68% for the
three months ended September 30, 1998 to 4.37% for the three months ended
September 30, 1999. Interest expense on repurchase agreements decreased
$62,000, or 6.9%, and totaled $835,000 and $897,000, respectively, for the
three months ended September 30, 1999 and 1998. The decrease in interest
expense on repurchase agreements is due to a decline in volume. Interest
expense on borrowed funds increased $516,000 and totaled $1.1 million and
$600,000, respectively, for the three months ended September 30, 1999 and
1998. The increase in interest expense on borrowed funds is attributable to
a $43.5 million increase in average borrowings outstanding, from $41.3
million for the three months ended September 30, 1998 to $84.8 million for
the three months ended September 30, 1999. This increase was partially
offset by a 54 basis point decrease in average cost of borrowed funds, from
5.81% for the three months ended September 30, 1998 to 5.27% for the three
months ended September 30, 1999.
Net Interest Income. Net interest income increased $142,000, or 2.6%, and
totaled $5.6 million and $5.5 million, respectively, for the three months
ended September 30, 1999 and 1998. The Company's net interest margin (net
interest income as a percentage of average interest-earning assets) was
3.54% for the three months ended September 30, 1999, down 4 basis points
from 3.58% for the three months ended September 30, 1998. The decline in
net interest margin was mainly due to a lower yield earned on loans
receivable in addition to increased borrowings, which generally have a
higher cost than core deposits. However, the Company's net interest margin
was positively affected by lower rates paid on deposits.
Provision for Loan Losses. The provision for loan losses totaled $101,000
for the three months ended September 30, 1999 compared to $125,000 for the
three months ended September 30, 1998. The provision for loan losses
reflects management's evaluation of the underlying credit risk of FFY Bank's
loan portfolio to adequately provide for probable loan losses inherent in
the loan portfolio as of the balance sheet date. The ratio of allowance for
loan losses to non-performing assets was 126.4% at September 30, 1999, up
from 112.3% at June 30, 1999, primarily due to a decline in non-accrual
loans. Future additions to the allowance for loan losses will be dependent
on a number of factors including the performance of FFY Bank's loan
portfolio, the economy, changes in interest rates and the effect of such
changes on real estate values and inflation. Management believes that the
allowance for loan losses was adequate at September 30, 1999.
Non-Interest Income. Non-interest income totaled $467,000 for the three
months ended September 30, 1999, a decrease of $151,000, or 24.5%, compared
to $618,000 for the three months ended September 30, 1998. Gains on sales
of securities totaled $1,000 and $64,000, respectively, for the three months
ended September 30, 1999 and 1998. Securities are primarily sold to fund
loan growth or deposit outflows. Gains on sales of loans totaled $60,000
and $94,000, respectively, for the three months ended September 30, 1999 and
1998. The decline in income from loans sold reflects an increase in
interest rates and management's decision to retain certain loans in FFY
Bank's portfolio. Other non-interest income totaled $150,000 for the three
months ended September 30, 1999, a decrease of $111,000 compared to $261,000
for the three months ended September 30, 1998. The decrease in other non-
interest income is primarily the result of activities of the Company's
former real estate affiliate, First Real Estate, Ltd., being consolidated in
the prior year period since the Company's interest was a controlling two-
thirds; whereas the Company's current real estate affiliate, Coldwell Banker
FFY Real Estate, is accounted for using the equity method of accounting
since the Company's investment is a non-controlling one-third. Service
charge income increased $57,000, or 28.7%, comparing the three months ended
September 30, 1999 and 1998, largely due to increased fee income from NOW
and demand accounts, automated teller machines, debit cards and loan
extensions.
Non-Interest Expense. Non-interest expense totaled $3.3 million for the
three months ended September 30, 1999, an increase of $209,000, or 6.7%,
compared to $3.1 million for the three months ended September 30, 1998.
Non-interest expenses for the recent three-month period include $196,000 in
name change expenses. On July 12, 1999, the Company announced a name change
for its affiliates to better reflect a single identity for the banking,
insurance and real estate lines of business the Company operates. The
Company's efficiency ratio totaled 54.8% for the three months ended
September 30, 1999 compared to 52.9% for the three months ended September
30, 1998.
Income Taxes. Income taxes totaled $781,000 for the three months ended
September 30, 1999, a decrease of $150,000, or 16.1%, compared to $931,000
for the three months ended September 30, 1998. The decline in income taxes
resulted from a reduction in the Company's effective tax rate due to
increased income from tax-exempt securities.
Effect of New Accounting Standards
Refer to Note 2 of the Notes to Consolidated Financial Statements contained
in this report.
Liquidity and Cash Flows
In general terms, liquidity is a measurement of the Company's ability to
meet its cash needs. The Company's objective in liquidity management is to
maintain the ability to meet loan commitments, purchase securities or to
repay deposits and other liabilities in accordance with their terms without
an adverse impact on current or future earnings. The Company's principal
sources of funds are deposits, amortization and prepayments of loans,
maturities, sales and principal receipts of securities, borrowings,
repurchase agreements and operations.
Federal regulations require FFY Bank to maintain minimum levels of liquid
assets in each calendar quarter of not less than 4% of either (i) its
liquidity base at the end of the preceding quarter, or (ii) the average
daily balance of its liquidity base during the preceding quarter. FFY
Bank's liquidity exceeded the applicable liquidity requirement at September
30, 1999 and 1998. Simply meeting the liquidity requirement does not
automatically mean FFY Bank has sufficient liquidity for a safe and sound
operation. Regulations also include a separate requirement that each thrift
must maintain sufficient liquidity to ensure its safe and sound operation.
Thus, adequate liquidity may vary depending on FFY Bank's overall
asset/liability structure, market conditions, the activities of competitors,
and the requirements of its own deposit and loan customers.institutions.
Management believes FFY Bank's liquidity is sufficient.
Liquidity management is both a daily and long-term responsibility of
management. FFY Bank adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) expected deposit
flows, (iii) yields available on interest-earning deposits and securities
and (iv) the objective of its asset/liability management program. Along
with its liquid assets, FFY Bank has additional sources of liquidity
available including, but not limited to, the ability to obtain deposits by
offering above-market interest rates and access to advances from the Federal
Home Loan Bank.
The primary investing activities of the Company are originating loans and
purchasing securities. For the three months ended September 30, 1999, an
increase in FFY Bank's loan portfolio used $6.7 million, whereas a decline
in the securities portfolio provided $17.1 million. For the three months
ended September 30, 1998, a decline in FFY Bank's loan portfolio provided
$12.3 million, whereas growth in the securities portfolio used $25.9
million. Generally, during periods of declining interest rates, FFY Bank
would be expected to experience increased loan prepayments, which would
likely be reinvested at lower interest rates. During periods of increasing
interest rates, loan prepayments would be expected to decline, reducing
funds available for investment at higher interest rates.
The primary financing activities of the Company are deposits, repurchase
agreements and borrowings. For the three months ended September 30, 1999, a
decline in deposit accounts used $11.5 million, whereas an increase in
borrowed funds provided $2.1 million. The effect of repurchase agreements
was immaterial for the three months ended September 30, 1999. For the three
months ended September 30, 1998, increases in deposits and borrowed funds
provided $4.5 million and $20.5 million, respectively, whereas a decline in
repurchase agreements used $4.1 million.
Capital Resources
Office of Thrift Supervision (OTS) regulations require savings institutions
to maintain certain minimum levels of regulatory capital. An institution
that fails to comply with its regulatory capital requirements must obtain
OTS approval of a capital plan and can be subject to a capital directive and
certain restrictions on its operations. At September 30, 1999, the minimum
capital regulations require institutions to have tangible capital to total
tangible assets of 1.5%; a minimum leverage ratio of core (Tier 1) capital
to total adjusted tangible assets of 3.0%; and a minimum ratio of total
capital (core capital and supplementary capital) to risk weighted assets of
8.0%, of which 4.0% must be core capital.
Under the prompt corrective action regulations, the OTS is required to take
certain supervisory actions (and may take additional discretionary actions)
with respect to an undercapitalized institution. Such actions could have a
direct material effect on an institution's financial statements. The
regulations establish a framework for the classification of savings
institutions into five categories: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. Generally, an institution is considered well capitalized
if it has a core (Tier 1) capital ratio of at least 5.0% (based on average
total assets); a core (Tier 1) risk-based capital ratio of at least 6.0%;
and a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the OTS about
capital components, risk weightings and other factors.
At September 30, 1999, FFY Bank meets all capital adequacy requirements to
which it is subject. Further, the most recent OTS notification categorized
FFY Bank as a well-capitalized institution under the prompt corrective
action regulations. There have been no conditions or events since that
notification that management believes have changed FFY Bank's capital
classification.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There were no material changes in information about market risk from that
provided in the 1999 Annual Report to Shareholders, which was incorporated
by reference into the Company's 1999 Annual Report on Form 10-K.
PART II: OTHER INFORMATION
FFY FINANCIAL CORP.
SEPTEMBER 30, 1999
Item 1. Legal Proceedings
FFY Financial Corp. or FFY Holdings, Inc. is not a party to any material
legal proceeding before any court or regulatory authority, administrative
agency or other tribunal. Further, FFY Financial Corp. or FFY Holdings,
Inc. is not aware of the threat of any such proceeding.
As part of its ordinary course of business, FFY Bank is a party to several
lawsuits involving a variety of claims, including the collection of OF
delinquent accounts. No litigation is pending or, to FFY Bank's knowledge,
threatened in which FFY Bank faces potential loss or exposure which would
have a material impact on its financial condition or results of operations.
FFY Bank is not involved in any administrative or judicial proceeding under
any Federal, State or Local provisions which have been enacted or adopted
relating to the protection of the environment.
Item 2. Changes in Securities
None to be reported.
Item 3. Defaults on Senior Securities
None to be reported.
Item 4. Submission of Matters to a Vote of Security Holders
On October 20, 1999, FFY Financial Corp. held its annual meeting of
stockholders. The matters approved by stockholders at the annual meeting
and the number of votes cast for, against or withheld (as well as the number
of abstentions and broker non-votes) as to each matter are set forth below.
Election of Directors for a three-year term:
BROKER
NAME FOR WITHHELD NON-VOTES
---- --- -------- ---------
Jeffrey L. Francis 5,905,971 55,602 -0-
Samuel A. Roth 5,916,032 45,541 -0-
Ronald P. Volpe, Ph.D. 5,931,376 30,197 -0-
Ratification of the Appointment of Auditors for a one-year term:
BROKER
NAME FOR AGAINST ABSTAIN NON-VOTES
---- --- ------- ------- ---------
KPMG LLP 5,939,275 9,662 12,635 -0-
Item 5. Other Information
None to be reported.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits: Exhibit 27 - Financial Data Schedule.
B. Reports on Form 8-K: On July 20, 1999, the Registrant announced the
approval of the regular quarterly dividend of
11.25 cents per share. The Registrant also
announced its Annual Meeting of Shareholders to
be held on October 20, 1999.
On August 4, 1999, the Registrant announced
earnings of $8.1 million, or $1.11 per diluted
share for the year ended June 30, 1999 and $.30
fourth quarter earnings per diluted share.
Pursuant the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FFY Financial Corp.
Date: November 12, 1999 By: /s/ Jeffrey L. Francis
------------------------------------
Jeffrey L. Francis
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 1999 By: /s/ Therese Ann Liutkus
------------------------------------
Therese Ann Liutkus
Treasurer and Chief Financial Officer
(Principal Financial and Accounting
Officer)