<PAGE> 1
FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee required]
For the fiscal Year Ended June 30, 1996
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: 0-27916
FFD FINANCIAL CORPORATION
(Name of small business issuer in its charter)
Ohio 34-1921148
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
321 North Wooster Avenue, Dover, Ohio 44622
(Address of principal executive offices) (Zip Code)
Issuer's telephone number:
(330) 364-7777
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Shares, without par value
(Title of class)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B contained in this Form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's revenues for the fiscal year ended June 30, 1996,
were $4.6 million.
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 prices quoted by The Nasdaq Stock Market, was $14.7 million on
September 16, 1996.
1,454,750 of the registrant's common shares were issued and
outstanding on September 23, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Annual Report to Shareholders for the fiscal year
ended June 30, 1996.
Part III of Form 10-KSB - Proxy Statement for 1996 Annual Meeting
of Shareholders.
Transitional Small Business Disclosure Format: Yes No X
--- ---
<PAGE> 2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
FFD Financial Corporation ("FFD") is a unitary savings and loan
holding company organized under Ohio law in November 1995 which owns all of the
issued and outstanding common shares of First Federal Savings Bank of Dover (the
"Bank"), a federal savings bank chartered under the laws of the United States.
On April 2, 1996, FFD acquired all of the common shares issued by the Bank upon
its conversion from a mutual savings bank to a stock savings bank (the
"Conversion").
The Bank has conducted business in Tuscarawas County since it was
incorporated in 1898 as an Ohio savings and loan association under the name
"Dover Building & Loan Company." The Bank obtained a federal savings and loan
charter in 1937 under the name "First Federal Savings & Loan Association." In
1983 the Bank changed its charter to a federal savings bank charter, at which
time the present name was adopted.
As a savings and loan holding company, FFD is subject to
regulation and examination by the Office of Thrift Supervision (the "OTS"). As a
federal savings bank, the Bank is subject to supervision and regulation by the
OTS and the Federal Deposit Insurance Corporation (the "FDIC") and is a member
of the Federal Home Loan Bank (the "FHLB") of Cincinnati. The deposits of the
Bank are insured up to applicable limits by the Savings Association Insurance
Fund (the "SAIF") administered by the FDIC.
The Bank is principally engaged in the business of making
permanent first mortgage loans secured by one- to four-family residential real
estate located in Tuscarawas County, Ohio. The Bank also originates construction
loans and loans secured by multifamily real estate (over four units),
nonresidential real estate and land. The origination of consumer loans
constitutes a small part of the lending activity of the Bank. Loan funds are
obtained primarily from savings deposits and loan repayments. In addition,
advances from the Federal Home Loan Bank (the "FHLB") of Cincinnati are utilized
from time to time when other sources of funds are inadequate to fund loan
demand. The Bank also invests in U.S. Government agency obligations,
interest-bearing deposits in other financial institutions, mortgage-backed
securities and other investments permitted by applicable law.
Interest on loans, mortgage-backed securities and investments is
the Bank's primary source of income. The Bank's principal expense is interest
paid on deposit accounts. Operating results are dependent to a significant
degree on the net interest income of the Bank, which is the difference between
interest earned on loans, mortgage-backed securities and other investments and
interest paid on deposits and borrowings. Like most thrift institutions, the
Bank's interest income and interest expense are significantly affected by
general economic conditions and by the policies of various regulatory
authorities.
LENDING ACTIVITIES
GENERAL. The Bank's principal lending activity is the origination
of conventional real estate loans, including construction loans, secured by one-
to four-family homes located in the Bank's primary market area. Loans secured by
multifamily properties containing five units or more and nonresidential
properties are also offered by the Bank. The Bank does not issue any letters of
credit or originate or purchase any loans for commercial, business or
agricultural purposes, other than loans secured by real estate.
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LOAN PORTFOLIO COMPOSITION. The following table presents certain
information with respect to the composition of the Bank's loan portfolio at the
dates indicated:
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------
1996 1995 1994
---------------------- -------------------- ---------------------
Percent Percent Percent
of total of total of total
Amount loans Amount loans Amount loans
------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family $44,344 89.4% $37,149 88.3% $35,317 89.0%
Multifamily 1,336 2.7 1,228 2.9 1,610 4.1
Construction 982 2.0 375 0.9 459 1.2
Nonresidential and land 1,543 3.1 1,906 4.6 1,794 4.5
Consumer 1,390 2.8 1,404 3.3 492 1.2
------- ----- ------- ----- ------- -----
Total loans 49,595 100.0% 42,062 100.0% 39,672 100.0%
===== ===== =====
Less:
Undisbursed portion of
loans in process 614 207 352
Deferred loan origination fees 296 265 240
Allowance for losses on loans 146 96 99
------- ------- -------
Loans receivable, net $48,539 $41,494 $38,981
======= ======= =======
</TABLE>
LOAN MATURITY SCHEDULE. The following table sets forth certain
information as of June 30, 1996, regarding the dollar amount of loans maturing
in the Bank's portfolio based on their contractual terms to maturity. Demand
loans and loans having no stated schedule of repayments and no stated maturity
are reported as due in one year or less.
<TABLE>
<CAPTION>
Due during the year ending Due 4-5 Due 6-10 Due 11-15 Due 15 or
June 30, years years years more years
----------------------- after after after after
1997 1998 1999 6/30/96 6/30/96 6/30/96 6/30/96 Total
---- ---- ---- ------- ------- ------- ------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate (1) $644 $106 $ 54 $298 $2,730 $13,471 $29,359 $46,662
Nonresidential and land -- 12 38 -- 29 947 517 1,543
Consumer loans 154 94 106 186 -- 850 -- 1,390
---- ---- ---- ---- ------ ------- ------- -------
Total loans $798 $212 $198 $484 $2,759 $15,268 $29,876 $49,595
==== ==== ==== ==== ====== ======= ======= =======
</TABLE>
- -----------------------------
(1) Includes one- to four-family, multifamily and construction loans.
The next table sets forth the dollar amount of all loans due
after one year from June 30, 1996, which have predetermined interest rates and
have floating or adjustable interest rates:
<TABLE>
<CAPTION>
Due more than one year after
June 30, 1996
----------------------------
(In thousands)
<S> <C>
Fixed rate of interest $12,048
Adjustable rate of interest 36,749
-------
$48,797
=======
</TABLE>
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LOANS. The primary
lending activity of the Bank has been the origination of permanent conventional
loans secured by a first mortgage on existing one- to four-family residences,
primarily single-family residences, located in Tuscarawas County. The Bank also
originates a limited amount of home
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equity loans secured by second mortgages on one- to four-family residential real
estate. Each of such loans is secured by a mortgage on the underlying real
estate and improvements thereon, if any. The aggregate amount of the Bank's one-
to four-family residential real estate loans equaled approximately $44.3 million
at June 30, 1996, and represented 89.4% of total loans at such date.
Between 1982 and 1994, the Bank originated only adjustable-rate
mortgage loans ("ARMs"). ARMs are offered by the Bank for terms up to 30 years.
The interest rate adjustment periods on the ARMs are one year, three years or
five years, although most of the ARMs originated by the Bank are one-year ARMs.
The rates on ARMs are tied to the average monthly mortgage contract rate for
previously occupied homes published by the Federal Housing Finance Board. The
maximum allowable adjustment at each adjustment date is 2%. Some of the Bank's
ARMs have a maximum adjustment of 6% over the term of the loan.
Adjustable-rate loans decrease the Bank's interest rate risk but
involve other risks, primarily credit risk, because as interest rates rise the
payment by the borrower rises to the extent permitted by the terms of the loan,
thereby increasing the potential for default. At the same time, the
marketability of the underlying property may be adversely affected by higher
interest rates. The Bank believes that these risks have not had a material
adverse effect on the Bank to date.
In September 1994 the Bank resumed originating fixed-rate loans
with terms of up to 15 years. All fixed-rate loans originated by the Bank since
that time have been held in the Bank's portfolio. Because adjustable-rate loans
accounted for approximately 75.3% of the Bank's total loans maturing after June
30, 1996, management believes that an increase in fixed-rate loans will not
create an unmanageable interest-rate risk management situation.
OTS regulations limit the amount that the Bank may lend in
relationship to the appraised value of the real estate and improvements (the
"Loan-to-Value Ratio" or "LTV") at the time of loan origination. Most of the
Bank's one- to four-family loans have a LTV of 80% or less, although the Bank
will make first mortgage loans on one- to four-family residences up to 89% of
the value of the real estate and improvements. The Bank has an affordable
housing loan program under which it originates a small number of fixed-rate
loans with LTVs of up to 95%.
Included in one- to four-family loans are lines of credit secured
by the equity in the borrower's principal residence. The Bank makes home equity
lines of credit in an amount which, when added to any prior indebtedness secured
by the real estate, does not exceed 89% of the estimated value of the real
estate. Home equity loans are secured by a second mortgage on the real estate.
The Bank's home equity loans have a term of 15 years. The interest rates charged
by the Bank on home equity loans adjust monthly and are tied to the base rate on
corporate loans, posted by at least 75% of the nation's 30 largest banks, as
reported in The Wall Street Journal. At June 30, 1996, the Bank had $616,000 in
home equity loans.
MULTIFAMILY RESIDENTIAL REAL ESTATE LOANS. In addition to loans
on one- to four-family properties, the Bank makes loans secured by multifamily
properties containing over four units. Such loans are made with adjustable
interest rates and a maximum LTV of 80% for terms of up to 30 years.
Multifamily lending is generally considered to involve a higher
degree of risk because the loan amounts are larger and the borrower typically
depends upon income generated by the project to cover operating expenses and
debt service. The profitability of a project can be affected by economic
conditions, government policies and other factors beyond the control of the
borrower. The Bank attempts to reduce the risk associated with multifamily
lending by evaluating the credit-worthiness of the borrower and the projected
income from the project and by obtaining personal guarantees on loans made to
corporations and partnerships.
At June 30, 1996, loans secured by multifamily properties totaled
approximately $1.3 million, or 2.7% of total loans.
CONSTRUCTION LOANS. The Bank makes loans for the construction of
residential real estate. Such loans are structured as permanent loans with fixed
or adjustable rates of interest and for terms of up to 30 years. Construction
loans originated by the Bank are primarily made to owner-occupants for the
construction of single-family homes by a general contractor, although the Bank
also makes construction loans to developers for the construction of
single-family homes.
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Construction loans generally involve greater underwriting and
default risks than do loans secured by mortgages on existing properties due to
the concentration of principal in a limited number of loans and borrowers and
the effects of general economic conditions on real estate developments,
developers, managers and builders. In addition, such loans are more difficult to
evaluate and monitor. Loan funds are advanced upon the security of the project
under construction, which is more difficult to value before the completion of
construction. Moreover, because of the uncertainties inherent in estimating
construction costs, it is relatively difficult to evaluate accurately the LTVs
and the total loan funds required to complete a project. In the event a default
on a construction loan occurs and foreclosure follows, the Bank must take
control of the project and attempt either to arrange for completion of
construction or dispose of the unfinished project.
At June 30, 1996, a total of $982,000, or approximately 2.0%, of
the Bank's total loans consisted of construction loans.
NONRESIDENTIAL REAL ESTATE AND LAND LOANS. The Bank makes loans
secured by nonresidential real estate consisting of retail stores, office
buildings and other commercial properties. Such loans are originated with terms
of up to 30 years and a maximum LTV of 80%. The Bank also makes loans secured by
lots for the construction of single-family residences. Lot loans have terms of
up to five years and a maximum LTV of 65%.
The Bank's loan portfolio also includes two participation
interests in loans originated by another financial institution headquartered in
Ohio. The loans are secured by a first mortgage and a second mortgage on a
nursing home property located in Westerville, Ohio.
Nonresidential real estate lending is generally considered to
involve a higher degree of risk than residential lending due to the relatively
larger loan amounts and the effects of general economic conditions on the
successful operation of income-producing properties. If the cash flow on the
property is reduced, for example, as leases are not obtained or renewed, the
borrower's ability to repay may be impaired. The Bank has endeavored to reduce
such risk by evaluating the credit history and past performance of the borrower,
the location of the real estate, the quality of the management constructing and
operating the property, the debt service ratio, the quality and characteristics
of the income stream generated by the property and appraisals supporting the
property's valuation. None of the Bank's nonresidential real estate loans was
nonperforming at June 30, 1996, 1995, or 1994.
At June 30, 1996, the Bank had a total of $1.5 million invested
in nonresidential real estate and land loans, including the participation
interests. Such loans comprised approximately 3.1% of the Bank's total loans at
such date.
Federal regulations limit the amount of nonresidential mortgage
and land loans which an association may make to 400% of its capital. At June 30,
1996, the Bank's nonresidential mortgage loans totaled 7.2% of the Bank's
capital.
CONSUMER LOANS. The Bank makes various types of consumer loans,
including unsecured loans and loans secured by savings accounts and motor
vehicles. Such loans are made at fixed or adjustable rates of interest. Consumer
loans may entail greater credit risk than do residential mortgage loans. The
risk of default on consumer loans increases during periods of recession, high
unemployment and other adverse economic conditions. Although the Bank has not
had significant delinquencies on consumer loans, no assurance can be provided
that delinquencies will not increase. Unsecured loans are made with terms of up
to two years. Motor vehicle loans are made with terms of up to five years.
At June 30, 1996, the Bank had approximately $774,000, or 1.6% of
its total loans, invested in consumer loans.
LOAN SOLICITATION AND PROCESSING. Loan originations are developed
from a number of sources, including continuing business with depositors,
borrowers and real estate developers, periodic newspaper and radio
advertisements, solicitations by the Bank's lending staff and walk-in customers.
Loan applications for permanent real estate loans are taken by
loan personnel. The Bank typically obtains a credit report, verification of
income and other documentation concerning the creditworthiness of the borrower.
An appraisal or evaluation of the fair market value of the real estate which
will be given as security for the loan is prepared by a staff appraiser or a fee
appraiser approved by the Board of Directors. Upon the completion of the
appraisal or evaluation and the receipt of information on the credit history of
the borrower, the application for a loan is submitted for review in accordance
with the Bank's underwriting guidelines to the Bank's Executive Committee. All
loans are ratified by the full Board of Directors.
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<PAGE> 6
Under the Bank's current loan guidelines, if a real estate loan
application is approved, title insurance is usually obtained on the real estate
which will secure the mortgage loan. In the past, the Bank used an attorney's
opinion for single-family loans, whereas title insurance was typically used for
nonresidential real estate loans. Borrowers are required to carry satisfactory
fire and casualty insurance and flood insurance, if applicable, and to name the
Bank as an insured mortgagee.
The procedure for approval of construction loans is the same as
for permanent real estate loans, except that an appraiser evaluates the building
plans, construction specifications and estimates of construction costs. The Bank
also evaluates the feasibility of the proposed construction project and the
experience and record of the builder.
Consumer loans are underwritten on the basis of the borrower's
credit history and an analysis of the borrower's income and expenses, ability to
repay the loan and the value of the collateral, if any.
LOAN ORIGINATIONS, PURCHASES AND SALES. Currently, the Bank is
originating both fixed-rate and ARM loans for its portfolio and not with the
intention of selling such loans in the secondary market. Because the Bank does
not require property surveys and certain other documentation that does not
relate to the creditworthiness of the borrower, the loans in the Bank's
portfolio do not conform to the secondary market standards of the Federal Home
Loan Mortgage Corporation ("FHLMC") or the Federal National Mortgage Association
(the "FNMA"). By originating non-conforming loans, however, the Bank is able to
process and close loans with lower out-of-pocket expenses and in a shorter time
than some of its competitors. As reflected by the relatively low levels of the
Bank's delinquent loans and nonperforming assets in recent years, management
believes that the origination of non-conforming loans has not adversely affected
the Bank's overall asset quality.
The following table presents the activity in the Bank's loan
portfolio for the periods indicated. The Bank does not sell loans. The Bank
occasionally purchases participation interests in loans originated by other
financial institutions. No loans were purchased during the periods presented,
although the Bank's loan portfolio at June 30, 1996, includes two participations
purchased in the 1992 fiscal year. See "Nonresidential Real Estate and Land
Loans."
Year ended June 30,
-----------------------------------
1996 1995 1994
--------- -------- --------
(In thousands)
Loans originated:
One- to four-family $ 15,241 $ 6,881 $ 7,335
Multifamily -- -- 476
Construction 1,224 879 926
Nonresidential and land -- 147 40
Consumer 362 334 359
-------- -------- --------
Total loans originated 16,827 8,241 9,136
Principal loan repayments 9,797 5,773 11,611
Increase in other items, net (1) 15 45 38
-------- -------- --------
Net increase (decrease) in loans
receivable $ 7,045 $ 2,513 $ (2,437)
======== ======== ========
- -----------------------------
(1) Other items consist of amortization of deferred loan origination fees and
the provision for losses on loans.
OTS regulations generally limit the aggregate amount that a
savings association may lend to any one borrower to an amount equal to 15% of
the association's total capital under the OTS capital requirements. A savings
association may loan to one borrower an additional amount not to exceed 10% of
the association's total capital if the additional amount is fully secured by
certain forms of "readily marketable collateral." Real estate is not considered
"readily marketable collateral." In addition, the regulations require that loans
to certain related or affiliated borrowers be aggregated for purposes of such
limits. Two exceptions to these limits permit loans to one borrower of up to
$500,000 "for any purpose"
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and, subject to certain conditions, including OTS prior approval, loans to one
borrower for the development of domestic residential housing units in amounts up
to the lesser of $30 million or 30% of the savings association's total capital.
Based on such limits, the Bank was able to lend approximately
$3.2 million to one borrower at June 30, 1996. The largest amount the Bank had
outstanding to one borrower at June 30, 1996, was $536,000. Such loan was
secured by one- to four-family investment property and a personal residence.
LOAN ORIGINATION AND OTHER FEES. The Bank realizes loan
origination fees and other fee income from its lending activities. In addition,
the Bank realizes income from late payment charges, application fees and fees
for other miscellaneous services.
Loan origination fees and other fees are a volatile source of
income, varying with the volume of lending, loan repayments and general economic
conditions. All nonrefundable loan origination fees and certain direct loan
origination costs are deferred and recognized as an adjustment to yield over the
life of the related loan.
DELINQUENT LOANS, NONPERFORMING ASSETS AND CLASSIFIED ASSETS. The
Bank endeavors to maintain a high level of asset quality through sound
underwriting practices and efficient collection practices.
To discourage late payments, the Bank charges a late fee of 5% of
the payment amount after 15 days for fixed-rate loans and 30 days for ARMs. When
a loan is 30 days or more delinquent, the borrower is sent a delinquency notice.
When a loan is 60 days delinquent, the Bank may contact the borrower by
telephone. When a loan becomes 90 days delinquent, it is generally referred to
an attorney for foreclosure, unless the Board of Directors authorizes
appropriate alternative payment arrangements to eliminate the arrearage. A
decision as to whether and when to initiate foreclosure proceedings is based on
such factors as the amount of the outstanding loan in relation to the original
indebtedness, the extent of the delinquency and the borrower's ability and
willingness to cooperate in curing delinquencies.
If a foreclosure occurs, the real estate is sold at public sale
and may be purchased by the Bank. Real estate acquired by the Bank as a result
of foreclosure proceedings is classified as real estate owned ("REO") until it
is sold. When property is so acquired it is initially recorded by the Bank at
the lower of cost or fair value of the real estate, less estimated costs to
sell. Real estate loss provisions are recorded if the properties' fair value
substantially declines below the value determined at the recording date. In
determining the lower of cost or fair value at acquisition, costs relating to
development and improvement are capitalized. Costs relating to holding real
estate acquired through foreclosure, net of rental income, are charged against
earnings as incurred. The Bank had no REO at June 30, 1996.
The following table reflects the amount of loans in a delinquent
status as of the dates indicated:
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995 June 30,1994
---------------------- ----------------------- -----------------------
Percent Percent Percent
of total of total of total
Number Amount loans Number Amount loans Number Amount loans
------ ------ ----- ------ ------ ------- ------ ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30 - 59 days -- $ -- -% 8 $202 0.48% 7 $381 0.96%
60 - 89 days 3 131 .26 3 111 0.26 4 131 0.33
90 days and over 7 117 .24 6 131 0.31 16 361 0.91
--- ---- --- -- ---- ---- -- ---- ----
Total delinquent loans 10 $248 .50% 17 $444 1.05% 27 $873 2.20%
=== ==== === == ==== ==== == ==== ====
</TABLE>
Nonperforming assets include nonaccruing loans, real estate
acquired by foreclosure or by deed-in-lieu, and repossessed assets. The Bank
ceases to accrue interest on real estate loans that are delinquent 90 days or
more. The accrual of interest may stop before a loan is 90 days delinquent if
the collateral value is not adequate, in the opinion of management, to cover the
outstanding principal and interest. The Bank places a loan on nonaccrual status
when, in the judgment of management, the collection of interest on loans
contractually past due is unlikely.
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The following table sets forth information with respect to the
Bank's nonaccruing loans at the dates indicated. The Bank had no other
nonperforming assets at any of the dates presented.
<TABLE>
<CAPTION>
At June 30,
------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Residential real estate $117 $128 $357
Nonresidential real estate -- -- --
Consumer and other -- 3 4
---- ---- ----
Total nonaccrual loans 117 131 361
---- ---- ----
Total nonperforming loans $117 $131 $361
==== ==== ====
Allowance for losses on loans $146 $ 96 $ 99
==== ==== ====
Nonperforming loans as a percent of total
loans 0.24% 0.31% 0.91%
Allowance for losses on loans as a percent of
nonperforming loans 124.79% 73.28% 27.42%
</TABLE>
For the year ended June 30, 1996, $9,000 would have been recorded
on nonaccruing loans had such loans been accruing pursuant to contractual terms.
During such period, no interest income was recorded on such loans.
OTS regulations require that each thrift institution classify its
own assets on a regular basis. Problem assets are classified as "substandard,"
"doubtful" or "loss." "Substandard" assets have one or more defined weaknesses
and are characterized by the distinct possibility that the insured institution
will sustain some loss if the deficiencies are not corrected. "Doubtful" assets
have the same weaknesses as "substandard" assets, with the additional
characteristics that (i) the weaknesses make collection or liquidation in full
on the basis of currently existing facts, conditions and values questionable and
(ii) there is a high possibility of loss. An asset classified "loss" is
considered uncollectible and of such little value that its continuance as an
asset of the institution is not warranted. The regulations also contain a
"special mention" category, consisting of assets which do not currently expose
an institution to a sufficient degree of risk to warrant classification but
which possess credit deficiencies or potential weaknesses deserving management's
close attention.
The aggregate amounts of the Bank's classified assets at the
dates indicated were as follows:
<TABLE>
<CAPTION>
At June 30,
----------------------------
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Classified assets:
Substandard $140 $161 $241
Doubtful -- 2 1
Loss -- -- --
---- ---- ----
Total classified assets $140 $163 $242
==== ==== ====
</TABLE>
Federal examiners are authorized to classify an association's
assets. If an association does not agree with an examiner's classification of an
asset, it may appeal the determination to the Regional Director of the OTS. The
Bank had no disagreements with the examiners regarding the classification of
assets at the time of the last examination.
OTS regulations require that the Bank establish prudent general
allowances for loan losses for any loan classified as substandard or doubtful.
If an asset, or portion thereof, is classified as loss, the association must
either establish specific allowances for losses in the amount of 100% of the
portion of the asset classified loss, or charge off such amount.
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ALLOWANCE FOR LOSSES ON LOANS. The Bank maintains an allowance
for losses on loans based upon a number of relevant factors, including, but not
limited to, growth and changes in the composition of the loan portfolio, trends
in the level of delinquent and problem loans, current and anticipated economic
conditions in the primary lending area, past loss experience and possible losses
arising from specific problem assets.
The single largest component of the Bank's loan portfolio
consists of one- to four-family residential real estate loans. Substantially all
of these loans are secured by property in the Bank's lending area of Tuscarawas
County, which has a fairly stable economy. The Bank's practice of making loans
primarily in its local market area has contributed to a low historical
charge-off rate. In addition to one- to four-family residential real estate
loans, the Bank makes home equity, multifamily residential real estate,
nonresidential real estate and construction loans. These real estate loans are
also secured by property in the Bank's lending area. The Bank has not
experienced any significant charge-offs from these other real estate loan
categories in recent years.
A small portion of the Bank's total loans consists of consumer
loans. Some of these loans are unsecured and others are secured by collateral
that declines in value. Such loans therefore carry a higher degree of risk than
the real estate loans. The Bank's charge-offs of $3,000 in each of the 1994 and
1995 fiscal years were for unsecured consumer loans.
Large loans are reviewed periodically to determine potential
problems at an early date. While the Board of Directors believes that it uses
the best information available to determine the allowance for loan losses,
unforeseen market conditions could result in material adjustments, and net
earnings could be significantly adversely affected, if circumstances differ
substantially from the assumptions used in making the final determination.
The following table sets forth an analysis of the Bank's
allowance for losses on loans for the periods indicated:
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period $ 96 $ 99 $ 75
Charge-offs -- (3) (3)
Recoveries -- -- --
---- ---- ----
Net charge-offs -- (3) (3)
Provision for losses on loans 50 -- 27
---- ---- ----
Balance at end of period $146 $ 96 $ 99
==== ==== ====
Ratio of net charge-offs to average loans
outstanding during the period 0.00% 0.01% 0.01%
Ratio of allowance for loan losses to
total loans 0.29% 0.23% 0.25%
</TABLE>
-9-
<PAGE> 10
The following table sets forth the allocation of the Bank's
allowance for loan losses by type of loan at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------------
1996 1995 1994
----------------------- ---------------------- -----------------------
Percent of Percent of Percent of
loans in each loans in each loans in each
category to category to category to
Amount total loans Amount total loans Amount total loans
------ ----------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at year end
applicable to:
Real estate loans $ 71 92.2% $50 96.7% $65 98.8%
Consumer loans 6 7.8 3 3.3 2 1.2
Unallocated 69 -- 43 -- 32 --
---- ----- --- ----- --- -----
Total $146 100.0% $96 100.0% $99 100.0%
==== ===== === ===== === =====
</TABLE>
Because the loan loss allowance is based on estimates, it is
monitored monthly and adjusted as necessary to provide an adequate allowance.
INVESTMENT ACTIVITIES
OTS regulations require that the Bank maintain a minimum amount
of liquid assets, which may be invested in U. S. Treasury obligations,
securities of various federal agencies, certificates of deposit at insured
banks, bankers' acceptances and federal funds. The Bank is also permitted to
make investments in certain commercial paper, corporate debt securities rated in
one of the four highest rating categories by one or more nationally recognized
statistical rating organizations, and mutual funds, as well as other investments
permitted by federal regulations.
The Bank maintains a significant portfolio of mortgage-backed
securities in the form of FHLMC and Government National Mortgage Corporation
("GNMA") participation certificates. Mortgage-backed securities generally
entitle the Bank to receive a portion of the cash flows from an identified pool
of mortgages. FHLMC and GNMA securities are guaranteed by the issuing agency as
to principal and interest. Although mortgage-backed securities generally yield
less than individual loans originated by the Bank, management believes they are
a prudent investment alternative during periods of decreased loan demand.
-10-
<PAGE> 11
The following table sets forth the composition of the Bank's
investment securities portfolio, including those designated as available for
sale, and mortgage-backed securities at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------------------
1996 1995
---------------------------------------- -----------------------------------------
Amortized % of Market % of Amortized % of Market % of
cost total value total cost total value total
---- ----- ----- ----- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities designated
as held to maturity:
U.S. Government agency
obligations $ 2,460 9.5% $ 2,427 9.1% $ 3,353 29.0% $ 3,337 26.5%
FHLMC stock -- -- -- -- -- -- -- --
------- ---- ------- ---- ------- ---- ------- -----
2,460 9.5 2,427 9.1 3,353 29.0 3,337 26.5
Investment securities designated
as available for sale:
U.S. Government and agency
obligations 8,184 31.8 8,134 30.4 -- -- -- --
FHLMC stock 51 0.2 1,122 4.2 51 .5 903 7.2
------- ---- ------- ---- ------- ---- ------- -----
8,235 32.0 9,256 34.6 51 .5 903 7.2
------- ---- ------- ---- ------- ---- ------- -----
Total investment securities 10,695 41.5 11,683 43.7 3,404 29.5 4,240 33.7
Mortgage-backed securities
designated as held to maturity 5,932 23.0 6,073 22.7 8,153 70.5 8,338 66.3
Mortgage-backed securities
designated as available for sale 9,140 35.5 9,007 33.6 -- -- -- --
------- ---- ------- ---- ------- ---- ------- -----
Total mortgage-backed securities 15,072 58.5 15,080 56.3 8,153 70.5 8,338 66.3
------- ---- ------- ---- ------- ---- ------- -----
Total investments and mortgage-
backed securities $25,767 100.0% $26,763 100.0% $11,557 100.0% $12,578 100.0%
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
At June 30,
1994
---------------------------------------
Amortized % of Market % of
cost total value total
---- ----- ----- -----
<S> <C> <C> <C> <C>
Investment securities designated
as held to maturity:
U.S. Government agency $ -- -% $ -- -%
obligations
FHLMC stock 51 0.6 794 8.2
------- ----- ------- -----
51 0.6 794 8.2
Investment securities designated
as available for sale:
U.S. Government and agency
obligations -- -- -- --
FHLMC stock -- -- -- --
------- ----- ------- -----
-- -- -- --
------- ----- ------- -----
Total investment securities 51 0.6 794 8.2
Mortgage-backed securities
designated as held to maturity 8,814 99.4 8,858 91.8
Mortgage-backed securities
designated as available for sale -- -- -- --
------- ----- ------- -----
Total mortgage-backed securities 8,814 99.4 8,858 91.8
------- ----- ------- -----
Total investments and mortgage-
backed securities $ 8,865 100.0% $ 9,652 100.0%
======= ===== ======= =====
</TABLE>
The maturities of the Bank's U. S. Government and agency obligations and
mortgage-backed securities at June 30, 1996, are indicated in the following
table:
<TABLE>
<CAPTION>
At June 30, 1996
------------------------------------------------------------------------------------------------------------
After one through After five After ten
One year or less five years through ten years years Total
-------------------- ----------------- ------------------ ------------------- ------------------------------
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Market Weighted
cost yield cost yield cost yield cost yield cost value average yield
---- ----- ---- ----- ---- ----- ---- ----- ---- ----- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and $503 6.1% $8,643 6.5% $1,498 6.8% $ -- -% $10,644 $10,561 6.5%
agency obligations
Mortgage-backed
securities -- -- -- -- 3,948 6.9 11,124 7.6 15,072 15,080 7.4
---- --- ------ --- ------ --- ------- --- ------- ------- ---
$503 6.1% $8,643 6.5% $5,446 6.9% $11,124 7.6% $25,716 $25,641 7.0%
==== === ====== === ====== === ======= === ======= ======= ===
</TABLE>
-11-
<PAGE> 12
DEPOSITS AND BORROWINGS
GENERAL. Deposits have traditionally been the primary source of
the Bank's funds for use in lending and other investment activities. In addition
to deposits, the Bank derives funds from interest payments and principal
repayments on loans and mortgage-backed securities, income on interest-earning
assets and service charges. Loan payments are a relatively stable source of
funds, while deposit inflows and outflows fluctuate more in response to changes
in general interest rates and money market conditions.
DEPOSITS. Deposits are attracted principally from within the
Bank's primary market area through the offering of a broad selection of deposit
instruments, including NOW accounts, passbook savings accounts, individual
retirement accounts ("IRAs") and term certificate accounts. Interest rates paid,
maturity terms, service fees and withdrawal penalties for the various types of
accounts are established periodically by the management of the Bank based on the
Bank's liquidity requirements, growth goals and interest rates paid by
competitors. The Bank does not use brokers to attract deposits.
At June 30, 1996, the Bank's certificates of deposit totaled
$32.9 million, or 63.0% of total deposits. Of such amount, approximately $23.8
million in certificates of deposit mature within one year. Based on past
experience and the Bank's prevailing pricing strategies, management believes
that a substantial percentage of such certificates will renew with the Bank at
maturity. If there is a significant deviation from historical experience, the
Bank can utilize borrowings from the FHLB as an alternative to this source of
funds.
The following table sets forth the dollar amount of deposits in
the various types of accounts offered by the Bank at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- ------------------
Percent Percent Percent
of total of total of total
Amount deposits Amount deposits Amount deposits
------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Transaction accounts:
NOW and money market accounts (1) $ 4,388 8.4% $ 4,522 8.9% $ 4,168 8.7%
Passbook savings accounts (2) 14,909 28.6 13,128 26.0 15,652 32.9
------- ---- ------- ---- ------- ----
Total transaction accounts 19,297 37.0 17,650 34.9 19,820 41.6
Certificates of deposit:
2.01 - 4.00% $ 412 0.8 3,089 6.1 21,905 46.0
4.01 - 6.00% 23,592 45.2 17,496 34.6 5,899 12.4
6.01 - 8.00% 8,907 17.0 12,366 24.4 -- --
8.01 - 10.00% -- -- -- -- 15 --
------- ---- ------- ---- ------- ----
Total certificates of deposit (3) 32,911 63.0 32,951 65.1 27,819 58.4
------- ---- ------- ---- ------- ----
Total deposits $52,208 100.0% $50,601 100.0% $47,639 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
- ------------------------
(1) The weighted average interest rates on NOW and money market accounts were
2.03% at June 30, 1996, and 2.31% at June 30, 1995 and 1994, respectively.
(2) The weighted average interest rate on passbook accounts was 3.76% at June
30, 1996, and 3.29% at June 30, 1995 and 1994, respectively.
(3) The weighted average rate on all certificates of deposit was 5.63%, 5.65%,
and 5.52%, at June 30, 1996, 1995 and 1994, respectively.
-12-
<PAGE> 13
The following table shows rate and maturity information for the
Bank's certificates of deposit at June 30, 1996:
<TABLE>
<CAPTION>
Amount Due
----------------------------------------------
Over Over
Up to 1 year to 2 years to
Rate one year 2 years 3 years Total
---- -------- ------- ------- -----
(In thousands)
<C> <C> <C> <C> <C>
2.01 - 4.00% $ 412 $ -- $ -- $ 412
4.01 - 6.00% 17,542 4,912 1,138 23,592
6.01 - 8.00% 5,834 2,744 329 8,907
------- ------- ------- -------
Total $23,788 $ 7,656 $ 1,467 $32,911
======= ======= ======= =======
</TABLE>
The following table presents the amount of the Bank's
certificates of deposit of $100,000 or more by the time remaining until maturity
at June 30, 1996:
<TABLE>
<CAPTION>
Maturity Amount
-------- ------
(In thousands)
<S> <C>
Three months or less $ 517
Over 3 months to 6 months -
Over 6 months to 12 months 490
Over 12 months 853
======
Total $1,860
======
</TABLE>
The following table sets forth the Bank's deposit account balance
activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance $ 50,601 $ 47,639 $ 50,201
Deposits 86,546 79,948 65,746
Withdrawals 86,907 78,543 69,450
-------- -------- --------
Net increase (decrease) in deposits
before interest credited (361) 1,405 (3,704)
Interest credited 1,968 1,557 1,142
-------- -------- --------
Ending balance $ 52,208 $ 50,601 $ 47,639
======== ======== ========
Net increase (decrease) $ 1,607 $ 2,962 $ (2,562)
======== ======== ========
Percent increase (decrease) 3.2% 6.2% (5.1)%
=== === ====
</TABLE>
BORROWINGS. The Bank's other sources of funds include advances
from the FHLB. As a member of the FHLB, the Bank is required to own capital
stock in the FHLB and is authorized to apply for advances from the FHLB. Each
FHLB credit program has its own interest rate, which may be fixed or variable,
and range of maturities. The FHLB may prescribe the acceptable uses for these
advances, as well as limitations on the size of the advances and repayment
provisions.
-13-
<PAGE> 14
The following table sets forth certain information as to the
Bank's FHLB advances at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
FHLB advances $ 5,184 $ 26 $ --
Weighted average interest rate of
FHLB advances 5.79% 8.15% --
</TABLE>
The following table sets forth the maximum balance, the average
balance and the weighted average interest rate of the Bank's FHLB advances
during the periods indicated:
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Maximum Balance $5,184 $ 26 $ --
Average Balance: $ 104 $ 26 $ --
Weighted average interest rate 6.73% 7.69% --%
</TABLE>
The Bank had no other borrowings during the last three fiscal years.
-14-
<PAGE> 15
YIELDS EARNED AND RATES PAID
The following table sets forth certain information relating to
FFD's average balance sheet information and reflects the average yield on
interest-earning assets and the average cost of interest-bearing liabilities for
the periods indicated. Such yields and costs are derived by dividing income or
expense by the average monthly balance of interest-earning assets or
interest-bearing liabilities, respectively, for the periods presented. Average
balances are derived from monthly balances, which include nonaccruing loans in
the loan portfolio, net of the allowance for losses on loans.
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------------------------------------------
1996 1995
------------------------------------ ------------------------------------
Average Interest Average Average Interest Average
outstanding earned/ yield/ outstanding earned/ yield/
balance paid rate balance paid rate
------- ---- ---- ------- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $44,855 $3,402 7.58% $40,172 $2,852 7.10%
Mortgage-backed securities 8,713 600 6.89 8,404 538 6.40
Investment securities 5,323 363 6.82 701 44 6.28
Interest-bearing deposits and other 4,570 190 4.16 5,237 284 5.42
------- ------ ---- ------- ------
Total interest-earning assets 63,461 4,555 7.18 54,514 3,718 6.82
Non-interest-earning assets 474 1,432
------- -------
Total assets $63,935 $55,946
------- -------
Interest-bearing liabilities:
Deposits $51,713 2,464 4.76 $48,170 1,949 4.05
Advances from the FHLB 104 7 6.73 26 2 7.69
------- ------ ---- ------- ------
Total interest-bearing liabilities 51,817 2,471 4.77 48,196 1,951 4.05
------- ------ ---- ------- ------
Non-interest-bearing liabilities 1,063 764
------- -------
Total liabilities 52,880 48,960
Shareholders' equity(1) 11,055 6,986
------- -------
Total liabilities and shareholders'
equity $63,935 $55,946
======= =======
Net interest income $2,084 $1,767
====== ======
Interest rate spread 2.41% 2.77%
==== ====
Net interest margin (net interest income as a
percent of average interest-earning
assets) 3.28% 3.24%
==== ====
Average interest-earning assets to average
interest-bearing liabilities 122.47% 113.11%
====== ======
</TABLE>
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------------
1994
---------------------------------------
Average Interest Average
outstanding earned/ yield/
balance paid rate
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable $39,819 $2,831 7.11%
Mortgage-backed securities 9,178 543 5.92
Investment securities 51 13 25.49
Interest-bearing deposits and other 5,929 189 3.19
------- ------ -----
Total interest-earning assets 54,977 3,576 6.50
Non-interest-earning assets 912
-------
Total assets $55,889
-------
Interest-bearing liabilities:
Deposits $49,135 1,731 3.52
Advances from the FHLB - - -
------- ------ -----
Total interest-bearing liabilities 49,135 1,731 3.52
------- ------ -----
Non-interest-bearing liabilities 275
-------
Total liabilities 49,410
Shareholders' equity(1) 6,479
-------
Total liabilities and shareholders'
equity $55,889
=======
Net interest income $1,845
======
Interest rate spread 2.98%
====
Net interest margin (net interest income as a
percent of average interest-earning
assets) 3.36%
====
Average interest-earning assets to average
interest-bearing liabilities 111.89%
======
</TABLE>
- -----------------------------
(1) In fiscal years ending June 30, 1995 and 1994, consisted of retained
earnings only.
-15-
<PAGE> 16
The following table sets forth, at the dates indicated, the
weighted average yields earned on the Bank's interest-earning assets, the
weighted average interest rates paid on interest-bearing liabilities and the
interest rate spread between the weighted average yields and rates at the dates
presented.
<TABLE>
<CAPTION>
At June 30,
--------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Weighted average yield on loans and
mortgage-backed securities 7.15% 7.25% 6.32%
Weighted average yield on investment
securities portfolio 6.29 5.87 4.89
Weighted average yield on all interest-
earning assets 7.02 7.07 6.16
Weighted average rate paid on deposits 4.78 4.65 3.52
Weighted average rate paid on
FHLB advances 5.79 8.15 -
Weighted average rate paid on all interest-
bearing liabilities 4.87 4.65 3.52
Interest rate spread 2.15 2.42 2.64
</TABLE>
The table below describes the extent to which changes in interest
rates and changes in volume of interest-earning assets and interest-bearing
liabilities have affected the Bank's interest income and expense during the
years indicated. 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 prior year rate), (ii)
changes in rate (changes in rate multiplied by prior year volume) and (iii)
total changes in rate and volume. The combined effects of changes in both volume
and rate, which cannot be separately identified, have been allocated
proportionately to the change due to volume and the change due to rate:
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
----------------------------- ------------------------------
Increase Increase
(decrease) (decrease)
due to due to
------------------ ------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Loans receivable $ 346 $ 204 $ 550 $ 25 $ (4) $ 21
Mortgage-backed securities 20 42 62 (48) 43 (5)
Investment securities 314 5 319 42 (11) 31
Interest-bearing deposits and other (31) (63) (94) (26) 121 93
----- ----- ----- ----- ----- -----
Total interest income 649 188 837 (7) 149 142
----- ----- ----- ----- ----- -----
Interest expense attributable to:
Deposits 156 359 515 (35) 253 218
FHLB advances 6 (1) 5 2 -- 2
----- ----- ----- ----- ----- -----
Total interest expense 162 358 520 (33) 253 220
----- ----- -----
Increase (decrease) in net interest income $ 487 $(170) $ 317 $ 26 $(104) $ (78)
===== ===== ===== ===== ===== =====
</TABLE>
ASSET AND LIABILITY MANAGEMENT
The Bank, like other financial institutions, is subject to
interest rate risk to the extent that its interest-earning assets reprice
differently than its interest-bearing liabilities. As part of its effort to
monitor and manage interest rate risk, the Bank uses the "net portfolio value"
("NPV") methodology recently adopted by the OTS as part of its capital
regulations. Although the Bank is not currently subject to the NPV regulation
because such regulation does not apply to institutions with less than $300
million in assets and risk-based capital in excess of 12%, the application of
the NPV methodology illustrates certain aspects of the Bank's interest rate
risk.
-16-
<PAGE> 17
Generally, NPV is the discounted present value of the difference
between incoming cash flows on interest-earning and other assets and outgoing
cash flows on interest-bearing and other liabilities. The application of the
methodology attempts to quantify interest rate risk as the change in the NPV
which would result from a theoretical 200 basis point (1 basis point equals
.01%) change in market interest rates. Both a 200 basis point increase in market
interest rates and a 200 basis point decrease in market interest rates are
considered. If the NPV would decrease more than 2% of the present value of the
institution's assets with either an increase or a decrease in market rates, the
institution must deduct 50% of the amount of the decrease in excess of such 2%
in the calculation of the institution's risk-based capital.
At June 30, 1996, 2% of the present value of the Bank's assets
was approximately $1.4 million. Because the interest rate risk of a 200 basis
point increase in market interest rates (which was greater than the interest
rate risk of a 200 basis point decrease) was $518,000 at June 30, 1996, the Bank
would not have been required to adjust its capital in determining whether the
Bank met its risk-based capital requirement.
Presented below, as of June 30, 1996 and 1995, is an analysis of
the Bank's interest rate risk as measured by changes in NPV for instantaneous
and sustained parallel shifts of 100 basis points in market interest rates. The
table also contains the policy limits set by the Board of Directors of the Bank
as the maximum change in NPV that the Board of Directors deems advisable in the
event of various changes in interest rates. Such limits have been established
with consideration of the dollar impact of various rate changes and the Bank's
strong capital position.
As illustrated in the table, NPV is more sensitive to rising
rates than declining rates. Such difference in sensitivity occurs principally
because, as rates rise, borrowers do not prepay fixed-rate loans as quickly as
they do when interest rates are declining. Thus, in a rising interest rate
environment, the amount of interest the Bank would receive on its loans would
increase relatively slowly as loans are slowly prepaid and new loans are made at
higher rates. Moreover, the interest the Bank would pay on its deposits would
increase rapidly because the Bank's deposits generally have shorter periods to
repricing.
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995
----------------------- ----------------------
Change in interest rate Board limit $ change % change $ change % change
(basis points) % change in NPV in NPV in NPV in NPV
----------------------- ----------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+400 +40.0% $(2,089) (16.17)% $(734) (9.5)%
+300 +30.0 (1,308) (10.11) (655) (8.4)
+200 +20.0 (518) (4.01) 113 1.5
+100 +10.0 (221) (1.71) 45 0.6
0 0 0 0 0 0
-100 -10.0 176 1.38 (68) (0.9)
-200 -20.0 260 2.01 (113) (1.5)
-300 -30.0 455 3.52 66 0.8
-400 -40.0 582 4.51 334 4.3
</TABLE>
As with any method of measuring interest rate risk, certain
shortcomings are inherent in the NPV approach. For example, although certain
assets and liabilities may have similar maturities or periods of 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. Further, in the event of a change in
interest rates, expected rates of prepayment on loans and mortgage-backed
securities and early withdrawal levels from certificates of deposit would likely
deviate significantly from those assumed in making the risk calculations.
In a rising interest rate environment, the Bank's net interest
income could be expected to be negatively affected. Moreover, rising interest
rates could negatively affect the Bank's earnings due to diminished loan demand.
-17-
<PAGE> 18
COMPETITION
The Bank competes for deposits with other savings associations,
commercial banks and credit unions and with the issuers of commercial paper and
other securities, such as shares in money market mutual funds. The primary
factors in competing for deposits are interest rates and convenience of office
location. In making loans, the Bank competes with other savings associations,
commercial banks, consumer finance companies, credit unions, leasing companies,
mortgage companies and other lenders. The Bank competes for loan originations
primarily through the interest rates and loan fees offered and through the
efficiency and quality of services provided. Competition is affected by, among
other things, the general availability of lendable funds, general and local
economic conditions, current interest rate levels and other factors which are
not readily predictable.
The size of financial institutions competing with the Bank is
likely to increase as a result of changes in statutes and regulations
eliminating various restrictions on interstate and inter-industry branching and
acquisitions. Such increased competition may have an adverse effect upon the
Bank.
SUBSIDIARIES
The Bank owns all of the outstanding shares of Dover Service
Corporation ("DSC"). The principal assets of DSC consist of an investment in a
data processing service center for financial institutions and a savings account
in the Bank. The net book value of the Bank's investment in DSC at June 30,
1996, was approximately $17,000.
PERSONNEL
At June 30, 1996, the Bank had 15 full-time employees and one
part-time employee. The Bank believes that relations with its employees are
good. The Bank offers health, disability and life insurance benefits. None of
the employees of the Bank are represented by a collective bargaining unit.
REGULATION
GENERAL
As a savings bank organized under the laws of the United States,
the Bank is subject to regulation, examination and oversight by the OTS. Because
the Bank's deposits are insured by the FDIC, the Bank is also subject to
regulatory oversight by the FDIC. The Bank must file periodic reports with the
OTS concerning its activities and financial condition. Examinations are
conducted periodically by the OTS to determine whether the Bank is in compliance
with various regulatory requirements and is operating in a safe and sound
manner. The Bank is a member of the FHLB of Cincinnati and is subject to certain
regulations promulgated by the Board of Governors of the Federal Reserve System
("FRB").
FFD is subject to regulation, examination and oversight by the
OTS as the holding company of the Bank and is required to submit periodic
reports to the OTS. Because FFD is a corporation organized under Ohio law, it is
subject to provisions of the Ohio Revised Code applicable to corporations
generally.
OTS REGULATIONS
GENERAL. The OTS is an office in the Department of the Treasury
and is responsible for the regulation and supervision of all savings
associations the deposits of which are insured by the FDIC in the SAIF and all
federally chartered savings institutions. The OTS issues regulations governing
the operation of savings associations, regularly examines such institutions and
imposes assessments on savings associations based on their asset size to cover
the costs of this supervision and examination. It also promulgates regulations
that prescribe the permissible investments and activities of federally chartered
savings associations, including the type of lending that such associations may
engage in and the investments in real estate, subsidiaries and securities they
may make. The OTS also may initiate enforcement actions against savings
associations and certain persons affiliated with them for violations of laws or
regulations or for engaging in unsafe or unsound practices. If the grounds
provided by law exist, the OTS may appoint a conservator or receiver for a
savings association.
-18-
<PAGE> 19
Federally chartered savings associations are subject to
regulatory oversight by the OTS under various consumer protection and fair
lending laws. These laws govern, among other things, truth-in-lending
disclosure, equal credit opportunity, fair credit reporting and community
reinvestment. Failure to abide by federal laws and regulations governing
community reinvestment could limit the ability of an association to open a new
branch or engage in a merger transaction. Community reinvestment regulations
evaluate how well and to what extent an institution lends and invests in its
designated service area, with particular emphasis on low-to-moderate income
areas and borrowers. The Bank has received a "satisfactory" rating under those
regulations.
REGULATORY CAPITAL REQUIREMENTS. The Bank is required by OTS
regulations to meet certain minimum capital requirements. These requirements
call for tangible capital of 1.5% of adjusted total assets, core capital (which
for the Bank is equal to tangible capital) of 3% of adjusted total assets, and
risk-based capital (which for the Bank consists of core capital and general
valuation allowances) equal to 8% of risk-weighted assets. Assets and certain
off-balance sheet items are weighted at percentage levels ranging from 0% to
100% depending on the relative risk.
The OTS has proposed to amend the core capital requirement so
that those associations that do not have the highest examination rating and
exceed an acceptable level of risk will be required to maintain core capital of
from 4% to 5%, depending on the association's examination rating and overall
risk. The Bank does not anticipate that it will be adversely affected if the
core capital requirement regulation is amended as proposed. The Bank's current
core capital ratio is 14.3%.
The OTS has adopted regulations governing prompt corrective
action to resolve the problems of capital deficient and otherwise troubled
savings associations. At each successively lower 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. The OTS has defined
these capital levels as follows: (1) well- capitalized associations must have
total risk-based capital of at least 10%, core risk-based capital (consisting
only of items that qualify for inclusion in core capital) of at least 6% and
core capital of at least 5%; (2) adequately capitalized associations are those
that meet the regulatory minimum of total risk-based capital of 8%, core
risk-based capital of 4% and core capital of 4% (except for institutions
receiving the highest examination rating, in which case the requirement is 3%)
but are not well-capitalized; (3) undercapitalized associations are those that
do not meet regulatory limits, but that are not significantly undercapitalized;
(4) significantly undercapitalized associations have total risk-based capital of
less than 6%, core risk-based capital of less than 3% or core capital of less
than 3%; and (5) critically undercapitalized associations are those with
tangible capital of 2% or less of total assets. In addition, the OTS can
downgrade an association's designation notwithstanding its capital level, based
on less than satisfactory examination ratings in areas other than capital or,
after notice and an opportunity for hearing, if the institution is deemed to be
in an unsafe or unsound condition or to be engaging in an unsafe or unsound
practice. Each undercapitalized association must submit a capital restoration
plan to the OTS within 45 days after it becomes undercapitalized. Such
institution will be subject to increased monitoring and asset growth
restrictions and will be required to obtain prior approval for acquisitions,
branching and engaging in new lines of business. A critically undercapitalized
institution must be placed in conservatorship or receivership within 90 days
after reaching such capitalization level, except under limited circumstances.
The Bank's capital at June 30, 1996, meets the standards for a well-capitalized
association.
Federal law prohibits an insured institution from making a
capital distribution to anyone or paying management fees to any person having
control of the institution if, after such distribution or payment, the
institution would be undercapitalized. In addition, each company controlling an
undercapitalized institution must guarantee that the institution will comply
with the terms of an OTS-approved capital plan until the institution has been
adequately capitalized on an average during each of four consecutive calendar
quarters and must provide adequate assurances of performance. The aggregate
liability pursuant to such guarantee is limited to the lesser of (a) an amount
equal to 5% of the institution's total assets at the time the institution became
undercapitalized or (b) the amount which is necessary to bring the institution
into compliance with all capital standards applicable to such institution at the
time the institution fails to comply with its capital restoration plan.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. The OTS imposes various
restrictions or requirements on the ability of associations to make capital
distributions, according to ratings of associations based on their capital level
and supervisory condition. Capital distributions, for purposes of such
regulation, include, without limitation, payments of cash dividends,
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repurchases and certain other acquisitions by an association of its shares and
payments to stockholders of another association in an acquisition of such other
association.
The first rating category is Tier 1, consisting of associations
that, before and after the proposed capital distribution, meet their fully
phased-in capital requirement. Associations in this category may make capital
distributions during any calendar year equal to the greater of 100% of their net
income, current year-to-date, plus 50% of the amount by which the lesser of the
tangible, core or risk-based capital exceeds fully phased-in capital requirement
for such capital component, as measured at the beginning of the calendar year,
or the amount authorized for a Tier 2 association. The second category, Tier 2,
consists of associations that, before and after the proposed capital
distribution, meet their current minimum, but not fully phased-in, capital
requirement. Associations in this category may make capital distributions up to
75% of their net income over the most recent four quarters. Tier 3 associations
do not meet their current minimum capital requirement and must obtain OTS
approval of any capital distribution. 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.
The Bank meets the requirements for a Tier 1 association and has
not been notified of any need for more than normal supervision. As a subsidiary
of FFD, the Bank will also be required to give the OTS 30 day's notice prior to
declaring any dividend on its shares. The OTS may object to the dividend during
that 30-day period based on safety and soundness concerns. Moreover, the OTS may
prohibit any capital distribution otherwise permitted by regulation if the OTS
determines that such distribution would constitute an unsafe or unsound
practice.
LIQUIDITY. OTS regulations require that each savings association
maintain an average daily balance of liquid assets (cash, certain time deposits,
bankers' acceptances and specified United States Government, state or federal
agency obligations) equal to a monthly average of not less than 5% of its net
withdrawable savings deposits plus borrowings payable in one year or less.
Federal regulations also require each member institution to maintain an average
daily balance of short-term liquid assets of not less than 1% of the total of
its net withdrawable savings accounts and borrowings payable in one year or
less. Monetary penalties may be imposed upon member institutions failing to meet
these liquidity requirements. The eligible liquidity of the Bank at June 30,
1996, was approximately $6.1 million, or 10.5%, which exceeded the 5% liquidity
requirement by approximately $3.2 million.
QUALIFIED THRIFT LENDER TEST. Savings associations are required
to maintain a specified level of investments in assets that are designated as
qualifying thrift investments. Such investments are generally related to
domestic residential real estate and manufactured housing and include stock
issued by any FHLB, the FHLMC or the FNMA. The Qualified Thrift Lender (the
"QTL") Test requires that 65% of an institution's "portfolio assets" (total
assets less goodwill and other intangibles, property used to conduct business
and 20% of liquid assets) consist of qualified thrift investments on a monthly
average basis in 9 out of every 12 months. The OTS may grant exceptions to the
QTL Test under certain circumstances. If a savings association fails to meet the
QTL Test, the association and its holding company will be subject to certain
operating restrictions. A savings association that fails to meet the QTL Test
will not be eligible for FHLB advances to the fullest possible extent. See
"Federal Home Loan Banks." At June 30, 1996, the Bank had QTL investments equal
to approximately 78.6% of its total portfolio assets.
LENDING LIMIT. OTS regulations generally limit the aggregate
amount that a savings association can lend to one borrower to an amount equal to
15% of the association's total capital under the OTS capital requirements. A
savings association may loan to one borrower an additional amount not to exceed
10% of the association's total capital, if the additional amount is fully
secured by certain forms of "readily marketable collateral." Real estate is not
considered "readily marketable collateral." Certain types of loans are not
subject to these limits. In applying these limits, loans to certain borrowers
may be aggregated. Notwithstanding the specified limits, an association may lend
to one borrower up to $500,000 for any purpose. See "Lending Activities -- Loan
Originations, Purchases and Sales."
TRANSACTIONS WITH INSIDERS AND AFFILIATES. Loans to executive
officers, directors and principal shareholders and their related interests must
conform to the lending limits and the total of such loans cannot exceed the
association's total capital (or 200% of total capital for qualifying
institutions with less than $100 million in assets). Most loans to directors,
executive officers and principal shareholders must be approved in advance by a
majority of the "disinterested" members of the board of directors of the
association with any "interested" director not participating. All loans to
directors, executive officers and principal shareholders must be made on terms
substantially the same as offered in comparable transactions to the general
public. Loans to executive officers are subject to additional limitations. The
Bank was in compliance with such restrictions at June 30, 1996."
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Savings associations must comply with Sections 23A and 23B of the
Federal Reserve Act (the "FRA") pertaining to transactions with affiliates. An
affiliate of a savings association is any company or entity that controls, is
controlled by or is under common control with the savings association. FFD is an
affiliate of the Bank. Generally, Sections 23A and 23B of the FRA (i) limit the
extent to which the savings institution or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to 10% of such
institution's capital stock and surplus, (ii) limit the aggregate of all such
transactions with all affiliates to an amount equal to 20% of such capital stock
and surplus, and (iii) require that all such transactions be on terms
substantially the same, or at least as favorable to the institution, as those
provided in transactions with a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
other similar types of transactions. In addition to the limits in Sections 23A
and 23B, a savings association may not make any loan or other extension of
credit to an affiliate unless the affiliate is engaged only in activities
permissible for a bank holding company and may not purchase or invest in
securities of any affiliate except shares of a subsidiary. The Bank was in
compliance with these requirements and restrictions at June 30, 1996.
HOLDING COMPANY REGULATION. Upon consummation of the Conversion,
FFD became a savings and loan holding company within the meaning of the Home
Owners' Loan Act (the "HOLA"). As such, FFD is subject to OTS regulations,
examination, supervision and reporting requirements, in addition to the
reporting requirements of the SEC.
Congress is considering legislation which may require that FFD
become a bank holding company regulated by the FRB. Bank holding companies with
more than $150 million in assets are subject to capital requirements similar to
those imposed on the Bank and have more extensive interstate acquisition
authority than savings and loan holding companies. They are, however, subject to
more restrictive activity and investment limits than savings and loan holding
companies. No assurances can be given that such legislation will be enacted, and
FFD cannot be certain of the legislation's impact on its future operations until
it is enacted.
The HOLA generally prohibits a savings and loan holding company
from controlling any other savings association or savings and loan holding
company without prior approval of the Director of the OTS, or from acquiring or
retaining more than 5% of the voting shares of a savings association or holding
company thereof which is not a subsidiary. Under certain circumstances, a
savings and loan holding company is permitted to acquire, with the approval of
the Director of the OTS, up to 15% of the previously unissued voting shares of
an undercapitalized savings association for cash without such savings
association being deemed to be controlled by the holding company. Except with
the prior approval of the OTS, no director or officer of a savings and loan
holding company or person owning or controlling by proxy or otherwise more than
25% of such company's stock may also acquire control of any savings institution,
other than a subsidiary institution, or any other savings and loan holding
company.
FFD is a unitary savings and loan holding company. Under current
law, there are generally no restrictions on the activities of a unitary savings
and loan holding company, and such companies are the only financial institution
holding companies which may engage in commercial, securities and insurance
activities without limitation. Congress is considering, however, either limiting
unitary savings and loan holding companies to the same activities as other
financial institution holding companies or permitting certain bank holding
companies to engage in commercial activities and expanded securities and
insurance activities. FFD cannot predict if and in what form these proposals
might become law. The broad latitude to engage in activities under current law
can be restricted, however, if the OTS determines that there is reasonable cause
to believe that the continuation by a savings and loan holding company of an
activity constitutes a serious risk to the financial safety, soundness or
stability of its subsidiary savings association. The OTS may impose such
restrictions as deemed necessary to address such risk, including limiting (i)
payment of dividends by the savings association, (ii) transactions between the
savings association and its affiliates, and (iii) any activities of the savings
association that might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings association.
Notwithstanding the foregoing rules as to permissible business activities of a
unitary savings and loan holding company, if the savings association subsidiary
of a holding company fails to meet the QTL Test, then such unitary holding
company would become subject to the activities restrictions applicable to
multiple holding companies. At June 30, 1996, the Bank met the QTL Test. See
"Qualified Thrift Lender Test."
If FFD were to acquire control of another savings institution
other than through a merger or other business combination with the Bank, FFD
would thereupon become a multiple savings and loan holding company. Except where
such acquisition is pursuant to the authority to approve emergency thrift
acquisitions and where each subsidiary savings association meets the QTL Test,
the activities of FFD and any of its subsidiaries (other than the Bank or other
subsidiary
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savings associations) would thereafter be subject to further restrictions. The
HOLA provides that, among other things, no multiple savings and loan holding
company or subsidiary thereof which is not a savings institution shall commence,
or shall continue after becoming a multiple savings and loan holding company or
subsidiary thereof, any business activity other than (i) furnishing or
performing management services for a subsidiary savings institution, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing or
liquidating assets owned by or acquired from a subsidiary savings institution,
(iv) holding or managing properties used or occupied by a subsidiary savings
institution, (v) acting as trustee under deeds of trust, (vi) those activities
previously directly authorized by federal regulation as of March 5, 1987, to be
engaged in by multiple holding companies, or (vii) those activities authorized
by the FRB as permissible for bank holding companies, unless the OTS by
regulation prohibits or limits such activities for savings and loan holding
companies. Those activities described in (vii) above must also be approved by
the OTS prior to being engaged in by a multiple holding company.
The OTS may also approve acquisitions resulting in the formation
of a multiple savings and loan holding company that controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 5, 1987, or if
the laws of the state in which the institution to be acquired is located
specifically permit institutions to be acquired by state-chartered institutions
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings institutions). As under prior law, the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
FDIC REGULATIONS
DEPOSIT INSURANCE. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of federally insured
banks and thrifts and safeguards the safety and soundness of the banking and
thrift industries. The FDIC has examination authority over all insured
depository institutions, including the Bank, and has authority to initiate
enforcement actions against federally insured savings associations, if the FDIC
does not believe the OTS has taken appropriate action to safeguard safety and
soundness and the deposit insurance fund.
The FDIC administers two separate insurance funds, the Bank
Insurance Fund (the "BIF") for commercial banks and state savings banks and the
SAIF for savings associations and deposits acquired by banks from savings
associations. The FDIC is required to maintain designated levels of reserves in
each fund. The reserves of the SAIF are below the level required by law, because
a significant portion of the assessments paid into the fund are used to pay the
cost of prior thrift failures. The reserves of the BIF met the level required by
law in May 1995.
Depository institutions are generally prohibited from converting
from one insurance fund to the other until the SAIF meets its designated reserve
level, except with the prior approval of the FDIC in certain limited cases,
provided applicable exit and entrance fees are paid. The insurance fund
conversion provisions do not prohibit a SAIF member from converting to a bank
charter or merging with a bank during the moratorium, as long as the resulting
bank continues to pay the applicable insurance assessments to the SAIF and
certain other conditions are met. The Bank is a member of the SAIF and its
deposit accounts are insured by the FDIC, up to the prescribed limits.
ASSESSMENTS. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance each for members of the BIF and the SAIF.
The FDIC may increase assessment rates for either fund if necessary to restore
the fund's ratio of reserves to insured deposits to its target level within a
reasonable time and may decrease such rates if such target level has been met.
The reserves of the SAIF are below the level required by law because a
significant portion of the assessments paid into the SAIF are used to pay the
cost of prior thrift failures.
The BIF has, however, met its required reserve level. The
assessments paid by healthy savings associations exceeded those paid by healthy
BIF members by approximately $.19 per $100 in deposits for 1995, and no BIF
assessments are required of healthy commercial banks in 1996 except a $2,000
minimum fee. The disparity between the premiums paid by savings associations and
commercial banks could have a negative competitive impact on the Bank and other
savings associations.
Congress is considering legislation to recapitalize the SAIF and
to eliminate the significant premium disparity between the SAIF and the BIF by
imposing a special assessment on SAIF members to increase SAIF reserves to the
level required by law. Currently, the special assessment is estimated to be
approximately $.71 per $100 of SAIF deposits held at
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March 31, 1995. In addition, the proposed legislation provides that the cost of
prior thrift failures currently assessed against the SAIF would be shared by the
BIF or certain government sponsored entities. This recapitalization plan also
provides for the merger of the SAIF and BIF on January 1, 1998. As currently
proposed, the SAIF recapitalization legislation provides for an elimination of
the thrift charter or of the separate federal regulation of thrifts prior to the
merger of the deposit insurance funds. If such proposal is adopted, FFD would be
required to become a bank holding company and would be subject to more
restrictive activity limits and to capital requirements similar to those imposed
on the Bank.
The Bank had $52.1 million in deposits at March 31, 1995. If the
special assessment is $.71 per $100 in deposits, the Bank will pay an additional
assessment of $370,000 within 60 days of the enactment of the recapitalization
plan. This assessment should be tax-deductible, but it will reduce earnings and
capital for the quarter in which it is recorded. It is expected that quarterly
SAIF assessments would then be reduced thereafter, but could never be reduced
below the level set for BIF institutions.
No assurance can be given that the SAIF recapitalization plan
will be enacted into law or in what form it may be enacted. In addition, FFD can
give no assurance that the disparity between BIF and SAIF assessments will be
eliminated and that the impact of FFD being regulated as a bank holding company
will not be material until the legislation requiring such changes is enacted.
FRB REGULATIONS
FRB regulations currently require savings associations to
maintain reserves of 3% of net transaction accounts (primarily NOW accounts) up
to $52.0 million in such accounts (subject to an exemption of $4.3 million) and
of 10% of net transaction accounts over $52.0 million. At June 30, 1996, the
Bank was in compliance with its reserve requirements.
FEDERAL HOME LOAN BANKS
The FHLBs, under the regulatory oversight of the Federal Housing
Financing Board, provide credit to their members in the form of advances. The
Bank is a member of the FHLB of Cincinnati and must maintain an investment in
the capital stock of the FHLB of Cincinnati in an amount equal to the greater of
1.0% of the aggregate outstanding principal amount of its residential mortgage
loans, home purchase contracts and similar obligations at the beginning of each
year, or 5% of its advances from the FHLB. The Bank is in compliance with this
requirement with an investment in FHLB of Cincinnati stock of $598,000 at June
30, 1996.
Upon the origination or renewal of a loan or advance, the FHLB of
Cincinnati is required by law to obtain and maintain a security interest in
collateral in one or more of the following categories: fully disbursed, whole
first mortgage loans on improved residential property or securities representing
a whole interest in such loans; securities issued, insured or guaranteed by the
United States Government or an agency thereof; deposits in any FHLB; or other
real estate related collateral (up to 30% of the member association's capital)
acceptable to the applicable FHLB, if such collateral has a readily
ascertainable value and the FHLB can perfect its security interest in the
collateral.
Each FHLB is required to establish standards of community
investment or service that its members must maintain for continued access to
long-term advances from the FHLBs. The standards take into account a member's
performance under the Community Reinvestment Act and its record of lending to
first-time home buyers. All long-term advances by each FHLB must be made only to
provide funds for residential housing finance. The FHLBs have established an
"Affordable Housing Program" to subsidize the interest rate of advances to
member associations engaged in lending for long-term, low- and moderate-income,
owner-occupied and affordable rental housing at subsidized rates. The FHLB of
Cincinnati reviews and accepts proposals for subsidies under that program twice
a year. The Bank has not participated in such program.
OHIO LAW
MERGER MORATORIUM STATUTE. Ohio has adopted a merger moratorium
statute regulating certain takeover bids affecting certain public corporations
that have significant ties to Ohio. The statute prohibits, with some exceptions,
any merger, combination or consolidation and any of certain other sales, leases,
distributions, dividends, exchanges, mortgages or transfers between such an Ohio
corporation and any person who has the right to exercise, alone or with others,
10% or more of the voting power of such corporation (an "Interested
Shareholder"), for three years following the date on which
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such person first becomes an Interested Shareholder. Such a business combination
is permitted only if, prior to the time such person first becomes an Interested
Shareholder, the Board of Directors of the issuing corporation has approved the
purchase of shares that resulted in such person first becoming an Interested
Shareholder.
After the initial three-year moratorium, such a business
combination may not occur unless (1) an exception specifically enumerated in the
statute is applicable to the combination, (2) the combination is approved, at a
meeting held for such purpose, by the affirmative vote of the holders of the
issuing public corporation entitling them to exercise at least two-thirds of the
voting power of the issuing public corporation in the election of directors or
of such different proportion as the articles may provide, provided the
combination is also approved by the affirmative vote of the holders of at least
a majority of the disinterested shares, or (3) the business combination meets
certain statutory criteria designed to ensure that the issuing public
corporation's remaining shareholders receive fair consideration for their
shares.
An Ohio corporation may, under certain circumstances, "opt out"
of the statute by specifically providing in its articles of incorporation that
the statutes does not apply to any business combination of such corporation.
However, the statute still prohibits for twelve months any business combination
that would have been prohibited but for the adoption of such an opt-out
amendment. The statute also provides that it will continue to apply to any
business combination between a person who became an Interested Shareholder prior
to the adoption of such an amendment as if the amendment had not been adopted.
The Articles of Incorporation of FFD do not opt out of the protection afforded
by Chapter 1704. Therefore, the merger moratorium statute applies to FFD.
CONTROL SHARE ACQUISITION STATUTE. Section 1701.831 of the Ohio
Revised Code (the "Control Share Acquisition Statute") requires that certain
acquisitions of voting securities that would result in the acquiring shareholder
owning 20%, 33 1/3%, or 50% of the outstanding voting securities of FFD must be
approved in advance by the holders of at least a majority of the outstanding
voting shares represented at a meeting at which a quorum is present and a
majority of the portion of the outstanding voting shares represented at such a
meeting, excluding the voting shares owned by the acquiring shareholder. The
Control Acquisition Statute was intended, in part, to protect shareholders of
Ohio corporations for coercive tender offers.
TAKEOVER BID STATUTE. Ohio law also contains a statute regulating
take over bids for any Ohio corporation. Such statute provided that no offer may
make a takeover bid unless (i) at least 20 days prior thereto the offer
announces publicly the terms of the proposed takeover bid and files with the
Ohio Division of Securities (the "Securities Division") and provides the target
company with certain information in respect of the offeror, his ownership of the
company's shares and his plans for the company, and (ii) within ten days
following such filing either (a) no hearing is required by the Securities
Division, (b) a hearing is requested by the target company within such time but
the Securities Division adjudicates that the offeror proposes to make full, fair
and effective disclosure to offerees of all information material to a decision
to accept or reject the offer.
The takeover bid statute also states that no offeror shall make a
takeover bid if he owns 5% or more of the issued and outstanding equity
securities of any class of the target company, any of which were purchased
within one year before the proposed takeover bid, and the offeror, before making
any such purchase, failed to announce his intention to gain control of the
target company or otherwise failed to make full and fair disclosure of such
intention to the persons from whom he acquired such securities. The United
States District Court for the Southern District of Ohio has determined that the
Ohio takeover bid statute is preempted by federal regulation.
TAXATION
FEDERAL TAXATION
FFD and the Bank are both subject to the federal tax laws and
regulations which apply to corporations generally. Prior to the enactment of the
Small Business Jobs Protection Act, which was signed into law on August 21,
1996, certain thrift institutions such as the Bank were allowed deductions for
bad debts under methods more favorable than those granted to other taxpayers.
Qualified thrift institutions could compute deductions for bad debts using
either the specific charge off method of Section 166 of the Code or the reserve
method of Section 593 of the Internal Revenue Code of 1986, as amended (the
"Code").
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Under Section 593 of the Code, a thrift institution annually
could elect to deduct bad debts under either (i) the "percentage of taxable
income" method applicable only to thrift institutions, or (ii) the "experience"
method that also was available to small banks. Under the "percentage of taxable
income" method, a thrift institution generally was allowed a deduction for an
addition to its bad debt reserve equal to 8% of its taxable income (determined
without regard to this deduction and with additional adjustments). Under the
experience method, a thrift institution was generally allowed a deduction for an
addition to its bad debt reserve equal to the greater of (i) an amount based on
its actual average experience for losses in the current and five preceding
taxable years, or (ii) an amount necessary to restore the reserve to its balance
as of the close of the base year. A thrift institution could elect annually to
compute its allowable addition to bad debt reserves for qualifying loans either
under the experience method or the percentage of taxable income method. For tax
years 1993, 1992 and 1991, the Bank used the percentage of taxable income method
because such method provided a higher bad debt deduction than the experience
method.
Section 1616(a) of the Small Business Job Protection Act repealed
the Section 593 reserve method of accounting for bad debts by thrift
institutions, effective for taxable years beginning after 1995. Thrift
institutions that are treated as small banks are allowed to utilize the
experience method applicable to such institutions, while thrift institutions
that are treated as large banks are required to use only the specific charge off
method. The percentage of taxable income method of accounting for bad debts is
no longer available for any financial institution.
A thrift institution required to change its method of computing
reserves for bad debt will treat such change as a change in the method of
accounting, initiated by the taxpayer and having been made with the consent of
the Secretary of the Treasury. Section 481(a) of the Code requires certain
amounts to be recaptured with respect to such change. Generally, the amount to
be recaptured will be determined solely with respect to the "applicable excess
reserves" of the taxpayer. The amount of the applicable excess reserves will be
taken into account ratably over a six taxable year period, beginning with the
first taxable year beginning after 1995, subject to the residential loan
requirement described below. In the case of a thrift institution that is treated
as a large bank, the amount of the institution's applicable excess reserves
generally is the excess of (i) the balances of its reserve for losses on
qualifying real property loans (generally loans secured by improved real estate)
and its reserve for losses on nonqualifying loans (all other types of loans) as
of the close of its last taxable year beginning before January 1, 1996, over
(ii) the balances of such reserves as of the close of its last taxable year
beginning before January 1, 1988 (the "pre-1988 reserves"). In the case of a
thrift institution that is treated as a small bank, like the Bank, the amount of
the institution's applicable excess reserves generally is the excess of (i) the
balances of its reserve for losses on qualifying real property loans and its
reserve for losses on nonqualifying loans as of the close of its last taxable
year beginning before January 1, 1996, over (ii) the greater of the balance of
(a) its pre-1988 reserves or (b) what the Bank's reserves would have been at the
close of its last tax year beginning before January 1, 1996, had the Bank always
used the experience method.
For taxable years that begin after December 31, 1995, and before
January 1, 1998, if a thrift meets the residential loan requirement for a tax
year, the recapture of the applicable excess reserves otherwise required to be
taken into account as a Code Section 481(a) adjustment for the year will be
suspended. A thrift meets the residential loan requirement if, for the tax year,
the principal amount of residential loans made by the thrift during the year is
not less than its base amount. The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996.
A residential loan is a loan as described in Section
7701(a)(19)(C)(v) (generally a loan secured by residential or church property
and certain mobile homes), but only to the extent that the loan is made to the
owner of the property to acquire, construct, or improve the property.
The balance of the pre-1988 reserves is subject to the provisions
of Section 593(e) as modified by the Small Business Job Protection Act which
requires recapture in the case of certain excessive distributions to
shareholders. The pre- 1988 reserves may not be utilized for payment of cash
dividends or other distributions to a shareholder (including distributions in
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). Distribution of a cash dividend by a thrift institution to a
shareholder is treated as made: first, out of the institution's post-1951
accumulated earnings and profits; second, out of the pre-1988 reserves; and
third, out of such other accounts as may be proper. To the extent a distribution
by the Bank to FFD is deemed paid out of its pre-1988 reserves under these
rules, the pre-1988 reserves would be reduced and the Bank's gross income for
tax purposes would be increased by the amount which, when reduced by the income
tax, if any, attributable to the inclusion of such amount in its gross income,
equals the amount deemed paid out of the pre-1988 reserves. As of June 30, 1996,
the Bank's pre-1988 reserves for tax purposes totaled approximately $1.9
million. The Bank believes it had approximately $5.9 million of accumulated
earnings and profits for tax purposes as of
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<PAGE> 26
June 30, 1996, which would be available for dividend distributions, provided
regulatory restrictions applicable to the payment of dividends are met. No
representation can be made as to whether the Bank will have current or
accumulated earnings and profits in subsequent years.
In addition to the regular income tax, FFD and the Bank 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. Such tax preference items
include interest on certain tax-exempt bonds issued after August 7, 1986. In
addition, 75% of the amount by which a corporation's "adjusted current earnings"
exceeds its alternative minimum taxable income computed without regard to this
preference item and prior to reduction by net operating losses, is included in
alternative minimum taxable income. 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. Payments
of alternative minimum tax may be used as credits against regular tax
liabilities in future years. In addition, for taxable years after 1986 and
before 1996, FFD and the Bank are also subject to an environmental tax equal to
0.12% of the excess of alternative minimum taxable income for the taxable year
(determined without regard to net operating losses and the deduction for the
environmental tax) over $2.0 million.
The tax returns of the Bank have been audited or closed without
audit through fiscal year 1992. In the opinion of management, any examination of
open returns would not result in a deficiency which could have a material
adverse effect on the financial condition of the Bank.
OHIO TAXATION
FFD is subject to the Ohio corporation franchise tax, which, as
applied to FFD, is a tax measured by both net earnings and net worth. The rate
of tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio taxable
income and 8.9% of computed Ohio taxable income in excess of $50,000 or (ii)
0.582% times taxable net worth.
In computing its tax under the net worth method, FFD may exclude
100% of its investment in the capital stock of the Bank after the Conversion, as
reflected on the balance sheet of FFD, in computing its taxable net worth as
long as it owns at least 25% of the issued and outstanding capital stock of the
Bank. The calculation of the exclusion from net worth is based on the ratio of
the excludable investment (net of any appreciation or goodwill included in such
investment) to total assets multiplied by the net value of the stock. As a
holding company, FFD may be entitled to various other deductions in computing
taxable net worth that are not generally available to operating companies.
A special litter tax is also applicable to all corporations,
including FFD, subject to the Ohio corporation franchise tax other than
"financial institutions." If the franchise tax is paid on the net income basis,
the litter tax is equal to .11% of the first $50,000 of computed Ohio taxable
income and .22% of computed Ohio taxable income in excess of $50,000. If the
franchise tax is paid on the net worth basis, the litter tax is equal to .014%
times taxable net worth.
The Bank is a "financial institution" for State of Ohio tax
purposes. As such, it is subject to the Ohio corporate franchise tax on
"financial institutions," which is imposed annually at a rate of 1.5% of the
Bank's book net worth determined in accordance with GAAP. As a "financial
institution," the Bank is not subject to any tax based upon net earnings or net
profits imposed by the State of Ohio.
ITEM 2. DESCRIPTION OF PROPERTY
The following table sets forth certain information at June
30, 1996, regarding the property on which the main office of the Bank is
located:
<TABLE>
<CAPTION>
Owned Date Square Net
Location or leased acquired footage book value(1)
<S> <C> <C> <C> <C>
321 North Wooster Avenue
Dover, Ohio 44622 Owned 1/96 4,586 $478,000
</TABLE>
(Footnote on next page.)
-26-
<PAGE> 27
(1) At June 30, 1996, the Bank's office equipment had a total net book value of
$67,000. For additional information regarding the Bank's office premises and
equipment, see Notes A-7 and E of Notes to Consolidated Financial
Statements.
ITEM 3. LEGAL PROCEEDINGS
Neither FFD nor the Bank is presently involved in any legal proceedings
of a material nature. From time to time, the Bank is a party to legal
proceedings incidental to its business to enforce its security interest in
collateral pledged to secure loans made by the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The information contained in the FFD Financial Corporation Annual
Report to Shareholders for the fiscal year ended June 30, 1996 (the "Annual
Report") under the caption "Market Price of FFD Common Shares and Related
Shareholder Matters" is incorporated herein by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in the Annual Report under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements appearing in the Annual Report
and the report of Grant Thornton LLP dated August 23, 1996, are incorporated
herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The information contained in the definitive Proxy Statement for the
1996 Annual Meeting of Shareholders of FFD (the "Proxy Statement"), under the
caption "Board of Directors" is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information contained in the Proxy Statement under the caption
"Compensation of Executive Officers and Directors" is incorporated herein by
reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Proxy Statement under the caption
"Voting Securities and Ownership of Certain Beneficial Owners and Management" is
incorporated herein by reference.
-27-
<PAGE> 28
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In consideration of services provided to FFD and the Bank in
connection with the Conversion, FFD and the Bank paid National Capital
Companies, LLC approximately $170,000. Mr. Stephen G. Clinton, an outside
director of FFD and the Bank, is a partner with National Capital Companies, LLC.
ITEM 13. EXHIBITS AND REPORTS ON FROM 8-K
<TABLE>
<CAPTION>
(a) Exhibits
<S> <C>
3 Articles of Incorporation and Code of Regulations
13 Annual Report to Shareholders (the following parts of which are incorporated herein by reference;
"Market Price of FFD's Common Shares and Related Shareholders' Matters;" "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and Consolidated
Financial Statements).
20 Proxy Statement for 1996 Annual Meeting of Shareholders
21 Subsidiaries of FFD Financial Corporation
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by FFD during the quarter ended
June 30, 1996.
-28-
<PAGE> 29
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
FFD FINANCIAL CORPORATION
By:/s/ Robert R. Gerber
-------------------------------------
Robert R. Gerber, President
(Principal Executive Officer)
Date: September 27, 1996
In accordance with the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
/s/ Robert R. Gerber /s/ Robert S. Grant
- ----------------------------- ------------------------------
Robert R. Gerber, Robert S. Grant
President and Director Treasurer
(Principal Financial Officer)
Date: September 27, 1996 Date: September 27, 1996
/s/ Stephen G. Clinton /s/ Roy O. Mitchell, Jr.
- ----------------------------- ------------------------------
Stephen G. Clinton Roy O. Mitchell, Jr.
Director Director
Date: September 27, 1996 Date: September 27, 1996
/s/ J. Richard Gray /s/ Robert D. Sensel
- ----------------------------- ------------------------------
J. Richard Gray Robert D. Sensel
Director Director
Date: September 27, 1996 Date: September 27, 1996
/s/ Richard J. Herzig
- -----------------------------
Richard J. Herzig
Director
Date: September 27, 1996
</TABLE>
-29-
<PAGE> 30
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
<S> <C> <C>
3.1 Articles of Incorporation of FFD Financial Incorporated by reference to the Registration Statement on
Corporation Form S-1 filed by FFD on December 15, 1995 (the "S-1")
with the Securities and Exchange Commission (the "SEC"),
Exhibit 3.1.
3.2 Certificate of Amendment to Articles of Incorporated by reference to Pre-Effective Amendment No. 1
Incorporation of FFD Financial to the S-1 filed with the SEC on February 1, 1996 ("Pre-
Corporation Effective Amendment No. 1"), Exhibit 3.2.
3.3 Certificate of Amendment to Articles of Incorporated by reference to Pre-Effective Amendment No. 1,
Incorporation of FFD Financial Exhibit 3.3.
Corporation
3.4 Code of Regulations of FFD Financial Incorporated by reference to the S-1, Exhibit 3.3.
Corporation
13 FFD Financial Corporation 1996 Annual
Report to Shareholders
20 Proxy Statement for 1996 Annual Meeting
of Shareholders
21 Subsidiaries of FFD Financial Corporation
27 Financial Data Schedule
</TABLE>
-30-
<PAGE> 1
Exhibit 13
FFD
FINANCIAL
CORPORATION
1996
ANNUAL
REPORT
TO
SHAREHOLDERS
<PAGE> 2
Dear Shareholders:
It is with great pleasure that I present FFD Financial Corporation's first
Annual Report to Shareholders.
Net earnings for the year totaled $632,000, or $.47 per share on a pro forma
basis. This represents a solid $153,000, or 32%, increase over the net earnings
of $479,000 recorded during fiscal 1995. Our asset growth during fiscal 1996 of
$20.5 million, or 35%, exceeded our expectations for the year. We are very
pleased with lending operations during fiscal year 1996 as our loan portfolio
increased by $7.0 million, or 17%, without sacrificing quality underwriting, as
nonperforming loans at June 30, 1996, declined from the prior year level.
As you are aware, we successfully completed the conversion of First Federal
Savings Bank of Dover from the mutual to the stock form of ownership and the
concurrent sale of 1,454,750 common shares of FFD Financial Corporation on April
2, 1996. The stock offering resulted in net capital proceeds, after benefit
plans, of $13.0 million. Understandably, one of our primary strategic objectives
for fiscal 1997 will be the deployment of this capital in the most effective
manner possible.
Uncertainty continues on the legislative front. Congress has not yet resolved
the BIF/SAIF insurance premium disparity, and we still expect that First Federal
will be required to pay a special assessment of as much as $300,000 on an
after-tax basis as part of a plan to recapitalize the SAIF. Progress has been
made on a related proposal, as the President has signed legislation that changes
the tax treatment of thrift bad debt reserves. Although this new law eliminates
a tax benefit for thrifts, it also eliminates a financial obstacle to thrift to
bank charter conversions. We believe that a level playing field for banks and
thrifts is critical to our long-term success, and we look forward to a
resolution of the BIF/SAIF premium disparity and related legislative initiatives
that will enhance our ability to compete. The Board of FFD will continue to
monitor these important legislative developments and evaluate charter
alternatives to position First Federal to grow and prosper in our changing
industry.
Notwithstanding the legislative uncertainty, we look forward with a great deal
of optimism toward our first full year of operations as a public company. We can
assure you that the Board of Directors and management are committed to
maximizing the return on your investment in FFD Financial Corporation.
On behalf of the Board of Directors, management and employees of FFD Financial
Corporation, I wish to thank you, our shareholders, for your confidence and
investment in FFD Financial Corporation.
Very truly yours,
FFD FINANCIAL CORPORATION
Robert R. Gerber
President
<PAGE> 3
BUSINESS OF FFD FINANCIAL CORPORATION
================================================================================
FFD Financial Corporation ("FFD"), a unitary savings and loan holding company
incorporated under the laws of the State of Ohio, owns all of the issued and
outstanding common stock of First Federal Savings Bank of Dover ("First
Federal"), a savings bank chartered under the laws of the United States. In
April 1996, FFD acquired all of the common stock issued by First Federal upon
its conversion from a mutual savings association to a stock savings association
(the "Conversion"). Since its formation, FFD's activities have been limited
primarily to holding the common shares of First Federal.
First Federal is a stock savings bank principally engaged in the business of
making permanent first mortgage loans secured by one- to four-family residential
real estate located in First Federal's primary lending area. First Federal also
originates loans for the construction of residential real estate and loans
secured by multifamily real estate (over four units) and nonresidential real
estate. The origination of consumer loans, including unsecured loans, passbook
loans, loans secured by motor vehicles and home improvement loans, constitutes a
small portion of First Federal's lending activities. In addition to originating
loans, First Federal invests in U.S. Government and agency obligations,
interest-bearing deposits in other financial institutions and mortgage-backed
securities. Funds for lending and investment activities are obtained primarily
from deposits, which are insured up to applicable limits by the Federal Deposit
Insurance Corporation ("FDIC"), and loan and mortgage-backed and related
securities repayments. First Federal conducts business from its office located
in Dover, Ohio, and its primary market area consists of Tuscarawas County.
As a savings and loan holding company, FFD is subject to regulation, supervision
and examination by the Office of Thrift Supervision of the United States
Department of the Treasury (the "OTS"). As a savings bank chartered under the
laws of the United States, First Federal is subject to regulation, supervision
and examination by the OTS and the FDIC. First Federal is also a member of the
Federal Home Loan Bank (the "FHLB") of Cincinnati.
MARKET PRICE OF FFD'S
COMMON SHARES AND RELATED SHAREHOLDER MATTERS
===============================================================================
There were 1,454,750 common shares of FFD outstanding on August 21, 1996, held
of record by approximately 770 shareholders. Price information with respect to
FFD's common shares is quoted on the Nasdaq Small-Cap Market ("Nasdaq") under
the symbol "FFDF." The high and low sales prices for the common shares of FFD,
as quoted by Nasdaq, were $11.00 and $9.875 per share, respectively, between
April 2, 1996, the date of completion of the Conversion, and June 30, 1996.
These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not represent actual transactions.
2
<PAGE> 4
In July 1996, FFD declared its first cash dividend, totaling $.05 per share,
payable August 15, 1996.
The income of FFD consists of dividends which may periodically be declared and
paid by the Board of Directors of First Federal on the common shares of First
Federal held by FFD and earnings on the $7.1 million in net proceeds retained by
FFD from the sale of FFD's common shares in connection with the Conversion. In
addition to certain federal income tax considerations, OTS regulations impose
limitations on the payment of dividends and other capital distributions by
savings associations.
Under OTS regulations applicable to converted savings associations, First
Federal is not permitted to pay a cash dividend on its common shares if the
regulatory capital of First Federal would, as a result of the payment of such
dividend, be reduced below the amount required for the liquidation account
(which was established for the purpose of granting a limited priority claim on
the assets of First Federal in the event of a complete liquidation to those
members of First Federal before the Conversion who maintain a savings account at
First Federal after the Conversion) or applicable regulatory capital
requirements prescribed by the OTS.
OTS regulations applicable to all savings associations provide that a savings
association which immediately prior to, and on a pro forma basis after giving
effect to, a proposed capital distribution (including a dividend) has total
capital (as defined by OTS regulations) that is equal to or greater than the
amount of its capital requirements is generally permitted without OTS approval
(but subsequent to 30 days' prior notice to the OTS) to make capital
distributions, including dividends, during a calendar year in an amount not to
exceed the greater of (1) 100% of its net earnings to date during the calendar
year, plus an amount equal to one-half the amount by which its total capital to
assets ratio exceeded its required capital to assets ratio at the beginning of
the calendar year, or (2) 75% of its net earnings for the most recent
four-quarter period. Savings associations with total capital in excess of the
capital requirements that have been notified by the OTS that they are in need of
more than normal supervision will be subject to restrictions on dividends. A
savings association that fails to meet current minimum capital requirements is
prohibited from making any capital distributions without the prior approval of
the OTS. First Federal currently meets all of its regulatory capital
requirements and, unless the OTS determines that First Federal is an institution
requiring more than normal supervision, First Federal may pay dividends in
accordance with the foregoing provisions of the OTS regulations.
3
<PAGE> 5
<TABLE>
SELECTED CONSOLIDATED
FINANCIAL INFORMATION AND OTHER DATA
================================================================================
The following table sets forth certain information concerning the consolidated
financial condition, earnings and other data regarding FFD at the dates and for
the periods indicated.
<CAPTION>
At June 30,
SELECTED CONSOLIDATED FINANCIAL ------------------------------------------------------------------
CONDITION AND OTHER DATA: 1996 1995 1994 1993 1992
--------- --------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $79,458 $58,955 $54,635 $56,718 $57,208
Interest-bearing
deposits (1) 1,793 3,659 5,420 4,676 6,690
Investment securities designated
available for sale - at market 9,256 903 - - -
Investment securities - at cost 2,460 3,353 51 51 51
Mortgage-backed securities designated
as available for sale - at market 9,007 - - - -
Mortgage-backed securities - at cost 5,932 8,153 8,814 9,230 8,443
Loans receivable - net 48,539 41,494 38,981 41,418 40,745
Deposits 52,208 50,601 47,639 50,201 51,359
Advances from the FHLB 5,184 26 - - -
Shareholders' equity (2) (3) 21,411 7,787 6,746 6,212 5,533
<CAPTION>
For the year ended June 30,
------------------------------------------------------------------
SUMMARY OF EARNINGS: 1996 1995 1994 1993 1992
--------- --------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income $ 4,555 $ 3,718 $ 3,576 $ 4,125 $ 4,579
Interest expense 2,471 1,951 1,731 2,187 2,954
--------- --------- -------- -------- --------
Net interest income 2,084 1,767 1,845 1,938 1,625
Provision for losses on loans 50 - 27 25 29
--------- --------- -------- -------- --------
Net interest income after provision
for losses on loans 2,034 1,767 1,818 1,913 1,596
Other income 88 37 37 59 32
General, administrative and other
expense 1,163 1,077 1,044 975 910
--------- --------- -------- -------- --------
Earnings before income taxes 959 727 811 997 718
Federal income taxes 327 248 277 318 232
--------- --------- -------- -------- --------
Net earnings $ 632 $ 479 $ 534 $ 679 $ 486
========= ========= ======== ======== ========
- -------------------------
<FN>
(1) Includes short-term interest-bearing deposits in other banks.
(2) Consists solely of retained earnings at June 30, 1992 through 1995,
inclusive.
(3) At June 30, 1996, includes $586,000 of net unrealized gain on
investment and mortgage-backed securities designated as available for
sale, net of related tax effects, pursuant to Statement of Financial
Accounting Standards ("SFAS") No. 115. At June 30, 1994, includes
$562,000 of net unrealized gain on securities designated as available
for sale, net of related tax effects.
</TABLE>
4
<PAGE> 6
<TABLE>
<CAPTION>
At or for the year ended June 30,
SELECTED FINANCIAL RATIOS -----------------------------------------------------------------
AND OTHER DATA: 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Return on average assets 0.99% 0.86% 0.96% 1.17% 0.88%
Return on average equity 5.72 6.86 8.24 11.56 9.19
Interest rate spread 2.41 2.77 2.98 3.00 2.37
Net interest margin 3.28 3.24 3.36 3.40 2.88
Operating expenses to
average assets 1.82 1.93 1.87 1.69 1.66
Average equity to average
assets 17.29 12.49 11.59 10.16 9.62
Nonperforming assets to
total assets 0.15 0.22 0.66 1.12 1.67
Nonperforming loans to total loans 0.24 0.31 0.91 1.52 2.27
Total delinquent loans to total loans(1) 0.51 1.06 2.20 3.31 3.19
Allowance for loan losses to total loans 0.29 0.23 0.25 0.18 0.12
Allowance for loan losses to
nonperforming loans 124.79 73.28 27.42 11.77 5.22
Net charge-offs to average
loans (2) - .01 .01 - -
Average interest-earning assets to
average interest-bearing liabilities 122.47 113.11 111.89 110.40 109.88
Number of full service offices 1 1 1 1 1
- ----------------------------
<FN>
(1) Delinquent loans are loans as to which a scheduled payment has not been
made within 30 days after the due date.
(2) For the years ended June 30, 1996, 1993 and 1992, First Federal did not
have any charge-offs.
</TABLE>
5
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
GENERAL
- --------------------------------------------------------------------------------
FFD was incorporated for the purpose of owning all of First Federal's
outstanding stock upon conversion to stock form. As a result, the discussion
that follows focuses on First Federal's financial condition and results of
operations. The following discussion and analysis of the financial condition and
results of operations of FFD and First Federal should be read in conjunction
with and with reference to the consolidated financial statements, and the notes
thereto, included in the Annual Report.
CHANGES IN FINANCIAL CONDITION
- --------------------------------------------------------------------------------
FFD's total assets amounted to $79.5 million at June 30, 1996, an increase of
$20.5 million, or 34.8%, from 1995 levels. The increase in total assets was
funded primarily by the $13.0 million net proceeds from FFD's offering of common
shares, a $1.6 million increase in deposits, and a $5.2 million increase in
advances from the FHLB.
Cash, interest-bearing deposits and investments securities totaled $14.4 million
at June 30, 1996, compared to $8.1 million in 1995, an increase of $6.3 million,
or 77.2%. Similarly, mortgage-backed securities increased by $6.8 million, or
83.2%, during fiscal 1996. During June 1996, management purchased $2.9 million
of 7.36%, 27-year term adjustable-rate mortgage-backed securities and a $2.2
million five-year term, one-year callable U.S. Government agency bond yielding
7.40%. These purchases were funded by $5.2 million of FHLB advances maturing
within the next two fiscal years bearing interest at an average rate of 5.81%.
Of the $5.2 million FHLB advances, $2.2 million were fixed-rate and $3.0 million
were adjustable-rate borrowings. The remainder of the increase resulted
primarily from management's deployment of proceeds from the stock offering to
purchase $12.1 million of investment and mortgage-backed securities, which were
partially offset by maturities and principal repayments totaling $3.1 million.
Loans receivable increased by $7.0 million, or 17.0%, to a total of $48.5
million at June 30, 1996, compared to $41.5 million in 1995. Loan disbursements
of $16.8 million, which represented an increase of $8.6 million, or 104.2%, over
total disbursements in fiscal 1995, were partially offset by principal
repayments of $9.8 million during fiscal 1996. The increase in loan
disbursements in fiscal 1996 was comprised primarily of $7.9 million in one- to
four-family residential loans, which was funded through proceeds from the stock
offering and growth in the deposit portfolio.
At June 30, 1996, First Federal's allowance for loan losses totaled $146,000,
representing .3% of total loans and 124.8% of nonperforming loans. At June 30,
1995, the allowance for loan losses totaled $96,000, or .2% of total loans and
73.3% of nonperforming loans. Nonperforming loans
6
<PAGE> 8
amounted to $117,000 and $131,000 at June 30, 1996 and 1995, respectively, and
represented .1% and .2% of total assets at those dates. Although management
believes that its allowance for loan losses was adequate at June 30, 1996, based
on facts and circumstances available to it, there can be no assurances that the
allowance will be adequate to absorb actual loan losses during the current
period, or that additions to such allowance will not be necessary in future
periods, which could adversely affect FFD's results of operations.
Savings deposits increased by $1.6 million, or 3.2%, during fiscal 1996 to a
total of $52.2 million at June 30, 1996. The increase was attributed primarily
to the introduction of a new high yield savings deposit in February 1996, which
bears interest at a rate of 4.57%.
FHLB advances increased by $5.2 million during fiscal 1996. Such funds were used
to purchase investments and mortgage-backed securities, as previously discussed.
COMPARISON OF OPERATING RESULTS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
- --------------------------------------------------------------------------------
GENERAL. The earnings of FFD depend primarily on its level of net interest
income, which is the difference between interest earned on FFD's
interest-earning assets and the interest paid on interest-bearing liabilities.
Net interest income is substantially affected by FFD's interest rate spread,
which is the difference between the average yield earned on interest-earning
assets and the average rate paid on interest-bearing liabilities, as well as by
the average balance of interest-earning assets compared to interest-bearing
liabilities.
Net earnings totaled $632,000 for the fiscal year ended June 30, 1996, an
increase of $153,000, or 31.9%, over the $479,000 in net earnings reported in
fiscal 1995. The increase resulted primarily from a $317,000 increase in net
interest income and a $51,000 increase in other income, which were partially
offset by a $50,000 increase in the provision for losses on loans, an $86,000
increase in general, administrative and other expense and a $79,000 increase in
the provision for federal income taxes.
NET INTEREST INCOME. Total interest income for the fiscal year ended June 30,
1996, amounted to $4.6 million, an increase of $837,000, or 22.5%, over the
amount recorded in 1995. Interest income on loans and mortgage-backed securities
increased by $612,000, or 18.1%. The increase resulted primarily from a $5.0
million increase in the average portfolio balance, coupled with a 49 basis point
increase in the average yield from 6.98% in 1995 to 7.47% in 1996. Interest
income on investment securities and interest-bearing deposits increased by
$225,000, or 68.6%, to a total of $553,000. The increase was due primarily to a
$4.0 million increase in the average balance outstanding. The increase in
interest-earning assets reflects the deployment of the Conversion proceeds which
were used to purchase intermediate-term U.S. Government agency obligations
yielding 6.6%, and to fund growth in the loan portfolio.
Total interest expense for the fiscal year ended June 30, 1996, amounted to $2.5
million, an increase of $520,000, or 26.7%, over the $2.0 million recorded in
1995. Interest expense on
7
<PAGE> 9
deposits increased by $515,000, or 26.4%, due to the increase in the average
deposit balance outstanding year to year of $3.5 million coupled with an
increase of 71 basis points in the average rate paid from 4.05% in 1995 to 4.76%
in 1996.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by approximately $317,000, or 17.9%, to a total of
$2.1 million for the fiscal year ended June 30, 1996. The interest rate spread
declined by 36 basis points during the year from 2.77% in 1995 to 2.41% in 1996,
while the net interest margin increased by 4 basis points from 3.24% in 1995 to
3.28% in 1996.
PROVISION FOR LOSSES ON LOANS. The provision for losses on loans amounted to
$50,000 for the fiscal year ended June 30, 1996. The increase in the provision
for loan losses is due primarily to the growth in the loan portfolio. Management
generally provides for additions to the allowance for loan losses based upon the
inherent risk of loss related to the lending function, the outstanding portfolio
balance, current and anticipated economic conditions as measured by leading
economic indicators and local unemployment data, the level of nonperforming
loans and past loss experience. There can be no assurance that the loan loss
allowance will be adequate to absorb losses on known nonperforming assets or
that the allowance will be adequate to cover losses on nonperforming assets in
the future.
OTHER INCOME. Other income totaled $88,000 for the fiscal year ended June 30,
1996, compared to $37,000 for the same period in 1995. During fiscal 1996, FFD
sold its former office building and acquired its present location at 321 North
Wooster Avenue. The sale resulted in a gain of $50,000, which accounted for the
increase in other income.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and other
expense totaled $1.2 million for the fiscal year ended June 30, 1996, an
increase of $86,000, or 8.0%, over the $1.1 million recorded in 1995. The
increase resulted primarily from an $18,000, or 22.5%, increase in occupancy and
equipment, a $10,000, or 10.2%, increase in franchise taxes, and an increase of
$45,000, or 23.1%, in other operating expenses. The increase in occupancy and
equipment expense resulted from higher depreciation expense on First Federal's
new main office. The franchise tax increase is primarily due to the increase in
shareholders' equity as a result of the Conversion. The increase in other
expenses is due to an increase of $13,000 in office supplies relative to the
formation of the holding company and the change of address, a $6,000 increase in
advertising and pro-rata increases in operating costs attendant to FFD's growth.
FEDERAL INCOME TAXES. The provision for federal income taxes totaled $327,000
for the year ended June 30, 1996, an increase of $79,000, or 31.9%, over the
$248,000 total recorded in 1995. The increase resulted primarily from the
increase in net earnings before taxes of $232,000, or 31.9%. FFD's effective tax
rates were 34.1% for each of the years ended June 30, 1996 and 1995.
8
<PAGE> 10
COMPARISON OF OPERATING RESULTS
FOR THE YEARS ENDED JUNE 30, 1995 AND 1994
- --------------------------------------------------------------------------------
GENERAL. Net earnings totaled $479,000 for the year ended June 30, 1995, a
decrease of $55,000, or 10.3%, from the $534,000 in net earnings recorded for
fiscal 1994. The decline in net earnings resulted primarily from a $78,000
decline in net interest income and a $33,000 increase in general, administrative
and other expense, which were partially offset by a $27,000 decline in the
provision for losses on loans and a $29,000 decline in the provision for federal
income taxes.
NET INTEREST INCOME. Interest income on loans totaled $2.9 million for the
fiscal year ended June 30, 1995, an increase of $21,000, or 0.7%, over the same
period in 1994. The increase resulted primarily from a $353,000, or 0.9%,
increase in weighted-average balances outstanding from year to year.
Interest income on mortgage-backed securities totaled $538,000 for the fiscal
year ended June 30, 1995, a decline of $5,000, or 0.9%, from the amount recorded
for fiscal 1994. The decrease resulted primarily from a $774,000 decline in
weighted-average balances year to year, which was partially offset by a 48 basis
point increase in yield, from 5.92% in 1994 to 6.40% in 1995. The decrease in
mortgage-backed securities resulted from management's decision to redeploy
principal repayments to partially fund growth in the loan portfolio.
Interest income on investment securities and interest-bearing deposits increased
by $126,000, or 62.4%, due primarily to a 214 basis point increase in yield,
from 3.38% in 1994 to 5.52% in 1995, while the weighted-average balance
outstanding remained relatively unchanged year to year. As mentioned previously,
management elected to redeploy excess liquidity during fiscal 1995 into higher
yielding U.S. Government agency obligations.
Interest expense on deposits totaled $1.9 million for the year ended June 30,
1995, an increase of $218,000, or 12.6%, over the $1.7 million total for fiscal
1994. The increase resulted primarily from a 53 basis point increase in the
average cost of deposits from 3.52% in 1994 to 4.05% in 1995, which was
partially offset by a $965,000 decline in the weighted-average balance
outstanding year to year. The increase in the cost of deposits generally
reflected the upward movement in interest rates year to year.
As a result of the foregoing, net interest income declined by $78,000, or 4.2%,
during the fiscal year ended June 30, 1995, compared to fiscal 1994. First
Federal's interest rate spread declined 21 basis points from 2.98% in fiscal
1994 to 2.77% in fiscal 1995. The net interest margin was 3.24% in fiscal 1995,
compared to 3.36% in fiscal 1994. The decline in net interest income was the
primary factor contributing to the downward trend in net earnings year to year.
PROVISION FOR LOSSES ON LOANS. The provision for losses on loans declined by
$27,000 during the fiscal year ended June 30, 1995, compared to fiscal 1994.
First Federal recorded no additions to the allowance for loan losses during
fiscal 1995, primarily based upon a $230,000 decline in nonperforming loans over
the fiscal year.
9
<PAGE> 11
OTHER INCOME. Other operating income totaled $37,000 for the fiscal years ended
June 30, 1995 and 1994. First Federal's other operating income is comprised
primarily of late charges and other fees on loans, service charges on negotiable
order of withdrawal ("NOW") accounts, safe deposit box rentals and other
miscellaneous income and fees.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and other
expense totaled $1.1 million for the year ended June 30, 1995, an increase of
$33,000, or 3.2%, over fiscal 1994. The increase resulted primarily from a
$93,000, or 21.2%, increase in employee compensation and benefits, which was
partially offset by a $59,000, or 23.2%, decline in other operating expense. The
increase in employee compensation and benefits resulted primarily from normal
merit increases coupled with increased costs relating to First Federal's health
insurance plan. The decline in other operating expense resulted primarily from
decreased professional and consulting fees following a management and
operational study performed in fiscal 1994.
FEDERAL INCOME TAXES. The provision for federal income taxes totaled $248,000
for the year ended June 30, 1995, a decrease of $29,000, or 10.5%, from the
$277,000 recorded in fiscal 1994. The decrease in tax expense resulted from an
$84,000, or 10.4%, decline in pre-tax earnings from year to year. The effective
tax rates for the years ended June 30, 1995 and 1994 were 34.1% and 34.2%,
respectively.
10
<PAGE> 12
AVERAGE BALANCE, YIELD, RATE AND VOLUME DATA
- --------------------------------------------------------------------------------
The following table sets forth certain information relating to FFD's average
balance sheet information and reflects the average yield on interest-earning
assets and the average cost of interest-bearing liabilities for the periods
indicated. Such yields and costs are derived by dividing income or expense by
the average monthly balance of interest-earning assets or interest-bearing
liabilities, respectively, for the periods presented. Average balances are
derived from month-end balances, which include nonaccruing loans in the loan
portfolio, net of the allowance for loan losses.
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- ------------------------------ -------------------------------
Average Interest Average Average Interest Average Average Interest Average
outstanding earned/ yield/ outstanding earned/ yield/ outstanding earned/ yield/
balance paid rate balance paid rate balance paid rate
----------- -------- ------- ----------- -------- ------- ----------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets:
Loans receivable $44,855 $3,402 7.58% $40,172 $2,852 7.10% $39,819 $2,831 7.11%
Mortgage-backed
securities 8,713 600 6.89 8,404 538 6.40 9,178 543 5.92
Investment 5,323 363 6.82 701 44 6.28 51 13 25.49
securities
Interest-bearing
deposits and other 4,570 190 4.16 5,237 284 5.42 5,929 189 3.19
------- ------ ------ ------- ------ ------ ------- ------ ------
Total interest-earning
assets 63,461 4,555 7.18 54,514 3,718 6.82 54,977 3,576 6.50
Non-interest-earning assets 474 1,432 912
------- ------- -------
Total assets $63,935 $55,946 $55,889
======= ======= =======
Interest-bearing liabilities:
Deposits $51,713 2,464 4.76 $48,170 1,949 4.05 $49,135 1,731 3.52
Advances from the
FHLB 104 7 6.73 26 2 7.69 - - -
------- ------ ------ ------- ------ ----- ------- ------ -----
Total interest-
bearing liabilities 51,817 2,471 4.77 48,196 1,951 4.05 49,135 1,731 3.52
------ ------ ------ ----- ====== =====
Non-interest-bearing
liabilities 1,063 764 275
------- ------- -------
Total liabilities 52,880 48,960 49,410
Shareholders' equity 11,055 6,986 6,479
------- ------- -------
Total liabilities and
shareholders' equity $63,935 $55,946 $55,889
======= ======= =======
Net interest income $2,084 $1,767 $1,845
====== ======= ======
Interest rate spread 2.41% 2.77% 2.98%
====== ====== ======
Net interest margin (net
interest income as a
percent of average
interest-earning assets) 3.28% 3.24% 3.36%
====== ====== ======
Average interest-earning
assets to average
interest-bearing
liabilities 122.47% 113.11% 111.89%
====== ====== ======
</TABLE>
11
<PAGE> 13
The table below describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected FFD's interest income and expense during the years indicated. 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 prior year rate), (ii) changes in rate (changes
in rate multiplied by prior year volume) and (iii) total changes in rate and
volume. The combined effects of changes in both volume and rate, which cannot be
separately identified, have been allocated proportionately to the change due to
volume and the change due to rate:
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
------------------------------ -------------------------------
Increase Increase
(decrease) (decrease)
due to due to
------------------ ----------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Loans receivable $346 $206 $550 $25 $ (4) $ 21
Mortgage-backed securities 20 42 62 (48) 43 (5)
Investment securities 314 5 319 42 (11) 31
Interest-bearing deposits and other
(31) (63) (94) (26) 121 95
---- ---- ---- --- ---- ----
Total interest income 649 188 837 (7) 149 142
---- ---- ---- --- ---- ----
Interest expense attributable to:
Deposits 156 359 515 (35) 253 218
FHLB advances 6 (1) 5 2 -- 2
---- ---- ---- --- ---- ----
Total interest expense 162 358 520 (33) 253 220
---- ---- ---- --- ---- ----
Increase (decrease) in net interest
income $487 $(170) $317 $26 $(104) $(78)
==== ====== ==== === ===== ====
</TABLE>
ASSET AND LIABILITY MANAGEMENT
- --------------------------------------------------------------------------------
First Federal, like other financial institutions, is subject to interest rate
risk to the extent that its interest-earning assets reprice differently than its
interest-bearing liabilities. As part of its effort to monitor and manage
interest rate risk, First Federal uses the "net portfolio value" ("NPV")
methodology adopted by the OTS as part of its capital regulations. Although
First Federal is not currently subject to the NPV regulation because such
regulation does not apply to institutions with less than $300 million in assets
and risk-based capital in excess of 12%, the application of the NPV methodology
illustrates certain aspects of First Federal's interest rate risk.
Generally, NPV is the discounted present value of the difference between
incoming cash flows on interest-earning and other assets and outgoing cash flows
on interest-bearing and other liabilities. The application of the methodology
attempts to quantify interest rate risk as the change in the
12
<PAGE> 14
NPV which would result from a theoretical 200 basis point (1 basis point equals
.01%) change in market interest rates. Both a 200 basis point increase in market
interest rates and a 200 basis point decrease in market interest rates are
considered. If the NPV would decrease more than 2% of the present value of the
institution's assets with either an increase or a decrease in market rates, the
institution must deduct 50% of the amount of the decrease in excess of such 2%
in the calculation of the institution's risk-based capital. See "Liquidity and
Capital Resources."
At June 30, 1996, 2% of the present value of First Federal's assets was
approximately $1.4 million. Because the interest rate risk of a 200 basis point
increase in market interest rates (which was greater than the interest rate risk
of a 200 basis point decrease) was $518,000 at June 30, 1996, First Federal
would not have been required to adjust its capital in determining whether First
Federal met its risk-based capital requirement.
Presented below, as of June 30, 1996 and 1995, is an analysis of First Federal's
interest rate risk as measured by changes in NPV for instantaneous and sustained
parallel shifts of 100 basis points in market interest rates. The table also
contains the policy limits set by the Board of Directors of First Federal as the
maximum change in NPV that the Board of Directors deems advisable in the event
of various changes in interest rates. Such limits have been established with
consideration of the dollar impact of various rate changes and First Federal's
strong capital position.
As illustrated in the table, NPV is more sensitive to rising rates than
declining rates. Such difference in sensitivity occurs principally because, as
rates rise, borrowers do not prepay fixed-rate loans as quickly as they do when
interest rates are declining. Thus, in a rising interest rate environment,
because First Federal has a significant amount of fixed-rate loans in its loan
portfolio, the amount of interest First Federal would receive on its loans would
increase relatively slowly as loans are slowly prepaid and new loans are made at
higher rates. Moreover, the interest First Federal would pay on its deposits
would increase rapidly because First Federal's deposits generally have shorter
periods to repricing. The assumptions used in calculating the amounts in this
table are OTS assumptions.
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995
----------------------------- -----------------------------
Change in interest rate Board limit $ change % change $ change % change
(basis points) % change in NPV in NPV in NPV in NPV
- ----------------------- ----------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+400 +40.0% $(2,089) (16.17)% $(734) (9.5)%
+300 +30.0 (1,308) (10.11) (655) (8.4)
+200 +20.0 (518) (4.01) 113 1.5
+100 +10.0 (221) (1.71) 45 0.6
0 0 0 0 0 0
-100 -10.0 176 1.38 (68) (0.9)
-200 -20.0 260 2.01 (113) (1.5)
-300 -30.0 455 3.52 66 0.8
-400 -40.0 582 4.51 334 4.3
</TABLE>
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or
13
<PAGE> 15
periods of 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. Further,
in the event of a change in interest rates, expected rates of prepayment on
loans and mortgage-backed securities and early withdrawal levels from
certificates of deposit would likely deviate significantly from those assumed in
making the risk calculations.
In a rising interest rate environment, First Federal's net interest income could
be expected to be negatively affected. Moreover, rising interest rates could
negatively affect First Federal's earnings due to diminished loan demand.
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
First Federal's principal sources of funds are deposits, loan and
mortgage-backed securities repayments, maturities of securities and other funds
provided by operations. First Federal also has the ability to borrow from the
FHLB of Cincinnati. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and loan and mortgage-backed securities
prepayments are more influenced by interest rates, general economic conditions
and competition. First Federal maintains investments in liquid assets based upon
management's assessment of (i) the need for funds, (ii) expected deposit flows,
(iii) the yields available on short-term liquid assets and (iv) the objectives
of the asset/liability management program. During fiscal 1996, First Federal was
able to increase total deposits through a combined strategy involving both
advertising and deposit pricing.
OTS regulations presently require First Federal to maintain an average daily
balance of investments in United States Treasury securities, federal agency
obligations and other investments having maturities of five years or less in an
amount equal to 5% of the sum of First Federal's average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less. The
liquidity requirement, which may be changed from time to time by the OTS to
reflect changing economic conditions, is intended to provide a source of
relatively liquid funds upon which First Federal may rely if necessary to fund
deposit withdrawals or other short-term funding needs. At June 30, 1996, First
Federal's regulatory liquidity ratio was 10.5%. At such date, First Federal had
commitments to originate loans totaling $1.5 million and no commitments to
purchase or sell loans. First Federal considers its liquidity and capital
sufficient to meet its outstanding short- and long-term needs. At June 30, 1996,
First Federal had no material commitments for capital expenditures.
14
<PAGE> 16
First Federal's liquidity, primarily represented by cash and cash equivalents,
is a result of the funds used in or provided by First Federal's operating,
investing and financing activities. These activities are summarized below for
the years ended June 30, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------------------
1996 1995 1994
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Net earnings $ 632 $ 479 $ 534
Adjustments to reconcile net earnings to
net cash from operating activities (91) (79) (93)
------- ------- ------
Net cash from operating activities 541 400 441
Net cash from investing activities (21,456) (5,192) 2,866
Net cash from financing activities 19,733 2,987 (2,561)
------- ------- ------
Net change in cash and cash equivalents (1,182) (1,805) 746
Cash and cash equivalents at
beginning of period 3,880 5,685 4,939
------- ------- ------
Cash and cash equivalents at
end of period $ 2,698 $ 3,880 $5,685
======= ======= ======
</TABLE>
First Federal is required by applicable law and regulation to meet certain
minimum capital standards. Such capital standards include a tangible capital
requirement, a core capital requirement or leverage ratio and a risk-based
capital requirement.
The tangible capital requirement requires savings associations to maintain
"tangible capital" of not less than 1.5% of the association's adjusted total
assets. Tangible capital is defined in OTS regulations as core capital minus any
intangible assets.
"Core capital" is comprised of common stockholders' equity (including retained
earnings), noncumulative preferred stock and related surplus, minority interests
in consolidated subsidiaries, certain nonwithdrawable accounts and pledged
deposits of mutual associations. OTS regulations require savings associations to
maintain core capital of at least 3% of the association's total assets. The OTS
has proposed to increase such requirement to 4% to 5%, except for those
associations with the highest examination rating and acceptable levels of risk.
OTS regulations require that savings associations maintain "risk-based capital"
in an amount not less than 8% of risk-weighted assets. Risk-based capital is
defined as core capital plus certain
15
<PAGE> 17
additional items of capital, which in the case of First Federal includes a
general loan loss allowance of $146,000 at June 30, 1996.
First Federal exceeded all of its capital requirements at June 30, 1996. The
following table summarizes First Federal's regulatory capital requirements and
regulatory capital at June 30, 1996:
<TABLE>
<CAPTION>
Excess of regulatory
capital over current
Regulatory capital Current requirement requirement
------------------ ------------------- -------------------- Applicable
Amount Percent Amount Percent Amount Percent asset total
------ ------- ------- ------- ------ ------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Tangible capital $12,542 17.3% $11,087 1.5% $11,445 15.8% $72,458
Core capital 12,542 17.3 2,174 3.0 10,368 14.3 72,458
Risk-based capital 12,688 36.8 2,761 8.0 9,927 28.8 34,516
</TABLE>
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------------------------------------------------------
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
FFD to disclose the fair value of its financial instruments, which include the
majority of First Federal's balance sheet accounts in addition to selected
off-balance sheet items. SFAS No. 107 became effective for FFD in fiscal 1996
because FFD has less than $150 million in total assets. Earlier adoption was
required for entities with assets in excess of $150 million. SFAS No. 107
focuses only on disclosure of fair values in the financial statements and,
therefore, had no effect on FFD's consolidated financial condition or results of
operations.
In June 1993, the Financial Accounting Standards Board (the "FASB") adopted SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan," which further
clarifies the accounting treatment, classification and valuation of impaired
loans. SFAS No. 114, which was amended by SFAS No. 118 as to certain income
recognition and financial statement disclosure provisions, and which was
effective for FFD's fiscal year beginning July 1, 1995, requires that impaired
loans be measured based upon the present value of expected future cash flows
discounted at the loan's effective interest rate or, as an alternative, at the
loan's observable market price or fair value of the collateral. FFD's current
procedures for evaluating impaired loans result in carrying loans at the lower
of cost or fair value. Management adopted SFAS No. 114 as of July 1, 1995,
without financial statement effect.
In May 1993, the FASB issued SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," which revises the accounting treatment,
classification and carrying value of investment securities. This accounting
standard results in adjusting certain investment securities to market value.
Under SFAS No. 115, investment securities are classified for balance sheet
purposes based on whether such securities are either held in trading accounts,
available for sale or strictly to be held to maturity. Under SFAS No. 115,
trading account securities are marked to
16
<PAGE> 18
market and the corresponding unrealized gains and losses are reflected in
earnings. Investment securities "available for sale" are adjusted to market
value with the corresponding unrealized gain or loss shown as an adjustment to
shareholders' equity net of deferred income taxes. Investment securities
earmarked to be held to maturity are carried at amortized cost. First Federal
adopted SFAS No. 115 for the fiscal year beginning July 1, 1994. The effect of
adoption was to initially increase retained earnings by approximately $490,000
on July 1, 1994, representing the unrealized market value appreciation of First
Federal's FHLMC stock, net of applicable deferred federal income taxes. As of
June 30, 1996, the amount of unrealized gains on securities designated as
available for sale had increased to approximately $586,000, which is reflected
in FFD's equity accounts.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of." SFAS No. 121
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be held
and used and for long-lived assets and certain identifiable intangibles to be
disposed of. SFAS No. 121 requires an impairment loss to be recognized when the
carrying amount of the asset exceeds the fair value of the asset. The fair value
of an asset is the amount at which the asset could be bought or sold in a
current transaction between willing parties (i.e., other than in a forced
liquidation sale). An entity that recognizes an impairment loss shall disclose
additional information in the financial statements related to the impaired
asset. All long-lived assets and certain identifiable intangibles to be disposed
of and for which management has committed to a plan to dispose of the assets,
whether by sale or abandonment, shall be reported at the lower of the carrying
amount or fair value less cost to sell. Subsequent revisions in estimates of
fair value less cost to sell shall be reported as adjustments to the carrying
amount of assets to be disposed of, provided that the carrying amount of the
asset does not exceed the carrying amount of the asset before an adjustment was
made to reflect the decision to dispose of the asset. SFAS No. 121 requires
additional disclosure in the footnotes regarding assets to be disposed of and is
effective for fiscal years beginning after December 15, 1995. Management does
not anticipate that SFAS No. 121 will have a material effect on the FFD's
consolidated financial condition or results of operations.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights and Excess Servicing Receivables and for Securitization of Mortgage
Loans." SFAS No. 122, which is effective for years beginning after December 15,
1995, will require FFD, to the extent it services mortgage loans for others in
return for servicing fees, to recognize these servicing rights as assets,
regardless of how such assets were acquired. Additionally, FFD would be required
to assess the fair value of these assets at each reporting date to determine any
potential impairment. FFD adopted SFAS No. 122 in July 1996, without material
effect on consolidated financial condition or results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," establishing financial accounting and reporting standards for
stock-based employee compensation plans. SFAS No. 123 encourages all entities to
adopt a new method of accounting to measure compensation cost of all employee
stock compensation plans based on the estimated fair value of the award at the
financial statement date. Companies are, however, allowed to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting,
17
<PAGE> 19
which generally does not result in compensation expense recognition for most
plans. Companies that elect to remain with the existing accounting are required
to disclose in a footnote to the financial statements pro forma net earnings
and, if presented, earnings per share, as if SFAS No. 123 had been adopted. The
accounting requirements of SFAS No. 123 are effective for transactions entered
into during fiscal years that begin after December 15, 1995, although companies
are required to disclose information for awards granted in their first fiscal
year beginning after December 15, 1994. Management has determined that FFD will
continue to account for stock-based compensation pursuant to Accounting
Principles Board Opinion No. 25, and therefore the disclosure provisions of SFAS
No. 123 will have no effect on its consolidated financial position or results of
operations.
IMPACT OF INFLATION AND CHANGING PRICES
- --------------------------------------------------------------------------------
The consolidated financial statements and notes thereto included herein have
been prepared in accordance with generally accepted accounting principles, which
require FFD to measure financial position and results of operations in terms of
historical dollars with the exception of investment and mortgage-backed
securities available-for-sale, which are carried at fair value. Changes in the
relative value of money due to inflation or recession are generally not
considered.
In management's opinion, changes in interest rates affect the financial
condition of a financial institution to a far greater degree than changes in the
rate of inflation. While interest rates are greatly influenced by changes in the
rate of inflation, they do not change at the same rate or in the same magnitude
as the rate of inflation. Rather interest rate volatility is based on changes in
the expected rate of inflation, as well as changes in monetary and fiscal
policies.
18
<PAGE> 20
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTS AND
CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
PAGE
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 20
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 21
CONSOLIDATED STATEMENTS OF EARNINGS 22
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 23
CONSOLIDATED STATEMENTS OF CASH FLOWS 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 26
</TABLE>
19
<PAGE> 21
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
FFD Financial Corporation and Subsidiary
We have audited the accompanying consolidated statements of financial condition
of FFD Financial Corporation and Subsidiary (successor-in-interest to First
Federal Savings Bank of Dover) as of June 30, 1996 and 1995, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the years ended June 30, 1996, 1995 and 1994. These consolidated
financial statements are the responsibility of the Corporation'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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of FFD Financial
Corporation and Subsidiary as of June 30, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the years ended
June 30, 1996, 1995 and 1994, in conformity with generally accepted accounting
principles.
As more fully discussed in Note A-2, the Corporation changed its method of
accounting for certain securities in accordance with Statement of Financial
Accounting Standards No. 115 as of July 1, 1994.
Grant Thornton LLP
Cincinnati, Ohio
August 23, 1996
20
<PAGE> 22
FFD FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
Cash and due from banks $ 905 $ 221
Interest-bearing deposits in other financial institutions 1,793 3,659
------- -------
Cash and cash equivalents 2,698 3,880
Investment securities designated as available
for sale - at market 9,256 903
Investment securities - at cost, approximate
market value of $2,427 and $3,337 as of
June 30, 1996 and 1995 2,460 3,353
Mortgage-backed securities designated as available for
sale - at market 9,007 -
Mortgage-backed securities - at amortized
cost, approximate market value of
$6,073 and $8,338 as of June 30,
1996 and 1995 5,932 8,153
Loans receivable - net 48,539 41,494
Office premises and equipment - at depreciated cost 545 314
Stock in Federal Home Loan Bank - at cost 598 558
Accrued interest receivable 283 152
Prepaid expenses and other assets 140 118
Prepaid federal income taxes - 31
------- -------
Total assets $79,458 $58,955
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $52,208 $50,601
Advances from the Federal Home Loan Bank 5,184 26
Accrued interest payable 37 29
Other liabilities 204 159
Accrued federal income taxes 40 -
Deferred federal income taxes 374 353
------- --------
Total liabilities 58,047 51,168
Commitments - -
Shareholders' equity
Preferred stock - authorized 1,000,000 shares without par
value; no shares issued - -
Common stock - authorized 5,000,000 shares without par or
stated value; 1,454,750 shares issued and outstanding in 1996 - -
Additional paid-in capital 14,132 -
Retained earnings - substantially restricted 7,857 7,225
Unrealized gain on securities designated as available
for sale, net of related tax effects 586 562
Shares acquired by employee stock ownership plan (1,164) -
------- ------
Total shareholders' equity 21,411 7,787
------- ------
Total liabilities and shareholders' equity $79,458 $58,955
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE> 23
FFD FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Interest income
Loans $3,402 $2,852 $2,831
Mortgage-backed securities 600 538 543
Investment securities 363 44 13
Interest-bearing deposits and other 190 284 189
------ ------ ------
Total interest income 4,555 3,718 3,576
Interest expense
Deposits 2,464 1,949 1,731
Borrowings 7 2 -
------ ------ ------
Total interest expense 2,471 1,951 1,731
------ ------ ------
Net interest income 2,084 1,767 1,845
Provision for losses on loans 50 - 27
------ ------ ------
Net interest income after
provision for losses on loans 2,034 1,767 1,818
Other income
Gain on sale of office premises and equipment 50 - -
Other operating income 38 37 37
------ ------ ------
Total other income 88 37 37
General, administrative and other expense
Employee compensation and benefits 528 532 439
Occupancy and equipment 98 80 79
Franchise taxes 108 98 90
Federal deposit insurance premiums 116 109 114
Data processing 73 63 68
Other operating 240 195 254
------ ------ ------
Total general, administrative
and other expense 1,163 1,077 1,044
------ ------ ------
Earnings before income taxes 959 727 811
Federal income taxes
Current 318 260 248
Deferred 9 (12) 29
------ ------- ------
327 248 277
------ ------- ------
NET EARNINGS $ 632 $ 479 $ 534
====== ======= ======
</TABLE>
The accompanying notes are an integral part of these statements.
22
<PAGE> 24
FFD FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended June 30, 1996, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
SHARES UNREALIZED
ACQUIRED BY GAIN ON
EMPLOYEE SECURITIES
ADDITIONAL STOCK DESIGNATED
COMMON PAID-IN OWNERSHIP AS AVAILABLE RETAINED
STOCK CAPITAL PLAN FOR SALE EARNINGS TOTAL
<S> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1993 $ - $ - $ - $ - $6,212 $ 6,212
Net earnings for the year ended June 30, 1994 - - - - 534 534
------- ----------- ------------ ------------- ------ -------
Balance at June 30, 1994 - - - - 6,746 6,746
Designation of securities as available for sale upon
adoption of SFAS No. 115 - - - 490 - 490
Net earnings for the year ended June 30, 1995 - - - - 479 479
Unrealized gain on securities designated as available
for sale, net of related tax effects - - - 72 - 72
------- ----------- ------------ ------------- ------ -------
Balance at June 30, 1995 - - - 562 7,225 7,787
Reorganization to common stock form and issuance
of shares in connection therewith - net - 14,132 (1,164) - - 12,968
Net earnings for the year ended June 30, 1996 - - - - 632 632
Unrealized gain on securities designated as available
for sale, net of related tax effects - - - 24 - 24
------- ----------- ------------ ------------- ------ -------
Balance at June 30, 1996 $ - $14,132 $(1,164) $586 $7,857 $21,411
======= =========== ============ ============= ====== =======
</TABLE>
The accompanying notes are an integral part of these statements.
23
<PAGE> 25
FFD FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 632 $ 479 $ 534
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of premiums and discounts
on investments and mortgage-backed securities - net (8) 8 (4)
Amortization of deferred loan origination fees (65) (46) (65)
Depreciation and amortization 43 41 36
Gain on sale of office premises and equipment (50) - -
Provision for losses on loans 50 - 27
Federal Home Loan Bank stock dividends (40) (34) (25)
Increase (decrease) in cash due to changes in:
Accrued interest receivable (131) (42) 41
Prepaid expenses and other assets (23) (39) (4)
Other liabilities 45 16 27
Accrued interest payable 8 (1) (7)
Federal income taxes
Current 71 30 (148)
Deferred 9 (12) 29
-------- ------- --------
Net cash provided by operating activities 541 400 441
Cash flows provided by (used in) investing activities:
Purchase of mortgage-backed securities - (915) (2,539)
Purchase of mortgage-backed securities designated
as available for sale (9,148) - -
Principal repayments on mortgage-backed securities 2,228 1,568 2,959
Purchase of investment securities designated as available
for sale (8,182) - -
Purchase of investment securities designated as
held to maturity - (3,352) -
Proceeds from maturity of investment securities 900 - -
Loan principal repayments 9,797 5,773 11,611
Loan disbursements (16,827) (8,241) (9,136)
Purchase of office premises and equipment (498) (25) (29)
Proceeds from sale of office premises and equipment 274 - -
-------- ------- --------
Net cash provided by (used in) investing activities (21,456) (5,192) 2,866
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts 1,607 2,961 (2,561)
Proceeds from Federal Home Loan Bank advances 5,160 30 -
Repayments on Federal Home Loan Bank advances (2) (4) -
Net proceeds from issuance of common stock 12,968 - -
-------- ------- --------
Net cash provided by (used in) financing activities 19,733 2,987 (2,561)
-------- ------- --------
Net increase (decrease) in cash and cash equivalents (1,182) (1,805) 746
Cash and cash equivalents at beginning of year 3,880 5,685 4,939
-------- ------- --------
Cash and cash equivalents at end of year $ 2,698 $ 3,880 $ 5,685
======== ======= ========
</TABLE>
24
<PAGE> 26
FFD FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 234 $ 214 $ 396
======== ====== ======
Interest on deposits and borrowings $ 2,445 $1,950 $1,738
======== ====== ======
Supplemental disclosure of noncash investing activities:
Securities transferred to available for sale classification
upon adoption of SFAS No. 115 $ - $ 51 $ -
======== ====== ======
Unrealized gain on securities designated as
available for sale, net of applicable tax effects $ 24 $ 562 $ -
======== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
25
<PAGE> 27
FFD FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
On November 14, 1995, the Board of Directors of First Federal Savings Bank
of Dover (the Savings Bank) adopted a Plan of Conversion (the Plan) whereby
the Savings Bank would convert to the stock form of ownership, followed by
the issuance of all of the Savings Bank's outstanding stock to a newly
formed holding company, FFD Financial Corporation (the Corporation).
Pursuant to the Plan, the Corporation offered for sale up to 1,454,750
common shares to certain depositors of the Savings Bank and members of the
community. The conversion was completed on April 2, 1996, and resulted in
the issuance of 1,454,750 common shares of the Corporation which, after
consideration of offering expenses totaling approximately $400,000 and $1.2
million in shares purchased by the ESOP, resulted in net proceeds of $13.0
million. Condensed financial statements of the Corporation are presented in
Note K. Future references are made either to the Corporation or the Savings
Bank as applicable.
The Corporation is a savings and loan holding company whose activities are
primarily limited to holding the stock of the Savings Bank. The Savings Bank
conducts a general banking business in north central Ohio which consists of
attracting deposits from the general public and applying those funds to the
origination of loans for residential, consumer and nonresidential purposes.
The Savings Bank's profitability is significantly dependent on net interest
income which is the difference between interest income generated from
interest-earning assets (i.e. loans and investments) and the interest
expense paid on interest-bearing liabilities (i.e. customer deposits and
borrowed funds). Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and the interest
received or paid on these balances. The level of interest rates paid or
received by the Savings Bank can be significantly influenced by a number of
environmental factors, such as governmental monetary policy, that are
outside of management's control.
The consolidated financial information presented herein has been prepared in
accordance with generally accepted accounting principles (GAAP) and general
accounting practices within the financial services industry. In preparing
consolidated financial statements in accordance with GAAP, management is
required to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ from such
estimates.
A summary of significant accounting policies which, with the exception of
the policy described in Note A-2, have been consistently applied in the
preparation of the accompanying consolidated financial statements follows:
1. Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the
Corporation and the Savings Bank, and its wholly-owned subsidiary, Dover
Service Corporation (Dover). At June 30, 1996 and 1995, Dover's principal
assets consisted of an investment in the stock of the Savings Bank's data
processor and a savings account in the Savings Bank. All intercompany
balances and transactions have been eliminated in the accompanying
consolidated financial statements.
26
<PAGE> 28
FFD FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2. Investment Securities and Mortgage-backed Securities
----------------------------------------------------
Prior to July 1, 1994, investment securities and mortgage-backed securities
were carried at cost, adjusted for amortization of premiums and accretion of
discounts. The investment and mortgage-backed securities were carried at
cost, as it was management's intent and the Corporation had the ability to
hold the securities until maturity. Investment securities and
mortgage-backed securities held for indefinite periods of time, or which
management utilized as part of its asset/liability management strategy, or
that would be sold in response to changes in interest rates, prepayment
risk, or the perceived need to increase regulatory capital were classified
as held for sale at the point of purchase and carried at the lower of cost
or market.
In May 1993, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for
Certain Investments in Debt and Equity Securities". SFAS No. 115 requires
that investments be categorized as held-to-maturity, trading, or available
for sale. Securities classified as held-to-maturity are carried at cost only
if the Corporation has the positive intent and ability to hold these
securities to maturity. Trading securities and securities designated as
available for sale are carried at fair value with resulting unrealized gains
or losses recorded to operations or shareholders' equity, respectively. The
Corporation adopted SFAS No. 115 effective July 1, 1994. The effect of
adoption was to initially increase retained earnings by approximately
$490,000 on July 1, 1994, representing the unrealized market value
appreciation on Federal Home Loan Mortgage Corporation (FHLMC) stock, net of
applicable deferred federal income taxes. During fiscal 1996 and 1995, the
amount of net unrealized gains on securities designated as available for
sale had increased and, at June 30, 1996 and 1995, the Corporation's
shareholders' equity reflected a net unrealized gain totaling $586,000 and
$562,000, respectively.
Realized gains and losses on sales of securities are recognized using the
specific identification method.
3. Loans Receivable
----------------
Loans are stated at the principal balance outstanding, reduced by deferred
loan origination fees and the allowance for loan losses. Interest is accrued
as earned unless the collectibility of the loan is in doubt. Interest on
loans that are contractually past due is charged off, or an allowance is
established based on management's periodic evaluation. The allowance is
established by a charge to interest income equal to all interest previously
accrued, and income is subsequently recognized only to the extent that cash
payments are received until, in management's judgment, the borrower's
ability to make periodic interest and principal payments has returned to
normal, in which case the loan is returned to accrual status. If the
ultimate collectibility of the loan is in doubt, in whole or in part, all
payments received on nonaccrual loans are applied to reduce principal until
such doubt is eliminated.
27
<PAGE> 29
FFD FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
4. Loan Origination Fees
---------------------
The Savings Bank accounts for loan origination fees in accordance with SFAS
No. 91 "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases". Pursuant
to the provisions of SFAS No. 91, origination fees received from loans, net
of certain direct origination costs, are deferred and amortized to interest
income using the level-yield method, giving effect to actual loan
prepayments. Additionally, SFAS No. 91 generally limits the definition of
loan origination costs to the direct costs attributable to originating a
loan, i.e., principally actual personnel costs. Fees received for loan
commitments that are expected to be drawn upon, based on the Savings Bank's
experience with similar commitments, are deferred and amortized over the
life of the loan using the level-yield method. Fees for other loan
commitments are deferred and amortized over the loan commitment period on a
straight-line basis.
5. Allowance for Loan Losses
-------------------------
It is the Savings Bank's policy to provide valuation allowances for
estimated losses on loans based on past loan loss experience, changes in the
composition of the loan portfolio, trends in the level of delinquent and
problem loans, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral and current and
anticipated economic conditions in the primary lending area. When the
collection of a loan becomes doubtful, or otherwise troubled, the Savings
Bank records a charge-off equal to the difference between the fair value of
the property securing the loan and the loan's carrying value. Major loans
and major lending areas are reviewed periodically to determine potential
problems at an early date. The allowance for loan losses is increased by
charges to earnings and decreased by charge-offs (net of recoveries).
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan". This Statement, which was amended by SFAS No. 118 as
to certain income recognition and financial statement disclosure provisions,
requires that impaired loans be measured based upon the present value of
expected future cash flows discounted at the loan's effective interest rate
or, as an alternative, at the loans observable market price or fair value of
the collateral if the loan is collateral dependent. The Savings Bank adopted
SFAS No. 114 effective July 1, 1995, without material effect on consolidated
financial condition or results of operations.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In applying the provisions of SFAS No. 114, the Savings Bank
considers its investment in one- to four-family residential loans and
consumer installment loans to be homogeneous and therefore excluded from
separate identification for evaluation of impairment. With respect to the
Savings Bank's investment in impaired nonresidential and multi-family
residential real estate loans, such loans are generally collateral dependent
and, as a result, are carried as a practical expedient at the lower of cost
or fair value.
28
<PAGE> 30
FFD FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. Allowance for Loan Losses (continued)
-------------------------
Collateral dependent loans which are more than ninety days delinquent are
considered to constitute more than a minimum delay in repayment and are
evaluated for impairment under SFAS No. 114 at that time.
At June 30, 1996, the Savings Bank had no loans that would be defined as
impaired under SFAS No. 114.
6. Real Estate Acquired through Foreclosure
----------------------------------------
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost) or fair value less estimated selling
expenses at the date of acquisition. Real estate loss provisions are
recorded if the properties' fair value subsequently declines below the value
determined at the recording date. In determining the lower of cost or fair
value at acquisition, costs relating to development and improvement of
property are capitalized. Costs relating to holding real estate acquired
through foreclosure, net of rental income, are charged against earnings as
incurred.
7. Office Premises and Equipment
-----------------------------
Office premises and equipment are carried at cost and include expenditures
which extend the useful lives of existing assets. Maintenance, repairs and
minor renewals are expensed as incurred. For financial reporting,
depreciation and amortization are provided on the straight-line method over
the useful lives of the assets, estimated to be thirty years for the
building, ten to thirty years for building improvements and five to ten
years for furniture and equipment. An accelerated method is used for tax
reporting purposes.
8. Income Taxes
------------
The Corporation accounts for income taxes pursuant to SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 established financial accounting
and reporting standards for the effects of income taxes that result from the
Corporation's activities within the current and previous years. In
accordance with SFAS No. 109, a deferred tax liability or deferred tax asset
is computed by applying the current statutory tax rates to net taxable or
deductible temporary differences between the tax basis of an asset or
liability and its reported amount in the consolidated financial statements
that will result in net taxable or deductible amounts in future periods.
Deferred tax assets are recorded only to the extent that the amount of net
deductible temporary differences or carryforward attributes may be utilized
against current period earnings, carried back against prior years' earnings,
offset against taxable temporary differences reversing in future periods, or
utilized to the extent of management's estimate of future taxable income. A
valuation allowance is provided for deferred tax assets to the extent that
the value of net deductible temporary differences and carryforward
attributes exceeds management's estimates of taxes payable on future taxable
income. Deferred tax liabilities are provided on the total amount of net
temporary differences taxable in the future.
29
<PAGE> 31
FFD FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
8. Income Taxes (continued)
------------
The Corporation's principal temporary differences between pretax financial
income and taxable income result primarily from the different methods of
accounting for deferred loan origination fees, Federal Home Loan Bank stock
dividends, general loan loss allowances, percentage of earnings bad debt
deductions and certain components of retirement expense. For certain assets
acquired after December 31, 1980, a temporary difference is also recognized
for depreciation expense computed using accelerated methods for federal
income tax purposes.
9. Retirement Plans
----------------
The Savings Bank has a defined benefit pension plan covering all employees
who have attained 21 years of age and have completed one full year of
service. Annual contributions are made to fund current service costs and
amortization of past service costs. The Savings Bank's provision for pension
expense was $25,000 and $8,000 for the years ended June 30, 1996 and 1995.
The disclosure requirements under SFAS No. 87, "Accounting for Pensions",
have not been provided based on materiality.
In conjunction with its reorganization to stock form, the Corporation
implemented an Employee Stock Ownership Plan (ESOP). The ESOP provides
retirement benefits for substantially all employees who have completed one
year of service and have attained the age of 21. The Corporation accounts
for the ESOP in accordance with Statement of Position (SOP) 93-6,
"Employers' Accounting for Employee Stock Ownership Plans". SOP 93-6
requires the measure of compensation expense recorded by employers to equal
the fair value of ESOP shares allocated to participants during a fiscal
year. Expense recognized related to the ESOP totaled approximately $30,000
for the year ended June 30, 1996.
10. Earnings Per Share
------------------
The provisions of Accounting Principles Board Opinion No. 15, "Earnings Per
Share", is not applicable for the fiscal years ended June 30, 1996, 1995 and
1994, as the Corporation completed its conversion to stock form in April
1996.
11. Cash and Cash Equivalents
-------------------------
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks and interest-bearing deposits in other financial
institutions with original terms to maturity of less than ninety days.
30
<PAGE> 32
FFD FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. Fair Value of Financial Instruments
-----------------------------------
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of fair value of financial instruments, both assets and
liabilities, whether or not recognized in the consolidated statement of
financial condition, for which it is practicable to estimate that value. For
financial instruments where quoted market prices are not available, fair
values are based on estimates using present value and other valuation
methods.
The methods used are greatly affected by the assumptions applied, including
the discount rate and estimates of future cash flows. Therefore, the fair
values presented may not represent amounts that could be realized in an
exchange for certain financial instruments.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments at June 30,
1996:
CASH AND CASH EQUIVALENTS: The carrying amounts presented in
the consolidated statement of financial condition for cash and
cash equivalents are deemed to approximate fair value.
INVESTMENT AND MORTGAGE-BACKED SECURITIES: For investment and
mortgage-backed securities, fair value is deemed to equal the
quoted market price.
LOANS RECEIVABLE: The loan portfolio has been segregated into
categories with similar characteristics, such as one- to
four-family residential, multi-family residential and
nonresidential real estate. These loan categories were further
delineated into fixed-rate and adjustable-rate loans. The fair
values for the resultant loan categories were computed via
discounted cash flow analysis, using current interest rates
offered for loans with similar terms to borrowers of similar
credit quality. For loans on deposit accounts and consumer and
other loans, fair values were deemed to equal the historic
carrying values. The historical carrying amount of accrued
interest on loans is deemed to approximate fair value.
FEDERAL HOME LOAN BANK STOCK: The carrying amount presented in
the consolidated statement of financial condition is deemed to
approximate fair value.
DEPOSITS: The fair value of NOW accounts, passbook and club
accounts, and money market deposits is deemed to approximate
the amount payable on demand. Fair values for fixed-rate
certificates of deposit have been estimated using a discounted
cash flow calculation using the interest rates currently
offered for deposits of similar remaining maturities.
31
<PAGE> 33
FFD FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. Fair Value of Financial Instruments (continued)
-----------------------------------
ADVANCES FROM FEDERAL HOME LOAN BANK: The fair value of these
advances is estimated using the rates currently offered for
similar advances of similar remaining maturities or, when
available, quoted market prices.
COMMITMENTS TO EXTEND CREDIT: For fixed-rate and
adjustable-rate loan commitments, the fair value estimate
considers the difference between current levels of interest
rates and committed rates. The difference between the fair
value and notional amount of outstanding loan commitments at
June 30, 1996 was not material.
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Corporation's financial instruments at June 30, 1996 are as
follows:
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
(In thousands)
<S> <C> <C>
Financial assets
Cash and cash equivalents $ 2,698 $ 2,698
Investment securities 11,716 11,683
Mortgage-backed securities 14,939 15,080
Loans receivable 48,539 48,373
Federal Home Loan Bank stock 598 598
------- -------
$78,490 $78,432
======= =======
Financial liabilities
Deposits $52,208 $52,221
Advances from the Federal Home Loan Bank 5,184 5,187
------- -------
$57,392 $57,408
======= =======
</TABLE>
13. Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the 1996
consolidated financial statement presentation.
32
<PAGE> 34
FFD FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses, and
estimated fair values of investment securities at June 30, 1996 and 1995, are as
follows:
<TABLE>
<CAPTION>
JUNE 30, 1996
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
HELD TO MATURITY:
U.S. Government agency obligations $ 2,460 $ - $ 33 $ 2,427
AVAILABLE FOR SALE:
FHLMC stock 51 1,071 - 1,122
U.S. Government and agency
obligations 8,184 - 50 8,134
---------- ----------- ----------- -------
Total investments available for sale 8,235 1,071 50 9,256
---------- ----------- ----------- -------
Total investment securities $ 10,695 $ 1,071 $ 83 $11,683
========== =========== =========== =======
<CAPTION>
JUNE 30, 1995
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
HELD TO MATURITY:
U.S. Government agency
obligations $ 3,353 $ 1 $ 17 $ 3,337
========== =========== =========== =======
AVAILABLE FOR SALE:
FHLMC stock $ 51 $ 852 $ - $ 903
========== =========== =========== =======
</TABLE>
The amortized cost and estimated fair value of U. S. Government and agency
obligations, including those designated as available for sale, at June 30,
1996, by term to maturity are shown below.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
(In thousands)
<S> <C> <C>
Due in one year or less $ 503 $ 501
Due after one year through five years 8,642 8,598
Due in five to ten years 1,498 1,462
---------- ----------
10,643 10,561
FHLMC stock 51 1,122
---------- ----------
$ 10,694 $ 11,683
========== ==========
</TABLE>
33
<PAGE> 35
FFD FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair value of mortgage-backed securities at June 30, 1996 and
1995, are shown below:
<TABLE>
<CAPTION>
1996
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
HELD TO MATURITY:
Federal Home Loan Mortgage
Corporation participation certificates $ 5,089 $ 141 $ - $ 5,230
Government National Mortgage
Association participation certificates 843 - - 843
----------- ----------- ----------- -----------
Total mortgage-backed securities
held to maturity 5,932 141 - 6,073
AVAILABLE FOR SALE:
Federal National Mortgage
Association participation certificates 4,999 - 122 4,877
Federal Home Loan Mortgage
Corporation participation certificates 4,141 - 11 4,130
----------- ----------- ----------- -----------
Total mortgage-backed securities
available for sale 9,140 - 133 9,007
----------- ----------- ----------- -----------
Total mortgage-backed securities $ 15,072 $ 141 $ 133 $ 15,080
=========== =========== =========== ===========
<CAPTION>
1995
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
HELD TO MATURITY:
Federal Home Loan
Mortgage Corporation
participation certificates $ 7,240 $ 177 $ - $ 7,417
Government National
Mortgage Association
participation certificates 913 8 - 921
----------- ----------- ----------- -----------
$ 8,153 $ 185 $ - $ 8,338
=========== =========== =========== ===========
</TABLE>
34
<PAGE> 36
FFD FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost of mortgage-backed securities, including those designated
as available for sale at June 30, 1996, by contractual term to maturity are
shown below. Expected maturities will differ from contractual maturities
because borrowers may generally prepay obligations without prepayment
penalties.
<TABLE>
<CAPTION>
AMORTIZED
COST
(In thousands)
<S> <C>
Due within ten years $ 3,908
Due after ten years 11,124
-------
$15,032
=======
</TABLE>
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at June 30 is as follows:
<TABLE>
<CAPTION>
1996 1995
(In thousands)
<S> <C> <C>
Residential real estate
One- to four-family $45,745 $37,811
Multi-family 1,336 1,228
Nonresidential real estate 1,124 1,621
Consumer and other loans 1,390 1,402
------- -------
49,595 42,062
Less:
Undisbursed portion of loans in
process 614 207
Deferred loan origination fees 296 265
Allowance for losses on loans 146 96
------- -------
$48,539 $41,494
======= =======
</TABLE>
The Savings Bank's lending efforts have historically focused on one- to
four-family and multi-family residential real estate loans, which comprise
approximately $46.0 million, or 95%, of the total loan portfolio at June 30,
1996, and approximately $38.5 million, or 93%, at June 30, 1995. Generally,
such loans have been underwritten on the basis of no more than an 80%
loan-to-value ratio, which has historically provided the Savings Bank with
adequate collateral coverage in the event of default. Nevertheless, the
Savings Bank, as with any lending institution, is subject to the risk that
real estate values could deteriorate in its primary lending area of north
central Ohio, thereby impairing collateral values. However, management is of
the belief that real estate values in the Savings Bank's primary lending
area are presently stable.
35
<PAGE> 37
FFD FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE C - LOANS RECEIVABLE (continued)
In the ordinary course of business, the Savings Bank has made loans to some
of its directors, officers and employees and their related business
interests. In the opinion of management, such loans are consistent with
sound lending practices and are within applicable regulatory lending
limitations. The balance of such loans totaled approximately $561,000 and
$403,000 at June 30, 1996 and 1995.
NOTE D - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is summarized as follows for
the years ended June 30:
<TABLE>
<CAPTION>
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Beginning balance $ 96 $ 99 $ 75
Provision for losses on loans 50 - 27
Loan charge-offs - (3) (3)
---- ---- ----
Ending balance $146 $ 96 $ 99
==== ==== ====
</TABLE>
As of June 30, 1996, the Savings Bank's allowance for loan losses was
comprised solely of a general loan loss allowance, which is includible as a
component of regulatory risk-based capital.
Nonperforming and nonaccrual loans at June 30, 1996, 1995 and 1994, totaled
$117,000, $131,000 and $361,000, respectively. Interest income that would
have been recognized had nonaccrual loans performed pursuant to contractual
terms totaled approximately $9,000, $9,000 and $25,000 for the years ended
June 30, 1996, 1995 and 1994, respectively.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at June 30 is comprised of the following:
<TABLE>
<CAPTION>
1996 1995
(In thousands)
<S> <C> <C>
Land $100 $104
Building and improvements 382 259
Furniture and equipment 158 154
---- ----
640 517
Less accumulated depreciation and
amortization 95 203
---- ----
$545 $314
==== ====
</TABLE>
During fiscal 1996, the Corporation sold its former office building and
moved to a new location. The sale resulted in recognition of a gain totaling
$50,000. The new office facility was acquired for a purchase price totaling
$438,000.
36
<PAGE> 38
FFD FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE F - DEPOSITS
Deposits consist of the following major classifications at June 30:
<TABLE>
<CAPTION>
DEPOSIT TYPE AND WEIGHTED-
AVERAGE INTEREST RATE 1996 1995
AMOUNT % AMOUNT %
(In thousands)
<S> <C> <C> <C> <C>
NOW accounts
1996 - 2.03% $ 4,389 8.4 $ - -
1995 - 2.31% - - 4,522 8.9
Passbook
1996 - 3.76% 14,909 28.6 - -
1995 - 3.29% - - 13,128 26.0
------- ----- ------- -----
Total demand, transaction and
passbook deposits 19,298 37.0 17,650 34.9
Certificates of deposit
Original maturities of:
One year or less
1996 - 4.90% 8,433 16.1 - -
1995 - 5.07% - - 9,970 19.7
12 months to 36 months
1996 - 5.91% 23,422 44.9 - -
1995 - 5.75% - - 20,092 39.7
Individual retirement accounts
1996 - 5.37% 1,056 2.0 - -
1995 - 4.89% - - 2,889 5.7
------- ----- ------- -----
Total certificates of deposit 32,911 63.0 32,951 65.1
------- ----- ------- -----
Total deposit accounts $52,208 100.0 $50,601 100.0
======= ===== ======= =====
</TABLE>
Interest expense on deposits at June 30 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Passbook $ 473 $ 451 $ 500
NOW accounts 103 102 100
Certificates of deposit 1,888 1,396 1,131
------ ------ ------
$2,464 $1,949 $1,731
====== ====== ======
</TABLE>
37
<PAGE> 39
FFD FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE F - DEPOSITS (continued)
Maturities of outstanding certificates of deposit at June 30 are summarized
as follows:
<TABLE>
<CAPTION>
1996 1995
(In thousands)
<S> <C> <C>
Less than one year $23,788 $21,497
One year to two years 7,656 9,475
Two years to three years 1,467 1,979
------- -------
$32,911 $32,951
======= =======
</TABLE>
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at June 30, 1996 by
a pledge of certain residential mortgage loans totaling $7.8 million and the
Savings Bank's investment in Federal Home Loan Bank stock, are summarized as
follows:
<TABLE>
<CAPTION>
INTEREST MATURING IN YEAR
RATE ENDING JUNE 30, 1996 1995
<S> <C> <C> <C>
6.20% 1997 $2,200 $ -
5.48% 1998 1,480 -
5.57% 1998 1,480 -
8.15% 2005 24 26
------ -----
$5,184 $ 26
====== =====
Weighted-average interest rate 5.79% 8.15%
==== ====
</TABLE>
NOTE H - FEDERAL INCOME TAXES
Federal income taxes differ from the amounts computed at the statutory
corporate tax rate at June 30 as follows:
<TABLE>
<CAPTION>
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Federal income taxes at statutory rate $326 $247 $276
Increase in taxes resulting from:
Other 1 1 1
---- ---- ----
Federal income taxes per consolidated
financial statements $327 $248 $277
==== ==== ====
Effective tax rate 34.1% 34.1% 34.2%
==== ==== ====
</TABLE>
38
<PAGE> 40
FFD FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE H - FEDERAL INCOME TAXES (continued)
The composition of the Corporation's net deferred tax liability at June 30
is as follows:
<TABLE>
<CAPTION>
Taxes (payable) refundable on temporary 1996 1995
differences at statutory rate: (In thousands)
<S> <C> <C>
Deferred tax assets:
Deferred loan origination fees $ 27 $ 42
Retirement expense 32 39
General loan loss allowance 50 33
ESOP contribution expense 10 -
Other 3 2
----- -----
Deferred tax assets 122 116
Deferred tax liabilities:
Federal Home Loan Bank stock dividends (85) (71)
Difference between book and tax depreciation (14) (13)
Percentage of earnings bad debt deduction (95) (95)
Unrealized gains on securities designated
as available for sale (302) (290)
----- -----
Deferred tax liabilities (496) (469)
----- -----
Net deferred tax liability $(374) $(353)
===== =====
</TABLE>
The Savings Bank is allowed a special bad debt deduction generally limited
to 8% of otherwise taxable income and subject to certain limitations based
on aggregate loans and deposit account balances at the end of the year. If
the amounts that qualify as deductions for federal income taxes are later
used for purposes other than bad debt losses, including distributions in
liquidation, such distributions will be subject to federal income taxes at
the then current corporate income tax rate. Retained earnings at June 30,
1996, include approximately $1.9 million for which federal income taxes have
not been provided. The approximate amount of unrecognized deferred tax
liability relating to the cumulative bad debt deduction was approximately
$550,000 at June 30, 1996.
39
<PAGE> 41
FFD FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE I - LOAN COMMITMENTS
The Savings Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers including commitments to extend credit. Such commitments involve,
to varying degrees, elements of credit and interest-rate risk in excess of
the amount recognized in the consolidated statement of financial condition.
The contract or notional amounts of the commitments reflect the extent of
the Savings Bank's involvement in such financial instruments.
The Savings Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit
is represented by the contractual notional amount of those instruments. The
Savings Bank uses the same credit policies in making commitments and
conditional obligations as those utilized for on-balance-sheet instruments.
At June 30, 1996, the Savings Bank had outstanding commitments of
approximately $1.5 million to originate loans. Additionally, the Savings
Bank was obligated under unused lines of credit totaling $615,000. In the
opinion of management, all loan commitments equaled or exceeded prevalent
market interest rates as of June 30, 1996, and will be funded from normal
cash flow from operations.
NOTE J - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL
The Savings Bank is subject to minimum regulatory capital standards
promulgated by the Office of Thrift Supervision (OTS). The minimum capital
standards generally require the maintenance of regulatory capital sufficient
to meet each of three tests, hereinafter described as the tangible capital
requirement, the core capital requirement and the risk-based capital
requirement. The tangible capital requirement provides for minimum tangible
capital (defined as shareholders' equity less all intangible assets) equal
to 1.5% of adjusted total assets. The core capital requirement provides for
minimum core capital (tangible capital plus certain forms of supervisory
goodwill and other qualifying intangible assets) equal to 3.0% of adjusted
total assets. An OTS proposal, if adopted in present form, would increase
the core capital requirement to a range of 4.0% to 5.0% of adjusted total
assets for substantially all savings associations.
In the opinion of management, the proposed revision to the capital
requirement will have no material effect on the Savings Bank's excess
regulatory capital position. The risk-based capital requirement provides for
the maintenance of core capital plus general loss allowances equal to 8.0%
of risk-weighted assets. In computing risk-weighted assets, the Savings Bank
multiplies the value of each asset on its statement of financial condition
by a defined risk-weighting factor, e.g., one-to-four family residential
loans carry a risk-weighted factor of 50%.
40
<PAGE> 42
FFD FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE J - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL (continued)
As of June 30, 1996, the Savings Bank's regulatory capital exceeded all
minimum capital requirements as shown in the following table:
<TABLE>
<CAPTION>
REGULATORY CAPITAL
TANGIBLE CORE RISK-BASED
CAPITAL % CAPITAL % CAPITAL %
(In thousands)
<S> <C> <C> <C>
Capital under generally accepted
accounting principles $ 13,190 $ 13,190 $ 13,190
General valuation allowances - - 146
Unrealized gains on securities
designated as available for sale (648) (648) (648)
-------- -------- --------
Regulatory capital computed 12,542 17.3 12,542 17.3 12,688 36.8
Minimum capital requirement 1,087 1.5 2,174 3.0 2,761 8.0
-------- ---- -------- ---- -------- ----
Regulatory capital - excess $ 11,455 15.8 $ 10,368 14.3 $ 9,927 28.8
======== ==== ======== ==== ======== ====
</TABLE>
The deposit accounts of the Savings Bank and of other savings associations
are insured by the FDIC in the Savings Association Insurance Fund ("SAIF").
The reserves of the SAIF are below the level required by law, because a
significant portion of the assessments paid into the fund are used to pay
the cost of prior thrift failures. The deposit accounts of commercial banks
are insured by the FDIC in the Bank Insurance Fund ("BIF"), except to the
extent such banks have acquired SAIF deposits. The reserves of the BIF met
the level required by law in May 1995. As a result of the respective reserve
levels of the funds, deposit insurance assessments paid by healthy savings
associations exceeded those paid by healthy commercial banks by
approximately $.19 per $100 in deposits in 1995. In 1996, no BIF assessments
will be required for healthy commercial banks except for a $2,000 minimum
fee. A continuation of this premium disparity could have a negative
competitive impact on the Savings Bank and other institutions with SAIF
deposits.
Congress is considering legislation to recapitalize the SAIF and eliminate
the significant premium disparity. Currently, that recapitalization plan
provides for a special assessment on deposits held at March 31, 1995, in
order to increase SAIF reserves to the level required by law. Estimates as
to the amount of the assessment range from $.69 to $.85 per $100 of SAIF
deposits. The cost of prior thrift failures would be shared by both the SAIF
and the BIF, which would likely increase BIF assessments by $.02 to $.025
per $100 in deposits. SAIF assessments would initially be set at the same
level as BIF assessments and could never be reduced below the level for BIF
assessments. These projected assessment levels may change if commercial
banks holding SAIF deposits are provided some relief from the special
assessment or are allowed to transfer SAIF deposits to the BIF.
41
<PAGE> 43
FFD FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE J - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL (continued)
A component of the recapitalization plan provides for the merger of the SAIF
and BIF on January 1, 1998. However, the SAIF recapitalization legislation
currently provides for an elimination of the thrift charter or of the
separate federal regulation of thrifts prior to the merger of the deposit
insurance funds. As a result, the Savings Bank would be regulated as a bank
under federal laws which would subject it to the more restrictive activity
limits imposed on national banks. Under separate legislation recently passed
by Congress, the Savings Bank will be required to recapture, as taxable
income, approximately $280,000 of its percentage of earnings bad debt
reserve, representing the post-1987 additions to the reserve, and will be
unable to utilize the percentage of earnings method to compute taxable
income in the future. The Savings Bank will be permitted to amortize the
recapture of its bad debt reserve into taxable income over six years. The
Savings Bank has previously provided deferred taxes on the amount of the bad
debt reserve subject to recapture.
The Savings Bank had $52.1 million in deposits at March 31, 1995. If the
special assessment is finalized at $.85 per $100 in deposits, the Savings
Bank will pay an additional assessment of $443,000. This assessment should
be tax deductible, but it will reduce earnings and capital for the quarter
in which it is recorded.
No assurances can be given that the SAIF recapitalization plan will be
enacted into law or in what form it may be enacted. In addition, the Savings
Bank can give no assurances that the disparity between BIF and SAIF
assessments will be eliminated and cannot predict the impact of being
regulated as a bank, or the change in tax accounting for bad debt reserves,
until the legislation requiring such change is enacted.
42
<PAGE> 44
FFD FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE K - CONDENSED FINANCIAL STATEMENTS OF FFD FINANCIAL CORPORATION
The following condensed financial statements summarize the financial
position of FFD Financial Corporation as of June 30, 1996, and the results
of its operations for the period ended June 30, 1996.
<TABLE>
<CAPTION>
FFD FINANCIAL CORPORATION
STATEMENT OF FINANCIAL CONDITION
June 30, 1996
(In thousands)
<S> <C>
ASSETS
Cash and due from banks $ 621
Investment securities designated as available for sale - at market 1,977
Mortgage-backed securities designated as available for sale -
at market 4,385
Loan receivable from ESOP 1,164
Investment in First Federal Savings Bank of Dover 13,190
Accrued interest receivable 80
-------
Total assets $21,417
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred federal income taxes $ 6
Shareholders' equity
Common stock -
Additional paid-in capital 20,571
Unrealized gain on securities designated as available
for sale, net of related tax effects 586
Retained earnings 254
-------
Total liabilities and shareholders' equity $21,417
=======
FFD FINANCIAL CORPORATION
STATEMENT OF EARNINGS
Period ended June 30, 1996
(In thousands)
Revenue
Interest income $ 120
Equity in earnings of subsidiary 176
-------
Total revenue 296
General and administrative expenses 22
-------
Earnings before income taxes 274
Federal income taxes 20
-------
NET EARNINGS $ 254
=======
</TABLE>
43
<PAGE> 45
FFD FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE L - CORPORATE REORGANIZATION AND CONVERSION TO STOCK FORM
On November 14, 1995, the Savings Bank's Board of Directors adopted a Plan
of Conversion whereby the Savings Bank would convert to the stock form of
ownership, followed by the issuance of all of the Savings Bank's outstanding
common stock to a newly formed holding company, FFD Financial Corporation.
On April 2, 1996, the Savings Bank completed its conversion to the stock
form of ownership, and issued all of the Savings Bank's outstanding common
shares to the Corporation.
In connection with the conversion, the Corporation sold 1,454,750 shares at
a price of $10.00 per share which, after consideration of offering expenses
totaling approximately $416,000, and shares purchased by employee benefit
plans totaling $1.2 million, resulted in net cash proceeds of approximately
$13.0 million.
At the date of the conversion, the Savings Bank established a liquidation
account in an amount equal to retained earnings reflected in the statement
of financial condition used in the conversion offering circular. The
liquidation account will be maintained for the benefit of eligible savings
account holders who maintained deposit accounts in the Savings Bank after
conversion.
In connection with the Conversion, the Corporation paid National Capital
Companies LLC approximately $170,000. A partner of National Capital
Companies LLC also serves as an outside director to FFD Financial
Corporation.
44
<PAGE> 46
FFD FINANCIAL CORP.
AND
FIRST FEDERAL SAVINGS BANK OF DOVER
DIRECTORS AND OFFICERS
================================================================================
BOARD OF DIRECTORS OF
FFD FINANCIAL CORPORATION AND
FIRST FEDERAL SAVINGS BANK OF DOVER
Stephen G. Clinton
President
National Capital Companies LLC
Robert R. Gerber
President
First Federal Savings Bank of Dover and
FFD Financial Corporation
J. Richard Gray
Chairman
Hanhart Agency, Inc.
Richard J. Herzig
Chairman - Retired
Toland-Herzig Funeral Homes, Inc.
Roy O. Mitchell, Jr.
Managing Officer - Retired
First Federal Savings Bank of Dover
Robert D. Sensel
President and Chief Executive Officer
Dover Hydraulics, Inc.
OFFICERS OF
FFD FINANCIAL CORPORATION
Robert R. Gerber
President
Robert S. Grant
Treasurer
Shirley A. Wallick
Secretary
OFFICERS OF
FIRST FEDERAL SAVINGS BANK OF DOVER
Robert R. Gerber
President
Robert S. Grant
Treasurer, Chief Financial Officer
and Vice President
Shirley A. Wallick
Secretary
45
<PAGE> 47
SHAREHOLDER SERVICES
================================================================================
Registrar and Transfer Company serves as transfer agent and dividend
distributing agent for FFD's shares. Communications regarding change of address,
transfer of shares, lost certificates and dividends should be sent to:
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016-3572
(800) 368-5948
ANNUAL MEETING
================================================================================
The Annual Meeting of Shareholders of FFD Financial Corp. will be held on
October 8, 1996, at 1:00 p.m., Eastern Time, at the office of FFD, 321 North
Wooster Avenue, Dover, Ohio 44622. Shareholders are cordially invited to attend.
ANNUAL REPORT ON FORM 10-KSB
================================================================================
A copy of FFD's Annual Report on Form 10-KSB, as filed with the Securities and
Exchange Commission, will be available at no charge to shareholders upon request
to:
FFD Financial Corporation
321 North Wooster Avenue
Dover, Ohio 44622
Attention: Secretary
46
<PAGE> 1
EXHIBIT 20
FFD FINANCIAL CORPORATION
321 NORTH WOOSTER AVENUE
DOVER, OHIO 44622
(330) 364-7777
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Notice is hereby given that the 1996 Annual Meeting of Shareholders of
FFD Financial Corporation ("FFD) will be held at 321 North Wooster Avenue,
Dover, Ohio 44622, on October 8, 1996 at 1:00 p.m., local time (the "Annual
Meeting"), for the following purposes, all of which are more completely set
forth in the accompanying Proxy Statement:
1. To elect three directors of FFD for terms expiring in
1998;
2. To approve the FFD Financial Corporation 1996 Stock
Option and Incentive Plan, a copy of which is
attached hereto as Exhibit A;
3. To approve the First Federal Savings Bank of Dover
Recognition and Retention Plan and Trust Agreement, a
copy of which is attached hereto as Exhibit B;
4. To ratify the selection of Grant Thornton LLP as the
auditors of FFD for the current fiscal year; and
5. To transact such other business as may properly come
before the Annual Meeting or any adjournments
thereof.
Only shareholders of FFD of record at the close of business on August
20, 1996, will be entitled to receive notice of and to vote at the Annual
Meeting and at any adjournments thereof. Whether or not you expect to attend the
Annual Meeting, we urge you to consider the accompanying Proxy Statement
carefully and to SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY SO THAT YOUR
SHARES MAY BE VOTED IN ACCORDANCE WITH YOUR WISHES AND THE PRESENCE OF A QUORUM
MAY BE ASSURED. The giving of a Proxy does not affect your right to vote in
person in the event you attend the Annual Meeting.
By Order of the Board of Directors
Dover, Ohio Robert R. Gerber
August 22, 1996
<PAGE> 2
THIS PAGE INTENTIONALLY LEFT BLANK
<PAGE> 3
FFD FINANCIAL CORPORATION
321 NORTH WOOSTER AVENUE
DOVER, OHIO 44622
(330) 364-7777
PROXY STATEMENT
PROXIES
The enclosed Proxy is being solicited by the Board of Directors of FFD
Financial Corporation ("FFD") for use at the 1996 Annual Meeting of Shareholders
of FFD to be held at 321 North Wooster Avenue, Dover, Ohio 44622, on October 8,
1996, at 1:00 p.m., local time, and at any adjournments thereof (the "Annual
Meeting"). Without affecting any vote previously taken, the Proxy may be revoked
by a shareholder executing a later dated proxy which is received by FFD before
the Proxy is exercised or by giving notice of revocation to FFD in writing or in
open meeting before the Proxy is exercised. Attendance at the Annual Meeting
will not, of itself, revoke a Proxy.
Each properly executed Proxy received prior to the Annual Meeting and
not revoked will be voted as specified thereon or, in the absence of specific
instructions to the contrary, will be voted:
FOR the reelection of Messrs. Stephen G. Clinton, Robert R.
Gerber and Richard J. Herzig as directors of FFD for terms
expiring in 1998;
FOR the approval of the FFD Financial Corporation 1996 Stock
Option and Incentive Plan (the "Stock Option Plan"), a copy of
which is attached hereto as Exhibit A;
FOR the approval of the First Federal Savings Bank of Dover
Recognition and Retention Plan and Trust Agreement (the
"RRP"), a copy of which is attached hereto as Exhibit B;
FOR the ratification of the selection of Grant Thornton LLP
("Grant Thornton") as the auditors of FFD for the current
fiscal year.
Proxies may be solicited by the directors, officers and other employees
of FFD and First Federal Savings Bank of Dover ("First Federal"), in person or
by telephone, telegraph or mail only for use at the Annual Meeting. Such Proxies
will not be used for any other meeting. The cost of soliciting Proxies will be
borne by FFD.
Only shareholders of record as of the close of business on August 20,
1996 (the "Voting Record Date"), are entitled to vote at the Annual Meeting.
Each such shareholder will be entitled to cast one vote for each share owned.
FFD's records disclose that, as of the Voting Record Date, there were 1,454,750
votes entitled to be cast at the Annual Meeting.
This Proxy Statement is first being mailed to shareholders of FFD on or
about August 30, 1996.
VOTE REQUIRED
ELECTION OF DIRECTORS
Under Ohio law and FFD's Code of Regulations (the "Regulations"), the
three nominees receiving the greatest number of votes will be elected as
directors. Shares as to which the authority to vote is withheld and shares held
by a nominee for a beneficial owner which are represented in person or by proxy
but not voted with respect to the election of directors are not counted toward
the election of directors or toward the election of the individual nominees
specified on the Proxy.
APPROVAL OF THE STOCK OPTION PLAN AND THE RRP
The affirmative vote of the holders of a majority of the outstanding
shares is necessary to approve the Stock Option Plan and the RRP. Under Ohio
law, shares held by a nominee for a beneficial owner which are represented in
person or by proxy but not voted with respect to such proposals ("non-votes")
are counted as present. The effect of an abstention or a non-vote is the same as
a vote against the approval of the Stock Option Plan and the RRP. If the
accompanying Proxy is signed and dated by the
<PAGE> 4
shareholder but no vote is specified thereon, however, the shares held by such
shareholder will be voted FOR the adoption of the Stock Option Plan and the RRP
and will not be considered "non-votes."
RATIFICATION OF SELECTION OF AUDITORS
The affirmative vote of the holders of a majority of the shares
represented in person or by proxy at the Annual Meeting is necessary to ratify
the selection of Grant Thornton as the auditors of FFD for the current fiscal
year. Under Ohio law and the Regulations, non-votes are counted as present. The
effect of an abstention or a non-vote is the same as a "no" vote. If the
accompanying Proxy is signed and dated by the shareholder but no vote is
specified thereon, however, the shares held by such shareholder will be voted
FOR the ratification of the selection of Grant Thornton as auditors and will not
be considered "non-votes."
VOTING SECURITIES AND OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
only person known to FFD to own beneficially more than five percent of the
outstanding common shares of FFD as of August 15, 1996:
Amount and Nature of Percent of
Name and Address Beneficial Ownership Shares Outstanding
- ---------------- -------------------- ------------------
First Bankers Trust, N.A.
1201 Broadway
Quincy, Illinois 62301 116,380(1) 8.00%
- ---------------------------
(1) Consists of the shares held by First Bankers Trust, N.A. as the Trustee
for the FFD Financial Corporation Employee Stock Ownership Plan (the
"ESOP").
The following table sets forth certain information with respect to the
number of common shares of FFD beneficially owned by each director of FFD and by
all directors and executive officers of FFD as a group as of August 15, 1996:
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Beneficial Ownership Shares Outstanding
-------------------------------------- ------------------
Sole Voting and Shared Voting and
Name and Address(1) Investment Power Investment Power
- ------------------- ---------------- -----------------
<S> <C> <C> <C>
Stephen G. Clinton 2,150 1,850 0.27%
Robert R. Gerber 3,000 5,000 0.54
J. Richard Gray - 20,000 1.37
Richard J. Herzig - 12,500 0.86
Roy O. Mitchell, Jr. 12,500 2,000 1.00
Robert D. Sensel 10,000 10,000 1.37
All directors and executive
officers of FFD as a group
(8 people) 28,850 51,350 5.51%
</TABLE>
- ----------------------------
(1) Each of the persons listed in this table may be contacted at the
address of FFD.
-2-
<PAGE> 5
BOARD OF DIRECTORS
ELECTION OF DIRECTORS
The Regulations provide for a Board of Directors consisting of six
persons. Each of the directors of FFD is also a director of First Federal.
In accordance with Section 2.03 of the Regulations, nominees for
election as directors may be proposed only by the directors or by a shareholder
entitled to vote for directors if such shareholder has submitted a written
nomination to the Secretary of FFD by the later of the July 31st immediately
preceding the annual meeting of shareholders or the sixtieth day before the
first anniversary of the most recent annual meeting of shareholders held for the
election of directors. Each such written nomination must state the name, age,
business or residence address of the nominee, the principal occupation or
employment of the nominee, the number of common shares of FFD owned either
beneficially or of record by each such nominee and the length of time such
shares have been so owned.
The Board of Directors proposes the reelection of the following persons
to terms which will expire in 1998:
<TABLE>
<CAPTION>
Director Director
of FFD of First Federal
Name Age(1) Position(s) Held Since(2) Since
- ---- ------ ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Stephen G. Clinton 43 Director 1995 1993
Robert R. Gerber 47 Director and President 1995 1990
Richard J. Herzig 71 Director 1995 1971
</TABLE>
- -----------------------------
(1) As of August 15, 1996.
(2) Each nominee became a director of FFD in connection with the conversion
of First Federal from mutual to stock form (the "Conversion") and the
formation of FFD as the holding company for First Federal.
If any nominee is unable to stand for election, any Proxies granting
authority to vote for such nominee will be voted for such substitute as the
Board of Directors recommends.
The following directors will continue to serve after the Annual Meeting
for the terms indicated:
<TABLE>
<CAPTION>
Director Director of
of FFD First Federal
Name Age(1) Positions Held Since(2) Since Term Expires
- ---- ------ -------------- --------- ------------- ------------
<S> <C> <C> <C> <C> <C>
J. Richard Gray 69 Director 1995 1969 1997
Roy O. Mitchell, Jr. 69 Director 1995 1965 1997
Robert D. Sensel 51 Director 1995 1993 1997
</TABLE>
- -----------------------------
(1) As of August 15, 1996.
(2) Each director became a director of FFD in connection with the
Conversion.
STEPHEN G. CLINTON has been employed by National Capital Companies LLC
("National Capital"), a financial consulting and investment banking firm
specializing in the financial services industry, since 1990. Although National
Capital is headquartered in Chevy Chase, Maryland, Mr. Clinton operates out of
an office in Dover, Ohio. Mr. Clinton has been President of National Capital
since August 1995.
ROBERT R. GERBER has served as President of First Federal since 1992.
From 1984 to 1992, Mr. Gerber was a loan officer and the Secretary of First
Federal.
-3-
<PAGE> 6
J. RICHARD GRAY has been employed by Hanhart Agency, Inc., an insurance
agency in Dover, since 1951. Mr. Gray has served as that company's Chairman for
the past two years.
RICHARD J. HERZIG is the Chairman and retired President of
Toland-Herzig Funeral Homes, Inc. located in Dover, Ohio.
ROY O. MITCHELL, JR. served as Managing Officer of First Federal from
1967 until his retirement from First Federal in 1992.
ROBERT D. SENSEL has been President and Chief Executive Officer of
Dover Hydraulics, Inc., Dover, Ohio, since 1984. Dover Hydraulics is involved in
the manufacture, repair and distribution of hydraulic cylinders and components
for the steel, construction and mining industries.
MEETINGS OF DIRECTORS
FFD was incorporated in November 1995. The Board of Directors of FFD
met six times for regularly scheduled and special meetings during the fiscal
year ended June 30, 1996. Each director attended at least 75% of the aggregate
of such meetings. No FFD Board of Directors committee meetings were held during
fiscal year 1995.
Each director of FFD is also a director of First Federal. The Board of
Directors of First Federal met 20 times for regularly scheduled and special
meetings during the fiscal year ended June 30, 1996. Each director attended at
least 75% of the aggregate of such meetings and all meetings of committees of
the Board of Directors of which such director was a member.
COMMITTEES OF DIRECTORS
The Board of Directors of FFD does not currently have any committees.
The Board of Directors of First Federal has an Executive Committee, which
functions primarily as a loan approval committee, although the Executive
Committee is authorized to act on other matters. The Executive Committee is
composed of at least three directors of First Federal, and there are no standing
appointments to the committee. The Executive Committee met 26 times during the
fiscal year ended June 30, 1996.
EXECUTIVE OFFICERS
In addition to Mr. Gerber, the President of both FFD and First Federal,
the following persons are executive officers of FFD and First Federal and hold
the designated positions:
<TABLE>
<CAPTION>
Name Age(1) Position(s) Held
---- ------ ----------------
<S> <C> <C>
Robert S. Grant 29 Treasurer of FFD and First Federal and Vice President of
First Federal
Shirley A. Wallick 51 Secretary of FFD and First Federal
</TABLE>
-----------------------------
(1) As of August 15, 1996.
-4-
<PAGE> 7
ROBERT S. GRANT is the Treasurer, Chief Financial Officer and a Vice
President of First Federal and the Treasurer of FFD. He has worked for First
Federal since 1993. From 1989 to 1993, Mr. Grant was an accounting supervisor
with the Federal Reserve Bank of Cleveland.
SHIRLEY A. WALLICK is the Secretary of First Federal and FFD. She is
responsible for teller operations, bookkeeping and on-line coordination of First
Federal's data processing system. She has been an employee of First Federal
since December 1982.
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to Robert R.
Gerber, the President of FFD and First Federal, for the fiscal years ended June
30, 1996, 1995 and 1994. No executive officer of FFD earned salary and bonus in
excess of $100,000 during such period.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
---------------------------
Name and Principal All Other
Position Year Salary($) Bonus($) Compensation(1)
------------------ ---- --------- -------- ---------------
<S> <C> <C> <C> <C>
Robert R. Gerber 1996 $73,933 $6,376 $12,275(2)
President 1995 $62,545 $6,110 $16,483(3)
1994 $55,700 $5,070 $15,791(4)
</TABLE>
- -------------------------
(1) Does not include amounts attributable to other miscellaneous benefits,
the cost of which was less than 10% of Mr. Gerber's cash compensation.
(2) Consists of directors' fees of $3,900 and First Federal's contribution
of $8,375 for the benefit of Mr. Gerber under First Federal's
tax-qualified profit sharing plan (the "Profit Sharing Plan").
(3) Consists of directors' fees of $7,350 and First Federal's contribution
of $9,133 for the benefit of Mr. Gerber under the Profit Sharing Plan.
(4) Consists of directors' fees of $7,425 and First Federal's contribution
of $8,366 for the benefit of Mr. Gerber under the Profit Sharing Plan.
DIRECTOR COMPENSATION
As of January 1, 1996, each director who is not an executive officer of
FFD receives a fee of $300 per regular meeting attended and $50 per special
meeting attended and each director who is not an executive officer of First
Federal receives a fee of $700 per regular meeting attended and $50 per special
meeting attended. In addition, directors who are not executive officers of
either FFD or First Federal receive a fee of $25 per committee meeting attended.
Prior to January 1, 1996, each director of First Federal, including executive
officers, received a fee of $600 per regular meeting attended and $50 per
special meeting attended.
-5-
<PAGE> 8
NEW PLAN BENEFITS
GENERAL. The Stock Option Plan and the RRP must be approved by the
holders of a majority of the outstanding shares of FFD. THE BOARD OF DIRECTORS
OF FFD RECOMMENDS THAT THE SHAREHOLDERS OF FFD APPROVE THE STOCK OPTION PLAN AND
THE RRP.
The following table sets forth certain information with respect to the
options expected to be granted pursuant to the Stock Option Plan and the awards
expected to be made pursuant to the RRP:
<TABLE>
<CAPTION>
Stock Option Plan(1) RRP
-------------------- ----------------------------------
Name and Position Shares Subject To Options Dollar Value(2) Shares
- ----------------- ------------------------- --------------- ------
<S> <C> <C> <C>
Robert R. Gerber, President 21,820 $ 59,364 5,820
All executive officers, as a group
(3 persons) 29,070 35,547 3,485
All directors who are not executive
officers, as a group (5 persons) 36,365 148,359 14,545
All employees who are not executive
officers, as a group (8 persons) 14,750 29,580 2,900
</TABLE>
- ------------------------------
(1) The dollar value of the shares subject to options under the Stock
Option Plan is not determinable.
(2) Based upon the number of shares awarded multiplied by the $10.20 per
share closing sales price quoted by the Nasdaq Small-Cap Market
("Nasdaq") on August 19, 1996.
STOCK OPTION PLAN
The following is a summary of the terms of the Stock Option Plan and is
qualified in its entirety by reference to the full text of the Stock Option
Plan, a copy of which is attached hereto as Exhibit A.
PURPOSE. The purposes of the Stock Option Plan include retaining and
providing incentives to the directors, managerial and other key employees of FFD
and First Federal by facilitating their purchase of a stock interest in FFD.
Pursuant to the Stock Option Plan, 145,475 common shares have been reserved for
issuance by FFD upon the exercise of options to be granted to certain directors,
officers and employees of First Federal and FFD from time to time under the
Stock Option Plan.
ADMINISTRATION AND ELIGIBILITY. The Stock Option Plan will be
administered by a committee of directors composed of at least three directors of
FFD who are not employees of FFD (the "Committee"). The Committee may grant
options under the Stock Option Plan at such times as it deems most beneficial to
First Federal and FFD on the basis of the individual participant's
responsibility, tenure and future potential to First Federal and FFD. Grants
must be made in accordance with the Office of Thrift Supervision ("OTS")
regulations, which provide that no individual may receive options to purchase
more than 25% of the shares which may be subject to options pursuant to the
Stock Option Plan, and directors who are not employees of FFD or First Federal
may not receive options to purchase more than 5% of such shares individually or
30% in the aggregate.
Without further approval of the shareholders, the Board of Directors
may at any time terminate the Stock Option Plan or may amend it from time to
time in such respects as the Board of Directors may deem advisable, except that
the Board of Directors may not, without the approval of the shareholders, make
any amendment which would (a) increase the aggregate number of common shares
which may be issued under the Stock Option Plan (except for adjustments to
reflect certain changes in the capitalization of FFD), (b) materially modify the
requirements as to eligibility for participation in the Stock Option Plan, or
(c) materially increase the benefits accruing to participants under the Stock
Option Plan. Notwithstanding the foregoing, the Board of Directors may amend the
Stock Option Plan to take into account changes in applicable securities, federal
income tax and other applicable laws.
OPTION TERMS. Options granted to the officers and employees under the
Stock Option Plan may be "incentive stock options" ("ISOs") within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").
Options
-6-
<PAGE> 9
granted under the Stock Option Plan to directors who are not employees of FFD or
First Federal will not qualify under the Code and thus will not be incentive
stock options ("Non-Qualified Stock Options").
The option exercise price of each option granted under the Stock Option
Plan will be determined by the Committee at the time of option grant, although
the exercise price must not be less than 100% of the fair market value of the
shares on the date of the grant. In addition, the exercise price of an ISO may
not be less than 110% of the fair market value of the shares on the date of the
grant if the recipient owns more than 10% of FFD's outstanding common shares.
The Committee shall fix the term of each option, except that an ISO shall not be
exercisable after the expiration of ten years from the date it is granted;
provided, however, that if a recipient of an ISO owns a number of shares
representing more than 10% of the FFD shares outstanding at the time the ISO is
granted, the term of the ISO shall not exceed five years. One-fifth of such
stock options awarded under the Stock Option Plan will become exercisable on
each of the first five anniversaries of the date of the award. If the fair
market value of shares awarded pursuant to ISOs exercisable for the first time
by a participant under the Stock Option Plan during any calendar year exceeds
$100,000, however, the ISOs will be considered Non-Qualified Stock Options to
the extent of such excess.
An option recipient cannot transfer or assign an option other than by
will or in accordance with the laws of descent and distribution. Termination for
cause, as defined in the Stock Option Plan, will result in the annulment of any
outstanding exercisable options and any options which have not yet become
exercisable shall terminate upon the resignation, removal or retirement of a
director of FFD or First Federal, or upon the termination of employment of an
officer or employee of FFD or First Federal, except in the case of death or
disability.
FFD will receive no monetary consideration for the granting of options
under the Stock Option Plan. Upon the exercise of options, FFD will receive
payment of cash or, if acceptable to the Committee, FFD common shares or
outstanding awarded stock options. The market value of the common shares
underlying the options reserved for the Stock Option Plan is $1,483,845 based
upon the number of shares reserved, multiplied by the $10.20 per share closing
sales price quoted by Nasdaq on August 19, 1996.
TAX TREATMENT OF INCENTIVE STOCK OPTIONS. An optionee who is granted an
ISO does not recognize taxable income either on the date of grant or on the date
of exercise. Upon disposition of shares acquired from the exercise of an ISO,
long-term capital gain or loss is generally recognized in an amount equal to the
difference between the amount realized on the sale or disposition and the
exercise price. However, if the optionee disposes of the shares within two years
of the date of grant or within one year from the date of the transfer of the
shares to the optionee (a "Disqualifying Disposition"), then the optionee will
recognize ordinary income, as opposed to capital gain, at the time of
disposition in an amount generally equal to the lesser of (i) the amount of gain
realized on the disposition, or (ii) the difference between the fair market
value of the shares received on the date of exercise and the exercise price. Any
remaining gain or loss is treated as a short-term or long-term capital gain or
loss, depending upon the period of time the shares have been held.
FFD is not entitled to a tax deduction upon either the exercise of an
ISO or the disposition of shares acquired pursuant to such exercise, except to
the extent that the optionee recognizes ordinary income in a Disqualifying
Disposition. Ordinary income from a Disqualifying Disposition will constitute
compensation but will not be subject to tax withholding, nor will it be
considered wages for payroll tax purposes.
If the holder of an ISO pays the exercise price, in whole or in part,
with previously acquired shares, the exchange should not affect the ISO tax
treatment of the exercise. Upon such exchange, and except as otherwise described
herein, no gain or loss is recognized by the optionee upon delivering previously
acquired shares to FFD, and shares received by the optionee equal in number to
previously acquired common stock exchanged therefor will have the same basis and
holding period for long-term capital gain purposes as the previously acquired
shares. (The optionee, however, will not be able to utilize the prior holding
period for the purpose of satisfying the ISO statutory holding period
requirements for avoidance of a Disqualifying Disposition.) Shares received by
the optionee in excess of the number of shares previously acquired will have a
basis of zero and a holding period which commences as of the date the shares are
transferred to the optionee upon exercise of the ISO. If the exercise of an ISO
is effected using shares previously acquired through the exercise of an ISO, the
exchange of such previously acquired shares will be considered a disposition of
such shares for the purpose of determining whether a Disqualifying Disposition
has occurred.
TAX TREATMENT OF NON-QUALIFIED STOCK OPTIONS. An optionee receiving a
Non-Qualified Stock Option does not recognize taxable income on the date of
grant of the option, provided that the option does not have a readily
ascertainable fair market value at the time it is granted. The optionee must
recognize ordinary income generally at the time of exercise of a
-7-
<PAGE> 10
Non-Qualified Stock Option in the amount of the difference between the fair
market value of the shares on the date of exercise and the option price. The
ordinary income received will constitute compensation for which tax withholding
by FFD generally will be required. The amount of ordinary income recognized by
an optionee will be deductible by FFD in the year that the optionee recognizes
the income if FFD complies with the applicable withholding requirement.
If, at the time of exercise, the sale of the shares could subject the
optionee to short-swing profit liability under Section 16(b) of the Securities
Exchange Act of 1934, such person generally will not recognize ordinary income
until the date that the optionee is no longer subject to such Section 16(b)
liability. Upon such date, the optionee will recognize ordinary income in an
amount equal to the fair market value of the shares on such date less the option
exercise price. Nevertheless, the optionee may elect under Section 83(b) of the
Code within 30 days of the date of exercise to recognize ordinary income as of
the date of exercise, without regard to the restriction of Section 16(b).
Shares acquired upon the exercise of a Non-Qualified Stock Option will
have a tax basis equal to their fair market value on the exercise date or other
relevant date on which ordinary income is recognized, and the holding period for
the shares generally will begin on the date of exercise or such other relevant
date. Upon subsequent disposition of the shares, the optionee will recognize
long-term capital gain or loss if the optionee has held the shares for more than
one year prior to disposition or short-term capital gain or loss if the optionee
has held the shares for one year or less.
If a holder of a Non-Qualified Stock Option pays the exercise price, in
whole or in part, with previously acquired shares, the optionee will recognize
ordinary income in the amount by which the fair market value of the shares
received exceeds the exercise price. The optionee will not recognize gain or
loss upon delivering such previously acquired shares to FFD. Shares received by
an optionee equal in number to the previously acquired shares exchanged therefor
will have the same basis and holding period as such previously acquired shares.
Shares received by an optionee in excess of the number of such previously
acquired shares will have a basis equal to the fair market value of such
additional shares as of the date ordinary income is recognized. The holding
period for such additional shares will commence as of the date of exercise or
such other relevant date.
PROPOSED AWARDS. If the shareholders approve the Stock Option Plan, the
Board of Directors of FFD expects to grant options to the following persons to
purchase the number of common shares indicated: 21,280 shares to Mr. Gerber,
3,625 shares to each of Mr. Grant and Ms. Wallick, Mr. Douglas Baker and Ms.
Jennifer Thomas; 1,500 shares to each of Ms. Kimberly Hammerstrom, Ms. Jodi
Frantz, Ms. Linda Schott and Ms. Mary Mitchell; 750 shares to Ms. Tammy Klein;
and 7,273 to each of the five directors who are not full-time employees of FFD
or First Federal and Mr. William R. Gerber, Director Emeritus of First Federal.
Such awards shall become exercisable at the rate of one-fifth per year
commencing on the date that is one year after the date of grant of the award. No
determination has yet been made with respect to the extent to which the options
granted to employees will be ISOs.
THE BOARD OF DIRECTORS OF FFD RECOMMENDS THAT THE SHAREHOLDERS OF FFD
APPROVE THE STOCK OPTION PLAN.
RECOGNITION AND RETENTION PLAN
The following is a summary of the terms of the RRP and is qualified in
its entirety by reference to the full text of the RRP, a copy of which is
attached hereto as Exhibit B.
PURPOSE. First Federal has proposed the RRP to compensate such
directors and key employees for services to First Federal in a manner which will
provide such persons with an additional incentive to put forth maximum efforts
for the success of First Federal and FFD. First Federal expects to contribute
sufficient funds to enable the RRP to purchase up to 58,190 common shares of
FFD.
ADMINISTRATION AND ELIGIBILITY. The RRP will be administered by a
committee of directors composed of at least three directors of First Federal who
are not employees of First Federal (the "RRP Committee").
The RRP Committee will determine which directors and employees of First
Federal will be awarded shares under the RRP and the number of shares awarded;
provided, however, that the aggregate number of shares covered by awards to any
one person shall not exceed 25% of the shares held pursuant to the RRP and
directors who are not employees of First Federal may not receive more than 5% of
such shares individually or 30% in the aggregate.
-8-
<PAGE> 11
TERMS. Unless the RRP Committee specifically states to the contrary at
the time of an award of shares, one-fifth of such shares will be earned and
non-forfeitable on each of the first five anniversaries of the date of the
award. Until shares awarded are earned by the participant, such shares will be
forfeited in the event that the participant ceases to be either a director or an
employee of First Federal, except that in the event of the death or disability
of a participant, the participant's shares will be deemed to be earned and
nonforfeitable.
The shares, together with any cash dividends or distributions paid
thereon, will be distributed as soon as practicable after they are earned. A
participant may direct the voting of all shares awarded to him or her which have
been earned, but have not yet been distributed to him or her. Shares that have
been awarded, but not earned, may not be transferred.
The Board of Directors of First Federal may, by resolution, amend or
terminate the RRP.
TAX TREATMENT OF SHARES AWARDED UNDER THE RRP. Persons receiving shares
under the RRP generally will not recognize income upon the award of such shares,
but will recognize ordinary income when and to the extent the restrictions on
such shares lapse, in an amount equal to the fair market value of the shares at
the time such restrictions lapse plus the amount of any dividends distributed to
the participant with respect to such shares. If applicable withholding
requirements are satisfied, FFD will be entitled to a deduction each year in an
amount equal to the income, if any, recognized by participants for such year.
Under Section 83(b) of the Code, a participant may elect, within 30
days after the shares are awarded, to recognize ordinary income on the date the
shares are awarded based on the fair market value of the shares on such date. If
the election is made, First Federal would be entitled to a deduction for an
equivalent amount. A participant making such an election will have a tax basis
in the shares equal to the amount of ordinary income recognized, and the
participant's holding period for capital gains purposes for such shares will
commence on the date the shares are awarded. If a Section 83(b) election is
made, however, and the shares are subsequently forfeited, the participant will
not be entitled to either a deduction of the amount previously recognized as
income with respect to such shares or a refund of any tax paid thereon.
PROPOSED AWARDS. If the shareholders approve the RRP, the Board of
Directors of First Federal expects to make the following grants: 5,820 shares to
Mr. Gerber; 2,035 shares to Ms. Wallick; 1,450 shares to each of Mr. Grant, Mr.
Baker and Ms. Thomas; and 2,909 shares to each of the five directors who are not
full-time employees of FFD or First Federal.
THE BOARD OF DIRECTORS OF FFD RECOMMENDS THAT THE SHAREHOLDERS OF FFD
APPROVE THE RRP.
SELECTION OF AUDITORS
The Board of Directors has selected Grant Thornton LLP as the auditors
of FFD and First Federal for the current fiscal year and recommends that the
shareholders ratify the selection. Management expects that a representative of
Grant Thornton will be present at the Annual Meeting, will have the opportunity
to make a statement if he or she so desires and will be available to respond to
appropriate questions.
-9-
<PAGE> 12
PROPOSALS OF SHAREHOLDERS AND OTHER MATTERS
Any proposals of shareholders intended to be included in FFD's proxy
statement for the 1997 Annual Meeting of Shareholders should be sent to FFD by
certified mail and must be received by FFD not later than April 24, 1997.
Management knows of no other business which may be brought before the
Annual Meeting. It is the intention of the persons named in the enclosed Proxy
to vote such Proxy in accordance with their best judgment on any other matters
which may be brought before the Annual Meeting.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. WHETHER OR NOT YOU
EXPECT TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO FILL IN, SIGN AND
RETURN THE PROXY IN THE ENCLOSED SELF-ADDRESSED ENVELOPE.
By Order of the Board of Directors
Robert R. Gerber, President
Dover, Ohio
August 22, 1996
-10-
<PAGE> 13
EXHIBIT A
FFD FINANCIAL CORPORATION
1996 STOCK OPTION AND INCENTIVE PLAN
1. PURPOSE. The purpose of the FFD Financial Corporation 1996 Stock
Option and Incentive Plan (this "Plan") is to promote and advance the interests
of FFD Financial Corporation (the "Company"), and its shareholders by enabling
the Company to attract, retain and reward directors, managerial and other key
employees of the Company and any Subsidiary (hereinafter defined), and to
strengthen the mutuality of interests between such directors and employees and
the Company's shareholders by providing such persons with a proprietary interest
in pursuing the long-term growth, profitability and financial success of the
Company.
2. DEFINITIONS. For purposes of this Plan, the following terms shall
have the meanings set forth below:
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as
amended, or any successor thereto, together with rules, regulations and
interpretations promulgated thereunder.
(c) "Committee" means the Committee of the Board constituted
as provided in Section 3 of this Plan.
(d) "Common Shares" means the common shares, without par
value, of the Company or any security of the Company issued in
substitution, in exchange or in lieu thereof.
(e) "Company" means FFD Financial Corporation, an Ohio
corporation, or any successor corporation.
(f) "Employment" means regular employment with the Company or
a Subsidiary and does not include service as a director only.
(g) "Exchange Act" means the Securities Exchange Act of 1934,
as amended, or any successor statute.
(h) "Fair Market Value" shall be determined as follows:
(i) If the Common Shares are traded on a
national securities exchange at the time of grant of the Stock
Option, then the Fair Market Value shall be the average of the
highest and the lowest selling price on such exchange on the
date such Stock Option is granted or, if there were no sales
on such date, then on the next prior business day on which
there was a sale.
(ii) If the Common Shares are quoted on The
Nasdaq Stock Market at the time of the grant of the Stock
Option, then the Fair Market Value shall be the mean between
the closing high bid and low asked quotation with respect to a
Common Share on such date on The Nasdaq Stock Market.
(iii) If the Common Shares are not traded on
a national securities exchange or quoted on The Nasdaq Stock
Market, then the Fair Market Value shall be as determined by
the Committee.
(i) "Incentive Stock Option" means any Stock Option granted
pursuant to the provisions of Section 6 of this Plan that is intended
to be and is specifically designated as an "incentive stock option"
within the meaning of Section 422 of the Code.
(j) "Non-Qualified Stock Option" means any Stock Option
granted pursuant to the provisions of Section 6 of this Plan that is
not an Incentive Stock Option.
(k) "OTS" means the Office of Thrift Supervision, Department
of the Treasury.
A-1
<PAGE> 14
(l) "Participant" means an employee or director of the Company
or a Subsidiary who is granted an Award under this Plan.
Notwithstanding the foregoing, for the purposes of the granting of any
Incentive Stock Option under this Plan, the term "Participant" shall
include only employees of the Company or a Subsidiary.
(m) "Plan" means the FFD Financial Corporation 1996 Stock
Option and Incentive Plan, as set forth herein and as it may be
hereafter amended from time to time.
(n) "Stock Option" means an award to purchase Common Shares
granted pursuant to the provisions of Section 6 of this Plan.
(o) "Subsidiary" means any corporation or entity in which the
Company directly or indirectly controls 50% or more of the total voting
power of all classes of its stock having voting power and includes,
without limitation, First Federal Savings Bank of Dover.
(p) "Terminated for Cause" means any removal of a director or
discharge of an employee for the personal dishonesty, incompetence,
willful misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of a
material provision of any law, rule or regulation (other than traffic
violations or similar offenses), a material violation of a final
cease-and-desist order or any other action of a director or employee
which results in a substantial financial loss to the Company or a
Subsidiary.
3. ADMINISTRATION.
(a) This Plan shall be administered by the Committee to be
comprised of not less than three of the members of the Board who are
not employees of the Company. The members of the Committee shall be
appointed from time to time by the Board. Members of the Committee
shall serve at the pleasure of the Board, and the Board may from time
to time remove members from, or add members to, the Committee. A
majority of the members of the Committee shall constitute a quorum for
the transaction of business. An action approved in writing by a
majority of the members of the Committee then serving shall be fully as
effective as if the action had been taken by unanimous vote at a
meeting duly called and held.
(b) The Committee is authorized to construe and interpret this
Plan and to make all other determinations necessary or advisable for
the administration of this Plan. The Committee may designate persons
other than members of the Committee to carry out its responsibilities
under such conditions and limitations as it may prescribe. Any
determination, decision or action of the Committee in connection with
the construction, interpretation, administration, or application of
this Plan shall be final, conclusive and binding upon all persons
participating in this Plan and any person validly claiming under or
through persons participating in this Plan. The Company shall effect
the granting of Stock Options under this Plan in accordance with the
determinations made by the Committee, by execution of instruments in
writing in such form as approved by the Committee.
4. DURATION OF, AND COMMON SHARES SUBJECT TO, THIS PLAN.
(a) Term. This Plan shall terminate on the date which is ten
(10) years from the date on which this Plan is adopted by the Board,
except with respect to Stock Options then outstanding. Notwithstanding
the foregoing, no Incentive Stock Option may be granted under this Plan
after the date which is ten (10) years from the date on which this Plan
is adopted by the Board or the date on which this Plan is approved by
the shareholders of the Company, whichever is earlier.
(b) Common Shares Subject to Plan. The maximum number of
Common Shares in respect of which Stock Options may be granted under
this Plan, subject to adjustment as provided in Section 9 of this Plan,
shall be ten percent of the total Common Shares sold in connection with
the conversion of First Federal Savings Bank of Dover from mutual to
stock form.
For the purpose of computing the total number of Common Shares
available for Stock Options under this Plan, there shall be counted against the
foregoing limitations the number of Common Shares subject to issuance upon the
exercise or settlement of Stock Options as of the dates on which such Stock
Options are granted. If any Stock Options are forfeited, terminated or exchanged
for other Stock Options, or expire unexercised, the Common Shares which were
theretofore subject
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to such Stock Options shall again be available for Stock Options under this Plan
to the extent of such forfeiture, termination or expiration of such Stock
Options.
Common Shares which may be issued under this Plan may be either
authorized and unissued shares or issued shares which have been reacquired by
the Company. No fractional shares shall be issued under this Plan.
5. ELIGIBILITY AND GRANTS. Persons eligible for Stock Options under
this Plan shall consist of directors and managerial and other key employees of
the Company or a Subsidiary who hold positions with significant responsibilities
or whose performance or potential contribution, in the judgment of the
Committee, will benefit the future success of the Company or a Subsidiary. In
selecting the directors and employees to whom Stock Options will be awarded and
the number of shares subject to such Stock Options, the Committee shall consider
the position, duties and responsibilities of the eligible directors and
employees, the value of their services to the Company and the Subsidiaries and
any other factors the Committee may deem relevant.
6. STOCK OPTIONS. Stock Options granted under this Plan may be in the
form of Incentive Stock Options or Non-Qualified Stock Options, and such Stock
Options shall be subject to the following terms and conditions as the Committee
shall deem desirable:
(a) Grant. Stock Options may be granted under this Plan on
terms and conditions not inconsistent with the provisions of this Plan
and in such form as the Committee may from time to time approve and
shall contain such additional terms and conditions, not inconsistent
with the express provisions of this Plan; provided, however, that no
more than 25% of the shares subject to Stock Options may be awarded to
any individual who is an employee of the Company or a Subsidiary, no
more than 5% of such shares may be awarded to any director who is not
an employee of the Company or a Subsidiary and no more than 30% of such
shares may be awarded to non-employee directors in the aggregate.
(b) Stock Option Price. The option exercise price per Common
Share purchasable under a Stock Option shall be determined by the
Committee at the time of grant; provided, however, that in no event
shall the exercise price of a Stock Option be less than 100% of the
Fair Market Value of the Common Shares on the date of the grant of such
Stock Option. Notwithstanding the foregoing, in the case of a
Participant who owns Common Shares representing more than 10% of the
outstanding Common Shares at the time an Incentive Stock Option is
granted, the option exercise price shall in no event be less than 110%
of the Fair Market Value of the Common Shares at the time an Incentive
Stock Option is granted to such Participant.
(c) Stock Option Terms. Subject to the right of the Company to
provide for earlier termination in the event of any merger, acquisition
or consolidation involving the Company, the term of each Stock Option
shall be fixed by the Committee; except that the term of Incentive
Stock Options will not exceed ten years after the date the Incentive
Stock Option is granted; provided, however, that in the case of a
Participant who owns a number of Common Shares representing more than
10% of the Common Shares outstanding at the time an Incentive Stock
Option is granted, the term of the Incentive Stock Option granted to
such Participant shall not exceed five years.
(d) Exercisability. Except as set forth in Section 6(f) and
Section 7 of this Plan, Stock Options awarded under this Plan shall
become exercisable at the rate of one-fifth per year commencing on the
date that is one year after the date of the grant of the Stock Option
and shall be subject to such other terms and conditions as shall be
determined by the Committee at the date of grant.
(e) Method of Exercise. A Stock Option may be exercised, in
whole or in part, by giving written notice of exercise to the Company
specifying the number of Common Shares to be purchased. Such notice
shall be accompanied by payment in full of the purchase price in cash
or, if acceptable to the Committee in its sole discretion, in Common
Shares already owned by the Participant, or by surrendering outstanding
Stock Options. The Committee may also permit Participants, either on a
selective or aggregate basis, to simultaneously exercise Options and
sell Common Shares thereby acquired, pursuant to a brokerage or similar
arrangement, approved in advance by the Committee, and use the proceeds
from such sale as payment of the purchase price of such shares.
(f) Special Rule for Incentive Stock Options. With respect to
Incentive Stock Options granted under this Plan, to the extent the
aggregate Fair Market Value (determined as of the date the Incentive
Stock Option is granted) of the number of shares with respect to which
Incentive Stock Options are exercisable under all plans of the
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Company or a Subsidiary for the first time by a Participant during any
calendar year exceeds $100,000, or such other limit as may be required
by the Code, such Stock Options shall be Non-Qualified Stock Options to
the extent of such excess.
7. TERMINATION OF EMPLOYMENT OR DIRECTORSHIP.
(a) Except in the event of the death or disability of a
Participant, upon the resignation, removal or retirement from the board
of directors of any Participant who is a director of the Company or a
Subsidiary or upon the termination of Employment of a Participant who
is not a director of the Company or a Subsidiary, any Stock Option
which has not yet become exercisable shall thereupon terminate and be
of no further force or effect, and, subject to extension by the
Committee, any Stock Option which has become exercisable shall
terminate if it is not exercised within 12 months of such resignation,
removal or retirement.
(b) Unless the Committee shall specifically state otherwise at
the time an Option is granted, all Options granted under this Plan
shall become exercisable in full on the date of termination of a
Participant's employment or directorship with the Company or a
Subsidiary because of his death or disability, and, subject to
extension by the Committee, all Options shall terminate if not
exercised within 12 months of the Participant's death or disability.
(c) In the event the Employment or the directorship of a
Participant is Terminated for Cause, any Option which has not been
exercised shall terminate as of the date of such termination for cause.
8. NON-TRANSFERABILITY OF STOCK OPTIONS. No Stock Option under this
Plan, and no rights or interests therein, shall be assignable or transferable by
a Participant except by will or the laws of descent and distribution. During the
lifetime of a Participant, Stock Options are exercisable only by, and payments
in settlement of Stock Options will be payable only to, the Participant or his
or her legal representative.
9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
(a) The existence of this Plan and the Stock Options granted
hereunder shall not affect or restrict in any way the right or power of
the Board or the shareholders of the Company to make or authorize the
following: any adjustment, recapitalization, reorganization or other
change in the Company's capital structure or its business; any merger,
acquisition or consolidation of the Company; any issuance of bonds,
debentures, preferred or prior preference stocks ahead of or affecting
the Company's capital stock or the rights thereof; the dissolution or
liquidation of the Company or any sale or transfer of all or any part
of its assets or business; or any other corporate act or proceeding,
including any merger or acquisition which would result in the exchange
of cash, stock of another company or options to purchase the stock of
another company for any Stock Option outstanding at the time of such
corporate transaction or which would involve the termination of all
Stock Options outstanding at the time of such corporate transaction.
(b) In the event of any change in capitalization affecting the
Common Shares of the Company, such as a stock dividend, stock split,
recapitalization, merger, consolidation, split-up, combination or
exchange of shares or other form of reorganization, or any other change
affecting the Common Shares, such proportionate adjustments, if any, as
the Board in its discretion may deem appropriate to reflect such change
shall be made with respect to the aggregate number of Common Shares for
which Stock Options in respect thereof may be granted under this Plan,
the maximum number of Common Shares which may be sold or awarded to any
Participant, the number of Common Shares covered by each outstanding
Stock Option, and the exercise price per share in respect of
outstanding Stock Options.
(c) The Committee may also make such adjustments in the number
of shares covered by, and the exercise price or other value of, any
outstanding Stock Options in the event of a spin-off or other
distribution (other than normal cash dividends) of Company assets to
shareholders. In the event that another corporation or business entity
is being acquired by the Company, and the Company agrees to assume
outstanding employee stock options and/or the obligation to make future
grants of options or rights to employees of the acquired entity, the
aggregate number of Common Shares available for Stock Options under
Section 4 of this Plan may be increased accordingly.
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10. AMENDMENT AND TERMINATION OF THIS PLAN. Without further approval of
the shareholders, the Board may at any time terminate this Plan or may amend it
from time to time in such respects as the Board may deem advisable, except that
the Board may not, without approval of the shareholders, make any amendment
which would (a) increase the aggregate number of Common Shares which may be
issued under this Plan (except for adjustments pursuant to Section 9 of this
Plan), (b) materially modify the requirements as to eligibility for
participation in this Plan, or (c) materially increase the benefits accruing to
Participants under this Plan. The above notwithstanding, the Board may amend
this Plan to take into account changes in applicable securities, federal income
tax and other applicable laws.
11. MODIFICATION OF OPTIONS. The Board may authorize the Committee to
direct the execution of an instrument providing for the modification of any
outstanding Stock Option which the Board believes to be in the best interests of
the Company; provided, however, that no such modification, extension or renewal
shall reduce the exercise price or confer on the holder of such Stock Option any
right or benefit which could not be conferred on him by the grant of a new Stock
Option at such time and shall not materially decrease the Participant's benefits
under the Stock Option without the consent of the holder of the Stock Option,
except as otherwise permitted under this Plan.
12. MISCELLANEOUS.
(a) Tax Withholding. The Company shall have the right to
deduct from any settlement, including the delivery or vesting of Common
Shares, made under this Plan any federal, state or local taxes of any
kind required by law to be withheld with respect to such payments or to
take such other action as may be necessary in the opinion of the
Company to satisfy all obligation for the payment of such taxes. If
Common Shares are used to satisfy tax withholding, such shares shall be
valued based on the Fair Market Value when the tax withholding is
required to be made.
(b) No Right to Employment. Neither the adoption of this Plan
nor the granting of any Stock Option shall confer upon any employee of
the Company or a Subsidiary any right to continued Employment with the
Company or a Subsidiary, as the case may be, nor shall it interfere in
any way with the right of the Company or a Subsidiary to terminate the
Employment of any of its employees at any time, with or without cause.
(c) Annulment of Stock Options. The grant of any Stock Option
under this Plan payable in cash is provisional until cash is paid in
settlement thereof. The grant of any Stock Option payable in Common
Shares is provisional until the Participant becomes entitled to the
certificate in settlement thereof. In the event the Employment or the
directorship of a Participant is Terminated for Cause, any Stock Option
which is provisional shall be annulled as of the date of such
termination.
(d) Other Company Benefit and Compensation Programs. Payments
and other benefits received by a Participant under a Stock Option made
pursuant to this Plan shall not be deemed a part of a Participant's
regular, recurring compensation for purposes of the termination
indemnity or severance pay law of any country and shall not be included
in, nor have any effect on, the determination of benefits under any
other employee benefit plan or similar arrangement provided by the
Company or a Subsidiary unless expressly so provided by such other plan
or arrangement, or except where the Committee expressly determines that
a Stock Option or portion of a Stock Option should be included to
accurately reflect competitive compensation practices or to recognize
that a Stock Option has been made in lieu of a portion of competitive
annual cash compensation. Stock Options under this Plan may be made in
combination with or in tandem with, or as alternatives to, grants,
stock options or payments under any other plans of the Company or a
Subsidiary. This Plan notwithstanding, the Company or any Subsidiary
may adopt such other compensation programs and additional compensation
arrangements as it deems necessary to attract, retain and reward
directors and employees for their service with the Company and its
Subsidiaries.
(e) Securities Law Restrictions. No Common Shares shall be
issued under this Plan unless counsel for the Company shall be
satisfied that such issuance will be in compliance with applicable
federal and state securities laws. Certificates for Common Shares
delivered under this Plan may be subject to such stock-transfer orders
and other restrictions as the Committee may deem advisable under the
rules, regulations, and other requirements of the Securities and
Exchange Commission, any stock exchange upon which the Common Shares
are then listed, and any applicable federal or state securities law.
The Committee may cause a legend or legends to be put on any such
certificates to make appropriate reference to such restrictions.
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(f) Stock Option Agreement. Each Participant receiving a Stock
Option under this Plan shall enter into an agreement with the Company
in a form specified by the Committee agreeing to the terms and
conditions of the Stock Option and such related matters as the
Committee shall, in its sole discretion, determine.
(g) Cost of Plan. The costs and expenses of administering this
Plan shall be borne by the Company.
(h) Governing Law. This Plan and all actions taken hereunder
shall be governed by and construed in accordance with the laws of the
State of Ohio, except to the extent that federal law shall be deemed
applicable.
(i) Effective Date. This Plan shall be effective upon the
later of adoption by the Board and approval by the Company's
shareholders. This Plan shall be submitted to the shareholders of the
Company for approval at an annual or special meeting of shareholders to
be held no sooner than six months after the effective date of the
Conversion.
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EXHIBIT B
FIRST FEDERAL SAVINGS BANK
OF DOVER
RECOGNITION AND RETENTION PLAN
AND TRUST AGREEMENT
ARTICLE I
DEFINITIONS
The following words and phrases when used in this Agreement with an
initial capital letter shall have the meanings set forth below, unless the
context clearly indicates otherwise. Wherever appropriate, the masculine pronoun
shall include the feminine pronoun and the singular shall include the plural:
1.01 "Agreement" means the First Federal Savings Bank of Dover
Recognition and Retention Plan and Trust Agreement.
1.02 "Award" means a right granted to a Director or an Employee under
this Plan to receive Plan Shares.
1.03 "Bank" means the First Federal Savings Bank of Dover, a savings
bank chartered under the laws of the United States.
1.04 "Beneficiary" means the person or persons designated by a
Recipient to receive any benefits payable under this Plan in the event of such
Recipient's death. Such person or persons shall be designated in writing on
forms provided for this purpose by the Committee and may be changed from time to
time by similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Recipient's estate.
1.05 "Board" means the Board of Directors of the Bank.
1.06 "Committee" means the Recognition and Retention Plan Committee
appointed by the Board pursuant to Article IV hereof.
1.07 "Common Shares" means common shares of the Corporation.
1.08 "Conversion" means the conversion of the Bank from mutual to stock
form.
1.09 "Corporation" means FFD Financial Corporation, a savings and loan
holding company incorporated under the laws of the State of Ohio for the purpose
of holding all of the common shares of the Bank issued in connection with the
Conversion.
1.10 "Director" means any person who is a member of the Board of
Directors of the Corporation, the Bank or a Subsidiary.
1.11 "Employee" means any person who is employed by the Corporation,
the Bank or a Subsidiary.
1.12 "Person" means an individual, corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed herein.
1.13 "Plan" means the Recognition and Retention Plan established by
this Agreement.
1.14 "Plan Shares" means the Common Shares held pursuant to the Trust
and which are awarded or issuable to a Recipient pursuant to the Plan.
1.15 "Plan Share Reserve" means the Common Shares held by the Trustee
pursuant to Sections 5.02 and 5.03 of this Agreement.
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1.16 "Recipient" means any Director or Employee who receives an Award
under the Plan.
1.17 "Subsidiaries" means subsidiaries of the Bank which, with the
consent of the Board, agree to participate in the Plan.
1.18 "Trust" means the trust established by this Agreement.
1.19 "Trustee" means the person or persons or entity approved by the
Board pursuant to Sections 4.01 and 4.02 to hold legal title to the Plan assets
for the purposes set forth herein.
ARTICLE II
ESTABLISHMENT OF THE PLAN AND TRUST
2.01 The Bank hereby establishes a Recognition and Retention Plan and
Trust upon the terms and subject to the conditions set forth in this Agreement.
2.02 The Trustee hereby accepts the Trust and agrees to hold the Trust
assets existing on the date of this Agreement and all additions and accretions
thereto upon the terms and conditions of this Agreement.
ARTICLE III
PURPOSE OF THE PLAN
3.01 The purpose of the Plan is to reward and retain the Directors and
Employees of the Corporation, the Bank and the Subsidiaries who are in key
positions of responsibility by providing such Directors and Employees with an
equity interest in the Corporation as reasonable compensation for their
contributions to the Corporation, the Bank and the Subsidiaries.
ARTICLE IV
ADMINISTRATION OF THE PLAN
4.01 ROLE OF THE COMMITTEE. The Plan shall be administered and
interpreted by the Committee, which shall consist of not less than three members
of the Board who are not employees of the Bank. The Committee shall have all of
the powers set forth in this Plan. The interpretation and construction by the
Committee of any provisions of this Agreement or of any Award granted hereunder
shall be final, conclusive and binding. The Committee shall act by the vote, or
the written consent, of a majority of its members. The Committee shall report
actions and decisions with respect to the Plan to the Board upon request by the
Board.
4.02 ROLE OF THE BOARD. The members of the Committee and the Trustee
shall be appointed or approved by and will serve at the pleasure of the Board.
The Board may in its discretion from time to time remove members from or add
members to the Committee and may remove, replace or add one or more Trustees.
The Board, in its absolute discretion, may take any action under or with respect
to the Plan which the Committee is authorized to take and may reverse or
override any action taken or decision made by the Committee under or with
respect to the Plan or take any other action reserved to the Board under this
Agreement; provided, however, that the Board may not revoke any Award already
granted under this Agreement. All decisions, determinations and interpretations
of the Board shall be final, conclusive and binding upon all parties having an
interest in the Plan.
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4.03 LIMITATION ON LIABILITY. No member of the Board or the Committee,
nor any Trustee, shall be liable for any determination made in good faith with
respect to the Plan or any Plan Shares or Awards granted under the Plan. If a
member of the Board or of the Committee or any Trustee is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of anything done or not done by such member in such capacity under or
with respect to this Plan, the Bank shall indemnify such member against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such member in connection with such action,
suit or proceeding if such member acted in good faith and in a manner such
member reasonably believed to be in or not opposed to the best interests of the
Corporation, the Bank and the Subsidiaries and, with respect to any criminal
action or proceeding, had no reasonable cause to believe such member's conduct
was unlawful.
ARTICLE V
CONTRIBUTIONS; PLAN SHARE RESERVE
5.01 AMOUNT AND TIMING OF CONTRIBUTIONS. The Board shall determine the
amounts (or the method of computing the amounts) to be contributed by the Bank
to the Trust. Such amounts shall be paid to the Trustee at the time of
contribution. No contributions to the Trust by Directors or Employees shall be
permitted.
5.02 INVESTMENT OF TRUST ASSETS. Except as otherwise permitted by
Section 8.02 of this Agreement, the Trustee shall invest all of the Trust's
assets, after providing for any required withholding as needed for tax purposes,
exclusively in Common Shares; provided, however, that the Trust shall not
purchase a number of Common Shares equal to more than 3% of the number of Common
Shares issued in connection with the Conversion, except that if the Bank's
tangible capital exceeds 10%, the Trust may purchase a number of Common Shares
equal to up to 4% of the Common Shares issued in connection with the Conversion.
After such investment, the Common Shares shall be held by the Trustee in the
Plan Share Reserve until such Common Shares are subject to one or more Awards.
Any funds held by the Trust before purchasing Common Shares shall be invested by
the Trustee in such interest-bearing account or accounts at the Bank as the
Trustee shall determine to be appropriate.
5.03 EFFECT OF ALLOCATIONS, RETURNS AND FORFEITURES UPON PLAN SHARE
RESERVES. Upon the allocation of Awards under Section 6.02 of this Agreement, or
the decision of the Committee to return Plan Shares to the Corporation, the Plan
Share Reserve shall be reduced by the number of Plan Shares so allocated or
returned. Any Plan Shares subject to an Award which is subject to forfeiture by
the Recipient pursuant to Section 7.01 of this Agreement shall be retained in
the Plan Share Reserve.
ARTICLE VI
ELIGIBILITY; ALLOCATIONS
6.01 ELIGIBILITY. Directors and Employees are eligible to receive
Awards within the sole discretion of the Committee.
6.02 ALLOCATIONS. The Committee will determine which of the Directors
and Employees will be granted Awards and the number of Plan Shares covered by
each Award; provided, however, that: (a) the aggregate number of Plan Shares
covered by Awards to any one Employee shall not exceed 25% of the total number
of Plan Shares, (b) no more than 5% of the Plan Shares shall be awarded to any
Director who is not an Employee, and (c) no more than 30% of the Plan Shares
shall be awarded in the aggregate to Directors who are not Employees. In the
event Plan Shares are forfeited for any reason or additional Plan Shares are
purchased by the Trustee, the Committee may, from time to time, determine which
of the Employees will be granted additional Awards to be awarded from forfeited
or additional Plan Shares.
In selecting the Directors and Employees to whom Awards will be granted
and the number of shares covered by such Awards, the Committee shall consider
the position, duties and responsibilities of the eligible Directors and
Employees, the value of their services to the Corporation, the Bank and the
Subsidiaries and any other factors the Committee may deem relevant. All
allocations by the Committee shall be subject to review and approval or
rejection by the Board.
6.03 FORM OF ALLOCATION. As promptly as practicable after a
determination is made pursuant to Section 6.02 of this Agreement that an Award
is to be made, the Committee shall notify the Recipient in writing of the grant
of the Award, the
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number of Plan Shares covered by the Award and the terms upon which the Plan
Shares subject to the Award may be earned. The date on which the Committee
determines that an Award is to be made or a later date designated by the
Committee shall be considered the date of grant of the Awards. The Committee
shall maintain records as to all grants of Awards under the Plan.
6.04 ALLOCATIONS NOT REQUIRED. None of the Directors or Employees,
either individually or as a group, shall have any right or entitlement to
receive an Award under the Plan. The Committee may, with the approval of the
Board, and shall, if so directed by the Board, return all Common Shares and
other assets in the Plan Share Reserve to the Corporation at any time and
thereafter cease issuing Awards.
6.05 SHAREHOLDER APPROVAL. This Agreement shall be submitted to the
shareholders of the Corporation at an annual or special meeting to be held no
sooner than six months after the effective date of the Conversion.
Notwithstanding anything to the contrary in this Agreement, no Awards shall be
granted hereunder until the shareholders of the Corporation approve this
Agreement.
ARTICLE VII
EARNING AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS
7.01 EARNING PLAN SHARES; FORFEITURES.
(a) GENERAL RULES. Unless the Committee shall specifically
state a longer period of time over which Awards shall be earned and
non-forfeitable at the time an Award is granted, Plan Shares covered by each
Award shall be earned and non-forfeitable by a Recipient over a period of five
years at the rate of one-fifth per year commencing on the date which is one year
after the date of the grant of such Award. As Plan Shares become earned and
non-forfeitable, any cash dividends, returned capital and earnings thereon shall
also be earned and non-forfeitable.
(b) REVOCATION. Unless otherwise permitted by applicable
laws and regulations, any Plan Shares and any cash dividends, returned capital
and earnings thereon that have not been earned and are not non-forfeitable in
accordance with Section 7.01(a) of this Agreement shall be forfeited in the
event that (i) a Recipient who is a Director ceases to serve on the Board or
(ii) a Recipient who is not a Director of the Bank ceases to be an Employee of
the Bank, except as otherwise provided in subsection (c) of this Section 7.01.
(c) EXCEPTION FOR TERMINATIONS DUE TO DEATH OR DISABILITY.
All Plan Shares and cash dividends, returned capital and earnings thereon
subject to an Award held by a Recipient whose service as a Director or Employee
of the Corporation, the Bank or a Subsidiary terminates due to (i) death or (ii)
disability (as determined by the Committee) shall be deemed fully earned and
non-forfeitable as of the later of the Recipient's last day of service as a
Director or as an Employee and shall be distributed as soon as practicable
thereafter.
7.02 DISTRIBUTION OF PLAN SHARES.
(a) TIMING OF DISTRIBUTIONS: GENERAL RULE. Except as
otherwise provided in this Agreement, Plan Shares shall be distributed to the
Recipient or his or her Beneficiary, as the case may be, as soon as practicable
after they have been earned, together with any cash, dividends, returned capital
and earnings thereon with respect to such Plan Shares that have been earned.
(b) FORM OF DISTRIBUTION. All distributions of Plan Shares,
together with any shares representing stock dividends, shall be distributed in
the form of Common Shares. No fractional shares shall be distributed. Payments
representing cash dividends, returned capital and earnings thereon shall be made
in cash.
(c) WITHHOLDING. The Trustee may withhold from any cash
payment made under this Plan sufficient amounts to cover any applicable
withholding and employment taxes and, if the amount of such cash payment is not
sufficient, the Trustee may require the Recipient or Beneficiary to pay to the
Trustee the amount required to be withheld as a condition of delivering the Plan
Shares. The Trustee shall pay over to the Bank or the Subsidiary which employs
or employed such Recipient or which the Recipient serves or served as a
Director, any such amount withheld from or paid by the Recipient or Beneficiary.
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(d) REGULATORY EXCEPTIONS. Notwithstanding anything to the
contrary in this Agreement, no Plan Shares, upon becoming fully earned and
non-forfeitable, shall be distributed unless and until all of the requirements
of all applicable laws and regulations shall have been met.
7.03 VOTING OF PLAN SHARES. All Common Shares held by the Trustee in
the Plan Share Reserve which have not yet been earned by a Recipient pursuant to
Section 7.01 of this Agreement shall be voted by the Trustee. A Recipient shall
be entitled to direct the voting of Plan Shares which have been earned pursuant
to Section 7.01 of this Agreement but have not yet been distributed to him.
ARTICLE VIII
TRUST
8.01 TRUST. The Trustee shall receive, hold, administer, invest and
make distributions and disbursements from the Trust in accordance with the
provisions of the Plan and the Trust and the applicable directions, rules,
regulations, procedures and policies established by the Committee pursuant to
this Agreement.
8.02 MANAGEMENT OF TRUST. The Trustee shall have complete authority and
discretion with respect to the management, control and investment of the Trust,
and the Trustee shall invest all assets of the Trust, except those attributable
to cash dividends paid with respect to Plan Shares not held in the Plan Share
Reserve, in Common Shares to the fullest extent practicable, and except to the
extent that the Trustee determines that the holding of monies in cash or cash
equivalents is necessary to meet the obligations of the Trust. The Trustee shall
have the power to do all things and execute such instruments as may be deemed
necessary or proper with respect to the duties of the Trustee hereunder,
including the following powers:
(a) To invest up to 100% of all Trust assets in Common Shares
without regard to any law now or hereafter in force limiting
investments for trustees or other fiduciaries. The investment
authorized herein may constitute the only investment of the Trust, and,
in making such investment, the Trustee is authorized to purchase Common
Shares from the Corporation or from any other source. Such Common
Shares so purchased may be outstanding, newly issued or treasury
shares;
(b) To invest any Trust assets not otherwise invested in
accordance with Section 8.02(a) of this Agreement in such deposit
accounts and certificates of deposit (including those issued by the
Bank), obligations of the United States government or its agencies or
such other investments as shall be considered the equivalent of cash;
(c) To sell, exchange or otherwise dispose of any property at
any time held or acquired by the Trust;
(d) To cause stocks, bonds or other securities to be
registered in the name of a nominee, without the addition of words
indicating that such security is an asset of the Trust (but accurate
records shall be maintained showing that such security is an asset of
the Trust);
(e) To hold cash without interest in such amounts as may be
reasonable, in the opinion of the Trustee, for the proper operation of
the Plan and the Trust;
(f) To employ brokers, agents, custodians, consultants and
accountants;
(g) To hire counsel to render advice with respect to the
rights, duties and obligations of the Trustee hereunder, and such other
legal services or representation as the Trustee may deem desirable; and
(h) To hold funds and securities representing the amounts to
be distributed to a Recipient or his or her Beneficiary as a
consequence of a dispute as to the disposition thereof, whether in a
segregated account or held in common with other assets of the Trust.
Notwithstanding anything herein contained to the contrary, the Trustee shall not
be required to make any inventory, appraisal or settlement or report to any
court, or to secure any order of court for the exercise of any power herein
contained, or to give bond.
B-5
<PAGE> 24
8.03 RECORDS AND ACCOUNTS. The Trustee shall maintain accurate and
detailed records and accounts of all transactions of the Trust, which shall be
available at all reasonable times for inspection by any legally entitled person
or entity to the extent required by applicable law, or any other person
determined by the Committee.
8.04 EARNINGS. All earnings, gains and losses with respect to Trust
assets shall be allocated, in accordance with a reasonable procedure adopted by
the Committee, to bookkeeping accounts for Recipients or to the general account
of the Trust, depending on the nature and allocation of the assets generating
such earnings, gains and losses. Without limiting the generality of the
foregoing, any earnings on cash dividends or returned capital received with
respect to Plan Shares shall be allocated (a) to accounts for Recipients, if
such shares which are the subject of outstanding Awards, and shall become earned
and distributed as specified in Article VII of this Agreement or (b) otherwise
to the Plan Share Reserve if such Plan Shares are not the subject of outstanding
awards.
8.05 EXPENSES. All costs and expenses incurred in the operation and
administration of the Plan shall be paid by the Bank.
ARTICLE IX
MISCELLANEOUS
9.01 ADJUSTMENTS FOR CAPITAL CHANGES. The aggregate number of Plan
Shares available for issuance pursuant to the Awards and the number of Plan
Shares to which any Award relates shall be proportionately adjusted for any
increase or decrease in the total number of outstanding Common Shares issued
subsequent to the effective date of the Plan if such increase or decrease
resulted from any split, subdivision or consolidation of shares or other capital
adjustment, or other increase or decrease in such shares effected without
receipt or payment of consideration by the Corporation.
9.02 AMENDMENT AND TERMINATION OF PLAN. The Board may, by resolution,
at any time amend or terminate the Plan. The power to amend or terminate the
Plan shall include the power to direct the Trustee to return to the Corporation
or the Bank all or any part of the assets of the Trust, including Common Shares
held in the Plan Share Reserve, as well as Common Shares and other assets
subject to Awards which are not yet earned by the Directors or Employees to whom
they are allocated; provided, however, that the termination of the Trust shall
not affect a Recipient's right to earn Awards and to the distribution of Common
Shares relating thereto, including earnings thereon, in accordance with the
terms of this Agreement and the grant by the Committee or the Board.
9.03 NONTRANSFERABLE. Awards shall not be transferable by a Recipient.
During the lifetime of the Recipient, an Award may only be earned by and paid to
the Recipient who was notified in writing of the Award by the Committee pursuant
to Section 6.03 of this Agreement. No Recipient or Beneficiary shall have any
right in or claim to any assets of the Plan or the Trust, nor shall the
Corporation, the Bank or any Subsidiary be subject to any claim for benefits
hereunder.
9.04 DIRECTORSHIP RIGHTS. Neither this Agreement nor any grant of an
Award hereunder nor any action taken by the Trustee, the Committee or the Board
in connection with the Plan shall create any right, either express or implied,
on the part of any Director to continue to serve as a Director of the Bank or a
Subsidiary.
9.05 EMPLOYMENT RIGHTS. Neither this Agreement nor any grant of an
Award hereunder nor any action taken by the Trustee, the Committee or the Board
in connection with the Plan shall create any right, either express or implied,
on the part of any Employee to continue in the employ of the Corporation, the
Bank or a Subsidiary.
9.06 VOTING AND DIVIDEND RIGHTS. No Recipient shall have any voting or
dividend rights or other rights of a shareholder in respect of any Plan Shares
covered by an Award, except as expressly provided in Sections 7.01, 7.02 and
7.03 of this Agreement, prior to the time such Plan Shares are actually
distributed to such Recipient.
9.07 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of Ohio, except to the extent that federal law shall
be deemed applicable.
9.08 EFFECTIVE DATE. Subject to Section 6.05 of this Agreement, this
Agreement shall be effective as of the ___ day of ____________, 1996.
B-6
<PAGE> 25
9.09 TERM OF PLAN. The Plan shall remain in effect until the earlier of
(a) the termination of the Plan by the Board or (b) the distribution of all
assets from the Trust. The termination of the Plan shall not affect any Awards
previously granted and such Awards shall remain valid and in effect until they
have been earned and paid or by their terms expire or are forfeited.
9.10 TAX STATUS OF TRUST. It is intended that the trust established
hereby be treated as a grantor trust of the Bank under the provisions of Section
671, et seq., of the Internal Revenue Code of 1986, as amended (26 U.S.C.
Section 671 et seq.).
IN WITNESS WHEREOF, the following Trustees execute this Agreement,
accepting and binding themselves to undertake and perform the obligations and
duties of the Trustee hereunder and consenting to the foregoing Agreement
effective the ___ day of _________________, 1996.
By: ___________________________ (Trustee)
By: ___________________________ (Trustee)
IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed
by its duly authorized officer and duly attested, all as of the ___ day of
_________________, 1996.
FIRST FEDERAL SAVINGS BANK OF DOVER
By:______________________________________
Robert R. Gerber
its President
ATTEST:
- ---------------------------------
Shirley A. Wallick
its Secretary
B-7
<PAGE> 26
THIS PAGE INTENTIONALLY LEFT BLANK
<PAGE> 1
Exhibit 21
SUBSIDIARIES
<TABLE>
<CAPTION>
Jurisdiction of
Name Incorporation
- ---- -------------
<S> <C>
First Federal Savings Bank of Dover United States
Dover Service Corporation Ohio
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 905
<INT-BEARING-DEPOSITS> 1,793
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18,263
<INVESTMENTS-CARRYING> 8,392
<INVESTMENTS-MARKET> 8,500
<LOANS> 48,539
<ALLOWANCE> 146
<TOTAL-ASSETS> 79,458
<DEPOSITS> 52,208
<SHORT-TERM> 2,200
<LIABILITIES-OTHER> 655
<LONG-TERM> 2,984
<COMMON> 0
0
0
<OTHER-SE> 21,411
<TOTAL-LIABILITIES-AND-EQUITY> 79,458
<INTEREST-LOAN> 3,402
<INTEREST-INVEST> 963
<INTEREST-OTHER> 190
<INTEREST-TOTAL> 4,555
<INTEREST-DEPOSIT> 2,464
<INTEREST-EXPENSE> 2,471
<INTEREST-INCOME-NET> 2,084
<LOAN-LOSSES> 50
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,163
<INCOME-PRETAX> 959
<INCOME-PRE-EXTRAORDINARY> 959
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 632
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 718
<LOANS-NON> 117
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 96
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 146
<ALLOWANCE-DOMESTIC> 146
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
