<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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number: 0-27916
FFD FINANCIAL CORPORATION
----------------------------------------------
(Name of small business issuer in its charter)
Ohio 34-1921148
- -------------------------------- -----------------------------
(State or other jurisdiction (I.R.S. Employer
of 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
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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, 1997, were
$7.2 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 Small Cap Market, was $18.9 million on September 24,
1997.
1,444,750 of the registrant's common shares were issued and outstanding
on September 24, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Portions of the Annual Report to Shareholders for the
fiscal year ended June 30, 1997.
Part III of Form 10-KSB - Portions of the Proxy Statement for 1997 Annual
Meeting of Shareholders.
<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. The Bank has recently implemented a
commercial lending program. 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 also recently instituted a
commercial loan program for businesses in its primary market area. The Bank does
not issue any letters of credit 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,
-------------------------------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
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 $52,842 92.3% $44,763 89.4% $37,149 88.3%
Multifamily 1,158 2.0 1,336 2.7 1,228 2.9
Construction 1,474 2.6 982 2.0 375 0.9
Nonresidential and land 1,192 2.1 1,124 3.1 1,906 4.6
Consumer 583 1.0 1,390 2.8 1,404 3.3
------- ---- ------- ---- ------- ----
Total loans 57,249 100.0% 49,595 100.0% 42,062 100.0%
===== ===== =====
Less:
Undisbursed portion of loans in
process 1,185 614 207
Deferred loan origination fees 290 296 265
Allowance for losses on loans 270 146 96
------- ------- -------
Loans receivable, net $55,504 $48,539 $41,494
======= ======= =======
</TABLE>
LOAN MATURITY SCHEDULE. The following table sets forth certain
information as of June 30, 1997, 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
1998 1999 2000 6/30/97 6/30/97 6/30/97 6/30/97 Total
---- ---- ---- ------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate(1) $823 $ 24 $45 $415 $3,239 $16,342 $34,586 $55,474
Nonresidential and land 69 22 2 277 138 684 - 1,192
Consumer loans 87 149 86 261 - - - 583
---- ---- ---- ---- ------ ------- ------- -------
Total loans $979 $195 $133 $953 $3,377 $17,026 $34,586 $57,249
==== ==== ==== ==== ====== ======= ======= =======
</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, 1997, which have predetermined interest rates and have
floating or adjustable interest rates:
<TABLE>
<CAPTION>
Due more than one year after
June 30, 1997
----------------------------
(In thousands)
<S> <C>
Fixed rate of interest $10,059
Adjustable rate of interest 46,211
------
$56,270
=======
</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 first mortgages on existing one-to four-family residences, primarily
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single-family residences, located in Tuscarawas County. The Bank also originates
a limited amount of home 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 $52.8 million at June 30, 1997, and represented 92.3% 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.
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 variable-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, 1997, the Bank had $763,000 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, 1997, loans secured by multifamily properties totaled
approximately $1.2 million, or 2.0% 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, 1997, a total of $1.5 million, or approximately 2.6%, 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, 1997, 1996 or 1995.
At June 30, 1997, the Bank had a total of $1.2 million invested in
nonresidential real estate and land loans, including the participation
interests. Such loans comprised approximately 2.1% 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,
1997, the Bank's nonresidential mortgage loans totaled 33% 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, 1997, the Bank had approximately $583,000, or 1.0% 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, 1997, includes two participations purchased in
the 1992 fiscal year. See "Nonresidential Real Estate and Land Loans."
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------
1997 1996 1995
------- -------- ------
(In thousands)
<S> <C> <C> <C>
Loans originated:
One-to four-family $13,899 $15,241 $6,881
Construction 2,710 1,224 879
Nonresidential and land 162 -- 147
Consumer 302 362 334
------- ------- ------
Total loans originated 17,073 16,827 8,241
Principal loan repayments 10,049 9,797 5,773
Increase (decrease) in other items, net(1) (59) 15 45
------- ------- ------
Net increase in loans receivable $ 6,965 $ 7,045 $2,513
======= ======= ======
</TABLE>
- -----------------------------
(1) Other items consist of amortization of deferred loan origination fees and
the provision for losses on loans.
OTS regulations impose a lending limit on 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 for risk-based capital purposes plus any loan
reserves not already included in total capital (the "Lending Limit Capital"). A
savings association may loan to one borrower an additional amount not to exceed
10% of the association's Lending Limit Capital if the additional amount is fully
secured by certain forms of "readily marketable collateral." Real estate is not
considered "readily marketable collateral." In applying this limit, the
regulations require that loans to certain related or affiliated borrowers be
aggregated. An exception to this limit permits loans to one borrower of up to
$500,000. In addition, the OTS, under certain circumstance, may permit
exceptions to the lending limit on a case-by-case basis.
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<PAGE> 7
Based on such limits, the Bank was able to lend approximately $2.0
million to one borrower at June 30, 1997. The largest amount the Bank had
outstanding to one borrower at June 30, 1997, was $500,000. 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, 1997.
The following table reflects the amount of loans in a delinquent status
as of the dates indicated:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996 June 30, 1995
------------------------- ------------------------- -------------------------
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%
60 - 89 days 7 333 .58 3 131 .26 3 111 0.26
90 days and over 2 64 .11 7 117 .24 6 131 0.31
- ---- ---- -- ---- ---- -- ---- ----
Total delinquent loans 9 $397 .69% 10 $248 .50% 17 $444 1.05%
= ==== ==== == ==== ==== == ==== ====
</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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<PAGE> 8
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,
--------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Residential real estate $ 64 $117 $128
Consumer and other -- -- 3
---- ---- ----
Total nonaccrual loans 64 117 131
---- ---- ----
Total nonperforming loans $ 64 $117 $131
==== ==== ====
Allowance for losses on loans $270 $146 $ 96
==== ==== ====
Nonperforming loans as a percent of total
loans .11% 0.24% 0.31%
Allowance for losses on loans as a percent
of nonperforming loans 421.88% 124.79% 73.28%
</TABLE>
For the year ended June 30, 1997, $2,000 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,
------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Classified assets:
Substandard $64 $140 $161
Doubtful -- -- 2
--- ---- ----
Total classified assets $64 $140 $163
=== ==== ====
</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 its 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.
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
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<PAGE> 9
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-off of $3,000 in the 1995 fiscal year was
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,
----------------------------
1997 1996 1995
----- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period $ 146 $ 96 $ 99
Charge-offs (1) -- (3)
Recoveries -- -- --
----- ---- ----
Net charge-offs (1) -- (3)
Provision for losses on loans 125 50 --
----- ---- ----
Balance at end of period $ 270 $146 $ 96
===== ==== ====
Ratio of net charge-offs to average loans -- -- 0.01%
outstanding during the period
Ratio of allowance for loan losses to 0.47% 0.29% 0.23%
total loans
</TABLE>
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,
---------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- --------------------
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
------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at year end
applicable to:
Real estate $ 77 99.0% $ 71 97.2% $50 96.7%
loans
Consumer 2 1.0 6 2.8 3 3.3
loans
Unallocated 191 -- 69 -- 43 --
---- ----- ---- ----- --- -----
Total $270 100.0% $146 100.0% $96 100.0%
==== ===== ==== ===== === =====
</TABLE>
-9-
<PAGE> 10
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 Association
("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.
<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,
-------------------------------------------------
1997
------------------------------------------------
Amortized % of Market % of
cost total value total
------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Investment securities designated
as held to maturity:
U.S. Government agency
obligations $ 1,469 5.5% $ 1,459 5.5%
Investment securities designated
as available for sale:
U.S. Government and agency
obligations 9,931 37.5 9,924 37.3
FHLMC stock -- -- -- --
------- ------- ------- -------
Total investment securities
designated as available for sale 9,931 37.5 9,924 37.3
------- ------- ------- -------
Total investment securities 11,400 43.0 11,383 42.8
Mortgage-backed securities
designated as held to maturity 7,165 27.1 7,304 27.4
Mortgage-backed securities
designated as available for sale 7,906 29.9 7,944 29.8
------- -------
Total mortgage-backed securities 15,701 57.0 15,248 57.2
------- ------- ------- -------
Total investments and mortgage-
backed securities $26,471 100.0% $26,631 100.0%
======= ======= ======= =======
At June 30,
-----------------------------------------------------------------------------------------
1996 1995
-------------------------------------------- -----------------------------------------
Amortized % of Market % of Amortized % of Market % of
cost total value total cost total value total
------- ------- ------- ------- ------- ------- ------- -------
(Dollars in thousands)
<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%
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>
The maturities of the Bank's U. S. Government and agency obligations
and mortgage-backed securities at June 30, 1997, are indicated in the following
table:
<TABLE>
<CAPTION>
At June 30, 1997
-----------------------------------------------------------------------------------------------------
After one through After five After ten
One year or less five years through ten years years
--------------------- --------------------- --------------------- ---------------------
Amortized Average Amortized Average Amortized Average Amortized Average
cost yield cost yield cost yield cost yield
--------- ------- --------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and
agency obligations $6,440 5.42% $3,462 6.27% $1,498 6.84% $ -- --%
Mortgage-backed
securities -- -- -- -- 199 8.12 14,872 7.20
------ ---- ------ ---- ------ ---- ------- ----
$6,440 5.42% $3,462 6.27% $1,697 6.99% $14,872 7.20%
====== ====== ====== =======
At June 30, 1997
----------------------------------------
Total
---------------------------------------
Amortized Market Weighted
cost value average yield
--------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C>
U.S. Government and
agency obligations $11,400 $11,383 5.87%
Mortgage-backed
securities 15,071 15,248 7.22
------- ------- ----
$26,471 $26,631 6.64%
======= =======
</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, 1997, the Bank's certificates of deposit totaled $34.3
million, or 60.1% of total deposits. Of such amount, approximately $23.6 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,
-----------------------------------------------------
1997 1996 1995
---------------- ----------------- ----------------
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) $ 5,219 9.1% $ 4,388 8.4% $ 4,522 8.9%
Passbook savings accounts (2) 17,568 30.8 14,909 28.6 13,128 26.0
------- ----- ------- ----- ------- -----
Total transaction accounts 22,787 39.9 19,297 37.0 17,650 34.9
Certificates of deposit:
2.01 - 4.00% -- -- 412 0.8 3,089 6.1
4.01 - 6.00% 24,420 42.8 23,592 45.2 17,496 34.6
6.01 - 8.00% 9,883 17.3 8,907 17.0 12,366 24.4
Total certificates of deposit(3) 34,303 60.1 32,911 63.0 32,951 65.1
------- ----- ------- ----- ------- -----
Total deposits $57,090 100.0% $52,208 100.0% $50,601 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
- ------------------------
(1) The weighted average interest rates on NOW and money market accounts were
1.66% at June 30, 1997, 2.03% at June 30, 1996 and 2.31% at June 30, 1995.
(2) The weighted average interest rate on passbook accounts were 3.95% at June
30, 1997, 3.76% at June 30, 1996 and 3.29% at June 30, 1995.
(3) The weighted average rate on all certificates of deposit was 5.67%, 5.63%
and 5.65%, at June 30, 1997, 1996 and 1995, respectively.
-12-
<PAGE> 13
The following table shows rate and maturity information for the Bank's
certificates of deposit at June 30, 1997:
<TABLE>
<CAPTION>
Amount Due
--------------------------------------------------
Over Over
Up to 1 year to 2 years to
Rate one year 2 years 3 years Total
---- -------- --------- ----------- -----
(In thousands)
<S> <C> <C> <C> <C>
4.01 - 6.00% $18,528 $5,519 $373 $24,420
6.01 - 8.00% 5,111 4,236 536 9,883
------- ------ ---- -------
Total $23,639 $9,755 $909 $34,303
======= ====== ==== =======
</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,
1997:
<TABLE>
<CAPTION>
Maturity Amount
-------- ------
(In thousands)
<S> <C>
Three months or less $ 366
Over 3 months to 6 months 1,039
Over 6 months to 12 months 644
Over 12 months 1,852
-------
Total $ 3,901
</TABLE>
The following table sets forth the Bank's deposit account balance
activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------
1997 1996 1995
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance $ 52,208 $ 50,601 $ 47,639
Deposits 96,413 86,546 79,948
Withdrawals 93,434 86,907 78,543
-------- -------- --------
Net increase (decrease) in
deposits before interest 2,979 (361) 1,405
credited
Interest credited 1,903 1,968 1,557
-------- -------- --------
Ending balance $ 57,090 $ 52,208 $ 50,601
======== ======== ========
Net increase $ 4,882 $ 1,607 $ 2,962
======== ======== ========
Percent increase 9.4% 3.2% 6.2%
======== ======== ========
</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,
-----------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
FHLB advances $ 8,382 $ 5,184 $ 26
Weighted average interest rate of
FHLB advances 5.76% 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,
--------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Maximum balance $10,782 $ 5,184 $ 26
Average balance 8,887 104 26
Weighted average interest rate 5.68% 6.73% 7.69%
</TABLE>
The Bank had no other borrowings during the last three fiscal years.
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.
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,
1997, was approximately $17,000.
PERSONNEL
At June 30, 1997, the Bank had 19 full-time employees and 2 part-time
employees. 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 and loan holding company within the meaning of the Home
Owners' Loan Act of 1933, as amended (the "HOLA"), FFD is subject to regulation,
examination and oversight by the OTS. The Bank is also subject to regulation,
examination and oversight by the OTS and the FDIC. FFD and the Bank must file
periodic reports with these governmental
-14-
<PAGE> 15
agencies concerning their activities and financial condition. The Bank is also
subject to certain regulations promulgated by the Board of Governors of the
Federal Reserve System ("FRB").
Congress is considering legislation to eliminate the federal savings
and loan charter and the separate federal regulation of savings and loan
associations, and the Department of the Treasury is preparing a report for
Congress on the development of a common charter for all federally-chartered
financial institutions. Pursuant to such legislation, Congress may eliminate the
OTS and the Bank may be regulated under federal law as a bank or be required to
change its charter. Such change in regulation or charter would likely change the
range of activities in which the Bank may engage and would probably subject the
Bank to more regulation by the FDIC. In addition, FFD might become subject to a
different set of holding company regulations limiting the activities in which
FFD may engage and subjecting FFD to additional regulatory requirements,
including separate capital requirements. At this time, FFD cannot predict when
or whether Congress may actually pass legislation regarding FFD's and the Bank's
regulatory requirements or charter. Although such legislation may change the
activities in which FFD or the Bank are authorized to engage, it is not
anticipated that the current activities of either FFD or the Bank will be
materially affected by those activity limits.
OTS REGULATION
SUPERVISION AND EXAMINATION. The OTS is responsible for the regulation
and supervision of all savings associations, including the Bank. The Bank must
undergo a full-scope, on-site examination by the OTS at least (a) once every
twelve months, if it has total assets of $250 million or more, or (b) once every
eighteen months, if it has total assets of less than $250 million and satisfies
other specified criteria.
The OTS issues regulations governing the operations 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
permissible activities for federally chartered associations, including the types
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.
Savings associations are subject to regulatory oversight 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
institution to open a new branch or engage in a merger transaction.
LIQUIDITY. OTS regulations require that the Bank 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 association to maintain an average daily
balance of short-term liquid assets of not less than 1% of the total of its net
withdrawable savings deposits plus borrowings payable in one year or less.
Monetary penalties may be imposed upon associations failing to meet liquidity
requirements. The average eligible liquidity of the Bank, as computed under
current regulations, was approximately $6.1 million or 9.3%, for the month of
June 1997, and exceeded the applicable 5% liquidity requirement by approximately
$3.3 million.
QUALIFIED THRIFT LENDER TEST. Savings associations are required to meet
the QTL test. Prior to September 30, 1996, the QTL test required savings
associations to maintain a specified level of investments in assets that are
designated as qualifying thrift investments ("QTI"), which are generally related
to domestic residential real estate and manufactured housing and include credit
card, student and small business loans, and stock issued by any FHLB, the FHLMC
or the Federal National Mortgage Association ("FNMA"). Under this test 65% of an
institution's "portfolio assets" (total assets less goodwill and other
intangibles, property used to conduct business and 20% of liquid assets) must
consist of QTI on a monthly average basis in 9 out of every 12 months. Congress
created a second QTL test, effective September 30, 1996, pursuant to which a
savings association will qualify as a QTL thrift if at least 60% of the
institution's assets (on a tax basis) consist of specified assets (generally
loans secured by residential real estate or deposits, educational loans, cash
and certain governmental obligations). 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 become subject to certain
operating and regulatory restrictions. A savings association that fails to meet
the QTL test will not be eligible for new FHLB advances. At June 30, 1997, the
Bank met the QTL test.
-15-
<PAGE> 16
LIMITATIONS ON CAPITAL DISTRIBUTIONS. The OTS imposes various
restrictions or requirements on the ability of associations, including the Bank,
to make capital distributions, including dividend payments. OTS regulations also
establish a three-tier system limiting capital distributions according to
ratings of associations based on their capital level and supervisory condition.
Tier 1 consists of associations that, before and after the proposed
distribution, meet their fully phased-in capital requirements. Associations in
this category may make capital distributions during any calendar year equal to
the greater of 100% of net income, current year-to-date, plus 50% of the amount
by which the lesser of the association's tangible, core or risk-based capital
exceeds its fully phased-in capital requirement for such capital component, as
measured at the beginning of the calendar year, or 75% of its net income over
the most recent four-quarter period. 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. Tier 1
associations proposing to make any capital distribution need only submit written
notice to the OTS 30 days prior to such distribution. The OTS may object to the
distribution during that 30-day period based on safety and soundness concerns.
Tier 2 associations, which before and after the proposed distribution
meet their current minimum, but not fully phased-in, capital requirements, may
make capital distributions of up to 75% of net income over the most recent
four-quarter period. Tier 3 associations do not meet current minimum capital
requirements and must obtain OTS approval of any capital distribution.
LENDING LIMITS. OTS regulations generally limit the aggregate amount
that the Bank can lend to one borrower to an amount equal to 15% of its Lending
Limit Capital. A savings association may lend to one borrower an additional
amount not to exceed 10% of the association's Lending Limit 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. Notwithstanding the
specified limits, an association may lend to one borrower up to $500,000 for any
purpose. In applying these limits, the regulations require that loans to certain
related borrowers be aggregated.
REGULATORY CAPITAL REQUIREMENTS. The Bank is required by applicable law
and regulations to meet certain minimum capital requirements. The capital
standards include a leverage limit, or core capital requirement, a tangible
capital requirement, and a risk-based capital requirement.
The leverage limit requires "core capital" of at least 3% of total
assets. "Core capital" is comprised of common stockholders' equity (including
retained earnings), noncumulative perpetual preferred stock and related surplus,
minority interests in consolidated subsidiaries, certain nonwithdrawable
accounts and pledged deposits of mutual associations and certain purchased
mortgage servicing rights.
The tangible capital requirement provides that the Bank must
maintain "tangible capital" of not less than 1.5% of its adjusted total
assets. "Tangible capital" is defined as core capital minus any "intangible
assets."
Pursuant to the risk-based capital requirement, the Bank must maintain
total capital, which consists of core or Tier 1 capital and certain general
valuation reserves, of 8% of risk-weighted assets. For purposes of computing
risk-based capital, assets and certain off-balance sheet items are weighted at
percentage levels ranging from 0% to 100%, depending on their relative risk.
-16-
<PAGE> 17
The following tables present certain information regarding compliance
by the Bank with applicable regulatory capital requirements at June 30, 1997:
<TABLE>
<CAPTION>
At June 30, 1997
-------------------------------------------------------------------------------------
Actual capital Regulatory requirement Excess capital
--------------------------- ---------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------ ----- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $13,320 16.4% $1,216 1.5% $12,104 14.9%
Core Capital 13,320 16.4 2,432 3.0 10,888 13.4
Risk-based capital 13,590 37.5 2,895 8.0 12,695 29.5
</TABLE>
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings
association. At each successively lower defined capital category, an institution
is subject to more restrictive and numerous mandatory or discretionary
regulatory actions or limits, and the applicable agency has less flexibility in
determining how to resolve the problems of the institution. In addition, the OTS
generally can downgrade an institution's capital category, notwithstanding its
capital level, if, after notice and opportunity for hearing, the institution is
deemed to be engaging in an unsafe or unsound practice, because it has not
corrected deficiencies that resulted in it receiving a less than satisfactory
examination rating on matters other than capital or it is deemed to be in an
unsafe or unsound condition.
An undercapitalized institution 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. Furthermore, critically undercapitalized institutions
must be placed in conservatorship or receivership within 90 days of reaching
that capitalization level, except under limited circumstances. The Bank's
capital levels at June 30, 1997, met the standards for the highest category, a
"well-capitalized" institution.
FEDERAL DEPOSIT INSURANCE CORPORATION
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 administers two separate insurance funds, the BIF for commercial banks and
state savings banks and the SAIF for savings associations. The Bank is a member
of the SAIF, and its deposit accounts are insured by the FDIC, up to the
prescribed limits. 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 is required to maintain designated levels of reserves in each
fund. 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 FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary based on the risk the
institution poses to its deposit insurance fund. The risk level is determined
based on the institution's capital level and the FDIC's level of supervisory
concern about the institution.
Because of the differing reserve levels of the funds, deposit insurance
assessments paid by healthy savings associations were reduced significantly
below the level paid by healthy savings associations effective in mid-1995.
Assessments paid by healthy savings associations exceeded those paid by healthy
commercial banks by approximately $.19 per $100 in deposits in late 1995. Such
excess equaled approximately $.23 per $100 in deposits beginning in 1996. This
premium disparity had a negative competitive impact on the Bank and other
institutions in the SAIF.
Federal legislation, which was effective September 30, 1996, provided
for the recapitalization of the SAIF by means of a special assessment of $.657
per $100 of SAIF deposits held at March 31, 1995, in order to increase SAIF
reserves to the level required by law. Certain banks holding SAIF-insured
deposits were required to pay the same special assessment on 80% of deposits at
March 31, 1995. In addition, part of the cost of prior thrift failures, which
had previously been paid only
-17-
<PAGE> 18
by SAIF members, will be paid by BIF members. As a result, BIF assessments for
healthy banks in 1997 will be $.013 per $100 in deposits and SAIF assessments
for healthy institutions in 1997 will be $.064 per $100 in deposits.
The Bank had $49.2 million in deposits at March 31, 1995. The Bank paid
a special assessment of $332,000 in November 1996, which was accounted for and
recorded as of September 30, 1996. This assessment was tax-deductible, but
reduced earnings for the year ended March 31, 1997.
TRANSACTIONS WITH AFFILIATES AND INSIDERS
Loans to executive officers, directors and principal shareholders and
their related interests must conform to the lending limit on loans to one
borrower, and the total of such loans to executive officers, directors,
principal shareholders and their related interests cannot exceed the
association's Lending Limit Capital (or 200% of Lending Limit Capital for
qualifying institutions with less than $100 million in deposits). 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 with the
general public or as offered to all employees in a company-wide benefit program,
and loans to executive officers are subject to additional limitations. The Bank
was in compliance with such restrictions at June 30, 1997.
All transactions between savings associations and their affiliates must
comply with Sections 23A and 23B of the Federal Reserve Act (the "FRA"). An
affiliate is any company or entity which controls, is controlled by or is under
common control with the financial institution. In a holding company context, the
parent holding company of a savings association and any companies that are
controlled by such parent holding company are affiliates of the institution.
Generally, Sections 23A and 23B of the FRA (i) limit the extent to which a
financial 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 for any one affiliate and 20% of such capital stock and
surplus for the aggregate of such transactions with all affiliates, and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable to the institution or the subsidiary, as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar types of transactions.
In addition to limits in Sections 23A and 23B, the Bank 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. Exemptions
from Sections 23A or 23B of the FRA may be granted only by the FRB. The Bank was
in compliance with these requirements at June 30, 1997.
CHANGE IN CONTROL
The Federal Deposit Insurance Act (the "FDIA") provides that no person,
acting directly or indirectly or in concert with one or more persons, shall
acquire control of any insured depository institution or holding company, unless
60-days prior written notice has been given to the primary federal regulator for
that institution and such regulator has not issued a notice disapproving the
proposed acquisition. Control, for purposes of the FDIA, means the power,
directly or indirectly, alone or acting in concert, to direct the management or
policies of an insured institution or to vote 25% or more of any class of
securities of such institution. Control exists in situations in which the
acquiring party has direct or indirect voting control of at least 25% of the
institution's voting shares, controls in any manner the election of a majority
of the directors of such institution or is determined to exercise a controlling
influence over the management or policies of such institution. In addition,
control is presumed to exist, under certain circumstances, where the acquiring
party (which includes a group "acting in concert") has voting control of at
least 10% of the institution's voting stock. These restrictions do not apply to
holding company acquisitions. See "Holding Company Regulation".
HOLDING COMPANY REGULATION
FFD is a unitary savings and loan holding company subject to the
regulatory oversight, examination and enforcement authority of the OTS. FFD is
required to register and file periodic reports with the OTS. If the OTS
determines that the continuation of a particular activity by a savings and loan
holding company constitutes a serious threat to the financial condition of its
subsidiary institutions, the OTS may impose restrictions on the holding company.
Such restrictions may include limiting the payment of dividends, transactions
with affiliates or any other activities deemed to pose a serious threat to the
subsidiary institutions.
Generally, no savings and loan holding company may (i) acquire or
retain control of a savings association or another savings and loan holding
company or control the assets thereof or (ii) acquire or retain more than 5% of
the voting shares of a
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<PAGE> 19
savings association or holding company thereof, which is not a subsidiary,
without the prior written approval of the Director of the OTS. Additionally,
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 Director 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.
The Director of the OTS may approve acquisitions resulting in the
formation of a multiple savings and loan holding company which 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 Director of 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.
Federal law provides that an insured institution shall be liable for
any loss incurred by the FDIC in connection with the default or potential
default of, or federal assistance provided to, an insured institution which is
controlled by the same holding company. Such loss would be apportioned among all
of the insured institutions controlled by the holding company.
FEDERAL RESERVE REQUIREMENTS
FRB regulations currently require savings associations to maintain
reserves of 3% of net transaction accounts (primarily NOW accounts) up to $49.3
million (subject to an exemption of up to $4.4 million), and of 10% of net
transaction accounts in excess of $49.3 million. At June 30, 1997, the Bank was
in compliance with its reserve requirements.
FEDERAL HOME LOAN BANK SYSTEMFEDERAL HOME LOAN BANK SYSTEM
The FHLBs provide credit to their members in the form of advances. As
members of the FHLB of Cincinnati, the Bank is required to 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 their
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or 5% of their advances from the FHLB of Cincinnati.
FFD is in compliance with this requirement with an aggregate investment by the
Bank in FHLB of Cincinnati stock of $642,000 at June 30, 1997.
Upon the origination or renewal of a loan or advance, the FHLB of
Cincinnati is required to obtain and to 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'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.
FEDERAL TAXATION
FFD and the Bank are each subject to the federal tax laws and
regulations which apply to corporations generally. In addition to the regular
income tax, FFD and the Bank may be 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. However, the
Taxpayer Relief Act of 1997 repealed the alternative minimum tax for certain
"small corporations" for tax years beginning after December 31, 1997. A
corporation initially qualifies as a small corporation if it had average gross
receipts of $5,000,000 or less for the three tax years ending with its first tax
year beginning after December 31, 1996. Once a corporation is recognized as a
small corporation, it will continue to
-19-
<PAGE> 20
be exempt from the alternative minimum tax for as long as its average gross
receipts for the prior three-year period does not exceed $7,500,000. In
determining if a corporation meets this requirement, the first year that it
achieved small corporation status is not taken into consideration.
Prior to the enactment of the Small Business Jobs Protection Act (the
"Act"), which was signed into law on August 21, 1996, certain thrift
institutions, including 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 one of the two reserve methods
of Section 593 of the Code. The reserve methods under Section 593 of the Code
permitted a thrift institution annually to 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 1995 and 1993,
the Bank used the percentage of taxable income method because such method
provided a higher bad debt deduction than the experience method. In tax year
1994, the Bank used the experience method.
The Act eliminated the percentage of taxable income reserve method of
accounting for bad debts by thrift institutions, effective for taxable years
beginning after 1995. Thrift institutions that would be 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.
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 amounts 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 becomes 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 (i.e., the "pre-1988 reserves"). In the case of a thrift
institution that becomes a small 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 thrift's reserves would have been at the close of its
last year beginning before January 1, 1996, had the thrift 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 then 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 real and church property and certain mobile homes), but only to the
extent that the loan is made to the owner of the property.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e) as modified by the Act which require 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 (excess 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
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<PAGE> 21
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, 1997,
the Bank's pre-1988 reserves for tax purposes totaled approximately $1.6
million. FFD believes the Bank had approximately $7.3 million of accumulated
earnings and profits for tax purposes as of June 30, 1997, 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.
The tax returns of FFD 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 FFD.
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. For tax years beginning after December 31, 1998, the rate of
tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio taxable
income and 8.5% of computed Ohio taxable income in excess of $50,000 or (ii)
.400% times taxable net worth.
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 book net worth
of the Bank determined in accordance with generally accepted accounting
principles. For tax year 1999, however, the franchise tax on financial
institutions will be 1.4% of the book net worth and for tax year 2000 and years
thereafter the tax will be 1.3% of the book net worth. As a "financial
institution," the Bank is not subject to any tax based upon net income 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 $590,000
</TABLE>
- --------------------------------
(1) At June 30, 1997, the Bank's office equipment had a total net book value of
approximately $154,000. For additional information regarding the Bank's
office premises and equipment, see Notes A-7 and E of Notes to Consolidated
Financial Statements.
During the year ended June 30, 1997, FFD purchased a lot in New
Philadelphia, Ohio for approximately $100,000 in order to construct a new branch
office. The outstanding commitment attendant to this construction was
approximately $261,000 at June 30, 1997.
-21-
<PAGE> 22
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, 1997 (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 22, 1997, 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 1997 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.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable.
-22-
<PAGE> 23
ITEM 13. EXHIBITS AND REPORTS ON FROM 8-K
(A) EXHIBITS
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 1997 Annual Meeting of Shareholders
21 Subsidiaries of FFD Financial Corporation
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed by FFD during the quarter ended
June 30, 1997.
-23-
<PAGE> 24
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 9, 1997
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.
/s/ Robert R. Gerber /s/ Charles A. Bradley
- -------------------------- ---------------------------
Robert R. Gerber, Charles A. Bradley,
President and Director Treasurer
(Principal Financial Officer)
Date: September 9, 1997 Date: September 9, 1997
/s/ Stephen G. Clinton /s/ Roy O. Mitchell, Jr.
- -------------------------- ---------------------------
Stephen G. Clinton Roy O. Mitchell, Jr.
Director Director
Date: September 9, 1997 Date: September 9, 1997
/s/ J. Richard Gray /s/ Robert D. Sensel
- -------------------------- ---------------------------
J. Richard Gray Robert D. Sensel
Director Director
Date: September 9, 1997 Date: September 9, 1997
/s/ Richard J. Herzig
- --------------------------
Richard J. Herzig
Director
Date: September 9, 1997
-24-
<PAGE> 25
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 to
Incorporation of FFD Financial Corporation the S-1 filed with the SEC on February 1, 1996
("Pre-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 Corporation Exhibit 3.3.
3.4 Code of Regulations of FFD Financial Incorporated by reference to the S-1, Exhibit 3.3.
Corporation
13 FFD Financial Corporation 1997 Annual
Report to Shareholders
20 Proxy Statement for 1997 Annual Meeting of
Shareholders
21 Subsidiaries of FFD Financial Corporation Incorporated by reference to the Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1996, filed with the SEC
on September 30, 1996, Exhibit 21.
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 13
Dear Shareholders:
On behalf of the directors, officers and employees of FFD Financial Corporation
and First Federal Savings Bank of Dover, I am pleased to highlight the
accomplishments and events of the fiscal year ended June 30, 1997, which more
than exceeded our primary operating objective of maintaining FFD Financial and
First Federal Savings Bank of Dover as a profitable and growing independent
provider of financial services.
FFD Financial Corporation reported record consolidated net earnings of $1.4
million, or $1.07 per share, for the fiscal year ended June 30, 1997, an
increase of $801,000 or 127.6%, over reported net earnings of $632,000 for the
fiscal year ended June 30, 1996. The increase in net earnings is primarily
attributable to a $665,000, or 31.9%, increase in net interest income and a $1.3
million gain on the sale of Federal Home Loan Mortgage Corporation stock.
Management intends to use the proceeds from the gain on the sale of the Federal
Home Loan Mortgage Corporation stock for loan production in the local economy.
A non-recurring charge significantly affected net earnings for the year, but
will have a positive effect in the future. On September 30, 1996, institutions
insured by the Savings Associations Insurance Fund (SAIF) of the FDIC were
assessed a one-time charge of $0.65 for every $100 of deposits to increase the
SAIF fund to the required level. This one-time assessment resulted in a $332,000
charge ($219,000 after tax). Additionally, 1997 earnings were impacted by an
increase in the allowance for loan losses of $125,000 which was established to
support current and planned growth in the loan portfolio.
We have been pleased with investors' support of and confidence in our common
shares. During the 1997 fiscal year, the price of our common shares increased
from $10.63 per share to $14.50 per share, an increase of 36.47%, and dividends
totaling $.175 per share were paid.
FFD Financial Corporation experienced growth in significant areas in fiscal year
1997. Total assets were $88.0 million as of June 30, 1997, an increase of $8.5
million, or 10.8%, from $79.5 million in the prior year. Deposit account
balances increased from $52.2 million to $57.1 million, or 9.4%, and net loans
increased $7.0 million to $55.5 million.
Asset quality remains excellent. At June 30, 1997, nonperforming loans totaled
less than $150,000, and capital levels were well above regulatory requirements
with our core capital of 16.4% and risk-based capital of 37.5%.
<PAGE> 2
We continue to take steps to position FFD Financial Corporation and First
Federal Savings Bank of Dover for continued growth and increased profitability.
In fiscal year 1997, the following activities have been undertaken:
- - Introduction of ATM and debit card
- - Expansion of lending activities to include commercial loans and deposit
products
- - Expansion of consumer products and services
- - Announcement of plans for a full service branch in New Philadelphia,
Ohio
Our directors, management and staff look forward to meeting all of the
challenges of the future. Please be assured that FFD Financial Corporation is
committed to supporting our local community, providing friendly professional
service, offering fairly priced financial services products, and providing local
decision making and focus that our customers have grown to expect.
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. First Federal has also
recently implemented a commercial lending program. 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 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 September 3, 1997, held
of record by approximately 744 shareholders. Price information with respect to
FFD's common shares is quoted on the Nasdaq Small-Cap Market ("Nasdaq") under
the symbol "FFDF."
The following table sets forth the high and low bid prices for the common shares
of FFD, together with the respective dividends declared per share, for each
quarter of fiscal 1997 and the quarter ended June 30, 1996. These quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission,
and may not represent actual transactions.
1
<PAGE> 4
<TABLE>
<CAPTION>
High Bid Low Bid Cash Dividends Declared
-------- ------- -----------------------
<S> <C> <C> <C>
FISCAL 1996
Quarter Ended:
June 30, 1996 $11.000 $ 9.875 $.050
FISCAL 1997
Quarter Ended:
September 30, 1996 $10.750 $10.125 $.050
December 31, 1996 11.750 10.750 .050
March 31, 1997 13.500 13.500 .050
June 30, 1997 14.000 13.375 .075
</TABLE>
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.
2
<PAGE> 5
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.
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL At June 30,
CONDITION: 1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(In thousands)
Total amount of:
<S> <C> <C> <C> <C> <C>
Assets $88,000 $79,458 $58,955 $54,635 $56,718
Interest-bearing
deposits (1) 3,547 1,793 3,659 5,420 4,676
Investment securities designated as
available for sale - at market 9,924 9,256 903 -- --
Investment securities - at cost 1,469 2,460 3,353 51 51
Mortgage-backed securities
designated as available for sale
- at market 7,944 9,007 -- -- --
Mortgage-backed securities - at cost
7,165 5,932 8,153 8,814 9,230
Loans receivable - net 55,504 48,539 41,494 38,981 41,418
Deposits 57,090 52,208 50,601 47,639 50,201
Advances from the FHLB 8,382 5,184 26 -- --
Shareholders' equity (2) (3) 21,480 21,411 7,787 6,746 6,212
</TABLE>
<TABLE>
<CAPTION>
For the year ended June 30,
SUMMARY OF EARNINGS: 1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income $5,880 $4,555 $3,718 $3,576 $4,125
Interest expense 3,101 2,471 1,951 1,731 2,187
------ ------ ------ ------ ------
Net interest income 2,779 2,084 1,767 1,845 1,938
Provision for losses on loans 125 50 -- 27 25
------ ------ ------ ------ ------
Net interest income after provision
for losses on loans 2,654 2,034 1,767 1,818 1,913
Other income 1,337 88 37 37 59
General, administrative and other
expense 1,859 1,163 1,077 1,044 975
------ ------ ------ ------ ------
Earnings before income taxes 2,132 959 727 811 997
Federal income taxes 705 327 248 277 318
------ ------ ------ ------ ------
Net earnings $1,427 $ 632 $ 479 $ 534 $ 679
====== ====== ====== ====== ======
</TABLE>
- -------------------------
(1) Includes short-term interest-bearing deposits in other banks.
(2) Consists solely of retained earnings at June 30, 1993 through 1995,
inclusive.
(3) At June 30, 1997, 1996 and 1995, includes $20,000, $586,000 and
$562,000, respectively, of net unrealized gains 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.
3
<PAGE> 6
<TABLE>
<CAPTION>
SELECTED FINANCIAL RATIOS At or for the year ended June 30,
AND OTHER DATA: 1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Return on average assets 1.65% 0.99% 0.86% 0.96% 1.17%
Return on average equity 6.65 5.72 6.86 8.24 11.56
Interest rate spread 2.15 2.41 2.77 2.98 3.00
Net interest margin 3.30 3.28 3.24 3.36 3.40
General, administrative and other
expense to average assets 2.15 1.82 1.93 1.87 1.69
Average equity to average
assets 24.83 17.29 12.49 11.59 10.16
Nonperforming assets to
total assets 0.07 0.15 0.22 0.66 1.12
Nonperforming loans to total loans
0.11 0.24 0.31 0.91 1.52
Total delinquent loans to total loans(1) 0.69 0.51 1.06 2.20 3.31
Allowance for loan losses to
total loans 0.47 0.29 0.23 0.25 0.18
Allowance for loan losses to
nonperforming loans 421.88 124.79 73.28 27.42 11.77
Net charge-offs to average
loans (2) -- -- .01 .01 --
Average interest-earning
assets to average interest-bearing
liabilities 131.46 122.47 113.11 111.89 110.40
Number of full service offices 1 1 1 1 1
</TABLE>
- ----------------------------
(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, 1997, 1996 and 1993, First Federal did not
have any charge-offs.
4
<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. 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 this
Annual Report.
CHANGES IN FINANCIAL CONDITION
Consolidated assets at June 30, 1997, totaled $88.0 million representing an
increase of $8.5 million, or 10.8%, over June 30, 1996 levels. Asset growth
during the fiscal year ended June 30, 1997, resulted primarily from a $4.9
million, or 9.4%, increase in savings deposits and a $3.2 million increase in
FHLB advances. The increase in deposits during fiscal 1997 generally reflects
management's efforts to aggressively market FFD's savings programs to leverage
FFD's capital position. During fiscal 1997, a portion of the $16.0 million of
proceeds from maturities and sales of investment securities were redeployed to
fund growth in the loan portfolio, as loans receivable increased by $7.0
million, or 14.4%. Management utilized the remaining investment securities
proceeds, funds from FHLB advances and proceeds from maturities and sales of
mortgage-backed securities to fund purchases of adjustable-rate mortgage-backed
securities and investment securities. Cash and cash equivalents increased
approximately $1.4 million as management chose to increase liquid assets to fund
loan commitments.
FFD's allowance for loan losses at June 30, 1997, totaled $270,000, or .47% of
total loans, compared to $146,000, or .29%, of total loans at June 30, 1996. The
allowance for loan losses constituted 421.88% of non-performing loans at June
30, 1997, compared to a 124.79% coverage ratio at June 30, 1996. The increase in
the allowance for loan losses during fiscal 1997 related solely to growth in the
loan portfolio during the year, as nonperforming loans totaled $64,000, or .11%
of total loans, at June 30, 1997, compared to $117,000, or .24% of total loans,
at June 30, 1996.
COMPARISON OF OPERATING RESULTS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
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
5
<PAGE> 8
interest-bearing liabilities, as well as by the average balance of
interest-earning assets compared to interest-bearing liabilities.
GENERAL. Net earnings for fiscal 1997 totaled $1.4 million, representing an
increase of $795,000, or 125.8%, over the $632,000 in net earrings recorded
during the fiscal year ended June 30, 1996. The growth in earnings in fiscal
1997 resulted primarily from a $620,000, or 30.5%, increase in net interest
income after provision for losses on loans, and a $1.2 million increase in other
income, which were partially offset by a $696,000, or 59.8% increase in general,
administrative and other expense and a $378,000 increase in the provision for
federal income taxes.
NET INTEREST INCOME. Total interest income for fiscal 1997 amounted to $5.9
million, an increase of $1.3 million, or 29.1%, over the $4.6 million recorded
in fiscal 1996. Interest income on loans and mortgage-backed securities
increased during fiscal 1997 by $980,000, or 24.5%, primarily reflecting the
$16.0 million growth in the weighted average portfolio outstanding year to year.
Interest income on investment securities and interest-bearing deposits increased
during fiscal 1997 by $345,000, or 62.4%, reflecting a $4.7 million increase in
the weighted average balances outstanding year to year. The growth in weighted
average interest-earning assets outstanding is indicative of the beneficial
effects of the conversion of First Federal from mutual to stock form (the
"Conversion") in fiscal 1996 and FFD's deposit growth in fiscal 1997.
Interest expense on deposits increased during fiscal 1997 by $134,000, or 5.4%.
The increase in expense resulted primarily from a $3.5 million increase in the
weighted average balance outstanding, which was partially offset by a .05%
decline in the weighted average yield during fiscal 1997. During fiscal 1997
interest expense on borrowings increased by $496,000, reflecting the increase in
weighted average balance outstanding year to year.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by approximately $695,000, or 33.3%, to a total of
$2.8 million for fiscal 1997. The interest rate spread decreased by 26 basis
points during the year from 2.41% in fiscal 1996 to 2.15% in fiscal 1997, while
the net interest margin increased by 2 basis points from 3.28% in fiscal 1996 to
3.30% in fiscal 1997.
PROVISION FOR LOSSES ON LOANS. The provision for losses on loans amounted to
$125,000 for fiscal 1997, compared to $50,000 for fiscal 1996. The increase in
the provision for losses on loans is due primarily to the growth in the loan
portfolio as well as First Federal's recent implementation of a commercial
lending program. Management generally provides for additions to the allowance
for loan losses based upon the inherent risk of loss related to the lending
activities, 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. Although
management believes that its allowance for loan losses at June 30, 1997, was
adequate based on the available facts and circumstances, there can be no
assurances that additions to such allowance will not be necessary in future
periods, which could adversely affect FFD's results of operations.
The foregoing statement is a "forward-looking" statement within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Factors that could affect the
adequacy of the loan loss allowance include, but are not limited to, the
following: (1) changes in the national and local economy which may negatively
impact the ability of borrowers to repay their loans and which may cause the
value of real estate and other properties that
6
<PAGE> 9
secure outstanding loans to decline; (2) unforeseen adverse changes in
circumstances with respect to certain large loan borrowers; (3) decrease in the
value of collateral securing consumer loans to amounts equal to or less than the
outstanding balances of the consumer loans; and (4) determinations by various
regulatory agencies that First Federal must recognize additions to its allowance
for loan losses based on such regulators' judgment of information available to
them at the time of their examinations.
OTHER INCOME. Other income increased during fiscal 1997 by $1.2 million due
primarily to the $1.3 million gain on sale of securities recorded in fiscal
1997. Most of this gain resulted from the sale of FFD's investment in Federal
Home Loan Mortgage Corporation ("FHLMC") common stock.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and other
expense increased during fiscal 1997 by $696,000, or 59.8%. The growth in
operating expense resulted primarily from a $249,000, or 47.2% increase in
employee compensation and benefits, a $278,000, or 240.5%, increase in federal
deposit insurance expense, and a $111,000, or 46.3%, increase in other operating
expenses. The increase in employee compensation generally reflects the cost of
employee stock benefit plans which were implemented in connection with the
Conversion, the termination of First Federal's defined benefit retirement
program, implementation of the commercial lending program and the hiring of
additional personnel in anticipation of the opening of a branch office in the
fall, while the increase in deposit insurance reflects the $332,000 assessment
related to recapitalizing the SAIF. The increase in other operating expense is
primarily attributable to increased professional fees related to the reporting
requirements of a public company.
FEDERAL INCOME TAXES. The provision for federal income taxes totaled $705,000
during fiscal 1997, an increase of $378,000, or 115.6%, over the $327,000
provision recorded in fiscal 1996. The increase primarily resulted from a $1.2
million, or 122.3%, increase in earnings before taxes. FFD's effective tax rates
were 33.1% and 34.1% for fiscal 1997 and 1996, respectively.
COMPARISON OF OPERATING RESULTS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
GENERAL. Net earnings totaled $632,000 for fiscal 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 fiscal 1996 amounted to $4.6
million, an increase of $837,000, or 22.5%, over the amount recorded in fiscal
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 fiscal 1995 to 7.47% in fiscal 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
7
<PAGE> 10
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 fiscal 1996 amounted to $2.5 million, an increase of
$520,000, or 26.7%, over the $2.0 million recorded in fiscal 1995. Interest
expense on 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 fiscal 1996. The interest rate spread declined by 36 basis
points during the year from 2.77% in fiscal 1995 to 2.41% in fiscal 1996, while
the net interest margin increased by 4 basis points from 3.24% in fiscal 1995 to
3.28% in fiscal 1996.
PROVISION FOR LOSSES ON LOANS. The provision for losses on loans amounted to
$50,000 for fiscal 1996. The increase in the provision for loan losses was due
primarily to the growth in the loan portfolio.
OTHER INCOME. Other income totaled $88,000 for fiscal 1996, compared to $37,000
for the same period in fiscal 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 fiscal 1996, an increase of $86,000, or 8.0%,
over the $1.1 million recorded in fiscal 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 fiscal 1996, an increase of $79,000, or 31.9%, over the $248,000 total
recorded in fiscal 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 fiscal 1996 and 1995.
8
<PAGE> 11
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,
1997 1996 1995
------------------------------ ----------------------------- -----------------------------
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)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable $52,295 $3,807 7.28% $44,855 $ 3,402 7.58% $40,172 $ 2,852 7.10%
Mortgage-backed securities 17,228 1,175 6.82 8,713 600 6.89 8,404 538 6.40
Investment securities 12,198 782 6.41 5,323 363 6.82 701 44 6.28
Interest-bearing deposits and other 2,444 116 4.75 4,570 190 4.16 5,237 284 5.42
------- ------ ------ ------- ------- ------ ------- ------- ------
Total interest-earning assets 84,165 5,880 6.99 63,461 4,555 7.18 54,514 3,718 6.82
Non-interest-earning assets 2,255 474 1,432
------- ------- -------
Total assets $86,419 $63,935 $55,946
======= ======= =======
Interest-bearing liabilities:
Deposits $55,166 2,598 4.71 $51,713 2,464 4.76 $48,170 1,949 4.05
Advances from the FHLB 8,857 503 5.68 104 7 6.73 26 2 7.69
------- ------ ------ ------- ------- ------ ------- ------- ------
Total interest-bearing liabilities 64,023 3,101 4.84 51,817 2,471 4.77 48,196 1,951 4.05
------ ------ ------- ------ ------- -------
Non-interest-bearing liabilities 937 1,063 764
------- ------- -------
Total liabilities 64,960 52,880 48,960
Shareholders' equity 21,459 11,055 6,986
------- ------- -------
Total liabilities and shareholders'
equity $86,419 $63,935 $55,946
======= ======= =======
Net interest income $2,779 $ 2,084 $ 1,767
====== ======= =======
Interest rate spread 2.15% 2.41% 2.77%
======= ======= ======
Net interest margin (net interest
income as a percent of average
interest-earning assets) 3.30% 3.28% 3.24%
======= ======= ======
Average interest-earning assets to
average interest-bearing liabilities 131.46% 122.47% 113.11%
======= ======= ======
</TABLE>
The table on the following page 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.
9
<PAGE> 12
<TABLE>
<CAPTION>
Year ended June 30,
1997 vs. 1996 1996 vs. 1995
------------------------------ ----------------------------
Increase Increase
(decrease) (decrease)
due to due to
Volume Rate Total Volume Rate Total
(In thousands)
Interest income attributable to:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable $ 545 $ (140) $ 405 $ 348 $ 202 $ 550
Mortgage-backed securities 581 (6) 575 20 42 62
Investment securities 442 (23) 419 314 5 319
Interest-bearing deposits and other
(98) 24 (74) (31) (63) (94)
------- ------- ------- ------- ------- -------
Total interest income 1,470 (145) 1,325 651 186 837
------- ------- ------- ------- ------- -------
Interest expense attributable to:
Deposits 161 (27) 134 156 359 515
FHLB advances 511 (15) 496 6 (1) 5
------- ------- ------- ------- ------- -------
Total interest expense 672 (42) 630 162 358 520
------- ------- ------- ------- ------- -------
Increase (decrease) in net interest income
$ 798 $ (103) $ 695 $ 489 $ (172) $ 317
======= ======= ======= ======= ======= =======
</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 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."
10
<PAGE> 13
At June 30, 1997, 2% of the present value of First Federal's assets was
approximately $1.6 million, and the interest rate risk of a 200 basis point
decrease in market interest rates (which was greater than the interest rate risk
of a 200 basis point increase) was $732,000.
Presented below, as of June 30, 1997, 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.
<TABLE>
<CAPTION>
June 30, 1997
Change in interest rate Board limit $ change % change
(basis points) % change in NPV in NPV
- ----------------------------- -------------------------- ------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C>
+400 +40.0% $(847) (6.33)%
+300 +30.0 (286) (2.14)
+200 +20.0 150 1.12
+100 +10.0 132 0.99
0 0 0 0
-100 -10.0 (266) (1.99)
-200 -20.0 (732) (5.48)
-300 -30.0 (668) (4.99)
-400 -40.0 (484) (3.62)
</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.
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
11
<PAGE> 14
deposit flows, (iii) the yields available on short-term liquid assets and (iv)
the objectives of the asset/liability management program. During fiscal 1997,
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, 1997, First
Federal's regulatory liquidity ratio was 10.5%. At such date, First Federal had
commitments to originate loans totaling $1.8 million and no commitments to
purchase or sell loans. Additionally, as of June 30, 1997, First Federal had
entered into a commitment to construct a new branch for a total cost of
approximately $261,000. First Federal considers its liquidity and capital
sufficient to meet its outstanding short- and long-term needs.
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, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
Year ended June 30,
1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Net earnings $ 1,427 $ 632 $ 479
Adjustments to reconcile net earnings to
net cash from operating activities (490) (91) (79)
-------- -------- --------
Net cash from operating activities 937 541 400
Net cash from investing activities (6,814) (21,456) (5,192)
Net cash from financing activities 7,259 19,733 2,987
-------- -------- --------
Net change in cash and cash equivalents 1,382 (1,182) (1,805)
Cash and cash equivalents at
beginning of period 2,698 3,880 5,685
-------- -------- --------
Cash and cash equivalents at
end of period $ 4,080 $ 2,698 $ 3,880
======== ======== ========
</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.
12
<PAGE> 15
"Core capital" is comprised of common shareholders' 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% or 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 additional items of capital, which in the
case of First Federal includes a general loan loss allowance of $270,000 at June
30, 1997.
First Federal exceeded all of its capital requirements at June 30, 1997. The
following table summarizes First Federal's regulatory capital requirements and
regulatory capital at June 30, 1997:
<TABLE>
<CAPTION>
Excess of regulatory capital
over current
Regulatory capital Current requirement requirement
Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $13,320 16.4% $1,216 1.5% $12,104 14.9%
Core capital 13,320 16.4 2,432 3.0 10,888 13.4
Risk-based capital 13,590 37.5 2,895 8.0 10,695 29.5
</TABLE>
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation", establishing financial
accounting and reporting standards for stock-based compensation plans. SFAS No.
123 encourages all entities to adopt a new method of accounting to measure the
compensation cost of all stock compensation plans based on the estimated fair
value of the award at the date it is granted. Companies are, however, allowed to
continue to measure compensation cost for those plans using the intrinsic value
based method of accounting, 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; however, 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 condition or results of operations.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers of
Financial Assets, Servicing Rights, and Extinguishment of Liabilities", that
provides accounting guidance on transfers of
13
<PAGE> 16
financial assets, servicing of financial assets, and extinguishment of
liabilities. SFAS No. 125 introduces an approach to accounting for transfers of
financial assets that provides a means of dealing with more complex transactions
in which the seller disposes of only a partial interest in the assets, retains
rights or obligations, makes use of special purpose entities in the transaction,
or otherwise has continuing involvement with the transferred assets. The new
accounting method, the financial components approach, provides that the carrying
amount of the financial assets transferred be allocated to components of the
transaction based on their relative fair values. SFAS No. 125 provides criteria
for determining whether control of assets has been relinquished and whether a
sale has occurred. If the transfer does not qualify as a sale, it is accounted
for as a secured borrowing. Transactions subject to the provisions of SFAS No.
125 include, among others, transfers involving repurchase agreements,
securitizations of financial assets, loan participations, factoring
arrangements, and transfers of receivables with recourse.
An entity that undertakes an obligation to service financial assets recognizes
either a servicing asset or liability for the servicing contract (unless related
to a securitization of assets, and all the securitized assets are retained and
classified as held-to-maturity). A servicing asset or liability that is
purchased or assumed is initially recognized at its fair value. Servicing assets
and liabilities are amortized in proportion to and over the period of estimated
net servicing income or net servicing loss and are subject to subsequent
assessments for impairment based on fair value.
SFAS No. 125 provides that a liability is removed from the balance sheet only if
the debtor either pays the creditor and is relieved of its obligation for the
liability or is legally released from being the primary obligor.
SFAS No. 125 is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1997, and is to be
applied prospectively. Earlier or retroactive application is not permitted.
Management does not believe that adoption of SFAS No. 125 will have a material
adverse effect on the FFD's consolidated financial position or results of
operations.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share", which
requires companies to present basic earnings per share and, if applicable,
diluted earnings per share, instead of primary and fully diluted earnings per
share, respectively. Basic earnings per share is computed without including
potential common shares, i.e., no dilutive effect. Diluted earnings per share is
computed taking into consideration common shares outstanding and potentially
dilutive common shares, including options, warrants, convertible securities and
contingent stock agreements. SFAS No. 128 is effective for periods ending after
December 15, 1997. Early application is not permitted. Based upon the provisions
of SFAS No. 128, FFD's basic and diluted earnings per share for the fiscal year
ended June 30, 1997, would each have been $1.07.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which requires entities presenting a complete set of financial statements to
include details of comprehensive income that arise in the reporting period.
Comprehensive income consists of net earnings or loss for the current period and
other comprehensive income, expense, gains and losses that bypass the income
statement and are reported in a separate component of equity, i.e., unrealized
gains and losses on certain investment securities. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. Management does not believe that
adoption of SFAS No. 130 will have a material adverse effect on the FFD's
consolidated financial position or results of operations.
14
<PAGE> 17
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS AND
CONSOLIDATED FINANCIAL STATEMENTS
PAGE
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 16
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 17
CONSOLIDATED STATEMENTS OF EARNINGS 18
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 19
CONSOLIDATED STATEMENTS OF CASH FLOWS 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 22
15
<PAGE> 18
[GRANT THORNTON LETTERHEAD]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
FFD Financial Corporation
We have audited the accompanying consolidated statements of financial condition
of FFD Financial Corporation as of June 30, 1997 and 1996, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the years ended June 30, 1997, 1996 and 1995. 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 as of June 30, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the years ended June 30, 1997, 1996
and 1995, in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
----------------------
Cincinnati, Ohio
August 22, 1997
16
<PAGE> 19
FFD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
Cash and due from banks $ 533 $ 905
Interest-bearing deposits in other financial institutions 3,547 1,793
-------- --------
Cash and cash equivalents 4,080 2,698
Investment securities designated as available
for sale - at market 9,924 9,256
Investment securities - at cost, approximate market value of
$1,459 and $2,427 as of June 30, 1997 and 1996 1,469 2,460
Mortgage-backed securities designated as available for
sale - at market 7,944 9,007
Mortgage-backed securities - at amortized cost, approximate
market value of $7,304 and $6,073 as of June 30,
1997 and 1996 7,165 5,932
Loans receivable - net 55,504 48,539
Office premises and equipment - at depreciated cost 865 545
Stock in Federal Home Loan Bank - at cost 642 598
Accrued interest receivable 267 283
Prepaid expenses and other assets 140 140
-------- --------
Total assets $ 88,000 $ 79,458
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $57,090 $ 57,090 $ 52,208
Advances from the Federal Home Loan Bank 8,382 5,184
Accrued interest payable 82 37
Other liabilities 340 204
Accrued federal income taxes 609 40
Deferred federal income taxes 17 374
-------- --------
Total liabilities 66,520 58,047
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 -- --
Additional paid-in capital 14,137 14,132
Retained earnings - substantially restricted 8,957 7,857
Unrealized gains on securities designated as available
for sale, net of related tax effects 20 586
Shares acquired by stock benefit plans (1,634) (1,164)
-------- --------
Total shareholders' equity 21,480 21,411
-------- --------
Total liabilities and shareholders' equity $ 88,000 $ 79,458
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
17
<PAGE> 20
FFD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended June 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
1997 1996 1995
Interest income
<S> <C> <C> <C>
Loans $ 3,807 $ 3,402 $ 2,852
Mortgage-backed securities 1,175 600 538
Investment securities 782 363 44
Interest-bearing deposits and other 116 190 284
------- ------- -------
Total interest income 5,880 4,555 3,718
Interest expense
Deposits 2,598 2,464 1,949
Borrowings 503 7 2
------- ------- -------
Total interest expense 3,101 2,471 1,951
------- ------- -------
Net interest income 2,779 2,084 1,767
Provision for losses on loans 125 50 --
------- ------- -------
Net interest income after
provision for losses on loans 2,654 2,034 1,767
Other income
Gain on sale of investment securities designated
as available for sale 1,284 -- --
Gain on sale of real estate acquired through foreclosure 2 -- --
Gain on sale of office premises and equipment -- 50 --
Other operating income 51 38 37
------- ------- -------
Total other income 1,337 88 37
General, administrative and other expense
Employee compensation and benefits 777 528 532
Occupancy and equipment 118 98 80
Franchise taxes 144 108 98
Federal deposit insurance premiums 394 116 109
Data processing 75 73 63
Other operating 351 240 195
------- ------- -------
Total general, administrative
and other expense 1,859 1,163 1,077
------- ------- -------
Earnings before income taxes 2,132 959 727
Federal income taxes
Current 769 318 260
Deferred (64) 9 (12)
------- ------- -------
705 327 248
------- ------- -------
NET EARNINGS $ 1,427 $ 632 $ 479
======= ======= =======
EARNINGS PER SHARE $ 1.07 N/A N/A
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE> 21
FFD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended June 30, 1997, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
UNREALIZED
SHARES GAIN ON
ACQUIRED BY SECURITIES
ADDITIONAL STOCK DESIGNATED
COMMON PAID-IN BENEFIT AS AVAILABLE RETAINED
STOCK CAPITAL PLANS FOR SALE EARNINGS TOTAL
<S> <C> <C> <C> <C> <C> <C>
Balance at July 1, 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
Net earnings for the year ended June 30, 1997 -- -- -- -- 1,427 1,427
Purchase of shares for stock benefit plan -- -- (494) -- -- (494)
Amortization expense of stock benefit plans -- 5 24 -- -- 29
Realized gain on securities designated as available
for sale, net of related tax effects -- -- -- (566) -- (566)
Dividends paid of $.225 per share -- -- -- -- (327) (327)
--- -------- -------- -------- -------- --------
Balance at June 30, 1997 $-- $ 14,137 $ (1,634) $ 20 $ 8,957 $ 21,480
=== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE> 22
FFD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings for the year $ 1,427 $ 632 $ 479
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 (13) (8) 8
Amortization of deferred loan origination fees (66) (65) (46)
Depreciation and amortization 61 43 41
Gain on sale of investment and mortgage-backed
securities designated as available for sale (1,284) -- --
Gain on sale of office premises and equipment -- (50) --
Provision for losses on loans 125 50 --
Amortization expense of stock benefit plans 29 -- --
Federal Home Loan Bank stock dividends (44) (40) (34)
Increase (decrease) in cash due to changes in:
Accrued interest receivable 16 (131) (42)
Prepaid expenses and other assets -- (23) (39)
Other liabilities 136 45 16
Accrued interest payable 45 8 (1)
Federal income taxes
Current 569 71 30
Deferred (64) 9 (12)
-------- -------- --------
Net cash provided by operating activities 937 541 400
Cash flows provided by (used in) investing activities:
Purchase of mortgage-backed securities (2,528) -- (915)
Purchase of mortgage-backed securities designated
as available for sale (4,737) (9,148) --
Principal repayments on mortgage-backed securities 3,257 2,228 1,568
Proceeds from sale of mortgage-backed securities
designated as available for sale 3,970 -- --
Purchase of investment securities designated as available
for sale (15,391) (8,182) --
Purchase of investment securities designated as
held to maturity -- -- (3,352)
Proceeds from maturity of investment securities 13,648 900 --
Proceeds from sale of investment securities designated
as available for sale 2,372 -- --
Loan principal repayments 10,049 9,797 5,773
Loan disbursements (17,073) (16,827) (8,241)
Purchase of office premises and equipment (381) (498) (25)
Proceeds from sale of office premises and equipment -- 274 --
-------- -------- --------
Net cash used in investing activities (6,814) (21,456) (5,192)
-------- -------- --------
Net cash used in operating and investing
activities (subtotal carried forward) (5,877) (20,915) (4,792)
-------- -------- --------
</TABLE>
20
<PAGE> 23
FFD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
Net cash used in operating and investing
<S> <C> <C> <C>
activities (subtotal brought carried forward) $ (5,877) $(20,915) $ (4,792)
Cash flows provided by (used in) financing activities:
Net increase in deposit accounts 4,882 1,607 2,961
Proceeds from Federal Home Loan Bank advances 8,900 5,160 30
Repayments on Federal Home Loan Bank advances (5,702) (2) (4)
Net proceeds from issuance of common stock -- 12,968 --
Purchase of shares for stock benefit plans (494) -- --
Dividends paid on common stock (327) -- --
-------- -------- --------
Net cash provided by financing activities 7,259 19,733 2,987
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 1,382 (1,182) (1,805)
Cash and cash equivalents at beginning of year 2,698 3,880 5,685
-------- -------- --------
Cash and cash equivalents at end of year $ 4,080 $ 2,698 $ 3,880
======== ======== ========
Supplemental disclosure of cash flow information: Cash paid during the year for:
Federal income taxes $ 116 $ 234 $ 214
======== ======== ========
Interest on deposits and borrowings $ 3,056 $ 2,445 $ 1,950
======== ======== ========
Supplemental disclosure of noncash investing activities:
Securities transferred to available for sale classification
upon adoption of SFAS No. 115 $ -- $ -- $ 51
======== ======== ========
Unrealized (realized) gains on securities designated as
available for sale, net of applicable tax effects $ (566) $ 24 $ 562
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE> 24
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
During fiscal 1996, 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 L. 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 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, 1997 and 1996, Dover's principal
assets consisted of an investment in the stock of the Savings Bank's data
processor and a deposit account in the Savings Bank. All intercompany
balances and transactions have been eliminated in the accompanying
consolidated financial statements.
22
<PAGE> 25
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2. Investment Securities and Mortgage-backed Securities
The Corporation accounts for investment and mortgage-backed securities in
accordance with 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. At June 30, 1997 and 1996, the Corporation's shareholders'
equity reflected a net unrealized gain on securities designated as available
for sale totaling $20,000 and $586,000, 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.
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.
23
<PAGE> 26
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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, 1997 and 1996, the Savings Bank had no loans that would be
defined as impaired under SFAS No. 114.
24
<PAGE> 27
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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. Federal Income Taxes
The Corporation accounts for federal 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.
25
<PAGE> 28
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
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. A temporary
difference is also recognized for depreciation expense computed using
accelerated methods for federal income tax purposes.
9. Retirement Plans
The Savings Bank had 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 were made to fund current service costs and
amortization of past service costs. The plan was terminated during fiscal
1997. The Savings Bank's provision for pension expense was $25,000 and
$8,000 for fiscal 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 $120,000
and $30,000 for fiscal 1997 and 1996, respectively.
Additionally, the Corporation adopted the First Federal Savings Bank of
Dover Recognition and Retention Plan ("RRP"). Subsequent to the Conversion,
the Savings Bank purchased 40,600 shares of the Corporation's common stock
in the open market. All shares were awarded to certain officers and
directors of the Savings Bank, under a five year vesting schedule. A
provision of $61,000 related to the RRP was charged to expense for fiscal
1997.
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 and 1995,
as the Corporation completed its conversion to stock form in April 1996.
Earnings per share is computed based upon weighted-average common shares
outstanding less shares in the ESOP which are unallocated and not committed
to be released. Weighted-average shares outstanding, which gives effect to a
reduction for 114,044 shares held by the ESOP, totaled 1,340,706 for fiscal
1997.
26
<PAGE> 29
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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, 1997
and 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.
27
<PAGE> 30
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. Fair Value of Financial Instruments (continued)
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.
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, 1997 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 are as follows:
<TABLE>
<CAPTION>
1997 1996
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(In thousands)
Financial assets
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 4,080 $ 4,080 $ 2,698 $ 2,698
Investment securities 11,393 11,383 11,716 11,683
Mortgage-backed securities 15,109 15,248 14,939 15,080
Loans receivable 55,504 55,014 48,539 48,373
Federal Home Loan Bank stock 642 642 598 598
------- ------- ------- -------
$86,728 $86,367 $78,490 $78,432
======= ======= ======= =======
Financial liabilities
Deposits $57,090 $57,079 $52,208 $52,221
Advances from the Federal Home Loan Bank 8,382 8,382 5,184 5,187
------- ------- ------- -------
$65,472 $65,461 $57,392 $57,408
======= ======= ======= =======
</TABLE>
13. Reclassifications
Certain prior year amounts have been reclassified to conform to the 1997
consolidated financial statement presentation.
28
<PAGE> 31
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
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, 1997 and 1996, are as
follows:
<TABLE>
<CAPTION>
JUNE 30, 1997
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
HELD TO MATURITY:
<S> <C> <C> <C> <C>
U.S. Government agency obligations $ 1,469 $ -- $ 10 $ 1,459
AVAILABLE FOR SALE:
U.S. Government and agency
obligations 9,931 6 13 9,924
------- ------- ------- -------
Total investment securities $11,400 $ 6 $ 23 $11,383
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
HELD TO MATURITY:
<S> <C> <C> <C> <C>
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
======= ======= ======= =======
</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,
1997, 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 $ 6,440 $ 6,432
Due after one year through five years 3,462 3,456
Due in five to ten years 1,498 1,495
-------- --------
$ 11,400 $ 11,383
======== ========
</TABLE>
29
<PAGE> 32
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
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, 1997 and
1996, are shown below:
<TABLE>
<CAPTION>
1997
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
HELD TO MATURITY:
Federal Home Loan Mortgage
<S> <C> <C> <C> <C>
Corporation participation certificates $ 6,450 $ 105 $ 1 $ 6,554
Government National Mortgage
Association participation certificates 715 35 -- 750
------- ------- ------- -------
Total mortgage-backed securities
held to maturity 7,165 140 1 7,304
AVAILABLE FOR SALE:
Federal National Mortgage
Association participation certificates 7,176 37 13 7,200
Federal Home Loan Mortgage
Corporation participation certificates 730 14 -- 744
------- ------- ------- -------
Total mortgage-backed securities
available for sale 7,906 51 13 7,944
------- ------- ------- -------
Total mortgage-backed securities $15,071 $ 191 $ 14 $15,248
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
1996
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
HELD TO MATURITY:
Federal Home Loan Mortgage
<S> <C> <C> <C> <C>
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
======= ======= ======= =======
</TABLE>
30
<PAGE> 33
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
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, 1997, 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 $ 199
Due after ten years 14,872
---------
$ 15,071
=========
</TABLE>
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at June 30 is as follows:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
Residential real estate
<S> <C> <C>
One- to four-family $ 54,316 $45,745
Multi-family 1,158 1,336
Nonresidential real estate 1,192 1,124
Consumer and other loans 583 1,390
-------- -------
57,249 49,595
Less:
Undisbursed portion of loans in process 1,185 614
Deferred loan origination fees 290 296
Allowance for losses on loans 270 146
-------- --------
$ 55,504 $ 48,539
======== ========
</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 $53.7 million, or 97%, of the total loan portfolio at June 30,
1997, and approximately $46.0 million, or 95%, at June 30, 1996. 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.
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 $641,000 and
$561,000 at June 30, 1997 and 1996, respectively.
31
<PAGE> 34
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 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>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Beginning balance $ 146 $ 96 $ 99
Provision for losses on loans 125 50 --
Loan charge-offs (1) -- (3)
----- ----- -----
Ending balance $ 270 $ 146 $ 96
===== ===== =====
</TABLE>
As of June 30, 1997, 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, 1997, 1996 and 1995, totaled
$64,000, $117,000 and $131,000, respectively. Interest income that would
have been recognized had nonaccrual loans performed pursuant to contractual
terms totaled approximately $2,000, $9,000 and $9,000 for the years ended
June 30, 1997, 1996 and 1995, respectively.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at June 30 is comprised of the following:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Land $ 314 $ 100
Building and improvements 502 382
Furniture and equipment 205 158
------ ------
1,021 640
Less accumulated depreciation and
amortization 156 95
------ ------
$ 865 $ 545
====== ======
</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.
During fiscal 1997, the Corporation entered into a commitment for
construction of a new branch office facility. Construction is estimated to
be completed before December 1997 at a total cost of approximately $261,000.
32
<PAGE> 35
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE F - DEPOSITS
Deposits consist of the following major classifications at June 30:
<TABLE>
<CAPTION>
DEPOSIT TYPE AND WEIGHTED-
AVERAGE INTEREST RATE 1997 1996
AMOUNT % AMOUNT %
(In thousands)
<S> <C> <C> <C> <C>
NOW accounts
1997 - 1.66% $ 5,219 9.1
1996 - 2.03% $ 4,389 8.4
Passbook
1997 - 3.95% 17,568 30.8
1996 - 3.76% 14,909 28.6
------- ------- ------- -------
Total demand, transaction and
passbook deposits 22,787 39.9 19,298 37.0
Certificates of deposit
Original maturities of:
One year or less
1997 - 5.24% 10,236 17.9
1996 - 4.90% 8,433 16.1
12 months to 36 months
1997 - 5.88% 22,614 39.6
1996 - 5.91% 23,422 44.9
Individual retirement accounts
1997 - 5.60% 1,453 2.6
1996 - 5.37% 1,056 2.0
------- ------- ------- -------
Total certificates of deposit 34,303 60.1 32,911 63.0
------- ------- ------- -------
Total deposit accounts $57,090 100.0 $52,208 100.0
======= ======= ======= =======
</TABLE>
The Savings Bank had deposit accounts with balances in excess of $100,000
totaling $3.9 million and $1.9 million at June 30, 1997 and 1996, respectively.
Interest expense on deposits at June 30 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Passbook $ 613 $ 473 $ 451
NOW accounts 85 103 102
Certificates of deposit 1,900 1,888 1,396
------ ------ ------
$2,598 $2,464 $1,949
====== ====== ======
</TABLE>
33
<PAGE> 36
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE F - DEPOSITS (continued)
Maturities of outstanding certificates of deposit at June 30 are summarized
as follows:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Less than one year $23,639 $23,788
One year to two years 8,608 7,656
Two years to three years 2,056 1,467
------- -------
$34,303 $32,911
======= =======
</TABLE>
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at June 30, 1997 by
a pledge of certain residential mortgage loans totaling $12.6 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, 1997 1996
<S> <C> <C> <C>
6.20% 1997 $ - $2,200
5.48% - 5.69% 1998 780 1,480
5.57% - 5.78% 1998 1,180 1,480
5.81% - 5.88% 1999 3,900 -
5.62% 2004 2,500 -
8.15% 2005 22 24
------- -------
$8,382 $5,184
===== =====
Weighted-average interest rate 5.76% 5.79%
==== ====
</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>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Federal income taxes at statutory rate $725 $326 $247
Increase in taxes resulting from:
Other (primarily nontaxable interest income in 1997) (20) 1 1
---- ----- -----
Federal income taxes per consolidated
financial statements $705 $327 $248
===== ==== ====
Effective tax rate 33.1% 34.1% 34.1%
==== ==== ====
</TABLE>
34
<PAGE> 37
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
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 1997 1996
differences at statutory rate: (In thousands)
Deferred tax assets:
<S> <C> <C>
Deferred loan origination fees $ 16 $ 27
Retirement expense 53 32
General loan loss allowance 92 50
ESOP expense 49 10
Other 1 3
----- -----
Deferred tax assets 211 122
Deferred tax liabilities:
Federal Home Loan Bank stock dividends (99) (85)
Difference between book and tax depreciation (22) (14)
Percentage of earnings bad debt deduction (95) (95)
Unrealized gains on securities designated
as available for sale (12) (302)
----- -----
Deferred tax liabilities (228) (496)
----- -----
Net deferred tax liability $ (17) $(374)
===== =====
</TABLE>
The Savings Bank was 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,
1997, 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, 1997. See Note K for additional information regarding
the Savings Bank's future percentage of earnings bad debt deductions.
35
<PAGE> 38
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
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, 1997, the Savings Bank had outstanding commitments of
approximately $1.8 million to originate loans. Additionally, the Savings
Bank was obligated under unused lines of credit totaling $785,000. In the
opinion of management, all loan commitments equaled or exceeded prevalent
market interest rates as of June 30, 1997, and will be funded from normal
cash flow from operations.
NOTE J - REGULATORY CAPITAL
The Savings Bank is subject to minimum regulatory capital standards
promulgated by the Office of Thrift Supervision (the "OTS"). Failure to meet
minimum capital requirements can initiate certain mandatory -- and possibly
additional discretionary -- actions by regulators that, if undertaken, could
have a direct material effect on the consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Savings Bank must meet specific capital guidelines
that involve quantitative measures of the Savings Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Savings Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
The minimum capital standards of the OTS 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
36
<PAGE> 39
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE J - REGULATORY CAPITAL (continued)
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% - 5.0% of adjusted total assets for
substantially all savings associations. Management anticipates no material
change to the Savings Bank's excess regulatory capital position as a result
of this proposed change in the regulatory capital requirement. The
risk-based capital requirement currently 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%.
As of June 30, 1997, management believes that the Savings Bank met all
capital adequacy requirements to which it is subject.
AS OF JUNE 30, 1997
<TABLE>
<CAPTION>
TO BE "WELL-
CAPITALIZED" UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------- ----------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $13,320 16.4% =>$1,216 =>1.5% =>$4,053 => 5.0%
Core Capital $13,320 16.4% =>$2,432 =>3.0% =>$4,863 => 6.0%
Risk-based capital $13,590 37.5% =>$2,895 =>8.0% =>$3,619 =>10.0%
</TABLE>
The Savings Bank's management believes that, under the current regulatory
capital regulations, the Savings Bank will continue to meet its minimum
capital requirements in the foreseeable future. However, events beyond the
control of the Savings Bank, such as increased interest rates or a downturn
in the economy in the Savings Bank's market area, could adversely affect
future earnings and, consequently, the ability to meet future minimum
regulatory capital requirements.
37
<PAGE> 40
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE K - LEGISLATIVE DEVELOPMENTS
The deposit accounts of the Savings Bank and of other savings associations
are insured by the Federal Deposit Insurance Corporation ("FDIC") through
the Savings Association Insurance Fund ("SAIF"). The reserves of the SAIF
were below the level required by law, because a significant portion of the
assessments paid into the fund were used to pay the cost of prior thrift
failures. The deposit accounts of commercial banks are insured by the FDIC
through 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 fiscal 1996 and 1997, no BIF assessments were
required for healthy commercial banks except for a $2,000 minimum fee.
Legislation was enacted to recapitalize the SAIF that provided for a special
assessment totaling $.657 per $100 of SAIF deposits held at March 31, 1995,
in order to increase SAIF reserves to the level required by law. The Savings
Bank held $49.2 million in deposits at March 31, 1995, resulting in an
assessment of approximately $332,000, or $219,000 after-tax, which was
charged to operations in fiscal 1997.
A component of the recapitalization plan provided for the merger of the SAIF
and BIF on January 1, 1999. 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. In the opinion of management, such
activity limit restrictions would not have a material effect on the
Corporation's financial position or results of operations.
Under separate legislation related to the recapitalization plan, the Savings
Bank is required to recapture as taxable income approximately $281,000 of
its tax bad debt reserve, which represents the post-1987 additions to the
reserve, and will be unable to utilize the percentage of earnings method to
compute its bad debt deduction in the future. The Savings Bank has provided
deferred taxes for this amount and will be permitted to amortize the
recapture of the bad debt reserve in taxable income over six years.
38
<PAGE> 41
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE L- CONDENSED FINANCIAL STATEMENTS OF FFD FINANCIAL CORPORATION
The following condensed financial statements summarize the financial
position of FFD Financial Corporation as of June 30, 1997 and 1996, and the
results of its operations for the periods then ended.
FFD FINANCIAL CORPORATION
STATEMENTS OF FINANCIAL CONDITION
June 30,
(In thousands)
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
Cash and due from banks $ 460 $ 621
Investment securities 6,430 1,977
Mortgage-backed securities -- 4,385
Loan receivable from ESOP 1,131 1,164
Investment in First Federal Savings Bank of Dover 13,348 13,190
Accrued interest receivable 128 80
Prepaid expenses and other assets 30 --
-------- --------
Total assets $ 21,527 $ 21,417
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued federal income taxes $ 47 $ --
Deferred federal income taxes -- 6
-------- --------
Total liabilities 47 6
Shareholders' equity
Common stock -- --
Additional paid-in capital 14,137 14,132
Unrealized gain on securities designated as available
for sale, net of related tax effects 20 586
Retained earnings 8,957 7,857
Shares acquired by stock benefit plans (1,634) (1,164)
-------- --------
Total shareholders' equity 21,480 21,411
-------- --------
Total liabilities and shareholders' equity $ 21,527 $ 21,417
======== ========
</TABLE>
39
<PAGE> 42
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE L- CONDENSED FINANCIAL STATEMENTS OF FFD FINANCIAL CORPORATION (continued)
FFD FINANCIAL CORPORATION
STATEMENTS OF EARNINGS
Period ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1997 1996
Revenue
<S> <C> <C>
Interest income $ 476 $ 120
Equity in earnings of subsidiary 1,243 176
-------- --------
Total revenue 1,719 296
General and administrative expenses 219 22
-------- --------
Earnings before income taxes 1,500 274
Federal income taxes 73 20
-------- --------
NET EARNINGS $ 1,427 $ 254
======== ========
FFD FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
Period ended June 30,
(In thousands)
1997 1996
Cash provided by (used in) operating activities:
Net earnings for the year $ 1,427 $ 254
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Undistributed earnings of consolidated subsidiary (1,243) (194)
Loss on sale of mortgage-backed and investment
securities 12 --
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets (10) (79)
Other liabilities (3) 50
-------- --------
Net cash provided by operating activities 203 31
Cash flows provided by (used in) investing activities:
Proceeds from repayment of loan to ESOP 33 --
Proceeds from maturities of investment securities 9,948 --
Purchase of investment securities (15,391) (1,999)
Proceeds from sale of investment securities 994 --
Purchase of mortgage-backed securities -- (4,479)
Principal repayment on mortgage-backed securities 444 21
Proceeds from sale of mortgage-backed securities 3,935 --
Purchase of common shares of First Federal Savings
Bank of Dover -- (4,757)
Issuance of loan to ESOP -- (1,164)
-------- --------
Net cash used in investing activities (37) (12,378)
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock -- 12,968
Payment of dividends on common stock (327) --
-------- --------
Net cash provided by (used in) financing activities (327) 12,968
-------- --------
Net (increase) decrease in cash and cash equivalents (161) 621
Cash and cash equivalents at beginning of period 621 --
-------- --------
Cash and cash equivalents at end of period $ 460 $ 621
======== ========
</TABLE>
40
<PAGE> 43
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE L- CONDENSED FINANCIAL STATEMENTS OF FFD FINANCIAL CORPORATION (continued)
As a condition to regulatory approval of the stock conversion and
reorganization to the holding company form of ownership, the Savings Bank
agreed to limit the amount of dividends payable to the Corporation.
Regulations of the Office of Thrift Supervision (OTS) impose limitations on
the payment of dividends and other capital distributions by savings
associations. Under such regulations, a savings association that,
immediately prior to, and on a pro forma basis after giving effect to, a
proposed capital distribution, has total capital (as defined by OTS
regulation) that is equal to or greater than the amount of its fully
phased-in capital requirement is generally permitted without OTS approval
(but subsequent to 30 days prior notice to the OTS of the planned dividend)
to make capital distributions during a calendar year in the amount of up to
the greater of (i) 100% of its net earnings to date during the year plus an
amount equal to one-half of the amount by which its total capital-to-assets
ratio exceeded its fully phased-in capital-to-assets ratio at the beginning
of the year or (ii) 75% of its net earnings for the most recent four
quarters. Pursuant to such OTS dividend regulations, the Savings Bank had
the ability to pay dividends of approximately $5.0 million to the
Corporation at June 30, 1997.
NOTE M- STOCK OPTION PLAN
The Corporation initiated the FFD Financial Corporation 1996 Stock Option
and Incentive Plan (the "Plan") in October 1996 upon shareholder approval of
the Plan that provides for the issuance of 145,475 shares of authorized, but
unissued shares of common stock. The Board of Directors granted stock
options to purchase 100,458 shares of the Corporation's common stock to
officers and directors at a weighted-average exercise price of $11.56 per
share.
The Corporation applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for the Plan. Accordingly, no
compensation cost has been recognized for the Plan. Had compensation cost
for the Corporation's stock option plan been determined based on the fair
value at the grant dates for awards under the Plan consistent with the
accounting method utilized in SFAS No. 123, the Company's net earnings and
earnings per share for the year ended June 30, 1997 would have been reduced
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
<S> <C>
Net earnings As reported $1,427
======
Pro-forma $1,407
======
Earnings per share As reported $1.07
=====
Pro-forma $1.05
=====
</TABLE>
41
<PAGE> 44
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE M- STOCK OPTION PLAN (continued)
The fair value of each option grant is estimated on the date of grant using
the modified Black-Scholes options-pricing model with the following
weighted-average assumptions used; dividend yield of 2.25% and expected
volatility of 30.0%; risk-free interest rate of 6.0% and expected life of
ten years.
A summary of the status of the Corporation's fixed stock option plans as of
June 30, 1997, and changes during the year then ended is presented below:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
<S> <C> <C>
Outstanding at beginning of year - $ -
Granted 100,458 $11.56
Exercised - $ -
Forfeited 5,125 $11.25
---------
Outstanding at end of year 95,333 $11.58
Options exercisable at year-end -
Weighted-average fair value of
options granted during the year $11.56
The following information applies to options outstanding at June 30, 1997:
Number outstanding 95,333
Range of exercise prices $11.25 - $13.75
Weighted-average exercise price $11.58
Weighted-average remaining contractual life in years 9.33
</TABLE>
NOTE N - 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.
42
<PAGE> 45
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE N - CORPORATE REORGANIZATION AND CONVERSION TO STOCK FORM (continued)
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.
43
<PAGE> 46
FFD FINANCIAL CORP.
AND
FIRST FEDERAL SAVINGS BANK OF DOVER
DIRECTORS AND EXECUTIVE 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.
EXECUTIVE OFFICERS OF
FFD FINANCIAL CORPORATION
Robert R. Gerber
President
Charles A. Bradley
Treasurer
Shirley A. Wallick
Secretary
EXECUTIVE OFFICERS OF
FIRST FEDERAL SAVINGS BANK OF DOVER
Robert R. Gerber
President
Charles A. Bradley
Treasurer, Chief Financial Officer
and Vice President
Shirley A. Wallick
Secretary
44
<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 Corporation will be held on
October 14, 1997, 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
45
<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 1997 Annual Meeting of Shareholders of
FFD Financial Corporation ("FFD") will be held at 321 North Wooster Avenue,
Dover, Ohio 44622, on October 14, 1997 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
1999;
2. To ratify the selection of Grant Thornton LLP as the
auditors of FFD for the current fiscal year; and
3. 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
29, 1997, 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, President
September 12, 1997
<PAGE> 2
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 1997 Annual Meeting of Shareholders
of FFD to be held at 321 North Wooster Avenue, Dover, Ohio 44622, on October 14,
1997, 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 J. Richard Gray, Roy O. Mitchell, Jr.
and Robert D. Sensel as directors of FFD for terms expiring in
1999; and
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 29,
1997 (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 September 12, 1997.
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 are not counted
toward the election of directors or toward the election of the individual
nominees specified on the Proxy. If the accompanying Proxy is signed and dated
by the shareholder but no vote is specified thereon, the shares held by such
shareholder will be voted FOR the reelection of the three nominees.
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
-1-
<PAGE> 3
year. The effect of an abstention is the same as a vote against ratification. If
the accompanying Proxy is signed and dated by the shareholder but no vote is
specified thereon, the shares held by such shareholder will be voted FOR the
ratification of the selection of Grant Thornton as auditors.
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 31, 1997:
<TABLE>
<CAPTION>
Amount and nature of Percent of
Name and address beneficial ownership shares outstanding
- ---------------- -------------------- ------------------
<S> <C> <C>
First Bankers Trust, N.A. 116,380(1) 8.00%
1201 Broadway
Quincy, Illinois 62301
</TABLE>
- ---------------------------
(1) Includes 114,044 shares that First Bankers Trust Company, N.A. (the
"ESOP Trustee"), as the Trustee for the FFD Financial Corporation
Employee Stock Ownership Plan (the "ESOP"), has sole voting power over
and 2,336 shares over which the ESOP Trustee has shared voting power.
The ESOP Trustee has sole investment power over all 116,380 shares.
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 31, 1997:
<TABLE>
<CAPTION>
Amount and nature of beneficial ownership
---------------------------------------------
Sole voting and/or Shared voting and/or Percent of
Name and address (1) investment power investment power shares outstanding
- -------------------- ----------------- -------------------- ------------------
<S> <C> <C> <C>
Stephen G. Clinton 4,186.4 (2) 37,390 (3) 2.86%
Robert R. Gerber 8,528.0 (4) 40,540 (3) 3.36
J. Richard Gray 22,036.4 (2) - 1.51
Richard J. Herzig 14,536.4 (2) - 1.00
Roy O. Mitchell, Jr. 14,536.4 (2) 2,000 1.14
Robert D. Sensel 12,036.4 (2) 10,000 1.51
All directors and executive
officers of FFD as a group
(8 people) 77,492.0 (5) 54,390 (6) 8.99%
</TABLE>
- -----------------------------
(1) Each of the persons listed on this table may be contacted at the
address of FFD.
(2) This number includes 1,454.6 shares that may be acquired upon the
exercise of options awarded pursuant to the FFD Financial Corporation
1996 Stock Option and Incentive Plan (the "Stock Option Plan") and
581.8 shares which will be earned in the next 60 days pursuant to the
First Federal Savings Bank of Dover Recognition and Retention Plan and
Trust (the "RRP").
(Footnotes continued on next page)
-2-
<PAGE> 4
(3) This number includes 35,540 shares held by the RRP Trust with regard to
which Messrs. Clinton and Gerber have shared voting power as Trustees
of the RRP.
(4) This number includes 4,364 shares that may be acquired upon the
exercise of an option awarded pursuant to the Stock Option Plan and
1,164 shares which will be earned in the next 60 days pursuant to the
RRP.
(5) This number includes 12,362 shares that may be acquired upon the
exercise of options awarded pursuant to the Stock Option Plan and 4,480
shares that will be earned in the next 60 days pursuant to the RRP.
(6) The 35,540 shares held by the RRP Trust are reflected in each Trustee's
amounts but counted only once in the amount beneficially owned by all
directors and executive officers of FFD as a group.
BOARD OF DIRECTORS
ELECTION OF DIRECTORS
FFD's Regulations provide for a Board of Directors consisting of six
persons divided into two classes. 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.
Each of the directors of FFD is also a director of First Federal. Each
director of FFD became a director of the Company in connection with the
conversion of FFD from mutual to stock form (the "Conversion") and the formation
of FFD as the holding company for First Federal.
The Board of Directors proposes the reelection of the following persons
to serve as directors of FFD until the annual meeting of shareholders in 1999
and until their successors are duly elected and qualified or until their earlier
resignation, removal from office or death:
<TABLE>
<CAPTION>
Name Age (1) Position(s) held Director of FFD since
- ---- ------- ---------------- ---------------------
<S> <C> <C> <C>
J. Richard Gray 70 Director 1995
Roy O. Mitchell, Jr. 70 Director 1995
Robert D. Sensel 52 Director 1995
</TABLE>
- -----------------------------
(1) As of August 31, 1997.
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.
-3-
<PAGE> 5
The following directors will continue to serve after the Annual Meeting
for the terms indicated:
<TABLE>
<CAPTION>
Name Age (1) Position(s) held Director of FFD since Term expires
- ---- ------- ---------------- --------------------- ------------
<S> <C> <C> <C> <C>
Stephen G. Clinton 44 Director 1995 1998
Robert R. Gerber 48 Director and President 1995 1998
Richard J. Herzig 72 Director 1995 1998
</TABLE>
- -----------------------------
(1) As of August 31, 1997.
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.
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
The Board of Directors of FFD met 13 times for regularly scheduled and
special meetings during the fiscal year ended June 30, 1997.
Each director of FFD is also a director of First Federal. The Board of
Directors of First Federal met 14 times for regularly scheduled and special
meetings during the fiscal year ended June 30, 1997.
COMMITTEES OF DIRECTORS
The Board of Directors of FFD has an Audit Committee, an ESOP Committee
and a Stock Option Committee. The full Board of Directors serves as a nominating
committee.
The Audit Committee is responsible for selecting and recommending to
the Board of Directors a firm to serve as auditors for FFD and reviewing the
report prepared by the auditors. The full Board of Directors served as the Audit
Committee during fiscal year 1997 and met once during the fiscal year ended June
30, 1997.
-4-
<PAGE> 6
The ESOP Committee is responsible for administering the ESOP. The ESOP
Committee consists of all of the directors of FFD. The ESOP Committee met once
during the 1997 fiscal year.
The Stock Option Committee is responsible for administering the Stock
Option Plan, including interpreting the Stock Option Plan and granting options
pursuant to its terms. The members of the Stock Option Committee are Messrs.
Gray, Herzig, Mitchell and Sensel. The Stock Option Committee met twice during
the fiscal year ended June 30, 1997.
The Board of Directors of First Federal has an Executive Committee and
an RRP Committee.
The Executive Committee functions primarily as a loan approval
committee, although it is authorized to act on other matters. The members of the
Executive Committee are Messrs. Gerber, Gray and Herzig. The Executive Committee
met 48 times during the fiscal year ended June 30, 1997.
The RRP Committee administers the RRP and recommends awards thereunder,
subject to the approval of the full Board of Directors. The members of the RRP
Committee are Messrs. Gray, Herzig, Mitchell and Sensel. The RRP Committee met
twice during the fiscal year ended June 30, 1997.
EXECUTIVE OFFICERS
In addition to Mr. Gerber, who is 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>
Charles A. Bradley 36 Treasurer of FFD and Vice President, Treasurer and
Chief Financial Officer of First Federal
Shirley A. Wallick 52 Secretary of FFD and First Federal
</TABLE>
- -----------------------------
(1) As of August 31, 1997.
CHARLES A. BRADLEY is the Vice President, the Treasurer and the Chief
Financial Officer of First Federal and the Treasurer of FFD. Prior to joining
FFD and First Federal in 1997, Mr. Bradley served as the Chief Financial Officer
of the Bank One branches located in Dover, Coshocton and Cambridge, Ohio, from
1995 to February, 1997, and as Vice President/Finance and Manager of Operations
at the Bank One branch in Dover, Ohio, from 1992 to 1995.
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.
-5-
<PAGE> 7
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to Robert R.
Gerber, who is the President of FFD and First Federal, for the fiscal years
ended June 30, 1997, 1996 and 1995. No other executive officer of FFD or First
Federal earned salary and bonus in excess of $100,000 during such periods.
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Annual Compensation Long term Compensation All Other
------------------------------------------------------------------ Compensation (1)
Name and Year Salary ($) Bonus ($) Awards
Principal -----------------------------------------
Position Restricted Stock Securities Underlying
Awards ($) Options/SARs (#)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert R. Gerber 1997 $84,000 $8,000 $64,020 (2) 21,280 (3) -
President 1996 $73,933 $6,376 - - $12,275 (4)
1995 $62,545 $6,110 - - $16,483 (5)
</TABLE>
- -------------------------
(1) Does not include amounts attributable to other miscellaneous benefits
received by Mr. Gerber, the cost of which was less than 10% of his
compensation.
(2) On October 8, 1996, Mr. Gerber was awarded 5,820 common shares pursuant
to the RRP. Mr. Gerber paid no consideration for such shares. Such
shares will become earned and nonforfeitable at the rate of one-fifth
per year on the anniversary of the date of the award, beginning October
8, 1997, assuming continued employment with, or service on the Board of
Directors of, First Federal. The market price of FFD's shares on
October 8, 1996, determined by reference to the closing bid for FFD's
shares on the Nasdaq SmallCap Market ("Nasdaq") on such date was $11.00
per share. The aggregate market value of the shares awarded to Mr.
Gerber under the RRP, as of such date, was $64,020. At June 30, 1997,
the market price was $14.00, based on the closing bid of FFD's common
shares, and the aggregate market value of the shares awarded to Mr.
Gerber was $81,480. In addition, dividends and other distributions paid
on such shares and earnings on such dividends and distributions will be
distributed to Mr. Gerber according to the vesting schedule.
(3) Represents the number of common shares of the FFD underlying options
granted to Mr. Gerber pursuant to the Stock Option Plan.
(4) Consists of directors' fees of $3,900 and First Federal's contribution
of $8,375 to First Federal's tax-qualified profit sharing plan (the
"Profit Sharing Plan.").
(5) Consists of directors' fees of $7,350 and $9,133 contributed to the
Profit Sharing Plan by First Federal.
-6-
<PAGE> 8
STOCK OPTION PLAN
The shareholders of FFD adopted the Stock Option Plan at the 1996
Annual Meeting of Shareholders. Pursuant to the Stock Option Plan, 145,475
shares were reserved for issuance by FFD upon exercise of options to be granted
to certain directors, officers and employees of FFD and First Federal from time
to time under the Stock Option Plan. Options to purchase 96,833 common shares of
FFD were granted pursuant to the Stock Option Plan during the fiscal year ended
June 30, 1997.
The Stock Option 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 and in accordance with the Office of Thrift
Supervision ("OTS") regulations.
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 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").
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 following table sets forth information regarding all grants of
options to purchase common shares of FFD made to Mr. Gerber during the fiscal
year ended June 30, 1997:
<TABLE>
<CAPTION>
Option/SAR Grants In Last Fiscal Year
Individual Grants
------------------------------------------------------------------------------------------------
Number of Securities % Of Total Options/SARs
Underlying Options/ Granted to Employees in Exercise or Base
Name SARs Granted (#) 1997 Fiscal Year Price ($/Share) Expiration Date
- ---- -------------------- ------------------------ ---------------- ---------------
<S> <C> <C> <C> <C>
Robert R. Gerber 21,820 (1) 22.53% $11.25 October 8, 2006
</TABLE>
- ----------------------------
(1) The option was granted on October 8, 1996, and is first exercisable
with respect to one-fifth of the shares subject to the option on each
anniversary of the date of grant of such option, commencing October 8,
1997.
-7-
<PAGE> 9
The following table sets forth information regarding the number and
value of unexercised options held by Mr. Gerber at June 30, 1997:
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and 6/30/97 Option/SAR Values
-----------------------------------------------------------------------------------------------------
Number of Securities Underlying
Unexercised Options/SARs at Value of Unexercisable
Shares Acquired on Value 6/30/97(#) "In The Money" Options/
Name Exercise(#) Realized($) Exercisable/Unexercisable SARs at 6/30/97(#)(1)
- ---- ----------- ----------- ------------------------- ---------------------
<S> <C> <C> <C> <C>
Robert R. Gerber -0- N/A -0-/21,820 -0-/$60,005
</TABLE>
- ---------------------------
(1) For purposes of this table, the value of the option was determined by
multiplying the number of shares subject to unexercised options by the
difference between the $11.25 exercise price and the fair market value
of FFD's common shares, which was $14.00 on June 30, 1997, based on the
closing bid price reported by Nasdaq.
RECOGNITION AND RETENTION PLAN
The shareholders of FFD adopted the RRP at the 1996 Annual Meeting of
Shareholders. With funds contributed by First Federal, the RRP purchased 40,600
common shares of FFD, 28,293 of which were awarded to directors and executive
officers of First Federal during the fiscal year ended June 30, 1997.
The RRP is administered by the RRP Committee. The RRP Committee
determines which directors and employees of First Federal will be awarded shares
under the RRP and the number of shares awarded.
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. Shares awarded pursuant to the RRP, along with any dividends and other
distributions paid on such shares and earnings thereon, are distributed to
recipients as soon as practicable after such shares become earned. Recipients
are not permitted to transfer or direct the voting of shares awarded under the
RRP until they become earned.
EMPLOYEE STOCK OWNERSHIP PLAN
FFD has established the ESOP for the benefit of employees of FFD and
its subsidiaries, including First Federal, who are age 21 or older and who have
completed at least one year of service with FFD and its subsidiaries. The ESOP
provides an ownership interest in the Company to all eligible full-time
employees of the Company. The ESOP trust borrowed funds from the Company with
which it acquired 116,380 of the common shares sold in the Conversion.
Contributions to the ESOP and shares released from the suspense account
are allocated among participants on the basis of compensation. Except for
participants who retire, become disabled or die during a plan year, all other
participants must have completed at least 1,000 hours of service in order to
receive an allocation. Benefits become fully vested after five years of service.
DIRECTOR COMPENSATION
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. Each
director who is not an executive officer of First Federal receives a
-8-
<PAGE> 10
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 receives a fee of $25 per committee meeting.
SELECTION OF AUDITORS
The Board of Directors has selected Grant Thornton LLP as the auditors
of FFD for the current fiscal year and recommends that the shareholders ratify
the selection. Management expects that a representative of Grant Thornton LLP
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.
PROPOSALS OF SHAREHOLDERS AND OTHER MATTERS
Any proposals of shareholders intended to be included in FFD's proxy
statement for the 1998 Annual Meeting of Shareholders should be sent to FFD by
certified mail and must be received by FFD not later than May 16, 1998.
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
September 12, 1997
-9-
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