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 Quarter Ended September 30, 1996
[ ] 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, 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.
<TABLE>
<CAPTION>
CLASS SHARES OUTSTANDING AT OCTOBER 31, 1996
----- --------------------------------------
<S> <C>
common stock, $.01 par value 5,117,198
</TABLE>
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
Part II. Other Information:
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults on 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 15
Signatures 16
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
FFY FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30,
1996 June 30,
(Unaudited) 1996
------------- -------------
<S> <C> <C>
ASSETS
Cash $ 3,918,964 $ 3,374,031
Interest-bearing deposits 2,795,107 4,888,366
Federal funds sold 1,960,000 -
--------------------------------
TOTAL CASH AND CASH EQUIVALENTS 8,674,071 8,262,397
Securities available for sale 125,023,001 109,835,614
Loans receivable 449,145,477 438,789,657
Interest and dividends receivable on securities 1,766,244 1,845,835
Interest receivable on loans 2,386,960 2,312,575
Federal Home Loan Bank stock, at cost 3,839,400 3,773,800
Office properties and equipment 8,023,272 7,973,576
Other assets 3,698,366 2,808,873
--------------------------------
TOTAL ASSETS $ 602,556,791 $ 575,602,327
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposit accounts $ 448,910,033 $ 456,540,807
Securities sold under agreements to repurchase 6,618,809 6,639,553
Borrowed funds 32,655,000 1,200,000
Advance payments by borrowers for taxes and insurance 1,056,091 2,279,624
Other payables and accrued expenses 11,088,726 7,021,490
--------------------------------
TOTAL LIABILITIES 500,328,659 473,681,474
Commitments - -
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 6,630,000 shares,
outstanding 5,117,198 shares at September 30, 1996
and 5,081,198 shares at June 30, 1996 66,300 66,300
Additional paid-in capital 63,572,849 63,529,201
Retained earnings, substantially restricted 70,961,434 72,165,978
Treasury stock, at cost, 1,512,802 shares at
September 30, 1996 and 1,548,802 shares at June 30, 1996 (27,829,917) (28,492,183)
Unrealized loss on securities available for sale, net (335,382) (869,461)
Common stock purchased by:
Employee stock ownership plan (3,759,612) (3,865,692)
Recognition and retention plans (447,540) (613,290)
--------------------------------
TOTAL STOCKHOLDERS' EQUITY 102,228,132 101,920,853
--------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 602,556,791 $ 575,602,327
================================
</TABLE>
See accompanying notes to consolidated financial statements
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
FFY FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
INTEREST INCOME
Mortgage loans $ 8,200,502 $ 7,706,046
Consumer and other loans 1,286,051 905,426
Securities available for sale 1,612,767 1,828,226
Securities held to maturity - 169,562
Federal Home Loan Bank stock 67,557 63,198
Other interest-earning assets 42,312 175,210
-----------------------------
TOTAL INTEREST INCOME 11,209,189 10,847,668
-----------------------------
INTEREST EXPENSE
Deposit accounts 5,422,644 5,602,487
Securities sold under agreements to repurchase 85,399 -
Borrowed funds 58,313 -
-----------------------------
TOTAL INTEREST EXPENSE 5,566,356 5,602,487
NET INTEREST INCOME 5,642,833 5,245,181
Provision for loan losses 154,416 76,166
-----------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,488,417 5,169,015
-----------------------------
NON-INTEREST INCOME
Service charges 129,172 138,588
Loss on sale of securities (543,130) -
Other 89,832 116,750
-----------------------------
TOTAL NON-INTEREST INCOME (324,126) 255,338
-----------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,437,212 1,450,004
Net occupancy 184,117 170,824
Insurance and bonding 3,330,263 321,564
State and local taxes 269,524 262,377
Depreciation 234,533 231,922
Other 497,267 506,007
-----------------------------
TOTAL NON-INTEREST EXPENSE 5,952,916 2,942,698
-----------------------------
INCOME (LOSS) BEFORE FEDERAL INCOME TAXES (788,625) 2,481,655
FEDERAL INCOME TAX EXPENSE (BENEFIT) (293,000) 830,000
-----------------------------
NET INCOME (LOSS) $ (495,625) $ 1,651,655
=============================
EARNINGS (LOSS) PER SHARE $ (0.10) $ 0.32
=============================
CASH DIVIDENDS DECLARED PER SHARE $ 0.175 $ 0.15
=============================
</TABLE>
See accompanying notes to consolidated financial statements
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
FFY FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30,
--------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Balance at July 1, $ 101,920,853 $ 106,400,098
Net income (loss) (495,625) 1,651,655
Dividends paid, $.15 and $.125 per share, respectively (708,919) (625,273)
Stock options exercised 360,000 77,590
Amortization of ESOP expense 106,080 110,670
Amortization of RRP stock awards 165,750 170,487
Tax benefit related to RRP stock awards 73,964 65,264
Tax benefit related to exercise of stock options 124,366 9,059
Difference between average fair value per share and cost
per share on ESOP shares committed to be released 147,584 124,790
Change in unrealized loss on securities available
for sale, net 534,079 66,251
--------------------------------
$ 102,228,132 $ 108,050,591
================================
</TABLE>
See accompanying notes to consolidated financial statements
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
FFY FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 5,600,489 $ 4,756,238
-----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of securities available for sale 13,000,000 19,000,000
Proceeds from sales of securities available for sale 977,000 -
Purchase of securities available for sale (29,727,595) (7,113,000)
Principal receipts on securities available for sale 781,560 -
Principal receipts on securities held to maturity - 625,087
Net increase in loans (10,373,833) (8,680,923)
Purchase of office properties and equipment (293,941) (285,192)
Other, net 10,000 22,804
-----------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (25,626,809) 3,568,776
-----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposit accounts (7,559,381) (5,349,847)
Net decrease in securities sold under agreements to repurchase (20,744) -
Net increase in short-term borrowings 31,455,000 -
Net decrease in advance payments by borrowers for taxes and insurance (1,223,533) (931,605)
Dividends paid (708,919) (625,273)
Net increase (decrease) in amounts due to bank (1,520,319) 290,803
Other, net 15,890 (395,228)
-----------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 20,437,994 (7,011,150)
-----------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 411,674 1,313,864
CASH AND CASH EQUIVALENTS
Beginning of period 8,262,397 11,734,251
-----------------------------
End of period $ 8,674,071 $ 13,048,115
=============================
</TABLE>
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)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
These interim consolidated financial statements of the Company include the
accounts of FFY Financial Corp. (Holding Company) and its wholly-owned
subsidiary First Federal Savings Bank of Youngstown (Bank). These financial
statements are prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. These financial statements should be read
in conjunction with the consolidated financial statements and notes thereto
included in the Company's 1996 Annual Report to Shareholders. These 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.
Earnings Per Share:
The computation of primary and fully diluted earnings per share is based on the
weighted average number of common stock and common stock equivalent shares
outstanding during the three months ended September 30, 1996 and 1995. Stock
options are regarded as common stock equivalents and are, therefore, considered
in both primary and fully diluted earnings per share computations. Common stock
equivalents are computed using the treasury stock method and, therefore, fully
diluted earnings per share reflect additional dilution related to stock options
due to the use of the market price at the end of the period, when higher than
the average price for the period. ESOP shares that have not been committed to be
released are not considered outstanding for the computation of primary and fully
diluted earnings per share in accordance with Statement of Position 93-6,
Employers' Accounting for Employee Stock Ownership Plans. The weighted average
number of shares of common stock and common stock equivalents outstanding during
the three months ended September 30, 1996 and 1995 were 4,871,529 and 5,224,757,
respectively. Fully diluted earnings per share is not significantly different
than primary earnings per share.
Reclassifications:
Certain amounts in the 1995 consolidated financial statements have been
reclassified to conform with the 1996 presentation.
NOTE B - EFFECT OF NEW FINANCIAL ACCOUNTING STANDARDS
Effective July 1, 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of. This statement requires that long-lived
assets and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. An impairment loss
is recognized if the sum of the expected future cash flows is less than the
carrying amount of the asset. This statement excludes financial instruments,
long-term customer relationships of financial institutions, mortgage and other
servicing rights and deferred tax assets. The adoption of SFAS No. 121 does not
have a material impact on the Company's consolidated financial position or
results of operations.
Effective July 1, 1996, the Company adopted SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 123 defines a fair value based method of
accounting for stock-based employee compensation plans. Under the fair value
based method, compensation cost is measured at the grant date based upon the
value of the award and is accrued over the vesting or other service period. SFAS
No. 123 allows companies to continue to account for their stock compensation
plans as prescribed in Accounting Principles Board Opinion No. 25, (APB No. 25)
Accounting for Stock Issued to Employees, but with additional footnote
disclosures. Management has elected to continue using the APB No. 25 method of
accounting and will provide pro forma disclosures of the fair value based method
in its 1997 Annual Report. The Company made no stock option grants during the
three months ended September 30, 1996.
NOTE C - SIGNIFICANT EVENTS
On September 30, 1996, President Clinton signed the FY 1997 omnibus
appropriations bill which states that a special assessment on Savings
Association Insurance Fund (SAIF) deposits held as of March 31, 1995 will be
imposed to capitalize the thrift fund up to the statutorily prescribed 1.25
percent. Therefore, the Bank recorded a one-time charge of approximately
$1,987,000 after tax, or $.41 per share, representing the special assessment of
65.7 basis points on the Bank's deposits held as of March 31, 1995. This
assessment is payable on November 27, 1996 and will be deductible for tax
purposes on the Company's fiscal year 1997 federal income tax return.
The current quarter also includes a charge of $340,000 after tax, or $.07 per
share, representing a write-down for other-than-temporary impairment in the
value of certain available for sale securities which management decided to sell
at September 30, 1996. Proceeds from the sale, which was completed in October
1996, will be used for liquidity or reinvestment purposes.
If not for the one-time charge or the write-down of securities, the Company's
earnings for the quarter ended September 30, 1996 would have been approximately
$1,831,000, or $.37 per share.
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FFY FINANCIAL CORP.
SEPTEMBER 30, 1996
The following analysis discusses changes in the financial condition and results
of operations at and for the three months ended September 30, 1996 for FFY
Financial Corp. and Subsidiary (Company).
Forward-Looking Statements
When used in this Form 10-Q, 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.
Financial Condition
At September 30, 1996, assets totaled $602.6 million, an increase of $27.0
million, or 4.7% during the three months ended September 30, 1996 from $575.6 at
June 30, 1996. The increase in assets during the quarter ended September 30,
1996 was principally due to a $15.2 million increase in the securities
portfolio, due mainly to mortgage-backed security purchases partially offset by
security maturities, and $10.4 million in loan growth. There were modest changes
in other balance sheet categories during the quarter ended September 30, 1996.
The Company's securities portfolio increased $15.2 million during the three
months ended September 30, 1996 from $109.8 million at June 30, 1996 to $125.0
million at September 30, 1996. The increase was due primarily to the purchase of
securities, predominantly mortgage-backed securities, totaling $29.7 million
partially offset by $14.8 million in maturities, sales and principal receipts.
The source of funds to purchase securities came from Federal Home Loan Bank
borrowings (see below) and the aforementioned maturities. The securities
portfolio is classified as available for sale and the unrealized loss associated
with the securities portfolio was $505,000 before tax and $1.3 million before
tax at September 30, 1996 and June 30, 1996, respectively, representing a
$812,000 decrease in the unrealized loss during the quarter. Contributing to the
decrease in the unrealized loss was a charge of $516,000 before tax,
representing a write-down for other-than-temporary impairment in the value of
certain available for sale securities which management decided to sell at
September 30, 1996. Proceeds from the sale, which was completed in October 1996,
will be used for liquidity or reinvestment purposes.
The Bank continued to experience strong loan demand, particularly in one-to-four
family mortgages and consumer loans. Net loans receivable totaled $449.1 million
at September 30, 1996, an increase of $10.3 million, or 2.4% from $438.8 million
at June 30, 1996 principally due to an increase in loan originations. Of the
$10.3 million increase during the three months ended September 30, 1996, $5.7
million was attributable to one-to-four family home loans and $4.4 million to
consumer loans, particularly in the indirect auto lending portfolio which began
in January 1996 in an effort to develop a share of the local market for such
lending. At September 30, 1996, the Bank had 1,001 indirect automobile loans
totaling $12.3 million compared to 697 indirect automobile loans totaling $8.9
million at June 30, 1996. Also included in the consumer loan category was growth
during the three months ended September 30, 1996 of $1.2 million in home equity
loans.
Loan originations during the first quarter of fiscal year 1997 totaled $34.9
million. Mortgage loans for the purchase, construction or refinance of
one-to-four family homes in the Bank's market continued to represent the largest
segment of the Bank's loan originations during the three months ended September
30, 1996, with one-to-four family loans totaling $21.2 million or 60.8% of
originations; multi-family residential, commercial real estate and development
loans totaling $1.7 million or 4.9% of originations; and consumer loans totaling
$12.0 million or 34.3% of originations. The Bank focuses on originating a
portion of its one-to-four family loans as adjustable-rate mortgages (ARMs) in
an attempt to reduce interest rate risk. However, market conditions, including
increased competition and generally low market interest rates continued to
inhibit the marketability of ARMs. Adjustable-rate originations totaled $5.4
million, or 15.5% of originations during the three months ended September 30,
1996. At September 30, 1996, adjustable-rate loans represented 18.3% of the
gross loan portfolio.
The Bank has historically been a portfolio lender, however, management is
currently pursuing a secondary market mortgage lending operation by way of loan
originations and selling qualifying loans to Federal National Mortgage
Association (FNMA) in an effort to access that portion of the mortgage market
that is currently serviced by secondary market lenders. Management believes that
the operational efficiencies existing in the portfolio lending operations will
allow the Bank to be competitive in the secondary market. The application
process with FNMA is complete and management anticipates that the Bank will
begin selling loans during fiscal year 1997.
The allowance for loan losses totaled $3.5 million at September 30, 1996,
compared to $3.4 million at June 30, 1996, which represented .6% of total assets
and .8% of net loans receivable at September 30, 1996. Non-performing assets,
including non-performing loans, troubled debt restructurings and foreclosed
assets (real estate owned), totaled $5.1 million and $4.7 million at September
30, 1996 and June 30, 1996, respectively. The allowance for loan losses as a
percentage of non-performing assets totaled 70.0% and 73.6% at September 30,
1996 and June 30, 1996, respectively.
Other assets increased $889,000 during the first quarter of fiscal year 1997 and
totaled $3.7 million at September 30, 1996. This increase was predominantly due
to an increase in the deferred federal income tax asset associated with the
one-time Savings Association Insurance Fund (SAIF) assessment imposed on thrift
institutions on September 30, 1996 which was recorded for book purposes on that
date. This assessment is not deductible for tax purposes until paid, which will
be November 27, 1996, thus creating a timing difference in the deductibility of
the assessment and a larger deferred tax asset at September 30, 1996. Real
estate owned was $32,000 at September 30, 1996. There was no real estate owned
at June 30, 1996.
Deposits declined $7.6 million, or 1.7% during the first quarter of fiscal year
1997, from $456.5 million at June 30, 1996 to $448.9 million at September 30,
1996. Although the Bank continues to offer competitive market rates on its
deposit products, the decrease in deposits was due primarily to continued
competition for deposits as customers seek higher yields in this generally low
market interest rate environment. Passbook and money market deposits declined
$3.5 million and $2.0 million, respectively, and NOW account deposits increased
$1.3 million during the three months ended September 30, 1996. Certificates of
deposit decreased $3.4 million during the quarter. The largest changes in
certificate types were decreases of $2.2 million, $1.6 million, $1.5 million and
$1.5 million in 12-month, 24-month, 36-month and 60-month accounts,
respectively, partially offset by an increase of $3.6 million in 17-month
accounts, which the Bank began offering in August 1996. At September 30, 1996,
certificate accounts totaled $283.6 million, passbook accounts totaled $110.8
million, money market accounts totaled $25.0 million and NOW and checking
accounts totaled $29.5 million.
Securities sold under agreements to repurchase (repurchase agreements) declined
$21,000 during the first three months of fiscal year 1997 and totaled $6.6
million at September 30, 1996. Securities underlying the agreements are U.S.
Government obligations. These repurchase agreements mature overnight. The
repurchase agreements are treated as financings, and the obligations to
repurchase securities sold are reflected as a liability in the consolidated
statements of financial condition. The securities, although held in safekeeping
outside the Bank, remain in the asset accounts. The Bank enters into the
repurchase agreements for a source of funds, as a result of to the continuing
decline in deposit accounts, to provide for continued loan growth.
The Company's borrowed funds increased $31.5 million during the three months
ended September 30, 1996 and totaled $32.7 million. As part of a wholesale
growth strategy, the Bank borrowed $24.3 million from Federal Home Loan Bank
(FHLB) to purchase adjustable-rate mortgage-backed securities (see above). This
growth strategy is designed to enable the Company to leverage its excess
capital, and will be managed within the Company's guidelines for asset/liability
management, profitability and overall growth objectives. The Bank utilized $7.2
million in additional FHLB advances for the purpose of funding loan originations
and deposit withdrawals. There was $1.2 million in borrowed funds outstanding at
June 30, 1996.
Other payables and accrued expenses increased $4.1 million during the first
quarter of fiscal year 1997 and totaled $11.1 million at September 30, 1996. The
increase was due primarily to the recording of the SAIF assessment totaling $3.0
million (mentioned above) that is payable on November 27, 1996 and an increase
of $2.2 million in accrued interest on deposit accounts, particularly
certificates of deposit. These increases were partially offset by a $1.5 million
decline in conjunction with the Bank's official check remittance system.
Total stockholders' equity increased $307,000 during the three months ended
September 30, 1996, from $101.9 million at June 30, 1996 to $102.2 million at
September 30, 1996. The net increase in capital resulted principally from a
decline in the net unrealized loss on securities available for sale totaling
$534,000, stock option exercises of $360,000, amortization and tax benefits
associated with employee benefits totaling $470,000 and recognition of the
difference between the average fair value of Employee Stock Ownership Plan
(ESOP) shares committed to be released over cost totaling $148,000. These
increases in capital were partially offset by a net loss for the quarter
totaling $496,000 and regular dividend payments of $709,000. Book value per
share decreased from $20.06 per share at June 30, 1996 to $19.98 per share at
September 30, 1996.
Results of Operations
Interest income on loans totaled $9.5 million for the quarter ended September
30, 1996, an increase of $875,000 compared to the quarter ended September 30,
1995 due to a $39.6 million increase in the average balance of loans
outstanding, reflecting continued growth in the loan portfolio, and a 3 basis
point increase in the weighted average yield on the portfolio, from 8.52% to
8.55%. Income from securities totaled $1.6 million for the quarter ended
September 30, 1996, a decrease of $385,000 from $2.0 million for the quarter
ended September 30, 1995. The decline was the result of a $30.7 million decline
in average balances compared to the three months ended September 30, 1995,
partially offset by a 35 basis point increase in average yield, from 5.87% to
6.22%.
Interest expense on deposits during the quarter ended September 30, 1996 totaled
$5.4 million, a decrease of $180,000 compared to $5.6 million during the same
period last year, due to a $7.3 million decrease in the average balance of
deposits partially offset by an 8 basis point decrease in the average cost of
deposit accounts, from 4.88% to 4.80%. Interest expense associated with
repurchase agreements totaled $85,000 during the quarter ended September 30,
1996 with an average balance of $8.2 million and a weighted average rate of
4.16%. There was no interest expense on repurchase agreements during the quarter
ended September 30, 1995, since the Bank began entering into such agreements in
May 1996. Interest expense on borrowed funds totaled $58,000 during the quarter
ended September 30, 1996 with an average balance of $4.3 million and a weighted
average rate of 5.41%. There was no interest expense on borrowed funds during
the quarter ended September 30, 1995 as borrowed funds were not utilized by the
Company.
The provision for loan losses totaled $154,000 for the quarter ended September
30, 1996 compared to $76,000 for the same period last year based on management's
continuing assessment of the loan portfolio and management's desire to maintain
the allowance for loan losses at a level considered adequate to provide for
probable future loan losses. This $78,000 increase principally reflects growth
in the Bank's indirect auto lending portfolio which totaled $12.3 million at
September 30, 1996. Management anticipates that further increases in this area
of lending will likely result in increases in the provision for loan losses.
Also, future additions to the allowance for loan losses will be dependent on a
number of factors, including the performance of the Bank's loan portfolio,
specifically the indirect auto lending portfolio, the economy, changes in
interest rates and the effect of such changes on real estate values, inflation
and the view of regulatory authorities toward adequate reserve levels.
Net interest income after provision for loan losses totaled $5.5 million for the
three months ended September 30, 1996, an increase of $319,000 from $5.2 million
for the three months ended September 30, 1995 primarily due to an increase in
interest income of $361,000 and a decline in interest expense of $36,000
partially offset by an increase in the provision for loan losses of $78,000, as
discussed previously.
Non-interest income, excluding loss on sale of securities, totaled $219,000 for
the quarter ended September 30, 1996, a decrease of $36,000 from $255,000 during
the prior year's period. The decrease was primarily attributable to declines in
ATM service fee income, other service fee income and safety deposit box rentals.
Loss on sale of securities totaled $543,000 for the quarter ended September 30,
1996. On September 30, 1996, management decided to sell $28.8 million in
available for sale securities for liquidity or reinvestment purposes. The
Company recorded a loss on sale of securities for the write-down to fair value
for other-than-temporary impairment when the decision to sell such securities
was made. Management did not expect the fair value of such securities to recover
prior to the expected time of sale, which was completed in early October 1996.
There were no sales of securities for the quarter ended September 30, 1995.
Non-interest expense totaled $5.9 million for the quarter ended September 30,
1996, an increase of $3.0 million from $2.9 million for the quarter ended
September 30, 1995. The increase is primarily attributable to the one-time
charge of $3.0 million representing a special assessment of 65.7 basis points on
the Bank's deposits held as of March 31, 1995. This one-time charge was the
result of the recently enacted legislation to recapitalize the Savings
Association Insurance Fund (SAIF).
A review of salary and benefits expense, specifically regarding retirement
costs, indicated that the Bank's retirement expense was significantly higher
than financial institution industry averages, primarily due to the Employee
Stock Ownership Plan (ESOP) accounting change that was adopted in fiscal year
1995. The accounting change caused ESOP expense to be recorded at the market
value of Holding Company shares, not the original $10 cost per share as was
allowed under previous accounting. In order to reduce retirement costs, the
board of directors approved termination of the existing defined benefit pension
plan as of November 15, 1996, implementation of a 401(k) plan effective January
1, 1997 and, subject to approval by the Internal Revenue Service (IRS),
restructuring of the ESOP loan. The termination of the defined benefit pension
plan resulted in no pension expense for the quarter ended September 30, 1996,
compared to $39,000 for the quarter ended September 30, 1995, and is expected to
generate cost savings of approximately $156,000 before tax annually. Cost
savings associated with restructuring the ESOP loan, although expected to be
approximately $450,000 before tax in the first year and average $256,000 before
tax per year over the remaining 17 year term of the proposed restructured loan,
have not been reflected in the results for the quarter ended September 30, 1996,
as the restructuring is dependent on IRS approval. Cost savings will be
reflected in the Company's financial statements when, and if, the IRS approves
the change. No assurance can be given as to whether the IRS will approve the
restructuring.
Federal income tax expense (benefit) totaled ($293,000) for the quarter ended
September 30, 1996, a decrease of $1.1 million from $830,000 for the quarter
ended September 30, 1995. The decrease is primarily the result of the impairment
loss on securities and the one-time SAIF assessment mentioned above.
Effect of New Accounting Standards
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. SFAS No. 125 establishes the accounting for certain financial
asset transfers, including securitization transactions, and will become
effective for transactions entered into on or after January 1, 1997. Management
does not expect the implementation of SFAS No. 125 to have a material impact on
the Company's consolidated financial position or results of operations.
Liquidity
In general terms, liquidity is a measurement of the Company's ability to meet
its cash needs. For example, the Company's objective 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 principal sources of funds are deposits, amortization
and prepayments of loans, maturities, sales and principal receipts of
securities, operations and borrowings.
All savings institutions, including the Bank, are required by federal regulation
to maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of its average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. This liquid asset ratio may
vary from time to time depending on economic conditions and savings flows of all
savings institutions. Currently, the minimum liquid asset ratio is 5%.. In
addition, short-term liquid assets (e.g., cash, certain time deposits, certain
banker's acceptances and short-term U.S. Government obligations) currently must
constitute at least 1% of the Bank's average daily balance of net withdrawable
deposit accounts and current borrowings. Penalties may be imposed for violations
of either liquid assets ratio requirement. At September 30, 1996 and 1995, the
Bank was in compliance with both requirements, with overall liquid asset ratios
of 10.3% and 16.0%, respectively, and short-term liquid asset ratios of 4.0% and
7.0%, respectively. The decrease in the overall liquid asset ratio from the
September 30, 1995 level reflects the use of security maturities and sales and
increased borrowings to fund loan originations during the past year. The Bank
intends to maintain higher than required levels of liquidity, but will continue
to reduce these ratios as lending opportunities become available.
Capital Resources
Federal regulations require savings institutions to maintain certain minimum
levels of regulatory capital. Regulations require tangible capital divided by
total adjusted assets to be at least 1.5%. The regulations also require core
capital divided by total adjusted assets to be at least 3.0%, and risk-based
capital divided by risk-weighted assets must be at least 8.0%. The regulations
define tangible, core and risk-based capital as well as total adjusted assets
and risk-weighted assets.
The Federal Deposit Insurance Corporation Improvement Act (FDICIA) was signed
into law on December 19, 1991. Regulations implementing the prompt corrective
action provisions of FDICIA became effective on December 19, 1992. The prompt
corrective action regulations define specific capital categories based on an
institution's capital ratios. The capital categories, in declining order, are
"well capitalized", "adequately capitalized", "undercapitalized", "significantly
undercapitalized", and "critically undercapitalized." To be considered "well
capitalized", an institution must generally have a leverage capital ratio of at
lease 5%, a Tier-1 risk-based capital ratio of at least 6%, and a total
risk-based capital ratio of at least 10 %.
At September 30, 1996, the Bank was in compliance with regulatory capital
requirements and is considered "well capitalized" as set forth below:
<TABLE>
<CAPTION>
Core/ Tier-1 Total
Equity Tangible Leverage Risk-Based Risk-Based
(dollars in thousands) Capital Capital Capital Capital Capital
- ---------------------- --------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
GAAP Capital $ 52,954 $ 52,954 $ 52,954 $ 52,954 $ 52,954
Unrealized depreciation or loss on securities
available for sale, net 406 406 406 406
General loan valuation allowances - - - 3,331
-------------------------------------------------
Regulatory capital 53,360 53,360 53,360 56,691
Total assets 567,185
Adjusted total assets 567,691 567,691
Risk-weighted assets 334,094 334,094
--------------------------------------------------------------
Capital ratio 9.3% 9.4% 9.4% 16.0% 17.0%
Regulatory capital category
Well capitalized - equal to or greater than 5.0% 6.0% 10.0%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Recent Developments
On August 20, 1996, the Small Business Job Protection Act of 1996 was signed
into law which, among other things, effects thrift institutions such as the Bank
regarding bad debt provisions. Large thrifts (see below) must switch to the
specific charge-off method of Internal Revenue Code (IRC) Section 166 while
small thrifts must switch to the reserve method of IRC Section 585 (the method
currently used by small commercial banks). Under the specific charge-off method
for large thrifts, charge-offs are deducted and recoveries are taken into
taxable income as incurred. This bill eliminates the percentage of taxable
income method for computing additions to the thrift tax bad debt reserves for
tax years beginning after December 31, 1995. This will effect the Bank beginning
in fiscal year ending June 30, 1997. The bill also requires that thrift
institutions such as the Bank recapture all or a portion of their tax bad debt
reserves added since the base year. For the Bank, the base year is June 30, 1988
and the tax bad debt reserves added since that date is $3.4 million. The amount
of the reserves to be recaptured depends upon whether the institution is
considered a large institution for tax purposes. A small thrift is required to
recapture the portion of its reserves that exceeds the greater of (1) the
experience method reserve computed as if the thrift had always been a small
bank, or (2) the lessor of the qualifying and non-qualifying base year reserves
or the contracted base year reserves. The opening tax bad debt reserve for a
small thrift for the first taxable year beginning after December 31, 1995 is the
greater of the two amounts described in (1) and (2) above. A small thrift that
switches to the Section 585 experience method must make an annual addition to
its reserve for bad debts. Under the repealed Section 593, a thrift was not
required to make a minimum addition to its reserve for any taxable year.
An institution is considered large if the quarterly average of the institution's
(or the consolidated group's) total assets exceeds $500 million for the year.
The Bank is considered a large institution and is required to recapture the
excess of its bad debt reserves beginning in fiscal year 1997 and to continue
such recapture ratably over a six year period. However, postponement of the
recapture is possible for a two year period and will generally allow
institutions, such as the Bank, to suspend such recapture for the first two
years. In order to postpone the bad debt reserve recapture, the Bank must meet a
minimum level of mortgage lending activity for those years. The level of
mortgage lending activity needed to qualify for this suspension is the
institution's average mortgage lending activity for the six taxable years
preceding 1996 adjusted for inflation. For this purpose, only home purchase and
home improvement loans qualify (refinancing and home equity loans do not
qualify) and financial institutions can elect to have the tax years with the
highest and lowest lending activity removed from the average calculation.
As a result of the recently enacted legislation capitalizing the SAIF (see NOTE
D of the Notes to Consolidated Financial Statements contained herein) the Bank
Insurance Fund (BIF) and SAIF will be merged on January 1, 1999, into a new
Deposit Insurance Fund (DIF), provided "no insured depository institution is a
savings association on that date." The Treasury Department is directed to
present recommendations to Congress for establishment of a common depository
institution charter by March 31, 1997.
PART II: OTHER INFORMATION
FFY FINANCIAL CORP.
SEPTEMBER 30, 1996
Item 1. Legal Proceedings
The Holding Company is not a party to any material legal proceeding before any
court or regulatory authority, administrative agency or other tribunal. Further,
the Holding Company is not aware of the threat of any such proceeding.
As part of its ordinary course of business, the Bank is a party to several
lawsuits involving a variety of claims including the collection of delinquent
accounts. No litigation is pending or, to the Bank's knowledge, threatened in
which the Bank faces potential loss or exposure which would have a material
impact on its financial condition or results of operations. The 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 16, 1996, 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:
<TABLE>
<CAPTION>
BROKER
NAME FOR WITHHELD NON-VOTES
---- --------- -------- ---------
<S> <C> <C> <C>
Jeffrey L. Francis 4,113,508 49,291 -0-
Myron S. Roh 4,030,118 132,680 -0-
Ronald P. Volpe 4,028,674 134,125 -0-
</TABLE>
Ratification of the Appointment of Auditors for a three-year term:
<TABLE>
<CAPTION>
BROKER
NAME FOR AGAINST ABSTAIN NON-VOTES
---- --------- ------- ------- ---------
<S> <C> <C> <C> <S>
KPMG Peat Marwick LLP 4,021,497 107,453 34,281 -0-
</TABLE>
Item 5. Other Information
Kenneth C. Schafer retired as director of the Company effective
October 16, 1996. Mr. Schafer has been a director for 36 years.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits - None
B. Reports on Form 8-K - None
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 14, 1996 By: /s/ Jeffrey L. Francis
-------------------------------------
Jeffrey L. Francis
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 1996 By: /s/ Therese Ann Liutkus
-------------------------------------
Therese Ann Liutkus
Treasurer and Chief Financial Officer
(Principal Financial and Accounting
Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1996
<CASH> 3,918,964
<INT-BEARING-DEPOSITS> 2,795,107
<FED-FUNDS-SOLD> 1,960,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 125,023,001
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 449,145,477
<ALLOWANCE> 3,544,712
<TOTAL-ASSETS> 602,556,791
<DEPOSITS> 448,910,033
<SHORT-TERM> 39,273,809
<LIABILITIES-OTHER> 12,144,817
<LONG-TERM> 0
0
0
<COMMON> 66,300
<OTHER-SE> 102,161,832
<TOTAL-LIABILITIES-AND-EQUITY> 602,556,791
<INTEREST-LOAN> 9,486,553
<INTEREST-INVEST> 1,680,324
<INTEREST-OTHER> 42,312
<INTEREST-TOTAL> 11,209,189
<INTEREST-DEPOSIT> 5,422,644
<INTEREST-EXPENSE> 5,566,356
<INTEREST-INCOME-NET> 5,642,833
<LOAN-LOSSES> 154,416
<SECURITIES-GAINS> (543,130)
<EXPENSE-OTHER> 5,952,916
<INCOME-PRETAX> (788,625)
<INCOME-PRE-EXTRAORDINARY> (495,625)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (495,625)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
<YIELD-ACTUAL> 4.08
<LOANS-NON> 4,415,584
<LOANS-PAST> 0
<LOANS-TROUBLED> 618,828
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,439,305
<CHARGE-OFFS> 51,059
<RECOVERIES> 2,050
<ALLOWANCE-CLOSE> 3,544,712
<ALLOWANCE-DOMESTIC> 3,544,712
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
