<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
For the fiscal Year Ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number: 0-27916
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 Identification Number)
organization)
321 North Wooster Avenue, Dover, Ohio 44622
----------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number:
(330) 364-7777
----------------------------
Securities registered under Section 12(b) of the Exchange Act:
None
----------------------------------------------------
Securities registered under Section 12(g) of the Exchange Act:
Common Shares, without par value
----------------------------------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this Form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's revenues for the fiscal year ended June 30, 1998, were
$7.0 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 SmallCap Market, was $19.3 million on September 22,
1998.
1,445,350 of the registrant's common shares were issued and outstanding
on September 23, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Portions of the Annual Report to Shareholders
for the fiscal year ended June 30, 1998.
Part III of Form 10-KSB - Portions of the Proxy Statement for 1998 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,
commercial loans and loans secured by multifamily real estate (over four units),
nonresidential real estate and land. The origination of consumer loans
constitutes a small part of the lending activity of the Bank. Loan funds are
obtained primarily from savings deposits and loan repayments. In addition,
advances from the Federal Home Loan Bank (the "FHLB") of Cincinnati are utilized
from time to time when other sources of funds are inadequate to fund loan
demand. The Bank also invests in U.S. Government agency obligations,
interest-bearing deposits in other financial institutions, mortgage-backed
securities and other investments permitted by applicable law.
Interest on loans, mortgage-backed securities and investments is the
Bank's primary source of income. The Bank's principal expense is interest paid
on deposit accounts. Operating results are dependent to a significant degree on
the net interest income of the Bank, which is the difference between interest
earned on loans, mortgage-backed securities and other investments and interest
paid on deposits and borrowings. Like most thrift institutions, the Bank's
interest income and interest expense are significantly affected by general
economic conditions and by the policies of various regulatory authorities.
LENDING ACTIVITIES
GENERAL. The Bank's principal lending activity is the origination of
conventional real estate loans, including construction loans, secured by one- to
four-family homes located in the Bank's primary market area. Loans secured by
multifamily properties containing five units or more and nonresidential
properties are also offered by the Bank. The Bank also originates commercial
loans for businesses located 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.
<PAGE> 3
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,
-------------------------------------------------------------
1998 1997 1996
------------------ ----------------- ------------------
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 $62,010 85.4% $52,842 92.3% $44,763 90.2%
Multifamily 1,058 1.4 1,158 2.0 1,336 2.7
Construction 1,572 2.2 1,474 2.6 982 2.0
Nonresidential, commercial and
land 6,722 9.3 1,192 2.1 1,124 2.3
Consumer 1,263 1.7 583 1.0 1,390 2.8
-------- ----- --------- ----- -------- ------
Total loans 72,625 100.0% 57,249 100.0% 49,595 100.0%
===== ===== =====
Less:
Undisbursed portion of loans in
process 1,079 1,185 614
Deferred loan origination fees 286 290 296
Allowance for losses on loans 270 270 146
------- --------- ---------
Loans receivable, net $70,990 $55,504 $48,539
======= ======= =======
</TABLE>
LOAN MATURITY SCHEDULE. The following table sets forth certain
information as of June 30, 1998, 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
1999 2000 2001 6/30/98 6/30/98 6/30/98 6/30/98 Total
---- ---- ---- ------- ------- ------- ------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate $1,448 $ 24 $ 63 $ 764 $3,529 $17,965 $40,847 $64,640
(1)
Nonresidential and land 1,145 46 157 323 862 3,043 1,146 6,722
Consumer loans 144 92 163 265 17 582 - 1,263
-------- ------ ----- -------- --------- --------- --------- ---------
Total loans $2,737 $162 $383 $1,352 $4,408 $21,590 $41,993 $72,625
====== ==== ==== ====== ====== ======= ======= =======
</TABLE>
- -----------------------------
(1) Includes one- to four-family, multifamily and construction loans.
The following table sets forth the dollar amount of all loans due after
one year from June 30, 1998, which have predetermined interest rates and which
have floating or adjustable interest rates:
<TABLE>
<CAPTION>
Due more than one year after
June 30, 1998
----------------------------
(In thousands)
<S> <C>
Fixed rate of interest $21,082
Adjustable rate of interest 48,806
-------
$69,888
=======
</TABLE>
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<PAGE> 4
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
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 $62.0 million at June 30, 1998, and represented 85.4% of total
loans at such date.
Between 1982 and 1994, the Bank originated only adjustable-rate
mortgage loans ("ARMs"). ARMs are offered by the Bank for terms up to 30 years.
The interest rate adjustment periods on the ARMs are one year, three years or
five years, although most of the ARMs originated by the Bank are one-year ARMs.
The rates on ARMs are tied to the average monthly mortgage contract rate for
previously occupied homes published by the Federal Housing Finance Board. The
maximum allowable adjustment at each adjustment date is 2%. Some of the Bank's
ARMs have a maximum adjustment of 6% over the term of the loan.
Adjustable-rate loans decrease the Bank's interest rate risk but
involve other risks, primarily credit risk, because as interest rates rise the
payment by the borrower rises to the extent permitted by the terms of the loan,
thereby increasing the potential for default. At the same time, the
marketability of the underlying property may be adversely affected by higher
interest rates. The Bank believes that these risks have not had a material
adverse effect on the Bank to date.
In September 1994 the Bank resumed originating fixed-rate loans with
terms of up to 15 years. All fixed-rate loans originated by the Bank since that
time have been held in the Bank's portfolio.
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, 1998, the Bank had $1.5 million
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, 1998, loans secured by multifamily properties totaled
approximately $1.1 million, or 1.4% 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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<PAGE> 5
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, 1998, a total of $1.6 million, or approximately 2.2%, of
the Bank's total loans, consisted of construction loans.
NONRESIDENTIAL REAL ESTATE, COMMERCIAL 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
improved and unimproved lots for the construction of single-family residences.
Unimproved lot loans have terms of up to five years and a maximum LTV of 65%.
Improved lot loans have terms of up to five years and a maximum LTV of 89%. The
Bank has also originated a limited number of commercial loans which are secured
by a security interest in inventory, accounts receivable, machinery or other
assets of the borrower. As a result of the addition of an experienced loan
officer and the implementation of enhanced underwriting procedures, the Bank
anticipates an increase in its commercial loan volume in the future.
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, 1998, 1997 or 1996.
Commercial loans are generally deemed to entail significantly greater
risk than real estate lending. The repayment of commercial loans is typically
dependent on the income stream and successful operation of a business, which can
be affected by economic conditions. The collateral for commercial loans, if any,
often consists of rapidly depreciating assets.
At June 30, 1998, the Bank had a total of $6.7 million invested in
nonresidential real estate, commercial and land loans, including the
participation interests. Such loans comprised approximately 9.3% 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,
1998, the Bank's nonresidential mortgage loans totaled 46.4% 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 and a half
years.
At June 30, 1998, the Bank had approximately $1.3 million, or 1.7% 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, television, and radio
advertisements, solicitations by the Bank's lending staff and walk-in customers.
-5-
<PAGE> 6
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.
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. The Bank does not
sell fixed-rate 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 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, 1998, includes two participations purchased in the 1992 fiscal year.
See "Nonresidential Real Estate and Land Loans."
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Loans originated:
One- to four-family $ 19,424 $ 13,899 $ 15,241
Construction 2,391 2,710 1,224
Nonresidential and land 6,818 162 -
Consumer 606 302 362
-------- -------- --------
Total loans originated 29,239 17,073 16,827
Principal loan repayments 13,826 10,049 9,797
Increase (decrease) in other items, net (1) 73 (59) 15
-------- -------- --------
Net increase in loans receivable $ 15,486 $ 6,965 $ 7,045
======== ======== ========
<FN>
- -----------------------------
(1) Other items consist of amortization of deferred loan origination fees
and the provision for losses on loans.
</TABLE>
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
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<PAGE> 7
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.
Based on the 15% limit, the Bank was able to lend approximately $2.2
million to one borrower at June 30, 1998. The largest amount the Bank had
outstanding to one borrower at June 30, 1998, was $1.7 million. Such loan was
secured by a hotel located in New Philadelphia, Ohio.
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, 1998.
The following table reflects the amount of loans in a delinquent status
as of the dates indicated:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997 June 30,1996
----------------------------- ---------------------------- ----------------------------
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 2 $ 75 .10% - $ - -% - $ - -%
60 - 89 days 7 193 .27 7 333 .58 3 131 .26
90 days and over 5 96 .13 2 64 .11 7 117 .24
--- ----- --- - ------ --- --- ----- ---
Total delinquent loans 14 $364 .50% 9 $397 .69% 10 $248 .50%
== ==== === = ==== === == ==== ===
</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,
---------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Residential real estate $ 82 $ 64 $117
Consumer and other - - -
---- ---- ----
Total nonaccrual loans 82 64 117
---- ---- ----
Total nonperforming loans $ 82 $ 64 $117
==== ==== ====
Allowance for losses on loans $270 $270 $146
==== ==== ====
Nonperforming loans as a percent of total
loans .11% .11% 0.24%
Allowance for losses on loans as a percent
of nonperforming loans 329.27% 421.88% 124.79%
</TABLE>
For the year ended June 30, 1998, $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,
------------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Classified assets:
Substandard $ 93 $ 64 $140
Doubtful - - -
---- ---- ----
Total classified assets $ 93 $ 64 $140
==== ==== ====
</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.
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,
---------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period $ 270 $ 146 $ 96
Charge-offs - (1) -
Recoveries - - -
----- ----- -----
Net charge-offs - (1) -
Provision for losses on loans - 125 50
----- ----- -----
Balance at end of period $ 270 $ 270 $ 146
===== ===== =====
Ratio of net charge-offs to average loans
outstanding during the period - - -
Ratio of allowance for loan losses to
total loans 0.37% 0.47% 0.29%
</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,
--------------------------------------------------------------------------
1998 1997 1996
--------------------- ---------------------- -----------------------
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 loans $142 98.3% $ 77 99.0% $ 71 97.2%
Consumer loans 4 1.7 2 1.0 6 2.8
Unallocated 124 - 191 - 69 -
---- ----- ----- ----- ---- -----
Total $270 100.0% $ 270 100.0% $146 100.0%
==== ===== ===== ===== ==== =====
</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, Government National Mortgage Association
("GNMA") and Federal National Mortgage Association ("FNMA") participation
certificates. Mortgage-backed securities generally entitle the Bank to receive a
portion of the cash flows from an identified pool of mortgages. FHLMC, GNMA and
FNMA securities are guaranteed by the issuing agency as to principal and
interest. Although mortgage-backed securities generally yield less than
individual loans originated by the Bank, management believes they are a prudent
investment alternative during periods of decreased loan demand.
-10-
<PAGE> 11
The following table sets forth the composition of the Bank's investment
securities portfolio, including those designated as available for sale, and
mortgage-backed securities at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------------- --------------------------------- -----------------------------------
Amortized % of Market % of Amortized % of Market % of Amortized % of Market % of
cost total value total cost total value total cost total value total
---- ----- ----- ----- ---- ----- ----- ----- ---- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities
designated as held
to maturity:
U.S. Government
agency obligations $ 977 6.4% $ 993 6.3% $ 1,469 5.5% $ 1,459 5.5% $ 2,460 9.5% $ 2,427 9.1%
Investment securities
designated as available
for sale:
U.S. Government and
agency obligations 2,496 16.3 2,498 16.0 9,931 37.5 9,924 37.3 8,184 31.8 8,134 30.4
FHLMC stock 3 - 157 1.0 - - - - 51 0.2 1,122 4.2
------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total investment
securities designated
as available for sale 2,499 16.3 2,655 17.0 9,931 37.5 9,924 37.3 8,235 32.0 9,256 34.6
------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total investment
securities 3,476 22.7 3,648 23.3 11,400 43.0 11,383 42.8 10,695 41.5 11,683 43.7
Mortgage-backed
securities
designated as held
to maturity 5,960 38.9 6,073 38.8 7,165 27.1 7,304 27.4 5,932 23.0 6,073 22.7
Mortgage-backed
securities
designated as
available for sale 5,879 38.4 5,935 37.9 7,906 29.9 7,944 29.8 9,140 35.5 9,007 33.6
------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total mortgage-backed
securities 11,839 77.3 12,008 76.7 15,701 57.0 15,248 57.2 15,072 58.5 15,080 56.3
------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total investment
and mortgage-backed
securities $15,315 100.0% $15,656 100.0% $26,471 100.0% $26,631 100.0% $25,767 100.0% $26,763 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
The maturities of the Bank's U. S. Government and agency obligations
and mortgage-backed securities at June 30, 1998, are indicated in the following
table:
<TABLE>
<CAPTION>
At June 30, 1998
---------------------------------------------------------------------------------------------------------------
After one through After five After ten
One year or less five years through ten years years Total
------------------ ------------------ ------------------ ------------------ --------------------------------
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Market Weighted
cost yield cost yield cost yield cost yield cost value average yield
---- ----- ---- ----- ---- ----- ---- ----- ---- ----- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and
agency obligations $499 4.75% $1,977 5.79% $ - -% $ 997 6.13% $ 3,473 $ 3,491 5.74%
Mortgage-backed
securities - - - - 1,343 6.83 10,496 7.64 11,839 12,008 7.54
---- ---- ------ ---- ------ ---- ------- ---- ------- ------- ----
$499 4.75% $1,977 5.79% $1,343 6.83% $11,493 7.51% $15,312 $15,499 7.13%
==== ==== ====== ==== ====== ==== ======= ==== ======= ======= ====
</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, 1998, the Bank's certificates of deposit totaled $37.0
million, or 59.8% of total deposits. Of such amount, approximately $22.8 million
in certificates of deposit mature within one year. Based on past experience and
the Bank's prevailing pricing strategies, management believes that a substantial
percentage of such certificates will renew with the Bank at maturity. If there
is a significant deviation from historical experience, the Bank can utilize
borrowings from the FHLB as an alternative to this source of funds.
The following table sets forth the dollar amount of deposits in the
various types of accounts offered by the Bank at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------
1998 1997 1996
------------------ ------------------- ------------------
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) $ 5,954 9.6% $ 5,219 9.1% $ 4,388 8.4%
Passbook savings accounts (2) 18,955 30.6 17,568 30.8 14,909 28.6
------- ----- ------- ----- ------- -----
Total transaction accounts 24,909 40.2 22,787 39.9 19,297 37.0
Certificates of deposit:
2.01 - 4.00% - - - - 412 0.8
4.01 - 6.00% 34,419 55.6 24,420 42.8 23,592 45.2
6.01 - 8.00% 2,628 4.2 9,883 17.3 8,907 17.0
------- ----- ------- ----- ------- -----
Total certificates of deposit (3) 37,047 59.8 34,303 60.1 32,911 63.0
------- ----- ------- ----- ------- -----
Total deposits $61,956 100.0% $57,090 100.0% $52,208 100.0%
======= ===== ======= ===== ======= =====
<FN>
- -----------------------------
(1) The weighted average interest rates on NOW and money market accounts
were 1.62% at June 30, 1998, 1.66% at June 30, 1997, and 2.03% at
June 30, 1996.
(2) The weighted average interest rate on passbook accounts were 3.86% at
June 30, 1998, 3.95% at June 30, 1997, and 3.76% at June 30, 1996.
(3) The weighted average rate on all certificates of deposit was 5.62%,
5.67% and 5.63%, at June 30, 1998, 1997 and 1996, respectively.
</TABLE>
-12-
<PAGE> 13
The following table shows rate and maturity information for the Bank's
certificates of deposit at June 30, 1998:
<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% $21,194 $10,584 $2,641 $34,419
6.01 - 8.00% 1,639 858 131 2,628
------- ------- ------- -------
Total $22,833 $11,442 $2,772 $37,047
======= ======= ====== =======
</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,
1998:
<TABLE>
<CAPTION>
Maturity Amount
-------- ------
(In thousands)
<S> <C>
Three months or less $ 105
Over 3 months to 6 months 100
Over 6 months to 12 months 1,220
Over 12 months 469
------
Total $1,894
======
</TABLE>
The following table sets forth the Bank's deposit account balance
activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------
1998 1997 1996
--------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance $ 57,090 $ 52,208 $ 50,601
Deposits 113,942 96,413 86,546
Withdrawals (110,996) (93,434) (86,907)
--------- --------- ---------
Net increase (decrease) in
deposits before interest 2,946 2,979 (361)
credited
Interest credited 1,920 1,903 1,968
--------- --------- ---------
Ending balance $ 61,956 $ 57,090 $ 52,208
========= ========= =========
Net increase $ 4,866 $ 4,882 $ 1,607
========= ========= =========
Percent increase 8.5% 9.4% 3.2%
=== === ===
</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,
--------------------------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
FHLB advances $12,519 $8,382 $5,184
Weighted average interest rate of
FHLB advances 5.11% 5.76% 5.79%
</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,
--------------------------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Maximum balance $18,031 $10,782 $5,184
Average balance 11,685 8,887 104
Weighted average interest rate 5.62% 5.68% 6.73%
</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,
1998, was approximately $17,000.
PERSONNEL
At June 30, 1998, the Bank had 24 full-time employees and 4 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.
YEAR 2000
As with most providers of financial services, the Bank's operations are
heavily dependent on information technology systems. The Bank is addressing the
potential problems associated with the possibility that the computers that
control or operate The Bank 's information technology system and infrastructure
may not be programmed to read four-digit date codes and, upon arrival of the
year 2000, may recognize the two-digit code "00" as the year 1900, causing
systems to fail to function or to generate erroneous data. The Bank is working
with the companies that supply or service its information technology systems to
identify and remedy any year 2000 related problems.
-14-
<PAGE> 15
The Bank's primary data processing applications are handled by a
third-party service bureau which has advised FFD that it has transferred to a
fully year 2000-compliant processing system that will be fully tested by January
1, 1999. Management has also reviewed the Bank's ancillary equipment and is in
the process of providing the appropriate remedial measures without material
cost.
As a result of the foregoing, FFD has not identified any material
specific expenses that are reasonably likely to be incurred by the Bank in
connection with this issue and does not expect to incur significant expense to
implement the necessary corrective measures. No assurance can be given, however,
that significant expense will not be incurred in future periods. In the unlikely
event that the Bank is ultimately required to purchase replacement computer
systems, programs and equipment, or incur substantial expense to make the Bank's
current systems, programs and equipment year 2000 compliant, FFD's net earnings
and financial condition could be adversely affected. While the Bank is
endeavoring to ensure that its computer-dependent operations are year 2000
compliant, no assurance can be given that some year 2000 problems will not
occur.
In addition to possible expense related to its own systems, FFD could
incur losses if year 2000 issues adversely affect the Bank's depositors or
borrowers. Such problems could include delayed loan payments due to year 2000
problems affecting any significant borrowers or impairing the payroll systems of
large employers in the Bank's primary market area. Because the Bank's loan
portfolio is highly diversified with regard to individual borrowers and types of
businesses and the Bank's primary market area is not significantly dependent
upon one employer or industry, the Bank does not expect any significant or
prolonged difficulties that will affect net earnings or cash flow.
REGULATION
GENERAL. FFD, as the holding company of the Bank, is subject to
regulation, examination and oversight by the OTS and is required to submit
periodic reports to the OTS. As a savings association organized under the laws
of the United States, the Bank is also subject to regulatory oversight by the
OTS, and, because the Bank's deposits are insured by the FDIC, the Bank is also
subject to examination and regulation by the FDIC. The Bank must file periodic
reports with the OTS concerning its activities and financial condition.
Examinations are conducted periodically by the OTS and the FDIC to determine
whether the Bank is in compliance with various regulatory requirements and is
operating in a safe and sound manner. The Bank is a member of the FHLB of
Cincinnati.
Congress is considering legislation to eliminate the federal savings and
loan charter and the separate federal regulation of savings and loan
associations. Pursuant to such legislation, Congress may eliminate the OTS and
the Bank may be regulated under federal law as a bank or may 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 form of holding company regulation which may limit the activities in
which FFD may engage and subject FFD to additional regulatory requirements,
including separate capital requirements. FFD cannot predict when or whether
Congress may actually pass legislation regarding the Company's and the Bank's
regulatory requirements or charter. Although such legislation may change the
activities in which FFD and the Bank may engage, it is not anticipated that the
current activities of either FFD or the Bank will be materially affected by
those activity limits.
OFFICE OF THRIFT SUPERVISION. The OTS is an office in the Department of
the Treasury and is responsible for the regulation and supervision of all
federally chartered savings associations and all other savings associations, the
deposits of which are insured by the FDIC in the SAIF. The OTS issues
regulations governing the operation of savings associations, regularly examines
such associations and imposes assessments on savings associations based on their
asset size to cover the costs of general supervision and examination. It also
promulgates regulations that prescribe the permissible investments and
activities of federally chartered savings associations, including the type of
lending that such associations may engage in and the investments in real estate,
subsidiaries and securities they may make. The OTS also may initiate enforcement
actions against savings associations and certain persons affiliated with them
for violations of laws or regulations or for engaging in unsafe or unsound
practices. If the grounds provided by law exist, the OTS may appoint a
conservator or receiver for a savings association.
Federally chartered 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 association to open a new branch or engage in a merger
transaction. Community reinvestment regulations evaluate how well and to what
extent an institution lends and invests in its designated service area, with
particular emphasis on low-to-moderate income communities and borrowers in such
areas. The Bank has received a satisfactory examination rating under those
regulations.
-15-
<PAGE> 16
OTS REGULATORY CAPITAL REQUIREMENTS. The Bank is required by OTS
regulations to meet certain minimum capital requirements. The following table
sets forth the amount and percentage level of regulatory capital of the Bank at
June 30, 1998, and the amount by which it exceeds the minimum capital
requirements. Tangible and core capital are reflected as a percentage of
adjusted total assets. Total (or risk-based) capital, which consists of core and
supplementary capital, is reflected as a percentage of risk-weighted assets.
Assets are weighted at percentage levels ranging from 0% to 100% depending on
their relative risk.
<TABLE>
<CAPTION>
At June 30, 1998
---------------------------------
Amount Percent
------ -------
(In thousands)
<S> <C> <C>
Tangible capital $14,502 16.00%
Requirement 1,361 1.50
------- -----
Excess $13,141 14.50%
======= =====
Core capital $14,502 16.00%
Requirement 2,721 3.00
------- -----
Excess $11,781 13.00%
======= =====
Total capital $14,772 29.70%
Risk-based requirement 3,981 8.00
------- -----
Excess $10,791 21.70%
======= =====
</TABLE>
Current capital requirements call for tangible capital (which for the
Bank is equity capital under generally accepted accounting principles less the
unrealized gain on available-for-sale securities) of 1.5% of adjusted total
assets, core capital (which for the Bank consists of tangible capital) of 3.0%
of adjusted total assets and risk-based capital (which for the Bank consists of
core capital plus general valuation reserves of $270,000) of 8% of risk-weighted
assets. The OTS has proposed to amend the core capital requirement so that those
associations that do not have the highest examination rating and exceed an
acceptable level of risk will be required to maintain core capital of from 4% to
5%, depending on the association's examination rating and overall risk. The Bank
does not anticipate that it will be adversely affected if the core capital
requirement regulation is amended as proposed. The Bank's current core capital
level is 16.0% of adjusted total assets.
The OTS has adopted an interest rate risk component to the risk-based
capital requirement, though the implementation of that component has been
delayed. Pursuant to that requirement, a savings association would have to
measure the effect of an immediate 200 basis point change in interest rates on
the value of its portfolio, as determined under the methodology established by
the OTS. If the measured interest rate risk is above the level deemed normal
under the regulation, the association will be required to deduct one-half of
that excess exposure from its total capital when determining its level of
risk-based capital. In general, an association with less than $300 million in
assets and a risk-based capital ratio of greater than 12% will not be subject to
the interest rate risk component. The Bank currently qualifies for such
exemption. Pending implementation of the interest rate risk component, the OTS
has the authority to impose a higher individualized capital requirement on any
savings association it deems to have excess interest rate risk. The OTS also may
adjust the risk-based capital requirement on an individual basis for any
association to take into account risks due to concentrations of credit and
non-traditional activities.
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings
associations. At each successively lower defined capital category, an
association is subject to more restrictive and numerous mandatory or
discretionary regulatory actions or limits, and the OTS has less flexibility in
determining how to resolve the problems of the institution. The OTS has defined
these capital levels as follows: (1) well-capitalized associations must have
total risk-based capital of at least 10%, core risk-based capital (consisting
only of items that qualify for inclusion in core capital) of at least 6% and
core capital of at least 5%; (2) adequately capitalized associations are those
that meet the regulatory minimum of total risk-based capital of at least 8%,
core risk-based capital (consisting only of items that qualify for inclusion in
core capital) of at least 4% and core capital of at least 4% (except for
associations receiving the highest examination rating and with an acceptable
level of risk, in which case the level is at least 3%); (3) undercapitalized
associations are those that do not meet regulatory limits, but that are not
significantly undercapitalized; (4) significantly undercapitalized associations
have total risk-based capital of less than 6%, core risk-based capital
(consisting only of items that qualify for inclusion in core capital) of less
than 3% or core capital of less than 3%; and (5) critically
-16-
<PAGE> 17
undercapitalized associations are those with tangible equity of less than 2% of
total assets. In addition, the OTS generally can downgrade an association's
capital category, notwithstanding its capital level, if, after notice and
opportunity for hearing, the association 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 association must submit a capital restoration plan to the OTS
within 45 days after it becomes undercapitalized. Such an association 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 at June 30, 1998, meets the standards for a well-capitalized
institution.
Federal law prohibits an insured institution from making a capital
distribution to anyone or paying management fees to any person having control of
the association if, after such distribution or payment, the association would be
undercapitalized. In addition, each company controlling an undercapitalized
association must guarantee that the association will comply with its capital
plan until the association has been adequately capitalized on an average during
each of four preceding calendar quarters and must provide adequate assurances of
performance. The aggregate liability pursuant to such guarantee is limited to
the lesser of (a) an amount equal to 5% of the association's total assets at the
time the institution became undercapitalized or (b) the amount that is necessary
to bring the association into compliance with all capital standards applicable
to such association at the time the association fails to comply with its capital
restoration plan.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. The OTS imposes various
restrictions or requirements on the ability of associations to make capital
distributions, including dividend payments. An association which has converted
to stock form is prohibited from declaring or paying any dividends or from
repurchasing any of its stock if, as a result, the net worth of the association
would be reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to stock conversion. 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 capital requirement for such capital component, as measured at the
beginning of the calendar year, or the amount authorized for a Tier 2
association. 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. Tier
2 consists of associations that before and after the proposed distribution meet
their current minimum, but not fully phased-in, capital requirements.
Associations in this category may make capital distributions of up to 75% of net
income over the four most recent quarters. Tier 3 associations do not meet
current minimum capital requirements and must obtain OTS approval of any capital
distribution.
The Bank meets the requirements for a Tier 1 association and has not
been notified of any need for more than normal supervision. As a subsidiary of
FFD, the Bank is required to give the OTS 30 days notice prior to declaring any
dividend on its common shares. The OTS may object to the dividend during that
30-day period based on safety and soundness concerns. Moreover, the OTS may
prohibit any capital distribution otherwise permitted by regulation if the OTS
determines that such distribution would constitute an unsafe or unsound
practice. The Bank paid no dividends to FFD during fiscal 1998.
In January 1998, the OTS issued a proposal to amend the capital
distribution limits. Under that proposal, an association owned by a holding
company would still be required to provide either a notice or an application to
the OTS, although under certain circumstances a savings association without a
holding company having an examination rating of 1 or 2 could make a capital
distribution without notice to the OTS, if it would remain adequately
capitalized after the distribution is made.
LIQUIDITY. OTS regulations require that each savings association
maintain an average daily balance of liquid assets (cash, certain time deposits,
bankers' acceptances and specified United States government, state or federal
agency obligations) in each calendar quarter equal to not less than 4% of (1)
its net withdrawable savings deposits plus borrowings payable in one year or
less at the end of the preceding quarter or (2) the average daily balance of its
net withdrawable savings deposits plus borrowings payable in one year or less
during the preceding quarter. Monetary penalties may be imposed upon
associations failing to meet liquidity requirements. The eligible liquidity of
the Bank, as computed under current regulations, at June 30, 1998, was $18.7
million, or 31.0% and exceeded the 4.0% liquidity requirement by approximately
$16.3 million.
-17-
<PAGE> 18
QUALIFIED THRIFT LENDER TEST. Savings associations are required to meet
the Qualified Thrift Lender ("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 stock issued by any FHLB, the FHLMC or the 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 may also 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, 1998, the
Bank met the QTL Test.
LENDING LIMIT. OTS regulations generally limit the aggregate amount
that a savings association may lend to one borrower (the "Lending Limit") to an
amount equal to 15% of the savings association's total capital under the
regulatory capital requirements plus any additional loan reserve not included in
total capital (the "Lending Limit Capital"). A savings association may loan to
one borrower an additional amount not to exceed 10% of total capital plus
additional reserves if the additional loan amount is fully secured by certain
forms of "readily marketable collateral." Real estate is not considered "readily
marketable collateral." Certain types of loans are not subject to these limits.
In applying these limits, loans to certain borrowers may be aggregated.
Notwithstanding the specified limits, an association may lend to one borrower up
to $500,000 "for any purpose." At June 30, 1998, the Bank was in compliance with
this lending limit.
TRANSACTIONS WITH INSIDERS AND AFFILIATES. Loans to executive officers,
directors and principal shareholders and their related interests must conform to
the Lending Limit, and the total of such loans cannot exceed the association's
Lending Limit Capital. Most loans to directors, executive officers and principal
shareholders must be approved in advance by a majority of the "disinterested"
members of 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. Loans to executive officers are subject to
additional restrictions. The Bank was in compliance with such restrictions at
June 30, 1998.
All transactions between savings associations and their affiliates must
comport with Sections 23A and 23B of the Federal Reserve Act ("FRA"). An
affiliate of a savings association is any company or entity that controls, is
controlled by or is under common control with the savings association. FFD is an
affiliate of the Bank. Generally, Sections 23A and 23B of the FRA (i) limit the
extent to which a savings association or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such
institution's capital stock and surplus, (ii) limit the aggregate of all such
transactions with all affiliates to an amount equal to 20% of such capital stock
and surplus, and (iii) require that all such transactions be on terms
substantially the same, or at least as favorable to the association, as those
provided in transactions with a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
other similar types of transactions. In addition to the limits in Sections 23A
and 23B, a savings association may not make any loan or other extension of
credit to an affiliate unless the affiliate is engaged only in activities
permissible for a bank holding company and may not purchase or invest in
securities of any affiliate except shares of a subsidiary. The Bank was in
compliance with these requirements and restrictions at June 30, 1998.
FEDERAL DEPOSIT INSURANCE CORPORATION REGULATIONS. The FDIC is an
independent federal agency that insures the deposits of federally insured banks
and thrifts, up to prescribed statutory limits, and safeguards the safety and
soundness of the banking and thrift industries. The FDIC administers two
separate insurance funds, the Bank Insurance Fund ("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
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<PAGE> 19
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 banks were reduced significantly below the level
paid by healthy savings associations effective in mid-1995. 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.
The Bank had $49.2 million in deposits at March 31, 1995, and paid a special
assessment of $332,000, which was accounted for and recorded as of September 30,
1996. BIF assessments for healthy banks in 1997 and the first half of 1998 were
$.013 per $100 in deposits and SAIF assessments for healthy institutions in 1997
and the first half of 1998 were $.064 per $100 in deposits.
FRB RESERVE REQUIREMENTS. FRB regulations currently require that
reserves of 3% of net transaction accounts (primarily NOW accounts) up to $47.8
million (subject to an exemption of up to $4.7 million), and of 10% of net
transaction accounts in excess of $47.8 million. At June 30, 1998, the Bank was
in compliance with its reserve requirements.
FEDERAL HOME LOAN BANKS. The FHLBs provide credit to their members in
the form of advances. The Bank is a member of the FHLB of Cincinnati and must
maintain an investment in the capital stock of that FHLB in an amount equal to
the greater of 1.0% of the aggregate outstanding principal amount of the Bank's
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or 5% of its advances from the FHLB. The Bank is in
compliance with this requirement with an investment in stock of the FHLB of
Cincinnati of $933,000 at June 30, 1998.
Upon the origination or renewal of a loan or advance, the FHLB of
Cincinnati is required by law to obtain and maintain a security interest in
collateral in one or more of the following categories: fully disbursed, whole
first mortgage loans on improved residential property or securities representing
a whole interest in such loans; securities issued, insured or guaranteed by the
United States government or an agency thereof; deposits in any FHLB; or other
real estate related collateral (up to 30% of the member association's capital)
acceptable to the applicable FHLB, if such collateral has a readily
ascertainable value and the FHLB can perfect its security interest in the
collateral.
Each FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances from the FHLBs. The standards take into account a member's performance
under the Community Reinvestment Act and its record of lending to first-time
home buyers. All long-term advances by each FHLB must be made only to provide
funds for residential housing finance.
HOLDING COMPANY REGULATION. FFD is a unitary savings and loan holding
company within the meaning of the Home Owners' Loan Act (the "HOLA"). As such,
FFD is registered with the OTS and is subject to OTS regulations, examination,
supervision and reporting requirements.
There are generally no restrictions on the activities of unitary
savings and loan holding companies and such companies are the only financial
institution holding companies that may engage in commercial, securities and
insurance activities without limitation. The broad latitude to engage in
activities under current law can be restricted if the OTS determines that there
is reasonable cause to believe that the continuation of an activity by a savings
and loan holding company constitutes a serious risk to the financial safety,
soundness or stability of its subsidiary savings association. The OTS may impose
such restrictions as deemed necessary to address such risk, including limiting
(i) payment of dividends by the savings association, (ii) transactions between
the savings association and its affiliates, and (iii) any activities of the
savings association that might create a serious risk that the liabilities of the
holding company and its affiliates may be imposed on the savings association.
Notwithstanding the foregoing rules as to permissible business activities of a
unitary savings and loan holding company, if the savings association subsidiary
of a holding company fails to meet the QTL Test, then such unitary holding
company would become subject to the activities restrictions applicable to
multiple holding companies. At June 30, 1998, the Bank met the QTL Test.
The HOLA generally prohibits a savings and loan holding company from
controlling any other savings association or savings and loan holding company,
without prior approval of the OTS, or from acquiring or retaining more than 5%
of the voting shares of a savings association or holding company thereof, which
is not a subsidiary. Under certain circumstances, a savings and loan holding
company is permitted to acquire, with the approval of the OTS, up to 15% of the
previously unissued voting shares of an undercapitalized savings association for
cash without such savings association being deemed to
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<PAGE> 20
be controlled by the holding company. Except with the prior approval of the OTS,
no director or officer of a savings and loan holding company or person owning or
controlling by proxy or otherwise more than 25% of such company's stock may also
acquire control of any savings institution, other than a subsidiary institution,
or any other savings and loan holding company.
If FFD were to acquire control of another savings institution, other
than through a merger or other business combination with the Bank, FFD would
become a multiple savings and loan holding company. Unless the acquisition is an
emergency thrift acquisition and each subsidiary savings association meets the
QTL Test, the activities of FFD and any of its subsidiaries (other than the Bank
or other subsidiary savings associations) would thereafter be subject to
activity restrictions. The HOLA provides that, among other things, no multiple
savings and loan holding company or subsidiary thereof that is not a savings
institution shall commence or continue for a limited period of time after
becoming a multiple savings and loan holding company or subsidiary thereof, any
business activity other than (i) furnishing or performing management services
for a subsidiary savings institution, (ii) conducting an insurance agency or
escrow business, (iii) holding, managing or liquidating assets owned by or
acquired from a subsidiary savings institution, (iv) holding or managing
properties used or occupied by a subsidiary savings institution, (v) acting as
trustee under deeds of trust, (vi) those activities previously directly
authorized by federal regulation as of March 5, 1987, to be engaged in by
multiple holding companies, or (vii) those activities authorized by the FRB as
permissible for bank holding companies, unless the OTS by regulation prohibits
or limits such activities for savings and loan holding companies. Those
activities described in (vii) above must also be approved by the OTS prior to
being engaged in by a multiple holding company.
The OTS may approve acquisitions resulting in the formation of a
multiple savings and loan holding company that controls savings associations in
more than one state only if the multiple savings and loan holding company
involved controls a savings association that 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). 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.
MERGER MORATORIUM STATUTE. Chapter 1704 of the Ohio Revised Code
regulates certain takeover bids affecting certain public corporations with
significant ties to Ohio. The statute prohibits, with some exceptions, any
merger, combination or consolidation and any of certain other sales, leases,
distributions, dividends, exchanges, mortgages or transfers between such an Ohio
corporation and any person who has the right to exercise, alone or with others,
10% or more of the voting power of such corporation (an "Interested
Shareholder"), for three years following the date on which such person first
becomes an Interested Shareholder. Such a business combination is permitted only
if, prior to the time such person first becomes an Interested Shareholder, the
Board of Directors of the issuing corporation has approved the purchase of
shares that resulted in such person first becoming an Interested Shareholder.
After the initial three-year moratorium, such a business combination
may not occur unless (1) an exception specifically enumerated in the statute is
applicable to the combination, (2) the combination is approved, at a meeting
held for such purpose, by the affirmative vote of the holders of the issuing
public corporation entitling them to exercise at least two-thirds of the voting
power of the issuing public corporation in the election of directors or of such
different proportion as the articles may provide, provided the combination is
also approved by the affirmative vote of the holders of at least a majority of
the disinterested shares, or (3) the business combination meets certain
statutory criteria designed to ensure that the issuing public corporation's
remaining shareholders receive fair consideration for their shares.
An Ohio corporation may, under certain circumstances, "opt out" of the
statute by specifically providing in its articles of incorporation that the
statute does not apply to any business combination of such corporation. However,
the statute still prohibits for twelve months any business combination that
would have been prohibited but for the adoption of such an opt-out amendment.
The statute also provides that it will continue to apply to any business
combination between a person who became an Interested Shareholder prior to the
adoption of such an amendment as if the amendment had not been adopted. The
Articles of Incorporation of FFD do not opt out of the protection afforded by
Chapter 1704.
CONTROL SHARE ACQUISITION. Section 1701.831 of the Ohio Revised Code
(the "Control Share Acquisition Statute") requires that, with certain
exceptions, acquisitions of voting securities which would result in the
acquiring shareholder owning 20%, 33 1/3%, or 50% of the outstanding voting
securities of an Ohio corporation (a "Control Share Acquisition") must be
approved in advance by (a) the holders of at least a majority of the outstanding
voting shares of such corporation
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<PAGE> 21
represented at a meeting at which a quorum is present, and (b) a majority of the
portion of the outstanding voting shares represented at such a meeting excluding
the voting shares owned by the acquiring shareholder, by certain other persons
who acquire or transfer voting shares after public announcement of the
acquisition or by certain officers of the corporation or directors of the
corporation who are employees of the corporation. The Control Share Acquisition
Statute was intended, in part, to protect shareholders of Ohio corporations from
coercive tender offers.
TAKEOVER BID STATUTE. Ohio law provides that an offeror may not make a
tender offer or request or invitation for tenders that would result in the
offeror beneficially owning more than ten percent of any class of the target
company's equity securities unless such offeror files certain information with
the Ohio Division of Securities (the "Securities Division") and provides such
information to the target company and the offerees within Ohio. The Securities
Division may suspend the continuation of the control bid if the Securities
Division determines that the offeror's filed information does not provide full
disclosure to the offerees of all material information concerning the control
bid. The statute also provides that an offeror may not acquire any equity
security of a target company within two years of the offeror's previous
acquisition of any equity security of the same target company pursuant to a
control bid unless the Ohio offerees may sell such security to the offeror on
substantially the same terms as provided by the previous control bid. The
statute does not apply to a transaction if either the offeror or the target
company is a savings and loan holding company and the proposed transaction
requires federal regulatory approval.
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 the alternative minimum tax which
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 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.
The Bank's average gross receipts for the three tax years ending on
December 31, 1997, is $1.2 million and as a result, the Bank does qualify as a
small corporation exempt from the alternative minimum tax.
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, such as the Bank , were allowed deductions for bad debts under
methods more favorable than those granted to other taxpayers. Qualified thrift
institutions could compute deductions for bad debts using either the specific
charge-off method of Section 166 of the Code or one of 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, 1994, and
1993, the Bank used the percentage of taxable income method.
The Act eliminated the percentage of taxable income method of
accounting for bad debts by thrift institutions, effective for taxable years
beginning after 1995. Thrift institutions that are treated as small banks are
allowed to utilize the
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<PAGE> 22
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 is treated
as a large bank, the amount of the institution's applicable excess reserves
generally is the excess of (i) the balances of its reserve for losses on
qualifying real property loans (generally loans secured by improved real estate)
and its reserve for losses on nonqualifying loans (all other types of loans) as
of the close of its last taxable year beginning before January 1, 1996, over
(ii) the balances of such reserves as of the close of its last taxable year
beginning before January 1, 1988 (i.e., the "pre-1988 reserves"). In the case of
a thrift institution that is treated as a small bank, like the Bank , the amount
of the institution's applicable excess reserves generally is the excess of (i)
the balances of its reserve for losses on qualifying real property loans and its
reserve for losses on nonqualifying loans as of the close of its last taxable
year beginning before January 1, 1996, over (ii) the greater of the balance of
(a) its pre-1988 reserves or (b) what the 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 than its base amount. The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996. A residential loan is a
loan as described in Section 7701(a)(19)(C)(v) (generally a loan secured by
residential or church property and certain mobile homes), but only to the extent
that the loan is made to the owner of the property.
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 (except to absorb bad debt losses). Distribution of a cash
dividend by a thrift institution to a shareholder is treated as made: first, out
of the institution's post-1951 accumulated earnings and profits; second, out of
the pre-1988 reserves; and third, out of such other accounts as may be proper.
To the extent a distribution by the Bank to FFD is deemed paid out of its
pre-1988 reserves under these rules, the pre-1988 reserves would be reduced and
the gross income of the Bank for tax purposes would be increased by the amount
which, when reduced by the income tax, if any, attributable to the inclusion of
such amount in its gross income, equals the amount deemed paid out of the
pre-1988 reserves. As of June 30, 1998, the pre-1988 reserves of the Bank for
tax purposes totaled approximately $1.6 million. The Bank believes it had
approximately $8.3 million of accumulated earnings and profits for tax purposes
as of June 30, 1998, which would be available for dividend distributions,
provided regulatory restrictions applicable to the payment of dividends are met.
See Notes A and L to the financial statements. 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 the Bank have been audited or closed without audit
through fiscal year 1994. In the opinion of management, any examination of open
returns would not result in a deficiency which could have a material adverse
effect on the financial condition of the Bank .
OHIO TAXATION
FFD is subject to the Ohio corporation franchise tax, which, as applied
to FFD, is a tax measured by both net earnings and net worth. The rate of tax is
the greater of (i) 5.1% on the first $50,000 of computed Ohio taxable income and
8.9% of computed Ohio taxable income in excess of $50,000 or (ii) 0.582% times
taxable net worth. 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.
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<PAGE> 23
In computing its tax under the net worth method, FFD may exclude 100%
of its investment in the capital stock of the Bank , as reflected on the balance
sheet of FFD in computing its taxable net worth as long as it owns at least 25%
of the issued and outstanding capital stock of the Bank . The calculation of the
exclusion from net worth is based on the ratio of the excludable investment (net
of any appreciation or goodwill included in such investment) to total assets
multiplied by the net value of the stock. As a holding company, FFD may be
entitled to various other deductions in computing taxable net worth that are not
generally available to operating companies.
A special litter tax is also applicable to all corporations, including
FFD, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
.22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to .014% times taxable
net worth.
The Bank is a "financial institution" for State of Ohio tax purposes.
As such, it is subject to the Ohio corporate franchise tax on "financial
institutions," which is imposed annually at a rate of 1.5% of the 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.
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<PAGE> 24
ITEM 2. DESCRIPTION OF PROPERTY
The following table sets forth certain information at June 30,
1998, regarding the properties on which the main office of the Bank and a branch
office are located:
<TABLE>
<CAPTION>
Owned Date Net
Location or leased acquired book value(1)
- -------- --------- -------- -------------
<S> <C> <C> <C>
321 North Wooster Avenue
Dover, Ohio 44622 Owned 1/96 $577,000
224 West High Avenue
New Philadelphia, OH 44663 Owned 11/97 $415,000
<FN>
- -----------------------------
(1) At June 30, 1998, the Bank's office equipment had a total net book
value of approximately $391,000. For additional information regarding
the Bank's office premises and equipment, see Notes A-7 and E of Notes
to Consolidated Financial Statements.
</TABLE>
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 COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information contained in the FFD Financial Corporation Annual
Report to Shareholders for the fiscal year ended June 30, 1998 (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 OR PLAN OF OPERATION
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 21, 1998, are
incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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<PAGE> 25
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 1998 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.
ITEM 13. EXHIBITS AND REPORTS ON FROM 8-K
(a) EXHIBITS
3 Articles of Incorporation and Code of Regulations
10.1 FFD Financial Corporation 1996 Stock Option and Incentive
Plan
10.2 First Federal Savings Bank of Dover Recognition and
Retention Plan and Trust Agreement
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 1998 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, 1998.
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<PAGE> 26
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 ___, 1998
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 ___, 1998 Date: September ___, 1998
/s/ Stephen G. Clinton /s/ Roy O. Mitchell, Jr.
- ------------------------------- ----------------------------------
Stephen G. Clinton Roy O. Mitchell, Jr.
Director Director
Date: September ___, 1998 Date: September ___, 1998
/s/ J. Richard Gray /s/ Robert D. Sensel
- ------------------------------- ----------------------------------
J. Richard Gray Robert D. Sensel
Director Director
Date: September ___, 1998 Date: September ___, 1998
/s/ Richard J. Herzig /s/ Enos L. Loader
- ------------------------------- ----------------------------------
Richard J. Herzig Enos L. Loader
Director Director
Date: September ___, 1998 Date: September ___, 1998
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INDEX TO EXHIBITS
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<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
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<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
10.1 FFD Financial Corporation 1996 Stock
Option and Incentive Plan
10.2 First Federal Savings Bank of Dover
Recognition and Retention Plan and Trust
Agreement
13 FFD Financial Corporation 1998 Annual
Report to Shareholders
20 Proxy Statement for 1998 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
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EXHIBIT 10.1
FFD FINANCIAL CORPORATION
1996 STOCK OPTION AND INCENTIVE PLAN
1. PURPOSE. The purpose of the FFD Financial Corporation 1996 Stock
Option and Incentive Plan (this "Plan") is to promote and advance the interests
of FFD Financial Corporation (the "Company"), and its shareholders by enabling
the Company to attract, retain and reward directors, managerial and other key
employees of the Company and any Subsidiary (hereinafter defined), and to
strengthen the mutuality of interests between such directors and employees and
the Company's shareholders by providing such persons with a proprietary interest
in pursuing the long-term growth, profitability and financial success of the
Company.
2. DEFINITIONS. For purposes of this Plan, the following terms shall
have the meanings set forth below:
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as
amended, or any successor thereto, together with rules, regulations and
interpretations promulgated thereunder.
(c) "Committee" means the Committee of the Board constituted
as provided in Section 3 of this Plan.
(d) "Common Shares" means the common shares, without par
value, of the Company or any security of the Company issued in
substitution, in exchange or in lieu thereof.
(e) "Company" means FFD Financial Corporation, an Ohio
corporation, or any successor corporation.
(f) "Employment" means regular employment with the Company or
a Subsidiary and does not include service as a director only.
(g) "Exchange Act" means the Securities Exchange Act of 1934,
as amended, or any successor statute.
(h) "Fair Market Value" shall be determined as follows:
(i) If the Common Shares are traded on a
national securities exchange at the time of grant of the Stock
Option, then the Fair Market Value shall be the average of the
highest and the lowest selling price on such exchange on the
date such Stock Option is granted or, if there were no sales
on such date, then on the next prior business day on which
there was a sale.
(ii) If the Common Shares are quoted on The
Nasdaq Stock Market at the time of the grant of the Stock
Option, then the Fair Market Value shall be the mean between
the closing high bid and low asked quotation with respect to a
Common Share on such date on The Nasdaq Stock Market.
(iii) If the Common Shares are not traded on
a national securities exchange or quoted on The Nasdaq Stock
Market, then the Fair Market Value shall be as determined by
the Committee.
(i) "Incentive Stock Option" means any Stock Option granted
pursuant to the provisions of Section 6 of this Plan that is intended
to be and is specifically designated as an "incentive stock option"
within the meaning of Section 422 of the Code.
(j) "Non-Qualified Stock Option" means any Stock Option
granted pursuant to the provisions of Section 6 of this Plan that is
not an Incentive Stock Option.
(k) "OTS" means the Office of Thrift Supervision, Department
of the Treasury.
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(l) "Participant" means an employee or director of the Company
or a Subsidiary who is granted an Award under this Plan.
Notwithstanding the foregoing, for the purposes of the granting of any
Incentive Stock Option under this Plan, the term "Participant" shall
include only employees of the Company or a Subsidiary.
(m) "Plan" means the FFD Financial Corporation 1996 Stock
Option and Incentive Plan, as set forth herein and as it may be
hereafter amended from time to time.
(n) "Stock Option" means an award to purchase Common Shares
granted pursuant to the provisions of Section 6 of this Plan.
(o) "Subsidiary" means any corporation or entity in which the
Company directly or indirectly controls 50% or more of the total voting
power of all classes of its stock having voting power and includes,
without limitation, First Federal Savings Bank of Dover.
(p) "Terminated for Cause" means any removal of a director or
discharge of an employee for the personal dishonesty, incompetence,
willful misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of a
material provision of any law, rule or regulation (other than traffic
violations or similar offenses), a material violation of a final
cease-and-desist order or any other action of a director or employee
which results in a substantial financial loss to the Company or a
Subsidiary.
3. ADMINISTRATION.
(a) This Plan shall be administered by the Committee to be
comprised of not less than three of the members of the Board who are
not employees of the Company. The members of the Committee shall be
appointed from time to time by the Board. Members of the Committee
shall serve at the pleasure of the Board, and the Board may from time
to time remove members from, or add members to, the Committee. A
majority of the members of the Committee shall constitute a quorum for
the transaction of business. An action approved in writing by a
majority of the members of the Committee then serving shall be fully as
effective as if the action had been taken by unanimous vote at a
meeting duly called and held.
(b) The Committee is authorized to construe and interpret this
Plan and to make all other determinations necessary or advisable for
the administration of this Plan. The Committee may designate persons
other than members of the Committee to carry out its responsibilities
under such conditions and limitations as it may prescribe. Any
determination, decision or action of the Committee in connection with
the construction, interpretation, administration, or application of
this Plan shall be final, conclusive and binding upon all persons
participating in this Plan and any person validly claiming under or
through persons participating in this Plan. The Company shall effect
the granting of Stock Options under this Plan in accordance with the
determinations made by the Committee, by execution of instruments in
writing in such form as approved by the Committee.
4. DURATION OF, AND COMMON SHARES SUBJECT TO, THIS PLAN.
(a) Term. This Plan shall terminate on the date which is ten
(10) years from the date on which this Plan is adopted by the Board,
except with respect to Stock Options then outstanding. Notwithstanding
the foregoing, no Incentive Stock Option may be granted under this Plan
after the date which is ten (10) years from the date on which this Plan
is adopted by the Board or the date on which this Plan is approved by
the shareholders of the Company, whichever is earlier.
(b) Common Shares Subject to Plan. The maximum number of
Common Shares in respect of which Stock Options may be granted under
this Plan, subject to adjustment as provided in Section 9 of this Plan,
shall be ten percent of the total Common Shares sold in connection with
the conversion of First Federal Savings Bank of Dover from mutual to
stock form.
For the purpose of computing the total number of Common Shares
available for Stock Options under this Plan, there shall be counted against the
foregoing limitations the number of Common Shares subject to issuance upon the
exercise or settlement of Stock Options as of the dates on which such Stock
Options are granted. If any Stock Options are forfeited, terminated or exchanged
for other Stock Options, or expire unexercised, the Common Shares which were
theretofore subject
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to such Stock Options shall again be available for Stock Options under this Plan
to the extent of such forfeiture, termination or expiration of such Stock
Options.
Common Shares which may be issued under this Plan may be either
authorized and unissued shares or issued shares which have been reacquired by
the Company. No fractional shares shall be issued under this Plan.
5. ELIGIBILITY AND GRANTS. Persons eligible for Stock Options under
this Plan shall consist of directors and managerial and other key employees of
the Company or a Subsidiary who hold positions with significant responsibilities
or whose performance or potential contribution, in the judgment of the
Committee, will benefit the future success of the Company or a Subsidiary. In
selecting the directors and employees to whom Stock Options will be awarded and
the number of shares subject to such Stock Options, the Committee shall consider
the position, duties and responsibilities of the eligible directors and
employees, the value of their services to the Company and the Subsidiaries and
any other factors the Committee may deem relevant.
6. STOCK OPTIONS. Stock Options granted under this Plan may be in the
form of Incentive Stock Options or Non-Qualified Stock Options, and such Stock
Options shall be subject to the following terms and conditions as the Committee
shall deem desirable:
(a) Grant. Stock Options may be granted under this Plan on
terms and conditions not inconsistent with the provisions of this Plan
and in such form as the Committee may from time to time approve and
shall contain such additional terms and conditions, not inconsistent
with the express provisions of this Plan; provided, however, that no
more than 25% of the shares subject to Stock Options may be awarded to
any individual who is an employee of the Company or a Subsidiary, no
more than 5% of such shares may be awarded to any director who is not
an employee of the Company or a Subsidiary and no more than 30% of such
shares may be awarded to non-employee directors in the aggregate.
(b) Stock Option Price. The option exercise price per Common
Share purchasable under a Stock Option shall be determined by the
Committee at the time of grant; provided, however, that in no event
shall the exercise price of a Stock Option be less than 100% of the
Fair Market Value of the Common Shares on the date of the grant of such
Stock Option. Notwithstanding the foregoing, in the case of a
Participant who owns Common Shares representing more than 10% of the
outstanding Common Shares at the time an Incentive Stock Option is
granted, the option exercise price shall in no event be less than 110%
of the Fair Market Value of the Common Shares at the time an Incentive
Stock Option is granted to such Participant.
(c) Stock Option Terms. Subject to the right of the Company to
provide for earlier termination in the event of any merger, acquisition
or consolidation involving the Company, the term of each Stock Option
shall be fixed by the Committee; except that the term of Incentive
Stock Options will not exceed ten years after the date the Incentive
Stock Option is granted; provided, however, that in the case of a
Participant who owns a number of Common Shares representing more than
10% of the Common Shares outstanding at the time an Incentive Stock
Option is granted, the term of the Incentive Stock Option granted to
such Participant shall not exceed five years.
(d) Exercisability. Except as set forth in Section 6(f) and
Section 7 of this Plan, Stock Options awarded under this Plan shall
become exercisable at the rate of one-fifth per year commencing on the
date that is one year after the date of the grant of the Stock Option
and shall be subject to such other terms and conditions as shall be
determined by the Committee at the date of grant.
(e) Method of Exercise. A Stock Option may be exercised, in
whole or in part, by giving written notice of exercise to the Company
specifying the number of Common Shares to be purchased. Such notice
shall be accompanied by payment in full of the purchase price in cash
or, if acceptable to the Committee in its sole discretion, in Common
Shares already owned by the Participant, or by surrendering outstanding
Stock Options. The Committee may also permit Participants, either on a
selective or aggregate basis, to simultaneously exercise Options and
sell Common Shares thereby acquired, pursuant to a brokerage or similar
arrangement, approved in advance by the Committee, and use the proceeds
from such sale as payment of the purchase price of such shares.
(f) Special Rule for Incentive Stock Options. With respect to
Incentive Stock Options granted under this Plan, to the extent the
aggregate Fair Market Value (determined as of the date the Incentive
Stock Option is granted) of the number of shares with respect to which
Incentive Stock Options are exercisable under all plans of
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the Company or a Subsidiary for the first time by a Participant during
any calendar year exceeds $100,000, or such other limit as may be
required by the Code, such Stock Options shall be Non-Qualified Stock
Options to the extent of such excess.
7. TERMINATION OF EMPLOYMENT OR DIRECTORSHIP.
(a) Except in the event of the death or disability of a
Participant, upon the resignation, removal or retirement from the board
of directors of any Participant who is a director of the Company or a
Subsidiary or upon the termination of Employment of a Participant who
is not a director of the Company or a Subsidiary, any Stock Option
which has not yet become exercisable shall thereupon terminate and be
of no further force or effect, and, subject to extension by the
Committee, any Stock Option which has become exercisable shall
terminate if it is not exercised within 12 months of such resignation,
removal or retirement.
(b) Unless the Committee shall specifically state otherwise at
the time an Option is granted, all Options granted under this Plan
shall become exercisable in full on the date of termination of a
Participant's employment or directorship with the Company or a
Subsidiary because of his death or disability, and, subject to
extension by the Committee, all Options shall terminate if not
exercised within 12 months of the Participant's death or disability.
(c) In the event the Employment or the directorship of a
Participant is Terminated for Cause, any Option which has not been
exercised shall terminate as of the date of such termination for cause.
8. NON-TRANSFERABILITY OF STOCK OPTIONS. No Stock Option under this
Plan, and no rights or interests therein, shall be assignable or transferable by
a Participant except by will or the laws of descent and distribution. During the
lifetime of a Participant, Stock Options are exercisable only by, and payments
in settlement of Stock Options will be payable only to, the Participant or his
or her legal representative.
9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
(a) The existence of this Plan and the Stock Options granted
hereunder shall not affect or restrict in any way the right or power of
the Board or the shareholders of the Company to make or authorize the
following: any adjustment, recapitalization, reorganization or other
change in the Company's capital structure or its business; any merger,
acquisition or consolidation of the Company; any issuance of bonds,
debentures, preferred or prior preference stocks ahead of or affecting
the Company's capital stock or the rights thereof; the dissolution or
liquidation of the Company or any sale or transfer of all or any part
of its assets or business; or any other corporate act or proceeding,
including any merger or acquisition which would result in the exchange
of cash, stock of another company or options to purchase the stock of
another company for any Stock Option outstanding at the time of such
corporate transaction or which would involve the termination of all
Stock Options outstanding at the time of such corporate transaction.
(b) In the event of any change in capitalization affecting the
Common Shares of the Company, such as a stock dividend, stock split,
recapitalization, merger, consolidation, split-up, combination or
exchange of shares or other form of reorganization, or any other change
affecting the Common Shares, such proportionate adjustments, if any, as
the Board in its discretion may deem appropriate to reflect such change
shall be made with respect to the aggregate number of Common Shares for
which Stock Options in respect thereof may be granted under this Plan,
the maximum number of Common Shares which may be sold or awarded to any
Participant, the number of Common Shares covered by each outstanding
Stock Option, and the exercise price per share in respect of
outstanding Stock Options.
(c) The Committee may also make such adjustments in the number
of shares covered by, and the exercise price or other value of, any
outstanding Stock Options in the event of a spin-off or other
distribution (other than normal cash dividends) of Company assets to
shareholders. In the event that another corporation or business entity
is being acquired by the Company, and the Company agrees to assume
outstanding employee stock options and/or the obligation to make future
grants of options or rights to employees of the acquired entity, the
aggregate number of Common Shares available for Stock Options under
Section 4 of this Plan may be increased accordingly.
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10. AMENDMENT AND TERMINATION OF THIS PLAN. Without further approval of
the shareholders, the Board may at any time terminate this Plan or may amend it
from time to time in such respects as the Board may deem advisable, except that
the Board may not, without approval of the shareholders, make any amendment
which would (a) increase the aggregate number of Common Shares which may be
issued under this Plan (except for adjustments pursuant to Section 9 of this
Plan), (b) materially modify the requirements as to eligibility for
participation in this Plan, or (c) materially increase the benefits accruing to
Participants under this Plan. The above notwithstanding, the Board may amend
this Plan to take into account changes in applicable securities, federal income
tax and other applicable laws.
11. MODIFICATION OF OPTIONS. The Board may authorize the Committee to
direct the execution of an instrument providing for the modification of any
outstanding Stock Option which the Board believes to be in the best interests of
the Company; provided, however, that no such modification, extension or renewal
shall reduce the exercise price or confer on the holder of such Stock Option any
right or benefit which could not be conferred on him by the grant of a new Stock
Option at such time and shall not materially decrease the Participant's benefits
under the Stock Option without the consent of the holder of the Stock Option,
except as otherwise permitted under this Plan.
12. MISCELLANEOUS.
(a) Tax Withholding. The Company shall have the right to
deduct from any settlement, including the delivery or vesting of Common
Shares, made under this Plan any federal, state or local taxes of any
kind required by law to be withheld with respect to such payments or to
take such other action as may be necessary in the opinion of the
Company to satisfy all obligation for the payment of such taxes. If
Common Shares are used to satisfy tax withholding, such shares shall be
valued based on the Fair Market Value when the tax withholding is
required to be made.
(b) No Right to Employment. Neither the adoption of this Plan
nor the granting of any Stock Option shall confer upon any employee of
the Company or a Subsidiary any right to continued Employment with the
Company or a Subsidiary, as the case may be, nor shall it interfere in
any way with the right of the Company or a Subsidiary to terminate the
Employment of any of its employees at any time, with or without cause.
(c) Annulment of Stock Options. The grant of any Stock Option
under this Plan payable in cash is provisional until cash is paid in
settlement thereof. The grant of any Stock Option payable in Common
Shares is provisional until the Participant becomes entitled to the
certificate in settlement thereof. In the event the Employment or the
directorship of a Participant is Terminated for Cause, any Stock Option
which is provisional shall be annulled as of the date of such
termination.
(d) Other Company Benefit and Compensation Programs. Payments
and other benefits received by a Participant under a Stock Option made
pursuant to this Plan shall not be deemed a part of a Participant's
regular, recurring compensation for purposes of the termination
indemnity or severance pay law of any country and shall not be included
in, nor have any effect on, the determination of benefits under any
other employee benefit plan or similar arrangement provided by the
Company or a Subsidiary unless expressly so provided by such other plan
or arrangement, or except where the Committee expressly determines that
a Stock Option or portion of a Stock Option should be included to
accurately reflect competitive compensation practices or to recognize
that a Stock Option has been made in lieu of a portion of competitive
annual cash compensation. Stock Options under this Plan may be made in
combination with or in tandem with, or as alternatives to, grants,
stock options or payments under any other plans of the Company or a
Subsidiary. This Plan notwithstanding, the Company or any Subsidiary
may adopt such other compensation programs and additional compensation
arrangements as it deems necessary to attract, retain and reward
directors and employees for their service with the Company and its
Subsidiaries.
(e) Securities Law Restrictions. No Common Shares shall be
issued under this Plan unless counsel for the Company shall be
satisfied that such issuance will be in compliance with applicable
federal and state securities laws. Certificates for Common Shares
delivered under this Plan may be subject to such stock-transfer orders
and other restrictions as the Committee may deem advisable under the
rules, regulations, and other requirements of the Securities and
Exchange Commission, any stock exchange upon which the Common Shares
are then listed, and any applicable federal or state securities law.
The Committee may cause a legend or legends to be put on any such
certificates to make appropriate reference to such restrictions.
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(f) Stock Option Agreement. Each Participant receiving a Stock
Option under this Plan shall enter into an agreement with the Company
in a form specified by the Committee agreeing to the terms and
conditions of the Stock Option and such related matters as the
Committee shall, in its sole discretion, determine.
(g) Cost of Plan. The costs and expenses of administering this
Plan shall be borne by the Company.
(h) Governing Law. This Plan and all actions taken hereunder
shall be governed by and construed in accordance with the laws of the
State of Ohio, except to the extent that federal law shall be deemed
applicable.
(i) Effective Date. This Plan shall be effective upon the
later of adoption by the Board and approval by the Company's
shareholders. This Plan shall be submitted to the shareholders of the
Company for approval at an annual or special meeting of shareholders to
be held no sooner than six months after the effective date of the
Conversion.
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EXHIBIT 10.2
FIRST FEDERAL SAVINGS BANK
OF DOVER
RECOGNITION AND RETENTION PLAN
AND TRUST AGREEMENT
ARTICLE I
DEFINITIONS
The following words and phrases when used in this Agreement with an
initial capital letter shall have the meanings set forth below, unless the
context clearly indicates otherwise. Wherever appropriate, the masculine pronoun
shall include the feminine pronoun and the singular shall include the plural:
1.01 "Agreement" means the First Federal Savings Bank of Dover
Recognition and Retention Plan and Trust Agreement.
1.02 "Award" means a right granted to a Director or an Employee under
this Plan to receive Plan Shares.
1.03 "Bank" means the First Federal Savings Bank of Dover, a savings
bank chartered under the laws of the United States.
1.04 "Beneficiary" means the person or persons designated by a
Recipient to receive any benefits payable under this Plan in the event of such
Recipient's death. Such person or persons shall be designated in writing on
forms provided for this purpose by the Committee and may be changed from time to
time by similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Recipient's estate.
1.05 "Board" means the Board of Directors of the Bank.
1.06 "Committee" means the Recognition and Retention Plan Committee
appointed by the Board pursuant to Article IV hereof.
1.07 "Common Shares" means common shares of the Corporation.
1.08 "Conversion" means the conversion of the Bank from mutual to stock
form.
1.09 "Corporation" means FFD Financial Corporation, a savings and loan
holding company incorporated under the laws of the State of Ohio for the purpose
of holding all of the common shares of the Bank issued in connection with the
Conversion.
1.10 "Director" means any person who is a member of the Board of
Directors of the Corporation, the Bank or a Subsidiary.
1.11 "Employee" means any person who is employed by the Corporation,
the Bank or a Subsidiary.
1.12 "Person" means an individual, corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed herein.
1.13 "Plan" means the Recognition and Retention Plan established by
this Agreement.
1.14 "Plan Shares" means the Common Shares held pursuant to the Trust
and which are awarded or issuable to a Recipient pursuant to the Plan.
1.15 "Plan Share Reserve" means the Common Shares held by the Trustee
pursuant to Sections 5.02 and 5.03 of this Agreement.
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1.16 "Recipient" means any Director or Employee who receives an Award
under the Plan.
1.17 "Subsidiaries" means subsidiaries of the Bank which, with the
consent of the Board, agree to participate in the Plan.
1.18 "Trust" means the trust established by this Agreement.
1.19 "Trustee" means the person or persons or entity approved by the
Board pursuant to Sections 4.01 and 4.02 to hold legal title to the Plan assets
for the purposes set forth herein.
ARTICLE II
ESTABLISHMENT OF THE PLAN AND TRUST
2.01 The Bank hereby establishes a Recognition and Retention Plan and
Trust upon the terms and subject to the conditions set forth in this Agreement.
2.02 The Trustee hereby accepts the Trust and agrees to hold the Trust
assets existing on the date of this Agreement and all additions and accretions
thereto upon the terms and conditions of this Agreement.
ARTICLE III
PURPOSE OF THE PLAN
3.01 The purpose of the Plan is to reward and retain the Directors and
Employees of the Corporation, the Bank and the Subsidiaries who are in key
positions of responsibility by providing such Directors and Employees with an
equity interest in the Corporation as reasonable compensation for their
contributions to the Corporation, the Bank and the Subsidiaries.
ARTICLE IV
ADMINISTRATION OF THE PLAN
4.01 ROLE OF THE COMMITTEE. The Plan shall be administered and
interpreted by the Committee, which shall consist of not less than three members
of the Board who are not employees of the Bank. The Committee shall have all of
the powers set forth in this Plan. The interpretation and construction by the
Committee of any provisions of this Agreement or of any Award granted hereunder
shall be final, conclusive and binding. The Committee shall act by the vote, or
the written consent, of a majority of its members. The Committee shall report
actions and decisions with respect to the Plan to the Board upon request by the
Board.
4.02 ROLE OF THE BOARD. The members of the Committee and the Trustee
shall be appointed or approved by and will serve at the pleasure of the Board.
The Board may in its discretion from time to time remove members from or add
members to the Committee and may remove, replace or add one or more Trustees.
The Board, in its absolute discretion, may take any action under or with respect
to the Plan which the Committee is authorized to take and may reverse or
override any action taken or decision made by the Committee under or with
respect to the Plan or take any other action reserved to the Board under this
Agreement; provided, however, that the Board may not revoke any Award already
granted under this Agreement. All decisions, determinations and interpretations
of the Board shall be final, conclusive and binding upon all parties having an
interest in the Plan.
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4.03 LIMITATION ON LIABILITY. No member of the Board or the Committee,
nor any Trustee, shall be liable for any determination made in good faith with
respect to the Plan or any Plan Shares or Awards granted under the Plan. If a
member of the Board or of the Committee or any Trustee is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of anything done or not done by such member in such capacity under or
with respect to this Plan, the Bank shall indemnify such member against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such member in connection with such action,
suit or proceeding if such member acted in good faith and in a manner such
member reasonably believed to be in or not opposed to the best interests of the
Corporation, the Bank and the Subsidiaries and, with respect to any criminal
action or proceeding, had no reasonable cause to believe such member's conduct
was unlawful.
ARTICLE V
CONTRIBUTIONS; PLAN SHARE RESERVE
5.01 AMOUNT AND TIMING OF CONTRIBUTIONS. The Board shall determine the
amounts (or the method of computing the amounts) to be contributed by the Bank
to the Trust. Such amounts shall be paid to the Trustee at the time of
contribution. No contributions to the Trust by Directors or Employees shall be
permitted.
5.02 INVESTMENT OF TRUST ASSETS. Except as otherwise permitted by
Section 8.02 of this Agreement, the Trustee shall invest all of the Trust's
assets, after providing for any required withholding as needed for tax purposes,
exclusively in Common Shares; provided, however, that the Trust shall not
purchase a number of Common Shares equal to more than 3% of the number of Common
Shares issued in connection with the Conversion, except that if the Bank's
tangible capital exceeds 10%, the Trust may purchase a number of Common Shares
equal to up to 4% of the Common Shares issued in connection with the Conversion.
After such investment, the Common Shares shall be held by the Trustee in the
Plan Share Reserve until such Common Shares are subject to one or more Awards.
Any funds held by the Trust before purchasing Common Shares shall be invested by
the Trustee in such interest-bearing account or accounts at the Bank as the
Trustee shall determine to be appropriate.
5.03 EFFECT OF ALLOCATIONS, RETURNS AND FORFEITURES UPON PLAN SHARE
RESERVES. Upon the allocation of Awards under Section 6.02 of this Agreement, or
the decision of the Committee to return Plan Shares to the Corporation, the Plan
Share Reserve shall be reduced by the number of Plan Shares so allocated or
returned. Any Plan Shares subject to an Award which is subject to forfeiture by
the Recipient pursuant to Section 7.01 of this Agreement shall be retained in
the Plan Share Reserve.
ARTICLE VI
ELIGIBILITY; ALLOCATIONS
6.01 ELIGIBILITY. Directors and Employees are eligible to receive
Awards within the sole discretion of the Committee.
6.02 ALLOCATIONS. The Committee will determine which of the Directors
and Employees will be granted Awards and the number of Plan Shares covered by
each Award; provided, however, that: (a) the aggregate number of Plan Shares
covered by Awards to any one Employee shall not exceed 25% of the total number
of Plan Shares, (b) no more than 5% of the Plan Shares shall be awarded to any
Director who is not an Employee, and (c) no more than 30% of the Plan Shares
shall be awarded in the aggregate to Directors who are not Employees. In the
event Plan Shares are forfeited for any reason or additional Plan Shares are
purchased by the Trustee, the Committee may, from time to time, determine which
of the Employees will be granted additional Awards to be awarded from forfeited
or additional Plan Shares.
In selecting the Directors and Employees to whom Awards will be granted
and the number of shares covered by such Awards, the Committee shall consider
the position, duties and responsibilities of the eligible Directors and
Employees, the value of their services to the Corporation, the Bank and the
Subsidiaries and any other factors the Committee may deem relevant. All
allocations by the Committee shall be subject to review and approval or
rejection by the Board.
6.03 FORM OF ALLOCATION. As promptly as practicable after a
determination is made pursuant to Section 6.02 of this Agreement that an Award
is to be made, the Committee shall notify the Recipient in writing of the grant
of the Award,
B-3
<PAGE> 4
the number of Plan Shares covered by the Award and the terms upon which the Plan
Shares subject to the Award may be earned. The date on which the Committee
determines that an Award is to be made or a later date designated by the
Committee shall be considered the date of grant of the Awards. The Committee
shall maintain records as to all grants of Awards under the Plan.
6.04 ALLOCATIONS NOT REQUIRED. None of the Directors or Employees,
either individually or as a group, shall have any right or entitlement to
receive an Award under the Plan. The Committee may, with the approval of the
Board, and shall, if so directed by the Board, return all Common Shares and
other assets in the Plan Share Reserve to the Corporation at any time and
thereafter cease issuing Awards.
6.05 SHAREHOLDER APPROVAL. This Agreement shall be submitted to the
shareholders of the Corporation at an annual or special meeting to be held no
sooner than six months after the effective date of the Conversion.
Notwithstanding anything to the contrary in this Agreement, no Awards shall be
granted hereunder until the shareholders of the Corporation approve this
Agreement.
ARTICLE VII
EARNING AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS
7.01 EARNING PLAN SHARES; FORFEITURES.
(a) GENERAL RULES. Unless the Committee shall specifically
state a longer period of time over which Awards shall be earned and
non-forfeitable at the time an Award is granted, Plan Shares covered by each
Award shall be earned and non-forfeitable by a Recipient over a period of five
years at the rate of one-fifth per year commencing on the date which is one year
after the date of the grant of such Award. As Plan Shares become earned and
non-forfeitable, any cash dividends, returned capital and earnings thereon shall
also be earned and non-forfeitable.
(b) REVOCATION. Unless otherwise permitted by applicable
laws and regulations, any Plan Shares and any cash dividends, returned capital
and earnings thereon that have not been earned and are not non-forfeitable in
accordance with Section 7.01(a) of this Agreement shall be forfeited in the
event that (i) a Recipient who is a Director ceases to serve on the Board or
(ii) a Recipient who is not a Director of the Bank ceases to be an Employee of
the Bank, except as otherwise provided in subsection (c) of this Section 7.01.
(c) EXCEPTION FOR TERMINATIONS DUE TO DEATH OR DISABILITY.
All Plan Shares and cash dividends, returned capital and earnings thereon
subject to an Award held by a Recipient whose service as a Director or Employee
of the Corporation, the Bank or a Subsidiary terminates due to (i) death or (ii)
disability (as determined by the Committee) shall be deemed fully earned and
non-forfeitable as of the later of the Recipient's last day of service as a
Director or as an Employee and shall be distributed as soon as practicable
thereafter.
7.02 DISTRIBUTION OF PLAN SHARES.
(a) TIMING OF DISTRIBUTIONS: GENERAL RULE. Except as
otherwise provided in this Agreement, Plan Shares shall be distributed to the
Recipient or his or her Beneficiary, as the case may be, as soon as practicable
after they have been earned, together with any cash, dividends, returned capital
and earnings thereon with respect to such Plan Shares that have been earned.
(b) FORM OF DISTRIBUTION. All distributions of Plan Shares,
together with any shares representing stock dividends, shall be distributed in
the form of Common Shares. No fractional shares shall be distributed. Payments
representing cash dividends, returned capital and earnings thereon shall be made
in cash.
(c) WITHHOLDING. The Trustee may withhold from any cash
payment made under this Plan sufficient amounts to cover any applicable
withholding and employment taxes and, if the amount of such cash payment is not
sufficient, the Trustee may require the Recipient or Beneficiary to pay to the
Trustee the amount required to be withheld as a condition of delivering the Plan
Shares. The Trustee shall pay over to the Bank or the Subsidiary which employs
or employed such Recipient or which the Recipient serves or served as a
Director, any such amount withheld from or paid by the Recipient or Beneficiary.
B-4
<PAGE> 5
(d) REGULATORY EXCEPTIONS. Notwithstanding anything to the
contrary in this Agreement, no Plan Shares, upon becoming fully earned and
non-forfeitable, shall be distributed unless and until all of the requirements
of all applicable laws and regulations shall have been met.
7.03 VOTING OF PLAN SHARES. All Common Shares held by the Trustee in
the Plan Share Reserve which have not yet been earned by a Recipient pursuant to
Section 7.01 of this Agreement shall be voted by the Trustee. A Recipient shall
be entitled to direct the voting of Plan Shares which have been earned pursuant
to Section 7.01 of this Agreement but have not yet been distributed to him.
ARTICLE VIII
TRUST
8.01 TRUST. The Trustee shall receive, hold, administer, invest and
make distributions and disbursements from the Trust in accordance with the
provisions of the Plan and the Trust and the applicable directions, rules,
regulations, procedures and policies established by the Committee pursuant to
this Agreement.
8.02 MANAGEMENT OF TRUST. The Trustee shall have complete authority and
discretion with respect to the management, control and investment of the Trust,
and the Trustee shall invest all assets of the Trust, except those attributable
to cash dividends paid with respect to Plan Shares not held in the Plan Share
Reserve, in Common Shares to the fullest extent practicable, and except to the
extent that the Trustee determines that the holding of monies in cash or cash
equivalents is necessary to meet the obligations of the Trust. The Trustee shall
have the power to do all things and execute such instruments as may be deemed
necessary or proper with respect to the duties of the Trustee hereunder,
including the following powers:
(a) To invest up to 100% of all Trust assets in Common
Shares without regard to any law now or hereafter in force limiting
investments for trustees or other fiduciaries. The investment
authorized herein may constitute the only investment of the Trust, and,
in making such investment, the Trustee is authorized to purchase Common
Shares from the Corporation or from any other source. Such Common
Shares so purchased may be outstanding, newly issued or treasury
shares;
(b) To invest any Trust assets not otherwise invested in
accordance with Section 8.02(a) of this Agreement in such deposit
accounts and certificates of deposit (including those issued by the
Bank), obligations of the United States government or its agencies or
such other investments as shall be considered the equivalent of cash;
(c) To sell, exchange or otherwise dispose of any property
at any time held or acquired by the Trust;
(d) To cause stocks, bonds or other securities to be
registered in the name of a nominee, without the addition of words
indicating that such security is an asset of the Trust (but accurate
records shall be maintained showing that such security is an asset of
the Trust);
(e) To hold cash without interest in such amounts as may be
reasonable, in the opinion of the Trustee, for the proper operation of
the Plan and the Trust;
(f) To employ brokers, agents, custodians, consultants and
accountants;
(g) To hire counsel to render advice with respect to the
rights, duties and obligations of the Trustee hereunder, and such other
legal services or representation as the Trustee may deem desirable; and
(h) To hold funds and securities representing the amounts to
be distributed to a Recipient or his or her Beneficiary as a
consequence of a dispute as to the disposition thereof, whether in a
segregated account or held in common with other assets of the Trust.
Notwithstanding anything herein contained to the contrary, the Trustee shall not
be required to make any inventory, appraisal or settlement or report to any
court, or to secure any order of court for the exercise of any power herein
contained, or to give bond.
B-5
<PAGE> 6
8.03 RECORDS AND ACCOUNTS. The Trustee shall maintain accurate and
detailed records and accounts of all transactions of the Trust, which shall be
available at all reasonable times for inspection by any legally entitled person
or entity to the extent required by applicable law, or any other person
determined by the Committee.
8.04 EARNINGS. All earnings, gains and losses with respect to Trust
assets shall be allocated, in accordance with a reasonable procedure adopted by
the Committee, to bookkeeping accounts for Recipients or to the general account
of the Trust, depending on the nature and allocation of the assets generating
such earnings, gains and losses. Without limiting the generality of the
foregoing, any earnings on cash dividends or returned capital received with
respect to Plan Shares shall be allocated (a) to accounts for Recipients, if
such shares which are the subject of outstanding Awards, and shall become earned
and distributed as specified in Article VII of this Agreement or (b) otherwise
to the Plan Share Reserve if such Plan Shares are not the subject of outstanding
awards.
8.05 EXPENSES. All costs and expenses incurred in the operation and
administration of the Plan shall be paid by the Bank.
ARTICLE IX
MISCELLANEOUS
9.01 ADJUSTMENTS FOR CAPITAL CHANGES. The aggregate number of Plan
Shares available for issuance pursuant to the Awards and the number of Plan
Shares to which any Award relates shall be proportionately adjusted for any
increase or decrease in the total number of outstanding Common Shares issued
subsequent to the effective date of the Plan if such increase or decrease
resulted from any split, subdivision or consolidation of shares or other capital
adjustment, or other increase or decrease in such shares effected without
receipt or payment of consideration by the Corporation.
9.02 AMENDMENT AND TERMINATION OF PLAN. The Board may, by resolution,
at any time amend or terminate the Plan. The power to amend or terminate the
Plan shall include the power to direct the Trustee to return to the Corporation
or the Bank all or any part of the assets of the Trust, including Common Shares
held in the Plan Share Reserve, as well as Common Shares and other assets
subject to Awards which are not yet earned by the Directors or Employees to whom
they are allocated; provided, however, that the termination of the Trust shall
not affect a Recipient's right to earn Awards and to the distribution of Common
Shares relating thereto, including earnings thereon, in accordance with the
terms of this Agreement and the grant by the Committee or the Board.
9.03 NONTRANSFERABLE. Awards shall not be transferable by a Recipient.
During the lifetime of the Recipient, an Award may only be earned by and paid to
the Recipient who was notified in writing of the Award by the Committee pursuant
to Section 6.03 of this Agreement. No Recipient or Beneficiary shall have any
right in or claim to any assets of the Plan or the Trust, nor shall the
Corporation, the Bank or any Subsidiary be subject to any claim for benefits
hereunder.
9.04 DIRECTORSHIP RIGHTS. Neither this Agreement nor any grant of an
Award hereunder nor any action taken by the Trustee, the Committee or the Board
in connection with the Plan shall create any right, either express or implied,
on the part of any Director to continue to serve as a Director of the Bank or a
Subsidiary.
9.05 EMPLOYMENT RIGHTS. Neither this Agreement nor any grant of an
Award hereunder nor any action taken by the Trustee, the Committee or the Board
in connection with the Plan shall create any right, either express or implied,
on the part of any Employee to continue in the employ of the Corporation, the
Bank or a Subsidiary.
9.06 VOTING AND DIVIDEND RIGHTS. No Recipient shall have any voting or
dividend rights or other rights of a shareholder in respect of any Plan Shares
covered by an Award, except as expressly provided in Sections 7.01, 7.02 and
7.03 of this Agreement, prior to the time such Plan Shares are actually
distributed to such Recipient.
9.07 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of Ohio, except to the extent that federal law shall
be deemed applicable.
9.08 EFFECTIVE DATE. Subject to Section 6.05 of this Agreement, this
Agreement shall be effective as of the ___ day of ____________, 1996.
B-6
<PAGE> 7
9.09 TERM OF PLAN. The Plan shall remain in effect until the earlier of
(a) the termination of the Plan by the Board or (b) the distribution of all
assets from the Trust. The termination of the Plan shall not affect any Awards
previously granted and such Awards shall remain valid and in effect until they
have been earned and paid or by their terms expire or are forfeited.
9.10 TAX STATUS OF TRUST. It is intended that the trust established
hereby be treated as a grantor trust of the Bank under the provisions of Section
671, ET SEQ., of the Internal Revenue Code of 1986, as amended (26 U.S.C. ss.
671 ET SEQ.).
IN WITNESS WHEREOF, the following Trustees execute this Agreement,
accepting and binding themselves to undertake and perform the obligations and
duties of the Trustee hereunder and consenting to the foregoing Agreement
effective the ___ day of _________________, 1996.
By: ___________________________ (Trustee)
By: ___________________________ (Trustee)
IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed
by its duly authorized officer and duly attested, all as of the ___ day of
_________________, 1996.
FIRST FEDERAL SAVINGS BANK OF DOVER
By:______________________________________
Robert R. Gerber
its President
ATTEST:
- ---------------------------------
Shirley A. Wallick
its Secretary
B-7
<PAGE> 8
B-8
<PAGE> 1
COVER TO ANNUAL REPORT
(PHOTOGRAPHS OF PRESENT FORM OF STOCK CERTIFICATE OF FFD FINANCIAL
CORPORATION AND STOCK CERTIFICATE OF THE DOVER BUILDING AND LOAN
COMPANY FROM 1898)
FFD FINANCIAL CORPORATION
1998 ANNUAL REPORT
A CENTURY OF SERVICE
1898-1998
<PAGE> 2
FFD FINANCIAL CORPORATION
TELEPHONE (330) 364-7777
321 North Wooster Avenue P.O. BOX 38 DOVER, OHIO 44622
Robert R. Gerber
President
Dear Shareholders:
It is with a great deal of pleasure that we present to you our third Annual
Report to Shareholders.
The fiscal year ended June 30, 1998, represented the capstone of our first
hundred years of providing personalized financial services to our community.
Happily, we were able to celebrate the attainment of this significant milestone
with another strong earnings performance.
Net earnings for the fiscal year ended June 30, 1998, totaled $1.0 million or
$.73 per share, representing an annualized return on assets of 1.10%. Our
earnings in fiscal 1998 were primarily fueled by a healthy $352,000, or 13.3%,
increase in net interest income. This improvement in net interest income during
fiscal 1998 generally reflects growth in interest-earning assets as a result of
a two-fold strategy of gains taking in the securities portfolio and an increase
in net loans of $15.5 million, while simultaneously increasing our marketing
efforts toward growth in savings deposits, increasing deposits from $57.1
million to $61.7 million.
We believe that asset growth is a strategic imperative for your Corporation.
Toward this end, we successfully opened our New Philadelphia branch office
during fiscal 1998. Nine months later, we are rapidly approaching $5.0 million
in new deposits. Additionally, we have sought further growth on the asset side
by adding a number of new consumer and business banking loan products. We have
offset the short-term costs related to these initiatives by selling FHLMC stock
during fiscal 1998 and 1997, recognizing after tax gains of $300,000 and
$850,000, respectively.
Our operating success has culminated in total share appreciation (increase in
value of common shares plus dividends received) of 51% from July 1, 1997, to
September 10, 1998. Our share value was further enhanced via utilization of a
novel tax strategy that recharacterized our dividend payments as partially
tax-free returns of capital.
Your directors, managers, and staff are confident that our current strategic
direction has positioned FFD and First Federal Savings Bank of Dover to meet the
challenges confronting us as we enter our 101st year and second century of
service. We remain committed to maintaining friendly, personalized financial
services in our markets, while continuing the local decision making and focus
that our customers have grown to expect.
As always, we wish to take this opportunity to thank all of our customers and
shareholders for your past and continued support.
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 fixed-rate and adjustable-rate first mortgage loans to be held in
portfolio and sold in the secondary mortgage market 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, loans secured by multifamily real estate (over four units), loans
for commercial business purposes and nonresidential real estate loans. The
origination of consumer loans, including unsecured loans, passbook loans, loans
secured by motor vehicles and home improvement loans, constitutes a small
portion of First Federal's lending activities. In addition to originating loans,
First Federal invests in U.S. Government and agency obligations,
interest-bearing deposits in other financial institutions and mortgage-backed
securities. Funds for lending and investment activities are obtained primarily
from deposits, which are insured up to applicable limits by the Federal Deposit
Insurance Corporation ("FDIC"), and loan and mortgage-backed securities
repayments. First Federal conducts business from two locations, one in Dover,
Ohio, and one in New Philadelphia, Ohio. The primary market area for First
Federal is 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 1,445,350 common shares of FFD outstanding on September 4, 1998, held
of record by approximately 717 shareholders. Price information with respect to
FFD's common shares is quoted on the Nasdaq SmallCap Market ("Nasdaq") under the
symbol "FFDF."
The following table sets forth the high and low bid prices for the common shares
of FFD, as quoted by Nasdaq, together with the respective dividends declared per
share, for each quarter of fiscal 1998
1
<PAGE> 4
and 1997. These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions.
<TABLE>
<CAPTION>
High Bid Low Bid Cash Dividends Declared
-------- ------- -----------------------
<S> <C> <C> <C>
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
FISCAL 1998
Quarter Ended:
September 30, 1997 $16.500 $14.125 $ .075
December 31, 1997 19.500 16.250 .075
March 31, 1998 22.750 17.750 .075
June 30, 1998 24.125 19.125 4.575
</TABLE>
The income of FFD consists primarily 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. 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 that 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 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
2
<PAGE> 5
requirements and, unless the OTS determines that First Federal is an institution
requiring more than normal supervision, First Federal may pay dividends in
accordance with the foregoing provisions of the OTS regulations.
3
<PAGE> 6
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>
At June 30,
SELECTED CONSOLIDATED FINANCIAL ------------------------------------------------------------------
CONDITION: 1998 1997 1996 1995 1994
------ ------ -------- ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $90,966 $88,000 $79,458 $58,955 $54,635
Interest-bearing
deposits (1) 607 3,547 1,793 3,659 5,420
Investment securities
designated as available for
sale - at market 2,655 9,924 9,256 903 -
Investment securities - at cost 977 1,469 2,460 3,353 51
Mortgage-backed securities
designated as available for
sale - at market 5,935 7,944 9,007 - -
Mortgage-backed securities - at
cost 5,960 7,165 5,932 8,153 8,814
Loans receivable - net 70,990 55,504 48,539 41,494 38,981
Deposits 61,956 57,090 52,208 50,601 47,639
Advances from the FHLB 12,519 8,382 5,184 26 -
Shareholders' equity (2) (3) 15,825 21,480 21,411 7,787 6,746
</TABLE>
<TABLE>
<CAPTION>
For the year ended June 30,
-----------------------------------------------------------------
SUMMARY OF EARNINGS: 1998 1997 1996 1995 1994
------ ------ -------- ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income $6,460 $5,880 $4,555 $3,718 $3,576
Interest expense 3,454 3,101 2,471 1,951 1,731
------- ------- ------- ------
Net interest income 3,006 2,779 2,084 1,767 1,845
Provision for losses on loans - 125 50 - 27
------ ------ -------- ------ ------
Net interest income after provision
for losses on loans 3,006 2,654 2,034 1,767 1,818
Other income 525 1,337 88 37 37
General, administrative and other
expense 2,044 1,859 1,163 1,077 1,044
------ ------ -------- ------ ------
Earnings before income taxes 1,487 2,132 959 727 811
Federal income taxes 505 705 327 248 277
------ ------ -------- ------ ------
Net earnings $ 982 $1,427 $ 632 $ 479 $ 534
====== ====== ======== ====== ======
- -----------------------------------
<FN>
(1) Includes short-term interest-bearing deposits in other banks.
(2) Consists solely of retained earnings at June 30, 1995 and 1994.
(3) At June 30, 1998, 1997, 1996 and 1995, includes $140,000, $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.
</TABLE>
4
<PAGE> 7
<TABLE>
<CAPTION>
At or for the year ended June 30,
SELECTED FINANCIAL RATIOS -----------------------------------------------------------------
AND OTHER DATA: 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Return on average assets 1.06% 1.65% 0.99% 0.86% 0.96%
Return on average equity 4.65 6.65 5.72 6.86 8.24
Interest rate spread 2.22 2.15 2.41 2.77 2.98
Net interest margin 3.29 3.30 3.28 3.24 3.36
General, administrative and other
expense to average assets 2.20 2.15 1.82 1.93 1.87
Average equity to average
assets 22.75 24.83 17.29 12.49 11.59
Nonperforming assets to
total assets 0.09 0.07 0.15 0.22 0.66
Nonperforming loans to total
loans 0.11 0.11 0.24 0.31 0.91
Total delinquent loans to total
loans(1) 0.51 0.69 0.51 1.06 2.20
Allowance for loan losses to
total loans 0.37 0.47 0.29 0.23 0.25
Allowance for loan losses to
nonperforming loans 329.27 421.88 124.79 73.28 27.42
Net charge-offs to average
loans(2) - - - .01 .01
Average interest-earning
assets to average interest-bearing
liabilities 128.34 131.46 122.47 113.11 111.89
Number of full service offices 2 1 1 1 1
<FN>
- ----------------------------
(1) Delinquent loans are loans as to which a scheduled payment has not been made within 30 days after the due
date.
(2) For the years ended June 30, 1998, 1997 and 1996, First Federal did not have any charge-offs.
</TABLE>
5
<PAGE> 8
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 FROM JUNE 30, 1997 TO JUNE 30, 1998
- --------------------------------------------------------------------------------
FFD's total assets at June 30, 1998, amounted to $91.0 million, a $3.0 million,
or 3.4%, increase over the total at June 30, 1997. This increase was funded
primarily through growth in deposits of $4.9 million and an increase in advances
from the Federal Home Loan Bank ("FHLB") of $4.1 million, which were partially
offset by a decrease in shareholders' equity of $5.7 million.
Cash and interest-bearing deposits totaled $1.6 million at June 30, 1998, a
decrease of $2.4 million from the total at June 30, 1997. Investment securities
totaled $3.6 million at June 30, 1998, a decrease of $7.8 million from the total
at June 30, 1997, as maturities and sales of securities totaling $10.2 million
and $6.4 million, respectively, were partially offset by purchases of $8.2
million during the period.
Mortgage-backed securities totaled $11.9 million at June 30, 1998, a $3.2
million, or 21.3%, decrease from the total at June 30, 1997. This decrease
resulted primarily from principal repayments of $3.2 million.
The overall decrease in cash, investment securities and mortgage-backed
securities was due primarily to management's use of excess liquidity to fund the
$6.5 million, or $4.50 per share, distribution to shareholders paid in June
1998, and to fund growth in the loan portfolio during the year.
Loans receivable totaled $71.0 million at June 30, 1998, an increase of $15.5
million, or 27.9%, over the June 30, 1997, total. Loan disbursements during the
period totaled $29.2 million, which were partially offset by principal
repayments of $13.8 million. Loan disbursements during the twelve months ended
June 30, 1998, increased by $12.2 million, or 71.3%, compared to the origination
volume during fiscal 1997. Growth in the loan portfolio, entirely through
originations with the assistance of a new commercial lending officer, rather
than purchases,
6
<PAGE> 9
consisted of $9.3 million in loans secured by one- to four-family residential
real estate and approximately $5.5 million in nonresidential real estate loans.
The allowance for loan losses totaled $270,000 at both June 30, 1998, and June
30, 1997, which represented .37% and .47% of total loans and 329% and 422% of
nonperforming loans at those respective dates. Nonperforming loans amounted to
$82,000 and $64,000 at June 30, 1998, and June 30, 1997, respectively. Although
management believes that its allowance for loan losses at June 30, 1998, is
adequate based upon the available facts and circumstances, there can be no
assurance that additions to such allowance will not be necessary in future
periods, which could adversely affect FFD's results of operations.
Deposits totaled $62.0 million at June 30, 1998, a $4.9 million, or 8.5%,
increase over June 30, 1997. This increase resulted primarily from growth in
deposits at the new branch office location, coupled with management's efforts to
obtain moderate growth through advertising and pricing strategies.
FHLB advances totaled $12.5 million at June 30, 1998, a $4.1 million, or 49.4%,
increase over the total at June 30, 1997. Proceeds from the increase in
borrowings were primarily used to fund part of the loan portfolio growth.
Shareholders' equity totaled $15.8 million at June 30, 1998, a decrease of $5.7
million, or 26.3%, from the total at June 30, 1997. The decrease resulted
primarily from the $6.5 million special distribution, coupled with regular
quarterly dividends totaling $403,000, which were partially offset by net
earnings of $982,000.
COMPARISON OF OPERATING RESULTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
The earnings of FFD depend primarily on its level of net interest income, which
is the difference between interest earned on FFD's interest-earning assets and
the interest paid on interest-bearing liabilities. Net interest income is
substantially affected by FFD's interest rate spread, which is the difference
between the average yield earned on interest-earning assets and the average rate
paid on interest-bearing liabilities, as well as by the average balance of
interest-earning assets compared to interest-bearing liabilities.
GENERAL. FFD's net earnings totaled $982,000 for the fiscal year ended June 30,
1998, a decrease of $445,000, or 31.2%, from the net earnings of $1.4 million
recorded in fiscal 1997. The decrease in net earnings resulted primarily from an
$812,000 decrease in other income and a $185,000 increase in general,
administrative and other expense, which were partially offset by a $227,000
increase in net interest income coupled with a $200,000 decrease in the
provision for federal income taxes.
7
<PAGE> 10
NET INTEREST INCOME. Total interest income increased by $580,000, or 9.9%, to a
total of $6.5 million for the year ended June 30, 1998, compared to $5.9 million
for the year ended June 30, 1997. Interest income on loans increased by
$959,000, or 25.2%, due primarily to an $11.0 million, or 21.1%, increase in the
average loan portfolio balance outstanding, coupled with a 25 basis point
increase in the average yield, to 7.53% in fiscal 1998. Interest income on
mortgage-backed securities decreased by $248,000, or 21.1%, due primarily to a
$3.0 million decrease in the average balance outstanding, coupled with a
decrease in the yield earned on such securities. Interest income on investment
securities and interest-bearing deposits decreased by $131,000, or 14.6%, due
primarily to an approximate $729,000 decrease in the related average investment
balance and a decrease in the yield earned on such investments.
Interest expense on deposits increased by $199,000, or 7.7%, for the year ended
June 30, 1998, compared to fiscal 1997, due primarily to a $4.4 million, or
8.0%, increase in the average deposit portfolio balance outstanding.
Interest expense on borrowings increased by $154,000, or 30.6%, due primarily to
a $2.8 million increase in the average balance of advances outstanding.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $227,000, or 8.2%, for the fiscal year ended
June 30, 1998, compared to fiscal 1997. The interest rate spread amounted to
approximately 2.22% for the fiscal year ended June 30, 1998, compared to 2.15%
for the comparable 1997 period, while the net interest margin amounted to 3.29%
in 1998, compared to 3.30% in 1997.
PROVISION FOR LOSSES ON LOANS. A provision for losses on loans is charged to
earnings to bring the total allowance for losses on loans to a level considered
appropriate by management based on historical loss experience, the volume and
type of lending conducted by First Federal, the status of past due principal and
interest payments, general economic conditions, particularly as such conditions
relate to First Federal's market area, and other factors related to the
collectibility of First Federal's loan portfolio. As a result of such analysis,
management concluded that the allowance for loan losses was adequate and,
therefore, did not record a provision for losses on loans during the fiscal year
ended June 30, 1998, as compared to the $125,000 provision recorded in fiscal
1997. There can be no assurance that the loan loss allowance of First Federal
will be adequate to cover losses on nonperforming assets in the future.
OTHER INCOME. Other income totaled $525,000 for the year ended June 30, 1998, a
decrease of $812,000 from the 1997 total. The decrease resulted primarily from
an $843,000, or 65.7%, decrease in gain on sales of securities. Other operating
income consists primarily of fees generated from ATM transactions, late charges
on loans, safety deposit box rentals and negotiable order of withdrawal ("NOW")
account fees.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and other
expense totaled $2.0 million for the year ended June 30, 1998, an increase of $
185,000, or 10.0%, compared to the same period in 1997. The increase resulted
primarily from a $257,000, or 33.1%, increase in employee compensation and
benefits, a $75,000, or 63.6%, increase in
8
<PAGE> 11
occupancy and equipment expense, a $69,000, or 47.9%, increase in franchise
taxes and a $110,000, or 31.3%, increase in other operating expenses, which were
partially offset by a $360,000, or 91.4%, decrease in federal deposit insurance
premiums, due to the $332,000 one-time pre-tax charge to recapitalize the SAIF
which was recorded in the fiscal 1997 period.
The increase in employee compensation and benefits was due primarily to
increased staffing levels related to the opening of the New Philadelphia office
location in November 1997, and the addition of a commercial lending officer
during fiscal 1997, coupled with an increase in expense associated with stock
benefit plans and normal merit increases. The increase in occupancy and
equipment and other operating expense resulted primarily from costs associated
with the start-up of the New Philadelphia office. The increase in franchise
taxes was due to the increase in shareholders' equity year to year.
FEDERAL INCOME TAXES. FFD recorded a provision for federal income taxes totaling
$505,000 for the year ended June 30, 1998, a decrease of $200,000, or 28.4%,
from fiscal 1997. The decrease resulted primarily from a $645,000, or 30.3%,
decrease in earnings before taxes. The effective tax rates were 34.0% and 33.1%
for the years ended June 30, 1998 and 1997, respectively.
COMPARISON OF OPERATING RESULTS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
- --------------------------------------------------------------------------------
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 earnings 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
9
<PAGE> 12
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 secure outstanding loans to
decline; (2) unforeseen adverse changes in circumstances with respect to certain
large loan borrowers; (3) decreases 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 partial 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 239.7%, 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
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
10
<PAGE> 13
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.
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,
-------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- -------------------------- ----------------------------
Average Interest Average Average Interest Average Average Interest Average
outstanding earned/ yield/ outstanding earned/ Yield/ outstanding earned/ yield/
balance paid rate balance paid rate balance paid rate
------- ---- ---- ------- ---- ---- ------- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $63,315 $4,766 7.53% $52,295 $3,807 7.28% $44,855 $3,402 7.58%
Mortgage-backed securities 14,202 927 6.53 17,228 1,175 6.82 8,713 600 6.89
Investment securities 5,097 319 6.26 12,198 782 6.41 5,323 363 6.82
Interest-bearing deposits
and other 8,816 448 5.08 2,444 116 4.75 4,570 190 4.16
-------- ------- ---- --------- ------- ---- -------- ------- ----
Total interest-earning
assets 91,430 6,460 7.07 84,165 5,880 6.99 63,461 4,555 7.18
-------- --------
Non-interest-earning assets 1,417 2,255 474
-------- -------- -------
Total assets $92,847 $86,419 $63,935
======= ======= =======
Interest-bearing liabilities:
Deposits $59,554 2,797 4.70 $55,166 2,598 4.71 $51,713 2,464 4.76
Advances from the FHLB 11,685 657 5.62 8,857 503 5.68 7 6.73
-------- ------- ---- -------- ------- ---- -------- --------- ----
Total interest-bearing 71,239 3,454 4.85 64,023 3,101 4.84 51,817 2,471 4.77
------ ---- ------- ---- ------- ----
liabilities
Non-interest-bearing liabilities 487 937 1,063
-------- -------- --------
Total liabilities 71,726 64,960 52,880
Shareholders' equity 21,121 21,459 11,055
------ ------ ------
Total liabilities and
shareholders' equity $92,847 $86,419 $63,935
======= ======= =======
Net interest income $3,006 $2,779 $2,084
====== ====== ======
Interest rate spread 2.22% 2.15% 2.41%
==== ==== ====
Net interest margin (net
interest income as a
percent of average 3.29% 3.30% 3.28%
==== ==== ====
interest-earning assets)
Average interest-earning assets
to average interest-bearing
liabilities 128.34% 131.46% 122.47%
====== ====== ======
</TABLE>
11
<PAGE> 14
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.
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
----------------------------- -----------------------------
Increase Increase
(decrease) (decrease)
due to due to
------------------ -----------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Loans receivable $824 $135 $959 $ 545 $(140) $ 405
Mortgage-backed securities (200) (48) (248) 581 (6) 575
Investment securities (445) (18) (463) 442 (23) 419
Interest-bearing deposits and
other 323 9 332 (98) 24 (74)
---- ------ ---- ------ ------ -----
Total interest income 502 78 580 1,470 (145) 1,325
---- ----- ---- ----- ------ -----
Interest expense attributable to:
Deposits 193 6 199 161 (27) 134
FHLB advances 149 5 154 511 (15) 496
---- ------ ---- ------ ---- -----
Total interest expense 342 11 353 672 (42) 630
---- ----- ---- ------ ----- -----
Increase (decrease) in net interest
income $160 $ 67 $227 $ 798 $(103) $ 695
==== ==== ==== ===== ===== =====
</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.
12
<PAGE> 15
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."
At June 30, 1998, 2% of the present value of First Federal's assets was
approximately $1.8 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 $1.2 million.
Presented below, as of June 30, 1998, is an analysis of First Federal's interest
rate risk as measured by changes in NPV for instantaneous and sustained parallel
shifts of 200 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, 1998
-----------------------
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% $(678) (4.47)%
+200 +20.0 100 .66
0 0 0 0
-200 -20.0 (1,231) (8.12)
-400 -40.0 (1,574) (10.38)
</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.
13
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
First Federal's principal sources of funds are deposits, loan and
mortgage-backed securities repayments, maturities of securities and other funds
provided by operations. First Federal also has the ability to borrow from the
FHLB of Cincinnati. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and loan and mortgage-backed securities
prepayments are more influenced by interest rates, general economic conditions
and competition. First Federal maintains investments in liquid assets based upon
management's assessment of (i) the need for funds, (ii) expected deposit flows,
(iii) the yields available on short-term liquid assets and (iv) the objectives
of the asset/liability management program. During fiscal 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 certain other investments having maturities of five years or
less in an amount equal to 4% 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, 1998,
First Federal's regulatory liquidity ratio was 8.9%. At such date, First Federal
had commitments to originate loans including unused lines of credit totaling
$3.2 million and no commitments to purchase or sell loans.
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, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------------------------
1998 1997 1996
------- ------- ---------
(In thousands)
<S> <C> <C> <C>
Net earnings $ 982 $1,427 $ 632
Adjustments to reconcile net earnings to
net cash from operating activities (675) (490) (91)
------- ------- ---------
Net cash from operating activities 307 937 541
Net cash used in investing activities (4,706) (6,814) (21,456)
Net cash from financing activities 1,952 7,259 19,733
------- ------ -------
Net change in cash and cash equivalents (2,447) 1,382 (1,182)
Cash and cash equivalents at
beginning of period 4,080 2,698 3,880
------- ------- --------
Cash and cash equivalents at
end of period $1,633 $4,080 $ 2,698
====== ====== ========
</TABLE>
14
<PAGE> 17
First Federal is required by applicable law and regulation to meet certain
minimum capital standards. Such capital standards include a tangible capital
requirement, a core capital requirement or leverage ratio and a risk-based
capital requirement.
The tangible capital requirement requires savings associations to maintain
"tangible capital" of not less than 1.5% of the association's adjusted total
assets. Tangible capital is defined in OTS regulations as core capital minus any
intangible assets.
"Core capital" is comprised of common 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, 1998.
First Federal exceeded all of its capital requirements at June 30, 1998. The
following table summarizes First Federal's regulatory capital requirements and
regulatory capital at June 30, 1998:
<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 $14,502 16.0% $1,361 1.5% $13,141 14.5%
Core capital 14,502 16.0 2,721 3.0 11,781 13.0
Risk-based capital 14,772 29.7 3,981 8.0 10,791 21.7
</TABLE>
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------------------------------------------------------
In June 1996, the Financial Accounting Standards Board (the "FASB") issued SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," that provides accounting guidance on transfers
of 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
15
<PAGE> 18
assets. The new accounting method, known as 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 has adopted SFAS No. 125, as required, without material effect on
FFD's consolidated financial position or results of operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. It does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in that
financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. SFAS No. 130 is not expected to
have a material impact on FFD's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 significantly changes the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about reportable segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 uses a
"management approach" to disclose financial and descriptive information about
the way that management organizes the segments within the enterprise for making
operating decisions and assessing performance. For many enterprises, the
management approach will likely result in more segments being reported. In
16
<PAGE> 19
addition, SFAS No. 131 requires significantly more information to be disclosed
for each reportable segment than is presently being reported in annual financial
statements and also requires that selected information be reported in interim
financial statements. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. SFAS No. 131 is not expected to have a material impact on
FFD's financial statements.
OTHER MATTERS
- --------------------------------------------------------------------------------
As with most providers of financial services, First Federal's operations are
heavily dependent on information technology systems. First Federal is addressing
the potential problems associated with the possibility that the computers that
control or operate First Federal's information technology system and
infrastructure may not be programmed to read four-digit date codes and, upon
arrival of the year 2000, may recognize the two-digit code "00" as the year
1900, causing systems to fail to function or to generate erroneous data. First
Federal is working with the companies that supply or service its information
technology systems to identify and remedy any year 2000 related problems.
FFD's primary data processing applications are handled by a third-party service
bureau which has advised FFD that it has transferred to a fully year
2000-compliant processing system that will be fully tested by January 1, 1999.
Management has also reviewed FFD's ancillary equipment and is in the process of
providing the appropriate remedial measures without material cost.
As a result of the foregoing, FFD has not identified any material specific
expenses that are reasonably likely to be incurred by First Federal in
connection with this issue and does not expect to incur significant expense to
implement the necessary corrective measures. No assurance can be given, however,
that significant expense will not be incurred in future periods. In the event
that First Federal is ultimately required to purchase replacement computer
systems, programs and equipment, or incur substantial expense to make First
Federal's current systems, programs and equipment year 2000 compliant, FFD's net
earnings and financial condition could be adversely affected. While First
Federal is endeavoring to ensure that its computer-dependent operations are year
2000 compliant, no assurance can be given that some year 2000 problems will not
occur.
In addition to possible expense related to its own systems, FFD could incur
losses if year 2000 issues adversely affect First Federal's depositors or
borrowers. Such problems could include delayed loan payments due to year 2000
problems affecting any significant borrowers or impairing the payroll systems of
large employers in First Federal's primary market area. Because First Federal's
loan portfolio is highly diversified with regard to individual borrowers and
types of businesses and First Federal's primary market area is not significantly
dependent upon one employer or industry, First Federal does not expect any
significant or prolonged difficulties that will affect net earnings or cash
flow.
17
<PAGE> 20
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS AND
CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
CONTENTS
PAGE
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 19
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 20
CONSOLIDATED STATEMENTS OF EARNINGS 21
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 22
CONSOLIDATED STATEMENTS OF CASH FLOWS 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 25
18
<PAGE> 21
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, 1998 and 1997, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the years ended June 30, 1998, 1997 and 1996. 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, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the years ended June 30, 1998, 1997
and 1996, in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Cincinnati, Ohio
August 21, 1998
<PAGE> 22
FFD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30,
(In thousands, except share data)
<TABLE>
<S> <C> <C>
ASSETS 1998 1997
Cash and due from banks $ 1,026 $ 533
Interest-bearing deposits in other financial institutions 607 3,547
-------- --------
Cash and cash equivalents 1,633 4,080
Investment securities designated as available for sale - at market 2,655 9,924
Investment securities - at cost, approximate market value of $993 and $1,459 as of 977 1,469
June 30, 1998 and 1997
Mortgage-backed securities designated as available for sale - at market 5,935 7,944
Mortgage-backed securities - at amortized cost, approximate market value of $6,073 and 5,960 7,165
$7,304 as of June 30, 1998 and 1997
Loans receivable - net 70,990 55,504
Office premises and equipment - at depreciated cost 1,383 865
Stock in Federal Home Loan Bank - at cost 933 642
Accrued interest receivable 279 267
Prepaid expenses and other assets 221 140
-------- --------
Total assets $ 90,966 $ 88,000
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 61,956 $ 57,090
Advances from the Federal Home Loan Bank 12,519 8,382
Accrued interest payable 94 82
Other liabilities 258 340
Accrued federal income taxes 197 609
Deferred federal income taxes 117 17
-------- --------
Total liabilities 75,141 66,520
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
Additional paid-in capital 7,705 14,137
Retained earnings - substantially restricted 9,536 8,957
Unrealized gains on securities designated as available for sale, net of related tax 140 20
effects
Shares acquired by stock benefit plans (1,411) (1,634)
Less 9,400 treasury shares - at cost (145) -
-------- --------
Total shareholders' equity 15,825 21,480
-------- --------
Total liabilities and shareholders' equity $ 90,966 $ 88,000
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 23
FFD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended June 30,
(In thousands, except share data)
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
Interest income
Loans $ 4,766 $ 3,807 $ 3,402
Mortgage-backed securities 927 1,175 600
Investment securities 319 782 363
Interest-bearing deposits and other 448 116 190
------- ------- -------
Total interest income 6,460 5,880 4,555
Interest expense
Deposits 2,797 2,598 2,464
Borrowings 657 503 7
------- ------- -------
Total interest expense 3,454 3,101 2,471
------- ------- -------
Net interest income 3,006 2,779 2,084
Provision for losses on loans - 125 50
------- ------- -------
Net interest income after provision for losses on loans 3,006 2,654 2,034
Other income
Gain on sale of investment securities designated as available for 441 1,284 -
sale
Gain on sale of real estate acquired through foreclosure - 2 -
Gain on sale of office premises and equipment - - 50
Other operating income 84 51 38
------- ------- -------
Total other income 525 1,337 88
General, administrative and other expense
Employee compensation and benefits 1,034 777 528
Occupancy and equipment 193 118 98
Franchise taxes 213 144 108
Federal deposit insurance premiums 34 394 116
Data processing 109 75 73
Other operating 461 351 240
------- ------- -------
Total general, administrative and other expense 2,044 1,859 1,163
------- ------- -------
Earnings before income taxes 1,487 2,132 959
Federal income taxes
Current 311 769 318
Deferred 194 (64) 9
------- ------- -------
Total federal income taxes 505 705 327
------- ------- -------
NET EARNINGS $ 982 $ 1,427 $ 632
======= ======= =======
EARNINGS PER SHARE
Basic $ .73 $ 1.07 N/A
======= ======= =======
Diluted $ .71 $ 1.06 N/A
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 24
FFD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended June 30, 1998, 1997 and 1996
(In thousands, except share data)
<TABLE>
<CAPTION>
SHARES
ADDITIONAL ACQUIRED BY
COMMON PAID-IN STOCK BENEFIT TREASURERY
STOCK CAPITAL PLANS SHARES - AT COST
<S> <C> <C> <C> <C>
Balance at July 1, 1995 $ - $ - $ - $ -
Reorganization to common stock form and issuance of - 14,132 (1,164) -
shares in connection therewith - net
Net earnings for the year ended June 30, 1996 - - - -
Unrealized gain on securities designated as available for - - - -
sale, net of related tax effects
-------- -------- -------- --------
Balance at June 30, 1996 - 14,132 (1,164) -
Net earnings for the year ended June 30, 1997 - - - -
Purchase of shares for stock benefit plan - - (494) -
Amortization of stock benefit plan expense - 5 24 -
Realized gain on securities designated as available for - - - -
sale, net of related tax effects
Dividends of $.225 per share - - - -
-------- -------- -------- --------
Balance at June 30, 1997 - 14,137 (1,634) -
Net earnings for the year ended June 30, 1998 - - - -
Purchase of treasury shares - - - (154)
Amortization of stock benefit plan expense - 71 223 -
Unrealized gain on securities designated as available for - - - -
sale, net of related tax effects
Exercise of stock options - 1 - 9
Capital distribution of $4.50 per share - (6,504) - -
Dividends of $.30 per share - - - -
-------- -------- -------- --------
Balance at June 30, 1998 $ - $ 7,705 $ (1,411) $ (145)
======== ======== ======== ========
<CAPTION>
UNREALIZED GAIN ON
SECURITIES DESIGNATED RETAINAGE
AS AVAILABLE FOR SALE EARNINGS TOTAL
<S> <C> <C> <C>
Balance at July 1, 1995 $ 562 $ 7,225 $ 7,787
Reorganization to common stock form and issuance of - - 12,968
shares in connection therewith - net
Net earnings for the year ended June 30, 1996 - 632 632
Unrealized gain on securities designated as available for 24 - 24
-------- -------- --------
sale, net of related tax effects
Balance at June 30, 1996 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)
Amortization of stock benefit plan expense - - 29
Realized gain on securities designated as available for (566) - (566)
sale, net of related tax effects
Dividends of $.225 per share - (327) (327)
-------- -------- --------
Balance at June 30, 1997 20 8,957 21,480
Net earnings for the year ended June 30, 1998 - 982 982
Purchase of treasury shares - - (154)
Amortization of stock benefit plan expense - - 294
Unrealized gain on securities designated as available for 120 - 120
sale, net of related tax effects
Exercise of stock options - - 10
Capital distribution of $4.50 per share - - (6,504)
Dividends of $.30 per share - (403) (403)
-------- -------- --------
Balance at June 30, 1998 $ 140 $ 9,536 $ 15,825
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 25
FFD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30,
(In thousands)
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
Cash flows from operating activities:
Net earnings for the year $ 982 $ 1,427 $ 632
Adjustments to reconcile net earnings to net cash provided by (used in) operating
activities:
Amortization of premiums and discounts on investments and mortgage-backed 33 (13) (8)
securities - net
Amortization of deferred loan origination fees (73) (66) (65)
Depreciation and amortization 109 61 43
Gain on sale of investment and mortgage-backed securities designated as available (441) (1,284) -
for sale
Gain on sale of office premises and equipment - - (50)
Provision for losses on loans - 125 50
Amortization of stock benefit plan expense 294 29 -
Federal Home Loan Bank stock dividends (55) (44) (40)
Increase (decrease) in cash due to changes in:
Accrued interest receivable (12) 16 (131)
Prepaid expenses and other assets (81) - (23)
Other liabilities (82) 136 45
Accrued interest payable 12 45 8
Federal income taxes
Current (573) 569 71
Deferred 194 (64) 9
-------- -------- --------
Net cash provided by operating activities 307 937 541
Cash flows provided by (used in) investing activities:
Purchase of investment securities designated as available for sale (6,947) (15,391) (8,182)
Purchase of investment securities designated as held to maturity (1,244) - -
Proceeds from maturity of investment securities 10,157 13,648 900
Proceeds from sale of investment securities designated as available for sale 6,430 2,372 -
Purchase of mortgage-backed securities designated as held to maturity - (2,528) -
Purchase of mortgage-backed securities designated as available for sale - (4,737) (9,148)
Principal repayments on mortgage-backed securities 3,174 3,257 2,228
Proceeds from sale of mortgage-backed securities designated as available for sale - 3,970 -
Purchase of Federal Home Loan Bank stock (236) - -
Loan principal repayments 13,826 10,049 9,797
Loan disbursements (29,239) (17,073) (16,827)
Purchase of office premises and equipment (627) (381) (498)
Proceeds from sale of office premises and equipment - - 274
-------- -------- --------
Net cash used in investing activities (4,706) (6,814) (21,456)
-------- -------- --------
Net cash used in operating and investing
activities (subtotal carried forward) (4,399) (5,877) (20,915)
-------- -------- --------
</TABLE>
<PAGE> 26
FFD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended June 30,
(In thousands)
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
Net cash used in operating and investing activities $ (4,399) $ (5,877) $(20,915)
(subtotal brought carried forward)
Cash flows provided by (used in) financing activities:
Net increase in deposit accounts 4,866 4,882 1,607
Proceeds from Federal Home Loan Bank advances 11,950 8,900 5,160
Repayments on Federal Home Loan Bank advances (7,813) (5,702) (2)
Net proceeds from issuance of common stock - - 12,968
Proceeds from exercise of stock options 10 - -
Purchase of shares for stock benefit plans - (494) -
Purchase of treasury shares (154) - -
Cash distributions paid on common stock (6,907) (327) -
-------- -------- --------
Net cash provided by financing activities 1,952 7,259 19,733
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (2,447) 1,382 (1,182)
Cash and cash equivalents at beginning of year 4,080 2,698 3,880
-------- -------- --------
Cash and cash equivalents at end of year $ 1,633 $ 4,080 $ 2,698
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 819 $ 116 $ 234
======== ======== ========
Interest on deposits and borrowings $ 3,442 $ 3,056 $ 2,445
======== ======== ========
Supplemental disclosure of noncash investing activities:
Unrealized (realized) gains on securities designated as available for sale, net of
applicable tax effects $ 120 $ (566) $ 24
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 27
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
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 1,454,750 common shares to certain
depositors of the Savings Bank and members of the community. The sale of common
shares was completed on April 2, 1996, and resulted in net capital proceeds of
$13.0 million after consideration of $400,000 in offering expenses and ESOP
purchases of $1.2 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,
the Savings Bank, and its wholly-owned subsidiary, Dover Service Corporation
("Dover"). At June 30, 1998 and 1997, 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.
<PAGE> 28
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
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,
1998 and 1997, the Corporation's shareholders' equity reflected a net unrealized
gain on securities designated as available for sale totaling $140,000 and
$20,000, 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.
<PAGE> 29
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
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).
The Savings Bank accounts for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," which 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.
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, commercial 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, 1998 and 1997, the Savings Bank had no loans that would be defined
as impaired under SFAS No. 114.
6. Real Estate Acquired through Foreclosure
----------------------------------------
Real estate acquired through foreclosure is carried at the lower of the loan's
unpaid principal balance (cost) or fair value less estimated selling expenses at
the date of acquisition. Real estate loss provisions are recorded if the
properties' fair value subsequently declines below the value determined at the
recording date. In determining the lower of cost or fair value at acquisition,
costs relating to development and improvement of property are capitalized. Costs
relating to holding real estate acquired through foreclosure, net of rental
income, are charged against earnings as incurred.
<PAGE> 30
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 between twenty and 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". 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.
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.
In fiscal 1996, the Savings Bank filed a deconsolidation request with the
Internal Revenue Service ("IRS") pursuant to an available Revenue Procedure. In
August 1998, management was authorized to enter into a closing agreement with
the IRS regarding such deconsolidation request. As a result, the Corporation,
the Savings Bank and Dover will file separate federal tax returns and will be
individually responsible for their separate corporate tax liabilities.
<PAGE> 31
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
9. Benefit 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 for fiscal 1996. 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 $228,000, $120,000 and $30,000 for the
fiscal years ended June 30, 1998, 1997 and 1996, respectively.
Additionally, during fiscal 1997, 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. The Corporation has awarded 29,300 shares under the
RRP which vest over a five year period. A provision of $109,000 and $61,000
related to the RRP was charged to expense for the fiscal years ended June 30,
1998 and 1997, respectively.
10. Earnings Per Share and Cash Distributions Per Share
---------------------------------------------------
Basic 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 106,515 and 114,044 shares held by the ESOP, totaled 1,340,049 and
1,340,706 for the fiscal years ended June 30, 1998 and 1997, respectively.
Diluted earnings per share is computed taking into consideration common shares
outstanding and dilutive potential common shares to be issued under the
Corporation's stock option plan. Weighted-average common shares deemed
outstanding for purposes of computing diluted earnings per share totaled
1,376,664 and 1,345,995 for the fiscal years ended June 30, 1998 and 1997,
respectively.
Effective for the fiscal year ending June 30, 1998, the Corporation began
presenting earnings per share pursuant to the provisions of SFAS No. 128,
"Earnings Per Share." Accordingly, the fiscal 1997 earnings per share
presentation has been revised to conform to SFAS No. 128.
<PAGE> 32
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
10. Earnings Per Share and Cash Distributions Per Share (continued)
---------------------------------------------------
During fiscal 1998, the Corporation paid cash distributions of $4.80 per share.
Of these distributions, management deemed $4.50 per share as a return of capital
charging such amount to additional paid-in capital in the 1998 consolidated
financial statements. The remaining $.30 of the fiscal 1998 distribution was
accounted for as a normal quarterly cash dividend.
The provisions of SFAS No. 128, "Earnings Per Share," are not applicable for the
fiscal year ended June 30, 1996, as the Corporation completed its conversion to
stock form in April 1996.
11. Cash and Cash Equivalents
-------------------------
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks and interest-bearing deposits in other financial institutions
with original terms to maturity of less than ninety days.
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, 1998 and 1997:
CASH AND CASH EQUIVALENTS: The carrying amounts presented in the
consolidated statements 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.
<PAGE> 33
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. Fair Value of Financial Instruments (continued)
-----------------------------------
FEDERAL HOME LOAN BANK STOCK: The carrying amount presented in the
consolidated statements of financial condition is deemed to approximate
fair value.
DEPOSITS: The fair value of NOW accounts, passbook and club accounts, and
money market deposits is deemed to approximate the amount payable on
demand. Fair values for fixed-rate certificates of deposit have been
estimated using a discounted cash flow calculation using the interest rates
currently offered for deposits of similar remaining maturities.
ADVANCES FROM THE 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, 1998 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>
1998 1997
Carrying Carrying
value Fair value value Fair Value
Financial assets (In thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 1,633 $ 1,633 $ 4,080 $ 4,080
Investment securities 3,632 3,648 11,393 11,383
Mortgage-backed securities 11,895 12,008 15,109 15,248
Loans receivable 70,990 71,595 55,504 55,014
Federal Home Loan Bank stock 933 933 642 642
------- ------- ------- -------
$89,083 $89,817 $86,728 $86,367
======= ======= ======= =======
Financial liabilities
Deposits $61,956 $63,017 $57,090 $57,079
Advances from the Federal Home Loan Bank 12,519 12,519 8,382 8,382
------- ------- ------- -------
$74,475 $75,536 $65,472 $65,461
======= ======= ======= =======
</TABLE>
13. Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the 1998
consolidated financial statement presentation.
<PAGE> 34
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
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, 1998 and 1997, are as
follows:
<TABLE>
<CAPTION>
JUNE 30, 1998
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
HELD TO MATURITY: (In thousands)
U.S. Government agency obligations $ 977 $ 16 $- $ 993
AVAILABLE FOR SALE:
U.S. Government and agency obligations 2,496 2 - 2,498
Federal Home Loan Mortgage Corporation stock 3 154 - 157
-------- --- - ------
Total available for sale 2,499 156 - 2,655
----- --- - -----
Total investment securities $3,476 $172 $- $3,648
===== === = =====
<CAPTION>
JUNE 30, 1998
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
HELD TO MATURITY: (In thousands)
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>
The amortized cost and estimated fair value of U. S. Government and agency
obligations, including those designated as available for sale, at June 30, 1998,
by term to maturity are shown below.
<TABLE>
<CAPTION>
AMORTIZED COST ESTIMATED FAIR VALUE
(In thousands)
<S> <C> <C>
Due in one year or less $ 499 $ 499
Due after one year through five years 1,977 1,993
Due after ten years through twenty years 997 999
------ ------
$3,473 $3,491
====== ======
</TABLE>
<PAGE> 35
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
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, 1998 and 1997,
are shown below:
<TABLE>
<CAPTION>
1998
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
HELD TO MATURITY: (In thousands)
Federal Home Loan Mortgage
Corporation participation certificates $ 5,367 $ 98 $ 2 $ 5,463
Government National Mortgage Association participation
certificates 593 17 - 610
------- ------- ------- -------
Total mortgage-backed securities held to maturity 5,960 115 2 6,073
AVAILABLE FOR SALE:
Federal National Mortgage
Association participation certificates 5,348 45 - 5,393
Federal Home Loan Mortgage
Corporation participation certificates 531 11 - 542
------- ------- ------- -------
Total mortgage-backed securities available for sale 5,879 56 - 5,935
------- ------- ------- -------
Total mortgage-backed securities $11,839 $ 171 $ 2 $12,008
======= ======= ======= =======
<CAPTION>
1997
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
HELD TO MATURITY: (In thousands)
Federal Home Loan Mortgage
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 7,176 37 13 7,200
certificates
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>
<PAGE> 36
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
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, 1998, 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 $ 1,343
Due after ten years 10,496
--------
$ 11,839
</TABLE>
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at June 30 is as follows:
<TABLE>
<CAPTION>
1998 1997
(In thousands)
<S> <C> <C>
Residential real estate
One- to four-family $63,582 $54,316
Multi-family 1,058 1,158
Nonresidential real estate 6,722 1,192
Consumer and other loans 1,263 583
------- -------
72,625 57,249
Less:
Undisbursed portion of loans in process 1,079 1,185
Deferred loan origination fees 286 290
Allowance for losses on loans 270 270
------- -------
$70,990 $55,504
======= =======
</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 $63.6 million, or 90%, of the total loan portfolio at June 30,
1998, and approximately $54.3 million, or 98%, of the total loan portfolio at
June 30, 1997. 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 $423,000 and $641,000 at June 30, 1998 and
1997, respectively.
<PAGE> 37
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
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>
1998 1997 1996
(In thousand)
<S> <C> <C> <C>
Beginning balance $ 270 $ 146 $ 96
Provision for losses on loans - 125 50
Loan charge-offs - (1) -
----- ----- -----
Ending balance $ 270 $ 270 $ 146
===== ===== =====
</TABLE>
As of June 30, 1998, 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, 1998, 1997 and 1996, totaled
$82,000, $64,000 and $117,000, respectively. Interest income that would have
been recognized had nonaccrual loans performed pursuant to contractual terms
totaled approximately $2,000, $2,000 and $9,000 for the years ended June 30,
1998, 1997 and 1996, respectively.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at June 30 is comprised of the following:
<TABLE>
<CAPTION>
1998 1997
(In thousands)
<S> <C> <C>
Land $ 323 $ 314
Building and improvements 833 502
Furniture and equipment 483 205
------ ------
1,639 1,021
Less accumulated depreciation and amortization 256 156
------ ------
$1,383 $ 865
====== ======
</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 was completed in fiscal 1998 for a
total building cost of approximately $282,000.
<PAGE> 38
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE F - DEPOSITS
Deposits consist of the following major classifications at June 30:
<TABLE>
<CAPTION>
DEPOSIT TYPE AND WEIGHTED-AVERAGE INTEREST RATE 1998 1997
AMOUNT % AMOUNT %
(Dollars in thousands)
NOW accounts
<S> <C> <C> <C> <C>
1998 - 1.62% $ 5,954 9.6
1997 - 1.66% $ 5,219 9.1
Passbook
1998 - 3.86% 18,955 30.6
1997 - 3.95% 17,568 30.8
------ ------
Total demand, transaction and passbook deposits
24,909 40.2 22,787 39.9
Certificates of deposit
Original maturities of:
One year or less
1998 - 5.08% 8,687 14.0
1997 - 5.24% 10,236 17.9
12 months to 36 months
1998 - 5.83% 22,375 36.1
1997 - 5.88% 22,614 39.6
Individual retirement accounts
1998 - 5.59% 5,985 9.7
1997 - 5.60% 1,453 2.6
------- -------
Total certificates of deposit 37,047 59.8 34,303 60.1
------ ------ ------ ------
Total deposit accounts $61,956 100.0 $57,090 100.0
====== ===== ====== =====
</TABLE>
The Savings Bank had certificates of deposit accounts with balances in excess of
$100,000 totaling $1.3 million and $1.5 million at June 30, 1998 and 1997,
respectively.
Interest expense on deposits at June 30 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Passbook $ 702 $ 613 $ 473
NOW accounts 98 85 103
Certificates of deposit 1,997 1,900 1,888
----- ----- -----
$2,797 $2,598 $2,464
===== ===== =====
</TABLE>
<PAGE> 39
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE F - DEPOSITS (continued)
Maturities of outstanding certificates of deposit at June 30 are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997
(In thousands)
<S> <C> <C>
Less than one year $22,833 $23,639
One year to two years 11,442 8,608
Two years to three years 2,772 2,056
------- -------
$37,047 $34,303
====== ======
</TABLE>
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at June 30, 1998 by a
pledge of certain residential mortgage loans totaling $18.8 million and the
Savings Bank's investment in Federal Home Loan Bank stock, are summarized as
follows:
<TABLE>
<CAPTION>
MATURING IN YEAR ENDING
JUNE 30,
INTEREST RATE 1998 1997
(In thousands)
<S> <C> <C> <C> <C>
5.48% - 5.69% 1998 $ - $ 780
5.57% - 5.78% 1998 - 1,180
5.81% - 5.88% 1999 - 3,900
5.62% 2004 2,500 2,500
8.15% 2005 19 22
4.96% - 5.10% 2008 10,000 -
------- -------
$12,519 $ 8,382
======= =======
Weighted-average interest rate 5.11% 5.76%
==== ====
</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>
1998 1997 1996
(Dollars in thousands)
<S> <C> <C> <C>
Federal income taxes at statutory rate $ 506 $ 725 $ 326
Increase (decrease) in taxes resulting from:
Other (primarily nontaxable interest income in 1997) (1) (20) 1
----- ----- -----
Federal income taxes per consolidated financial statements $ 505 $ 705 $ 327
===== ===== =====
Effective tax rate 33.9% 33.1% 34.1%
===== ===== =====
</TABLE>
<PAGE> 40
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE H - FEDERAL INCOME TAXES (continued)
The composition of the Corporation's net deferred tax liability at June 30 is as
follows:
<TABLE>
<S> <C> <C>
Taxes (payable) refundable on temporary 1998 1997
differences at statutory rate: (In thousands)
Deferred tax assets:
Deferred loan origination fees $ 8 $ 32
Retirement expense 106 102
General loan loss allowance 92 92
Other 1 1
----- -----
Deferred tax assets 207 227
Deferred tax liabilities:
Financed loan origination fees (16) (16)
Federal Home Loan Bank stock dividends (118) (99)
Difference between book and tax depreciation (31) (22)
Percentage of earnings bad debt deduction (87) (95)
Unrealized gains on securities designated as available for sale (72) (12)
----- -----
Deferred tax liabilities (324) (244)
----- -----
Net deferred tax liability $(117) $ (17)
===== =====
</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, 1998, 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,
1998. See Note K for additional information regarding the Savings Bank's future
percentage of earnings bad debt deductions.
<PAGE> 41
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
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, 1998, the Savings Bank had outstanding commitments of approximately
$679,000 to originate loans. Additionally, the Savings Bank was obligated under
unused lines of credit totaling $2.5 million. In the opinion of management, all
loan commitments equaled or exceeded prevalent market interest rates as of June
30, 1998, 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
<PAGE> 42
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE J - REGULATORY CAPITAL (continued)
plus certain forms of supervisory goodwill and other qualifying intangible
assets) equal to 3.0% of adjusted total assets. An OTS proposal, if adopted in
present form, would increase the core capital requirement to a range of 4.0% -
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, 1998 and 1997, management believes that the Savings Bank met all
capital adequacy requirements to which it is subject.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
TO BE "WELL CAPITALIZED"
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------ --------------------- ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $14,502 16.0% =>$1,361 =>1.5% =>$4,535 => 5.0%
Core capital $14,502 16.0% =>$2,721 =>3.0% =>$5,442 => 6.0%
Risk-based capital $14,772 29.7% =>$3,981 =>8.0% =>$4,976 =>10.0%
<CAPTION>
AS OF JUNE 30, 1998
TO BE "WELL CAPITALIZED"
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------ --------------------- ------------------------
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% =>$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.
<PAGE> 43
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE K - LEGISLATIVE MATTERS
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, if the thrift charter or the separate federal regulation
of thrifts is eliminated by then. 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.
<PAGE> 44
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
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, 1998 and 1997, and the results of its
operations and its cash flows for the periods ended June 30, 1998, 1997 and
1996.
FFD FINANCIAL CORPORATION
STATEMENTS OF FINANCIAL CONDITION
June 30,
(In thousands)
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
Cash and due from banks $ 103 $ 460
Investment securities - 6,430
Loan receivable from ESOP 1,047 1,131
Investment in First Federal Savings Bank of Dover 14,642 13,348
Accrued interest receivable 19 128
Prepaid expenses and other assets 18 30
-------- --------
Total assets $ 15,829 $ 21,527
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued federal income taxes $ 4 $ 47
Shareholders' equity
Common stock - -
Additional paid-in capital 7,705 14,137
Unrealized gain on securities designated as available for sale, net 140 20
of related tax effects
Retained earnings 9,536 8,957
Shares acquired by stock benefit plans (1,411) (1,634)
Treasury shares - at cost (145) -
-------- --------
Total shareholders' equity 15,825 21,480
-------- --------
Total liabilities and shareholders' equity $ 15,829 $ 21,527
======== ========
</TABLE>
<PAGE> 45
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE L- CONDENSED FINANCIAL STATEMENTS OF FFD FINANCIAL CORPORATION (continued)
FFD FINANCIAL CORPORATION
STATEMENTS OF EARNINGS
Period ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
Revenue
<S> <C> <C> <C>
Interest income $ 377 $ 476 $ 120
Equity in earnings of subsidiary 888 1,243 176
------ ------ ------
Total revenue 1,265 1,719 296
General and administrative expenses 235 219 22
------ ------ ------
Earnings before income taxes 1,030 1,500 274
Federal income taxes 48 73 20
------ ------ ------
NET EARNINGS $ 982 $1,427 $ 254
====== ====== ======
</TABLE>
FFD FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
Period ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash provided by (used in) operating activities:
Net earnings for the period $ 982 $ 1,427 $ 254
Adjustments to reconcile net earnings to net cash provided by (used in) operating
activities:
Undistributed earnings of consolidated subsidiary (888) (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 121 10 (79)
Other liabilities - (3) 50
Accrued federal income tax (43) - -
-------- -------- --------
Net cash provided by operating activities 172 203 31
Cash flows provided by (used in) investing activities:
Proceeds from repayment of loan to ESOP 84 33 -
Proceeds from maturities of investment securities 11,389 9,948 -
Purchase of investment securities (4,951) (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 provided by (used in) investing activities 6,522 (37) (12,378)
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock - - 12,968
Proceeds from exercise of stock options 10 - -
Purchase of treasury shares (154) - -
Cash distributions on common stock (6,907) (327) -
-------- -------- --------
Net cash provided by (used in) financing activities (7,051) (327) 12,968
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (357) (161) 621
Cash and cash equivalents at beginning of period 460 621 -
-------- -------- --------
Cash and cash equivalents at end of period $ 103 $ 460 $ 621
======== ======== ========
</TABLE>
<PAGE> 46
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
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 $2.4 million to the Corporation at June 30, 1998.
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. The Plan 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 123,563 shares of the Corporation's common stock to officers and
directors at a weighted-average exercise price of $9.36 per share.
Coincident with the Plan's inception, the Corporation adopted SFAS No. 123,
"Accounting for Stock-Based Compensation," which contains a fair value-based
method for valuing stock-based compensation that entities may use, which
measures compensation cost at the grant date based on the fair value of the
award. Compensation is then recognized over the service period, which is usually
the vesting period. Alternatively, SFAS No. 123 permits entities to continue to
account for stock options and similar equity instruments under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Entities that continue to account for stock options using APB
Opinion No. 25 are required to make pro forma disclosures of net earnings and
earnings per share, as if the fair value-based method of accounting defined in
SFAS No. 123 had been applied.
The Corporation applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock option plan. Accordingly, no
compensation cost has been recognized with respect to the Plan. Had compensation
cost for the Corporation's stock option plan been determined based on the fair
value at the grant date in a manner consistent with the accounting method
utilized in SFAS No. 123, then the Corporation's consolidated net earnings and
earnings per share for the fiscal years ended June 30, 1998 and 1997, would have
been reduced to the pro forma amounts indicated below:
<PAGE> 47
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE M- STOCK OPTION PLAN (continued)
<TABLE>
<CAPTION>
1998 1997
(Earnings in thousands)
<S> <C> <C>
Net earnings As reported $ 982 $ 1,427
=========== ===========
Pro-forma $ 963 $ 1,407
=========== ===========
Earnings per share Basic As reported $ 0.73 $ 1.07
=========== ===========
Pro-forma $ 0.72 $ 1.05
=========== ===========
Diluted As reported $ 0.71 $ 1.06
=========== ===========
Pro-forma $ 0.70 $ 1.05
=========== ===========
</TABLE>
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 for grants in fiscal 1998 and 1997: dividend yield of 6.55%,
expected volatility of 20.0%, a risk-free interest rate of 6.0% and an expected
life of ten years.
A summary of the status of the Corporation's stock option plan as of June 30,
1998 and 1997, and changes during the years then ended are presented below:
<TABLE>
<CAPTION>
1998 1997
WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
Outstanding at beginning of year 117,259 $ 9.38 - $ -
Granted 12,635 17.19 123,563 9.36
Exercised 738 11.17 - -
Forfeited - - 6,304 9.14
------- ------- ------- -------
Outstanding at end of year 129,156 $ 10.20 117,259 $ 9.38
======= ======= ======= =======
Options exercisable at year-end 23,452 $ 9.38 - $ -
======= ======= ======= =======
Weighted-average fair value of options $ 2.01 $ 1.10
======= =======
granted during the year
The following information applies to options outstanding at June 30, 1998:
<CAPTION>
<S> <C>
Number outstanding 129,156
Range of exercise prices $9.14 - $18.14
Weighted-average exercise price $10.20
Weighted-average remaining contractual life in years 8.4 years
</TABLE>
<PAGE> 48
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE N - CORPORATE REORGANIZATION AND CONVERSION TO STOCK FORM
In fiscal 1996, the Savings Bank's Board of Directors adopted a Plan of
Conversion whereby the Savings Bank would convert to the stock form of
ownership, followed by the issuance of all of the Savings Bank's outstanding
common stock to a newly formed holding company, FFD Financial Corporation.
On April 2, 1996, the Savings Bank completed its conversion to the stock form of
ownership, and issued all of the Savings Bank's outstanding common shares to the
Corporation.
In connection with the conversion, the Corporation sold 1,454,750 shares at a
price of $10.00 per share which, after consideration of offering expenses
totaling approximately $416,000, and shares purchased by employee benefit plans
totaling $1.2 million, resulted in net cash proceeds of approximately $13.0
million.
At the date of the conversion, the Savings Bank established a liquidation
account in an amount equal to retained earnings reflected in the statement of
financial condition used in the conversion offering circular. The liquidation
account will be maintained for the benefit of eligible savings account holders
who maintained deposit accounts in the Savings Bank after conversion.
In connection with the common stock offering, 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.
<PAGE> 49
FFD FINANCIAL CORPORATION
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
Vice President
Tucker Anthony Incorporated
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.
Enos L. Loader
Financial Consultant
Retired Senior Bank Officer
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
47
<PAGE> 50
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 13, 1998, at 1:00 p.m., Eastern Time, at the McDonald/Marlite Conference
Center, 143 McDonald Drive SW, New Philadelphia, Ohio 44663. 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
<PAGE> 1
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 1998 Annual Meeting of Shareholders of
FFD Financial Corporation ("FFD") will be held at the McDonald/Marlite
Conference Center, 143 McDonald Drive SW, New Philadelphia, Ohio 44663, on
October 13, 1998 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 four directors of FFD for terms expiring in
2000;
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
31, 1998, 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 16, 1998
<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 1998 Annual Meeting of Shareholders
of FFD to be held at the McDonald/Marlite Conference Center, 143 McDonald Drive
SW, New Philadelphia, Ohio 44663, on October 13, 1998, 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 Stephen G. Clinton, Robert R. Gerber,
Richard J. Herzig and Enos L. Loader as directors of FFD for
terms expiring in 2000; 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 31,
1998 (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 1,445,350
votes entitled to be cast at the Annual Meeting.
This Proxy Statement is first being mailed to shareholders of FFD on or
about September 18, 1998.
VOTE REQUIRED
ELECTION OF DIRECTORS
Under Ohio law and FFD's Code of Regulations (the "Regulations"), the
four 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 four nominees.
-1-
<PAGE> 3
RATIFICATION OF SELECTION OF AUDITORS
The affirmative vote of the holders of a majority of the shares
represented in person or by proxy at the Annual Meeting is necessary to ratify
the selection of Grant Thornton as the auditors of FFD for the current fiscal
year. 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, 1998:
<TABLE>
<CAPTION>
Amount and nature of Percent of
Name and address beneficial ownership shares outstanding
- ---------------- -------------------- ------------------
<S> <C> <C>
FFD Financial Corporation 142,941(1) 9.89%
Employee Stock Ownership Plan
1201 Broadway
Quincy, Illinois 62301
<FN>
- ---------------------------
(1) Includes 98,862 unallocated shares with respect to which 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. The ESOP Trustee has sole investment power over all
142,941 shares.
</TABLE>
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, 1998:
<TABLE>
<CAPTION>
Amount and nature of beneficial ownership
-----------------------------------------
Sole voting and Shared voting and Percent of
Name and address (1) investment power (2) investment power shares outstanding
- -------------------- -------------------- ---------------- ------------------
<S> <C> <C> <C>
Stephen G. Clinton 6,892 (3) 46,234 (4) 3.67%
Robert R. Gerber 15,798 (5) 53,349 (4)(6) 4.75
J. Richard Gray 4,742 (3) 20,000 1.71
Richard J. Herzig 4,742 (3) 12,500 1.19
Enos L. Loader - 1,000 0.07
Roy O. Mitchell, Jr. 17,242 (3) 2,000 1.33
Robert D. Sensel 14,742 (3) 10,000 1.66
All directors and executive
officers of FFD as a group
(9 people) 70,316 (7) 103,662 (8) 11.47%
<FN>
- -----------------------------
(1) Each of the persons listed on this table may be contacted at the address of FFD.
</TABLE>
(Footnotes continued on next page)
-2-
<PAGE> 4
(2) The number of shares held with sole voting and investment power does
not reflect a number of shares, yet to be determined, recently
purchased by the First Federal Savings Bank of Dover Recognition and
Retention Plan Trust (the "RRP") using cash distributions paid on
shares awarded to participants in the RRP but not yet earned.
(3) This number includes 3,578 shares that may be acquired upon the
exercise of options awarded pursuant to the FFD Financial Corporation
1997 Stock Option and Incentive Plan (the "Stock Option Plan") and 582
shares which are expected to be earned in the next 60 days pursuant to
the RRP.
(4) This number includes 44,384 shares held by the RRP Trust with regard to
which Messrs. Clinton and Gerber have shared voting power as Trustees
of the RRP.
(5) This number includes 10,470 shares that may be acquired upon the
exercise of an option awarded pursuant to the Stock Option Plan and
1,164 shares which are expected to be earned in the next 60 days
pursuant to the RRP.
(6) This number include 3,965 shares allocated to Mr. Gerber's ESOP
account, with respect to which Mr. Gerber has voting power.
(7) This number includes 32,604 shares that may be acquired upon the
exercise of options awarded pursuant to the Stock Option Plan and 4,481
shares that are expected to be earned in the next 60 days pursuant to
the RRP.
(8) The 44,384 shares held by the RRP Trust (including the shares held by
the RRP Trust but expected to be earned and distributed in the next 60
days, which are also included in the numbers of shares held with sole
voting and investment power) are reflected in each Trustee's amount but
counted only once in the amount beneficially owned by all directors and
executive officers of FFD as a group. This number includes 6,928 shares
allocated to the ESOP accounts of executive officers, with respect to
which such executive officers have voting power.
BOARD OF DIRECTORS
ELECTION OF DIRECTORS
FFD's Regulations provide for a Board of Directors consisting of seven
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.
Messrs. Clinton, Gerber, Gray, Herzig, Mitchell and Sensel became directors of
FFD 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.
Mr. Loader was appointed to the boards of FFD and First Federal effective June
1, 1998, to fill vacancies created when the size of the boards was changed from
six to seven members.
-3-
<PAGE> 5
The Board of Directors proposes the reelection of the following persons
to serve as directors of FFD until the annual meeting of shareholders in 2000
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>
Stephen G. Clinton 45 Director 1995
Robert R. Gerber 49 Director and President 1995
Richard J. Herzig 73 Director 1995
Enos L. Loader 61 Director 1998
<FN>
- -----------------------------
(1) As of August 31, 1998.
</TABLE>
If any nominee is unable to stand for election, any Proxies granting
authority to vote for such nominee will be voted for such substitute as the
Board of Directors recommends.
The following directors will continue to serve after the Annual Meeting
for the terms indicated:
<TABLE>
<CAPTION>
Name Age (1) Position(s) held Director of FFD since Term expires
- ---- ------- ---------------- --------------------- ------------
<S> <C> <C> <C> <C>
J. Richard Gray 71 Director 1995 1999
Roy O. Mitchell, Jr. 71 Director 1995 1999
Robert D. Sensel 53 Director 1995 1999
<FN>
- -----------------------------
(1) As of August 31, 1998.
</TABLE>
STEPHEN G. CLINTON is a Vice President with Tucker Anthony
Incorporated, an investment banking firm headquartered in Boston, Massachusetts,
providing assistance to financial institutions in their implementation of
capital strategies. Prior to joining Tucker Anthony in 1997, Mr. Clinton was for
seven years the President of National Capital Companies, LLC, an investment
banking firm.
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.
RICHARD J. HERZIG is the Chairman and retired President of
Toland-Herzig Funeral Homes, Inc., located in Dover, Ohio.
ENOS L. LOADER was employed by Bank One Dover N.A. for 38 years,
retiring in 1998 as Executive Vice President and Chief Operating Officer. He
currently provides business financial consulting to several firms.
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 three years.
ROY O. MITCHELL, JR. served as Managing Officer of First Federal from
1967 until his retirement from First Federal in 1992.
-4-
<PAGE> 6
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, 1998.
Each director of FFD is also a director of First Federal. The Board of
Directors of First Federal met 13 times for regularly scheduled and special
meetings during the fiscal year ended June 30, 1998.
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 1998 and met once during the fiscal year ended June
30, 1998.
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 1998 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, 1998.
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, 1998.
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
once during the fiscal year ended June 30, 1998.
-5-
<PAGE> 7
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 37 Treasurer of FFD and Vice President, Treasurer and Chief
Financial Officer of First Federal
Shirley A. Wallick 53 Secretary of FFD and First Federal
<FN>
- -----------------------------
(1) As of August 31, 1998.
</TABLE>
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.
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, 1998, 1997 and 1996. No other executive officer of FFD or First
Federal earned salary and bonus in excess of $100,000 during such periods.
<TABLE>
<CAPTION>
Summary Compensation Table
------------------------------------------------------------------------------------------------
All Other
Annual Compensation(1) Long term Compensation Compensation
- -----------------------------------------------------------------------------------------------------------
Name and Year Salary ($) Bonus ($) Awards
Principal ---------------------------------------------
Position Restricted Stock Securities Underlying
Awards ($) Options/SARs (#)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert R. Gerber 1998 $87,500 $5,400 - - -
President 1997 $84,000 $8,000 $64,020 (2) 26,174 (3) $62,486 (4)
1996 $77,833(5) $6,376 - - $15,546 (6)
<FN>
- -------------------------
</TABLE>
(Footnotes on next page)
-6-
<PAGE> 8
(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,
1998, the market price was $19.25, based on the closing bid of FFD's
common shares, and the aggregate market value of the shares awarded to
Mr. Gerber was $112,035. In addition, dividends and other distributions
paid on such shares and earnings on such dividends and distributions
are 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, as adjusted
due to a return of capital paid in June 1998.
(4) Consists of the aggregate value at the date of allocation of 3,423.89
shares allocated to Mr. Gerber's ESOP account.
(5) Includes directors' fees of $7,350.
(6) Consists of First Federal's contribution of $8,375 to First Federal's
tax-qualified profit sharing plan and the aggregate value at the date
of allocation of 541.2 shares allocated to Mr. Gerber's ESOP account.
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 131,067 common shares
of FFD have been granted and not forfeited pursuant to the Stock Option Plan.
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.
-7-
<PAGE> 9
The following table sets forth information regarding the number and
value of unexercised options held by Mr. Gerber at June 30, 1998:
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and 6/30/98 Option/SAR Values
---------------------------------------------------------------------------------
Number of Securities Underlying Value of Unexercised
Shares Unexercised Options/SARs at "In The Money" Options/
Acquired on Value 6/30/98(#) SARs at 6/30/98($)(1)
Name Exercise(#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------ ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Robert R. Gerber -0- N/A 5,235/20,939 $52,874/$211,484
<FN>
- ---------------------------
(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 $9.14 exercise price and the fair market value
of FFD's common shares, which was $19.24 on June 30, 1998, based on the
closing bid price reported by Nasdaq.
</TABLE>
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 has purchased
50,245 common shares of FFD, 29,800 of which have been awarded and not
forfeited.
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.
-8-
<PAGE> 10
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 fee of $700
per regular meeting attended and $50 per special meeting attended. In addition,
directors who are not executive officers of either FFD or First Federal receive
a fee of $25 per committee meeting attended, except that non-officer members of
the Executive Committee of First Federal receive a payment of $1,200 per year
rather than the committee meeting fee.
CERTAIN TRANSACTIONS
First Federal makes loans to executive officers and directors in the
ordinary course of business. Although First Federal may make loans to such
persons on terms more favorable than those offered to persons not affiliated
with First Federal, all amounts owed by directors or executive officers in
excess of $60,000 during the last two fiscal years were owed pursuant to loans
made on substantially the same terms as those prevailing at the time for
comparable transactions with other persons, did not involve more than the normal
risk of collectibility or present other unfavorable features and are current in
their payments.
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 1999 Annual Meeting of Shareholders should be sent to FFD by
certified mail and must be received by FFD not later than May 21, 1999. In
addition, if a shareholder intends to present a proposal at the 1999 Annual
Meeting without including the proposal in the proxy materials related to that
meeting, and if the proposal is not received by August 4, 1999, then the proxies
designated by the Board of Directors of FFD for the 1999 Annual Meeting of
Shareholders of FFD may vote in their discretion on any such proposal any shares
for which they have been appointed proxies without mention of such matter in the
proxy statement or on the proxy card for such meeting.
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
Dover, Ohio Robert R. Gerber, President
September 16, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 1,026
<INT-BEARING-DEPOSITS> 607
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,590
<INVESTMENTS-CARRYING> 6,937
<INVESTMENTS-MARKET> 7,066
<LOANS> 70,990
<ALLOWANCE> 270
<TOTAL-ASSETS> 90,966
<DEPOSITS> 61,956
<SHORT-TERM> 12,519
<LIABILITIES-OTHER> 666
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 15,825
<TOTAL-LIABILITIES-AND-EQUITY> 90,966
<INTEREST-LOAN> 4,766
<INTEREST-INVEST> 1,246
<INTEREST-OTHER> 448
<INTEREST-TOTAL> 6,460
<INTEREST-DEPOSIT> 2,797
<INTEREST-EXPENSE> 3,454
<INTEREST-INCOME-NET> 3,006
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 441
<EXPENSE-OTHER> 2,044
<INCOME-PRETAX> 1,487
<INCOME-PRE-EXTRAORDINARY> 982
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 982
<EPS-PRIMARY> .73
<EPS-DILUTED> .71
<YIELD-ACTUAL> 3.29
<LOANS-NON> 82
<LOANS-PAST> 14
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 270
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 270
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 270
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 533
<INT-BEARING-DEPOSITS> 3,547
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 17,868
<INVESTMENTS-CARRYING> 8,634
<INVESTMENTS-MARKET> 8,763
<LOANS> 55,504
<ALLOWANCE> 270
<TOTAL-ASSETS> 88,000
<DEPOSITS> 57,090
<SHORT-TERM> 8,382
<LIABILITIES-OTHER> 1,048
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 21,480
<TOTAL-LIABILITIES-AND-EQUITY> 88,000
<INTEREST-LOAN> 3,807
<INTEREST-INVEST> 1,957
<INTEREST-OTHER> 116
<INTEREST-TOTAL> 5,880
<INTEREST-DEPOSIT> 2,598
<INTEREST-EXPENSE> 3,101
<INTEREST-INCOME-NET> 2,779
<LOAN-LOSSES> 125
<SECURITIES-GAINS> 1,284
<EXPENSE-OTHER> 1,859
<INCOME-PRETAX> 2,132
<INCOME-PRE-EXTRAORDINARY> 1,427
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,427
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 1.06
<YIELD-ACTUAL> 3.30
<LOANS-NON> 0
<LOANS-PAST> 64
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 146
<CHARGE-OFFS> 1
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 270
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 270
</TABLE>
