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, 1998
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
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(Exact Name of Registrant as Specified in its Charter)
Delaware 34-1735753
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
724 Boardman-Poland Rd., Youngstown, Ohio 44512
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(Address and Zip Code of Principal Executive Offices)
Registrant's telephone number, including area code: (330) 726-3396
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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
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(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 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 31, 1998, the Registrant had 3,953,935 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 31, 1998 was $93.0 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, 1998.
Part III of Form 10-K - Proxy Statement for Annual Meeting of Stockholders
to be held in 1998.
PART I
Item 1. Business
General. FFY Financial Corp. (FFYF 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, Ohio. At June 30, 1998, the Holding Company had total
consolidated assets of $651.7 million.
The business of the Holding Company currently consists primarily of the
business of First Federal. The holding company structure, however, provides
FFYF with greater flexibility than the Bank has to diversify its business
activities, through existing or newly formed subsidiaries, or through
acquisitions or mergers of both mutual and stock thrift institutions as well
as other companies. In August 1997, FFY Holdings, Inc. was formed, as a
wholly-owned subsidiary of FFYF, for the purpose of investing in entities
that offer expanded financial services to customers. In September 1997 and
April 1998, the Holding Company announced real estate and insurance
affiliations through investments of FFY Holdings, Inc. Currently, there are
no arrangements, understandings or agreements regarding any acquisitions or
mergers, however, the Holding Company is in a position, subject to
regulatory restrictions, to take advantage of any favorable acquisition or
merger opportunity 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.
Market Area. First Federal conducts operations through its main office in
Youngstown, Ohio, which is located approximately 75 miles northwest of
Pittsburgh, PA and 75 miles southeast of Cleveland, OH, and through its 11
other banking offices in Ohio. Nine of First Federal's office locations,
including the main office, are in Mahoning County and three office locations
are in Trumbull County. The Youngstown-Warren area (Mahoning and Trumbull
Counties) makes up the 7th largest metropolitan statistical area in the
State of Ohio. First Federal also has customers in Columbiana County
although there are no office locations in such county. According to the
latest census information, approximately 606,000 people live in the tri-
county area, of which approximately 266,000 are residents in Mahoning
County, which is considered First Federal's primary market area. Mahoning
County was once a leading steel producing area, however this industry
experienced significant declines in the total number of persons employed
over the past several years. Major industries in Mahoning County include
light manufacturing, transportation, health care, as well as retail and
wholesale trade and services. Major industries in Trumbull County and
Columbiana County include manufacturing, trade and services. Major
employers in Mahoning County include Western Reserve Care System, St.
Elizabeth Health Center, U.S. Postal Service, Youngstown City Schools and
Youngstown State University. The largest employers in the tri-county area
include General Motors Corporation in Lordstown, Ohio and Delphi Packard
Electric Systems (a division of General Motors Corporation) in Warren, Ohio,
both located in Trumbull County. The Company's business and operating
results could be significantly affected by changes in general economic
conditions, as well as changes in population levels, unemployment rates,
strikes and layoffs.
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 adjustable-rate mortgage
(ARM) loans and 15 year fixed-rate mortgage loans secured by one-to-four
family residences for its own portfolio. The Bank also offers 15 and 30
year fixed-rate loans which, if they qualify, are sold on the secondary
market to Federal National Mortgage Corporation (FNMA). As of June 30,
1998, the Bank did not sell loans to any other secondary market investors.
The Bank also emphasizes the origination of consumer loans with higher
yields and shorter durations than traditional mortgage loans. To a lesser
extent, commercial and multi-family loans with higher yields than
traditional one-to-four family loans are offered by the Bank.
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, 1998, the maximum amount which the Bank
could have lent under this limit to any one borrower and the borrower's
related entities was approximately $8.4 million. At June 30, 1998, 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, 1998 totaled $6.3 million which is secured by office buildings located
in Ohio. There are 17 other large lending relationships ranging from $1.1
million to $3.4 million for an aggregate total of $33.3 million. At June
30, 1998, all such loans were performing in accordance with their terms.
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,
---------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------ ---------------- ---------------- ----------------
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 $354,202 71.65% $349,053 73.59% $334,307 73.64% $308,774 74.45% $293,540 75.58%
Multi-family 15,659 3.17% 16,294 3.44% 15,934 3.51% 15,157 3.65% 12,186 3.14%
Commercial 28,606 5.79% 30,997 6.53% 29,024 6.39% 28,304 6.82% 25,826 6.65%
Construction and development 23,999 4.85% 23,179 4.88% 22,636 4.99% 20,491 4.94% 21,126 5.44%
--------------------------------------------------------------------------------------------
Total real estate loans 422,466 85.46% 419,523 88.44% 401,901 88.53% 372,726 89.86% 352,678 90.81%
--------------------------------------------------------------------------------------------
Consumer Loans:
Deposit account 1,341 0.27% 1,240 0.26% 1,115 0.25% 1,090 0.26% 1,098 0.28%
Automobile 12,161 2.46% 16,349 3.45% 17,245 3.80% 8,380 2.02% 7,287 1.88%
Home equity 37,912 7.67% 33,269 7.01% 29,783 6.56% 29,711 7.17% 25,055 6.45%
90-day notes 17,677 3.58% 1,323 0.28% 1,441 0.32% 907 0.22% 713 0.18%
Other 2,791 0.56% 2,646 0.56% 2,479 0.54% 1,949 0.47% 1,535 0.40%
--------------------------------------------------------------------------------------------
Total consumer loans 71,882 14.54% 54,827 11.56% 52,063 11.47% 42,037 10.14% 35,688 9.19%
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Total loans 494,348 100.00% 474,350 100.00% 453,964 100.00% 414,763 100.00% 388,366 100.00%
====== ====== ====== ====== ======
Less:
Loans in process (6,557) (7,861) (8,830) (6,346) (8,136)
Deferred fees and discount (2,588) (2,815) (2,905) (3,594) (3,987)
Allowance for losses (2,740) (2,962) (3,439) (3,159) (2,801)
-------- -------- -------- -------- --------
Total loans receivable, net $482,463 $460,712 $438,790 $401,664 $373,442
======== ======== ======== ======== ========
</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,
---------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ----------------- ----------------- ----------------- -----------------
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(1) $217,075 43.91% $260,128 54.84% $268,816 59.21% $246,036 59.32% $232,521 59.87%
Multi-family 3,965 0.80% 3,969 0.84% 3,624 0.79% 5,256 1.27% 4,700 1.21%
Commercial 24,533 4.96% 24,498 5.16% 23,784 5.24% 23,818 5.74% 21,243 5.47%
Construction and development 21,087 4.27% 23,179 4.88% 22,636 4.99% 20,461 4.93% 21,126 5.44%
--------------------------------------------------------------------------------------------
Total fixed-rate real estate
loans 266,660 53.94% 311,774 65.72% 318,860 70.23% 295,571 71.26% 279,590 71.99%
Consumer - fixed-rate 67,243 13.60% 52,013 10.97% 50,081 11.03% 40,870 9.85% 35,415 9.12%
--------------------------------------------------------------------------------------------
Total fixed-rate loans 333,903 67.54% 363,787 76.69% 368,941 81.26% 336,441 81.11% 315,005 81.11%
Adjustable-Rate Loans:
Real estate:
One-to-four family(1) 137,127 27.74% 88,925 18.75% 65,491 14.43% 62,738 15.13% 61,019 15.71%
Multi-family 11,694 2.37% 12,325 2.60% 12,310 2.71% 9,901 2.39% 7,486 1.93%
Commercial 4,073 0.82% 6,499 1.37% 5,240 1.16% 4,486 1.08% 4,583 1.18%
Construction and development 2,912 0.59% - - - - 30 0.01% - -
--------------------------------------------------------------------------------------------
Total adjustable-rate real
estate loans 155,806 31.52% 107,749 22.72% 83,041 18.30% 77,155 18.61% 73,088 18.82%
Consumer - adjustable-rate 4,639 0.94% 2,814 0.59% 1,982 0.44% 1,167 0.28% 273 0.07%
--------------------------------------------------------------------------------------------
Total adjustable-rate loans 160,445 32.46% 110,563 23.31% 85,023 18.74% 78,322 18.89% 73,361 18.89%
--------------------------------------------------------------------------------------------
Total loans 494,348 100.00% 474,350 100.00% 453,964 100.00% 414,763 100.00% 388,366 100.00%
====== ====== ====== ====== ======
Less:
Loans in process (6,557) (7,861) (8,830) (6,346) (8,136)
Deferred fees and discounts (2,588) (2,815) (2,905) (3,594) (3,987)
Allowance for losses (2,740) (2,962) (3,439) (3,159) (2,801)
-------- -------- -------- -------- --------
Total loans receivable, net $482,463 $460,712 $438,790 $401,664 $373,442
======== ======== ======== ======== ========
- --------------------
<F1> One-to-four family 7/1-year ARMs were classified as fixed-rate loans for
1997 and 1996 and were reclassified to adjustable-rate loans for this
presentation.
</TABLE>
The following schedule illustrates the interest rate sensitivity of the
Bank's loan portfolio at June 30, 1998. 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,
--------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999(1) $ 427 6.66% $ - - $ 110 8.30% $ 6,043 9.43% $20,123 9.48% $ 26,703 9.42%
2000 to 2003 12,513 8.64% 1,651 9.00% 3,554 8.50% 12,372 9.08% 26,959 9.56% 57,049 9.17%
2004 and following 341,262 7.74% 14,008 8.92% 24,942 9.14% 5,584 7.92% 24,800 9.57% 410,596 7.98%
-------- ------- ------- ------- ------- --------
$354,202 $15,659 $28,606 $23,999 $71,882 $494,348
======== ======= ======= ======= ======= ========
- --------------------
<F1> Includes overdraft loans.
</TABLE>
The total amount of loans due after June 30, 1999 which have predetermined
interest rates is $339.8 million, while the total amount of loans due after
such dates which have floating or adjustable interest rates is $127.8
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. The Bank has generally limited its
real estate loan originations to properties within its market area. As of
June 30, 1998, all one-to-four family residential loans were located in the
Bank's market area. The Bank originates both fixed and ARM loans with terms
up to 30 years with its focus primarily on ARM originations as part of its
asset/liability management. Fixed-rate originations are generally affected
by market rates, customer preference and competition. In the current low
interest rate environment, borrowers typically prefer fixed-rate loans over
ARM loans, however, the Bank has been successful in originating 7/1-year
ARMs which are fixed for seven years and convert to a one-year ARM in the
eighth year. At June 30, 1998, $52.0 million, or 10.5% of the Bank's gross
loan portfolio consisted of 7/1-year ARMs compared to $15.1 million, or 3.2%
at June 30, 1997. A significant portion of the Bank's other ARM products
are subject to interest adjustments 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, in order to comply with
standard secondary market underwriting requirements, First Federal
established procedures to verify employment history and down payment sources
since the Bank sells certain qualifying loans to FNMA. Underwriting
standards required by FNMA and other secondary market investors are also
followed for new loan originations that the Bank retains in its portfolio.
The compliance with secondary market underwriting standards did 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 88% 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 $3.4 million are subject to any personal
guarantees, but are performing according to their terms.
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, 1998, the Bank had one multi-family or commercial real estate
loan 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 $1.2 million at June 30, 1998, 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, 1998. 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 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, 1998, 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, 1998, the Bank had
$10.1 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, 1998, the Bank had $5.3 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, 1998, the Bank had $7.4 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, 1998, the Bank had $1.2 million 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, 1998, 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, 1998, the Bank held a first lien on approximately 94% 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. The Bank's home equity loan portfolio grew from $29.8
million, or 57% of gross consumer loans at June 30, 1996 to $37.9 million,
or 53% of gross consumer loans at June 30, 1998. Without the effect of the
increase in short-term consumer loans mentioned below, home equity loans
would account for approximately 68% of gross consumer loans at June 30,
1998.
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 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 and
644 loans totaling $5.5 million at June 30, 1998. The decline over the past
two years 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, 1998. 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.
During June 1998, the Bank lent $15.9 million in short-term loans (90-day
notes) to customers to fund their stock subscriptions for a local financial
institution's initial public offering. At August 31, 1998, $2.6 million of
these loans remained outstanding. There is no prepayment penalty on 90-day
notes.
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.
Sale of Mortgage Loans
During the current year, the Bank began selling one-to-four family fixed-
rate mortgage loans to FNMA. The Bank originated and sold $5.0 million of
fixed-rate 15- and 30-year loans during fiscal year 1998 and recorded a gain
of $134,000 for the sale of such loans. The Bank retains servicing on such
loans sold to FNMA, typically receiving a servicing fee of 25 basis points.
Loan Origination and Repayment Activities
The following table sets forth the Bank's originations, sales and repayments
of loans for the periods indicated.
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
Originations by type:
- ---------------------
<S> <C> <C> <C>
Adjustable rate:
Real estate - one-to-four family(1) $ 45,473 31,668 14,113
- multi-family 586 943 1,922
- commercial 3,413 995 654
- construction or development 2,250 197 451
Non-real estate - consumer 4,844 2,395 2,320
-------------------------------
Total adjustable rate 56,566 36,198 19,460
-------------------------------
Fixed rate:
Real estate - one-to-four family(1) 8,834 19,045 45,735
- multi-family 658 314 677
- commercial 1,069 2,248 2,136
- construction or development 27,997 29,045 27,413
Non-real estate - consumer 48,728 32,013 34,790
-------------------------------
Total fixed rate 87,286 82,665 110,751
-------------------------------
Total loans originated 143,852 118,863 130,211
Principal repayments (105,621) (97,840) (91,206)
Loan sales (4,988) - -
Increase (decrease) in other items, net (795) (638) 196
-------------------------------
Net increase $ 32,448 20,385 39,201
===============================
- --------------------
<F1> One-to-four family 7/1-year ARM originations were reclassified from
fixed to adjustable rate originations for 1997 and 1996.
</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 and 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, including home equity loans, are handled in a
similar manner except that late notices are generated between 10 and 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 of a vehicle 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 experienced significant delinquencies with 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, 1998, 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 28 $1,473 0.42% 54 $2,280 0.64% 82 $3,753 1.06%
Construction or
development 1 137 0.57% - - - 1 137 0.57%
Consumer 30 188 0.26% 68 582 0.81% 98 770 1.07%
-------------- --------------- ---------------
Total 59 $1,798 0.36% 122 $2,862 0.58% 181 $4,660 0.94%
============== =============== ===============
</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 generally when a loan
is more than 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 4
payments 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,
----------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One-to-four family $2,168 2,359 3,617 3,405 3,463
Multi-family - - - - 4
Commercial real estate - 110 - 67 -
Construction or development - 4 71 - -
Consumer 566 782 409 420 404
----------------------------------------------
Total 2,734 3,255 4,097 3,892 3,871
----------------------------------------------
Troubled debt restructurings:
One-to-four family 575 685 506 405 879
Consumer 15 53 70 55 144
----------------------------------------------
Total 590 738 576 460 1,023
----------------------------------------------
Total non-performing loans 3,324 3,993 4,673 4,352 4,894
----------------------------------------------
Foreclosed assets:
One-to-four family - - - - 36
----------------------------------------------
Total non-performing assets $3,324 3,993 4,673 4,352 4,930
==============================================
Total non-performing assets as a percentage
of total assets 0.51% 0.67% 0.81% 0.75% 0.84%
==============================================
Total non-performing loans as a percentage
of total loans receivable, net 0.69% 0.87% 1.06% 1.08% 1.32%
==============================================
Allowance for loan losses as a percentage
of non-performing assets 82.43% 74.18% 73.59% 72.59% 56.82%
==============================================
</TABLE>
For the year ended June 30, 1998, gross interest income which would have
been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $262,000. The amount that was included in
interest income on such loans was $194,000 for the year ended June 30, 1998.
For the year ended June 30, 1998, gross interest income which would have
been recorded had the troubled debt restructurings been current in
accordance with their original terms amounted to $42,000. The amount that
was included in interest income on such loans was $50,000 for the year ended
June 30, 1998.
Troubled Debt Restructurings and Other Loans of Concern. As of June 30,
1998, the Bank had $590,000 in net book value of troubled debt
restructurings, approximately 97% 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 $83,000
at June 30, 1998.
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,
1998. The Bank's net book value for the loan at June 30, 1998 was
approximately $1.2 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, 1998 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, 1998 consisted of 146 loans totaling $5.0
million, or 0.8% of total assets compared to 231 loans totaling $6.8
million, or 1.1% of total assets at June 30, 1997. The decline in
classified assets over the past year was primarily in indirect auto loans
(see "Consumer Lending" above). The largest classified asset was $1.2
million at June 30, 1998 and is discussed above under "Troubled Debt
Restructurings and Other Loans of Concern".
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, 1998, the Bank had an allowance for loan losses
of $2.7 million, which was equal to 54.4% of classified assets and 82.4% of
non-performing assets. See Notes 1(f) 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,
----------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $2,962 3,439 3,159 2,801 2,437
Charge-offs:
One-to-four family (97) (40) (18) (43) (40)
Multi-family - - (1) (1) -
Consumer (743) (1,159) (58) (16) (13)
----------------------------------------------
(840) (1,199) (77) (60) (53)
----------------------------------------------
Recoveries:
One-to-four family 3 1 18 12 6
Construction or development - - 2 - -
Commercial real estate - - 2 - -
Consumer 50 33 10 3 2
----------------------------------------------
53 34 32 15 8
----------------------------------------------
Net charge-offs (787) (1,165) (45) (45) (45)
Additions charged to operations 565 688 325 403 409
----------------------------------------------
Balance at end of period $2,740 2,962 3,439 3,159 2,801
==============================================
Ratio of net charge-offs during the
period to average loans outstanding
during the period 0.17% 0.26% 0.01% 0.01% 0.01%
==============================================
Ratio of net charge-offs during
the period to average
non-performing assets 20.74% 24.22% 0.94% 1.04% 0.65%
==============================================
</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, 1998, 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,
-------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ----------------- ----------------- ----------------- -----------------
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 $ 923 71.65% $1,283 73.59% $1,547 73.64% $1,093 74.45% $ 781 75.58%
Multi-family 19 3.17% 28 3.44% 88 3.51% 53 3.65% 1 3.14%
Commercial real estate 351 5.79% 444 6.53% 773 6.39% 1,704 6.82% 1,459 6.65%
Construction or development 15 4.85% 45 4.88% 125 4.99% 72 4.94% - 5.44%
Consumer 1,201 14.54% 787 11.56% 518 11.47% 237 10.14% 166 9.19%
Unallocated 231 - 375 - 388 - - - 394 -
-----------------------------------------------------------------------------------------------
Total $2,740 100.00% $2,962 100.00% $3,439 100.00% $3,159 100.00% $2,801 100.00%
===============================================================================================
</TABLE>
Investment Activities
First Federal's investment policy is designed to provide a required level of
liquidity and minimize potential losses due to interest rate fluctuations
without incurring undue credit risk. 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Asset/Liability Management"
and "- Liquidity and Cash Flows" 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, federal agency obligations, including mortgage-backed
securities, and state, county and municipal bonds.
Mortgage-backed securities represent a participation interest in a pool of
single-family or multi-family mortgages, the principal and interest payments
on which are passed from the mortgage originators through intermediaries
(generally U.S. Government agencies and government sponsored enterprises)
that pool and repackage the participation interest in the form of securities
to investors such as the Bank. The underlying pool of mortgages can be
composed of either fixed-rate or ARM loans. As a result, the interest rate
risk characteristics of the underlying pool of mortgages, as well as
prepayment risk, are passed on to the certificate holder. 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. All of the Bank's
mortgage-backed securities are available for sale and consist of securities
issued or guaranteed by the FNMA, Federal Home Loan Mortgage Corporation
(FHLMC) and Government National Mortgage Association (GNMA). At June 30,
1998, $81.4 million, or 58% of the securities portfolio consisted of
mortgage-backed securities.
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), FNMA and 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, 1998, $35.0 million, or 24% of the
securities portfolio consisted of Federal agency obligations.
The following table sets forth the composition of the consolidated debt,
equity and other securities, and FHLB stock portfolios at June 30, 1998,
1997 and 1996.
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
------------------- ------------------- -------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Debt securities:
U.S. government securities $ - - $ 2,005 1.73% $ 37,011 32.20%
Federal agency obligations(1) 35,049 24.33% 24,975 21.54% 53,003 46.12%
Mortgage-backed securities 81,580 56.63% 75,718 65.29% 16,398 14.27%
State, county and municipal bonds 20,778 14.42% 7,416 6.40% 4,263 3.71%
Equity securities 637 0.44% 753 0.65% 478 0.42%
Other securities 1,517 1.05% 1,000 0.86% - -
FHLB stock 4,512 3.13% 4,095 3.53% 3,774 3.28%
----------------------------------------------------------------
Total securities and FHLB stock $144,073 100.00% $115,962 100.00% $114,927 100.00%
================================================================
Average remaining life of debt securities excluding
equity and other securities and FHLB stock 4.66 years 4.72 years 4.67 years
Other interest-earning assets:
Interest-bearing deposits with banks $ 5,713 100.00% $ 6,216 97.49% $ 4,888 100.00%
Short-term investments - - 160 2.51% - -
----------------------------------------------------------------
Total $ 5,713 100.00% $ 6,376 100.00% $ 4,888 100.00%
================================================================
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 4.47 years
- --------------------
<F1> Excluding mortgage-backed securities which include FNMA, FHLMC and
GNMA pass-through certificates.
</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, 1998
-----------------------------------------------------------------
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>
Debt securities:
Federal agency obligations $ 8,048 27,001 - - 35,049 35,283
Mortgage-backed securities 3,572 2,700 9,167 66,141 81,580 81,444
State, county and municipal
securities - 1,927 15,182 3,669 20,778 21,049
Other - - - 1,517 1,517 1,758
----------------------------------------------------------------
Total debt and other securities $11,620 31,628 24,349 71,327 138,924 139,534
================================================================
Weighted average yield(1) 6.18% 6.31% 6.84% 6.08% 6.22%
====================================================
- --------------------
<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 also has access
to advances from the Federal Home Loan Bank (FHLB) of Cincinnati. See Note
7 of the Notes to Consolidated Financial Statements in the Annual Report to
Stockholders included as Exhibit 13 herein for a detail of advances from the
FHLB of Cincinnati.
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 (including non-interest bearing
checking accounts), money market and certificate accounts. The Bank relies
primarily on advertising, competitive pricing policies, promotions and
customer service to attract and retain these deposits. Management believes
the Bank is competitive in the types of accounts and interest rates it has
offered on its deposit products. In November 1997, First Federal introduced
a new money market product that offers attractive rates and liquidity to
customers. Refer to "Management's Discussion and Analysis of Changes in
Financial Condition and Results of Operations - Deposits" in the Annual
Report to Stockholders included as Exhibit 13 herein. Management regularly
evaluates the internal cost of funds, surveys rates offered by the Bank's
competitors, review the Company's cash flow requirements for lending and
liquidity and executes rate changes when necessary as part if its
asset/liability management, profitability and growth objectives. First
Federal generally solicits deposits from its market area.
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, 1998. 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,
----------------------------------------------------------------
1998 1997 1996
------------------- -------------------- -------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Transaction and Savings Deposits:
- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Passbook and statement savings
accounts 2.50% to 3.00% $ 93,276 21.01% $107,575 23.89% $114,247 25.03%
NOW and non-interest bearing
accounts 0.00% - 2.50% 34,382 7.74% 31,236 6.94% 28,168 6.17%
Money market
accounts 0.00% - 4.41% 28,059 6.32% 22,822 5.07% 27,031 5.92%
---------------------------------------------------------------
Total non-certificates 155,717 35.07% 161,633 35.90% 169,446 37.12%
---------------------------------------------------------------
Total Certificates:
- -------------------
4.00% - 4.99% 29,484 6.64% 8,809 1.96% 27,815 6.09%
5.00% - 5.99% 141,125 31.78% 146,339 32.50% 134,702 29.50%
6.00% - 6.99% 109,895 24.75% 124,649 27.69% 68,145 14.93%
7.00% - 7.99% 7,796 1.76% 8,794 1.95% 56,433 12.36%
--------------------------------------------------------------
Total certificates 288,300 64.93% 288,591 64.10% 287,095 62.88%
--------------------------------------------------------------
Total deposits $444,017 100.00% $450,224 100.00% 456,541 100.00%
==============================================================
</TABLE>
The following table sets forth the savings flows at the Bank during the
periods indicated. The net decrease refers to the amount of withdrawals
during the period less deposits and interest credited during the period.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance $450,224 456,541 461,979
Net deposits/withdrawals
and transfers (27,340) (28,006) (27,511)
Interest credited 21,133 21,689 22,073
--------------------------------
Ending balance $444,017 450,224 456,541
================================
Net decrease (6,207) (6,317) (5,438)
================================
Percent decrease -1.38% -1.38% -1.18%
=================================
</TABLE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of June 30, 1998.
<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)
Certificate accounts maturing
in quarter ending:
<S> <C> <C> <C> <C> <C> <C>
September 30, 1998 $15,339 33,400 3,741 99 52,579 18.2%
December 31, 1998 8,374 27,375 1,160 - 36,909 12.8%
March 31, 1999 458 18,944 24,914 154 44,470 15.4%
June 30, 1999 1,911 13,844 13,978 - 29,733 10.3%
September 30, 1999 977 16,187 7,226 1,884 26,274 9.1%
December 31, 1999 741 5,610 7,458 50 13,859 4.8%
March 31, 2000 1,105 4,939 8,272 2,310 16,626 5.8%
June 30, 2000 539 3,246 7,170 115 11,070 3.8%
September 30, 2000 40 1,817 5,248 - 7,105 2.5%
December 31, 2000 - 1,929 2,370 - 4,299 1.5%
March 31, 2001 - 3,167 1,068 - 4,235 1.5%
June 30, 2001 - 3,643 133 - 3,776 1.3%
September 30, 2001 - 1,375 300 50 1,725 0.6%
Thereafter - 5,649 26,857 3,134 35,640 12.4%
---------------------------------------------------------------
Total $29,484 141,125 109,895 7,796 288,300 100.0%
===============================================================
Percent of total 10.2% 49.0% 38.1% 2.7% 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, 1998.
<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 $45,981 25,432 63,503 104,834 239,750
Certificates of deposit greater than
or equal to $100,000 6,598 11,477 10,700 19,775 48,550
-----------------------------------------------------
Total certificates of deposit $52,579 36,909 74,203 124,609 288,300
=====================================================
</TABLE>
Subsidiary and Other Activities
First Federal and FFY Holdings, Inc. are wholly-owned subsidiaries of the
Holding Company. First Federal has one subsidiary--Ardent Service
Corporation (Ardent), which was formed on July 16, 1997 for the purpose of
being a 50% owner of Hedgerows Development, Ltd., a limited liability
company formed for the purpose of constructing, marketing and selling
residential condominium units. Ardent is a wholly-owned subsidiary of First
Federal.
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. The primary
factors in competing for loans are interest rates, loan fees, timing and
quality of service. The primary factors in competing for deposits are
interest rates, customer service and convenience of office locations.
Employees
At August 31, 1998, the Bank had a total of 194 employees, including 53
part-time employees. The Bank's employees are not represented by any
collective bargaining group. Management considers its employee relations to
be good.
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 of 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.
The Holding Company, as a savings and loan holding company within the
meaning of the Home Owners Loan Act (HOLA), is subject to OTS regulations,
examinations, supervision and reporting requirements. As a subsidiary of a
savings and loan holding company, the Bank is subject to certain
restrictions in its dealings with the Holding Company.
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, 1998 was
$130,000.
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, 1998, First Federal's lending limit under this
restriction was $8.4 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
$100,000 per insured member (as defined by law and regulation) 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.
Both the SAIF and the Bank Insurance Fund (BIF), the federal deposit
insurance fund that covers the deposits of state and national banks and
certain state savings banks, are required by law to attain and maintain a
reserve ratio of 1.25% of the insured deposits. The BIF has achieved the
required reserve rate, and as a result, the FDIC reduced the average deposit
insurance premium paid by BIF-insured banks to a level substantially below
the average premium paid by savings institutions. Legislation was enacted
September 30, 1996 to eliminate the premium differential between SAIF-
insured institutions and BIF-insured institutions. The legislation provided
that all insured depository institutions with SAIF-assessable deposits as of
March 31, 1995 pay a special one-time assessment at 65.7 basis points to
recapitalize the SAIF. Based on its level of SAIF deposits at March 31,
1995, the Bank paid a tax deductible special assessment of $3.0 million in
November 1996, which was recorded as of September 30, 1996. 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 and considered healthy pay the
lowest premium while institutions that are less than adequately capitalized
and considered of substantial supervisory concern pay the highest premium.
Based on its regulatory capital as of June 30, 1998, 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. Failure to meet minimum capital requirements can
initiate certain mandatory and possible discretionary actions by regulators,
which could have a direct material effect on the Bank's statement of
condition and results of operations. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weights and other factors.
The Bank's capital requirements include tangible capital, core capital and
total risk-based capital. Under the tangible capital requirement, a savings
association must maintain tangible capital in an amount equal to at least
1.5% of adjusted total assets. At June 30, 1998, the Bank had tangible
capital of $53.3 million, or 8.5% of adjusted total assets. Under the core
capital requirement, a savings association must maintain core capital in an
amount equal to at least 3.0% of adjusted total assets. At June 30, 1998,
the Bank had core capital of $53.3 million, or 8.5% of adjusted total
assets. Under the total risk-based capital requirement, a savings
association must maintain core capital equal to at least 4.0% of risk-
weighted assets and total capital equal to at least 8.0% of risk-weighted
assets. At June 30, 1998, the Bank had total risk-based capital of $54.9
million, or 14.3% 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. Refer to Note 8 of the
Notes to Consolidated Financial Statements in the Annual Report to
Stockholders included as Exhibit 13 herein regarding compliance with
regulatory capital requirements.
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 has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled
institutions. At each successively lower defined capital category, an
institution is subject to more restrictive and numerous mandatory or
discretionary regulatory actions or limits, and the OTS has less flexibility
in determining how to resolve the problems of the institution. Under the
regulations, an institution shall be deemed to be (i) "well capitalized" if
it has total risk-based capital ratio of 10.0% or more, a Tier-1 risk-based
capital ratio of 6.0% or more, a Tier-1 leverage capital ratio of 5.0% or
more and is not subject to any order or final capital directive to meet and
maintain a specific capital level for any capital measure; (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8.0% or more, a
Tier-1 risk-based capital ratio of 4.0% or more, a Tier-1 leverage capital
ratio of 4.0% or more (3.0% under certain circumstances) and does not meet
the definition of "well capitalized"; (iii) "undercapitalized" if it has a
total risk-based capital ratio that is less than 8.0%, a Tier-1 risk-based
capital ratio that is less than 4.0% or a Tier-1 leverage capital ratio that
is less than 4.0% (3.0% under certain circumstances); (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less
than 6.0%, a Tier-1 risk-based capital ratio that is less than 3.0% or a
Tier-1 leverage capital ratio that is less than 3.0%, and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that
is equal to or less than 2.0%. Regulations also specify circumstances under
which a federal banking agency may reclassify a well capitalized institution
as adequately capitalized and may require an adequately capitalized
institution or an undercapitalized institution to comply with supervisory
actions as if it were in the next lower category. An institution that is
significantly undercapitalized may not be reclassified as critically
undercapitalized. As of June 30, 1998, 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 "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements), 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 Note 14 of the Notes to
Consolidated Financial Statements in the Annual Report to Stockholders
included as Exhibit 13 herein for a detail of distributions from the Bank to
the Holding Company.
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 depending upon economic
conditions and savings flows of all savings associations. In November 1997,
the OTS revised its liquidity rule to lower the minimum requirement from 5%
to 4%, the lowest level permitted by current law and eliminate the 1% short-
term liquidity requirement. The OTS also expanded the types of investments
considered to be liquid assets and removed the requirement that certain
investments must mature within 5 years in order to qualify as a liquid
asset. At June 30, 1998, the Bank was in compliance with the applicable
regulatory liquidity requirements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Cash Flows" contained in the Annual Report to Stockholders included as
Exhibit 13 herein.
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 than 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. As an alternative, the savings association
may maintain 60% of its assets specified by Section 7701(a)(19) of the
Internal Revenue Code of 1986, as amended (the "Code"). Under either test,
such assets primarily consist of residential housing related loans and
investments. At June 30, 1998, First Federal met the QTL test and has
always met the test since its effectiveness. At June 30, 1998, First
Federal's QTL percentage was 90.6%.
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 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.
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 May 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 Common 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 Exchange Act and the rules and regulations of the SEC thereunder.
The registration under the Securities Act of the Holding Company's Common
Stock does not cover the resale of such shares. Shares of Common Stock
purchased by persons who are not affiliates of the Holding Company may be
resold without registration. Shares purchased by an affiliate (generally
officers, directors and principal stockholders) of the Holding Company will
be subject to the resale restrictions of Rule 144 under the Securities Act.
If the Holding Company meets the current public information requirements of
Rule 144 under the Securities Act, each affiliate of the Holding Company who
complies with the other conditions of Rule 144 (including those that require
the affiliate's sale to be aggregated with those of certain other persons)
would be able to sell in the public market, without registration, a number
of shares not to exceed 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, 1998, 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.
The Bank had no discount window borrowings as of June 30, 1998.
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, 1998, First Federal had $4.5 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 6.8% and were 7.3%
for fiscal year 1998. For the year ended June 30, 1998, dividends paid by
the FHLB of Cincinnati to First Federal totaled $312,000 which represented a
$33,000 increase from the amount of dividends received in 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.
Federal Taxation. Certain 1996 tax legislation significantly affected
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
affected 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. As the Bank has previously provided
deferred taxes on the recapture amounts, no additional financial statement tax
expense will result from the recapture.
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 years 1997 and 1998, 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.
Under section 593(e), earnings appropriated for bad debt reserves and
deducted for federal income tax purposes cannot be used by the Bank to pay
cash dividends or distributions to the Holding Company without the Bank
including the amount in taxable income, together with an amount deemed
necessary to pay the resulting income tax. Thus, any dividends to the Holding
Company that would reduce amounts appropriated to the Bank's bad debt reserves
and deducted for federal income tax purposes could create a tax liability for
the Bank. The Bank does not intend to pay dividends that would result in a
recapture of its bad debt reserves.
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, FFY Holdings, Inc., the Bank and the Bank's subsidiary,
Ardent Service Corp. 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 1995 through
1997. 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 1998
return, which was based on net worth as of June 30, 1997. The Bank's state
franchise tax returns are open and subject to audit for the years 1995
through 1998.
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 1995 through 1998.
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.
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, 1998 who are not
also directors.
<TABLE>
<CAPTION>
Age at Positions Held with Bank
Name June 30, 1998 and Holding Company
- ------------------------------------------------------------------
<S> <C> <S>
Therese Ann Liutkus 39 Treasurer and CFO of the Bank
and the Holding Company
David S. Hinkle 40 Vice President of the Bank
Mark S. Makoski 48 Vice President of the Bank
J. Craig Carr 50 Vice President and General Counsel
of the Bank and Holding Company
</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 has also served as Treasurer of FFY Holdings, Inc. since
September 1997. 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 (including Year 2000 compliance), 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 Vice President of the Bank and
Holding Company since July 1997, Assistant Vice President of the Bank from
1991 to June 1997 and General Counsel since joining the Bank in 1974. Mr.
Carr has also served as Vice President of FFY Holdings and Ardent Service
Corp. since September 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, 1998, 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, 1998, the net
book value of the Bank's investment in premises, equipment and leaseholds,
excluding computer equipment and software, was approximately $6.7 million.
The Bank's accounting and record keeping activities are maintained on an in-
house data processing system. The Bank owns data processing equipment it
uses for its internal processing needs. The net book value of such data
processing equipment and related software, including the new comprehensive
software system to run the core banking operation (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Year 2000" contained in the Annual Report to Shareholders included as
Exhibit 13 herein) was $1.1 million at June 30, 1998.
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,
1998.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information under the caption "Market Prices and Dividends Declared" on
page 18 of the 1998 Annual Report to Stockholders which portions attached
hereto as Exhibit 13 is herein incorporated by reference.
Item 6. Selected Financial Data
Pages 4 through 6 of the 1998 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 7 through 19 of the 1998 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 and 15 of the 1998 Annual Report to Stockholders which portions
attached hereto as Exhibit 13 are herein incorporated by reference.
Item 8. Financial Statements and Supplementary Data
Pages 20 through 42 of the 1998 Annual Report to Stockholders which portions
attached hereto as Exhibit 13 are herein incorporated by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
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 1998, 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 1998, 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 1998, all
of these filing requirements were satisfied, except for the inadvertent
omission of an option exercise by Director Izzo-Cartwright, which omission
has 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 1998, 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 1998, 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 1998, 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, 1998, is incorporated by
reference in this Annual Report on Form 10-K as Exhibit 13.
<TABLE>
<CAPTION>
Pages in
Annual Report Section Annual Report
- -----------------------------------------------------------------------
<S> <C>
Selected Financial Data and Other Data 4-6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-19
Common Stock and Related Information 18
Consolidated Statements of Financial Condition as of
June 30, 1998 and 1997 20
Consolidated Statements of Income for Years Ended
June 30, 1998, 1997 and 1996 21
Consolidated Statements of Changes in Stockholders'
Equity for Years Ended June 30, 1998, 1997 and 1996 22-23
Consolidated Statements of Cash Flows for Years Ended
June 30, 1998, 1997 and 1996 24
Notes to Consolidated Financial Statements 25-41
Independent Auditors' Report 42
</TABLE>
With the exception of the aforementioned information, the Holding Company's
Annual Report to Stockholders for the year ended June 30, 1998 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
Regulation or Exhibit
S-K Number
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 None
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
24 Power of attorney Not required
27 Financial Data Schedule 27
99 Additional Exhibits - predecessor accountants'
independent auditors' report None
- --------------------
<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, 1998, the Holding Company filed a
report on Form 8-K on April 23, 1998 announcing third quarter earnings and
the regular quarterly dividend.
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.
<TABLE>
<S> <C>
/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 Officer)
(Principal Executive and Operating Officer) Date: September 25, 1998
Date: September 25, 1998
/s/ Randy Shaffer /s/ Myron S. Roh
- --------------------------------------- --------------------------------------
Randy Shaffer, Vice President and Myron S. Roh, Chairman of the Board
Director and Director
Date: September 25, 1998 Date: September 25, 1998
/s/ A. Gary Bitonte /s/ Jack R. Brownlee
- --------------------------------------- -------------------------------------
A. Gary Bitonte, Director Jack R. Brownlee, Director
Date: September 25, 1998 Date: September 25, 1998
/s/ Marie Izzo Cartwright /s/ Daniel J. Mirto
- --------------------------------------- -------------------------------------
Marie Izzo Cartwright, Director Daniel J. Mirto, Director
Date: September 25, 1998 Date: September 25, 1998
/s/ Henry P. Nemenz /s/ W. Terry Patrick
- --------------------------------------- -------------------------------------
Henry P. Nemenz, Director W. Terry Patrick, Director
Date: September 25, 1998 Date: September 25, 1998
/s/ Ronald P. Volpe
- ---------------------------------------
Ronald P. Volpe, Director
Date: September 25, 1998
</TABLE>
1998 ANNUAL REPORT
-------------------
FFYF
-------------------
FFY Financial Corp.
Contents
- ------------------------------------------------------------------------------
Financial Highlights 1
President's Letter 2
Selected Consolidated Financial Information 4
Management's Discussion & Analysis 7
Financial Statements 20
Officers & Directors 43
Stockholder Information 44
<TABLE>
<CAPTION>
1998 Financial Highlights
- -------------------------------------------------------------------------------
FFY Financial Corp. and Subsidiaries
(Dollars in Thousands Except Per Share Data)
For the year 1998 1997 Change
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income $ 22,447 22,102 1.56%
Net income 7,729 5,324 45.17%
Dividends on common stock 2,901 2,890 0.38%
Average shares outstanding - basic 3,758 4,325 -13.11%
Average shares outstanding - diluted 3,897 4,464 -12.70%
Per common share
- ------------------------------------------------------------------------------------
Basic earnings per share $ 2.06 1.23 67.48%
Diluted earnings per share 1.98 1.19 66.39%
Cash dividends declared per share 0.80 0.70 14.29%
Tangible book value per share 20.98 19.83 5.80%
Market price at year end 32.50 26.00 25.00%
At year end
- ------------------------------------------------------------------------------------
Total assets $651,746 599,249 8.76%
Loans receivable, net 482,463 460,712 4.72%
Securities available for sale 140,793 112,036 25.67%
Deposits 444,017 450,224 -1.38%
Securities sold under agreements to repurchase 64,388 32,307 99.30%
Borrowed funds 33,985 27,455 23.78%
Stockholders' equity 84,216 82,174 2.48%
Average for the year
- ------------------------------------------------------------------------------------
Total assets $618,664 591,588 4.58%
Loans receivable, net 463,118 451,872 2.49%
Securities available for sale 124,764 102,661 21.53%
Deposits 450,768 451,792 -0.23%
Securities sold under agreements to repurchase 49,482 16,993 191.19%
Borrowed funds 24,004 19,619 22.35%
Stockholders' equity 83,315 92,937 -10.35%
Financial ratios
- ------------------------------------------------------------------------------------
Return on average assets 1.25% 0.90% 38.89%
Return on average equity 9.28% 5.73% 61.95%
Efficiency ratio 49.08% 62.01% -20.85%
</TABLE>
---------------------------
| NOTE: Photo of CEO is |
| shown with Letter |
---------------------------
To Our Shareholders:
During the past year we continued our commitment to building a better
organization for our shareholders, customers and employees. Following our
theme line of "The First Place to Bank", extensive employee education
together with two new affiliations and a commitment to technology continued
throughout the year. Competitive pressures heightened this year with the
increased presence of banks and thrifts in our market, as well as increased
competition from mortgage brokers and securities firms.
Intense competition for both deposits and loans, together with a
difficult interest rate environment, led to pressure on our net interest
margin. In response to this increased competition, we reorganized our
retail staff effective in March 1998, more clearly defining their focus and
responsibility. Where we formerly had branch managers and loan officers, we
now have personal bankers and loan originators. In addition to the
administrative responsibilities of managing a branch office, our personal
bankers are well trained in consumer loans, as well as checking and
deposit products. In short, our personal bankers focus on those services
most frequently requested in our branch network. Our loan originators are
now responsible only for the origination of real estate loans, both for our
portfolio and for sale in the secondary market. This focus allows them to
specialize in the origination of real estate loans, with delivery at a time
and place convenient to our customers, home builders and real estate
professionals. This origination specialty is supported by a complete array
of mortgage products as well as full time in-house loan processors,
appraisers and legal staff. Our confidence is supported by the marketplace
wherein we were the leading provider of loans for the purchase of homes in
Mahoning County for the first six months of 1998.
Toward our goal of providing a broader line of financial services, FFY
became a partner in David B. Roberts Real Estate in September 1997. A full
service real estate brokerage firm founded by our partner David Roberts in
1982, David B. Roberts Real Estate offers both residential and commercial
real estate brokerage services through a staff of 39 sales professionals
operating from offices located in Poland Village, Canfield City and Liberty
Township. In April 1998, we became a founding partner in Daniel W. Landers
Insurance. Operating from a bank-owned facility adjacent to our home
office, this independent insurance agency offers property and casualty
insurance to individuals and commercial enterprises. Ardent Service
Corporation, a bank subsidiary, is a joint venture partner in "The
Hedgerows", a 19 unit condominium development in New Middletown, Ohio.
Late in the year we commenced a marketing campaign titled " Find It,
Fund It, Insure It" relating to our capability of assisting our customers
find, fund and insure their homes. Our intent is to grow these businesses
and add additional lines of affiliate businesses.
In April 1998 we completed the installation of a new computer system
for our core banking applications. This comprehensive system
contains modules for all deposit and lending products. In addition to
providing broader product functionality, this system is designed in such a
way as not to be susceptible to Year 2000 problems. We expect to be fully
Year 2000 compliant by the end of this calendar year. Before, during and
after this conversion, our staff underwent extensive training not only in
the use of the new system, but in the use of other personal computer
applications as well as in sales and service training.
While operating in a difficult competitive market, we have improved
retail service, improved our loan origination capability both quantitatively
and qualitatively, broadened our product line, reduced the level of non-
performing loans and provided solid technology to support our business. I'm
pleased to say that we have also focused on cost control. Excluding the
affiliates, we have maintained a sub-50% efficiency ratio and reduced the
number of full time equivalent employees from 179.4 to 175.8 comparing the
final pay period of fiscal 1997 and 1998.
Lastly, I would encourage our Mahoning Valley shareholders to also be
our customers. From real estate to insurance to banking, our products are
competitive and our staff is capable. I invite you to find out why we are
"The First Place to Bank."
Sincerely,
/s/ JEFFREY L. FRANCIS
Jeffrey L. Francis
President and CEO
<TABLE>
<CAPTION>
Selected Consolidated Financial Information
- ------------------------------------------------------------------------------------
FFY Financial Corp. and Subsidiaries
(Dollars in Thousands Except Per Share Data)
June 30,
----------------------------------------------------------
Selected Consolidated Financial Condition Data: 1998 1997 1996 1995 1994
--------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Total assets $ 651,746 599,249 575,602 576,619 584,151
Loans receivable, net 482,463 460,712 438,790 401,664 373,442
Allowance for loan losses 2,740 2,962 3,439 3,159 2,801
Non-performing assets 3,324 3,993 4,673 4,352 4,930
Securities available for sale 140,793 112,036 109,836 132,341 -
Securities held to maturity - - - 11,819 180,652
Deposits 444,017 450,224 456,541 461,979 456,134
Securities sold under agreements to repurchase:
Short-term 13,088 7,307 6,640 - -
Long-term 51,300 25,000 - - -
Borrowed funds 33,985 27,455 1,200 - 8,125
Stockholders' equity 84,216 82,174 101,921 106,400 110,834
Years ended June 30,
---------------------------------------------------
Selected Consolidated Operations Data: 1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
Total interest income $ 48,006 45,925 43,716 42,444 41,983
Total interest expense 25,559 23,823 22,133 19,730 18,940
---------------------------------------------------
Net interest income 22,447 22,102 21,583 22,714 23,043
Provision for loan losses 565 688 325 403 409
---------------------------------------------------
Net interest income after provision for loan losses 21,882 21,414 21,258 22,311 22,634
Service charges 700 563 522 429 348
Gain (loss) on sale of securities 247 (320) 30 (17) -
Other non-interest income 818 375 548 428 352
Total non-interest expense (11,771) (14,288) (11,991) (11,789) (11,277)
---------------------------------------------------
Income before federal income taxes and cumulative
effect of change in accounting for federal income taxes 11,876 7,744 10,367 11,362 12,057
Federal income taxes 4,147 2,420 3,465 3,872 4,315
---------------------------------------------------
Income before cumulative effect of change in
accounting for federal income taxes 7,729 5,324 6,902 7,490 7,742
Cumulative effect as of July 1, 1993 of change in method
of accounting for federal income taxes per SFAS No. 109 - - - - 540
---------------------------------------------------
Net income $ 7,729 5,324 6,902 7,490 8,282
===================================================
Basic earnings per share (1) $ 2.06 1.23 1.43 1.39 1.43(2)
===================================================
Diluted earnings per share (1) $ 1.98 1.19 1.37 1.34 1.40(2)
===================================================
Cash dividends declared per share $ 0.80 0.70 0.60 0.50 0.40
===================================================
- --------------------
<F1> Basic and diluted earnings per share were restated for years prior to
June 30, 1998 to conform with the disclosure requirements of SFAS
No. 128, Earnings per Share.
<F2> Basic and diluted earnings per share would have been $1.33 per share
and $1.31 per share, respectively, without the cumulative effect of
change in accounting for federal income taxes.
</TABLE>
<TABLE>
<CAPTION>
At or for the years ended June 30,
----------------------------------------------
Selected Financial Ratios and Other Data: 1998 1997 1996 1995 1994
----------------------------------------------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets (1) 1.25% 0.90% 1.20% 1.31% 1.44%
Return on average equity (2) 9.28% 5.73% 6.58% 6.87% 7.42%
Interest rate spread information:
Average during the period (3) 3.19% 3.16% 3.04% 3.28% 3.38%
End of period (3) 2.94% 3.06% 2.95% 2.66% 3.06%
Net interest margin (3) (4) 3.81% 3.89% 3.89% 4.09% 4.16%
Operating expense to average assets 1.90% 2.42% 2.09% 2.06% 1.97%
Efficiency ratio (5) 49.08% 62.01% 52.93% 49.60% 46.67%
Dividend payout ratio (6) 40.40% 58.82% 43.80% 37.59% 31.25%
Performance Ratios Excluding Affiliates (7):
Return on average assets (1) 1.27% 0.90% 1.20% 1.31% 1.44%
Return on average equity (2) 9.41% 5.73% 6.58% 6.87% 7.42%
Operating expense to average assets 1.84% 2.42% 2.09% 2.06% 1.97%
Efficiency ratio (5) 47.92% 62.01% 52.93% 49.60% 46.67%
Quality Ratios:
Non-performing assets to total assets 0.51% 0.67% 0.81% 0.75% 0.84%
Allowance for loan losses to non-performing assets 82.43% 74.18% 73.59% 72.59% 56.82%
Allowance for loan losses to gross loans outstanding 0.56% 0.64% 0.77% 0.77% 0.74%
Capital Ratios:
Equity to total assets at end of period 12.92% 13.71% 17.71% 18.45% 18.97%
Average equity to average assets 13.47% 15.71% 18.29% 19.06% 19.45%
Book value per share $21.00 19.83 20.06 19.60 18.51
Tangible book value per share $20.98 19.83 20.06 19.60 18.49
Change in book value per share due to SFAS No. 115 $ 0.20 0.03 (0.17) (0.06) n/a
Ratio of average interest-earning assets to average
interest-bearing liabilities 1.15x 1.17x 1.21x 1.22x 1.23x
<F1> Ratio of net income to average total assets.
<F2> Ratio of net income to average equity.
<F3> Ratio is presented on a fully taxable equivalent basis using the
Company's federal statutory tax rate of 34%.
<F4> Net interest income divided by average interest earning assets -
calculated without consideration of the unrealized gain on securities
available for sale.
<F5> Ratio is calculated without consideration to goodwill amortization and
gain (loss) on sale of securities.
<F6> Cash dividends per share divided by diluted earnings per share.
<F7> Ratios presented do not include the activity of the Company's real
estate and insurance affiliates which began operations in September
1997 and April 1998, respectively.
</TABLE>
Ratios and Other Financial Data
FFY Financial Corp. and Subsidiaries
At or for the years ended June 30
Return on Average Assets Return on Average Equity Net Interest Margin
1994 1.44% 1994 7.42% 1994 4.16%
1995 1.31% 1995 6.87% 1995 4.09%
1996 1.20% 1996 6.58% 1996 3.89%
1997 0.90% 1997 5.73% 1997 3.89%
1998 1.25% 1998 9.28% 1998 3.81%
Operating Expense Cash Dividends
to Average Assets Efficiency Ratio Declared per Share
1994 1.97% 1994 46.67% 1994 $0.40
1995 2.06% 1995 49.60% 1995 $0.50
1996 2.09% 1996 52.93% 1996 $0.60
1997 2.42% 1997 62.01% 1997 $0.70
1998 1.90% 1998 49.08% 1998 $0.80
Allowance for Loan Losses Tangible Book
to Non-Performing Assets Equity to Total Assets Value per Share
1994 56.82% 1994 18.97% 1994 $18.49
1995 72.59% 1995 18.45% 1995 $19.60
1996 73.59% 1996 17.71% 1996 $20.06
1997 74.81% 1997 13.71% 1997 $19.83
1998 82.34% 1998 12.92% 1998 $20.98
Note: Certain 1997 ratios above would be positively affected without regard to
the one-time SAIF special assessment.
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 savings bank engaged
primarily in mortgage and consumer lending and deposit account services
including certificate, savings and checking accounts. FFY Holdings, Inc., a
wholly-owned subsidiary of the Holding Company, was formed in August 1997
for the purpose of investing in entities offering expanded financial
services to customers. Real estate services are offered through the
affiliation with First Real Estate, Ltd., also known as David B. Roberts
Real Estate, and property and casualty insurance is offered through the
affiliation with Daniel W. Landers Insurance Agency, Ltd. First Real
Estate, Ltd. and Daniel W. Landers Insurance Agency, Ltd. began operations
in September 1997 and April 1998, respectively. When used in this Annual
Report, the phrase "the Company" refers to FFY Financial Corp. and its two
subsidiaries, First Federal Savings Bank of Youngstown and FFY Holdings,
Inc.
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.
------------------------------------------------
| Photo of |
| Tony Fusco, Jerry Zetts, Connie Tarr-Bellino, |
| Rick Curry, Jane Hutchins, Jon Schmied, |
| Mark Taylor, Frank Pasquale, Dan Kopp |
------------------------------------------------
"Fund It!"
First Federal has a reputation of fast efficient and affordable
mortgage lending. This year, we created the position of Loan Originator
and expanded our line of mortgage offerings.
Our staff of mortgage lenders can tailor financing to most any need.
The headline of the marketing campaign
introducing our originators summed it up by saying,
"Meet Our Mortgage Team. Your Place Or Ours."
For real estate, banking, and insurance,
"Find, Fund and Insure it" through affiliates of FFY Financial.
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
General. Total assets increased $52.5 million, or 8.8%, and totaled $651.7
million at June 30, 1998 compared to $599.2 million at June 30, 1997. The
increase in assets was predominantly due to growth in loans receivable and
securities available for sale funded by repurchase agreements and borrowed
funds. This current year asset increase compares to a $23.6 million, or
4.1% asset increase during fiscal year 1997.
Loan Portfolio. Overall loan growth during fiscal year 1998 was comparable
to fiscal year 1997, however, most of the growth occurred in the consumer
loan portfolio during the last month of the current fiscal year. The
increase in net loans receivable was $21.8 million for the current year
compared to an increase of $21.9 million during prior the year. Net loans
receivable totaled $482.5 million at June 30, 1998 compared to $460.7
million at June 30, 1997, an increase of 4.7%. The largest area of growth
was $17.1 million in gross consumer loans where $15.9 million was lent to
customers in June 1998 to fund their stock subscriptions in an initial
public offering by a local financial institution converting from a mutual to
stock form of ownership. Management anticipates that most of this growth in
the consumer loan portfolio will be short-term due to the nature of the
stock subscription loans. Portfolio loan originations during the current
year totaled $138.9 million compared to $118.9 million for the prior year
for an increase of $20.0 million, including the $15.9 million in stock
subscription loans mentioned above and loan refinances due to the low
interest rate environment. Loan repayments also increased from $97.8
million for the year ended June 30, 1997 to $105.6 million for the current
year, primarily due to refinances. All mortgage loans originated by First
Federal 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. Mortgage loans secured by one-to-four family
residences continued to be the largest component of the loan portfolio,
representing 71.7% of the gross loan portfolio at June 30, 1998 compared to
73.6% at June 30, 1997. Gross consumer loans made up 14.5% of First
Federal's loan portfolio at June 30, 1998 compared to 11.6% at June 30,
1997.
First Federal has historically been a portfolio lender, however, during the
current year management put in place a secondary market mortgage lending
operation designed to originate and sell qualifying loans to the Federal
National Mortgage Association (FNMA). Currently, First Federal only sells
fixed-rate loans to FNMA. First Federal sold 66 loans totaling $5.0 million
during the last half of the current year resulting in a pre-tax gain of
$134,000. Management anticipates increased activity in secondary market
mortgage lending as long as market conditions dictate it to be profitable.
-----------------------------------
| Photo of Lori Taylor, Dennis Sell |
-----------------------------------
To meet the competitive challenge of more mortgage lenders in our market,
we expanded our loan operation by entering the secondary market.
By originating loans eligible for sale, we are able to offer our customers the
most comprehensive loan solutions. Since
we continue to service these loans, we are also enhancing income.
Securities Portfolio. Funds not utilized in lending programs or for
operations are invested in securities available for sale or held in
interest-bearing deposits. Securities available for sale increased $28.8
million, or 25.7%, and totaled $140.8 million at June 30, 1998 compared to
$112.0 million at June 30, 1997. The increase over the prior year primarily
consisted of increases in tax-exempt securities, federal agency obligations
and mortgage-backed securities, funded by additional repurchase agreements
and borrowed funds.
The securities portfolio consists largely of fixed and adjustable rate
mortgage-backed securities, all of which are underwritten to the standards
of and guaranteed by the government-sponsored agencies of FNMA, the Federal
Home Loan Mortgage Corporation (FHLMC) and the Government National Mortgage
Association (GNMA). These securities differ from traditional debt
securities in that they have uncertain maturity dates and are priced based
on estimated prepayment rates on the underlying mortgages.
Other Assets. Other assets increased $1.0 million over the prior year and
totaled $1.9 million at June 30, 1998 due to the Bank's investment in a real
estate joint venture where condominium units are being constructed for
future sale. As of June 30, 1998, no condominiums have been completed or
sold and there has been no effect on the Company's consolidated statement of
operations. The Bank accounts for this investment under the equity method
of accounting.
Deposits. Deposits declined $6.2 million, or 1.4%, and totaled $444.0
million at June 30, 1998 compared to $450.2 million at June 30, 1997. Most
of the current year decline occurred in June 1998 as a result of customers
funding their stock subscriptions in the initial public offering by a local
financial institution, mentioned above. The average balance of deposits
only declined $1.0 million and averaged $450.8 million for the current year.
In order to be competitive in obtaining funds and to respond to changes in
consumer demand, First Federal introduced a new money market product in
November 1997 for customers who are generally interest rate conscious and
want to keep their funds liquid. At June 30, 1998, this new money market
product had a balance of $11.5 million and a weighted average rate of 4.27%.
Securities Sold Under Agreements to Repurchase. Short- and long-term
securities sold under agreements to repurchase (repurchase agreements)
increased $32.1 million and totaled $64.4 million at June 30, 1998 compared
to $32.3 million at June 30, 1997. Funds provided by these repurchase
agreements were primarily used to fund loan growth and to purchase
securities, enabling the Company to leverage its excess capital.
Borrowed Funds. Borrowed funds increased $6.5 million and totaled $34.0
million at June 30, 1998 compared to $27.5 million at June 30, 1997.
Borrowed funds are short-term and consist of advances from the Federal Home
Loan Bank of Cincinnati. Such borrowings are generally used for liquidity
purposes and other earning asset growth not funded by core deposits.
Borrowed funds are managed within the Company's guidelines for
asset/liability management, profitability and overall growth objectives.
Other Liabilities. Other payables and accrued expenses increased $17.7
million over the prior year and totaled $22.5 million at June 30, 1998. The
increase was primarily the result of securities purchases recorded on the
trade date in June 1998 that did not settle until July 1998.
Stockholders' Equity. Stockholders' equity increased $2.0 million, or 2.5%,
and totaled $84.2 million at June 30, 1998 compared to $82.2 million at June
30, 1997. This increase was mainly attributable to net income for the year
totaling $7.7 million and other increases totaling $2.4 million consisting
of increased unrealized gains 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. Stock
repurchases and dividends paid to shareholders totaled $5.2 million and $2.9
million, respectively, partially offset the aforementioned increases.
Tangible book value per share totaled $20.98 and $19.83 per share,
respectively, at June 30, 1998 and 1997. At June 30, 1998, the ratio of
stockholders' equity to total assets was 12.9% compared to 13.7% at June 30,
1997.
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 consist primarily of
loans receivable and securities, whereas interest-bearing liabilities
consist 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 1.15:1 compared to 1.17:1 during the
prior year. Net interest income is affected by both changes in the level of
interest rates and changes in the amount and composition of interest-earning
assets and interest-bearing liabilities. Results of operations are also
dependent upon, among other things, the provision for loan losses, non-
interest income, non-interest expense and federal income taxes.
---------------------------------------------------
| Photo of |
| Kathy Sherman, Shary Watson, Rhonda Hilderhoff, |
| Adriane Morgan, Sheri McConnell, Aaron Frank |
| Joni Fiorpiselli, Ann Martin, Jennifer Baillie |
---------------------------------------------------
Building customer relationships is our primary focus.
Our ongoing commitment to this is evidenced by multiple training programs
this year to assist our employees sharpen their skills
and expand valuable relationships.
Comparison of Years Ended June 30, 1998 and 1997
General. Net income for the year ended June 30, 1998 totaled $7.7 million,
an increase of $2.4 million from net income of $5.3 million for the year
ended June 30, 1997. The increase over the prior year was largely
attributable to the one-time SAIF special assessment of $2.0 million, net of
taxes, recorded in the prior fiscal year. Basic and diluted earnings per
share for the year ended June 30, 1998 totaled $2.06 per share and $1.98 per
share, respectively, compared to $1.23 per share and $1.19 per share,
respectively, for the year ended June 30, 1997.
Net Interest Income. Net interest income increased $346,000, or 1.6%, and
totaled $22.4 million for the year ended June 30, 1998 compared to $22.1
million for the year ended June 30, 1997. The net interest margin for the
years ended June 30, 1998 and 1997 was 3.81% and 3.89%, respectively.
Although net interest income increased over the prior year, the net interest
margin dropped 8 basis points due mainly to a higher average outstanding
balance of repurchase agreements and borrowings during the current year that
were used to fund the growth in the loan and securities portfolios. These
sources of funds tend to have a higher cost than core deposits. Refer to
"Changes in Financial Condition - General" above.
------------------------------------
| Photo of |
| Don Creed, Judy Schenker. |
| Ann Massullo-Sabella, Dick Davis |
------------------------------------
"Find It!"
Our goal is to provide one-stop shopping for financial services,
and in September 1997 we made our first move toward that goal by joining forces
with David B. Roberts Real Estate, a full service real estate brokerage firm.
Through our affiliation we are able to offer both residential and commercial
real estate brokerage services with a staff of 39 sales professionals
operating from offices located in Poland, Canfield and Liberty.
For real estate, banking, and insurance,
"Find, Fund, and Insure it" through affiliates of FFY Financial.
Interest income from loans increased $1.4 million, or 3.6%, and totaled
$39.8 million for the year ended June 30, 1998 compared to $38.4 million for
the year ended June 30, 1997. This increase was the result of an increase of
$11.2 million in the average balance of loans outstanding and a 9 basis
point increase in the average yield on loans, from 8.50% to 8.59%, despite a
relatively flat yield curve throughout the year. The average yield on loans
increased due to growth in the consumer loan portfolio, primarily home
equity loans and short-term notes, which tend to have higher interest rates
than traditional mortgage loans.
Interest income from securities increased $1.0 million, or 16.3%, and
totaled $7.6 million for the year ended June 30, 1998 compared to $6.6
million for the year ended June 30, 1997. This increase was the result of a
$22.1 million increase in the average balance of securities. The increase
in the average balance of securities was partially offset by a 10 basis
point decline in the average yield on securities, from 6.51% to 6.41%. The
decline in the weighted average yield was largely the result of a decline in
the yield on mortgage-backed securities caused by high loan prepayments over
the last six months of the current year, primarily loan refinances due to
the low interest rate environment.
Interest expense increased $1.8 million, or 7.3%, and totaled $25.6 million
for the year ended June 30, 1998 compared to $23.8 million for the year
ended June 30, 1997. Interest expense increased due to more repurchase
agreements and borrowings partially offset by a decline in interest on
deposit accounts. Interest expense on short- and long-term repurchase
agreements increased $389,000 and $1.5 million, respectively, mainly due to
volume to fund the growth in securities and loans. Interest expense on
borrowed funds increased $280,000, primarily due to volume. Interest
expense on deposits declined $417,000, or 1.9%, as a result of a decrease in
the average balance of interest-bearing deposits totaling $3.3 million from
$450.2 million at June 30, 1997 to $446.9 million at June 30, 1998 and a 6
basis point decrease in the average cost on deposits from 4.82% to 4.76%.
Provision for Loan Losses. The provision for loan losses declined $122,000
from $688,000 for the year ended June 30, 1997 and totaled $566,000 for the
year ended June 30, 1998. This decline reflected management's evaluation of
the underlying credit risk of the Bank's loan portfolio to provide for
an adequate level of allowance for loan losses. The allowance for loan
losses totaled 82.4% of non-performing assets at June 30, 1998, up from
74.2% and 73.6% at June 30, 1997 and 1996, respectively. Future additions
to the allowance for loan losses will be dependent on a number of factors
including the performance of the Bank's loan portfolio, the economy, changes
in interest rates and the effect of such changes on real estate values,
inflation and the view of regulatory authorities toward adequate reserve
levels. Management believes that the allowance for loan losses is adequate
at June 30, 1998.
Non-Interest Income. Total non-interest income increased $1.1 million over
the prior year and totaled $1.8 million for the year ended June 30, 1998.
Service charges totaled $700,000 for the year ended June 30, 1998, an
increase of $137,000, or 24.3% compared to the year ended June 30, 1997 due
to increases in fees associated with NOW accounts, automated teller machines
and debit cards. Sales of securities available for sale resulted in a
$246,000 gain for the year ended June 30, 1998 compared to a $320,000 loss
for the year ended June 30, 1997. The prior year loss was the result of
securities sold to fund a stock repurchase program (tender offer) in late
1996. Other non-interest income increased $443,000 over the prior year and
totaled $818,000 for the year ended June 30, 1998, primarily reflecting the
activities of FFY Holdings, Inc., which include real estate brokerage
services and insurance sales through its two respective affiliations. Also
contributing to the current year increase was a gain on sale of loans from
First Federal's secondary market mortgage operation which began in January
1998.
Non-Interest Expense. Non-interest expense declined $2.5 million, or 17.6%
from the prior year and totaled $11.8 million for the year ended June 30,
1998. This decline was primarily due to prior year expenses that include
the one-time SAIF assessment of $3.0 million. Partially offsetting the SAIF
assessment were expenses related to the activities of FFY Holding's real
estate and insurance affiliates and increased professional services at the
Bank. The Company's efficiency ratio totaled 49.1% for the year ended June
30, 1998 compared to 62.0% (or 48.9% without the affect of the SAIF
assessment) for the year ended June 30, 1997.
Federal Income Taxes. Federal income taxes increased $1.7 million over the
prior year and totaled $4.1 million for the year ended June 30, 1998. The
increase in federal income taxes was due to the increase in net income
before tax resulting from the SAIF assessment recorded in the prior year and
the difference in the gain/loss on sale of securities.
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. Basic earnings per
share for the year ended June 30, 1997 totaled $1.23 per share, a decline of
$0.20 per share from basic earnings per share of $1.43 for the year ended
June 30, 1996. Diluted earnings per share for the year ended June 30, 1997
totaled $1.19 per share, a decline of $0.18 per share from diluted earnings
per share of $1.37 for the year ended June 30, 1996. These declines were
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. The net interest margin was 3.89% for fiscal
year 1997 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 previous 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.
--------------------------------------------------------------
| Photo of |
| Peter Noll, Marilyn Burros, Dan Kopp, Susan Thompson, |
| Robin Stock, Eleanor Hardy, Karen Franczkowski, |
| Teresa Norris David Gebhardt, Maryann Nanosky, Mark Taylor |
--------------------------------------------------------------
Expert in customer service and specialists
in consumer lending, our personal bankers are able to
concentrate more fully on those areas thanks to a
realignment of responsibilities this past March.
Customers visiting our branches
can expect a full complement of banking services
in a professional environment.
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 previous 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 previous
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 interest-bearing deposits
totaling $6.7 million from $456.9 million at June 30, 1996 to $450.2 million
at June 30, 1997 and a decrease of 1 basis point in the average cost on
deposits from 4.83% to 4.82%. 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 year ended June 30, 1996 and totaled $688,000
for the year ended June 30, 1997. The increase over fiscal year 1996
principally reflects the performance of the Bank's indirect auto loan
portfolio. During fiscal year 1997, 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. Management
believes that the allowance for loan losses was 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 fiscal year 1996 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 year ended June 30, 1997 totaled $320,000
compared to a gain of $30,000 for the previous year. The loss during fiscal
year 1997 was primarily the result of securities sold to fund the tender
offer completed in December 1996. 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 year ended June 30, 1996 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
previous year. Salaries and employee benefits declined $379,000, or 6.1%
from the previous 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 fiscal year
1996. 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 in the first quarter of fiscal year
1997 indicated that the Bank's retirement expense was significantly higher
than financial institution industry averages. This was primarily due to a
required accounting change which 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 implementation of a 401(k) plan,
termination of the existing defined benefit pension plan and, subject to
approval by the Internal Revenue Service (IRS), restructuring of the ESOP
loan. A 401(k) plan was adopted January 1, 1997 and the pension plan
termination was completed during fiscal year 1998, resulting in retirement
cost savings of approximately $130,000. To date, no change has been made to
the ESOP loan and the IRS has advised the Company that it is currently
reviewing its procedures regarding such issues.
Federal Income Taxes. Federal income taxes decreased $1.0 million from the
previous year and totaled $2.4 million for the year ended June 30, 1997.
The decline in federal income taxes was primarily due to decreased net
income before taxes, mainly the result of the one-time SAIF assessment.
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
(Dollars in Thousands)
<TABLE>
<CAPTION>
Years ended June 30,
--------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ----------------------------- -----------------------------
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) $463,118 39,785 8.59% $451,872 38,417 8.50% $418,370 35,664 8.52%
Securities available for sale,
net (2)(3) 124,764 7,916 6.41% 102,661 6,708 6.51% 124,593 7,493 6.00%
FHLB Stock 4,284 312 7.28% 3,935 279 7.09% 3,675 258 7.02%
Other 5,556 287 5.17% 13,356 676 5.06% 9,054 347 3.83%
------------------- ------------------- -------------------
Total interest-earning assets(2) 597,722 48,300 8.10% 571,824 46,080 8.05% 555,692 43,762 7.87%
------ ------ ------
Noninterest-earning assets 20,942 19,764 17,560
-------- -------- --------
Total assets $618,664 $591,588 $573,252
======== ======== ========
Interest-Bearing Liabilities:
Demand and NOW deposits $ 54,962 1,399 2.55% $ 53,259 1,355 2.54% $ 56,047 1,433 2.56%
Savings deposits 100,125 2,683 2.68% 110,177 3,302 3.00% 115,467 3,472 3.01%
Certificate accounts 291,841 17,200 5.89% 286,796 17,042 5.94% 285,354 17,157 6.01%
Short-term repurchase agreements 15,241 872 5.72% 7,916 483 6.10% 1,006 42 4.17%
Long-term repurchase agreements 34,241 2,043 5.97% 9,077 559 6.16% - - -
Short-term borrowings 24,004 1,362 5.67% 19,619 1,082 5.52% 496 29 5.85%
------------------- ------------------- -------------------
Total interest-bearing
liabilities 520,414 25,559 4.91% 486,844 23,823 4.89% 458,370 22,133 4.83%
------ ------ ------
Noninterest-bearing liabilities (4) 14,935 11,807 10,050
-------- -------- --------
Total liabilities 535,349 498,651 468,420
Stockholders' equity 83,315 92,937 104,832
-------- -------- --------
Total liabilities and equity $618,664 $591,588 $573,252
======== ======== ========
Net interest income 22,741 22,257 21,629
Less fully taxable equivalent
adjustment (294) (155) (46)
------ ------ ------
Net interest income per statement
of income 22,447 22,102 21,583
====== ====== ======
Net interest rate spread 3.19% 3.16% 3.04%
===== ===== =====
Net earning assets $ 77,308 $ 84,980 $ 97,322
======== ======== ========
Net yield on average
interest-earning assets (2) 3.81% 3.89% 3.89%
===== ===== =====
Average interest-earning assets
to average interest-bearing
liabilities 1.15x 1.17x 1.21x
===== ===== =====
- --------------------
<F1> Calculated net of deferred loan fees, loan discounts, loans in process
and loss reserves.
<F2> Yield is calculated without consideration of the unrealized gain
(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%.
<F4> Includes noninterest-bearing checking accounts.
</TABLE>
The following table 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 (changes in volume multiplied by old
rate) and (ii) changes in rate (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 due to rate.
Rate/Volume Analysis
(Dollars in Thousands)
<TABLE>
<CAPTION>
Years ended June 30,
----------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
--------------------------------- ---------------------------------
Increase (Decrease) Total Increase (Decrease) Total
Due to Increase Due to Increase
Volume Rate (Decrease) Volume Rate (Decrease)
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 960 408 1,368 2,837 (84) 2,753
Securities (1) 1,313 (105) 1,208 (1,385) 600 (785)
FHLB stock 26 7 33 18 3 21
Other (404) 15 (389) 197 132 329
------------------------------------------------------------------
Total interest-earning assets $1,895 325 2,220 1,667 651 2,318
==================================================================
Interest-bearing liabilities:
Demand and NOW deposits $ 44 - 44 (30) (48) (78)
Savings deposits (285) (334) (619) (158) (12) (170)
Certificate accounts 301 (143) 158 86 (201) (115)
Short-term repurchase agreements 421 (32) 389 414 27 441
Long-term repurchase agreements 1,502 (18) 1,484 559 - 559
Short-term borrowings 250 30 280 1,055 (2) 1,053
------------------------------------------------------------------
Total interest-bearing liabilities $2,233 (497) 1,736 1,926 (236) 1,690
==================================================================
Net interest income $ 484 628
====== ======
- --------------------
<F1> Presented on a fully taxable equivalent basis.
</TABLE>
Asset/Liability Management
Asset/liability management is the measurement and analysis of the Company's
exposure to changes in the interest rate environment. Management analyzes
the effects of interest rate changes on net interest income over specified
periods of time by projecting the Company's mix of interest-earning assets
and interest-bearing liabilities in varied interest rate environments. The
Company is also subject to interest rate risk to the extent its liabilities
reprice at different times than its assets. The Company manages this risk
on a continuing basis through the use of a number of strategies as an
ongoing part of its business plan. The objective of the Company's
asset/liability management is to maintain consistent growth in net interest
income within the Company's policy guidelines. Management considers
interest rate risk to be the Company's most significant market risk.
The Company employs various measurement techniques to identify and manage
its exposure to interest rate risk. Income simulation techniques are used
to determine the Company's sensitivity to changes in interest rates, while
gap analysis is used to determine the repricing characteristics of interest-
earning assets and interest-bearing liabilities. The models are based on
actual cash flows and repricing characteristics for on and off balance sheet
instruments and incorporate market-based assumptions regarding the impact of
changing interest rates on certain assets and liabilities. Actual results
will differ from simulated results due to timing, magnitude and frequency of
interest rate changes. Actual results may also differ due to changes in
market conditions and management strategies.
The simulation modeling employed by the Company measures changes in net
interest income over the next 12- and 24-month periods resulting from
hypothetical rising and declining interest rates. Key assumptions used in
this model include (i) balance sheet growth, (ii) reinvestment of security
and mortgage cash flows, (iii) loan prepayment speeds, (iv) reinvestment of
certificate of deposit maturities and (v) deposit pricing strategies. As of
June 30, 1998, the Company's simulation modeling indicated that with a 200
basis point (bp) increase in interest rates, the Company's net interest
income would be 2.15 percent and 1.18 percent less than if rates remained
constant over the next 12- and 24-month periods, respectively. As of the
same date and a 200 bp decrease in interest rates, the Company's net
interest income would be 0.01 percent and 11.54 percent less than if rates
remained constant over the next 12- and 24-month periods, respectively.
<TABLE>
<CAPTION>
Gap Analysis
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Six Months One Year Three Years
Within to through through Over
Six Months One Year Three Years Five Years Five Years Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total interest-earning assets (1) $119,650 85,885 182,266 86,555 163,989 638,345
Total interest-bearing liabilities 169,819 105,143 195,244 72,185 - 542,391
-------------------------------------------------------------------------
Periodic gap $(50,169) (19,258) (12,978) 14,370 163,989 95,954
Cumulative gap $(50,169) (69,427) (82,405) (68,035) 95,954
============================================================
Cumulative gap as a % of assets at June 30, 1998 (7.7%) (10.7%) (12.6%) (10.4%) 14.7%
============================================================
Cumulative gap as a % of assets at June 30, 1997 (7.9%)
=========
Cumulative gap as a % of assets at June 30, 1996 (16.5%)
=========
- --------------------
<F1> Adjustable rate loans are shown at repricing dates and securities
available for sale are shown at amortized cost for gap analysis
purposes.
</TABLE>
Gap analysis measures the difference between the amount of interest-earning
assets maturing or repricing within a specified time period and the amount
of interest-bearing liabilities maturing or repricing within that same time
period. A negative gap means the amount of interest-bearing liabilities
exceeds the amount of interest-earning assets maturing or repricing in a
given period and a positive gap means the amount of interest-earning assets
exceeds the amount of interest-bearing liabilities maturing or repricing in
a given period. The table above sets forth the repricing dates of the
Company's interest-earning assets and interest-bearing liabilities at June
30, 1998 and the interest rate sensitivity "gap" percentages at the dates
indicated. Assets and liabilities are included in the table based on their
maturities or period of repricing subject to the assumptions that follow.
Management has anticipated prepayments for mortgage-backed securities and
mortgage and consumer loans according to standard industry prepayment
assumptions in effect at June 30, 1998. 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 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) an 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.
The Bank measures the effect of interest rate changes on its net portfolio
value (NPV), which is the difference between the market value of the Bank's
assets and liabilities, under different interest rate scenarios. Changes in
NPV are measured using interest rate shocks rather than changes in interest
rates over a period of time. At June 30, 1998, the Bank's change in NPV,
using interest rate shocks ranging from a 400bp rise in rates to a 400bp
decline in rates, was within limits established by the board of directors.
A significant part of First Federal's asset/liability management is focusing
on originating 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,
ARM originations totaled 37.2% and 28.4% of total originations in fiscal
years 1998 and 1997, respectively, compared to 13.2% of total originations
in fiscal year 1996. Largely contributing to the increase in ARM
originations over the past two fiscal years was the introduction of a new
7/1-year ARM in 1996. This new product, which is fixed for seven years and
adjusts every year thereafter, accounted for 56.6% of total ARM originations
during the current year compared to 35.4% of total ARM originations during
the year ended June 30, 1997. At June 30, 1998, loans with an adjustable
rate feature totaled $160.4 million, or 32.5% of the gross loan portfolio
compared to $110.6 million, or 23.3% of the gross loan portfolio at June 30,
1997.
---------------------
| Photo of |
| Daniel W. Landers |
---------------------
"Insure It!"
As consumers become increasingly pressed for time, the convenience of
multiple financial services in one location is even more important.
In April 1998, we became a founding partner in
Daniel W. Landers Insurance Agency which offers property and casualty insurance
to individuals and commercial enterprises. The office is
conveniently located adjacent to our home office.
For real estate, banking and insurance,
"Find, Fund, and Insure it" through affiliates of FFY Financial.
In order to consolidate its customer base and reduce interest rate risk
while maintaining adequate returns, First Federal 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 $30.6 million, or 8.9% of
gross loans at June 30, 1993 to $67.2 million, or 13.6% of gross loans at
June 30, 1998. Furthermore, First Federal began offering a variable-rate
home-equity line of credit product during fiscal year 1994 which had grown
to an outstanding balance of $4.6 million at June 30, 1998. Refer to
"Changes in Financial Condition - Loan Portfolio" on page 8 regarding the
increase in the consumer loan portfolio over the past year. Management
intends to continue to expand the Bank's consumer loan portfolio over the
next several years.
Over the past two fiscal years, the Company increased its investments in
adjustable-rate securities in an attempt to reduce interest rate risk. At
June 30, 1998, the market value of adjustable-rate mortgage-backed
securities totaled $29.2 million, or 20.7% 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.
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. 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.
Liquidity and Cash Flows
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.
New federal regulations, which became effective November 24, 1997, require
the Bank to maintain minimum levels of liquid assets in each calendar
quarter of not less than 4% of either (i) its liquidity base at the end of
the preceding quarter, or (ii) the average daily balance of its liquidity
base during the preceding quarter. The new federal regulations decreased
the minimum liquidity requirement from 5%, removed the 1% short-term
liquidity requirement, expanded categories of liquid assets and reduced the
liquidity base. The Bank's liquidity substantially exceeded the applicable
liquidity requirement at June 30, 1998. Simply meeting the liquidity
requirement does not automatically mean the Bank has sufficient liquidity
for a safe and sound operation. The new final rule includes a separate
requirement that each thrift must maintain sufficient liquidity to ensure
its safe and sound operation. Thus, adequate liquidity may vary depending
on the Bank's overall asset/liability structure, market conditions, the
activities of competitors, and the requirements of its own deposit and loan
customers. Management believes the Bank's liquidity is sufficient.
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 access to
advances from the Federal Home Loan Bank (FHLB).
The primary investing activities of the Bank and/or Company are originating
loans and purchasing securities. Increases in the Bank's loans receivable
used $21.6 million, $22.1 million and $36.6 million of funds during fiscal
years 1998, 1997 and 1996, respectively. The growth in the Company's
securities portfolio used $11.5 million and $1.4 million during fiscal years
1998 and 1997, respectively, and the decline in the securities portfolio
provided $33.0 million during fiscal year 1996. During periods of general
interest rate declines, 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,
$6.1 million and $5.6 million during fiscal years 1998, 1997 and 1996,
respectively. Repurchase agreements provided $32.1 million, $25.7 million
and $6.6 million during fiscal years 1998, 1997 and 1996, respectively.
Borrowed funds provided $6.5 million, $26.3 million and $1.2 million during
fiscal years 1998, 1997 and 1996, respectively.
Capital Resources
Total stockholders' equity increased $2.0 million during the year ended June
30, 1998. Components of the increase largely consisted of current year
earnings partially offset by share repurchases of the Holding Company's
stock and dividends paid. Total stockholders' equity declined $19.7 million
during the year ended June 30, 1997 primarily due to share repurchases and
dividends paid partially offset by net income and other smaller increases to
stockholders' equity. Share repurchases during fiscal year 1997 included a
Modified Dutch Auction Tender Offer in December 1996 whereby the Holding
Company purchased 808,000 shares at $26.00 per share. See "Changes in
Financial Condition - Stockholders' Equity" and "Consolidated Statements of
Changes in Stockholders' Equity" contained in this Annual Report for a
detailed analysis of stockholders' equity for fiscal years 1998, 1997 and
1996.
Federal regulations require savings institutions to maintain certain minimum
levels of regulatory capital. Regulations require tangible capital divided
by total tangible assets to be at least 1.5%; core capital divided by total
adjusted tangible assets to be at least 3.0%; and total capital divided by
risk-weighted assets must be at least 8.0%. The regulations define
tangible, core and total capital as well as tangible assets, adjusted
tangible assets and risk-weighted assets. At June 30, 1998, the Bank's
tangible, core and total capital ratios were 8.5%, 8.5% and 14.2%,
respectively, each in excess of the minimum levels required by regulation
(see Note 8 of the Notes to Consolidated Financial Statements contained in
this Annual Report.).
Dividends paid by the Holding Company are substantially provided from
dividends from the Bank, which, in certain circumstances, must be approved
by the Office of Thrift Supervision (OTS). During the year ended June 30,
1998, the Bank received OTS approval for cash dividends to the Holding
Company totaling $9.9 million of which $4.9 million was paid during fiscal
year 1998 and $5.0 million was paid in July 1998. This compares to fiscal
year 1997 dividends totaling $4.5 million in cash and fiscal year 1996
dividends totaling $4.0 million, comprised of $3.1 million in securities and
related accrued interest and $900,000 in cash.
---------------------------------------------------
| Photo of |
| Cheryl Warfield, Janice Elias, Michelle Barnett |
| Jill Mayfield, Dominic Mancini, Debbie Seinkner |
| Todd Humphrey |
---------------------------------------------------
Employees from all areas of the institution dedicated their time and energy
in converting a new, year 2000 compliant computer system in April.
The new system provides efficient, cost effective solutions to our information
system needs and allows us to offer a wider range of products to our customers.
Year 2000
First Federal is highly dependent on computers and computer programs. The
operations of First Federal are critical to the accuracy of computers and
computer programs. Year 2000 presents the possibility that First Federal or
its customers, vendors or correspondent banks may experience processing
difficulties or may be subject to errors unless systems and programs are
reconfigured to handle the change to the Year 2000. The Company has been
addressing and continues to address the Year 2000 issues. The Company's
Year 2000 problem resolution process includes such phases as awareness of
the problem, assessment of its complexity, renovation, validation and
implementation. The resolution process includes contacting third party
vendors who are required to provide evidence of their efforts to become Year
2000 compliant. The Company has evaluated and will continue to evaluate
each vendor's Year 2000 compliance progress and, if not satisfied, will
consider other vendors or other means for obtaining such products or
services. Many vendors have provided the Company with a certification or
commitment letter noting they are or will be Year 2000 compliant within the
Company's specified time frame. The project is headed by First Federal's
Vice President of Operations and consists of members from the Bank's
internal audit, information systems and facilities departments.
A significant part of Year 2000 compliance was converting the Bank's
financial computer system to a new comprehensive software system to run the
core banking operation. The conversion was successfully completed on April
27, 1998. In addition to being Year 2000 compliant, this new system allows
First Federal to enhance its current services. It was determined that the
Bank's previous financial computer system would be too costly to make Year
2000 compliant and would hinder other program development. The capital
expenditure for the Bank's new software system was approximately $429,000.
Management believes that the conversion to the new banking system, vendor
delivery of compliant systems and modifications to other existing systems
will be resolved on a timely basis. Management does not anticipate that the
Company's additional efforts regarding Year 2000 compliance will have a
material impact on the Company's financial condition, results of operations,
liquidity and capital resources, although no assurance can be given in this
regard.
The ability of First Federal's loan customers to repay their obligations
could be affected by business interruptions caused by Year 2000 problems.
The potential impact to First Federal of such problems has not been
determined, but could be significant in that customers may be unable to
repay their obligations.
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.
Market Prices and Dividends Declared
The common stock of FFY Financial Corp. trades on The Nasdaq Stock Market
under the symbol "FFYF". As of July 31, 1998, there were 3,998,435 shares
outstanding held by approximately 1,397 shareholders 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, 1998 and 1997.
<TABLE>
<CAPTION>
June 30, 1998: High Low Dividends
---------------------------------------------
<S> <C> <C> <C>
First quarter 28 7/8 25 1/2 $0.20
Second quarter 33 1/8 27 5/8 $0.20
Third quarter 36 - 31 7/8 $0.20
Fourth quarter 35 1/4 32 3/8 $0.20
<CAPTION>
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
</TABLE>
<TABLE>
<CAPTION>
Quarterly Earnings Summary
- --------------------------------
FFY Financial Corp. and Subsidiaries
(Dollars in Thousands Except Per Share Data)
Quarter ended fiscal 1998 September 30 December 31 March 31 June 30
------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $11,958 12,004 12,074 11,969
Total interest expense 6,475 6,351 6,317 6,416
----------------------------------------------
Net interest income 5,483 5,653 5,757 5,553
Provision for loan losses 142 184 115 124
----------------------------------------------
Net interest income after provision for loan losses 5,341 5,469 5,642 5,429
Service charges 170 183 162 186
Gain on sale of securities available for sale 48 51 54 93
Other non-interest income 110 145 294 269
Non-interest expense (2,761) (2,920) (3,056) (3,033)
----------------------------------------------
Income before federal income taxes 2,908 2,928 3,096 2,944
Federal income tax expense 1,005 988 1,128 1,026
----------------------------------------------
Net income $ 1,903 1,940 1,968 1,918
==============================================
Basic earnings per share $ 0.50 0.51 0.53 0.51
==============================================
Diluted earnings per share $ 0.49 0.50 0.51 0.50
==============================================
<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 5,596 5,957 6,051 6,219
----------------------------------------------
Net interest income 5,613 5,631 5,367 5,490
Provision for loan losses 155 198 208 126
----------------------------------------------
Net interest income after provision for loan losses 5,458 5,433 5,159 5,364
Service charges 129 140 135 159
Gain (loss) on sale of securities available for sale (543) 173 24 25
Other non-interest income 90 79 97 109
Non-interest expense (5,923) (2,984) (2,617) (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
==============================================
Basic earnings (loss) per share $ (0.10) 0.40 0.48 0.52
==============================================
Diluted earnings (loss) per share $ (0.10) 0.39 0.47 0.50
==============================================
</TABLE>
- --------------------
Note: Certain amounts in the 1998 and 1997 quarterly earnings data have
been reclassified to conform with the presentation of the Selected
Consolidated Financial Information included in this Annual Report.
FFY Financial Corp. and Subsidiaries
Consolidated Financial Statements
June 30, 1998 and 1997
(With Independent Auditors' Report Thereon)
FFY FINANCIAL CORP. AND SUBSIDIARIES
Table of Contents
-----------------
Consolidated Statements of Financial Condition
June 30, 1998 and 1997
Consolidated Statements of Income
Years ended June 30, 1998, 1997, and 1996
Consolidated Statements of Changes in Stockholders' Equity
Years ended June 30, 1998, 1997, and 1996
Consolidated Statements of Cash Flows
Years ended June 30, 1998, 1997, and 1996
Notes to Consolidated Financial Statements
June 30, 1998, 1997, and 1996
Independent Auditors' Report
FFY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
June 30, 1998 and 1997
<TABLE>
<CAPTION>
Assets 1998 1997
------ ---- ----
<S> <C> <C>
Cash $ 4,362,127 3,631,798
Interest-bearing deposits 5,713,055 6,215,957
Short-term investments - 160,000
---------------------------
Total cash and cash equivalents 10,075,182 10,007,755
Securities available for sale 140,793,201 112,036,159
Loans receivable, net of allowance for loan losses of
$2,740,169 and $2,961,810, respectively 482,463,396 460,711,635
Interest and dividends receivable on securities 1,421,574 1,239,988
Interest receivable on loans 2,698,117 2,524,542
Federal Home Loan Bank stock, at cost 4,511,500 4,094,500
Office properties and equipment, net 7,920,660 7,797,721
Other assets 1,862,863 837,075
---------------------------
Total assets $651,746,493 599,249,375
===========================
Liabilities and Stockholders' Equity
------------------------------------
Deposits $444,017,422 450,223,793
Securities sold under agreements to repurchase
Short-term 13,088,323 7,307,248
Long-term 51,300,000 25,000,000
Borrowed funds 33,985,000 27,455,000
Advance payments by borrowers for taxes and insurance 2,621,514 2,313,090
Other payables and accrued expenses 22,518,533 4,776,028
---------------------------
Total liabilities 567,530,792 517,075,159
---------------------------
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 65,118,141 64,506,573
Retained earnings, substantially restricted 79,428,438 74,599,977
Treasury stock, at cost (2,619,010 and 2,485,160 shares,
respectively) (57,893,563) (53,387,258)
Net unrealized holding gain on securities available for sale,
net of deferred federal income tax of $419,000 and $57,000,
respectively 812,737 111,796
Common stock purchased by
Employee Stock Ownership and 401(k) Plan (3,034,562) (3,441,382)
Recognition and Retention Plans (281,790) (281,790)
---------------------------
Total stockholders' equity 84,215,701 82,174,216
===========================
Total liabilities and stockholders' equity $651,746,493 599,249,375
===========================
</TABLE>
See accompanying notes to consolidated financial statements.
FFY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest income
Loans $39,785,064 38,417,621 35,663,968
Securities available for sale 7,622,185 6,552,936 7,072,955
Securities held to maturity - - 374,084
Federal Home Loan Bank stock 312,213 278,841 257,749
Other interest-earning assets 286,969 675,843 347,498
---------------------------------------
Total interest income 48,006,431 45,925,241 43,716,254
---------------------------------------
Interest expense
Deposits 21,282,008 21,699,053 22,061,881
Securities sold under agreements to repurchase
Short-term 871,761 483,448 41,941
Long-term 2,043,340 559,167 -
Borrowed funds 1,361,933 1,082,015 29,887
---------------------------------------
Total interest expense 25,559,042 23,823,683 22,133,709
---------------------------------------
Net interest income 22,447,389 22,101,558 21,582,545
Provision for loan losses 565,521 687,642 324,870
---------------------------------------
Net interest income after provision for
loan losses 21,881,868 21,413,916 21,257,675
---------------------------------------
Noninterest income
Service charges 700,445 563,443 522,201
Gain (loss) on sale of securities available for sale 246,473 (320,290) 29,901
Other 818,058 375,217 548,082
---------------------------------------
Total noninterest income 1,764,976 618,370 1,100,184
---------------------------------------
Noninterest expense
Salaries and employee benefits 6,076,824 5,883,557 6,262,755
Net occupancy and equipment 1,805,939 1,644,858 1,676,561
Insurance and bonding 493,752 3,839,783 1,289,153
State and local taxes 1,077,154 1,085,987 1,045,661
Other 2,316,964 1,834,158 1,716,747
---------------------------------------
Total noninterest expense 11,770,633 14,288,343 11,990,877
---------------------------------------
Income before federal income taxes 11,876,211 7,743,943 10,366,982
Federal income taxes 4,147,000 2,420,000 3,465,000
---------------------------------------
Net income $ 7,729,211 5,323,943 6,901,982
=======================================
Basic earnings per share $ 2.06 1.23 1.43
=======================================
Diluted earnings per share $ 1.98 1.19 1.37
=======================================
</TABLE>
See accompanying notes to consolidated financial statements.
FFY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Common Stock
----------------------
Shares
Outstanding Amount
----------- ------
<S> <C> <C>
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 holding (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 KSOP 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 KSOP shares committed to be released - -
Change in unrealized holding gain (loss) on securities available for sale, net - -
---------------------
Balance at June 30, 1997 4,144,840 66,300
Net income - -
Dividends paid, $.775 per share - -
Treasury stock purchased (167,543) -
Stock options exercised 33,693 -
Amortization of KSOP expense - -
Tax benefit related to exercise of stock options - -
Difference between average fair value per share and cost per
share on KSOP shares committed to be released - -
Change in unrealized holding gain on securities available for sale, net - -
---------------------
Balance at June 30, 1998 4,010,990 $66,300
=====================
<CAPTION>
Net Common Stock
Unrealized Purchased By
Holding Gain ----------------------------
(Loss) on Employee
Additional Securities Stock Own- Recognition
Paid-In Retained Treasury Available for ership and and Retention
Capital Earnings Stock Sale 401(k) Plan Plans Total
- ---------- -------- -------- ------------- ----------- ------------- -----
<C> <C> <C> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
- 7,729,211 - - - - 7,729,211
- (2,900,750) - - - - (2,900,750)
- - (5,239,911) - - - (5,239,911)
(396,676) - 733,606 - - - 336,930
- - - - 406,820 - 406,820
152,987 - - - - - 152,987
855,257 - - - - - 855,257
- - - 700,941 - - 700,941
- --------------------------------------------------------------------------------------------------------
65,118,141 79,428,438 (57,893,563) 812,737 (3,034,562) (281,790) 84,215,701
========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
FFY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 7,729,211 5,323,943 6,901,982
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation 969,042 909,632 954,646
Amortization and accretion 381,801 406,691 936,630
Deferred federal income taxes 261,000 696,000 (74,000)
Net (gain) loss on sale of securities (246,473) 320,290 (29,901)
Gain on sale of loans (134,211) - -
Loans originated held for sale (4,988,080) - -
Proceeds from sales of loans originated for sale 5,077,069 - -
Provision for loan losses 565,521 687,642 324,870
Federal Home Loan Bank stock dividend (304,700) (270,400) (250,100)
(Increase) decrease in interest receivable (355,161) 393,880 194,029
Tax benefits related to employee plans 152,987 871,958 326,440
Other, net 555,641 895,238 566,563
------------------------------------------
Net cash provided by operating activities 9,663,647 10,234,874 9,851,159
------------------------------------------
Cash flows from investing activities
Proceeds from maturity of securities available for sale 16,727,605 30,000,000 56,000,000
Proceeds from sales of securities available for sale 41,929,782 44,044,024 5,350,377
Purchase of securities available for sale (99,324,173) (83,710,035) (26,867,259)
Purchase of securities held to maturity - - (4,099,233)
Purchase of Federal Home Loan Bank stock (112,300) (50,300) -
Principal receipts on securities available for sale 29,165,393 8,308,925 1,400,719
Principal receipts on securities held to maturity - - 1,227,662
Net increase in loans (21,563,866) (22,119,550) (36,575,292)
Purchase of office properties and equipment (1,136,981) (747,167) (877,912)
Investment in real estate development joint venture (766,241) - -
Other, net (6,017) 14,466 46,122
------------------------------------------
Net cash used in investing activities (35,086,798) (24,259,637) (4,394,816)
------------------------------------------
Cash flows from financing activities
Net decrease in deposits (6,138,251) (6,138,675) (5,606,561)
Net increase in securities sold under agreements to repurchase
Short-term 5,781,075 667,695 6,639,553
Long-term 26,300,000 25,000,000 -
Net increase in borrowed funds 6,530,000 26,255,000 1,200,000
Treasury stock purchases (5,239,911) (25,982,802) (11,783,245)
Dividends paid (2,900,750) (2,889,944) (2,781,473)
Proceeds from stock options exercised 336,930 555,270 1,756,010
Increase (decrease) in amounts due to bank 695,939 (1,551,024) 1,452,469
Other, net 125,546 (145,399) 195,050
------------------------------------------
Net cash provided by (used in) financing activities 25,490,578 15,770,121 (8,928,197)
------------------------------------------
Net increase (decrease) in cash and cash equivalents 67,427 1,745,358 (3,471,854)
Cash and cash equivalents at beginning of year 10,007,755 8,262,397 11,734,251
------------------------------------------
Cash and cash equivalents at end of year $ 10,075,182 10,007,755 8,262,397
==========================================
Supplemental disclosure of cash flow information
Cash payments of interest expense $ 25,095,614 23,716,934 21,986,359
Cash payments of income taxes 4,150,000 780,000 2,855,000
==========================================
Supplemental schedule of noncash investing activities
Real estate acquired through foreclosure $ 643,725 479,854 251,849
Real estate sales by loan issuance 543,500 455,400 282,000
==========================================
</TABLE>
See accompanying notes to consolidated financial statements.
FFY FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
(1) Summary of Significant Accounting Policies
------------------------------------------
(a) Principles of Consolidation
---------------------------
The consolidated financial statements of the Company include
the accounts of FFY Financial Corp. (FFY or Holding Company)
and its wholly owned subsidiaries, First Federal Savings Bank
of Youngstown (First Federal or Bank) and FFY Holdings, Inc.
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. The
preparation of the consolidated financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and the
disclosure of contingent assets and liabilities, and the
disclosure of contingent assets and liabilities at the date of
the consolidated statement of financial condition and the
reported amounts of revenues and expenses during 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.
(d) Securities
----------
Management determines the appropriate classification of
securities at the time of purchase. 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. Unrealized
holding gains and losses, net of the related tax effect, are
excluded from earnings and reported as a separate component of
stockholders' equity until realized. Gain or loss on the sale
of securities is recognized using the specific identification
method. Premiums and discounts are amortized using the
interest method over the estimated life. A decline in the fair
value of any security below cost that is deemed other than
temporary is charged to earnings resulting in the establishment
of a new cost basis for the security. Premiums and discounts
are amortized or accreted over the life of the related security
as an adjustment to yield using the interest method. Dividends
and interest income are recognized when earned.
(e) Loans and Related Fees and Costs
--------------------------------
Loans receivable originated with the intent to hold to maturity
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 more than 90 days delinquent or otherwise doubtful of
collection. Such interest ultimately collected is credited to
income in the period of recovery. Loans are returned to
accrual status when both principal and interest are current,
and the loan is determined to be performing in accordance with
the applicable loan terms.
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. The Bank is amortizing
these amounts using the interest method over the contractual
life of the related loans.
The Company currently sells loans to Federal National Mortgage
Association in the secondary market and delivers shortly after
funding. Mortgage loans held for sale are carried at the lower
of cost or market value, determined on a net aggregate basis.
Mortgage servicing rights associated with loans originated and
sold, where servicing is retained, are capitalized and included
in other assets in the statement of financial condition. The
servicing rights capitalized are amortized in proportion to and
over the period of estimated servicing income. Management
measures impairment of servicing rights based on prepayment
trends and external market factors. Any impairment is recorded
as a valuation allowance. The Company accounts for mortgage
servicing rights under Statement of Financial Accounting
Standards (SFAS) No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities. The adoption of SFAS No. 125 on January 1, 1997
did not have a material impact on the Company's financial
condition or results of operations.
(f) 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.
Management considers a loan impaired when, based on current
information and events, it is probable that the Company will be
unable to collect all amounts of principal and interest under
the original terms of the loan agreement. Significant factors
impacting management's judgment in determining when a loan is
impaired include an evaluation of compliance with repayment
program, condition of collateral, deterioration in financial
strength of borrower or any case when the expected future cash
payments may be less than the recorded amount. Accordingly,
the Company measures impaired loans based on the present value
of expected future cash flows, discounted at the loan's
effective interest rate, or at the loan's observable market
price or fair value of collateral if the loan is collateral
dependent. Management excludes large groups of smaller balance
homogeneous loans such as residential mortgages and consumer
loans which are collectively evaluated.
(g) 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. Estimated lives are 10 to 40 years for
office properties, including improvements, and 3 to 10 years
for equipment. Leasehold improvements are depreciated using
the straight-line method over the terms of the related leases.
(h) Repurchase Agreements
---------------------
The Bank enters into sales of securities under agreements to
repurchase securities of the same agency bearing the identical
contract rate and similar remaining weighted average maturities
as the original securities that result in approximately the
same market yield.
(i) 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.
(j) Earnings Per Share
------------------
In February 1997, the Financial Accounting Standards Board
(FASB) issued SFAS No. 128, Earnings Per Share. This statement
requires the presentation of basic and diluted earnings per
share which supersedes the presentation of primary and fully
diluted earnings per share under Accounting Principles Board
(APB) Opinion No. 15. The Company adopted SFAS No. 128
effective December 31, 1997 and all prior periods have been
restated to comply with SFAS No. 128. The computation of basic
and diluted earnings per share is shown in the following table.
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Basic earning per share computation:
Numerator - Net income $7,729,211 5,323,943 6,901,982
Denominator -
Weighted average common shares
outstanding 3,757,945 4,325,228 4,837,468
Basic earnings per share $ 2.06 1.23 1.43
====================================
Diluted earnings per share computation:
Numerator - Net income 7,729,211 5,323,943 6,901,982
Denominator -
Weighted average common shares
outstanding 3,757,945 4,325,228 4,837,468
Dilutive effect of stock options 139,081 138,591 204,419
------------------------------------
Weighted average common shares and
common stock equivalents 3,897,026 4,463,819 5,041,887
Diluted earnings per share $ 1.98 1.19 1.37
====================================
</TABLE>
(k) Effect of New Financial Accounting Standards
--------------------------------------------
In June 1997, the FASB issued SFAS No. 130, Reporting
Comprehensive Income. This statement establishes standards for
businesses to disclose comprehensive income and its components
in their general purpose financial statements. SFAS No. 130
requires the reporting of all items of comprehensive income in
a financial statement that is displayed with the same
prominence as other financial statements. This statement also
requires that an enterprise classify items of other
comprehensive income by their nature in a financial statement
and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid in
capital in the equity section of the statement of financial
condition. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997 and reclassification of
comparative financial statements is required for interim
periods. Implementation of SFAS No. 130 will require a revised
presentation in future financial statements but will not
otherwise affect the Company.
In June 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No.
131 requires public business enterprises to report certain
financial and descriptive information about operating segments.
This statement also establishes standards for related
disclosures about products and services, any major customers,
and geographic areas in which an enterprise operates. SFAS No.
131 is effective for financial statements for periods beginning
after December 15, 1997. Management does not believe the
implementation of SFAS No. 131 will result in the
identification of other reportable business segments.
In February 1998, the FASB issued SFAS No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits,
an Amendment of FASB Statements No. 87, 88 and 106. This
statement amends disclosure requirements with respect to
pensions and other postretirement benefits. It does not change
any of the current guidance on measurement or recognition
related to these areas. SFAS No. 132 is effective for fiscal
years beginning after December 15, 1997. Implementation of
SFAS No. 132 will require revised disclosure in future
financial statements but will not otherwise affect the Company.
In June 1998, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement
standardizes the accounting for derivative contracts, by
requiring that an entity recognize those items as assets or
liabilities in the statement of financial condition and measure
them at fair value. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. Management is currently
evaluating the effects SFAS No. 133 will have on the Company's
financial condition or results of operations.
(l) Reclassifications
-----------------
Certain amounts in the prior year consolidated financial
statements have been reclassified to conform with the current
year's 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, 1998
Federal agency obligations $ 35,049,270 234,661 (1,374) 35,282,557
Mortgage-backed securities 81,580,115 150,652 (287,033) 81,443,734
Tax-exempt securities 20,778,093 310,930 (39,747) 21,049,276
Equity securities 637,000 622,156 - 1,259,156
Other securities 1,516,986 261,674 (20,182) 1,758,478
-------------------------------------------------------
Totals $139,561,464 1,580,073 (348,336) 140,793,201
=======================================================
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
=======================================================
</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. Other securities
consist of equity investments in limited partnerships.
The amortized cost and fair values of debt securities available for
sale at June 30, 1998, 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 $ 11,620,295 11,695,474
After one year through five years 31,628,937 31,826,729
After five years through ten years 24,348,977 24,442,503
After ten years 71,326,255 71,569,339
---------------------------
$138,924,464 139,534,045
===========================
</TABLE>
The weighted average tax-equivalent annual yield of securities
available for sale at June 30, 1998 and 1997, was 6.28 percent and
6.88 percent, respectively.
Gross proceeds from sales of securities available for sale during the
years ended June 30, 1998, 1997, and 1996 totaled $41,929,782;
$44,044,024; and $5,350,377, respectively. Gross realized gains and
losses on sales of securities available for sale totaled $324,487 and
$78,014, respectively, for the year ended June 30, 1998; $133,222 and
$453,512, respectively, during the year ended June 30, 1997; and
$37,874 and $7,973, respectively, during the year ended June 30, 1996.
(3) Loans Receivable
----------------
Following is a summary of loans receivable at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
First mortgage loans
Secured by one-to-four family residences $354,202,256 349,052,874
Secured by other properties 15,658,952 16,294,053
Commercial 28,606,137 30,996,899
Construction and development loans,
primarily residential 23,998,473 23,179,215
---------------------------
422,465,818 419,523,041
Consumer and other loans
Automobile 12,161,179 16,349,407
Home equity 37,911,516 33,269,070
90-day notes 17,677,306 1,322,589
Other 4,132,170 3,886,376
---------------------------
71,882,171 54,827,442
---------------------------
494,347,989 474,350,483
Less
Undisbursed loans in process 6,556,642 7,861,460
Net deferred loan origination fees 2,587,782 2,815,578
Allowance for loan losses 2,740,169 2,961,810
---------------------------
11,884,593 13,638,848
---------------------------
$482,463,396 460,711,635
===========================
Weighted average annual yield at year-end 8.21% 8.28%
</TABLE>
Activity in the allowance for loan losses for the years ended June 30,
1998, 1997, and 1996 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $2,961,810 3,439,305 3,159,022
Provision charged to operations 565,521 687,642 324,870
Charge-offs (839,704) (1,198,867) (77,017)
Recoveries 52,542 33,730 32,430
-------------------------------------
Balance at end of year $2,740,169 2,961,810 3,439,305
=====================================
</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 1998, 1997, and
1996. At June 30, 1998 and 1997, non-accrual loans consisted
primarily of one-to-four family residences and amounted to $2,733,572
and $3,255,207, respectively. Impaired loans under SFAS No. 114 were
immaterial at June 30, 1998 and 1997.
Mortgage loans serviced for others are not included in the
accompanying consolidated statements of financial condition. The
outstanding principal balance of loans serviced for others totaled
$4,970,433 at June 30, 1998. Capitalized net mortgage servicing
rights were approximately $48,000 at June 30, 1998. The Bank did not
sell loans to outside investors prior to the fiscal year ended June
30, 1998.
In the normal course of business, the Bank extends loans to directors
and executive officers of the Company and their affiliates. All of
these loans were made on substantially the same terms as loans to
other individuals and businesses of comparable creditworthiness. The
aggregate balance of loans greater than $60,000 was $569,000 and
$467,000 at June 30, 1998 and 1997, respectively.
(4) Office Properties and Equipment
-------------------------------
Following is a summary of office properties and equipment by major
classifications as of June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land $ 1,617,581 1,662,581
Buildings 8,486,417 8,401,966
Furniture and equipment 2,662,966 2,451,774
Computer equipment and software 3,535,201 2,734,521
Automobiles 113,697 91,261
Leasehold improvements 401,822 401,822
-------------------------
16,817,684 15,743,925
Less accumulated depreciation and amortization 8,897,024 7,946,204
-------------------------
$ 7,920,660 7,797,721
=========================
</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, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
Account Type ---------------------- ----------------------
and Stated Interest Rate Amount % Amount %
------------------------ ------ --- ------ ---
<S> <C> <C> <C> <C>
NOW accounts, up to 2.50% $ 34,381,993 7.74 $ 31,235,718 6.94
Money market accounts, up
to 4.41% 28,058,912 6.32 22,822,047 5.07
Passbook accounts, 2.50 % to 3.00% 93,276,617 21.01 107,575,383 23.89
------------------------------------------------
155,717,522 35.07 161,633,148 35.90
Certificate accounts
4.00% to 4.99% 29,483,863 6.64 8,808,465 1.96
5.00% to 5.99% 141,125,055 31.78 146,339,271 32.50
6.00% to 6.99% 109,895,025 24.75 124,649,185 27.69
7.00% to 7.99% 7,795,957 1.76 8,793,724 1.95
------------------------------------------------
288,299,900 64.93 288,590,645 64.10
------------------------------------------------
$444,017,422 100.00 $450,223,793 100.00
================================================
</TABLE>
At June 30, 1998 and 1997, scheduled maturities of certificate
accounts are as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
Amount % Amount %
------ --- ------ ---
<S> <C> <C> <C> <C>
Less than 12 months $163,691,247 56.78 $132,906,239 46.05
13 to 24 months 67,829,342 23.53 78,474,344 27.19
25 to 36 months 19,414,656 6.73 44,962,940 15.58
37 to 48 months 18,091,111 6.27 11,976,052 4.15
49 to 60 months 15,967,370 5.54 19,103,375 6.62
Over 60 months 3,306,174 1.15 1,167,695 .41
------------------------------------------------
$288,299,900 100.00 $288,590,645 100.00
================================================
</TABLE>
The 1998 amounts above include callable certificate accounts totaling
$9,681,669. 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, 1998:
<TABLE>
<S> <C>
Three months or less $ 6,597,782
Over three to six months 11,476,932
Over six to twelve months 10,700,606
Over twelve months 19,775,033
-----------
$48,550,353
===========
</TABLE>
At June 30, 1998 and 1997, certificate accounts included $1,524,648
and $5,000,000, respectively, in customer deposits for which U.S.
Government obligations, federal agency obligations and/or mortgage-
backed securities with a market value, including accrued interest,
totaling $2,773,972 and $6,089,960, respectively, were pledged as
collateral. The weighted average rate of the certificate accounts was
5.45 percent and 4.85 percent, respectively, at June 30, 1998 and
1997. The certificates at June 30, 1998 for which securities are
pledged are scheduled to mature from July 1998 to April 2002. The
certificate at June 30, 1997 for which securities were pledged matured
in July 1997.
Interest expense on deposits for the years ended June 30, 1998, 1997,
and 1996 is summarized below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NOW accounts $ 636,915 620,759 577,515
Money market accounts 762,231 734,075 855,795
Passbook accounts 2,683,094 3,302,590 3,471,378
Certificate accounts 17,199,768 17,041,629 17,157,193
-----------------------------------------
$21,282,008 21,699,053 22,061,881
=========================================
</TABLE>
The weighted average interest rate on deposits was 4.63 percent and
4.81 percent at June 30, 1998 and 1997, respectively.
(6) Securities Sold Under Agreements to Repurchase
----------------------------------------------
At June 30, 1998 and 1997, securities sold under agreements to
repurchase were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Short-term
Repurchase agreements $13,088,323 7,307,248
Federal agency obligations
pledged as collateral
Book value, including accrued interest 15,376,953 8,179,608
Market value, including accrued interest 15,490,196 8,153,268
Average balance outstanding during the year 15,240,783 7,915,988
Maximum amount outstanding at any month-end 22,656,754 11,628,633
Weighted average interest rate 5.76% 5.96%
Long-term
Repurchase agreements $51,300,000 25,000,000
Mortgage-backed securities pledged as collateral
Book value, including accrued interest 56,146,814 28,553,417
Market value, including accrued interest 55,984,488 28,627,181
Average balance outstanding during the year 34,241,398 9,077,381
Maximum amount outstanding at any month-end 51,300,000 25,000,000
Weighted average interest rate 5.76% 6.10%
</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. A summary of individual long-term
repurchase agreements at June 30, 1998 with respect to maturity and
call dates is summarized in the table below. The call dates renew
every three months and are at the option of the buyer.
<TABLE>
<CAPTION>
Maturity Earliest Call 1998 1997
-------- ------------- ---- ----
<C> <C> <C> <C>
2/19/02 2/19/00 $25,000,000 25,000,000
1/16/03 1/16/01 10,000,000 --
3/19/01 3/19/99 16,300,000 --
</TABLE>
(7) Borrowed Funds
--------------
Borrowed funds at June 30, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ -------- ------ --------
<S> <C> <C> <C> <C>
Advances from the Federal Home
Loan Bank of Cincinnati
Line of credit advances $ 2,985,000 6.02% $ 2,455,000 5.80%
Repo-based advances 31,000,000 5.56% 25,000,000 5.59%
-----------------------------------------------
$33,985,000 5.60% $27,455,000 5.68%
===============================================
</TABLE>
Advances from the Federal Home Loan Bank (FHLB) of Cincinnati are
secured by a blanket mortgage collateral agreement for 150 percent of
outstanding advances, amounting to $50,977,500. The FHLB line of
credit advances have rates that are either fixed or adjust daily.
Fixed-rate line of credit advances must be repaid at the end of the
commitment term whereas adjustable-rate line of credit advances can be
repaid all or in-part daily. All the line of credit advances
outstanding at June 30, 1998 and 1997 were adjustable. The repo-based
advances have 30-day fixed-rate terms. These advances require
interest payments at maturity.
(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, 1998, the minimum regulatory capital
regulations require institutions to have tangible capital to total
tangible assets of 1.5 percent; a minimum leverage ratio of core (Tier
1) capital to total adjusted tangible assets of 3.0 percent; and a
minimum ratio of total capital (core capital and supplementary
capital) to risk weighted assets of 8.0 percent, of which 4.0 percent
must be core capital.
Under the prompt corrective action regulations, the OTS is required to
take certain supervisory actions (and may take additional
discretionary actions) with respect to an undercapitalized
institution. Such actions could have a direct material effect on an
institution's financial statements. The regulations establish a
framework for the classification of savings institutions into five
categories: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized. Generally, an institution is considered well
capitalized if it has a core (Tier 1) capital ratio of at least 5.0%
(based on average total assets); a core (Tier 1) risk-based capital
ratio of at least 6.0%; and a total risk-based capital ratio of at
least 10.0%.
The foregoing capital ratios are based in part on specific
quantitative measures of assets, liabilities and certain off-balance
sheet items as calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative
judgments by the OTS about capital components, risk weightings and
other factors.
Management believes that, as of June 30, 1998 and 1997, the Bank meets
all capital adequacy requirements to which it is subject. Further,
the most recent OTS notification categorized by the Bank as a well-
capitalized institution under the prompt corrective action
regulations. There have been no conditions or events since that
notification that management believes have changed the Bank's capital
classification.
The following is a reconciliation of the Bank's GAAP and Regulatory
capital, and a summary of the Bank's actual capital ratios compared
with the OTS minimum bank capital adequacy requirements and their
requirements for classification as well capitalized at June 30, 1998
and 1997:
<TABLE>
<CAPTION>
Tier-1 Tier-1 Total
Equity Tangible Core Risk-Based Risk-Based
June 30, 1998 Capital Equity Capital Capital Capital
------------- ------- -------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
GAAP capital $ 53,382,413 53,382,413 53,382,413 53,382,413 53,382,413
Unrealized appreciation or
gain on securities available
for sale, net (37,549) (37,549) (37,549) (37,549)
General loan valuation
allowances - - - 2,037,651
Other, net (48,565) (48,565) (48,565) (517,443)
--------------------------------------------------------
Regulatory capital 53,296,299 53,296,299 53,296,299 54,865,072
--------------------------------------------------------
Total assets 629,186,295
------------
Adjusted total assets 629,278,873 629,278,873
--------------------------
Risk-weighted assets 383,853,411 383,853,411
--------------------------
Actual capital ratio 8.48% 8.47% 8.47% 13.88% 14.29%
Minimum capital adequacy
requirements 1.50% 3.00% 8.00%
Regulatory capital category
Well capitalized - equal to
or greater than 5.00% 6.00% 10.00%
<CAPTION>
Core/ Tier-1 Total
Equity Tangible Leverage Risk-Based Risk-Based
June 30, 1997 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
--------------------------
Actual capital ratio 9.55% 9.56% 9.56% 16.27% 17.04%
Minimum capital adequacy
requirements 1.50% 4.00% 8.00%
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
consisted primarily of a fixed income fund with an insurance company,
at June 30, 1997.
The following table sets forth the plan's funded status and the
amounts recognized in the consolidated statements of financial
condition at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<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
===================
Projected benefit obligation for services
rendered to date $ - 1,661,216
Plan assets at fair value - 1,730,581
-------------------
Plan assets in excess of
projected benefit obligation - 69,365
Unrecognized net gain from past experience
different from that assumed - (202,913)
-------------------
Accrued pension cost $ - (133,548)
===================
</TABLE>
Components of net pension cost for the years ended June 30, 1998,
1997, and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost - benefits earned during
the period $ - 52,471 141,422
Interest cost on projected benefit obligation 50,820 114,296 214,786
Actual return on plan assets 8,589 (86,732) (97,476)
Net amortization and deferral (832) (42,229) (110,313)
Effects of settlement and curtailment (192,125) 85,016 -
--------------------------------
Net pension cost (credit) $(133,548) 122,822 148,419
================================
</TABLE>
Assumptions used in the accounting for the pension plan were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate
Preretirement N/A 6.00% 7.50%
Postretirement N/A 5.56 5.56
Rate of increase in compensation levels N/A N/A 4.00
Expected long-term rate of return on assets N/A 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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current $3,886,000 1,724,000 3,539,000
Deferred 261,000 696,000 (74,000)
------------------------------------
Applicable income tax expense 4,147,000 2,420,000 3,465,000
Deferred federal tax expense (benefit)
on unrealized gains (losses) on
securities available for sale 362,000 505,000 (280,000)
------------------------------------
$4,509,000 2,925,000 3,185,000
====================================
</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>
1998 1997 1996
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Expected income
tax expense at
statutory rate $4,156,674 35.00% $2,710,380 35.00% $3,628,444 35.00%
Other (9,674) (0.08) (290,380) (3.75) (163,444) (1.58)
-------------------------------------------------------------------
Actual tax expense $4,147,000 34.92% $2,420,000 31.25% $3,465,000 33.42%
===================================================================
</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, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets
Deferred loan fees $ 768,000 814,000
Employee benefits 113,000 191,000
Bad debts reserves 932,000 1,007,000
Interest on nonaccrual loans 49,000 52,000
Other 57,000 45,000
-----------------------
Total gross deferred tax assets 1,919,000 2,109,000
-----------------------
Deferred tax liabilities
FHLB stock dividends 838,000 734,000
Basis difference in fixed assets 213,000 265,000
Excess of tax reserves over base year amounts 1,153,000 1,153,000
Unrealized appreciation on securities
available for sale 419,000 57,000
Other 45,000 26,000
-----------------------
Total gross deferred tax liabilities 2,668,000 2,235,000
-----------------------
Net deferred tax liability $ 749,000 126,000
=======================
</TABLE>
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, 1998 and 1997.
Retained earnings at June 30, 1998 includes 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 legislation.
(12) Commitments, Contingencies, and Credit Risk
-------------------------------------------
In the normal course of business, the Bank is party to financial
instruments with off-balance sheet risk to meet the financing needs of
its customers and to minimize exposure to fluctuations in interest
rates. These financial instruments primarily include commitments to
extend credit and unused lines of credit. Currently the Bank does not
enter into forward contracts for future delivery of residential
mortgage loans. These instruments 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 45 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, 1998
Fixed rate mortgage loans $12,099,824 6.875-10.00%
Variable rate mortgage loans 2,434,541 6.625- 8.50%
Fixed rate consumer loans 2,058,147 6.50 -15.00%
Variable rate consumer loans 60,000 9.50%
Undisbursed lines of credit 4,083,442 9.50 -18.00%
-----------
$20,735,954
===========
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
===========
</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 two and one-half year period
beginning with the date of grant. The option exercise price
must be at least 100 percent of the fair 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, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Options outstanding, beginning of year 265,545 314,952 494,963
Exercised at $10.00 per share (33,693) (59,352) (179,801)
Forfeited - - (2,210)
Granted - 9,945 2,000
------------------------------
Options outstanding, end of year 231,852 265,545 314,952
==============================
Exercisable
At $10.00 per share 219,907 253,600 312,952
From $23.19 to $24.00 per share 11,945 3,981 -
Options available for grant, end of year 129,274 129,274 139,219
</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
for the years ended June 30, 1998, 1997, and 1996 would be as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- -----------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Net income $7,729 7,715 5,324 5,309 6,902 6,858
Basic earnings per share $ 2.06 2.05 1.23 1.23 1.43 1.42
Diluted earnings per share $ 1.98 1.98 1.19 1.19 1.37 1.36
</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:
<TABLE>
<S> <C>
Dividend yield 2.59 - 3.20 percent
Expected volatility 13.34 percent
Risk-free interest rate 5.12 - 6.64 percent
Expected option life 5.01 -7.21 years
</TABLE>
(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.
The Company follows SOP 93-6, Employers' Accounting for Employee
Stock Ownership Plans which requires that (1) compensation cost
be recognized based on the fair value of the KSOP shares when
committed to be released; (2) dividends on unallocated shares
used for debt service do not reduce compensation expense and are
not considered dividends for financial reporting purposes; and
(3) KSOP shares that have not been committed to be released are
not considered outstanding for purposes of computing earnings
per share.
KSOP compensation expense for the years ended June 30, 1998,
1997, and 1996 totaled $1,131,374; $976,059 and $912,288,
respectively. The fair value of unearned KSOP shares at June
30, 1998 and 1997, totaled $9,862,320 and $9,012,114,
respectively. Following is a summary of KSOP shares at June 30,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Allocated 226,944 186,262
Unallocated 303,456 344,138
------- -------
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.
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 except for 1,659 unvested shares that were
forfeited due to the retirement of a director. At June 30,
1998, 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 $-0-; $331,500; and
$674,814 for the years ended June 30, 1998, 1997, and 1996,
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, 1998, 1997, and 1996, the Bank paid dividends to
the Holding Company as follows:
<TABLE>
<CAPTION>
Date Amount Composition
---- ------ -----------
<C> <C> <S>
June 17, 1996 4,000,000 Federal agency obligations (FNMA),
related accrued interest, cash
May 16, 1997 4,500,000 Cash
October 16, 1997 1,630,583 Cash
January 23, 1998 1,577,312 Cash
April 13, 1998 1,713,029 Cash
</TABLE>
At June 30, 1998, dividends payable from the Bank to the Holding
Company totaled $5,009,984.
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, 1998 June 30, 1997
--------------------------- --------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 10,075,182 10,075,182 10,007,755 10,007,755
Securities available for sale 140,793,201 140,793,201 112,036,159 112,036,159
Loans receivable 482,463,396 490,430,000 460,711,635 458,932,000
Federal Home Loan Bank
stock 4,511,500 4,511,500 4,094,500 4,094,500
Accrued interest receivable 4,119,691 4,119,691 3,764,530 3,764,530
Liabilities
Deposits
Certificate accounts 288,299,900 290,971,000 288,590,645 289,079,000
Other deposit accounts 155,717,522 155,717,522 161,633,148 161,633,148
Securities sold under
agreements to repurchase
Short-term 13,088,323 13,088,323 7,307,248 7,307,248
Long-term 51,300,000 51,884,000 25,000,000 25,077,000
Borrowed funds 33,985,000 33,985,000 27,455,000 27,455,000
Accrued interest payable 1,064,546 1,064,546 535,672 535,672
</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, 1998
and 1997.
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 following condensed statements of financial condition as of June
30, 1998 and 1997, and related condensed statements of income and cash
flows for the years ended June 30, 1998, 1997, and 1996 for FFY
Financial Corp. should be read in conjunction with the consolidated
financial statements and the notes thereto.
<TABLE>
<CAPTION>
Condensed Statements of Financial Position 1998 1997
------------------------------------------ ---- ----
<S> <C> <C>
Assets
Cash $ 106,443 188,406
Short-term investments 895,000 2,765,050
---------------------------
Total cash and cash equivalents 1,001,443 2,953,456
Securities available for sale 21,827,325 19,982,325
Note receivable - KSOP 3,447,600 3,801,200
Equity in net assets of the Bank 53,382,413 55,262,513
Interest receivable on investments 236,393 183,817
Dividend receivable from Bank 5,009,984 -
Other assets 607,155 72,233
---------------------------
Total assets $ 85,512,313 82,255,544
===========================
Liabilities and stockholders' equity
Other liabilities $ 1,296,612 81,328
Stockholders' equity 84,215,701 82,174,216
---------------------------
Total liabilities and stockholders' equity $ 85,512,313 82,255,544
===========================
<CAPTION>
Condensed Statements of Income 1998 1997 1996
------------------------------ ---- ---- ----
<S> <C> <C> <C>
Income
Equity in earnings of the Bank and subsidiary $ 6,389,428 4,091,892 5,135,572
Interest income 1,587,602 2,143,876 3,028,903
Gain (loss) on sale of securities 266,002 (98,314) 971
-------------------------------------------
Total income 8,243,032 6,137,454 8,165,446
Expenses
State and local taxes 116,271 167,882 177,524
Other 181,550 177,629 225,940
-------------------------------------------
Total expenses 297,821 345,511 403,464
-------------------------------------------
Income before federal income taxes 7,945,211 5,791,943 7,761,982
Federal income taxes 216,000 468,000 860,000
-------------------------------------------
Net income $ 7,729,211 5,323,943 6,901,982
===========================================
<CAPTION>
Condensed Statements of Cash Flows 1998 1997 1996
---------------------------------- ---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 7,729,211 5,323,943 6,901,982
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in earnings of the Bank and subsidiary (6,389,428) (4,091,892) (5,135,572)
Amortization and accretion 77,419 70,246 229,753
(Increase) decrease in interest receivable (85,268) 449,649 136,455
Other, net (191,303) 780 (35,116)
-------------------------------------------
Net cash provided by operating activities 1,140,631 1,752,726 2,097,502
-------------------------------------------
Cash flows from investing activities
Proceeds from
Maturity of securities available for sale - 10,000,000 18,000,000
Sales of securities available for sale 13,648,851 28,254,806 2,295,572
Purchase of securities available for sale (14,101,273) (23,875,482) (8,733,625)
Principal receipts on securities available for sale 595,851 441,346 -
KSOP loan repayment 353,600 353,600 353,600
Dividend from the Bank 4,920,924 4,500,000 933,818
Loan to subsidiary (686,500) - -
Other (500) - 17,500
-------------------------------------------
Net cash provided by investing activities 4,730,953 19,674,270 12,866,865
-------------------------------------------
Cash flows from financing activities
Purchase of treasury stock (5,239,911) (25,982,802) (11,783,245)
Dividends paid (2,900,750) (2,889,944) (2,781,473)
Proceeds from stock options exercised 336,930 555,270 1,756,010
Other (19,866) - -
-------------------------------------------
Net cash used in financing activities (7,823,597) (28,317,476) (12,808,708)
-------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,952,013) (6,890,480) 2,155,659
Cash and cash equivalents at beginning of year 2,953,456 9,843,936 7,688,277
-------------------------------------------
Cash and cash equivalents at end of year $ 1,001,443 2,953,456 9,843,936
===========================================
Supplemental schedule of noncash investing activities
Dividend of noncash assets from Bank - - 3,066,182
Dividend receivable from Bank $ 5,009,984 - -
===========================================
</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 subsidiaries as of June 30, 1998 and
1997, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended June 30, 1998. 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 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of FFY
Financial Corp. and subsidiaries as of June 30, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in
the three-year period ended June 30, 1998, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick, LLP
Cleveland, Ohio
August 5, 1998
<TABLE>
<CAPTION>
Officers and Directors
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Board of Directors of Board of Directors of Officers of Officers of
FFY Financial Corp. and FFY Holdings, Inc. First Federal Savings Bank First Federal Savings Bank
First Federal Savings Bank of Youngstown of Youngstown, continued
of Youngstown
A. Gary Bitonte, MD Jeffrey L. Francis Jeffrey L. Francis Janet Byrne
Private Practice President and CEO President and CEO Assistant Secretary
Urologic Surgeon of FFY Financial Corp. and
First Federal Savings Bank Therese Ann Liutkus, CPA Christine Chasko
Jack R. Brownlee of Youngstown Treasurer and CFO Assistant Controller
Former Owner of
Brownlee Pontiac, Inc. Mark Makoski Shirley A. Reighard Richard Curry
Vice President of First Federal Vice President Assistant Secretary
Marie Izzo Cartwright Savings Bank of Youngstown and Secretary
Vice President Dominic Mancini
Glimcher Properties Henry P. Nemenz J. Craig Carr Assistant Secretary
Limited Partnership President, Vice President
H.P. Nemenz Food Stores, Inc. and General Counsel Frank Pasquale
Jeffrey L. Francis Assistant Secretary
President and CEO W. Terry Patrick David S. Hinkle
of FFY Financial Corp. and Partner, Friedman & Rummell Vice President Jeanne G. Yankle
First Federal Savings Bank Attorneys at Law Assistant Treasurer
of Youngstown Mark Makoski
Myron S. Roh Vice President Jerome D. Zetts
Daniel J. Mirto Chairman of the Board of Assistant Treasurer
Chairman of the Board FFY Financial Corp. and Joseph R. Sainato
Rhiel Supply Company First Federal Savings Bank Vice President
of Youngstown and Officers of
Henry P. Nemenz President and Treasurer Timm B. Schreiber FFY Holdings, Inc.
President Scholl Choffin Co. Vice President
H.P. Nemenz Food Stores, Inc. Jeffrey L. Francis
Robert L. Wagmiller Randy Shaffer President
W. Terry Patrick. Partner/Principal of Vice President
Partner, Friedman & Rummell Hill, Barth & King, Inc. Therese Ann Liutkus, CPA
Attorneys at Law Jeffrey L. DeRose, CPA Treasurer
Controller
Myron S. Roh Officers of J. Craig Carr
Chairman of the Board of FFY Financial Corp. Robert Campolito Vice President
FFY Financial Corp. and Assistant Vice President
First Federal Savings Bank Jeffrey L. Francis Randy Shaffer
of Youngstown and President and CEO Jane Hutchins Vice President
President and Treasurer Assistant Vice President
Scholl Choffin Co. Therese Ann Liutkus, CPA Shirley A. Reighard
Treasurer and CFO Jon Schmied Secretary
Randy Shaffer Assistant Vice President
Vice President of Shirley A. Reighard
FFY Financial Corp. and Vice President Dennis Sell
First Federal Savings Bank and Secretary Assistant Vice President
of Youngstown
Randy Shaffer Joanne Harrold
Ronald P. Volpe, Ph.D. Vice President Internal Auditor
Professor of Finance
Williamson College of J. Craig Carr Marilyn Burrows
Business Administration Vice President Assistant Treasurer
Youngstown State University and General Counsel
</TABLE>
Annual Report on Form 10-K
A copy of the Annual Report on Form 10-K filed with the Securities and
Exchange Commission will be available September 28, 1998 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
Phone: (330) 726-3396
Fax: (330) 758-1356
E-mail: [email protected]
Web page: www.ffytown.com
Annual Meeting
The Annual Meeting of Stockholders of FFY Financial Corp. will be held at
10:00 a.m. on Wednesday, October 21, 1998 at:
The Holiday Inn
7410 South Avenue
Youngstown, Ohio, 44512
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
Market Makers
McDonald & Company Securities, Inc.
Herzog, Heine, Geduld, Inc.
Robert W. Baird & Co, Inc.
Sandler O'Neill & Partners
Keefe, Bruyette & Woods, Inc.
Friedman, Billings, Ramsey & Co.
Stifel Nicholaus & Co.
Chicago Capital, Inc.
Parker/Hunter Inc.
Affiliations
First Real Estate, Ltd.
DBA David B. Roberts Real Estate
20 East McKinley Way
Poland, Ohio 44514
Phone: (330) 757-0777
Fax: (330) 757-0796
E-mail: [email protected]
Daniel W. Landers Insurance Agency, Ltd.
700 Boardman-Poland Road
Youngstown, Ohio 44512
Phone: (330) 726-4636
Fax: (330) 726-4635
First Federal Savings Bank of Youngstown Office Locations
Phone Number (330) 726-3396 connects all offices except
Howland (330) 856-5566
Main Office 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
----
FFYF
----
FFY Financial Corp.
724 Boardman-Poland Road
P.O. Box 3300
Youngstown, Ohio 4513-3300
Exhibit 21
Subsidiaries of the Registrant
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State of
Percentage Incorporation
of or
Parent Subsidiary Ownership Organization
- -------------------------- --------------------------- ---------- -------------
<S> <C> <C> <S>
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
FFY Holdings, Inc. Daniel W. Landers 67% Ohio
Insurance Agency, Ltd.
First Federal Savings Ardent Service Corporation 100% Ohio
Bank of Youngstown
Ardent Service Corporation Hedgerows Development, Ltd. 50% Ohio
</TABLE>
Exhibit 23
Consent of KPMG Peat Marwick LLP
EXHIBIT 23
KPMG Peat Marwick LLP
[Letterhead]
Independent Auditors' Consent
The Board of Directors
FFY Financial Corporation:
We consent to incorporation by reference in the Registration Statement No.
33-85088 on Form S-8 of FFY Financial Corporation of our report dated August
5, 1998, relating to the consolidated statements of financial condition of
FFY Financial Corporation and subsidiaries as of June 30, 1998 and 1997, and
the related consolidated statements of income, stockholders' equity, and
cash flows for each of the years in the three-year period ended June 30,
1998, which report is incorporated by reference in the June 30, 1998 annual
report on Form 10-K of FFY Financial Corporation.
/s/ KPMG Peat Marwick LLP
Cleveland, Ohio
September 22, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,362,127
<INT-BEARING-DEPOSITS> 5,713,055
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 140,793,201
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 482,463,396
<ALLOWANCE> 2,740,169
<TOTAL-ASSETS> 651,746,493
<DEPOSITS> 444,017,422
<SHORT-TERM> 47,073,323
<LIABILITIES-OTHER> 25,140,047
<LONG-TERM> 51,300,000
0
0
<COMMON> 66,300
<OTHER-SE> 84,149,401
<TOTAL-LIABILITIES-AND-EQUITY> 651,746,493
<INTEREST-LOAN> 39,785,064
<INTEREST-INVEST> 7,934,398
<INTEREST-OTHER> 286,969
<INTEREST-TOTAL> 48,006,431
<INTEREST-DEPOSIT> 21,282,008
<INTEREST-EXPENSE> 25,559,042
<INTEREST-INCOME-NET> 22,447,389
<LOAN-LOSSES> 565,521
<SECURITIES-GAINS> 246,473
<EXPENSE-OTHER> 11,770,633
<INCOME-PRETAX> 11,876,211
<INCOME-PRE-EXTRAORDINARY> 7,729,211
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,729,211
<EPS-PRIMARY> 2.06
<EPS-DILUTED> 1.98
<YIELD-ACTUAL> 3.81
<LOANS-NON> 2,733,572
<LOANS-PAST> 0
<LOANS-TROUBLED> 589,867
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,961,810
<CHARGE-OFFS> 839,704
<RECOVERIES> 52,542
<ALLOWANCE-CLOSE> 2,740,169
<ALLOWANCE-DOMESTIC> 2,740,169
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
