UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
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 CORPORATION
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 34-1735753
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
724 Boardman-Poland Rd., Youngstown, Ohio 44512
- ----------------------------------------- --------
(Address of Principal Executive Offices) Zip Code
Registrant's telephone number, including area code: (330) 726-3396
____________________
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such requirements for the past 90 days.
YES [X] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Sect. 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [ ]
As of August 29, 1997, the Registrant had 4,117,407 shares of Common Stock
issued and outstanding.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, computed by reference to the average of the bid and asked price
of such stock as of August 29, 1997 was $83.9 million. (The exclusion from
such amount of the market value of the shares owned by any person shall not
be deemed an admission by the Registrant that such person is an affiliate of
the Registrant.)
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of Form 10-K - Annual Report to Stockholders for the fiscal
year ended June 30, 1997.
Part III of Form 10-K - Proxy Statement for Annual Meeting of Stockholders
to be held in 1997.
PART I
Item 1. Business
FFY Financial Corp. (FFY or Holding Company), is a Delaware corporation
formed in 1993 at the direction of First Federal Savings Bank of Youngstown
(First Federal or Bank). The Holding Company owns all of the common stock of
First Federal which operates 10 full service banking facilities and 2 limited
banking facilities in Mahoning and Trumbull Counties of Ohio. At June 30,
1997, the Holding Company had total consolidated assets of $599.2 million.
The business of the Holding Company currently consists primarily of the
business of First Federal. The holding company structure, however, provides
the Holding Company with greater flexibility than the Bank has to diversify
its business activities, through existing or newly formed subsidiaries (see
"Subsidiary and Other Activities" on page 20 of this report), or through
acquisitions or mergers of both mutual and stock thrift institutions as well
as other companies. Although there are no current arrangements, understandings
or agreements regarding any such acquisitions, the Holding Company is in a
position, subject to regulatory restrictions, to take advantage of any
favorable acquisition opportunities that may arise. First Federal provides a
variety of banking services to its customers other than its primary business
activities of making loans and accepting deposits.
Forward-Looking Statements
When used in this Form 10-K, or, in future filings by the Holding Company with
the Securities and Exchange Commission, in the Holding 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 Bank's market
area, changes in policies by regulatory agencies, fluctuations in interest
rates, demand for loans in the Bank's market area and competition, that could
cause actual results to differ materially from historical earnings and those
presently anticipated or projected. The Holding 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 Holding Company wishes to advise
readers that the factors listed above could affect the Holding Company's
financial performance and could cause the Holding 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 Holding 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.
Lending Activities
General. The Bank emphasizes the origination of 15 and 20 year fixed- and
adjustable-rate mortgage loans secured by one-to-four family residences and,
to a lesser extent, commercial and multi-family loans with higher yields
than traditional one-to-four family loans. The Bank also emphasizes the
origination of consumer loans with higher yields and shorter durations than
traditional mortgage loans.
All loans that are $350,000 or less must be approved by either the Vice
President in charge of lending or a committee comprised of officers of the
Bank. Loans greater than $350,000 must be approved by the Executive
Committee of the Board of Directors and loans greater than $650,000 must be
approved by the Board of Directors. All loans, once approved, are reviewed
by the Board of Directors.
The Bank's loans-to-one-borrower limit is generally 15% of unimpaired
capital and surplus. At June 30, 1997, the maximum amount which the Bank
could have lent under this limit to any one borrower and the borrower's
related entities was approximately $8.7 million. At June 30, 1997, the Bank
had no loans or groups of loans to related borrowers with outstanding
balances in excess of this amount. The largest lending relationship at June
30, 1997 totaled $6.1 million which is secured by office buildings located
in Ohio. There are 13 other large lending relationships ranging from $1.0
million to $4.2 million for an aggregate total of $28.0 million.
Loan Portfolio Composition. The following table sets forth information
concerning the composition of the Bank's loan portfolio in dollar amounts
and in percentages (before deductions for loans in process, deferred fees
and discounts and allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ---------------- ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One-to-four family $349,053 73.59% 334,307 73.64% 308,774 74.45% 293,540 75.58% 267,793 77.73%
Multi-family 16,294 3.44% 15,934 3.51% 15,157 3.65% 12,186 3.14% 8,751 2.54%
Commercial 30,997 6.53% 29,024 6.39% 28,304 6.82% 25,826 6.65% 21,725 6.31%
Development 489 0.10% 676 0.15% 204 0.05% 256 0.07% 452 0.13%
Construction 22,690 4.78% 21,960 4.84% 20,287 4.89% 20,870 5.37% 15,160 4.40%
---------------------------------------------------------------------------------------------
Total real estate loans 419,523 88.44% 401,901 88.53% 372,726 89.86% 352,678 90.81% 313,881 91.11%
---------------------------------------------------------------------------------------------
Consumer Loans:
Deposit account 1,240 0.26% 1,115 0.25% 1,090 0.26% 1,098 0.28% 1,459 0.42%
Automobile 16,349 3.45% 17,245 3.80% 8,380 2.02% 7,287 1.88% 5,180 1.50%
Home equity 33,269 7.01% 29,783 6.56% 29,711 7.17% 25,055 6.45% 21,891 6.36%
Other 3,969 0.84% 3,920 0.86% 2,856 0.69% 2,248 0.58% 2,097 0.61%
---------------------------------------------------------------------------------------------
Total consumer loans 54,827 11.56% 52,063 11.47% 42,037 10.14% 35,688 9.19% 30,627 8.89%
---------------------------------------------------------------------------------------------
Total loans 474,350 100.00% 453,964 100.00% 414,763 100.00% 388,366 100.00% 344,508 100.00%
======= ======= ======= ======= =======
Less:
Loans in process (7,861) (8,830) (6,346) (8,136) (5,980)
Deferred fees and discount (2,815) (2,905) (3,594) (3,987) (3,642)
Allowance for losses (2,962) (3,439) (3,159) (2,801) (2,437)
-------- ------- ------- ------- -------
Total loans receivable, net $460,712 438,790 401,664 373,442 332,449
======== ======= ======= ======= =======
</TABLE>
The following table shows the composition of the Bank's loan portfolio by
fixed and adjustable rates at the dates indicated.
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ---------------- ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One-to-four family $275,258 58.03% 271,557 59.82% 246,036 59.32% 232,521 59.87% 201,704 58.55%
Multi-family 3,969 0.84% 3,624 0.79% 5,256 1.27% 4,700 1.21% 4,653 1.35%
Commercial 24,498 5.16% 23,784 5.24% 23,818 5.74% 21,243 5.47% 16,907 4.91%
Development 489 0.10% 676 0.15% 174 0.04% 256 0.07% 286 0.08%
Construction 22,690 4.78% 21,960 4.84% 20,287 4.89% 20,870 5.37% 15,160 4.40%
---------------------------------------------------------------------------------------------
Total fixed-rate real estate
loans 326,904 68.91% 321,601 70.84% 295,571 71.26% 279,590 71.99% 238,710 69.29%
Consumer - fixed-rate 52,013 10.97% 50,081 11.03% 40,870 9.85% 35,415 9.12% 30,627 8.89%
---------------------------------------------------------------------------------------------
Total fixed-rate loans 378,917 79.88% 371,682 81.87% 336,441 81.11% 315,005 81.11% 269,337 78.18%
Adjustable-Rate Loans:
Real estate:
One-to-four family 73,795 15.56% 62,750 13.82% 62,738 15.13% 61,019 15.71% 66,089 19.18%
Multi-family 12,325 2.60% 12,310 2.71% 9,901 2.39% 7,486 1.93% 4,098 1.19%
Commercial 6,499 1.37% 5,240 1.16% 4,486 1.08% 4,583 1.18% 4,818 1.40%
Development - - - - 30 0.01% - - 166 0.05%
Construction - - - - - - - - - -
---------------------------------------------------------------------------------------------
Total adjustable-rate real
estate loans 92,619 19.53% 80,300 17.69% 77,155 18.61% 73,088 18.82% 75,171 21.82%
Consumer - adjustable-rate 2,814 0.59% 1,982 0.44% 1,167 0.28% 273 0.07% - -
---------------------------------------------------------------------------------------------
Total adjustable-rate loans 95,433 20.12% 82,282 18.13% 78,322 18.89% 73,361 18.89% 75,171 21.82%
---------------------------------------------------------------------------------------------
Total loans 474,350 100.00% 453,964 100.00% 414,763 100.00% 388,366 100.00% 344,508 100.00%
======= ======= ======= ======= =======
Less:
Loans in process (7,861) (8,830) (6,346) (8,136) (5,980)
Deferred fees and discounts (2,815) (2,905) (3,594) (3,987) (3,642)
Allowance for losses (2,962) (3,439) (3,159) (2,801) (2,437)
-------- ------- ------- ------- -------
Total loans receivable, net $460,712 438,790 401,664 373,442 332,449
======== ======= ======= ======= =======
</TABLE>
The following schedule illustrates the interest rate sensitivity of the
Bank's loan portfolio at June 30, 1997. Loans which have adjustable or
renegotiable interest rates are shown as maturing in the period during which
the contract matures. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
-------------------------------------------------------------------------
Construction and
One-to-four family Multi-family Commercial Development Consumer Total
------------------ ---------------- ---------------- ----------------- ---------------- -----------------
Weighted Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Due During
Periods Ending
June 30,
- --------------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998(1) $ 536 8.62% - - 31 10.56% 2,603 9.36% 2,611 10.92% 5,781 10.00%
1999 702 8.21% - - 674 8.35% 6,193 9.81% 3,597 8.94% 11,166 9.34%
2000 857 8.80% 509 8.50% 18 10.93% 793 8.98% 5,880 9.63% 8,057 9.41%
2001 and 2002 8,715 8.53% 913 9.63% 3,272 8.11% 1,224 9.53% 21,781 8.44% 35,905 8.50%
2003 to 2007 45,404 7.97% 2,986 8.56% 11,568 8.84% - - 17,990 9.50% 77,948 8.47%
2008 to 2012 98,269 7.76% 5,280 9.09% 12,146 9.33% 387(2) 8.00% 2,968 9.51% 119,050 8.02%
2013 and following 194,570 7.98% 6,606 9.04% 3,288 9.33% 11,979(2) 8.02% - - 216,443 8.04%
-------- ------ ------ ------ ------ -------
$349,053 16,294 30,997 23,179 54,827 474,350
======== ====== ====== ====== ====== =======
- --------------------
<F1> Includes overdraft loans.
<F2> Includes construction loans which the Bank reclassifies as permanent
loans once the construction phase is completed.
</TABLE>
The total amount of loans due after June 30, 1998 which have predetermined
interest rates is $373.1 million, while the total amount of loans due after
such date which have floating or adjustable interest rates is $95.5 million.
One-to-Four Family Residential Real Estate Lending
The cornerstone of the Bank's lending program has been the origination of
permanent loans, to be held in its portfolio, secured by mortgages on owner-
occupied, one-to-four family residences. As of June 30, 1997, more than 95%
of these loans were located in the Bank's market area.
Since 1987, the Bank has emphasized 10, 15 and 20 year fixed-rate loans due
to the more rapid amortization of such loans as compared to 30 year fixed-
rate loans. Such loans allow the Bank to broaden the range of products
offered to customers, thereby distinguishing itself from other lenders.
During December 1995, the Bank commenced its offering of "super seven" loans
in an effort to compete with other banks in its market area, especially
banks in Trumbull County, Ohio, which have been successful with such a
product. Super seven loans are fixed for seven years and convert to a
one-year adjustable rate mortgage (ARM) in the eighth year with a maximum
term of 30 years. At June 30, 1997, $15.1 million, or 3.2% of the Bank's
gross loan portfolio consisted of super seven loans.
The Bank also originates one-to-four family residential ARMs which are fully
amortizing loans with contractual maturities of up to 30 years. The
interest rates on substantially all of the ARMs originated by the Bank are
subject to adjustment at three-year intervals. The Bank's ARM products
generally carry interest rates which are reset to a stated margin over an
independent index. Increases and decreases in the interest rate of the
Bank's ARMs are generally limited to 2% at any adjustment date and 5% over
the life of the loan. The Bank's ARMs are not convertible into fixed-rate
loans, are not assumable, do not contain prepayment penalties and do not
produce negative amortization.
The Bank evaluates both the borrower's ability to make principal and
interest payments and the value of the property that will secure the loan.
In the past, First Federal generally did not verify a borrower's employment
history or the source of the down payment enabling the Bank to close a loan
significantly faster than its competitors. However, due to standard
secondary market underwriting requirements, First Federal is currently
establishing procedures to verify employment history and down payment
sources since the Bank anticipates selling certain loans to Federal National
Mortgage Association (FNMA) sometime during the first half of fiscal year
1998. Management has also determined that underwriting standards required by
FNMA and other secondary market investors will be followed for new loans
originated that the Bank retains in its portfolio. Management expects that
compliance with secondary market underwriting standards will not significantly
affect the timing of closing loans.
The Bank originates residential mortgage loans with loan-to-value ratios up
to 95%. On mortgage loans exceeding an 85% loan-to-value ratio at the time
of origination, however, First Federal generally requires private mortgage
insurance in an amount intended to reduce the Bank's exposure to 72% of the
appraised value of the underlying collateral. Property securing real estate
loans made by First Federal is appraised by staff appraisers of the Bank.
The Bank requires evidence of marketable title and lien position on all
loans secured by real property and requires fire and extended coverage
casualty insurance in amounts at least equal to the principal amount of the
loan or the value of improvements on the property, depending on the type of
loan. The Bank may also require flood insurance to protect the property
securing its interest.
Residential mortgage loan originations derive from a number of sources,
including real estate broker referrals, existing borrowers and depositors,
builders and walk-in customers. Loan applications are accepted at all of
the Bank's offices.
Multi-Family and Commercial Real Estate Lending
First Federal originates permanent loans secured by multi-family and
commercial real estate in order to enhance the yield on its assets. The
permanent multi-family and commercial real estate loan portfolio includes
loans secured by strip shopping centers, apartments, small office buildings,
warehouses, churches and other business properties, approximately 86% of
which are located within the Bank's market area.
Permanent multi-family and commercial real estate loans have a maximum term
of 30 years, with most having terms ranging from 10 to 15 years. Rates on
permanent loans are predominantly fixed, based on competitive factors. To a
lesser extent, the Bank originates adjustable rate loans which generally
carry interest rates which are reset to a stated margin over an independent
index. Multi-family loans and commercial real estate loans are generally
written in amounts of up to 75% of the appraised value of the property, and
borrowers are generally personally liable for all or part of the indebtedness.
However, none of the loans comprising the Bank's second largest lending
relationship of $4.2 million are subject to any personal guarantees.
Appraisals on properties securing multi-family and commercial real estate
loans originated by the Bank are performed by either an independent
appraiser designated by the Bank or by the Bank's staff appraisers at the
time the loan is made. All appraisals on multi-family and commercial real
estate loans are reviewed by the Bank's management. In addition, the Bank's
current underwriting procedures generally require verification of the
borrower's credit history, income and financial statements, banking
relationships, references and income projections for the property.
At June 30, 1997, the Bank had two multi-family or commercial real estate
loans, each with a net book value in excess of $2.0 million, and six other
multi-family or commercial real estate loans, each with a net book value in
excess of $1.0 million but less than $2.0 million. All of these loans were
current at that date. However, one of these commercial real estate loans,
totaling approximately $1.3 million at June 30, 1997, is secured by a strip
shopping center where the anchor tenant has no established sales history.
This loan has been classified substandard as of June 30, 1997. See "- Asset
Quality - Troubled Debt Restructurings," "- Other Loans of Concern,"
"- Classified Assets" and "- Allowance for Loan Losses."
Multi-family and commercial real estate loans generally present a higher
level of risk than loans secured by one-to-four family residences. This
greater risk is due to several factors, including the concentration of
principal in a limited number of loans and borrowers, the effects of general
economic conditions on income producing properties and the increased
complexity of evaluating and monitoring these types of loans. Furthermore,
the repayment of loans secured by multi-family and commercial real estate is
typically dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced (for example, if
leases are not obtained or renewed, or a bankruptcy court modifies a lease
term, or a major tenant is unable to fulfill its lease obligations), the
borrower's ability to repay the loan may be impaired.
Construction and Development Lending
The Bank makes construction loans to individuals for the construction of
their residences, as well as to builders and developers for the construction
of one-to-four family residences and commercial real estate and the
development of one-to-four family lots in Ohio. At June 30, 1997, all of
these loans were secured by property located within the Bank's market area.
Construction loans to individuals for their residences are structured to be
converted to permanent loans at the end of the construction phase, which
typically runs six months. These construction loans have rates and terms
which match any one-to-four family loans then offered by the Bank, except
that during the construction phase, the borrower pays interest only and the
maximum loan to value ratio is 90%. On construction loans exceeding an 85%
loan-to-value ratio, First Federal generally requires private mortgage
insurance, thus reducing the Bank's exposure. Residential construction
loans are generally underwritten pursuant to the same guidelines used for
originating permanent residential loans. At June 30, 1997, the Bank had
$12.2 million of construction loans to borrowers intending to live in the
properties upon completion of construction.
Construction loans to builders of one-to-four family residences require the
payment of interest only for up to 12 months and have terms of up to 12
months. These loans may provide for the payment of interest and loan fees
from loan proceeds and carry fixed rates of interest. Loan fees charged in
connection with the origination of such loans range from 1% of the loan
amount to a maximum of $2,000. At June 30, 1997, the Bank had $6.4 million
of construction loans to builders of one-to-four family residences.
The Bank also makes loans to builders for the purpose of developing one-to-
four family homesites. These loans typically have terms of from one to
three years and carry fixed interest rates. The maximum loan-to-value ratio
is 75% for such loans. Loan fees charged in connection with the origination
of such loans generally range from 1% to 2% of the loan amount. These loans
may provide for the payment of interest and loan fees from loan proceeds.
The principal in these loans is typically paid down as homesites are sold.
At June 30, 1997, the Bank had $3.2 million of development loans to
builders.
Construction loans on commercial real estate projects may be secured by
strip shopping centers, apartments, small office buildings, churches or
other property and are structured to be converted to permanent loans at the
end of the construction phase, which generally runs up to 12 months. These
construction loans have rates and terms which match any permanent multi-
family or commercial real estate loan then offered by the Bank, except that
during the construction phase, the borrower pays interest only. These loans
generally provide for the payment of interest and loan fees from loan
proceeds. At June 30, 1997, the Bank had $865,000 of commercial real estate
construction loans.
Construction and development loans are obtained principally through
continued business from developers and builders who have previously borrowed
from the Bank, as well as referrals from existing customers and walk-in
customers. The application process includes a submission to the Bank of
accurate plans, specifications and costs of the project to be
constructed/developed. These items are used as a basis to determine the
appraised value of the subject property. Loans are based on the lesser of
current appraised value and/or the cost of construction (land plus
building).
Because of the uncertainties inherent in estimating development and
construction costs and the market for the project upon completion, it is
relatively difficult to evaluate accurately the total loan funds required to
complete a project, the related loan-to-value ratios and the likelihood of
ultimate success of the project. In addition, management requires pro forma
cash flow analysis and debt service coverage ratios or verification of
construction progress prior to authorizing a construction draw and require
mechanics' lien waivers and other documents to protect and verify its lien
position. Construction and development loans to borrowers other than owner-
occupants also involve many of the same risks discussed above regarding
multi-family and commercial real estate loans and tend to be more sensitive
to general economic conditions than many other types of loans. Also, the
funding of loan fees and interest during the construction phase makes the
monitoring of the progress of the project particularly important, as
customary early warning signals of project difficulties may not be present.
At June 30, 1997, there were no construction and development loans in an
amount greater than $1.0 million.
Consumer Lending
The Bank originates various types of consumer loans including, but not
limited to, home equity and automobile loans. Since 1990, First Federal has
placed increasing emphasis on consumer loans, particularly home equity
loans, because of their attractive yields and shorter terms to maturity.
The Bank's home equity loans are written so that the total commitment
amount, when combined with the balance of the first mortgage lien, may not
exceed 100% of the appraised value of the property where the Bank holds the
first lien and 80% if the first mortgage is held by a third party. At June
30, 1997, the Bank held a first lien on approximately 93% of the properties
securing home equity loans from the Bank. Closed-end home equity loans are
written with terms of up to ten years and carry fixed rates of interest.
Open-end home equity lines of credit are written for a draw period of 10
years at a variable interest rate of 1% above the prime rate adjusted
monthly. After the draw period, the lines of credit convert into fixed
rate, closed-end loans with terms of up to 10 years, or the lines of credit
can be renewed.
During fiscal year 1996, the Bank began originating automobile loans through
dealerships (indirect auto lending) in an effort to gain a portion of this
market. However, this program was discontinued after approximately 14
months of operation due to the performance and potential returns of the
portfolio. Underwriting standards were tightened in mid-September 1996
in response to the performance of the portfolio. At September 30, 1996,
this portfolio had 1,001 loans totaling $12.3 million and has subsequently
dropped to 857 loans totaling $8.9 million at June 30, 1997. The decline
was due to both write-offs and principal receipts. Management has
identified potential problem loans that remain in this portfolio and
believes there are adequate reserves at June 30, 1997. Indirect auto loans
tend to be of greater risk than direct auto loans due to the fact that
institutions such as the Bank work with dealers rather than directly with the
customers.
Pursuant to the discontinuance of the indirect auto loan program, the Bank
began its own auto loan promotion in May 1997, offering potential customers
reduced rates, no processing fees, rebates and anti-theft devices. As of
July 31, 1997, the Bank disbursed $1.2 million through 134 loans as a result
of the promotion. The promotion is expected to last until the end of October
1997.
The underwriting standards employed by the Bank for consumer loans include a
determination of the applicant's payment history on other debts and ability
to meet existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is of primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount. While consumer loans other than home
equity loans generally involve a higher level of credit risk than one-to-four
family residential loans, consumer loans are typically made at higher interest
rates and for shorter terms. The shorter term of consumer loans reduces the
Bank's exposure to interest rate risk.
Loan Origination and Repayment Activities
The following table sets forth the loan origination and repayment activities
of the Bank for the periods indicated. The Bank has not sold loans in the
secondary market.
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate - one-to-four family $ 19,712 11,613 9,894
- multi-family 943 1,922 1,728
- commercial 995 654 -
- construction or development 197 451 481
Non-real estate - consumer 2,395 2,320 1,421
------------------------------
Total adjustable rate 24,242 16,960 13,524
Fixed rate:
Real estate - one-to-four family 31,001 48,235 30,482
- multi-family 314 677 761
- commercial 2,248 2,136 1,099
- construction or development 29,045 27,413 27,011
Non-real estate - consumer 32,013 34,790 25,736
------------------------------
Total fixed rate 94,621 113,251 85,089
------------------------------
Total loans originated 118,863 130,211 98,613
Principal repayments (97,840) (91,206) (72,694)
Increase (decrease) in other items, net (638) 196 478
------------------------------
Net increase $ 20,385 39,201 26,397
==============================
</TABLE>
Asset Quality
When a borrower fails to make a required payment on a loan, the Bank
attempts to cure the delinquency by contacting the borrower. In the case of
residential loans, a late notice is generated between 15 to 30 days past
the due date and collection action is commenced. Written and verbal
contacts are attempted from this point until the account is brought to a
current status. If the delinquency continues, a default letter is generally
sent between 60 and 90 days and if the status does not improve, the Bank
will begin foreclosure action between 90 and 120 days past due.
Delinquent consumer loans are handled in a similar manner except that late
notices are generated between 10 to 15 days past due and collection action
is commenced at that point. If the delinquency continues and no
arrangements are made with the borrower, the Bank will take appropriate
action to protect its interest generally by 60 days past due. This may
include repossession, foreclosure or law suit, if necessary. If
repossession occurs, the borrower has the opportunity to redeem the vehicle
prior to sale at public auction by contacting the Bank any paying charges
and delinquencies associated with the repossession. The Bank's repossession
guidelines comply with the requirements under the Ohio Revised Code.
The Bank has not had significant experience with delinquent multi-family,
commercial real estate or commercial real estate construction loans.
Delinquent Loans. The following table sets forth information concerning
delinquent loans at June 30, 1997, in dollar amounts and as a percentage of
each category of the Bank's loan portfolio. The amounts presented represent
the total remaining principal balances of the related loans, rather than the
actual payment amounts which are overdue.
<TABLE>
<CAPTION>
Loans Delinquent For:
------------------------------------------------------- Total Loans Delinquent
60-89 Days 90 Days and Over 60 Days and Over
-------------------------- -------------------------- --------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One-to-four family 50 $1,915 0.55% 69 2,348 0.67% 119 4,263 1.22%
Multi-family - - - - - - - - -
Commercial - - - 1 110 0.35% 1 110 0.35%
Construction or
development 2 132 0.57% 1 4 0.02% 3 136 0.59%
Consumer 43 473 0.86% 39 483 0.88% 82 956 1.74%
------------- ------------- -------------
Total 95 $2,520 0.53% 110 2,945 0.62% 205 5,465 1.15%
============= ============= =============
</TABLE>
Non-Performing Assets. The table below sets forth the amounts and
categories of non-performing assets in the Bank's loan portfolio. The
Bank's current approach requires that loans be reviewed periodically and any
loan where collectibility of principal is doubtful is placed on non-accrual
status. Loans are also placed on non-accrual status when the loan becomes
90 days delinquent. Payments received on non-accruing loans are recorded
as interest income, or are applied to the principal balance, depending on an
assessment of the collectibility of the principal of the loan. Loans remain
on non-accrual status until generally less than 90 days delinquent. Troubled
debt restructurings are instances where, due to the debtor's financial
difficulties, modifications are made in the original terms of the loans (e.g.,
principal or interest may be forgiven, the term of the loan may be extended or
the interest rate may be reduced below market rates). Loans remain as troubled
debt restructurings until they are current for 12 consecutive months and the
modifications originally given are not inconsistent with terms currently
provided. Foreclosed assets include assets acquired in settlement of loans.
The amounts shown do not reflect reserves set up against such assets. See
"- Allowance for Loan Losses."
<TABLE>
<CAPTION>
June 30,
----------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One-to-four family $2,359 3,617 3,405 3,463 4,440
Multi-family - - - 4 4
Commercial real estate 110 - 67 - 153
Construction or development 4 71 - - -
Consumer 782 409 420 404 380
----------------------------------------------
Total 3,255 4,097 3,892 3,871 4,977
----------------------------------------------
Troubled debt restructurings:
One-to-four family 685 506 405 879 138
Commercial real estate - - - - 1,428
Consumer 53 70 55 144 -
----------------------------------------------
Total 738 576 460 1,023 1,566(1)
----------------------------------------------
Total non-performing loans 3,993 4,673 4,352 4,894 6,543
----------------------------------------------
Foreclosed assets:
One-to-four family - - - 36 28
----------------------------------------------
Total non-performing assets $3,993 4,673 4,352 4,930 6,571
==============================================
Total non-performing assets as a percentage
of total assets 0.67% 0.81% 0.75% 0.84% 1.15%
==============================================
Total non-performing loans as a percentage
of total loans receivable, net 0.87% 1.06% 1.08% 1.32% 1.97%
==============================================
Allowance for loan losses as a percentage
of non-performing assets 74.18% 73.59% 72.59% 56.82% 37.09%
==============================================
- --------------------
<F1> Approximately $1.4 million of this total relates to one loan, see
"Troubled Debt Restructurings".
</TABLE>
For the year ended June 30, 1997, gross interest income which would have
been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $495,000. The amount that was included in
interest income on such loans was $428,000 for the year ended June 30, 1997.
For the year ended June 30, 1997, gross interest income which would have
been recorded had the troubled debt restructurings been current in
accordance with their original terms amounted to $48,000. The amount that
was included in interest income on such loans was $45,000 for the year ended
June 30, 1997.
Troubled Debt Restructurings. As of June 30, 1997, the Bank had $738,000 in
net book value of troubled debt restructurings, approximately 93% of which
were mortgage loans secured by one-to-four family residences. The largest
outstanding balance of mortgage loans categorized as troubled debt
restructuring was approximately $84,000 at June 30, 1997.
Willard, Ohio - Strip Shopping Center. In 1987, the Bank originated a $1.6
million construction/permanent loan on a strip shopping center in Willard,
Ohio. The loan had a 9.75% interest rate, a term of 15 years and was to be
amortized over 20 years. In July 1992, the shopping center's sole tenant
vacated the premises after filing for bankruptcy and a new tenant, without
any established operating history, moved in. The new tenant negotiated
lease terms at rates lower than the original tenant, thereby reducing the
revenue to the borrower. As a result, the loan was modified to reduce the
interest rate to 7% until 1997; 7.63% until 2002; and 8% until maturity in
2007. The loan was current under the modified loan terms as of June 30,
1997. The Bank's net book value for the loan at June 30, 1997 was
approximately $1.3 million. This loan was removed from troubled debt
restructurings at June 30, 1994 due to the payment history of the borrower
and the reduction in general market interest rates to the point where the
restructured terms no longer represented concessions. The Bank's management
reviews the tenant's operating statement annually and has classified this
loan as substandard at June 30, 1997 based on their review.
Classified Assets. Federal regulations provide for the classification of
loans and other assets, such as debt and equity securities considered by the
OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An
asset is considered "substandard" if it is inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that the insured institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as "doubtful" have
all of the weaknesses inherent in those classified "substandard," with the
added characteristic that the weaknesses present make "collection or
liquidation in full," on the basis of currently existing facts, conditions,
and values, "highly questionable and improbable." Assets classified as
"loss" are those considered "uncollectible" and of such little value that
their continuance as assets without the establishment of a specific loss
reserve is not warranted.
When an insured institution classifies problem assets as either substandard
or doubtful, it may establish general allowances for loan losses in an
amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk
associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies problem assets as "loss," it is required either to
establish a specific allowance for losses equal to 100% of that portion of
the asset so classified or to charge off such amount. An institution's
determination as to the classification of its assets and the amount of its
valuation allowances is subject to review by the OTS and the FDIC, either of
which may order the establishment of additional general or specific loss
allowances.
In connection with the filing of its periodic reports with the OTS and in
accordance with its classification of assets policy, the Bank regularly
reviews the problem loans in its portfolio to determine whether any loans
require classification in accordance with applicable regulations.
Classified assets at June 30, 1997 consisted of 231 loans totaling $6.8
million, or 1.1% of total assets compared to 183 loans totaling $5.7
million, or 1.0% of total assets at June 30, 1996. The largest classified
asset was $1.3 million at June 30, 1997 and is discussed above under
"Troubled Debt Restructurings".
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risk inherent in its loan portfolio and changes in the nature and volume of
its loan activity. Such evaluation, which includes a review of all loans of
which full collectibility may not be reasonably assured, considers among
other matters, the estimated fair value of the underlying collateral,
economic conditions, historical loan loss experience and other factors that
warrant recognition in providing for an adequate loan loss allowance.
Although management believes it uses the best information available to make
such determinations, future adjustments to reserves may be necessary, and
net income could be significantly affected, if circumstances differ
substantially from the assumptions used in making the initial
determinations. At June 30, 1997, the Bank had an allowance for loan losses
of $3.0 million, which was equal to 43.7% of classified assets and 74.2% of
non-performing assets. See Notes 1(g) and 3 of the Notes to Consolidated
Financial Statements in the Annual Report to Stockholders, included as
Exhibit 13 herein.
The following table sets forth an analysis of the Bank's allowance for loan
losses at the dates indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 3,439 3,159 2,801 2,437 600
Charge-offs:
One-to-four family (40) (18) (43) (40) (81)
Multi-family - (1) (1) - -
Consumer (1,159) (58) (16) (13) (13)
-------------------------------------------
(1,199) (77) (60) (53) (94)
-------------------------------------------
Recoveries:
One-to-four family 1 18 12 6 15
Construction or development - 2 - - -
Commercial real estate - 2 - - -
Consumer 33 10 3 2 8
-------------------------------------------
34 32 15 8 23
-------------------------------------------
Net charge-offs (1,165) (45) (45) (45) (71)
Additions charged to operations 688 325 403 409 1,908
-------------------------------------------
Balance at end of period $ 2,962 3,439 3,159 2,801 2,437
===========================================
Ratio of net charge-offs during the
period to average loans outstanding
during the period 0.26% 0.01% 0.01% 0.01% 0.02%
===========================================
Ratio of net charge-offs during
the period to average non-
performing assets 24.22% 0.94% 1.04% 0.65% 1.05%
===========================================
</TABLE>
When the Bank repossesses mortgaged property it is thereafter classified as
real estate owned. Any gains or losses (realized or reserved for)
thereafter are treated as real estate owned activity, not mortgage loan
activity. At June 30, 1997, the Bank had no real estate owned.
The distribution of the Bank's allowance for loan losses at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ----------------- ----------------- ----------------- -----------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four family $1,283 73.59% 1,547 73.64% 1,093 74.45% 781 75.58% 717 77.73%
Multi-family 28 3.44% 88 3.51% 53 3.65% 1 3.14% 1 2.54%
Commercial real estate 444 6.53% 773 6.39% 1,704 6.82% 1,459 6.65% 1,033 6.31%
Construction or development 45 4.88% 125 4.99% 72 4.94% - 5.44% 250 4.53%
Consumer 787 11.56% 518 11.47% 237 10.14% 166 9.19% 92 8.89%
Unallocated 375 - 388 - - - 394 - 344 -
-----------------------------------------------------------------------------------------------
Total $2,962 100.00% 3,439 100.00% 3,159 100.00% 2,801 100.00% 2,437 100.00%
===============================================================================================
</TABLE>
Investment Activities
First Federal must maintain minimum levels of investments that qualify as
liquid assets under OTS regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. The Bank has maintained
liquid assets at levels above the minimum requirements imposed by the OTS
regulations and above levels believed adequate to meet the requirements of
normal operations, including potential deposit outflows. Cash flow
projections are regularly reviewed and updated to assure that adequate
liquidity is maintained. At June 30, 1997, the Bank's liquidity ratio
(liquid assets as a percentage of net withdrawable savings deposits and
current borrowings) was 5.1%. The Bank's level of liquidity is a result of
management's asset/liability strategy. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Asset/Liability
Management" and "- Liquidity and Capital Resources" in the Annual Report to
Stockholders included as Exhibit 13 herein and "Regulation - Liquidity."
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury
obligations, securities of various federal agencies, certain certificates of
deposit of insured banks and savings institutions, certain bankers'
acceptances, repurchase agreements and federal funds. Subject to various
restrictions, federally chartered savings institutions may also invest their
assets in commercial paper, investment grade corporate debt securities and
mutual funds whose assets conform to the investments that a federally
chartered savings institution is otherwise authorized to make directly.
Generally, the investment policy of the Holding Company and Bank is to
invest funds among various categories of investments and maturities based on
asset/liability management policies, concern for the highest investment
quality, liquidity needs and performance objectives. It is the Holding
Company's and Bank's general policy to purchase securities which are U.S.
Government securities and federal agency obligations, including mortgage-
backed securities. At June 30, 1997, $102.6 million, or 91.5% of the
investment securities portfolio was made up of U.S. Government securities
and federal agency obligations.
The Holding Company and Bank have invested a percentage of their securities
portfolio in Federal agency obligations in an attempt to obtain the highest
yield possible while maintaining the flexibility and low credit risk
connected with such investments. Since 1990, the Federal Home Loan Banks
(FHLBs), the Federal National Mortgage Association (FNMA) and the Federal
Home Loan Mortgage Corporation (FHLMC) have offered callable bonds, issued
at a yield premium over U.S. Treasury obligations of a comparable final
maturity. The call risk is considered acceptable to the Bank because it
provides a higher yield. The call option would typically be exercised
during a declining interest rate environment, during which time the Bank's
cost of funds would also be declining. At June 30, 1997, the Holding
Company and Bank held callable Federal agency obligations with a face value
of $19.0 million.
During the current fiscal year, the Holding Company and Bank purchased
mortgage-backed securities with a face value of $66.2 million of which $28.2
million were adjustable-rate securities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Asset/Liability
Management" in the Annual Report to Stockholders included as Exhibit 13
herein. Management believes mortgage-backed securities offer improved
yields compared to other debt securities in the Company's investment portfolio
without an undue increase in credit or interest rate risk. At June 30, 1997,
mortgaged-backed securities totaled $75.7 million, or 67.5% of the securities
portfolio and 12.6% of total assets. The mortgage-backed securities portfolio
consists of government agency pass-through certificates that provide the
certificate holder a guarantee of timely payments of interest, whether or not
collected.
Mortgage-backed securities generally yield less than the loans that underlie
such securities due to the cost of payment guarantees or credit enhancements
that reduce credit risk to holders. Mortgage-backed securities are also
more liquid than individual mortgage loans and may be used to collateralize
obligations of the Bank. While mortgage-backed securities carry a reduced
credit risk as compared to whole loans, such securities remain subject to
the risk that a fluctuating interest rate environment, along with other
factors such as the geographic distribution of the underlying mortgage
loans, may alter the prepayment rate of such mortgage loans and thereby
affect both the prepayment speed, and value, of such securities. The short
maturity of the Bank's portfolio is designed to minimize that risk.
The following table sets forth the composition of the consolidated debt,
equity and other securities, and FHLB stock portfolios at June 30, 1997,
1996 and 1995.
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------
1997 1996 1995
------------------ ----------------- -----------------
Book % of Book % of Book % of
Value Total Value Total Value Total
------------------ ----------------- -----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Debt securities:
U.S. government securities $ 2,005 1.73% 37,011 32.20% 64,429 43.48%
Federal agency obligations(1) 24,975 21.54% 53,003 46.12% 68,174 46.00%
Mortgage-backed securities(2) 75,718 65.29% 16,398 14.27% 11,819 7.98%
State, county and municipal bonds 7,416 6.40% 4,263 3.71% - -
Equity securities 753 0.65% 478 0.42% 244 0.16%
Other securities 1,000 0.86% - - - -
FHLB stock 4,095 3.53% 3,774 3.28% 3,524 2.38%
---------------------------------------------------------
Total securities and FHLB stock $115,962 100.00% 114,927 100.00% 148,190 100.00%
=========================================================
Average remaining life of debt securities excluding
equity and other securities and FHLB stock 4.72 years 4.67 years 2.31 years
Other interest-earning assets:
Interest-bearing deposits with banks $ 6,216 97.49% 4,888 100.00% 4,855 50.84%
Short-term investments 160 0.03% - - 4,695 49.16%
---------------------------------------------------------
Total $ 6,376 100.00% 4,888 100.00% 9,550 100.00%
=========================================================
Average remaining life or term to repricing of debt
securities and other interest-earning assets excluding
equity and other securities and FHLB stock 4.47 years 4.47 years 2.17 years
- --------------------
<F1> Excluding mortgage-backed securities which include FNMA, FHLMC, and
GNMA pass-through certificates.
<F2> At June 30, 1995, mortgage-backed securities were classified as held
to maturity. See Note 1(d) of the Notes to Consolidated Financial
Statements in the Annual Report to Stockholders included as Exhibit 13
herein.
</TABLE>
The composition and contractual maturities of the consolidated debt and
other securities portfolios, excluding equity securities and FHLB of
Cincinnati stock, are indicated in the following table.
<TABLE>
<CAPTION>
June 30, 1997
-----------------------------------------------------------------
Over Over
One Year 1 thru 5 5 thru 10 Over Total Debt and Other
or Less Years Years 10 Years Securities
-------- -------- --------- -------- --------------------
Book Book Book Book Book Market
Value Value Value Value Value Value
-------- -------- --------- -------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. government securities $ 2,005 - - - 2,005 2,000
Federal agency obligations 10,979 5,998 7,998 - 24,975 24,882
Mortgage-backed securities 628 10,170 7,068 57,852 75,718 75,674
State, county and municipal
securities - 1,322 3,712 2,382 7,416 7,476
Other - - - 1,000 1,000 1,099
---------------------------------------------------------------
Total debt securities $13,612 17,490 18,778 61,234 111,114 111,131
===============================================================
Weighted average yield(1) 5.76% 6.30% 7.06% 7.24% 6.88%
==== ==== ==== ==== ====
- --------------------
<F1> Weighted average yield is presented for debt securities only on a
fully taxable equivalent basis using the Company's federal statutory
tax rate of 34%.
</TABLE>
Sources of Funds
General. The Bank's primary sources of funds are deposits, amortization and
prepayment of loans, maturities, sales and principal receipts of securities,
borrowings, repurchase agreements and operations. The Bank maintains a line
of credit with the Federal Home Loan Bank of Cincinnati if funds are required
beyond the Bank's ability to generate them internally. See Note 7 of the
Notes to Consolidated Financial Statements in the Annual Report to
Stockholders included as Exhibit 13 herein.
Deposits. First Federal offers a variety of deposit accounts having a wide
range of interest rates and terms. The Bank's deposits consist of passbook
and statement savings accounts, NOW accounts, money market and certificate
accounts. The Bank relies primarily on advertising, competitive pricing
policies and customer service to attract and retain these deposits. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset/Liability Management" in the Annual Report to
Stockholders included as Exhibit 13 herein for a discussion of the Bank's
current pricing policies. First Federal generally solicits deposits from its
market area.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition. The Bank manages the pricing of its deposits in keeping with
its asset/liability management, profitability and growth objectives. Based
on its experience, the Bank believes that its passbook, NOW and money market
accounts are relatively stable sources of deposits although they decreased an
aggregate total of $7.8 million, or 4.6% from the prior year. The ability of
the Bank to attract and maintain certificate deposits, and the rates paid on
these deposits, has been and will continue to be significantly affected by
market conditions.
The following table sets forth the dollar amount of savings deposits in the
various types of deposit programs offered by the Bank for the dates
indicated and the rates offered as of June 30, 1997. See Note 5 of the
Notes to Consolidated Financial Statements in the Annual Report to
Stockholders included as Exhibit 13 herein for weighted average nominal
rates.
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------------
1997 1996 1995
------------------- ------------------ ------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transaction and Savings Deposits:
Passbook and Statement Savings
Accounts 3.00% $107,575 23.89% 114,247 25.03% 118,880 25.73%
NOW and Non-Interest Bearing
Accounts 0.00% - 2.50% 31,236 6.94% 28,168 6.17% 27,195 5.89%
Money Market
Accounts 0.00% - 3.00% 22,822 5.07% 27,031 5.92% 30,809 6.67%
-----------------------------------------------------------
Total Non-Certificates 161,633 35.90% 169,446 37.12% 176,884 38.29%
-----------------------------------------------------------
Total Certificates:
3.00% - 3.99% - - - - 2,008 0.43%
4.00% - 4.99% 8,809 1.96% 27,815 6.09% 49,533 10.72%
5.00% - 5.99% 146,339 32.50% 134,702 29.50% 69,649 15.08%
6.00% - 6.99% 124,649 27.69% 68,145 14.93% 99,190 21.47%
7.00% - 7.99% 8,794 1.95% 56,433 12.36% 59,094 12.79%
8.00% - 9.99% - - - - 5,621 1.22%
-----------------------------------------------------------
Total Certificates 288,591 64.10% 287,095 62.88% 285,095 61.71%
-----------------------------------------------------------
Total Deposits $ 450,224 100.00% 456,541 100.00% 461,979 100.00%
===========================================================
</TABLE>
The following table sets forth the savings flows at the Bank during the
periods indicated. Net increase (decrease) refers to the amount of deposits
and interest credited during a period less the amount of withdrawals during
the period.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance $456,541 461,979 456,134
Deposits 491,637 432,473 440,657
Withdrawals (519,643) (459,984) (454,307)
Interest credited 21,689 22,073 19,495
-------------------------------
Ending balance 450,224 456,541 461,979
===============================
Net increase (decrease) (6,317) (5,438) 5,845
===============================
Percent increase (decrease) -1.38% -1.18% 1.28%
===============================
</TABLE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of June 30, 1997.
<TABLE>
<CAPTION>
0.00% - 5.00% - 6.00% - 7.00% - Percent
4.99% 5.99% 6.99% 7.99% Total of Total
------- ------- ------- ------- ----- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts maturing
in quarter ending:
- -----------------------------
September 30, 1997 $8,809 32,332 5,490 - 46,631 16.2%
December 31, 1997 - 22,906 3,045 147 26,098 9.1%
March 31, 1998 - 23,368 8,637 1,654 33,659 11.7%
June 30, 1998 - 13,334 12,244 940 26,518 9.2%
September 30, 1998 - 12,514 3,636 99 16,249 5.6%
December 31, 1998 - 10,698 1,005 - 11,703 4.1%
March 31, 1999 - 3,532 28,007 207 31,746 11.0%
June 30, 1999 - 8,730 10,047 - 18,777 6.5%
September 30, 1999 - 4,376 6,962 1,188 12,526 4.3%
December 31, 1999 - 2,336 7,485 49 9,870 3.4%
March 31, 2000 - 2,703 8,403 2,255 13,361 4.6%
June 30, 2000 - 1,739 6,723 744 9,206 3.2%
September 30, 2000 - 46 2,940 - 2,986 1.0%
Thereafter - 7,725 20,025 1,511 29,261 10.1%
-------------------------------------------------------------
Total $8,809 146,339 124,649 8,794 288,591 100.0%
=============================================================
Percent of total 3.1% 50.7% 43.2% 3.0% 100.0%
===================================================
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit by time remaining until maturity as of June 30, 1997.
<TABLE>
<CAPTION>
Maturity
------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
-------- ------ ------- --------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000 $36,051 23,593 48,283 133,400 241,327
Certificates of deposit greater than
or equal to $100,000 10,579 2,505 11,895 22,285 47,264
-----------------------------------------------------
Total certificates of deposit $46,630 26,098 60,178 155,685 288,591
=====================================================
</TABLE>
Subsidiary and Other Activities
The Bank was the only subsidiary of the Holding Company at June 30, 1997. On
August 12, 1997, FFY Holdings, Inc. was formed for the purpose of being the
holding company for various types of entities the Holding Company may use to
diversify its business activities. On September 8, 1997, the Holding Company
announced the establishment of a new real estate brokerage company in
affiliation with a local real estate firm. The new company, called First Real
Estate Ltd., is located approximately two miles from the Company's main office.
FFY Holdings, Inc. is a wholly-owned subsidiary of the Holding Company. The
Bank had no subsidiaries at June 30, 1997. On July 16, 1997, Ardent Service
Corporation was formed for the purpose of being a 50% owner of Hedgerows
Development, Ltd., a limited liability company formed for the purpose of
constructing, owning and marketing of residential condominium units. Ardent
is a wholly-owned subsidiary of the Bank. Management does not expect that FFY
Holdings, Inc. or Ardent Service Corporation will have a material impact to
the financial condition or results of operations of the Company.
Competition
First Federal's business of originating loans and attracting deposits is
highly competitive. First Federal competes actively with other savings and
loan associations, national and state banks, commercial banks, credit
unions, mortgage bankers and other financial service entities.
Regulation
General. First Federal is a federally chartered savings bank, the deposits
of which are federally insured and backed by the full faith and credit of
the United States Government. Accordingly, First Federal is subject to
broad federal regulation and oversight extending to all its operations.
First Federal is a member of the Federal Home Loan Bank of Cincinnati and is
subject to certain limited regulation by the Board of Governors of the
Federal Reserve System (Federal Reserve Board). First Federal is a member
of the Savings Association Insurance Fund (SAIF) and the deposits of First
Federal are insured by the FDIC. As a result, the FDIC has certain
regulatory and examination authority over First Federal.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations. The OTS, as the Bank's primary
federal regulator and chartering authority, and the FDIC, as the insurer of
its deposits, have extensive authority over the operations of savings
associations. As part of this authority, First Federal is required to file
periodic reports with the OTS and is subject to periodic examinations by the
OTS and the FDIC. The last regular OTS examinations of First Federal were
as of March 31, 1997 for safety and soundness and April 30, 1997 for
compliance. The last FDIC examination of First Federal was as of June 30,
1990. Under agency scheduling guidelines, it is likely that another
examination by the OTS or the FDIC will be initiated in the near future.
All savings associations are subject to a semi-annual assessment, based upon
the savings association's total assets, to fund the operations of the OTS.
First Federal's OTS assessment for the fiscal year ended June 30, 1997 was
$123,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including First Federal and the
Holding Company. This enforcement authority includes, among other things,
the ability to assess civil money penalties, to issue cease-and-desist or
removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated for violations of laws and regulations
and unsafe or unsound practices. Other actions or inactions may provide the
basis for enforcement action, including misleading or untimely reports filed
with the OTS. Except under certain circumstances, public disclosure of
final enforcement actions by the OTS and the FDIC is required.
In addition, the investment, lending and branching authority of First
Federal is prescribed by federal laws and regulations, and it is prohibited
from engaging in any activities not permitted by such laws and regulations.
For instance, no savings institution may invest in non-investment grade
corporate debt securities not rated in one of the four highest rating
categories by a nationally recognized rating organization. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of the institution's
regulatory capital, except with approval of the OTS. Federal savings
associations are also generally authorized to branch nationwide. First
Federal is in compliance with the noted restrictions.
First Federal's general permissible lending limit for loans-to-one-borrower
is equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and
surplus). At June 30, 1997, First Federal's lending limit under this
restriction was $8.7 million. First Federal is in compliance with the
loans-to-one-borrower limitation.
The OTS, as well as other federal banking agencies, has adopted guidelines
establishing safety and soundness standards on matters such as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan. A failure to submit a plan or to
comply with an approved plan will subject the institution to further
enforcement action.
Insurance of Accounts and Regulation by the FDIC. First Federal is a member
of the SAIF, which is administered by the FDIC. Deposits are insured up to
applicable limits by the FDIC and such insurance is backed by the full faith
and credit of the United States Government. As insurer, the FDIC imposes
deposit insurance premiums and is authorized to conduct examinations of and
to require reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines
by regulation or order to pose a serious risk to the FDIC. The FDIC also
has the authority to initiate enforcement actions against savings
associations, after giving the OTS an opportunity to take such action, and
may terminate the deposit insurance of an institution if it determines that
the institution has engaged or is engaging in unsafe or unsound practices,
or is in an unsafe or unsound condition. See Note 10 of the Notes to
Consolidated Financial Statements in the Annual Report to Stockholders
included as Exhibit 13 herein for a discussion of the SAIF special
assessment.
The FDIC's deposit insurance premiums are assessed semi-annually based on
(i) the probability that the institution will cause a loss to the Bank
Insurance Fund (BIF) or to the SAIF, (ii) the likely amount of the loss and
(iii) the revenue needs of the appropriate fund. The FDIC lowered the rates
on assessments paid to the SAIF and widened the spread of rates in order to
avoid collecting more than needed to maintain the SAIF's capitalization at
1.25% of aggregate insured deposits. The current SAIF premium schedule
ranges from 0% to .27% of deposits, down from .23% to .31% of deposits as a
result of the SAIF special assessment and is the same as the schedule
applicable to BIF-insured deposits. Under the system, institutions
classified as well capitalized (i.e., a core capital ratio of at least 5%, a
ratio of Tier 1 or core capital to risk-weighted assets (Tier 1 risk-based
capital) of at least 6% and a risk-based capital ratio of at least 10%) and
considered healthy pay the lowest premium while institutions that are less
than adequately capitalized (i.e., core and Tier 1 risk-based capital ratios
of less than 4% or a risk-based capital ratio of less than 8%) and
considered of substantial supervisory concern pay the highest premium. Risk
classification of all insured institutions are made by the FDIC for each
quarterly assessment period. Based on its regulatory capital as of June 30,
1997, the Bank qualified as a "well capitalized" institution, and is not
currently assessed deposit insurance premiums. All FDIC insured
institutions are, however, subject to an assessment on deposits to fund the
repayment of obligations issued in the 1980's to help resolve the thrift
crisis. The current assessment for SAIF-insured deposits is 6.48 basis points
and 1.30 basis points for BIF-insured deposits. These assessments are subject
to change based upon the level of BIF and SAIF deposits. Beginning no later
than the year 2000, the assessment is anticipated to be about 2.5 basis
points for both BIF- and SAIF-insured institutions as a result of BIF-
insured institutions fully participating in the assessment.
The FDIC is authorized to increase assessment rates if it determines that
the reserve ratio of the SAIF will be less than the designated reserve ratio
of 1.25% of SAIF insured deposits. In setting these increased assessments,
the FDIC must seek to restore the reserve ratio to that designated reserve
level, or such higher reserve ratio as established by the FDIC. In
addition, the FDIC may impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason
deemed necessary by the FDIC.
Regulatory Capital Requirements. Federally insured savings associations,
such as First Federal, are required to maintain a minimum level of
regulatory capital. The OTS has established capital standards, including a
tangible capital requirement, a leverage ratio (or core capital) requirement
and a risk-based capital requirement applicable to such savings
associations. These capital requirements must be generally as stringent as
the comparable capital requirements for national banks. The OTS is also
authorized to impose capital requirements in excess of these standards on
individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital
generally includes common stockholders' equity and retained income, and
certain noncumulative perpetual preferred stock and related income. In
addition, all intangible assets, other than a limited amount of purchased
mortgage servicing rights, must be deducted from tangible capital. At June
30, 1997, the Bank did not have any intangible assets.
At June 30, 1997, First Federal had tangible capital of $55.3 million, or
9.6% of adjusted total assets, which is approximately $46.6 million above
the minimum requirement of 1.5% of adjusted total assets in effect on that
date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets (as defined by regulation). Core capital generally
consists of tangible capital plus certain intangible assets. As a result of
the prompt corrective action provisions of FDICIA discussed below, however,
a savings association must maintain a core capital ratio of at least 4% to
be considered adequately capitalized unless its supervisory condition is
such to allow it to maintain a 3% ratio. At June 30, 1997, First Federal
had no intangibles which were subject to these tests.
At June 30, 1997, First Federal had core capital equal to $55.3 million, or
9.6% of adjusted total assets, which is $38.0 million above the minimum
leverage ratio requirement of 3% in effect on that date.
The OTS risk-based capital requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital
consists of core capital, as defined above, and supplementary capital.
Supplementary capital consists of certain permanent and maturing capital
instruments that do not qualify as core capital and general loan and lease
valuation allowances up to a maximum of 1.25% of risk-weighted assets.
Supplementary capital may be used to satisfy the risk-based requirement only
to the extent of core capital. At June 30, 1997, First Federal had $2.6
million of general loss reserves, which was less than 1.25% of risk-weighted
assets.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight ranging
from 0% to 100% based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently
underwritten permanent one-to-four family first lien mortgage loans not more
than 90 days delinquent and having a loan-to-value ratio of not more than
80% at origination unless insured to such ratio by an insurer approved by
FNMA or FHLMC.
On June 30, 1997, First Federal had total risk-based capital of $58.0
million and risk-weighted assets of $340.1 million (including converted off-
balance sheet assets); or total capital of 17.0% of risk-weighted assets.
This amount was $30.7 million above the 8% requirement in effect on that
date.
The OTS has adopted a final rule that requires every savings association
with more than normal interest rate risk exposure to deduct from its total
capital, for purposes of determining compliance with such requirement, an
amount equal to 50% of its interest-rate risk exposure multiplied by the
present value of its assets. This exposure is a measure of the potential
decline in the portfolio value of a savings association, greater than 2% of
the present value of its assets, based upon a hypothetical 200 basis point
increase or decrease in interest rates (whichever results in a greater
decline). Net portfolio value is the present value of expected cash flows
from assets, liabilities and off-balance sheet contracts. The rule provides
for a two quarter lag between calculating interest value risk and
recognizing any deduction from capital. The OTS announced that it will
delay the effectiveness of the rule until it evaluates the implementation of
the process by which savings associations may appeal an interest rate risk
deduction determination. Any savings association with less than $300
million in assets and a total capital ratio in excess of 12% is exempt from
this requirement unless the OTS determines otherwise. The Bank does not
anticipate that this final rule will affect its ability to meet its
regulatory capital requirements.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against associations that fail to meet
capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally
defined to be one with less than either a 4% core capital ratio, a 4% Tier 1
risk-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another
institution, establish a branch or engage in any new activities, and
generally may not make capital distributions. The OTS is authorized to
impose the additional restrictions, discussed below, that are applicable to
significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any company
controlling an undercapitalized association must agree that it will enter
into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must
be made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a
forced merger or acquisition of the association. An association that
becomes "critically undercapitalized" (i.e., a tangible capital ratio of 2%
or less) is subject to further mandatory restrictions on its activities in
addition to those applicable to significantly undercapitalized associations.
In addition, the OTS must appoint a receiver (or conservator with the
concurrence of the FDIC) for a savings association, with certain limited
exceptions, within 90 days after it becomes critically undercapitalized.
Any undercapitalized association is also subject to the general enforcement
authority of the OTS and the FDIC, including the appointment of a
conservator or a receiver.
Any undercapitalized association is also subject to other possible
enforcement actions by the OTS or the FDIC. Such actions could include a
capital directive, a cease-and-desist order, civil money penalties, the
establishment of restrictions on all aspects of the association's operations
or the appointment of a receiver or conservator or a forced merger into
another institution.
The OTS is also generally authorized to reclassify an association into a
lower capital category and impose the restrictions applicable to such
category if the institution is engaged in unsafe or unsound practices or is
in an unsafe or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on First
Federal may have a substantial adverse effect on First Federal's operations
and profitability. Holding Company shareholders do not have preemptive
rights, and therefore, if the Holding Company is directed by the OTS or the
FDIC to issue additional shares of Common Stock, such issuance may result in
the dilution in the percentage of ownership of the Holding Company of
existing stockholders. As of June 30, 1997, First Federal believes it
qualifies as a well capitalized institution under the prompt corrective
action rules.
Limitations on Dividends and Other Capital Distributions. OTS regulations
impose various restrictions or requirements on associations with respect to
their ability to pay dividends or make other distributions of capital. OTS
regulations prohibit an association from declaring or paying any dividends
or from repurchasing any of its stock if, as a result, the regulatory
capital of the association would be reduced below the amount required to be
maintained for the liquidation account established in connection with its
mutual to stock conversion. See Note 14 of the Notes to Consolidated
Financial Statements in the Annual Report to Stockholders included as
Exhibit 13 herein.
The OTS utilizes a three-tiered approach to permit associations, based on
their capital level and supervisory condition, to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers
and other transactions charged to the capital account (see "-Regulatory
Capital Requirements").
Generally, Tier 1 associations, which are associations that before and after
the proposed distribution meet their fully phased-in capital requirements,
may make capital distributions during any calendar year equal to the greater
of 100% of net income for the year-to-date plus 50% of the amount by which
the lesser of the association's tangible, core or risk-based capital exceeds
its fully phased-in capital requirement for such capital component, as
measured at the beginning of the calendar year, or the amount authorized for
a Tier 2 association. However, a Tier 1 association deemed to be in need of
more than normal supervision by the OTS may be downgraded to a Tier 2 or
Tier 3 association as a result of such a determination. First Federal meets
the requirements for a Tier 1 association and has not been notified of a
need for more than normal supervision. Tier 2 associations, which are
associations that before and after the proposed distribution meet their
current minimum capital requirements, may make capital distributions of up
to 75% of net income over the most recent four quarter period.
Tier 3 associations (which are associations that do not meet current minimum
capital requirements) that propose to make any capital distribution and Tier
2 associations that propose to make a capital distribution in excess of the
noted safe harbor level must obtain OTS approval prior to making such
distribution. Tier 2 associations proposing to make a capital distribution
within the safe harbor provisions and Tier 1 associations proposing to make
any capital distribution need only submit written notice to the OTS 30 days
prior to such distribution. As a subsidiary of the Holding Company, First
Federal is required to give the OTS 30 days' notice prior to declaring any
dividend on its stock. The OTS may object to the distribution during that
30-day period based on safety and soundness concerns. See "- Regulatory
Capital Requirements."
On May 16, 1997, after notifying the OTS, the Bank paid a $4.5 million cash
dividend to the Holding Company. See Note 14 of the Notes to Consolidated
Financial Statements in the Annual Report to Stockholders included as
Exhibit 13 herein. Commencing November 20, 1996 the Holding Company
announced a Modified Dutch Auction Tender Offer (Tender Offer) to buy up to
1.5 million shares between $24.00 and $26.00 per share. On December 31, 1996,
the Holding Company completed the Tender Offer and purchased 808,000 shares
at $26.00 per share. On April 15, 1997, the Holding Company announced its
intention to repurchase 5% of its then outstanding shares of common stock.
The OTS has proposed regulations that would revise the current capital
distribution restrictions. The proposal eliminates the current tiered
structure and the safe-harbor percentage limitations. Under the proposal, a
savings association may make a capital distribution without notice to the
OTS (unless it is a subsidiary of a holding company) provided that it has a
CAMEL 1 or 2 rating, is not in troubled condition (as defined by regulation)
and would remain adequately capitalized (as defined in the OTS prompt
corrective action regulations) following the proposed distribution. Savings
associations that would remain adequately capitalized following the proposed
distribution, but do not meet the other noted requirements, must notify the
OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions
that do not exceed 50% of the institution's excess regulatory capital plus
net income to date during the calendar year. A savings association may not
make a capital distribution without prior approval of the OTS and the FDIC
if it is undercapitalized before, or as a result of, such a distribution.
As under the current rule, the OTS may object to a capital distribution if
it would constitute an unsafe or unsound practice. No assurance may be
given as to whether or in what form the regulations may be adopted. The
Bank does not anticipate that these regulations, as proposed, will affect
its ability to make capital distributions.
Liquidity. All savings associations, including First Federal, are required
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 requirement may vary from time to time (between 4% and 10%)
depending upon economic conditions and savings flows of all savings
associations. At the present time, the minimum liquid asset ratio is 5%.
For a discussion of what the Bank includes in liquid assets and the proposed
lower minimum liquid asset requirement, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" contained in the Annual Report to Stockholders included
as Exhibit 13 herein.
In addition, short-term liquid assets (e.g., cash, certain time deposits,
certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's
average daily balance of net withdrawable deposit accounts and current
borrowings. Penalties may be imposed upon associations for violations of
either liquid asset ratio requirement. At June 30, 1997, First Federal was
in compliance with both requirements, with an overall liquid asset ratio of
5.1% and a short-term liquid assets ratio of 2.6%.
Accounting. An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its classification of
and accounting for loans and securities (i.e., whether held for investment,
sale or trading) with appropriate documentation. First Federal is in
compliance with these amended rules.
The OTS has adopted an amendment to its accounting regulations, which may be
made more stringent then GAAP by the OTS, to require that transactions be
reported in a manner that best reflects their underlying economic substance
and inherent risk and that financial reports must incorporate any other
accounting regulations or orders prescribed by the OTS. First Federal is in
compliance with these amended rules.
Qualified Thrift Lender Test. All savings associations, including First
Federal, are required to meet a qualified thrift lender (QTL) test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (which consists of
total assets less intangibles, properties used to conduct the savings
association's business and liquid assets not exceeding 20% of total assets)
in qualified thrift investments on a monthly average for nine out of every
12 months on a rolling basis. Such assets primarily consist of residential
housing related loans and investments. At June 30, 1997, First Federal met
the test and has always met the test since its effectiveness. At June 30,
1997, First Federal's QTL percentage was 91.2%.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains
a QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer
to the Bank Insurance Fund (BIF). If such an association has not yet
requalified or converted to a national bank, its new investments and
activities are limited to those permissible for both a savings association
and a national bank, and it is limited to national bank branching rights in
its home state. In addition, the association is immediately ineligible to
receive any new FHLB borrowings and is subject to national bank limits for
payment of dividends. If such association has not requalified or converted
to a national bank within three years after the failure, it must divest of
all investments and cease all activities not permissible for a national
bank. In addition, it must repay promptly any outstanding FHLB borrowings,
which may result in prepayment penalties. If any association that fails the
QTL test is controlled by a holding company, then within one year after the
failure, the holding company must register as a bank holding company and
become subject to all restrictions on bank holding companies. See "-
Holding Company Regulation."
Community Reinvestment Act. Under the Community Reinvestment Act (CRA),
every FDIC-insured institution has a continuing and affirmative obligation
consistent with safe and sound banking practices to help meet the credit
needs of its entire community, including low- and moderate-income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes
are best suited to its particular community, consistent with the CRA. The
CRA requires the OTS, in connection with the examination of First Federal,
to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as merger or the establishment of a branch, by First
Federal. An unsatisfactory rating may be used as the basis for the denial
of an application by the OTS.
Federal banking agencies, including the OTS, have recently revised the CRA
regulations and the methodology for determining an institution's compliance
with the CRA. Due to the heightened attention being given to the CRA in the
past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for
CRA compliance in March 1997 and received a rating of satisfactory.
Transactions with Affiliates. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on
terms as favorable to the association as transactions with non-affiliates.
In addition, certain of these transactions are restricted to a percentage of
the association's capital. Affiliates of First Federal include the Holding
Company and any company which is under common control with First Federal.
In addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the
securities of most affiliates. Affiliates do not generally include
subsidiaries, however, the OTS has the discretion to treat subsidiaries of
savings associations as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions
on loans to such persons and their related interests. Among other things,
such loans must be made on terms substantially the same as for loans to
unaffiliated individuals.
Holding Company Regulation. The Holding Company is a unitary savings and
loan holding company subject to regulatory oversight by the OTS. As such,
the Holding Company is required to register and file reports with the OTS
and is subject to regulation and examination by the OTS. In addition, the
OTS has enforcement authority over the Holding Company and its non-savings
association subsidiaries which also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary
savings association.
As a unitary savings and loan holding company, the Holding Company generally
is not subject to activity restrictions. If the Holding Company acquires
control of another savings association as a separate subsidiary, it would
become a multiple savings and loan holding company, and the activities of
the Holding Company and any of its subsidiaries (other than the Bank or any
other SAIF-insured savings association) would become subject to such
restrictions, which generally limit activities to those related to
controlling a savings association, unless such other associations each
qualify as a QTL and were acquired in a supervisory acquisition.
If First Federal fails the QTL test, the Holding Company must obtain the
approval of the OTS prior to continuing after such failure, directly or
through its other subsidiaries, any business activity other than those
approved for multiple savings and loan holding companies or their
subsidiaries. In addition, within one year of such failure the Holding
Company must register as, and will become subject to, the restrictions
applicable to bank holding companies. The activities authorized for a bank
holding company are more limited than are the activities authorized for a
unitary or multiple savings and loan holding company. See "- Qualified
Thrift Lender Test."
The Holding Company must obtain approval from the OTS before acquiring
control of any other SAIF-insured association. Such acquisitions are
generally prohibited if they result in a multiple savings and loan holding
company controlling savings associations in more than one state. However,
such interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings
association.
Federal Securities Law. The stock of the Holding Company is registered with
the SEC under the Securities Exchange Act of 1934, as amended (Exchange
Act). The Holding Company is subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the SEC
under the Exchange Act.
Holding Company stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Holding Company may
not be resold without registration or unless sold in accordance with certain
resale restrictions. If the Holding Company meets specified current public
information requirements, each affiliate of the Holding Company is able to
sell in the public market, without registration, a limited number of shares
in any three-month period.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At June 30, 1997, First Federal was in compliance with
these reserve requirements. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements that may be imposed by the OTS. See "- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds,
including FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. First Federal is a member of the FHLB of
Cincinnati, which is one of 12 regional FHLBs, that administers the home
financing credit function of savings associations. Each FHLB serves as a
reserve or central bank for its members within its assigned region. It is
funded primarily from proceeds derived from the sale of consolidated
obligations of the FHLB System. It makes loans to members (i.e., advances)
in accordance with policies and procedures established by the board of
directors of the FHLB. These policies and procedures are subject to the
regulation and oversight of the Federal Housing Finance Board. All advances
from the FHLB are required to be fully secured by sufficient collateral as
determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.
As a member, First Federal is required to purchase and maintain stock in the
FHLB of Cincinnati. At June 30, 1997, First Federal had $4.1 million in
FHLB stock which was in compliance with this requirement. In past years,
First Federal has received substantial dividends on its FHLB stock. Over
the past five fiscal years, such dividends have averaged 6.2% and were 7.1%
for fiscal year 1997.
Under federal law the FHLBs are required to provide funds for the resolution
of troubled savings associations and to contribute to low- and moderately
priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income
housing projects. These contributions have affected adversely the level of
FHLB dividends paid and could continue to do so in the future. These
contributions could also have an adverse effect on the value of FHLB stock
in the future. A reduction in value of First Federal's FHLB stock may
result in a corresponding reduction in First Federal's capital.
For the year ended June 30, 1997, dividends paid by the FHLB of Cincinnati
to First Federal totaled $279,000 which represented a $21,000 increase from
the amount of dividends received in fiscal year 1996. The $73,900 dividend
received for the quarter ended June 30, 1997 reflects an annualized rate of
7.25%.
Federal and State Taxation. Certain 1996 tax legislation significantly
effected thrift institutions such as the Bank regarding bad debt provisions.
Large thrifts (see below) were required to switch to the specific charge-off
method of Section 166 while small thrifts switched to the reserve method of
Section 585 (the method 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. The legislation eliminated the
percentage of taxable income method for computing additions to the thrift
tax bad debt reserves for tax years beginning after December 31, 1995 which
effected First Federal beginning in fiscal year ended June 30, 1997.
The legislation also required 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 were $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 lesser of the qualifying and non-qualifying base year
reserves or the contracted base year reserves. As the Bank has previously
provided deferred taxes on the recapture amounts, no additional financial
statement tax expense will result from the recapture. 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 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 June 30, 1997. 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.
For fiscal year 1997, the Bank qualified for postponement of the bad debt
recapture.
The base year reserves and the supplemental reserve are not forgiven. These
reserves continue to be subject to the section 593(e) recapture penalty and
are treated as a section 381(c) attribute for purposes of certain corporate
acquisitions. There are other ancillary provisions affected by the repeal
of section 593, most notably the repeal of section 595 which provides
thrifts with special treatment on foreclosure of property securing loans.
Section 595 is repealed for property acquired in taxable years beginning
after December 31, 1995.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on
alternative minimum taxable income, which is the sum of a corporation's
regular taxable income (with certain adjustments) and tax preference items,
less any available exemption. Net operating losses can offset no more than
90% of alternative minimum taxable income. The alternative minimum tax is
imposed to the extent it exceeds the corporation's regular income tax.
The Holding Company and Bank file consolidated federal income tax returns on
a fiscal year basis using the accrual method of accounting.
The Bank has been audited by the Internal Revenue Service with respect to
federal income tax returns through tax year 1991 and has federal income tax
returns which are open and subject to audit for the tax years 1994 through
1996. With respect to years examined by the IRS, all deficiencies have been
satisfied. In the opinion of management, any examination of still open
returns would not result in a deficiency which could have a material adverse
effect on the financial condition of the Company.
For additional information regarding federal taxation, see Note 11 of the
Notes to the Consolidated Financial Statements in the Annual Report to
Stockholders included as Exhibit 13 herein.
Ohio Taxation. As a federally chartered savings bank, the Bank is subject
to an Ohio franchise tax based on its net worth plus certain reserve
amounts. Total net worth for this purpose is reduced by certain exempted
assets. The resultant net worth was taxed at a rate of 1.5% for the 1997
return, which was based on net worth as of June 30, 1996. The Bank's state
franchise tax returns are open and subject to audit for the years 1994
through 1997.
The Holding Company is subject to the Ohio franchise tax on holding
companies of financial institutions. The tax imposed is the greater of the
tax on net worth after adjustments to exclude the portion attributable to
the financial institution or the tax on net income. The tax on net income
is computed on federal taxable income adjusted to exclude distributions from
the financial institution, and subject to certain other adjustments. The
rate of tax differs for the net worth and net income computations and can
include a surtax if based on net income and an add-on litter tax under
either method. The Company's state franchise tax returns are open and
subject to audit for the years 1994 through 1997.
Recent Ohio legislation will change the computation of tax and the rate of
tax for future years for both financial institutions and holding companies.
Delaware Taxation. As a Delaware holding company, the Holding Company is
exempted from Delaware corporate income tax but is required to file an
annual report with and pay an annual fee to the State of Delaware. The
Holding Company is also subject to an annual franchise tax imposed by the
State of Delaware.
Employees
At August 29, 1997, the Bank had a total of 209 employees, including 55
part-time employees. The Bank's employees are not represented by any
collective bargaining group. Management considers its employee relations to
be good.
Executive Officers of the Holding Company and the Bank
The following table sets forth certain information regarding executive
officers of the Holding Company and the Bank at June 30, 1997 who are not
also directors.
<TABLE>
<CAPTION>
Age at Positions Held with Bank
Name June 30, 1997 and Holding Company
---- ------------- ------------------------
<S> <C> <C>
Therese Ann Liutkus 38 Treasurer and CFO of the Bank
and the Holding Company
David S. Hinkle 39 Vice President of the Bank
Mark S. Makoski 47 Vice President of the Bank
J. Craig Carr 49 General Counsel and Assistant
Vice President of the Bank
</TABLE>
The business experience of the executive officers who are not also not
directors is set forth below.
Therese Ann Liutkus - Ms. Liutkus has served as Treasurer of the Bank and
Holding Company since January 1996 and March 1996, respectively, as well as
Chief Financial Officer of the Bank and Holding Company since October 1996.
Ms. Liutkus is responsible for the activities of the securities portfolios
and oversees the accounting functions. After joining the Bank in 1986, Ms.
Liutkus has served as the Bank's Internal Auditor through 1989, and served
as Accounting Manager of the Bank from 1990 to 1995. She earned a BBA
degree in accounting from Cleveland State University is a Certified Public
Accountant and member of both the American Institute of CPAs and Ohio
Society of CPAs.
David S. Hinkle - Mr. Hinkle has served as Vice President of the Bank since
January 1996. Mr. Hinkle is responsible for overall Bank operations
including information systems, check processing facilities management,
purchasing and courier services. He began his career with the Bank in 1979
as a member of the data processing department and was appointed an Assistant
Treasurer in 1982. He earned a Bachelor of Science degree in Management in
1981 from Youngstown State University. Mr. Hinkle is a member of the Board
of Directors for Humility of Mary Information Systems.
Mark S. Makoski - Mr. Makoski has served as Vice President of the Bank since
January 1996. Mr. Makoski is responsible for marketing, sales and deposits
of the Bank. He has served in various capacities since joining the Bank in
1982, including Internal Auditor from 1982 through 1986, Assistant
Treasurer from 1987 through 1991 and Assistant Vice President from 1992
through 1995. He earned a Bachelor of Science degree in Business
Administration from Milligan College in Tennessee. Mr. Makoski belongs to
the Canfield Fair Board, Mahoning County Securities Officers Group and
Austintown Rotary.
J. Craig Carr - Mr. Carr has served as General Counsel since joining the
Bank in 1974 and Assistant Vice President of the Bank since 1991. Mr. Carr
was promoted to Vice President of the Bank and Holding Company in July 1997.
Mr. Carr conducts the general legal work of the Bank, supervises the in-
house title department and advises and counsels all officers and
departments. He earned a Bachelor of Arts degree in Political Science from
Miami University of Ohio and Juris Doctor Degree from Ohio State University
College of Law. Mr. Carr is a member of the Ohio State and Mahoning County
Bar Associations.
Item 2. Properties
The Bank owns its main office building. At June 30, 1997, the Bank owned
six of its branch offices and the remaining six branch offices, including
two limited service facilities, were leased. As of June 30, 1997, the net
book value of the Bank's investment in premises, equipment and leaseholds,
excluding computer equipment and software, was approximately $7.0 million.
The Bank maintains an on-line data base of depositor and borrower customer
information as well as loan origination software. The net book value of the
data processing and computer equipment and software utilized by the Bank at
June 30, 1997 was $785,000.
Item 3. Legal Proceedings
First Federal is involved as plaintiff or defendant in various legal actions
arising in the normal course of business. While the ultimate outcome of
these proceedings cannot be predicted with certainty, it is the opinion of
management, after consultation with counsel representing First Federal in
the proceedings, that the resolution of these proceedings should not have a
material effect on the Bank's results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended June 30,
1997.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The information under the caption "Stock Price Information" on the inside back
cover of the 1997 Annual Report to Stockholders which portions attached hereto
as Exhibit 13 is herein incorporated by reference.
Item 6. Selected Financial Data
Pages 4 and 5 of the 1997 Annual Report to Stockholders which portions attached
hereto as Exhibit 13 are herein incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Pages 6 through 19 of the 1997 Annual Report to Stockholders which portions
attached hereto as Exhibit 13 are herein incorporated by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Pages 14 through 16 of the 1997 Annual Report to Stockholders which portions
attached hereto as Exhibit 13 are herein incorporated by reference.
Item 8. Financial Statements and Supplementary Data
Pages 21 through 44 of the 1997 Annual Report to Stockholders which portions
attached hereto as Exhibit 13 are herein incorporated by reference.
The independent auditors' report of Hill, Barth & King, Inc. dated August 4,
1995 is herein incorporated by reference as Exhibit 99.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
On February 13, 1996, Hill, Barth & King, Inc. was dismissed as the Holding
Company's independent accountants. Their accountant's report on the
financial statements for each of the years ended June 30, 1994 and 1995 was
unqualified and did not contain an adverse opinion or a disclaimer opinion,
or qualification or modification as to uncertainty, audit scope, or
accounting principles. The decision to dismiss Hill, Barth & King, Inc. was
approved by the Board of Directors upon recommendation by the audit
committee of the Board of Directors.
During the fiscal years ended June 30, 1994 and June 30, 1995, and the
subsequent interim period from July 1, 1995 through February 13, 1996, there
were no disagreements with Hill, Barth & King, Inc. on any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope of procedure which, if not resolved to the satisfaction of
Hill, Barth & King, Inc., would have caused it to make reference to the
subject matter of the disagreements in connection with its report.
Additionally, there were no disagreements with Hill, Barth & King, Inc.
regarding any of these matters, either those resolved to their satisfaction
or those not resolved to their satisfaction.
None of the events listed in Item 304(a)(1)(v)(A) through (D) of Regulation
S-K occurred during the fiscal years ended June 30, 1994 or June 30, 1995,
or the subsequent interim period from July 1, 1995 through February 13,
1996.
Pursuant to Item 304(a)(3) of Regulation S-K, the Holding Company has
provided Hill, Barth & King, Inc. with a copy of the disclosures contained
in this document and has requested that Hill, Barth & King, Inc. furnish the
Holding Company a letter addressed to the Securities and Exchange Commission
stating whether it agrees with the statements made herein and, if not,
stating the respects in which it does not agree. Hill, Barth & King, Inc.'s
letter is attached as an exhibit to this report.
On February 13, 1996, KPMG Peat Marwick LLP was engaged as FFY Financial
Corp.'s independent accountants. During the fiscal years ended June 30,
1994 and 1995 and the subsequent interim period from July 1, 1995 through
February 13, 1996, there was no consultation with KPMG Peat Marwick LLP
regarding: (i) application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on FFY Financial Corp.'s financial statements; or (ii) any
matter that was the subject of a disagreement (as defined in paragraph
304(a)(1)(iv) of Regulation S-K) or a reportable event (as defined in
paragraph 304(a)(1)(v) of Regulation S-K).
PART III
Item 10. Directors and Executive Officers of the Registrant
Executive Officers of the Holding Company and the Bank
Information regarding the executive officers of the Holding Company and the
Bank who are not directors is contained in Part I of this Form 10-K and
incorporated herein by reference.
Directors of the Holding Company and the Bank
Information concerning Directors of the Holding Company and the Bank is
incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in 1997, a copy of which has been
filed with the Securities and Exchange Commission.
Section 16(a) Beneficial Ownership Reporting Compliance
Information concerning compliance with the reporting requirements of Section
16(a) of the Securities and Exchange Act of 1934 by the Holding Company's
directors, officers and greater than 10% beneficial owners is incorporated
herein by reference from the definitive proxy statement for the Annual
Meeting of Stockholders to be held in 1997, a copy of which has been filed
with the Securities and Exchange Commission.
Under the federal securities laws, Holding Company directors, certain
officers and 10% shareholders are required to report to the Securities and
Exchange Commission, by specific due dates, transactions and holdings in the
Holding Company stock. The Bank believes that during fiscal year 1997, all
of these filing requirements were satisfied, except for the inadvertent
omission of the acquisition of shares through the dividend reinvestment plan
by Directors Bitonte, Patrick and Shaffer, which omissions have been
subsequently corrected.
Item 11. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1997, a copy of which has been filed with the
Securities and Exchange Commission.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in 1997, a copy
of which has been filed with the Securities and Exchange Commission.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions is
incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in 1997, a copy of which has been
filed with the Securities and Exchange Commission.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements
The following information appearing in the Holding Company's Annual Report
to Stockholders for the year ended June 30, 1997, is incorporated by
reference in this Annual Report on Form 10-K as Exhibit 13.
Annual Report Section Pages in Annual Report
- --------------------- ----------------------
Common Stock and Related Information Inside back cover
Selected Financial Data and Other Data Pages 4 - 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations Pages 6 - 19
Consolidated Statements of Financial Condition as of
June 30, 1997 and 1996 Page 22
Consolidated Statements of Income for Years Ended
June 30, 1997, 1996 and 1995 Page 23
Consolidated Statements of Changes in Stockholders'
Equity for Years Ended June 30, 1997, 1996 and 1995 Page 24
Consolidated Statements of Cash Flows for Years Ended
June 30, 1997, 1996 and 1995 Page 25
Notes to Consolidated Financial Statements Pages 26 - 43
Independent Auditors' Report Page 44
With the exception of the aforementioned information, the Holding Company's
Annual Report to Stockholders for the year ended June 30, 1997 is not deemed
filed as part of this Annual Report on Form 10-K.
(a) (2) Financial Statement Schedules
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Consolidated
Financial Statements.
(a) (3) Exhibits
<TABLE>
<CAPTION>
Reference to
Prior Filing
or Exhibit
Regulation Number
S-K Exhibit Attached
Number Document Herein
- ----------- -------- ------------
<S> <C> <C>
2 Plan of acquisition, reorganization,
arrangement, liquidation or succession None
3(i) Articles of Incorporation *
3(ii) By-Laws *
4 Instruments defining the rights of security holders,
including indentures *
9 Voting trust agreement None
10 Material contracts
Executive Compensation Plans and Arrangements *
Employment Contracts *
Recognition and Retention Plan and Trust Stock
Option and Incentive Plan *
11 Statement re: computation of per share earnings None
12 Statement re: computation of ratios Not required
13 Annual Report to security holders 13
16 Letter re: change in certifying accountant 16
18 Letter re: change in accounting principles None
21 Subsidiaries of registrant 21
22 Published report regarding matters submitted to vote
of security holders None
23 Consents of experts and counsel 23.1 and 23.2
24 Power of attorney Not required
27 Financial Data Schedule 27
99 Additional Exhibits - predecessor accountants'
independent auditors' report 99
- --------------------
<F*> Filed as exhibits to the Corporation's Form S-1 registration statement
filed on March 12, 1993 (File No. 33-59482) pursuant to Section 5 of
the Securities Act of 1933, as amended. All of such previously filed
documents are hereby incorporated herein by reference in accordance
with Item 601 of Regulation S-K.
</TABLE>
(b) Reports on Form 8-K
During the quarter ended on June 30, 1997, the Holding Company filed a
report on Form 8-K on April 15, 1997 announcing third quarter earnings and a
stock repurchase program.
SIGNATURES
Pursuant to the requirements of Section 15(d) 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.
By: /s/ Jeffrey L. Francis
-----------------------------------
Jeffrey L. Francis, President and
Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and
on the dates indicated.
/s/ Jeffrey L. Francis /s/ Therese Ann Liutkus
- ------------------------------------- --------------------------------------
Jeffrey L. Francis, President, Therese Ann Liutkus, Treasurer and CFO
Chief Executive Officer and Director (Principal Financial and Accounting
(Principal Executive and Operating Officer)
Officer)
Date: September 26, 1997 Date: September 26, 1997
/s/ Randy Shaffer /s/ Myron S. Roh
- ------------------------------------- --------------------------------------
Randy Shaffer, Vice President and Myron S. Roh, Chairman of the Board
Director and Director
Date: September 26, 1997 Date: September 26, 1997
/s/ W. Terry Patrick /s/ Ronald P. Volpe
- ------------------------------------- --------------------------------------
W. Terry Patrick, Director Ronald P. Volpe, Director
Date: September 26, 1997 Date: September 26, 1997
/s/ Daniel J. Mirto /s/ A. Gary Bitonte
- ------------------------------------- --------------------------------------
Daniel J. Mirto, Director A. Gary Bitonte, Director
Date: September 26, 1997 Date: September 26, 1997
/s/ Marie Izzo Cartwright /s/ Jack R. Brownlee
- ------------------------------------- --------------------------------------
Marie Izzo Cartwright, Director Jack R. Brownlee, Director
Date: September 26, 1997 Date: September 26, 1997
/s/ Henry P. Nemenz
- -------------------------------------
Henry P. Nemenz, Director
Date: September 26, 1997
1997 ANNUAL REPORT
CONTENTS
- -------------------------------------------------------------------------
To Our Stockholders 2
Financial Highlights 3
Selected Consolidated Financial Information 4
Mangement's Discussion and Analysis 6
Financial Statements 21
Officers, Directors, and Stockholder Information (Inside Back Cover)
To Our Stockholders
1997 was a year of significant change for FFY Financial Corp. and its
subsidiary, First Federal Savings Bank of Youngstown. It was the first full
year of operations with the new management team in place, and significant
headway was made in improving the performance of the Company.
Since we became a public company in June 1993, we have continually
sought to deploy or return the excess capital raised in our offering. Our
strategy has consistently been a generous dividend policy, aggressive stock
repurchases, growth and cost control as a means to improve the returns to our
stockholders.
We have increased our dividends each year; $.10 per share per quarter
in 1994, $.125 in 1995, $.15 in 1996 and $.175 in 1997; returning $10.1
million to our shareholders in dividends since 1993.
We intensified our stock repurchase program with a tender offer
announced in November 1996 and were successful in repurchasing 808,000 shares,
reducing our equity by approximately 16%. An additional 5% stock repurchase
was completed in July 1997. To date, we have repurchased 2.8 million shares,
or approximately 42% of the shares initially issued in July 1993, and returned
more than $58.1 million to our stockholders.
Competition for retail deposits remains strong and growth in our retail
deposit base difficult, as evidenced by a 1.4% decline in deposit balances
during 1997. A totally free checking account, step-rate certificate and
callable certificates were favorably received by our retail customers.
Additionally, $50.0 million in borrowings were utilized in 1997 to supplement
the retail deposit base. In addition to completely reorganizing our lending
operations, our lending staff originated $118.9 million in loans, increasing
net loans outstanding by $21.9 million.
Cost control and efficiency are basic to our operations. A number of
significant reductions in operating costs occurred during 1997. Although we
incurred the $3.0 million SAIF assessment in the first quarter, we now enjoy
reduced FDIC premiums, providing approximately $750,000 in annual pre-tax cost
savings. A review of our retirement costs indicated that our expenses were high
and, as a result, the pension plan was terminated and replaced with a 401(k)
plan which is expected to provide pre-tax cost savings of $450,000 in the first
year of implementation and an average of $250,000 per year over the life of the
ESOP. Certain cost reductions were first reflected in the third quarter
performance where we reported a 12% reduction in operating costs from the
second quarter, an operating expense ratio of 1.79% and an efficiency ratio of
47.02%.
By intensifying our strategies in 1997, we were able to report
significant growth in earnings per share and return on equity. In the fourth
quarter, we reported our highest earnings per share and return on equity; $.50
earnings per share and 9.70% annualized return on equity. Recognizing that the
progress made in 1997 needs to continue, your Board of Directors, management
and staff have an ongoing commitment to enhancing performance.
Lastly, FFY Financial Corp., through our First Federal Savings Bank of
Youngstown subsidiary, offers a broad array of competitive deposit and lending
services. I encourage our stockholders to also become our customers.
Sincerely,
/s/ JEFFREY L. FRANCIS
Jeffrey L. Francis
President and Chief Executive Officer
1997 Financial Highlights
- --------------------------------------------------------------------------------
FFY Financial Corp. and Subsidiary
(Dollars in Thousands Except Per Share Data)
<TABLE>
<CAPTION>
Percent
For The Year 1997 1996 Change
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income $ 22,102 21,583 2.40%
Net income 5,324(2) 6,902 -22.86%
Earnings per share 1.19(2) 1.37 -13.14%
Cash dividends declared per share 0.70 0.60 16.67%
At Year End
- ---------------------------------------------------------------------------
Total assets 599,249 575,602 4.11%
Loans receivable, net 460,712 438,790 5.00%
Securities available for sale 112,036 109,836 2.00%
Deposits 450,224 456,541 -1.38%
Securities sold under agreements
to repurchase (1) 32,307 6,640 NM
Borrowed funds 27,455 1,200 NM
Stockholders' equity 82,174 101,921 -19.37%
Book value per share 19.83 20.06 -1.15%
Financial Ratios
- ---------------------------------------------------------------------------
Return on assets 0.90%(3) 1.20% -25.00%
Return on equity 5.73%(3) 6.58% -12.92%
Efficiency ratio 62.01%(3) 52.93% 17.15%
<F1> Includes both short- and long-term "repurchase agreements".
<F2> Amount would be positively affected without regard to the one-time
SAIF special assessment of $1,987, net of tax.
<F3> Ratio would be positively affected without regard to the one-time SAIF
special assessment of $1,987, net of tax.
<FNM> Not a meaningful measure of performance.
</TABLE>
Selected Consolidated Financial Information
- --------------------------------------------------------------------------------
FFY Financial Corp. and Subsidiary
(Dollars in Thousands Except Per Share Data)
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------
Selected Consolidated Financial Condition Data: 1997 1996 1995 1994 1993
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $599,249 575,602 576,619 584,151 573,436
Loans receivable, net 460,712 438,790 401,664 373,442 332,449
Allowance for loan losses 2,962 3,439 3,159 2,801 2,437
Non-performing assets 3,993 4,673 4,352 4,930 6,571
Securities available for sale (1) 112,036 109,836 132,341 - -
Securities held to maturity (1) - - 11,819 180,652 169,544
Deposits 450,224 456,541 461,979 456,134 447,071
Securities sold under agreements to repurchase:
Short-term 7,307 6,640 - - -
Long-term 25,000 - - - -
Borrowed funds 27,455 1,200 - 8,125 2,823
Stockholders' equity 82,174 101,921 106,400 110,834 112,461
<CAPTION>
Years ended June 30,
-----------------------------------------------------------------
Selected Consolidated Operations Data: 1997 1996 1995 1994 1993
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest income $ 45,925 43,716 42,444 41,983 41,777
Total interest expense 23,823 22,133 19,730 18,940 22,948
-----------------------------------------------------------------
Net interest income 22,102 21,583 22,714 23,043 18,829
Provision for loan losses 688 325 403 409 1,908
-----------------------------------------------------------------
Net interest income after provision for loan
losses 21,414 21,258 22,311 22,634 16,921
Service charges 563 522 429 348 282
Gain (loss) on sale of securities (320) 30 (17) - 2
Other non-interest income 375 548 428 352 271
Total non-interest expense (14,288) (11,991) (11,789) (11,277) (9,450)
-----------------------------------------------------------------
Income before federal income taxes and cumulative
effect of change in accounting for federal
income taxes 7,744 10,367 11,362 12,057 8,026
Federal income taxes 2,420 3,465 3,872 4,315 3,342
-----------------------------------------------------------------
Income before cumulative effect of change in
accounting for federal income taxes 5,324 6,902 7,490 7,742 4,684
Cumulative effect as of July 1, 1993 of change in
method of accounting for federal income taxes (2) - - - 540 -
-----------------------------------------------------------------
Net income $ 5,324 6,902 7,490 8,282 4,684
=================================================================
Earnings per common and common equivalent
share: (3)
Income before cumulative effect of accounting
change $ 1.19 1.37 1.33 1.20 n/a
Cumulative effect of change in accounting
for federal income taxes - - - 0.08 n/a
-----------------------------------------------------------------
Net income $ 1.19 1.37 1.33 1.28 n/a
=================================================================
Cash dividends declared per share $ 0.70 0.60 0.50 0.40 n/a
=================================================================
<CAPTION>
June 30,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to
average total assets) 0.90%(6) 1.20% 1.31% 1.44% 0.90%
Interest rate spread information:
Average during the period (4) 3.17% 3.04% 3.28% 3.38% 3.25%
End of period (4) 3.06% 2.95% 2.66% 3.06% 2.75%
Net interest margin (4) (5) 3.89% 3.89% 4.09% 4.16% 3.72%
Ratio of operating expense to average total assets 2.42%(6) 2.09% 2.06% 1.97% 1.81%
Return on equity (ratio of net income to
average equity) 5.73%(6) 6.58% 6.87% 7.42% 8.62%
Efficiency ratio (7) 62.01%(6) 52.93% 49.60% 46.67% 47.74%
Dividend payout ratio 58.82% 43.80% 37.59% 31.25% n/a
Liquidity ratio (Bank only) 5.12% 7.57% 19.99% 28.43% 49.31%
Quality Ratios:
Non-performing assets to total assets at end of
period 0.67% 0.81% 0.75% 0.84% 1.15%
Allowance for loan losses to non-performing assets 74.18% 73.59% 72.59% 56.82% 37.09%
Provision for loan losses to total loans
receivable, net 0.15% 0.07% 0.10% 0.11% 0.57%
Capital Ratios:
Equity to total assets at end of period 13.71% 17.71% 18.45% 18.97% 19.61%
Average equity to average assets 15.71% 18.29% 19.06% 19.45% 10.42%
Book value per share $ 19.83 20.06 19.60 18.51 16.96
Increase (decrease) in book value per share
due to SFAS No. 115 $ 0.03 (0.17) (0.06) n/a n/a
Ratio of average interest-earning assets to
average interest-bearing liabilities 1.17x 1.21x 1.22x 1.23x 1.10x
<F1> Application of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
<F2> Application of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes".
<F3> Earnings per share data is not applicable prior to the year ended June
30, 1994; the date of conversion to stock form was June 28, 1993.
<F4> Ratio is presented on a fully taxable equivalent basis using the
Company's federal statutory tax rate of 34%.
<F5> Net interest income divided by average interest-earning assets.
<F6> Ratio would be positively affected if calculated without regard to the
one-time SAIF special assessment of $1,987, net of tax.
<F7> Ratio calculated without regard to gain (loss) on sale of securities,
if any, and goodwill amortization for 1995 and prior.
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
FFY Financial Corp. (FFY or Holding Company) is a unitary savings and loan
holding company formed at the direction of First Federal Savings Bank of
Youngstown (First Federal or Bank) which converted from a federally
chartered mutual savings bank to a federally chartered stock savings bank on
June 28, 1993. First Federal is a full service bank engaged primarily in
mortgage and consumer lending and deposit banking services including
certificate, savings and checking accounts. When used in this Annual Report,
the phrase "the Company" refers to both FFY Financial Corp. and First Federal
Savings Bank of Youngstown.
Fiscal year 1997 was highlighted by continued loan growth, increased
borrowings and securities sold under agreements to repurchase (repurchase
agreements) and the recapitalization of the Savings Association Insurance
Fund (SAIF). The Holding Company continued repurchasing shares in open
market transactions including a Modified Dutch Auction Tender Offer in
December 1996.
Management's discussion and analysis of financial condition and results of
operations is intended to facilitate the understanding and assessment of
changes in financial condition and results of operations of the Company.
The following information should be read in conjunction with the financial
statements and notes thereto.
Forward-Looking Statements
When used in this Annual Report, 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.
Changes in Financial Condition
Total assets increased $23.6 million, or 4.1%, and totaled $599.2 million at
June 30, 1997 compared to $575.6 million at June 30, 1996. The increase in
assets was due primarily to growth in loans receivable. This current year
asset increase compares to a $1.0 million, or 0.2% asset decline during
fiscal year 1996.
Loan growth slowed during fiscal year 1997, with an increase in net loans
receivable of $21.9 million for the current year compared to an increase of
$37.1 million during fiscal year 1996. Net loans receivable totaled $460.7
million at June 30, 1997 compared to $438.8 million at June 30, 1996, an
increase of 5.0%. The largest area of growth was $16.9 million in gross
mortgage loans secured by one-to-four family residences. All mortgage loans
originated by the Bank during the year were underwritten by the Bank's
personnel and are secured primarily by properties in Mahoning, Trumbull or
Columbiana counties in northeastern Ohio. Gross consumer loans grew $2.7
million during the current year compared to growth of $10.0 million during
fiscal year 1996. Consumer loan growth during fiscal year 1996 was mainly
attributable to the introduction of the indirect auto lending program in
January 1996 in an effort to develop a share in the local market for such
lending. However, after an analysis of the returns generated by the
existing indirect auto loan portfolio and potential returns from such a line
of business, the Bank exited this area of lending in March 1997. The
indirect auto loan portfolio was comprised of 857 loans totaling $8.9 million
at June 30, 1997 compared to 697 loans also totaling $8.9 million at June 30,
1996. Consumer loan growth during the current year was mainly attributable
to an increase in the home equity loan portfolio. Approximately 60% of the
Bank's consumer loan portfolio is secured by real estate where the Bank also
holds the first mortgage.
The Bank has historically been a portfolio lender, however, management is
putting in place a secondary market mortgage lending operation designed to
originate and sell 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, however management has delayed
the secondary market operation until the training phase of the new loan
origination software is completed. Management anticipates that the Bank
will begin selling loans during the first half of fiscal year 1998.
Funds not utilized in lending programs or for operations are currently held
in interest-bearing deposits or invested in securities available for sale.
Cash and cash equivalents increased $1.7 million, or 21.1% during the
current year and totaled $10.0 million at June 30, 1997. Securities
available for sale increased $2.2 million, or 2.0%, and totaled $112.0
million at June 30, 1997 compared to $109.8 million at June 30, 1996.
Matured securities totaling $30.0 million and proceeds from the sale of
securities totaling $44.0 million were primarily used to fund $21.9 million
in loan growth, $6.3 million in deposit outflows, which were also funded by
short-term Federal Home Loan Bank (FHLB) advances, $26.0 million in stock
repurchases and the remainder was used to purchase additional securities.
Deposit accounts declined $6.3 million, or 1.4%, and totaled $450.2 million
at June 30, 1997 compared to $456.5 million at June 30, 1996. The decline
in deposits was due primarily to customers seeking higher yields in this
generally low market interest rate environment. The variety of deposit
products offered by the Bank has allowed it to be competitive in obtaining
funds and to respond with flexibility to changes in consumer demand. The
Bank, however, continues to be susceptible to short-term fluctuations in
deposit flows because customers are generally interest rate conscious.
Short- and long-term securities sold under agreements to repurchase
(repurchase agreements) increased $25.7 million and totaled $32.3 million at
June 30, 1997 compared to $6.6 million at June 30, 1996. Funds generated
pursuant to the increase in repurchase agreements were primarily used to
purchase securities, enabling the Company to leverage its excess capital.
Borrowed funds increased $26.3 million and totaled $27.5 million at June 30,
1997 compared to $1.2 million at June 30, 1996. During the current year,
the Bank borrowed $25.0 million from FHLB to purchase adjustable-rate
mortgage-backed securities in order to leverage the Company's capital. The
remaining $1.3 million increase in borrowings were FHLB cash management
advances used for liquidity purposes. Borrowed funds are managed within the
Company's guidelines for asset/liability management, profitability and
overall growth objectives.
Stockholders' equity declined $19.7 million, or 19.4%, and totaled $82.2
million at June 30, 1997 compared to $101.9 million at June 30, 1996. This
decline was primarily attributable to the repurchase of 994,210 shares of
the Holding Company's stock, which are being held in treasury, during the
current year at an average price of $26.13 per share, for a total cost of
$26.0 million, and dividend payments totaling $2.9 million. Largely
contributing to the 994,210 shares repurchased was a Modified Dutch Auction
Tender Offer (Tender Offer) in December 1996 whereby the Holding Company
purchased 808,000 shares, approximately 15.8% of the shares then
outstanding, at $26.00 per share at a total cost of $21.2 million. The
declines in total stockholders' equity pursuant to stock repurchases and
dividends paid were partially offset by net income for the year totaling
$5.3 million and other components of stockholders' equity increasing a total
of $3.9 including increased market rates on available-for-sale securities,
stock option exercises, amortization and tax benefits associated with
employee benefits and ESOP accounting pursuant to Statement of Position
(SOP) 93-6. Book value per share totaled $19.83 and $20.06 per share,
respectively, at June 30, 1997 and 1996. At June 30, 1997, the ratio of
stockholders' equity to total assets was 13.7% compared to 17.7% at June
30, 1996.
Results of Operations
The Company's results of operations depend primarily on the level of net
interest income, which is the difference, or "spread", between the average
yield earned on interest-earning assets and the average rate paid on
interest-bearing liabilities. Interest-earning assets consists primarily of
loans receivable and securities whereas interest-bearing liabilities
consists primarily of deposits, repurchase agreements and borrowed funds.
The ratio of average interest-earning assets to average interest-bearing
liabilities during the current year was 1.17:1 compared to 1.21:1 during
fiscal year 1996. Results of operations is also dependent upon, among other
things, the provision for loan losses, non-interest income, non-interest
expense and federal income taxes.
Comparison of Years Ended June 30, 1997 and 1996
General. Net income for the year ended June 30, 1997 totaled $5.3 million,
a decline of $1.6 million from net income of $6.9 million for the year ended
June 30, 1996. The decline of $1.6 million was primarily attributable to an
increase in the provision for loan losses of $363,000, the one-time SAIF
special assessment of $3.0 million and a loss of $320,000 from security
sales compared to a gain of $30,000 during fiscal year 1996. These declines
were partially offset by an increase in net interest income of $519,000 and
a reduction in federal income taxes of $1.0 million. Earnings per share for
the year ended June 30, 1997 totaled $1.19 per share, a decline of $0.18 per
share from earnings per share of $1.37 for the year ended June 30, 1996.
This decline was the result of a decrease in net income partially offset by
a decline in the number of weighted average shares outstanding.
Net Interest Income. Net interest income increased $519,000, or 2.4%, and
totaled $22.1 million for the year ended June 30, 1997 compared to $21.6
million for the prior year. This represents a net interest margin of 3.89%
for the current year as well as for fiscal year 1996.
Interest income from loans increased $2.8 million, or 7.7%, and totaled
$38.4 million for the year ended June 30, 1997 compared to $35.7 million for
the prior year. This increase was the result of an increase of $33.5
million in the average balance of loans outstanding, reflecting continued
growth in the loan portfolio, partially offset by a 2 basis point decline,
from 8.52% to 8.50%, in the average yield on loans.
Interest income from securities declined $894,000, or 12.0%, and totaled
$6.6 million for the year ended June 30, 1997 compared to $7.4 million for
the prior year. This decline was the result of a $21.9 million decrease in
the average balance of securities which resulted from the use of proceeds
from the sale and maturity of securities to fund loan growth, deposit
outflows and stock repurchases. The decline in the average balance of
securities was partially offset by an increase of 51 basis points in the
average yield on securities, from 6.00% to 6.51%, primarily the result of
investing in higher-yield securities, particularly mortgage-backed
securities. At June 30, 1997 and 1996, mortgage-backed securities totaled
$75.7 million and $16.4 million, respectively, with a weighted average yield
of 7.0% and 6.4%, respectively.
Interest expense increased $1.7 million, or 7.6%, and totaled $23.8 million
for the year ended June 30, 1997 compared to $22.1 million for the prior
year. Interest expense increased due to more borrowings and repurchase
agreements partially offset by a decline in interest associated with deposit
accounts. Interest expense on deposits declined $363,000, or 1.6%, as a
result of a decrease in the average balance of deposits totaling $5.1
million from $456.9 million at June 30, 1996 to $451.8 million at June 30,
1997 and a decrease of 3 basis points in the average cost on deposits from
4.83% to 4.80%. Interest expense on short- and long-term repurchase
agreements increased $1.0 million due to volume. Interest expense on
borrowed funds increased $1.1 million, primarily due to volume.
Provision for Loan Losses. The Bank's provision for loan losses increased
$363,000 from $325,000 for the prior year and totaled $688,000 for the year
ended June 30, 1997. The increase over the prior year principally reflects
the performance of the Bank's indirect auto loan portfolio. During the
current year, the Bank wrote off $998,000 in indirect auto loans. At June
30, 1997, nonperforming indirect auto loans totaled $400,000, down from $1.1
million at December 31, 1996 and $812,000 at March 31, 1997. The allowance
for loan losses on the indirect auto loan portfolio was 102.7% of
nonperforming loans in this portfolio at June 30, 1997. The Bank's
allowance for loan losses, including the indirect auto loans mentioned
above, totaled 74.2% of non-performing assets at June 30, 1997, up from
73.6% and 72.6% at June 30, 1996 and 1995, respectively. Future additions
to the allowance for loan losses will be dependent on a number of factors
including the performance of the Bank's total loan portfolio, the economy,
changes in interest rates and the effect of such changes or real estate
values, inflation and the view of regulatory authorities toward adequate
reserve levels. Management believes that the allowance for loan losses is
adequate at June 30, 1997.
Non-Interest Income. Service charges, which are a major component of non-
interest income increased $41,000, or 7.9% over the prior year and totaled
$563,000 for the year ended June 30, 1997. Increases in this category were
attributable to debit card fees and automated teller machine charges. Loss
on sale of securities for the current year totaled $320,000 compared to a
gain of $30,000 for the prior year. The loss during the current year is
primarily the result of securities sold to fund the Tender Offer. Other
non-interest income declined $173,000 and totaled $375,000 for the year
ended June 30, 1997.
Non-Interest Expense. Non-interest expense increased $2.3 million, or 19.2%
over the prior year and totaled $14.3 million for the year ended June 30,
1997. This increase was primarily attributable to the one-time assessment
of $3.0 million on SAIF deposits. Refer to Note 10 of the Notes to
Consolidated Financial Statements included in this Annual Report regarding
the SAIF special assessment. Following the Bank's $3.0 million assessment,
First Federal experienced lower deposit insurance premiums, thus, insurance
and bonding expense increased a net of $2.6 million over the prior year.
Salaries and employee benefits declined $379,000, or 6.1% from the prior year
and totaled $5.9 million for the year ended June 30, 1997. This decline was
generally due to a decrease of $368,000 in severance pay for two executive
officers who announced their retirement in the prior fiscal year. Other
non-interest expense increased $117,000 due mainly to increased advertising
in an effort to stimulate lending and deposit programs.
A review of salary and benefits expense, specifically retirement costs,
indicated that the Bank's retirement expense was significantly higher than
financial institution industry averages, primarily due to the required 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. Management expects the termination of the
defined benefit pension plan will result in cost savings of appoximately
$120,000 in fiscal year 1998. 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 operating results for the year ended June 30, 1997, as the restructuring
is dependent upon 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 Taxes. Federal income taxes decreased $1.0 million from the
prior year and totaled $2.4 million for the year ended June 30, 1997. The
decline in federal income taxes is primarily due to decreased net income
before taxes, mainly the result of the one-time SAIF assessment.
Comparison of Years Ended June 30, 1996 and 1995
General. The Company had net income of $6.9 million, or $1.37 per share for
the year ended June 30, 1996 compared to $7.5 million, or $1.33 per share
for the year ended June 30, 1995. This decrease of $588,000 was primarily
attributable to decreased net interest income after provision for loan
losses of $1.1 million partially offset by increased non-interest income of
$260,000 and a reduction in federal income taxes of $407,000.
Net Interest Income. The Company's net interest income is comprised of
interest earned on loans, securities, FHLB stock and interest-bearing
deposits offset by interest paid on deposits, repurchase agreements and
borrowings. Net interest income totaled $21.6 million for the year ended
June 30, 1996, a decrease of $1.1 million, or 5.0% compared to the year
ended June 30, 1995. This represents a net interest margin of 3.89% for the
current year, down 20 basis points from 4.09% for fiscal year 1995.
Interest income from loans totaled $35.7 million for the year ended June 30,
1996, up $2.5 million, or 7.7% from the previous year. This increase was
the result of an increase of $26.7 million in the average balance of loans
outstanding and a 6 basis point increase, from 8.46% to 8.52%, in the
average yield on loans. The increase in average yield was primarily the
result of the implementation of the indirect auto lending program during
fiscal year 1996 which increased the weighted average yield on consumer
loans from 8.43% at June 30, 1995 to 9.37% at June 30, 1996.
Interest income from securities and interest-bearing deposits totaled $7.8
million for the year ended June 30, 1996, a decrease of $1.3 million, or
14.3% compared to the prior year. This decrease was the result of a $26.7
million decline in the average balance of securities which resulted from the
use of proceeds from the sale and maturity of securities to fund loan
growth. The decline in the average balance of securities was partially
offset by an increase in the average balance of other interest-earning
assets totaling $3.2 million. The overall net decline in average balances
was further offset by an increase of 24 basis points in the average yield on
securities, from 5.76% to 6.00%. The average yields on interest-earning
assets other than loans were higher during fiscal year 1996 as compared to
fiscal year 1995 due to generally higher market rates.
Interest expense increased $2.4 million compared to fiscal year 1995,
totaling $22.1 million for the year ended June 30, 1996. Of this increase
in interest expense, $2.6 million is attributable to interest on deposits,
which totaled $22.1 million, and $42,000 associated with repurchase
agreements that began in May 1996, partially offset by a $199,000 decrease
in interest expense associated with borrowings. The $2.6 million increase
in interest on deposits was the result of an increase in the average balance
of $8.3 million from $448.6 million at June 30, 1995 to $456.9 at June 30,
1996 and an increase of 48 basis points in the average cost of deposits from
4.35% to 4.83%.
Provision for Loan Losses. The Bank's provision for loan losses for the
year ended June 30, 1996 was $325,000, down $79,000 from the year ended June
30, 1995. This provision and a modest increase in non-performing assets
totaling $321,000 during fiscal year 1996 brought the Bank's allowance for
loan losses to 73.6% of non-performing assets at June 30, 1996, up from
72.6% and 56.8% at June 30, 1995 and 1994, respectively. The allowance for
loan losses totaled .78% of total loans receivable, net at June 30, 1996,
compared to .79% and .75% at June 30, 1995 and 1994, respectively.
Non-Interest Income. Service charges, which are a major component of non-
interest income, totaled $522,000 for the year ended June 30, 1996, up
$93,000, or 21.6% over the prior year. Increases in this category were
$81,000 in deposit account charges due primarily to increased fees on
business checking accounts and $12,000 in automated teller machine usage
charges due primarily to increased transaction volumes. Gains on security
sales totaled $30,000 for fiscal year 1996 compared to a $17,000 loss on
sale of securities for fiscal year 1995. Securities are sold for cash flow
purposes such as funding loan growth and deposit withdrawals. Other
non-interest income increased $120,000, or 28.0% to $548,000 for the year
ended June 30, 1996.
Non-Interest Expense. Non-interest expense totaled $12.0 million for the
year ended June 30, 1996, up 1.7% or $202,000 over the year ended June 30,
1995. The increase in salary and benefit expense is comprised largely of
$368,000 in severance pay for two executive officers who retired from the
Bank. The decline in state and local taxes was due to reduced franchise
taxes resulting from reduced equity at the Bank (as a result of dividends
paid from the Bank to the Holding Company), which is taxed at a higher rate
than the Holding Company. The $121,000 reduction in other non-interest
expenses was due primarily to a $98,000 decrease in the amortization of
goodwill, which was fully amortized at December 31, 1994.
Federal Income Taxes. Federal income taxes totaled $3.5 million for the
year ended June 30, 1996, down 10.5% from $3.9 million for the year ended
June 30, 1995. The Company's effective tax rate declined from 34.1% in the
prior year to 33.4% in the current year.
The following table presents for the periods indicated average balance
sheets, the total dollar amount of interest income from average interest-
earning assets and the resultant yields, as well as the interest expense on
the average interest-bearing liabilities, and the resultant costs, expressed
both in dollars and rates. Average balances for all years presented are
daily average balances. Interest on non-accruing loans has been included in
the table to the extent received.
Average Balances, Interest Rates and Yields
<TABLE>
<CAPTION>
(Dollars in Thousands) Years ended June 30,
-------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ----------------------------- -----------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
----------- -------- ------ ----------- -------- ------ ----------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable (1) $451,872 38,417 8.50% 418,370 35,664 8.52% 391,635 33,115 8.46%
Securities available for sale,
net (2) (3) 102,661 6,708 6.51% 124,593 7,493 6.00% 143,298 8,488 5.78%
Securities held to maturity - - - - - - 7,980 424 5.31%
FHLB Stock 3,935 279 7.09% 3,675 258 7.02% 3,439 229 6.66%
Other 13,356 676 5.06% 9,054 347 3.83% 5,893 188 3.19%
-------- ------ ------- ------ ------- ------
Total interest-earning
assets (2) 571,824 46,080 8.05% 555,692 43,762 7.87% 552,245 42,444 7.64%
------ ------ ------
Noninterest-earning assets 19,764 17,560 19,492
-------- ------- -------
Total assets $591,588 573,252 571,737
======== ======= =======
Interest-Bearing Liabilities:
Demand and NOW deposits $ 54,819 1,355 2.47% 56,047 1,433 2.56% 63,963 1,692 2.65%
Savings deposits 110,177 3,302 3.00% 115,467 3,472 3.01% 133,556 4,022 3.01%
Certificate accounts 286,796 17,042 5.94% 285,354 17,157 6.01% 251,063 13,787 5.49%
Short-term repurchase agreements 7,916 483 6.10% 1,006 42 4.17% - - -
Long-term repurchase agreements 9,077 559 6.16% - - - - - -
Short-term borrowings 19,619 1,082 5.52% 496 29 5.85% 4,117 229 5.56%
-------- ------ ------- ------ ------- ------
Total interest-bearing
liabilities 488,404 23,823 4.88% 458,370 22,133 4.83% 452,699 19,730 4.36%
------ ------ ------
Noninterest-bearing liabilities 10,247 10,050 10,047
-------- ------- -------
Total liabilities 498,651 468,420 462,746
Stockholders' equity 92,937 104,832 108,991
-------- ------- -------
Total liabilities and equity $591,588 573,252 571,737
======== ======= =======
Net interest income 22,257 21,629 22,714
Less fully taxable equivalent
adjustment (155) (46) -
------ ------ ------
Net interest income per statement
of income 22,102 21,583 22,714
====== ====== ======
Net interest rate spread 3.17% 3.04% 3.28%
==== ==== ====
Net earning assets $ 83,420 97,322 99,546
======== ======= =======
Net yield on average
interest-earning assets (2) 3.89% 3.89% 4.09%
==== ==== ====
Average interest-earning assets
to average interest-bearing
liabilities 1.17x 1.21x 1.22x
====== ====== ======
<F1> Calculated net of deferred loan fees, loan discounts, loans in process
and loss reserves.
<F2> Yield is calculated without consideration of the unrealized loss on
securities available for sale.
<F3> Interest is presented on a fully taxable equivalent basis using the
Company's federal statutory tax rate of 34%.
</TABLE>
The table at left presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets
and interest-bearing liabilities. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to (i) changes in volume (i.e., changes in volume multiplied by
old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old
volume). For purposes of this table, changes attributable to both rate and
volume, which cannot be segregated, have been allocated proportionately to
the change due to volume and the change in rate.
Rate/Volume Analysis
(Dollars in Thousands)
<TABLE>
<CAPTION>
Years ended June 30,
---------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
------------------------------ -----------------------------
Increase Total Increase Total
(Decrease) Increase (Decrease) Increase
Due to (Decrease) Due to (Decrease)
---------------------------------------------------------------
Volume Rate Volume Rate
------- ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 2,837 (84) 2,753 2,309 240 2,549
Securities (1) (1,385) 600 (785) (1,836) 371 (1,465)
FHLB stock 18 3 21 17 12 29
Other 197 132 329 116 43 159
------- --- ----- ----- --- ------
Total interest-earning assets $ 1,667 651 2,318 606 666 1,272
======= === ----- ===== === ------
Interest-bearing liabilities:
Demand and NOW deposits $ (30) (48) (78) (203) (56) (259)
Savings deposits (158) (12) (170) (550) - (550)
Certificate accounts 86 (201) (115) 1,990 1,380 3,370
Short-term repurchase agreements 414 27 441 42 - 42
Long-term repurchase agreements 559 - 559 - - -
Short-term borrowings 1,055 (2) 1,053 (211) 11 (200)
------- --- ----- ----- ----- ------
Total interest-bearing liabilities $ 1,926 (236) 1,690 1,068 1,335 2,403
======= === ----- ===== ===== ------
Net interest income 628 (1,131)
===== ======
<F1> Includes securities available for sale and securities held to maturity
at June 30, 1995.
</TABLE>
Weighted Average Yields
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Weighted average yield on:
Loans receivable 8.28% 8.17% 8.13% 8.02% 8.66%
Securities available for sale 6.88% 6.11% 5.72% n/a n/a
Securities held to maturity n/a n/a 5.97% 5.63% 5.98%
FHLB stock 7.25% 7.00% 6.63% 5.75% 4.50%
Other interest-earning assets 6.11% 5.10% 6.03% 4.39% 3.04%
-----------------------------------------
Combined weighted average
yield on interest-earning assets 7.99% 7.74% 7.48% 7.21% 7.30%
=========================================
Weighted average rate paid on:
Demand and NOW deposits 2.54% 2.58% 2.58% 2.67% 3.35%
Savings deposits 3.00% 3.00% 3.00% 3.00% 3.50%
Certificate accounts 5.91% 5.94% 6.03% 5.28% 5.81%
Short-term repurchase agreements 5.96% 4.16% n/a n/a n/a
Long-term repurchase agreements 6.10% n/a n/a n/a n/a
Short-term borrowings 5.61% 5.45% n/a 4.52% n/a
Long-term borrowings n/a n/a n/a n/a 2.92%
-----------------------------------------
Combined weighted average rate
paid on interest-bearing liabilities 4.93% 4.79% 4.82% 4.15% 4.55%
=========================================
Spread 3.06% 2.95% 2.66% 3.06% 2.75%
=========================================
</TABLE>
Asset/Liability Management
Asset/liability management is the measurement and analysis of the Bank's
exposure to changes in the interest rate environment. The Bank is subject
to interest rate risk to the extent its liabilities reprice more rapidly
than its assets. The Bank manages this risk on a continuing basis through
the use of a number of strategies as an ongoing part of its business plan.
The Company's asset/liability committee, which includes senior mangement
representatives, meets quarterly. Objectives include monitoring and methods
of managing the rate sensitivity and repricing characteristics of the
balance sheet components consistent with maintaining acceptable levels of
net interest income. The Bank's asset and liability program defined by the
Board of Directors is designed to minimize the impact of significant changes
in interest rates on net interest income. Strategies include attempting to
market variable-rate loans, growth in the consumer loan portfolio which tend
to have shorter terms to maturity, maintaining a substantial portion of the
securities portfolio in products having adjustable rates, and utilizing
deposit promotions in an effort to extend the term to maturity of its
liabilities.
A significant part of the Bank's asset/liability management is focusing on
originating a portion of its one-to-four family loans as adjustable-rate
mortgage loans (ARMs). Despite the decline in ARM originations prior to
fiscal year 1996 as a result of the decline in market interest rates, which
creates a greater demand for fixed-rate loans, current year ARM originations
increased 42.9%, or $7.2 million over fiscal year 1996. Adjustable-rate
originations totaled $24.2 million, or 20.4% of originations in fiscal year
1997 compared to $17.0 million, or 13.0% of originations in fiscal year
1996. At June 30, 1997, loans with an adjustable rate feature totaled $95.4
million, or 20.1% of the gross loan portfolio.
In order to consolidate its customer base and reduce interest rate risk
while maintaining adequate returns, the Bank has increased its investment in
consumer loans over the past several years. While consumer loans are
believed to have a greater risk of default than mortgage loans, consumer
loans are typically much shorter in duration than mortgage loans which
serves to reduce interest rate risk. Over the past five years, the fixed-
rate consumer loan portfolio has grown from $23.8 million, or 7.5% of gross
loans at June 30, 1992 to $52.0 million, or 13.7% of gross loans at June 30,
1997. Furthermore, the Bank began offering a variable-rate home-equity line
of credit product during fiscal year 1994 which had grown to an outstanding
balance of $2.8 million at June 30, 1997. Management intends to continue to
expand the Bank's consumer loan portfolio over the next several years.
Over the past fiscal year, the Bank increased its investments in adjustable-
rate securities in an attempt to reduce interest rate risk. At June 30,
1997, the market value of adjustable-rate mortgage-backed securities totaled
$25.0 million, or 22.3% of the total securities portfolio compared to a
market value of $694,000, or 0.6% of the total securities portfolio at June
30, 1996. Management intends to continue its investments in adjustable-rate
securities as attractive yields and cash flow are available.
The Company's management may, at times place greater emphasis on maximizing
net interest margin rather than merely concentrating on interest rate risk
depending on the relationship between short- and long-term interest rates,
market conditions and consumer preference. Management believes that
increased net income resulting from a moderate contrast between the maturity
of its assets and liabilities can provide high enough returns to justify the
increased risk exposure during periods of stable interest rates. The
Company's net interest margin was 3.89% for both the years ended June 30,
1997 and 1996. Management has established limits on the amount of its
interest rate risk exposure, however, there can be no assurance that
management's efforts to limit interest rate risk will be successful.
One measure of exposure to interest rate risk is gap analysis. A negative
gap for a given period means that the amount of interest-earning assets
maturing or otherwise repricing within such period is less than the amount
of interest-bearing liabilities maturing or otherwise repricing within the
same period. Accordingly, in a declining interest rate environment, an
institution with a negative gap generally experiences a greater decrease in
the cost of its liabilities than in the yield on its assets. Conversely, a
rising interest rate environment will generally have an unfavorable impact
on an institution with a negative gap because its cost of funds will
generally increase more than the yield on its assets. Changes in interest
rates generally have the opposite effect on an institution with a positive
gap. The Company's one year gap was (7.9%) at June 30, 1997, (16.5%) at
June 30, 1996 and (4.8%) at June 30, 1995. The reduced level of interest
rate risk at June 30, 1997 compared to June 30, 1996, measured under gap
analysis, was due to an increase in assets maturing or otherwise repricing
in one year or less totaling $16.0 million (due to an increase in loans and
securities repricing during that period) and a decrease in liabilities
maturing or otherwise repricing in one year or less totaling $31.6 million
(due primarily to a decline in certificates repricing during that period,
partially offset by increased short-term borrowings). The increased level
of interest rate risk at June 30, 1996 compared to June 30, 1995, measured
under gap analysis, was due to an increase in liabilities maturing or
otherwise repricing in one year or less totaling $74.7 million (due
particularly to an increase in time deposits maturing during that period and
repurchase agreements that mature overnight). There were no repurchase
agreements outstanding at June 30, 1995. The June 30, 1996 increase in
liabilities maturing in one year or less was partially offset by an increase
in assets maturing or otherwise repricing during the same period totaling
$7.3 million (due to higher annual prepayment rate assumptions on loans
offset by a decrease in securities and mortgage-backed securities repricing
during that period).
The table on page 16 sets forth the repricing dates of the Company's
interest-earning assets and interest-bearing liabilities at June 30, 1997
and the interest rate sensitivity "gap" percentages at the dates indicated
based on the assumptions that follow. The interest rate sensitivity gap is
defined as the amount by which assets repricing within the respective
periods exceed liabilities repricing within such periods. Fixed- and
adjustable-rate one-to-four family mortgage loans are assumed to prepay at a
rate of 20% per year. Multi-family, commercial real estate, development
loans and consumer loans are assumed to prepay at a rate of 15% per year.
Passbook accounts, money market deposit accounts and transaction accounts
are assumed to decay at an annual rate of 40% each year for the periods
shown. Loan amounts are calculated gross of deferred loan fees and loss
reserves. The table also provides information about the Company's other
financial instruments that are sensitive to interest rate changes.
<TABLE>
<CAPTION>
Gap Analysis
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Expected Maturity/Repricing Date
Fair
1998 1999 2000 2001 2002 Thereafter Total Value(3)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate one-to-four family, multi-family,
commercial real estate and construction and
development loans $ 70,713 55,929 44,152 34,628 26,780 86,841 319,043 314,204
Weighted average yield 8.12% 8.13% 8.14% 8.14% 8.12% 8.12% 8.12%
Adjustable rate one-to-four family,
multi-family, commercial real estate and
construction and development loans (1) 47,052 40,165 5,402 - - - 92,619 95,429
Weighted average yield 7.85% 7.87% 9.09% - - - 7.93%
Fixed rate consumer loans 15,483 12,679 10,324 7,375 3,418 2,734 52,013 52,263
Weighted average yield 9.79% 9.79% 9.79% 9.62% 9.19% 9.19% 9.70%
Adjustable rate consumer loans (1) 2,814 - - - - - 2,814 2,814
Weighted average yield 9.50% - - - - - 9.50%
Securities and other (2) 48,764 13,494 3,982 5,563 5,290 45,245 122,338 122,507
Weighted average yield 6.24% 6.28% 7.36% 7.11% 6.99% 7.38% 6.77%
----------------------------------------------------------------------------------
Total interest-earning assets 184,826 122,267 63,860 47,566 35,488 134,820 588,827 587,217
----------------------------------------------------------------------------------
Savings deposits and money market accounts 52,164 52,159 26,074 - - - 130,397 130,397
Weighted average rate 2.99% 2.99% 2.99% - - - 2.99%
Demand and NOW deposits 12,492 12,494 6,250 - - - 31,236 31,236
Weighted average rate 2.23% 2.23% 2.23% - - - 2.23%
Certificates 132,906 78,474 44,963 11,976 19,104 1,168 288,591 289,079
Weighted average rate 5.60% 5.98% 6.45% 6.00% 6.35% 7.08% 5.91%
Repurchase agreements 7,307 - - - 25,000 - 32,307 32,384
Weighted average rate 5.96% - - - 6.10% - 6.07%
Borrowed funds 27,455 - - - - - 27,455 27,455
Weighted average rate 5.61% - - - - - 5.61%
----------------------------------------------------------------------------------
Total interest-bearing liabilities 232,324 143,127 77,287 11,976 44,104 1,168 509,986 510,551
----------------------------------------------------------------------------------
Interest-earning assets less interest-
bearing liabilities $ (47,498) (20,860) (13,427) 35,590 (8,616) 133,652 78,841
========================================================================
Cumulative interest-rate sensitivity gap $ (47,498) (68,358) (81,785) (46,195) (54,811) 78,841
============================================================
Cumulative interest-rate gap as a percentage
of total assets at June 30, 1997 -7.9% -11.4% -13.6% -7.7% -9.1% 13.2%
============================================================
Cumulative interest-rate gap as a percentage
of total assets at June 30, 1996 -16.5%
=========
Cumulative interest-rate gap as a percentage
of total assets at June 30, 1995 -4.8%
=========
<FN>
- --------------------
<F1> Adjustable rate mortgage (ARM) and consumer loans are shown at repricing
dates for GAP analysis purposes. ARM's have a weighted average rate to
maturity (WARM) of 266 months and adjustable rate consumer loans have a
WARM of 20 months.
<F2> Securities available for sale are shown at amortized cost.
<F3> Fair value of loans are gross of deferred fees and allowance for loan
losses.
</FN>
</TABLE>
The effect of these assumptions is to quantify the dollar amount of items
that are interest-sensitive and can be repriced within each of the periods
specified. Such repricing can occur in one of three ways: (1) the rate of
interest to be paid on an asset or liability may adjust periodically based
on an index; (2) as asset, such as a mortgage loan, may amortize,
permitting reinvestment of cash flows at the then-prevailing interest rates;
or (3) an asset or liability may mature, at which time the proceeds can be
reinvested at current market rates.
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes
in market interest rates, while interest rates on other types may lag behind
changes in market rates. Additionally, certain assets, such as adjustable
rate loans, have features that restrict changes in interest rates on a
short-term basis and over the life of the asset. Further, in the event of a
change in interest rates, prepayment and early withdrawal levels would
likely deviate significantly from those assumed in calculating the table.
Finally, the ability of many borrowers to service their debt may decrease in
the event of an interest rate increase.
Liquidity and Capital Resources
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 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 the Bank to maintain minimum levels of liquid
assets. The required percentage varies based on economic conditions and
savings flows and is currently 5% of net withdrawable savings deposits and
borrowings payable on demand or in one year or less during the preceding
calendar month. Liquid assets for purposes of this ratio include cash,
certain time deposits, U.S. Government, government agency and corporate
securities and other obligations generally having remaining maturities of
less than five years. The Bank's liquidity ratio was 5.1% at June 30, 1997
compared to 7.6% and 20.0% at June 30, 1996 and 1995, respectively. The
reduction in the Bank's liquidity over the past two years was due primarily
to an increase in the loan portfolio, increased short-term borrowings that
were used to purchase adjustable-rate mortgage-backed securities with
maturities greater than five years and cash and security dividends to the
Company. Management believes that the Bank's current liquidity position is
adequate and it will be able to meet anticipated funding requirements as
they occur.
Liquidity management is both a daily and long-term responsibility of
management. The 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, the Bank has additional sources of liquidity
available including, but not limited to, loan repayments, the ability to
obtain deposits through offering above market interest rates and a $20
million line of credit with FHLB. At June 30, 1997 and 1996, the Bank had
outstanding FHLB line of credit advances of $2.5 million and $1.2 million,
respectively.
On May 14, 1997, the Office of Thrift Supervision (OTS) proposed to lower
the minimum liquid asset requirement from 5% to 4% of an institution's
liquidity base. The proposed change would increase regulatory flexibility
and reduce the burden on savings associations, such as the Bank. In
addition, the OTS would streamline the calculations used to measure
compliance with the liquidity requirements, expand the types of assets that
can be considered liquid and reduce the liquidity base by modifying the
definition of "net withdrawable account." Under the proposal, simply
meeting the minimum liquidity requirement does not automatically mean a
thrift institution holds sufficient liquid assets to support safe and sound
operations. Therefore, the OTS would add a new regulatory requirement that
all savings associations maintain a prudent level of liquidity. Management
does not expect the proposal to affect the Bank's compliance with respect to
maintaining adequate liquidity levels.
The primary investment activities of the Bank and/or Company are originating
loans and purchasing securities. Increases in the Bank's loans receivable
used $22.1 million, $36.6 million and $27.7 million of funds during fiscal
years 1997, 1996 and 1995, respectively. The growth in the Company's
securities portfolio used $1.4 million during fiscal year 1997 and the
decline in the securities portfolio provided $33.0 million and $34.9 million
during fiscal years 1996 and 1995, respectively. During periods of general
interest rate decline, the Bank would be expected to experience increased
loan prepayments, which would likely be reinvested at lower interest rates.
During a period 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 Bank are deposits, repurchase
agreements and borrowings. Declines in deposit accounts used $6.1 million
and $5.6 million during fiscal years 1997 and 1996, respectively, and growth
in deposit accounts provided $5.8 million during fiscal year 1995.
Repurchase agreements provided $25.7 million and $6.6 million during fiscal
years 1997 and 1996, respectively. The Bank did not enter into repurchase
agreements during fiscal year 1995. Borrowed funds provided $26.3 million
and $1.2 million during fiscal years 1997 and 1996, respectively, and used
$8.1 million during fiscal year 1995.
Total stockholders' equity declined $19.7 million during the year ended June
30, 1997. Components of the decline were comprised largely of share
repurchases of the Holding Company's stock and dividends paid. These
declines were partially offset by net income, amortization of employee
benefit expenses and stock option exercises. See "Changes in Financial
Condition" contained in this Annual Report for a detailed analysis of
stockholders' equity for fiscal year 1997. Total stockholders' equity
declined $4.5 million during the year ended June 30, 1996. The 1996 decline
was primarily due to the repurchase of 524,315 shares of the Holding Company's
stock during the year at an average price of $22.47 per share (totaling $11.8
million), dividend payments totaling $2.8 million and an increase in the net
unrealized loss on securities available for sale totaling $542,000. The 1996
decline was partially offset by net income for the year ended June 30, 1996
of $6.9 million and stock option exercises totaling $1.8 million.
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. At June 30, 1997, the Bank's
tangible, core and risk-based capital ratios were 9.6%, 9.6% and 17.0%,
respectively, each in excess of the minimum levels required by regulation
(see Note 8 of the Notes to Consolidated Financial Statements).
Dividends paid by the Holding Company are substantially provided from
dividends from the Bank, which must be approved by the Office of Thrift
Supervision (OTS). During the year ended June 30, 1997, the Bank received
OTS approval for and paid cash dividends to the Holding Company totaling
$4.5 million. This compares to fiscal year 1996 dividends totaling $4.0
million, comprised of $3.1 million in securities and related accrued
interest and $900,000 in cash, and fiscal year 1995 dividends totaling $10.9
million, comprised of $4.1 million in securities and related accrued
interest and $6.8 million in cash.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering the
change in the relative purchasing power of money over time due to inflation.
The impact of inflation is reflected in the increased cost of the Bank's
operations. Unlike most industrial companies, nearly all the assets and
liabilities of the Company are monetary. As a result, interest rates have a
greater impact on the Company's performance than do the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.
Quarterly Earnings Summary
- -------------------------------------------------------------------------------
FFY Financial Corp. and Subsidiary
(Dollars in Thousands Except Per Share Data)
<TABLE>
<CAPTION>
Quarter ended fiscal 1997 September 30 December 31 March 31 June 30
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $11,209 11,588 11,418 11,709
Total interest expense 5,566 5,927 6,021 6,219
- ------------------------------------------------------------------------------------------------------------
Net interest income 5,643 5,661 5,397 5,490
Provision for loan losses 155 198 208 126
- ------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 5,488 5,463 5,189 5,364
Non-interest income 219 219 232 268
Gain (loss) on sale of securities available for sale (543) 173 24 25
Non-interest expense (5,953) (3,014) (2,647) (2,764)
- ------------------------------------------------------------------------------------------------------------
Income (loss) before federal income taxes (789) 2,841 2,798 2,893
Federal income tax expense (benefit) (293) 940 887 886
- ------------------------------------------------------------------------------------------------------------
Net income (loss) $ (496) 1,901 1,911 2,007
- ------------------------------------------------------------------------------------------------------------
Earnings (loss) per common and common equivalent share $ (0.10) 0.39 0.47 0.50
- ------------------------------------------------------------------------------------------------------------
Quarter ended fiscal 1996 September 30 December 31 March 31 June 30
- ------------------------------------------------------------------------------------------------------------
Total interest income $10,848 10,883 10,944 11,041
Total interest expense 5,603 5,554 5,508 5,468
- ------------------------------------------------------------------------------------------------------------
Net interest income 5,245 5,329 5,436 5,573
Provision for loan losses 76 73 77 99
- ------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 5,169 5,256 5,359 5,474
Non-interest income 255 278 268 269
Gain on sale of securities available for sale - 17 4 9
Non-interest expense (2,942) (2,857) (3,263) (2,929)
- ------------------------------------------------------------------------------------------------------------
Income before federal income taxes 2,482 2,694 2,368 2,823
Federal income tax expense 830 918 790 927
- ------------------------------------------------------------------------------------------------------------
Net income $ 1,652 1,776 1,578 1,896
- ------------------------------------------------------------------------------------------------------------
Earnings per common and common equivalent share $ 0.32 0.35 0.32 0.39
- ------------------------------------------------------------------------------------------------------------
</TABLE>
First Federal Savings Bank of Youngstown Office Locations
- -------------------------------------------------------------------------------
Phone Number (330) 726-3396 connects all offices except
Howland (330) 856-5566
Main Office (pictured in background)
724 Boardman-Poland Road
P.O. Box 3300
Youngstown, Ohio 44513-3300
Branch Offices Downtown
25 Market Street
Suite 3
Youngstown, Ohio 44503
Westside
4390 Mahoning Avenue
Youngstown, Ohio 44515
Southside
3900 Market Street
Youngstown, Ohio 44512
Northside
600 Gypsy Lane
Youngstown, Ohio 44505
Logan Way
4423 Logan Way
Youngstown, Ohio 44505
Poland
30 South Main Street
Poland, Ohio 44514
Canfield
2 South Broad Street
Canfield, Ohio 44406
Canfield Drive-up
352 W. Main Street
Canfield, Ohio 44406
Cornersburg
3516 S. Meridian Road
Youngstown, Ohio 44511
New Middletown
10416 Main Street
New Middletown, Ohio 44442
Howland Loan Office
5000 E. Market Street, Suite 16
Warren, Ohio 44484
FFY Financial Corp. and Subsidiary
Consolidated Financial Statements
June 30, 1997 and 1996
(With Independent Auditors' Report Thereon)
FFY FINANCIAL CORP. and Subsidiary
Table of Contents
-----------------
Consolidated Statements of Financial Condition
June 30, 1997 and 1996
Consolidated Statements of Income
Years ended June 30, 1997, 1996, and 1995
Consolidated Statements of Changes in Stockholders' Equity
Years ended June 30, 1997, 1996, and 1995
Consolidated Statements of Cash Flows
Years ended June 30, 1997, 1996, and 1995
Notes to Consolidated Financial Statements
June 30, 1997, 1996, and 1995
Independent Auditors' Report
FFY FINANCIAL CORP. and Subsidiary
Consolidated Statements of Financial Condition
June 30, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
------ ---- ----
<S> <C> <C>
Cash $ 3,631,798 3,374,031
Interest-bearing deposits 6,215,957 4,888,366
Short-term investments 160,000 --
---------------------------
Total cash and cash equivalents 10,007,755 8,262,397
Securities available for sale 112,036,159 109,835,614
Loans receivable, net of allowance for loan losses of
$2,961,810 and $3,439,305, respectively 460,711,635 438,789,657
Interest and dividends receivable on securities 1,239,988 1,845,835
Interest receivable on loans 2,524,542 2,312,575
Federal Home Loan Bank stock, at cost 4,094,500 3,773,800
Office properties and equipment, net 7,797,721 7,973,576
Other assets 837,075 2,808,873
---------------------------
Total assets $599,249,375 575,602,327
===========================
Liabilities and Stockholders' Equity
------------------------------------
Deposits $450,223,793 456,540,807
Securities sold under agreements to repurchase
Short-term 7,307,248 6,639,553
Long-term 25,000,000 --
Borrowed funds 27,455,000 1,200,000
Advance payments by borrowers for taxes and insurance 2,313,090 2,279,624
Other payables and accrued expenses 4,776,028 7,021,490
---------------------------
Total liabilities 517,075,159 473,681,474
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 6,630,000 shares 66,300 66,300
Additional paid-in capital 64,506,573 63,529,201
Retained earnings, substantially restricted 74,599,977 72,165,978
Treasury stock, at cost (2,485,160 and 1,548,802 shares,
respectively) (53,387,258) (28,492,183)
Unrealized gain (loss) on securities available for sale,
net of federal income tax of $57,000 and ($448,000),
respectively 111,796 (869,461)
Common stock purchased by
Employee Stock Ownership and 401(k) Plan (3,441,382) (3,865,692)
Recognition and Retention Plans (281,790) (613,290)
---------------------------
Total stockholders' equity 82,174,216 101,920,853
---------------------------
Total liabilities and stockholders' equity $599,249,375 575,602,327
===========================
</TABLE>
See accompanying notes to consolidated financial statements.
FFY FINANCIAL CORP. and Subsidiary
Consolidated Statements of Income
Years ended June 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest income
Loans $ 38,417,621 35,663,968 33,114,856
Securities available for sale 6,552,936 7,072,955 8,487,416
Securities held to maturity -- 374,084 424,204
Federal Home Loan Bank stock 278,841 257,749 228,768
Other interest-earning assets 675,843 347,498 188,390
----------------------------------------
Total interest income 45,925,241 43,716,254 42,443,634
Interest expense
Deposits 21,699,053 22,061,881 19,500,583
Securities sold under agreements to repurchase
Short-term 483,448 41,941 --
Long-term 559,167 -- --
Borrowed funds 1,082,015 29,887 229,373
----------------------------------------
Total interest expense 23,823,683 22,133,709 19,729,956
----------------------------------------
Net interest income 22,101,558 21,582,545 22,713,678
Provision for loan losses 687,642 324,870 403,450
----------------------------------------
Net interest income after provision for
loan losses 21,413,916 21,257,675 22,310,228
Noninterest income
Service charges 563,443 522,201 429,474
Gain (loss) on sale of securities available for sale (320,290) 29,901 (17,374)
Other 375,217 548,082 428,150
----------------------------------------
Total noninterest income 618,370 1,100,184 840,250
----------------------------------------
Noninterest expense
Salaries and employee benefits 5,883,557 6,262,755 5,814,266
Net occupancy and equipment 1,644,858 1,676,561 1,692,889
Insurance and bonding 3,839,783 1,289,153 1,284,901
State and local taxes 1,085,987 1,045,661 1,158,516
Other 1,834,158 1,716,747 1,838,043
----------------------------------------
Total noninterest expense 14,288,343 11,990,877 11,788,615
----------------------------------------
Income before federal income taxes 7,743,943 10,366,982 11,361,863
Federal income taxes 2,420,000 3,465,000 3,872,000
----------------------------------------
Net income $ 5,323,943 6,901,982 7,489,863
========================================
Earnings per common and common equivalent share $ 1.19 1.37 1.33
========================================
</TABLE>
See accompanying notes to consolidated financial statements.
FFY FINANCIAL CORP. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Years ended June 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>
Common Stock
----------------------
Shares
Outstanding Amount
----------- ------
<S> <C> <C>
Balance at June 30, 1994 5,988,216 $66,300
Cumulative effect of adoption of SFAS No. 115 -- --
Net income -- --
Dividends paid, $.475 per share -- --
Treasury stock purchased (584,891) --
Stock options exercised 24,387 --
Amortization of ESOP expense -- --
Amortization of RRP stock awards -- --
Tax benefit related to RRP stock awards -- --
Tax benefit related to exercise of stock options -- --
Difference between average fair value per share and cost per
share on ESOP shares committed to be released -- --
Change in unrealized (loss) on securities available for sale, net -- --
---------------------
Balance at June 30, 1995 5,427,712 66,300
Net income -- --
Dividends paid, $.575 per share -- --
Treasury stock purchased (524,315) --
Stock options exercised 179,801 --
Common stock used to exercise options (2,000) --
Amortization of ESOP expense -- --
Amortization of RRP stock awards -- --
Tax benefit related to RRP stock awards -- --
Tax benefit related to exercise of stock options -- --
Difference between average fair value per share and cost per
share on ESOP shares committed to be released -- --
Change in unrealized (loss) on securities available for sale, net -- --
---------------------
Balance at June 30, 1996 5,081,198 66,300
Net income -- --
Dividends paid, $.675 per share -- --
Treasury stock purchased (994,210) --
Stock options exercised 59,352 --
Common stock used to exercise options (1,500) --
Amortization of ESOP expense -- --
Amortization of RRP stock awards -- --
Tax benefit related to RRP stock awards -- --
Tax benefit related to exercise of stock options -- --
Difference between average fair value per share and cost per
share on ESOP shares committed to be released -- --
Change in unrealized gain (loss) on securities available for sale, net -- --
---------------------
Balance at June 30, 1997 4,144,840 $66,300
=====================
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
Common Stock
Purchased By
Unrealized --------------------------
Gain (Loss) Employee Recognition
Additional on Securities Stock Own- and
Paid-In Retained Treasury Available for ership and Retention
Capital Earnings Stock Sale, Net 401(k) Plan Plans Total
- ---------- -------- -------- ------------- ----------- ----------- -----
<C> <C> <C> <C> <C> <C> <C>
63,676,247 63,117,165 (9,287,526) -- (4,768,532) (1,970,052) 110,833,602
-- -- -- (1,945,945) -- -- (1,945,945)
-- 7,489,863 -- -- -- -- 7,489,863
-- (2,561,559) -- -- -- -- (2,561,559)
-- -- (11,013,105) -- -- -- (11,013,105)
(127,543) -- 371,413 -- -- -- 243,870
-- -- -- -- 460,160 -- 460,160
-- -- -- -- -- 681,948 681,948
167,076 -- -- -- -- -- 167,076
59,788 -- -- -- -- -- 59,788
366,081 -- -- -- -- -- 366,081
-- -- -- 1,618,319 -- -- 1,618,319
- ------------------------------------------------------------------------------------------------------
64,141,649 68,045,469 (19,929,218) (327,626) (4,308,372) (1,288,104) 106,400,098
-- 6,901,982 -- -- -- -- 6,901,982
-- (2,781,473) -- -- -- -- (2,781,473)
-- -- (11,783,245) -- -- -- (11,783,245)
(1,464,270) -- 3,262,280 -- -- -- 1,798,010
-- -- (42,000) -- -- -- (42,000)
-- -- -- -- 442,680 -- 442,680
-- -- -- -- -- 674,814 674,814
224,508 -- -- -- -- -- 224,508
101,932 -- -- -- -- -- 101,932
525,382 -- -- -- -- -- 525,382
-- -- -- (541,835) -- -- (541,835)
- ------------------------------------------------------------------------------------------------------
63,529,201 72,165,978 (28,492,183) (869,461) (3,865,692) (613,290) 101,920,853
-- 5,323,943 -- -- -- -- 5,323,943
-- (2,889,944) -- -- -- -- (2,889,944)
-- -- (25,982,802) -- -- -- (25,982,802)
(532,457) -- 1,125,977 -- -- -- 593,520
-- -- (38,250) -- -- -- (38,250)
-- -- -- -- 424,310 -- 424,310
-- -- -- -- -- 331,500 331,500
296,657 -- -- -- -- -- 296,657
575,301 -- -- -- -- -- 575,301
637,871 -- -- -- -- -- 637,871
-- -- -- 981,257 -- -- 981,257
- ------------------------------------------------------------------------------------------------------
64,506,573 74,599,977 (53,387,258) 111,796 (3,441,382) (281,790) 82,174,216
======================================================================================================
</TABLE>
FFY FINANCIAL CORP. and Subsidiary
Consolidated Statements of Cash Flows
Years ended June 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 5,323,943 6,901,982 7,489,863
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 909,632 954,646 932,445
Amortization and accretion 406,691 936,630 1,509,086
Deferred federal income taxes 696,000 (74,000) 207,000
(Gain) loss on sale of securities 320,290 (29,901) 17,374
Provision for loan losses 687,642 324,870 403,450
Federal Home Loan Bank stock dividend (270,400) (250,100) (209,700)
Decrease in interest receivable 393,880 194,029 212,845
Tax benefits related to employee plans 871,958 326,440 226,864
Other, net 895,238 566,563 241,609
------------------------------------------
Net cash provided by operating activities 10,234,874 9,851,159 11,030,836
------------------------------------------
Cash flows from investing activities
Proceeds from maturity of securities available for sale 30,000,000 56,000,000 20,125,000
Proceeds from sales of securities available for sale 44,044,024 5,350,377 23,141,251
Purchase of securities available for sale (83,710,035) (26,867,259) (4,187,906)
Purchase of securities held to maturity -- (4,099,233) (5,015,658)
Purchase of Federal Home Loan Bank stock (50,300) -- --
Principal receipts on securities available for sale 8,308,925 1,400,719 --
Principal receipts on securities held to maturity -- 1,227,662 847,659
Net increase in loans (22,119,550) (36,575,292) (27,696,893)
Purchase of office properties and equipment (747,167) (877,912) (851,809)
Other, net 14,466 46,122 105,407
------------------------------------------
Net cash provided by (used in) investing activities (24,259,637) (4,394,816) 6,467,051
------------------------------------------
Cash flows from financing activities
Net increase (decrease) in deposits (6,138,675) (5,606,561) 5,801,003
Net increase in securities sold under agreements to repurchase
Short-term 667,695 6,639,553 --
Long-term 25,000,000 -- --
Net increase (decrease) in borrowed funds 26,255,000 1,200,000 (8,125,000)
Treasury stock purchases (25,982,802) (11,783,245) (11,013,105)
Dividends paid (2,889,944) (2,781,473) (2,561,559)
Proceeds from stock options exercised 555,270 1,756,010 243,870
Increase (decrease) in amounts due to bank (1,551,024) 1,452,469 (174,037)
Other, net (145,399) 195,050 82,849
------------------------------------------
Net cash provided by (used in) financing activities 15,770,121 (8,928,197) (15,745,979)
------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,745,358 (3,471,854) 1,751,908
Cash and cash equivalents at beginning of year 8,262,397 11,734,251 9,982,343
------------------------------------------
Cash and cash equivalents at end of year $ 10,007,755 8,262,397 11,734,251
==========================================
Supplemental disclosure of cash flow information
Cash payments of interest expense $ 23,716,934 21,986,359 19,562,604
Cash payments of income taxes 780,000 2,855,000 3,350,000
==========================================
Supplemental schedule of noncash investing activities
Real estate acquired through foreclosure $ 479,854 251,849 82,078
Real estate sales by loan issuance 455,400 282,000 103,800
==========================================
</TABLE>
See accompanying notes to consolidated financial statements.
FFY FINANCIAL CORP. and Subsidiary
Notes to Consolidated Financial Statements
June 30, 1997, 1996, and 1995
(1) Summary of Significant Accounting Policies
------------------------------------------
(a) Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of
the Company which include FFY Financial Corp. (FFY or Holding
Company) and its wholly owned subsidiary, First Federal Savings
Bank of Youngstown (First Federal or Bank). 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. In
preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the
consolidated statement of financial condition and revenues and
expenses for the reporting period. Actual results could differ
from those estimates.
(c) Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid debt instruments with
purchased maturities of three months or less to be cash
equivalents. Cash equivalents include interest-bearing deposits
and short-term investments (open-end repurchase agreements).
(d) Securities
----------
Management determines the appropriate classification of
securities at the time of purchase according to the provisions
of Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity
Securities. Debt and equity securities, including mortgage-
backed securities, are classified as available for sale and
reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of
stockholders' equity, net of tax. Available-for-sale securities
are those which management may decide to sell, if needed, for
liquidity, asset/liability management, or other reasons.
Gain or loss on the sale of securities is recognized using the
specific identification method. Premiums and discounts are
recognized in interest income using the interest method over the
estimated life.
On December 31, 1995, management took a permitted one-time
opportunity to re-evaluate securities classification under SFAS
No. 115 and reclassified securities with an amortized cost of
$14,680,835 from held to maturity to available for sale. The
unrealized loss at the time of the transfer was $26,871.
(e) Loans and Related Fees and Costs
--------------------------------
Loans receivable are carried at unpaid principal balances, less
the allowance for loan losses and net deferred loan origination
fees. Interest on loans is accrued and credited to income as
earned. The accrual of interest is discontinued generally when
a loan is 90 days delinquent. Loans are returned to accrual
status when the loan is determined to be performing in
accordance with the applicable loan terms.
Effective July 1, 1995, the Company adopted SFAS No. 114,
Accounting by Creditors for Impairment of a Loan, and SFAS No.
118, Accounting by Creditors for Impairment of a Loan -- Income
Recognition and Disclosures. These statements require that
certain impaired loans be measured based on the present value of
expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's
observable market price or fair value of the collateral if the
loan is collateral-dependent. The adoption of SFAS No. 114 and
SFAS No. 118 did not have a material impact on the Company's
consolidated financial position or results of operations.
Loan origination fees and certain direct loan origination costs
are deferred, and the net amounts are amortized as an adjustment
of the related loan's yield using the interest method over the
estimated life of the related loans. Amortization of net
deferred loan origination fees is discontinued when loans are
placed on nonaccrual status.
(f) Office Properties and Equipment
-------------------------------
Land is carried at cost. Office properties and equipment are
stated at cost less accumulated depreciation. Depreciation is
computed on the straight-line method over the estimated useful
lives of the assets except leasehold improvements, which are
depreciated using the straight-line method over the terms of the
related leases.
(g) Provision for Loan Losses
-------------------------
The provision for loan losses charged to expense is based on
management's judgment taking into consideration past experience,
current and estimated future economic conditions, known and
inherent risks in the loan portfolio, and the estimated value of
underlying collateral. While management uses the best
information available to make these evaluations, future
adjustments to the allowances may become necessary if economic
conditions change substantially from the assumptions used in
making the evaluations. Additionally, various regulatory
agencies, as an integral part of their examination process,
periodically review the reserve for loan losses. Such agencies
may require the recognition of additions to the reserve based on
their judgments of information available to them at the time of
their examination.
(h) Income Taxes
------------
The Company files a consolidated federal income tax return.
The Company accounts for income taxes under the asset and
liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period
that includes the enactment date.
(i) Earnings Per Share
------------------
Earnings per share is calculated by dividing net income for the
period by the weighted average number of shares of common stock
outstanding during the period. Earnings per share has not been
adjusted for the effect of stock options as the dilutive effect
is less than 3 percent in any year.
The weighted average number of shares of common stock and common
stock equivalents outstanding during the years ended June 30,
1997, 1996, and 1995 was 4,463,819; 5,041,888; and 5,616,585,
respectively.
(j) Effect of New Financial Accounting Standards
--------------------------------------------
In June 1996, the Financial Accounting Standards Board (FASB)
issued SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities. SFAS No.
125 establishes the accounting for certain financial asset
transfers, including securitization transactions, and is
effective for transactions entered into on or after January 1,
1997. The adoption of SFAS No. 125 did not have a material
impact on the Company's consolidated financial position or
results of operations.
In February 1997, the FASB issued SFAS No. 128, Earnings per
Share, which supersedes Accounting Principles Board Opinion No.
15, Earnings per Share, and replaces the presentation of primary
and fully diluted earnings per share with basic and diluted
earnings per share. SFAS No. 128 was issued to simplify the
computation of earnings per share and make the U.S. standard
more compatible with the earnings per share standards of other
countries and that of the International Accounting Standards
Committee. SFAS No. 128 is effective for financial statements
for both interim and annual periods ending after December 15,
1997. Earlier application is not permitted. The unaudited pro
forma earnings per share of the Company based on SFAS No. 128
are as follows:
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Year ended June 30, 1997
Basic earnings per share -- income
available to common stockholders $5,323,943 4,325,228 $1.23
=====
Effect of dilutive securities -- stock
options -- 182,633
--------------------------
Diluted earnings per share -- income
available to common stockholders $5,323,943 4,507,861 $1.18
=======================================
Year ended June 30, 1996
Basic earnings per share -- income
available to common stockholders $6,901,982 4,837,468 $1.43
=====
Effect of dilutive securities -- stock
options -- 247,851
--------------------------
Diluted earnings per share -- income
available to common stockholders $6,901,982 5,085,319 $1.36
=======================================
Year ended June 30, 1995
Basic earnings per share -- income
available to common stockholders $7,489,863 5,392,137 $1.39
=====
Effect of dilutive securities -- stock
options -- 201,086
--------------------------
Diluted earnings per share -- income
available to common stockholders $7,489,863 5,593,223 $1.34
=======================================
</TABLE>
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
information about operating segments. Also required is certain
information about products and services, geographic areas in
which an enterprise operates, and any major customers. SFAS No.
131 is effective after December 15, 1997. Management does not
expect the implementation of SFAS No. 131 to have a material
impact on the Company's consolidated financial position or
results of operations.
(k) Reclassifications
-----------------
Certain amounts in the 1996 and 1995 consolidated financial
statements have been reclassified to conform with the 1997
presentation.
(2) Securities
----------
A summary of securities available for sale is as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
June 30, 1997
U.S. Government obligations $ 2,004,933 -- (5,245) 1,999,688
Federal agency obligations 24,975,178 42,456 (135,597) 24,882,037
Mortgage-backed securities 75,718,129 178,522 (222,344) 75,674,307
Tax-exempt securities 7,415,773 67,346 (7,567) 7,475,552
Equity securities 753,350 177,550 (25,325) 905,575
Other securities 1,000,000 99,000 -- 1,099,000
--------------------------------------------------------
Totals $111,867,363 564,874 (396,078) 112,036,159
========================================================
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
June 30, 1996
U.S. Government obligations $ 37,011,236 40,388 (410,999) 36,640,625
Federal agency obligations 53,002,807 111,671 (690,728) 52,423,750
Mortgage-backed securities 16,397,785 -- (362,890) 16,034,895
Tax-exempt securities 4,263,613 1,816 (41,897) 4,223,532
Equity securities 477,634 42,062 (6,884) 512,812
--------------------------------------------------------
Totals $111,153,075 195,937 (1,513,398) 109,835,614
========================================================
</TABLE>
Federal agency obligations consist of Federal National Mortgage
Association (FNMA), Federal Home Loan Bank (FHLB), and Federal Home
Loan Mortgage Corporation (FHLMC) securities. Mortgage-backed
securities consist of FNMA, FHLMC, and Government National Mortgage
Association (GNMA) pass-through certificates. Tax-exempt securities
consist of obligations of school and city districts and general
obligations of various cities and municipalities.
The amortized cost and fair values of debt securities available for
sale at June 30, 1997, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because
issuers may have the right to call or prepay obligations with or
without call or prepayment penalties. Equity securities do not have a
contractual maturity.
<TABLE>
<CAPTION>
Amortized
Cost Fair Value
--------- ----------
<S> <C> <C>
Within one year $ 13,611,656 13,626,539
After one year through five years 17,490,208 17,411,136
After five years through ten years 18,778,089 18,663,693
After ten years 61,234,060 61,429,216
---------------------------
$111,114,013 111,130,584
===========================
</TABLE>
The weighted average tax-equivalent annual yield of securities
available for sale at June 30, 1997 and 1996, was 6.88 percent and
6.11 percent, respectively.
Gross proceeds from sales of securities available for sale during the
years ended June 30, 1997, 1996, and 1995 totaled $44,044,024;
$5,350,377; and $23,141,251, respectively. Gross realized gains and
losses on sales of securities available for sale totaled $133,222 and
$453,512, respectively, during the year ended June 30, 1997; $37,874
and $7,973, respectively, during the year ended June 30, 1996; and
$17,749 and $35,123, respectively, during the year ended June 30,
1995.
(3) Loans Receivable
----------------
Following is a summary of loans receivable at June 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
First mortgage loans
Secured by one-to-four family residences $349,052,874 334,307,505
Secured by other properties 16,294,053 15,934,071
Commercial 30,996,899 29,024,440
Construction and development loans 23,179,215 22,635,568
---------------------------
419,523,041 401,901,584
Consumer and other loans
Automobile 16,349,407 17,244,934
Home equity 33,269,070 29,783,378
Other 5,208,965 5,034,813
---------------------------
54,827,442 52,063,125
---------------------------
474,350,483 453,964,709
Less
Undisbursed loans in process 7,861,460 8,830,461
Net deferred loan origination fees 2,815,578 2,905,286
Allowance for loan losses 2,961,810 3,439,305
---------------------------
13,638,848 15,175,052
---------------------------
$460,711,635 438,789,657
===========================
Weighted average annual yield at year-end 8.28% 8.17%
</TABLE>
Activity in the allowance for loan losses for the years ended June 30,
1997, 1996, and 1995 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 3,439,305 3,159,022 2,800,658
Provision charged to operations 687,642 324,870 403,450
Charge-offs (1,198,867) (77,017) (59,707)
Recoveries 33,730 32,430 14,621
-------------------------------------
Balance at end of year $ 2,961,810 3,439,305 3,159,022
=====================================
</TABLE>
Real estate owned, troubled debt restructurings, and nonaccrual loans,
as well as the related impact on income in the accompanying
consolidated statements of income, were immaterial for 1997, 1996, and
1995. At June 30, 1997 and 1996, nonaccrual loans consisting
primarily of one-to-four family residences amounted to $3,255,207 and
$4,097,124, respectively. Impaired loans under SFAS No. 114 were
immaterial at June 30, 1997 and 1996.
(4) Office Properties and Equipment
-------------------------------
Following is a summary of office properties and equipment by major
classifications as of June 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land $ 1,662,581 1,662,581
Buildings 8,401,966 8,259,041
Furniture and equipment 2,451,774 2,348,536
Computer equipment and software 2,734,521 2,928,867
Automobiles 91,261 105,247
Leasehold improvements 401,822 393,913
-------------------------
15,743,925 15,698,185
Less accumulated depreciation and amortization 7,946,204 7,724,609
-------------------------
$ 7,797,721 7,973,576
=========================
</TABLE>
(5) Deposits
--------
Following is an analysis of interest-bearing deposits, which consist
of various savings and certificate accounts with varying interest
rates, as of June 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
Account Type ---------------------- ---------------------
and Stated Interest Rate Amount % Amount %
------------------------ ------ --- ------ ---
<S> <C> <C> <C> <C>
NOW accounts, up to 2.50% $ 31,235,718 6.94 28,167,703 6.17
Money market accounts, up
to 3.00% 22,822,047 5.07 27,030,568 5.92
Passbook accounts, 3.00% 107,575,383 23.89 114,247,471 25.03
-----------------------------------------------
161,633,148 35.90 169,445,742 37.12
Certificate accounts
4.00% to 4.99% 8,808,465 1.96 27,814,610 6.09
5.00% to 5.99% 146,339,271 32.50 134,702,356 29.50
6.00% to 6.99% 124,649,185 27.69 68,144,961 14.93
7.00% to 7.99% 8,793,724 1.95 56,433,138 12.36
-----------------------------------------------
288,590,645 64.10 287,095,065 62.88
-----------------------------------------------
$450,223,793 100.00 456,540,807 100.00
===============================================
</TABLE>
At June 30, 1997 and 1996, scheduled maturities of certificate
accounts are as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------- ---------------------
Amount % Amount %
------ --- ------ ---
<S> <C> <C> <C> <C>
Less than 12 months $132,906,239 46.05 182,910,889 63.71
13 to 24 months 78,474,344 27.19 35,719,821 12.44
25 to 36 months 44,962,940 15.58 27,540,396 9.59
37 to 48 months 11,976,052 4.15 28,584,547 9.96
49 to 60 months 19,103,375 6.62 12,339,412 4.30
Over 60 months 1,167,695 .41 -- --
-----------------------------------------------
$288,590,645 100.00 287,095,065 100.00
===============================================
</TABLE>
The 1997 amounts above include callable certificate accounts totaling
$1,823,723. Management may decide to call such certificates if market
conditions dictate. Call options are 12 months for 36-month accounts
and 24 months for 60- and 84-month accounts.
Following is a summary of certificate accounts of $100,000 or more by
remaining maturities at June 30, 1997:
<TABLE>
<S> <C>
Three months or less $10,578,885
Over three to six months 2,505,486
Over six to twelve months 11,894,988
Over twelve months 22,284,830
-----------
$47,264,189
===========
</TABLE>
At June 30, 1997, certificate accounts included a $5,000,000 deposit
from the Ohio Turnpike Commission at a rate of 4.85 percent, for which
U.S. Government and federal agency obligations with a book and market
value, including accrued interest, at June 30, 1997 of $6,074,376 and
$6,089,960, respectively, were pledged as collateral. This
certificate of deposit had a 30-day term and matured on July 15, 1997,
at which date the certificate was renewed at an interest rate of 5.03
percent for a term of 69 days. The renewed certificate is scheduled
to mature on September 22, 1997.
Interest expense on deposits for the years ended June 30, 1997, 1996,
and 1995 is summarized below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
NOW accounts $ 620,759 577,515 573,714
Money market accounts 734,075 855,795 1,118,594
Passbook accounts 3,302,590 3,471,378 4,021,622
Certificate accounts 17,041,629 17,157,193 13,786,653
---------------------------------------
$21,699,053 22,061,881 19,500,583
=======================================
</TABLE>
The weighted average interest rate on deposits was 4.81 percent and
4.80 percent at June 30, 1997 and 1996, respectively.
(6) Securities Sold Under Agreements to Repurchase
----------------------------------------------
At June 30, 1997 and 1996, securities sold under agreements to
repurchase were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Short-term
Repurchase agreements $ 7,307,248 6,639,553
U.S. Government and federal agency obligations
pledged as collateral
Book value, including accrued interest 8,179,608 7,159,077
Market value, including accrued interest 8,153,268 7,037,184
Average balance outstanding during the year 7,915,988 1,005,664
Maximum amount outstanding at any month-end 11,628,633 6,639,553
Weighted average interest rate 5.96% 4.16%
Long-term
Repurchase agreements $25,000,000 --
Mortgage-backed securities pledged as collateral
Book value, including accrued interest 28,553,417 --
Market value, including accrued interest 28,627,181 --
Average balance outstanding during the year 9,077,381 --
Maximum amount outstanding at any month-end 25,000,000 --
Weighted average interest rate 6.10% N/A
</TABLE>
Short- and long-term 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
pledged securities, although held in safekeeping outside the Bank,
remain in the asset accounts. The long-term repurchase agreement was
entered into on February 19, 1997 with a repurchase date of February
19, 2002. The buyer has an option to call the agreement on February
19, 2000 or any 90-day anniversary after that date.
(7) Borrowed Funds
--------------
The Bank maintains a $20,000,000 line of credit with the Federal Home
Loan Bank (FHLB) of Cincinnati, which matures in 1998. At June 30,
1997 and 1996, the Bank had outstanding advances of $2,455,000 and
$1,200,000, respectively, with a weighted average interest rate of
5.80 percent and 5.45 percent, respectively. Advances are secured
under a blanket mortgage collateral agreement for 150 percent of
outstanding advances, amounting to $41,182,500. The June 30, 1996
FHLB advances were secured by federal agency obligations.
The Bank has been authorized to borrow up to $25,000,000 in repo-based
FHLB advances that have 30-day terms. At June 30, 1997, the Bank had
$25,000,000 in outstanding repo-based advances at a rate of 5.59
percent. These advances require interest payments at maturity and are
secured by the blanket collateral agreement mentioned above. There
were no outstanding repo-based FHLB advances at June 30, 1996.
(8) Compliance with Regulatory Capital Requirements
-----------------------------------------------
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 June 30, 1997, the minimum regulatory capital
regulations require institutions to have tangible capital equal to 1.5
percent of adjusted total assets, a 3 percent leverage capital ratio,
and an 8 percent risk-based capital ratio. At June 30, 1997, the Bank
exceeded all of the aforementioned regulatory capital requirements.
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 a least 5 percent, a Tier-1 risk-based
capital ratio of at least 6 percent, and a total risk-based capital
ratio of at least 10 percent.
At June 30, 1997, 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
Capital Capital Capital Capital Capital
------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
GAAP capital $ 55,262,513 55,262,513 55,262,513 55,262,513 55,262,513
Unrealized depreciation or
loss on securities available
for sale, net 67,287 67,287 67,287 67,287
General loan valuation
allowances -- -- -- 2,621,993
--------------------------------------------------------
Regulatory capital 55,329,800 55,329,800 55,329,800 57,951,793
--------------------------------------------------------
Total assets 578,810,029
------------
Adjusted total assets 579,055,549 579,055,549
--------------------------
Risk-weighted assets 340,085,000 340,085,000
--------------------------
Capital ratio 9.55% 9.56% 9.56% 16.27% 17.04%
Regulatory capital category
Well capitalized -- equal to
or greater than 5.00% 6.00% 10.00%
</TABLE>
At June 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
Capital Capital Capital Capital Capital
------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
GAAP capital $ 52,760,874 52,760,874 52,760,874 52,760,874 52,760,874
Unrealized depreciation or
loss on securities available
for sale, net 711,396 711,396 711,396 711,396
General loan valuation
allowances -- -- -- 3,356,378
--------------------------------------------------------
Regulatory capital 53,472,270 53,472,270 53,472,270 56,828,648
--------------------------------------------------------
Total assets 540,333,080
------------
Adjusted total assets 541,198,918 541,198,918
--------------------------
Risk-weighted assets 319,618,000 319,618,000
--------------------------
Capital ratio 9.76% 9.88% 9.88% 16.73% 17.78%
Regulatory capital category
Well capitalized -- equal to
or greater than 5.00% 6.00% 10.00%
</TABLE>
(9) Pension Plan
------------
The Bank had a defined benefit pension plan that covered substantially
all of its employees. On November 15, 1996, the Board of Directors
approved the termination of the pension plan due to significantly high
retirement cost. Upon termination, all participants in the plan
became fully vested. At June 30, 1997, the plan assets were not yet
distributed to participants in the pension plan. Plan assets consist
primarily of a fixed income fund with an insurance company.
The following table sets forth the plan's funded status and the
amounts recognized in the consolidated statements of financial
condition at June 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Actuarial present value of benefit obligations
Accumulated benefit obligation, including
vested benefits of $1,661,216 and
$1,243,186, respectively $1,661,216 1,262,390
=======================
Projected benefit obligation for services
rendered to date $1,661,216 1,876,247
Plan assets at fair value 1,730,581 2,011,264
-----------------------
Plan assets in excess of
projected benefit obligation 69,365 135,017
Unrecognized net gain from past experience
different from that assumed (202,913) (386,641)
Unrecognized net obligation at July 1, 1987,
being recognized over 15 years -- 240,898
-----------------------
Accrued pension cost $ (133,548) (10,726)
=======================
</TABLE>
Components of net pension cost for the years ended June 30, 1997,
1996, and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost -- benefits earned during
the period $ 52,471 141,422 140,080
Interest cost on projected benefit obligation 114,296 214,786 206,412
Actual return on plan assets (86,732) (97,476) (157,664)
Net amortization and deferral (42,229) (110,313) (34,492)
Effects of settlement and curtailment 85,016 -- --
--------------------------------
Net pension cost $122,822 148,419 154,336
================================
</TABLE>
Assumptions used in the accounting for the pension plan were as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate
Preretirement 6.00% 7.50% 7.50%
Postretirement 5.56 5.56 5.56
Rate of increase in compensation levels N/A 4.00 4.50
Expected long-term rate of return on assets 7.00 7.00 7.00
======================
</TABLE>
(10) SAIF Special Assessment
-----------------------
On June 30, 1997, the President signed into law an omnibus
appropriations act for fiscal year 1997 that included, among other
things, the recapitalization of the Savings Association Insurance Fund
(SAIF) in a section entitled the Deposit Insurance Funds Act of 1996.
The Act included a provision where all insured depository institutions
would be charged a one-time special assessment on their SAIF
assessable deposits as of March 31, 1995. The Bank recorded a pretax
charge of $3,010,964, which represented 65.7 basis points of the March
31, 1995 assessable deposits. This charge was recorded upon enactment
on September 30, 1996, and later paid on November 27, 1996.
(11) Federal Income Taxes
--------------------
Federal income taxes (credit) include current and deferred amounts as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current $1,724,000 3,539,000 3,665,000
Deferred 696,000 (74,000) 207,000
------------------------------------
Applicable income tax expense 2,420,000 3,465,000 3,872,000
Deferred federal tax expense 505,000 (280,000) (178,000)
(Benefit) on unrealized gains -- -- --
(Losses) on securities available
for sale -- -- --
------------------------------------
$2,925,000 3,185,000 3,694,000
====================================
</TABLE>
Actual income tax expense differed from the amounts computed by
applying the federal income tax rate of 35 percent to income before
federal income taxes as a result of the following:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Expected income
tax expense at
statutory rate $2,710,380 35.00% 3,628,444 35.00% 3,976,652 35.00%
Other (290,380) (3.75) (163,444) (1.58) (104,652) (.92)
-----------------------------------------------------------------
Actual tax expense $2,420,000 31.25% 3,465,000 33.42% 3,872,000 34.08%
=================================================================
</TABLE>
The net tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June
30, 1997 and 1996, are:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets
Deferred loan fees $ 814,000 $ 1,023,000
Employee benefits 191,000 426,000
Bad debts reserves 1,007,000 1,170,000
Interest on nonaccrual loans 52,000 62,000
Other 45,000 24,000
---------------------------
Total gross deferred tax assets 2,109,000 2,705,000
---------------------------
Deferred tax liabilities
FHLB stock dividends 734,000 684,000
Basis difference in fixed assets 265,000 228,000
Excess of tax reserves over base year amounts 1,153,000 1,145,000
Other 26,000 21,000
---------------------------
Total gross deferred tax liabilities 2,178,000 2,078,000
---------------------------
Net deferred tax asset (liability) $ (69,000) $ 627,000
===========================
</TABLE>
At June 30, 1997 and 1996, the net deferred tax asset (liability) was
($69,000) and $627,000, respectively, of which $57,000 and ($448,000) of
deferred tax asset (liability), respectively, is included in unrealized
gain (loss) on securities available for sale.
Under SFAS No. 109, Accounting for Income Taxes, a valuation allowance is
established to reduce the deferred tax asset if it is more likely than
not that the related tax benefits will not be realized. In management's
opinion, it is more likely than not that the tax benefits will be
realized; consequently, no valuation allowance has been established as of
June 30, 1997 and 1996.
Retained earnings at June 30, 1997 include approximately $17,254,000 for
which no provision for federal income tax has been made. These amounts
represent allocations of income to bad debt deductions for tax purposes
only. These qualifying and nonqualifying base year reserves and
supplemental reserves will be recaptured into income in the event of
certain distributions and redemptions. Such recapture would create income
for tax purposes only, which would be subject to the then current
corporate income tax rate.
Recapture would not occur upon the reorganization, merger, or acquisition
of the Bank, nor if the Bank is merged or liquidated tax-free into a bank
or undergoes a charter change. If the Bank fails to qualify as a bank or
merges into a nonbank entity, these reserves will be recaptured into
income.
The favorable reserve method previously afforded to thrifts was repealed
for tax years beginning after December 31, 1995. Large thrifts must
switch to the specific charge-off method of Section 166. In general, a
thrift is required to recapture its qualifying and nonqualifying reserves
in excess of its qualifying and nonqualifying base year reserves. As the
Bank has previously provided deferred taxes on the recapture amount, no
additional financial statement tax expense should result from this new
legislation.
(12) Commitments, Contingencies, and Credit Risk
-------------------------------------------
In the normal course of business, the Bank enters into commitments with
off-balance sheet risk to meet the financing needs of its customers.
Commitments to extend credit involve elements of credit risk and interest
rate risk in excess of the amount recognized in the consolidated
statements of financial condition. The Bank's exposure to credit loss in
the event of nonperformance by the other party to the commitment is
represented by the contractual amount of the commitment. The Bank uses
the same credit policies in making commitments as it does for on- balance
sheet instruments. Interest rate risk on commitments to extend credit
results from the possibility that interest rates may have moved
unfavorably from the position of the Bank since the time the commitment
was made.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates of 60 to 180 days or
other termination clauses and may require payment of a fee. Since some of
the commitments may expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. Following
is a table of financial instruments whose contract amounts represent
credit risk:
<TABLE>
<CAPTION>
Amount Interest Rates
------------ --------------
<S> <C> <C>
June 30, 1997
Fixed rate mortgage loans $ 4,333,864 8.25 -- 11.00%
Variable rate mortgage loans 4,410,230 7.00 -- 9.25%
Fixed rate consumer loans 846,495 6.50 -- 15.00%
Variable rate consumer loans 20,000 9.50%
Undisbursed lines of credit 3,415,731 9.50 -- 18.00%
------------
$ 13,026,320
============
June 30, 1996
Fixed rate mortgage loans $ 10,061,290 6.75 -- 10.25%
Variable rate mortgage loans 1,923,725 7.00 -- 9.00%
Fixed rate consumer loans 917,365 6.50 -- 15.00%
Variable rate consumer loans 165,000 9.25%
Undisbursed lines of credit 2,749,196 9.25 -- 18.00%
------------
$ 15,816,576
============
</TABLE>
The Bank evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained by the Bank upon extension of
credit is based on management's credit evaluation of the applicant.
Collateral held is generally single-family residential real estate.
The Bank's primary lending area is in Mahoning, Trumbull, and Columbiana
counties in the state of Ohio. Accordingly, the ultimate collectibility
of a substantial portion of the loan portfolio is susceptible to changes
in market conditions in that area.
In the ordinary course of business, the Bank has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Bank is
a defendant in certain claims and legal actions arising in the ordinary
course of business. In the opinion of management, after consultation with
legal counsel, the ultimate disposition of these matters is not expected
to have a material adverse effect on the consolidated financial
statements of the Bank.
(13) Director and Employee Plans
---------------------------
(a) Stock Option and Incentive Plan
-------------------------------
In conjunction with the Bank's conversion, FFY adopted a stock
option and incentive plan for the benefit of directors and
employees of the Company. The number of shares of common stock
authorized under the plan is 663,000, equal to 10 percent of the
total number of shares issued in the conversion. Directors and
employees of the Bank are vested in options issued in connection
with the conversion over a three-year period beginning December 28,
1993. The option exercise price must be at least 100 percent of the
fair market value of the common stock on the date of the grant, and
the option term cannot exceed 10 years. Outstanding options can be
exercised over a 10- year period from the date of the grant.
Following is activity under the plan during the years ended June
30, 1997, 1996, and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
Options outstanding, beginning of year 314,952 494,963 522,002
Exercised at $10.00 per share (59,352) (179,801) (24,387)
Forfeited -- (2,210) (2,652)
Granted 9,945 2,000 --
------------------------------
Options outstanding, end of year 265,545 314,952 494,963
==============================
Exercisable
At $10.00 per share 253,600 312,952 321,920
From $23.19 to $24.00 per share 3,981 -- --
Options available for grant, end of year 129,274 139,219 139,009
==============================
</TABLE>
The Company applies Accounting Principles Board (APB) No. 25 for
its stock option and incentive plan. Accordingly, no compensation
cost has been recognized. Had compensation cost for this plan been
determined consistent with SFAS No. 123, the Company's net income
and earnings per share pro forma amounts would be as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Net income $ 5,324 5,309 6,902 6,858 7,490 7,346
Earnings per common and common
equivalent share $ 1.19 1.19 1.37 1.36 1.33 1.31
</TABLE>
The above results may not be representative of the effects of SFAS
No. 123 on net income for future years.
The Company applied the Black-Scholes option pricing model to
determine the fair value of each option granted. Below is a summary
of the assumptions used in the calculation:
Dividend yield 2.69 percent
Expected volatility 7.49 percent
Risk-free interest rate 6.17 - 6.22 percent
Expected option life 5.95 - 8.26 years
(b) Employee Stock Ownership and 401(k) Plan
----------------------------------------
In June 1993, the Company established the FFY Financial Corp.
Employee Stock Ownership Plan (ESOP) for the benefit of its
employees. The ESOP covers substantially all employees with more
than one year of employment and who have attained the age of 21.
The ESOP borrowed $5,304,000 from FFY and purchased 530,400 shares
in conjunction with the Bank's conversion. Effective January 1,
1997, the Company amended the ESOP to include 401(k) provisions
under Section 401(k) of the Internal Revenue Code, thus forming the
FFY Financial Corp. Employee Stock Ownership and 401(k) Plan
(KSOP). The eligibility requirements of the KSOP did not change
pursuant to the amendment. Under the 401(k) provisions of the KSOP,
employees may elect to make pretax contributions of up to 10
percent of compensation as defined in the plan document. The
Company matches up to 6 percent of employee compensation in the
form of stock from the shares that are committed to be released to
participants for that year. The remaining shares after the 401(k)
match are released to participants' accounts using the shares
allocated method. Dividends on allocated and unallocated shares are
used for debt service.
Effective July 1, 1994, the Company adopted Statement of Position
(SOP) 93-6, Employers' Accounting for Employee Stock Ownership
Plans, issued by the American Institute of Certified Public
Accountants. The SOP applies to the Company's KSOP shares that were
not committed to be released as of July 1, 1994 and requires that
(1) compensation cost be recognized based on the fair value of the
KSOP shares when committed to be released rather than based on the
cost of the shares to the KSOP as required by previous accounting;
(2) dividends on unallocated shares used for debt service do not
reduce compensation expense and are not considered dividends for
financial reporting purposes as was appropriate under previous
accounting; and (3) KSOP shares that have not been committed to be
released are not considered outstanding for purposes of computing
earnings per share, as was required by previous accounting.
Adoption of SOP 93-6 decreased net income for the year ended June
30, 1995 by $592,551 and had no effect on earnings per share for
the year ended June 30, 1995. The impact on earnings per share
derives from 453,703 average shares which were not committed to be
released during the year ended June 30, 1995 and were not
considered outstanding under SOP 93-6, but were considered
outstanding under previous accounting.
KSOP compensation expense for the years ended June 30, 1997, 1996,
and 1995 totaled $976,059; $912,288; and $800,806, respectively.
The fair value of unearned KSOP shares at June 30, 1997 and 1996,
totaled $9,012,114 and $9,132,693, respectively. Following is a
summary of KSOP shares at June 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Allocated 186,262 143,831
Unallocated 344,138 386,569
------------------
530,400 530,400
==================
</TABLE>
(c) Recognition and Retention Plans (RRPs)
--------------------------------------
In conjunction with the Bank's conversion, the Company formed 12
RRPs, which were authorized to acquire 4 percent of the shares of
common stock issued in the conversion. The Bank contributed
$2,652,000 to the RRPs to enable each of the RRP trustees to
acquire 22,100 shares of the common stock in the conversion for
each RRP at $10.00 per share. A total of 238,680 shares were
awarded to directors and employees in key management positions in
order to provide them with a proprietary interest in the Company in
a manner designed to encourage such employees to remain with the
Company. Due to the October 1996 retirement of one director, 1,659
of the awarded shares remain in the RRP. As a result of an
oversubscription in the subscription offering, the RRPs were not
able to acquire any shares in the conversion.
Subsequent to the conversion, the shares of common stock required
to fund the RRPs were purchased by the RRP trustees in the open
market. The RRP trustees purchased the shares at prices ranging
from a low of $12.69 to a high of $12.81 per share. The 265,200
shares not purchased at conversion were reflected in stockholders'
equity as additional paid-in capital at the conversion price of
$10.00 per share. As the shares were purchased by the RRP trustees,
additional paid-in capital was reduced at the actual purchase
price, which totaled $3,394,679.
The RRP shares awarded to the Bank's directors and employees were
amortized to compensation expense using the straight-line method at
the conversion price of $10.00 per share over 3-1/2 years as they
performed the related future services and became vested in those
shares. The final distribution was made in December 1996. At June
30, 1997, the 28,179 unawarded and unvested shares remain in the
RRP trusts. The unamortized cost, which is comparable to deferred
compensation, is reflected as a reduction of stockholders' equity.
Total expense of the RRPs was $331,500; $674,814; and $681,948 for
the years ended June 30, 1997, 1996, and 1995, respectively.
(14) Stockholders' Equity
--------------------
In accordance with federal regulations, at the time the Bank converted
from a federal mutual savings bank to a federal stock savings bank, the
Bank restricted a portion of retained earnings by establishing a
liquidation account. The liquidation account is maintained for the
benefit of eligible account holders who continue to maintain their
accounts at the Bank. The liquidation account is reduced annually to the
extent that eligible account holders have reduced their qualifying
deposits. Subsequent increases will not restore an eligible account
holder's interest in the liquidation account. In the event of a complete
liquidation, each eligible account holder is entitled to receive a
distribution from the liquidation account in an amount proportionate to
the current adjusted qualifying balances for accounts then held. Under
current regulations, the Bank is not permitted to pay dividends on its
stock if the effect would reduce its regulatory capital below the
liquidation account.
OTS regulations also provide that an institution that exceeds all fully
phased-in capital requirements before and after a proposed capital
distribution could, after prior notice but without approval by the OTS,
make capital distributions during the calendar year of up to 100 percent
of its net income to date during the calendar year plus the amount that
would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the
calendar year. Any additional capital distributions would require prior
regulatory approval. During the years ended June 30, 1997, 1996, and
1995, the Bank paid dividends to the Holding Company as follows:
<TABLE>
<CAPTION>
Date Amount Composition
---- ------ -----------
<S> <C> <C>
January 20, 1995 $ 4,635,000 U.S. Treasury securities, related accrued interest, cash
June 15, 1995 6,285,500 Cash
June 17, 1996 4,000,000 Federal agency obligations (FNMA), related accrued interest, cash
May 16, 1997 4,500,000 Cash
</TABLE>
After the dividends, the Bank's regulatory capital exceeds all of the
fully phased-in capital requirements imposed by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 as well as the
aforementioned liquidation account.
Unlike the Bank, the Holding Company is not subject to these regulatory
restrictions on the payment of dividends to its stockholders. However,
the source of future dividends may depend upon dividends from the Bank.
(15) Fair Value of Financial Instruments
-----------------------------------
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures About Fair Value of Financial Instruments. The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts.
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
-------------------------- --------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 10,007,755 10,007,755 8,262,397 8,262,397
Securities available for sale 112,036,159 112,036,159 109,835,614 109,835,614
Loans receivable 460,711,635 458,932,000 438,789,657 436,306,065
Federal Home Loan Bank stock 4,094,500 4,094,500 3,773,800 3,773,800
Accrued interest receivable 3,764,530 3,764,530 4,158,410 4,158,410
Liabilities
Deposits
Certificate accounts 288,590,645 289,079,000 287,095,065 288,631,907
Other deposit accounts 161,633,148 161,633,148 169,445,742 169,445,742
Securities sold under agreements to
repurchase
Short-term 7,307,248 7,307,248 6,639,553 6,639,553
Long-term 25,000,000 25,077,000 -- --
Borrowed funds 27,455,000 27,455,000 1,200,000 1,200,000
Accrued interest payable 535,672 535,672 250,921 250,921
</TABLE>
The fair value estimates are based on the following methods and
assumptions:
* Cash and cash equivalents. The carrying amounts of cash and cash
equivalents approximate their fair value.
* Securities available for sale. Fair values for securities are based
on quoted market prices or dealer quotes; where such quotes are not
available, fair values are based on quoted market prices of
comparable instruments.
* Loans receivable. The fair values of loans receivable are estimated
using a discounted cash flow calculation that applies estimated
discount rates reflecting the credit and interest rate risk
inherent in the loans to homogeneous categories of loans with
similar financial characteristics. Loans are segregated by types,
such as residential mortgage, commercial, and consumer. Each loan
category is further segmented into fixed and adjustable rate
interest terms.
* Federal Home Loan Bank stock. This item is valued at cost, which
represents redemption value and approximates fair value.
* Accrued interest receivable. The carrying amount of accrued
interest receivable approximates its fair value.
* Deposits. The fair values of fixed maturity certificate accounts
are estimated using a discounted cash flow calculation that applies
interest rates currently offered for deposits of similar remaining
maturities. The fair values of other deposit accounts (passbook,
NOW, and money market accounts) equal their carrying values.
* Short-term securities sold under agreements to repurchase. The
carrying amount of short-term securities sold under agreements to
repurchase approximates its fair value.
* Long-term securities sold under agreements to repurchase. Fair
value is estimated using a discounted cash flow calculation that
applies interest rates currently available to the Bank for debt
with similar terms and maturity.
* Borrowed funds. Borrowed funds reprice frequently and are assumed
to have a short duration period; therefore, the carrying amount
approximates its fair value.
* Accrued interest payable. The carrying amount of accrued interest
payable approximates its fair value.
* Off-balance sheet instruments. The fair value of commitments is
estimated using the fees currently charged to enter similar
agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing. For fixed-rate
loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair
value of undisbursed lines of credit is based on fees currently
charged for similar agreements or on estimated cost to terminate
them or otherwise settle the obligations with the counterparties at
the reporting date. The carrying amount and fair value of
off-balance sheet instruments is not significant as of June 30,
1997 and 1996.
The fair value estimates are presented for on-balance sheet financial
instruments without attempting to estimate the value of the Bank's
long-term relationships with depositors and the benefit that results from
low-cost funding provided by deposit liabilities. In addition,
significant assets which are not considered financial instruments and
are, therefore, not a part of the fair value estimates include office
properties and equipment.
(16) Condensed Parent-Company-Only Financial Statements
--------------------------------------------------
The condensed statements of financial condition as of June 30, 1997 and
1996, and related condensed statements of income and cash flows for the
years ended June 30, 1997, 1996, and 1995 for FFY Financial Corp.
should be read in conjunction with the consolidated financial statements
and the notes thereto.
<TABLE>
<CAPTION>
Condensed Statements of Financial Condition 1997 1996
------------------------------------------- ------------ -----------
<S> <C> <C>
Assets
Cash $ 188,406 107,580
Short-term investments 2,765,050 9,736,356
---------------------------
Total cash and cash equivalents 2,953,456 9,843,936
Securities available for sale 19,982,325 34,460,407
Note receivable -- KSOP 3,801,200 4,154,800
Equity in net assets of the Bank 55,262,513 52,760,874
Interest receivable on investments 183,817 633,466
Other assets 72,233 87,052
---------------------------
Total assets $ 82,255,544 101,940,535
===========================
Liabilities and stockholders' equity
Other liabilities $ 81,328 19,682
Stockholders' equity 82,174,216 101,920,853
---------------------------
Total liabilities and stockholders' equity $ 82,255,544 101,940,535
===========================
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Income 1997 1996 1995
------------------------------ ----------- --------- ---------
<S> <C> <C> <C>
Income
Equity in earnings of the Bank $ 4,091,892 5,135,572 5,668,969
Interest income 2,143,876 3,028,903 3,196,805
Gain (loss) on sale of securities (98,314) 971 (5,391)
-------------------------------------
Total income 6,137,454 8,165,446 8,860,383
Expenses
State and local taxes 167,882 177,524 236,371
Other 177,629 225,940 194,149
-------------------------------------
Total expenses 345,511 403,464 430,520
-------------------------------------
Income before federal income taxes 5,791,943 7,761,982 8,429,863
Federal income taxes 468,000 860,000 940,000
-------------------------------------
Net income $ 5,323,943 6,901,982 7,489,863
=====================================
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows 1997 1996 1995
---------------------------------- ------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 5,323,943 6,901,982 7,489,863
Adjustments to reconcile net income to net cash provided
by operating activities
Equity in earnings of the Bank (4,091,892) (5,135,572) (5,668,969)
Amortization and accretion 70,246 229,753 460,213
Decrease in interest receivable 449,649 136,455 57,308
Other, net 780 (35,116) (42,177)
------------------------------------------
Net cash provided by operating activities 1,752,726 2,097,502 2,296,238
------------------------------------------
Cash flows from investing activities
Proceeds from
Maturity of securities available for sale 10,000,000 18,000,000 7,000,000
Sales of securities available for sale 28,254,806 2,295,572 4,027,187
Purchase of securities available for sale (23,875,482) (8,733,625) (3,245,094)
Principal receipts on securities available for sale 441,346 -- --
KSOP loan repayment 353,600 353,600 353,600
Dividend from the Bank 4,500,000 933,818 6,805,876
Other -- 17,500 --
------------------------------------------
Net cash provided by investing activities 19,674,270 12,866,865 14,941,569
------------------------------------------
Cash flows from financing activities
Purchase of treasury stock (25,982,802) (11,783,245) (11,013,105)
Dividends paid (2,889,944) (2,781,473) (2,561,559)
Proceeds from stock options exercised 555,270 1,756,010 243,870
------------------------------------------
Net cash used in financing activities (28,317,476) (12,808,708) (13,330,794)
------------------------------------------
Net increase (decrease) in cash and cash equivalents (6,890,480) 2,155,659 3,907,013
Cash and cash equivalents at beginning of year 9,843,936 7,688,277 3,781,264
------------------------------------------
Cash and cash equivalents at end of year $ 2,953,456 9,843,936 7,688,277
==========================================
Supplemental schedule of noncash investing activities
Dividend of noncash assets from the Bank $ -- 3,066,182 4,114,624
==========================================
</TABLE>
Independent Auditors' Report
----------------------------
The Board of Directors
FFY Financial Corp.:
We have audited the accompanying consolidated statements of financial
condition of FFY Financial Corp. and subsidiary as of June 30, 1997 and
1996, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. The accompanying
consolidated financial statements of FFY Financial Corp. and subsidiary for
the year ended June 30, 1995, were audited by other auditors whose report
thereon dated August 4, 1995, expressed an unqualified opinion on those
statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the 1997 and 1996 consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
FFY Financial Corp. and subsidiary as of June 30, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK, LLP
KPMG Peat Marwick, LLP
Cleveland, Ohio
July 24, 1997
Officers and Directors
- -------------------------------------------------------------------------------
<TABLE>
<S> <S> <S>
Board of Directors of
FFY Financial Corp. and Officers of
First Federal Savings Bank Officers of First Federal Savings Bank
of Youngstown FFY Financial Corp. of Youngstown, continued
A. Gary Bitonte, M.D. Jeffrey L. Francis Robert Campolito
Private Practice President and CEO Assistant Vice President
Urologic Surgeon
Shirley A. Reighard Jane Hutchins
Jack R. Brownlee Vice President and Secretary Assistant Vice President
Former Owner of
Brownlee Pontiac, Inc. Randy Shaffer Joseph R. Sainato
Vice President Assistant Vice President
Marie Izzo Cartwright
Vice President Therese Ann Liutkus, CPA Jon Schmied
Glimcher Properties Treasurer and CFO Assistant Vice President
Limited Partnership
Joanne Harrold
Jeffrey L. Francis Internal Auditor
President and CEO Officers of
of FFY Financial Corp. and First Federal Savings Bank Marilyn Burrows
First Federal Savings Bank of Youngstown Assistant Treasurer
of Youngstown
Daniel J. Mirto Jeffrey L. Francis Janet Byrne
Chairman of the Board President and CEO Assistant Secretary
Rhiel Supply Company
Therese Ann Liutkus, CPA Christine Chasko
Henry P. Nemenz Treasurer and CFO Assistant Controller
President
H.P. Nemenz Food Stores, Inc. Shirley A. Reighard Richard Curry
Vice President and Secretary Assistant Secretary
W. Terry Patrick
Partner, Freidman & Rummell J. Craig Carr Frank Pasquale
Attorneys at Law Assistant Vice President Assistant Secretary
and General Counsel
Myron S. Roh Jeanne G. Yankle
Chairman of the Board of David S. Hinkle Assistant Treasurer
FFY Financial Corp. and Vice President
First Federal Savings Bank Jerome D. Zetts
of Youngstown and Mark Makoski Assistant Treasurer
President and Treasurer Vice President
Scholl Choffin Co.
Timm B. Schreiber
Randy Shaffer Vice President
Vice President of
FFY Financial Corp. and Randy Shaffer
First Federal Savings Bank Vice President
of Youngstown
Jeffrey L. DeRose, CPA
Ronald P. Volpe, Ph.D. Controller
Professor of Finance
Williamson College of
Business Administration
Youngstown State University
</TABLE>
Annual Report on Form 10-K
A copy of the Annual Report on Form 10-K filed with the Securities and
Exchange Commission is available without charge upon written request to:
Therese Ann Liutkus, CPA
Treasurer and CFO
FFY Financial Corp.
724 Boardman-Poland Road
P.O. Box 3300
Youngstown, Ohio 44513-3300
(330) 726-3396
Annual Meeting
The Annual Meeting of Stockholders of FFY Financial Corp. will be held at
10:00 a.m. on Wednesday, October 15, 1997 at:
The Butler Institute of American Art
524 Wick Avenue
Youngstown, Ohio
Stockholder Services
The Fifth Third Bank serves as transfer agent for FFY Financial Corp.'s
shares. Communications regarding change of address, transfer of shares,
lost certificates or dividend reinvestment should be sent to:
The Fifth Third Bank
Corporate Trust Operations
38 Fountain Square Plaza
Mail Drop 1090F5
Cincinnati, Ohio 45263
(800) 837-2755
Stock Price Information
FFY Financial Corp.'s common stock trades on The Nasdaq National Stock
Market under the symbol "FFYF". As of July 31, 1997, the Holding Company
had approximately 1,554 stockholders of record (not including the number of
persons or entities holding stock in nominee or street name through various
brokerage firms).
The table below shows the reported high and low trade prices of the common
stock and cash dividends per share declared during the years ended June 30,
1997 and 1996.
<TABLE>
<CAPTION>
Year Ended High Low Dividends
June 30, 1997:
- --------------------------------------------------------
<S> <C> <C> <C>
First quarter 24 1/4 23 1/2 $0.175
Second quarter 25 7/8 24 - $0.175
Third quarter 25 5/8 25 - $0.175
Fourth quarter 26 1/2 25 1/2 $0.175
<CAPTION>
June 30, 1996:
- --------------------------------------------------------
<S> <C> <C> <C>
First quarter 23 3/8 19 1/4 $0.15
Second quarter 21 7/8 19 7/8 $0.15
Third quarter 22 7/8 21 - $0.15
Fourth quarter 23 3/4 22 5/8 $0.15
</TABLE>
EXHIBIT 16
Hill, Barth & King, Inc.
Certified Public Accountants
[Letterhead]
February 14, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Gentlemen:
We have read and agree with the Comments of Item 4 of Form 8-K of FFY
Financial Corp. dated February 14, 1996.
/s/ HILL, BARTH & KING, INC.
Hill, Barth & King, Inc.
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State of
Percent Incorporation
of or
Parent Subsidiary Ownership Organization
- ------------------- -------------------------- --------- -------------
<S> <C> <C> <C>
FFY Financial Corp. First Federal Savings Bank 100% Federal
of Youngstown
FFY Financial Corp. FFY Holdings, Inc. 100% Ohio
FFY Holdings, Inc. First Real Estate, Ltd. 67% Ohio
First Federal Savings Ardent Service Corporation 100% Ohio
Bank of Youngstown
Ardent Service Corporation Hedgerows Development, Ltd. 50% Ohio
</TABLE>
EXHIBIT 23.1
KPMG Peat Marwick LLP
[Letterhead]
The Board of Directors
FFY Financial Corporation:
We consent to incorporation by reference in the registration statements
No. 33-85088 on Forms S-8 of FFY Financial Corporation of our report dated
July 24, 1997, relating to the consolidated statements of financial condition
of FFY Financial Corporation and subsidiary as of June 30, 1997 and 1996, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the years in the two-year period ended June 30, 1997, which
report is incorporated by reference in the June 30, 1997 annual report on Form
10-K of FFY Financial Corporation.
/s/ KPMG PEAT MARWICK LLP
Cleveland, Ohio
September 26, 1997
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
-----------------------------
We consent to the incorporation by reference in the Registration
Statement of FFY Financial Corp. on Form S-8 of our report dated August 4,
1995 appearing in the Annual Report on Form 10-K of FFY Financial Corp. for
the year ended June 30, 1997.
/s/ HILL, BARTH & KING, INC.
Certified Public Accountants
Youngstown, Ohio
September 26, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,631,798
<INT-BEARING-DEPOSITS> 6,215,957
<FED-FUNDS-SOLD> 160,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 112,036,159
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 460,711,635
<ALLOWANCE> 2,961,810
<TOTAL-ASSETS> 599,249,375
<DEPOSITS> 450,223,793
<SHORT-TERM> 34,762,248
<LIABILITIES-OTHER> 7,089,118
<LONG-TERM> 25,000,000
0
0
<COMMON> 66,300
<OTHER-SE> 82,107,916
<TOTAL-LIABILITIES-AND-EQUITY> 599,249,375
<INTEREST-LOAN> 38,417,621
<INTEREST-INVEST> 6,831,777
<INTEREST-OTHER> 675,843
<INTEREST-TOTAL> 45,925,241
<INTEREST-DEPOSIT> 21,699,053
<INTEREST-EXPENSE> 23,823,683
<INTEREST-INCOME-NET> 22,101,558
<LOAN-LOSSES> 687,642
<SECURITIES-GAINS> (320,290)
<EXPENSE-OTHER> 14,288,343
<INCOME-PRETAX> 7,743,943
<INCOME-PRE-EXTRAORDINARY> 5,323,943
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,323,943
<EPS-PRIMARY> 1.19
<EPS-DILUTED> 1.19
<YIELD-ACTUAL> 3.89
<LOANS-NON> 3,255,207
<LOANS-PAST> 0
<LOANS-TROUBLED> 738,247
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,439,305
<CHARGE-OFFS> 1,198,867
<RECOVERIES> 33,730
<ALLOWANCE-CLOSE> 2,961,810
<ALLOWANCE-DOMESTIC> 2,961,810
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 375,304
</TABLE>
EXHIBIT 99
INDEPENDENT AUDITORS' REPORT
Board of Directors
FFY Financial Corp.
Youngstown, Ohio
We have audited the accompanying consolidated statements of financial
condition of FFY Financial Corp. and subsidiary as of June 30, 1995 and the
related consolidated statements of income, changes in stockholders' equity
and cash flows for each of the two years in the period ended June 30, 1995.
These consolidated financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of FFY Financial Corp. and subsidiary as of June 30, 1995 and the
consolidated results of their operations and their consolidated cash flows
for each of the two years in the period ended June 30, 1995 in conformity
with generally accepted accounting principles.
As discussed in Notes 1c and 12b to the consolidated financial
statements, the company changed its method of accounting for securities and
their Employee Stock Ownership Plan effective July 1, 1994. As discussed in
Note 10 to the consolidated financial statements, the company changed its
method of accounting for income taxes effective July 1, 1993.
/s/ HILL, BARTH & KING, INC.
Hill, Barth & King, Inc.
Youngstown, Ohio
August 4, 1995
