<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, 1999
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
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Securities registered under Section 12(g) of the Exchange Act:
Common Shares, without par value
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(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, 1999, were
$7.3 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 $3.6 million on September 24,
1999.
1,453,416 of the registrant's common shares were issued and outstanding
on September 24, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Portions of the Annual Report to Shareholders for the
fiscal year ended June 30, 1999. Part III of Form 10-KSB - Portions of
the Proxy Statement for 1999 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 ("First
Federal"), 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 First Federal
upon its conversion from a mutual savings bank to a stock savings bank (the
"Conversion").
First Federal 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." First Federal obtained a federal savings and
loan charter in 1937 under the name "First Federal Savings & Loan Association."
In 1983, First Federal 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, First Federal 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 First
Federal are insured up to applicable limits by the Savings Association Insurance
Fund (the "SAIF") administered by the FDIC.
First Federal 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. First Federal 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 First
Federal. 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. First Federal 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 First
Federal's primary source of income. First Federal's principal expense is
interest paid on deposit accounts. Operating results are dependent to a
significant degree on the net interest income of First Federal, 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, First Federal's interest income and interest expense are
significantly affected by general economic conditions and by the policies of
various regulatory authorities.
LENDING ACTIVITIES
GENERAL. First Federal's principal lending activity is the origination
of conventional real estate loans, including construction loans, secured by one-
to four-family homes located in First Federal's primary market area. Loans
secured by multifamily properties containing five units or more and
nonresidential properties are also offered by First Federal. First Federal also
originates commercial loans for businesses located in its primary market area
and issues letters of credit for commercial, business or agricultural purposes,
other than loans secured by real estate.
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LOAN PORTFOLIO COMPOSITION. The following table presents certain
information with respect to the composition of First Federal's loan portfolio at
the dates indicated:
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------
1999 1998 1997
------------------------ ---------------- -------------
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 $63,182 71.5% $62,010 85.4% $52,842 92.3%
Multifamily 721 0.8 1,058 1.4 1,158 2.0
Construction 1,921 2.2 1,572 2.2 1,474 2.6
Nonresidential, commercial and
land 18,652 21.1 6,722 9.3 1,192 2.1
Consumer 3,912 4.4 1,263 1.7 583 1.0
------- ----- ------- ----- ------- -----
Total loans 88,388 100.0% 72,625 100.0% 57,249 100.0%
===== ===== =====
Less:
Undisbursed portion of loans in
process 1,560 1,079 1,185
Deferred loan origination fees 142 286 290
Allowance for losses on loans 269 270 270
------- -------- ---------
Loans receivable, net $86,417 $ 70,990 $ 55,504
======= ======== =========
</TABLE>
LOAN MATURITY SCHEDULE. The following table sets forth certain
information as of June 30, 1999, regarding the dollar amount of loans maturing
in First Federal'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
2000 2001 2002 6/30/99 6/30/99 6/30/99 6/30/99 Total
---- ---- ---- ------- ------- ------- ------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate(1) $ 1,393 $ 12 $ 91 $ 586 $ 4,542 $ 17,799 $ 41,401 $ 65,824
Nonresidential and land 1,229 1,166 380 1,613 3,434 5,892 4,938 18,652
Consumer loans 244 111 329 1,869 863 496 -- 3,912
-------- -------- -------- -------- -------- -------- -------- --------
Total loans $ 2,866 $ 1,289 $ 800 $ 4,068 $ 8,839 $ 24,187 $ 46,339 $ 88,388
======== ======== ======== ======== ======== ======== ======== ========
</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, 1999, which have predetermined interest rates and which
have floating or adjustable interest rates:
Due more than one year after
June 30, 1999
----------------------------
(In thousands)
Fixed rate of interest $22,892
Adjustable rate of interest 62,630
-------
$85,522
=======
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ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LOANS. The primary lending
activity of First Federal 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. First Federal
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 First Federal's one- to four-family residential
real estate loans equaled approximately $63.2 million at June 30, 1999, and
represented 71.5% of total loans at such date.
Between 1982 and 1994, First Federal originated only adjustable-rate
mortgage loans ("ARMs"). ARMs are offered by First Federal 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 First Federal 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 First Federal's ARMs have a maximum adjustment of 6% over the term of
the loan.
Adjustable-rate loans decrease First Federal'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. First Federal believes that these risks have not had a material
adverse effect on First Federal to date.
In September 1994 First Federal resumed originating fixed-rate loans
with terms of up to 15 years. The majority of First Federal's fixed-rate loan
portfolio has been sold in the secondary market.
OTS regulations limit the amount that First Federal 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 First
Federal's one- to four-family loans have a LTV of 80% or less, although First
Federal will make first mortgage loans on one- to four-family residences up to
89% of the value of the real estate and improvements. First Federal 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. First Federal 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. First Federal's home equity loans have a term of 15 years. The interest
rates charged by First Federal 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, 1999, First
Federal had $2.9 million in home equity loans.
MULTIFAMILY RESIDENTIAL REAL ESTATE LOANS. In addition to loans on one-
to four-family properties, First Federal makes loans secured by multifamily
properties containing over four units. The majority of 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. First
Federal 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, 1999, loans secured by multifamily properties totaled
approximately $721,000, or 0.8% of total loans.
CONSTRUCTION LOANS. First Federal 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 First Federal are primarily made to owner-occupants for the
construction of single-family homes by a general contractor, although First
Federal also makes construction loans to developers for the construction of
single-family homes.
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Construction loans generally involve greater underwriting and default
risks than do loans secured by mortgages on existing properties due to the
concentration of principal in a limited number of loans and borrowers and the
effects of general economic conditions on real estate developments, developers,
managers and builders. In addition, such loans are more difficult to evaluate
and monitor. Loan funds are advanced upon the security of the project under
construction, which is more difficult to value before the completion of
construction. Moreover, because of the uncertainties inherent in estimating
construction costs, it is relatively difficult to evaluate accurately the LTVs
and the total loan funds required to complete a project. In the event a default
on a construction loan occurs and foreclosure follows, First Federal must take
control of the project and attempt either to arrange for completion of
construction or dispose of the unfinished project.
At June 30, 1999, a total of $1.9 million, or approximately 2.2%, of
First Federal's total loans, consisted of construction loans.
NONRESIDENTIAL REAL ESTATE, COMMERCIAL AND LAND LOANS. First Federal
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%. First Federal 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%. First Federal 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, First Federal anticipates an increase in its commercial loan volume
in the future.
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. First Federal 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 First Federal's nonresidential real estate loans
was nonperforming at June 30, 1999, 1998 or 1997.
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, 1999, First Federal had a total of $18.7 million invested
in nonresidential real estate, commercial and land loans, including the
participation interests. Such loans comprised approximately 21.1% of First
Federal'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,
1999, First Federal's nonresidential mortgage loans totaled 115.1% of First
Federal's capital.
CONSUMER LOANS. First Federal 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 First Federal 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, 1999, First Federal had approximately $3.9 million, or 4.4%
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 First Federal's lending staff and walk-in
customers.
Loan applications for permanent real estate loans are taken by loan
personnel. First Federal typically obtains a credit report, verification of
income and other documentation concerning the creditworthiness of the borrower.
An appraisal
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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 First
Federal's underwriting guidelines. All loans are ratified by the full Board of
Directors.
Under First Federal'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, First Federal 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 First Federal 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. First
Federal 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, First Federal is
originating both fixed-rate and ARM loans for its portfolio. During the fiscal
year, First Federal was approved, and began, to sell fixed-rate loans to the
Federal Home Loan Mortgage Corporation ("FHLMC"). When a mortgage loan is sold,
First Federal services the loan by collecting monthly payments of principal and
interest and forwarding such payments to the FHLMC, net of a servicing fee.
During the year ended June 30, 1999, First Federal sold approximately $7.4
million in loans to the FHLMC.
In prior years First Federal did not sell fixed-rate loans in the
secondary market. Because First Federal did not require property surveys and
certain other documentation that does not relate to the creditworthiness of the
borrower, the loans in First Federal's portfolio did not conform to the
secondary market standards of the FHLMC or the Federal National Mortgage
Association (the "FNMA"). By originating non-conforming loans, however, First
Federal was 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 First Federal's delinquent loans and nonperforming
assets in recent years, management believes that the origination of
non-conforming loans had not adversely affected First Federal's overall asset
quality.
The following table presents the activity in First Federal's loan
portfolio, including loans held for sale, for the periods indicated. First
Federal occasionally purchases participation interests in loans originated by
other financial institutions. No loans were purchased during the periods
presented, although First Federal's loan portfolio at June 30, 1999, includes
two participations purchased in the 1992 fiscal year. See "Nonresidential Real
Estate and Land Loans."
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Loans originated:
One- to four-family $ 21,534 $ 19,424 $ 13,899
Construction 2,880 2,391 2,710
Nonresidential and land 15,056 6,818 162
Consumer 1,470 606 302
-------- -------- --------
Total loans originated 40,940 29,239 17,073
Principal loan repayments 17,172 13,826 10,049
Principal sold 7,433 -- --
Increase (decrease) in other items, net (1) 57 73 (59)
-------- -------- --------
Net increase in loans receivable $ 16,392 $ 15,486 $ 6,965
======== ======== ========
</TABLE>
- -----------------------------
(1) Other items consist of amortization of deferred loan origination fees,
the provision for losses on loans and the recognition and amortization
of mortgage servicing rights.
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OTS regulations impose a lending limit on the aggregate amount that a
savings association may lend to any one borrower to an amount equal to 15% of
the association's total capital for risk-based capital purposes plus any loan
reserves not already included in total capital (the "Lending Limit Capital"). A
savings association may loan to one borrower an additional amount not to exceed
10% of the association's Lending Limit Capital if the additional amount is fully
secured by certain forms of "readily marketable collateral." Real estate is not
considered "readily marketable collateral." In applying this limit, the
regulations require that loans to certain related or affiliated borrowers be
aggregated. An exception to this limit permits loans to one borrower of up to
$500,000. In addition, the OTS, under certain circumstances, may permit
exceptions to the lending limit on a case-by-case basis.
Based on the 15% limit, First Federal was able to lend approximately
$2.2 million to one borrower at June 30, 1999. The largest amount First Federal
had outstanding to one borrower at June 30, 1999, was $1.8 million. Such loan
was secured by a hotel located in New Philadelphia, Ohio.
LOAN ORIGINATION AND OTHER FEES. First Federal realizes loan
origination fees and other fee income from its lending activities. In addition,
First Federal 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. First
Federal endeavors to maintain a high level of asset quality through sound
underwriting practices and efficient collection practices.
To discourage late payments, First Federal 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, First Federal 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 First Federal. Real estate acquired by First Federal 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 First Federal
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. First Federal had no REO at June 30, 1999.
The following table reflects the amount of loans in a delinquent status
as of the dates indicated:
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998 June 30, 1997
---------------------------- ------------------------- ----------------------
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 6 $248 .28% 2 $ 75 .10% -- $ -- --%
60 - 89 days 13 178 .20 7 193 .27 7 333 .58
90 days and over 4 15 .02 5 82 .11 2 64 .11
---- ---- --- ---- ---- --- ---- ---- ---
Total delinquent loans 23 $441 .50% 14 $350 .48% 9 $397 .69%
==== ==== === ==== ==== === ==== ==== ===
</TABLE>
Nonperforming assets include nonaccruing loans, real estate acquired by
foreclosure or by deed-in-lieu, and repossessed assets. First Federal ceases to
accrue interest on real estate loans that are delinquent 90 days or more. The
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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. First Federal places a loan on nonaccrual
status when, in the judgment of management, the collection of interest on loans
contractually past due is unlikely.
The following table sets forth information with respect to First
Federal's nonaccruing loans at the dates indicated. First Federal had no other
nonperforming assets at any of the dates presented.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------
1999 1998 1997
-------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Total nonaccrual loans $ - $ 82 $ 64
======== ======= =======
Total nonperforming loans $ 15 $ 82 $ 64
======== ======= =======
Allowance for losses on loans $ 269 $ 270 $ 270
======== ======= =======
Loans delinquent 90 days or more and still
accruing $ 15 $ - $ -
Nonperforming loans as a percent of total
loans .02% .13% .11%
Allowance for losses on loans as a percent of
nonperforming loans 1,793.33% 329.27% 421.88%
</TABLE>
For the year ended June 30, 1999, $1,000 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 First Federal's classified assets at the dates
indicated were as follows:
At June 30,
------------------------------
1999 1998 1997
(In thousands)
Classified assets:
Substandard $ -- $93 $64
Doubtful -- -- --
------ --- ---
Total classified assets $ -- $93 $64
====== === ===
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. First
Federal had no disagreements with the examiners regarding the classification of
assets at the time of its last examination.
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OTS regulations require that First Federal 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. First Federal maintains an allowance for
losses on loans based upon a number of relevant factors, including, but not
limited to, growth and changes in the composition of the loan portfolio, trends
in the level of delinquent and problem loans, current and anticipated economic
conditions in the primary lending area, past loss experience and possible losses
arising from specific problem assets.
The single largest component of First Federal's loan portfolio consists
of one- to four-family residential real estate loans. Substantially all of these
loans are secured by property in First Federal's lending area of Tuscarawas
County, which has a fairly stable economy. First Federal'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, First Federal makes home equity, multifamily residential real estate,
nonresidential real estate and construction loans. These real estate loans are
also secured by property in First Federal's lending area. First Federal has not
experienced any significant charge-offs from these other real estate loan
categories in recent years.
A small portion of First Federal'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 First Federal's allowance
for losses on loans for the periods indicated:
Year ended June 30,
------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Balance at beginning of period $ 270 $ 270 $ 146
Charge-offs (1) -- (1)
Recoveries -- -- --
----- ----- -----
Net charge-offs (1) -- (1)
Provision for losses on loans -- -- 125
----- ----- -----
Balance at end of period $ 269 $ 270 $ 270
===== ===== =====
Ratio of net charge-offs to average loans
outstanding during the period -- -- --
Ratio of allowance for loan losses to
total loans 0.30% 0.37% 0.47%
-9-
<PAGE> 10
The following table sets forth the allocation of First Federal's
allowance for loan losses by type of loan at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- ---------------------
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 95.6% $142 98.3% $ 77 99.0%
Consumer loans 3 4.4 4 1.7 2 1.0
Unallocated 124 -- 124 -- 191 --
---- ----- ---- ----- ---- -----
Total $269 100.0% $270 100.0% $270 100.0%
==== ===== ==== ===== ==== =====
</TABLE>
Because the loan loss allowance is based on estimates, it is monitored
monthly and adjusted as necessary to provide an adequate allowance.
INVESTMENT ACTIVITIES
OTS regulations require that First Federal 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. First Federal 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.
First Federal 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 First Federal 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 First Federal, 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 First Federal's
investment securities portfolio, including those designated as available for
sale, and mortgage-backed securities at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------------
1999 1998
----------------------------------- ------------------------------------
Amortized % of Market % of Amortized % of Market % of
cost total value total cost total value total
---- ----- ----- ----- ---- ----- ----- -----
Investment securities designated as (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
held to maturity:
U.S. Government agency
obligations $ -- -% $ -- -% $ 977 6.4% $ 993 6.3%
Investment securities designated as
available for sale:
U.S. Government and agency
obligations 3,000 15.8 2,924 15.5 2,496 16.3 2,498 16.0
FHLMC stock -- -- -- -- 3 -- 157 1.0
------- ----- ------- ----- ------- ----- ------- -----
Total investment securities
designated as available for sale 3,000 15.8 2,924 15.5 2,499 16.3 2,655 17.0
------- ----- ------- ----- ------- ----- ------- -----
Total investment securities 3,000 15.8 2,924 15.5 3,476 22.7 3,648 23.3
Mortgage-backed securities
designated as held to maturity 4,779 25.1 4,907 26.1 5,960 38.9 6,073 38.8
Mortgage-backed securities
designated as available for sale 11,230 59.1 10,978 58.4 5,879 38.4 5,935 37.9
------- ----- ------- ----- ------- ----- ------- -----
Total mortgage-backed securities 16,009 84.2 15,885 84.5 11,839 77.3 12,008 76.7
------- ----- ------- ----- ------- ----- ------- -----
Total investment and mortgage-
backed securities $19,009 100.0% $18,809 100.0% $15,315 100.0% $15,656 100.0%
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------
1997
------------------------------------
Amortized % of Market % of
cost total value total
---- ----- ----- -----
Investment securities designated as
<S> <C> <C> <C> <C>
held to maturity:
U.S. Government agency
obligations $ 1,469 5.5% $ 1,459 5.5%
Investment securities designated as
available for sale:
U.S. Government and agency
obligations 9,931 37.5 9,924 37.3
FHLMC stock -- -- -- --
------- ----- ------- -----
Total investment securities
designated as available for sale 9,931 37.5 9,924 37.3
------- ----- ------- -----
Total investment securities 11,400 43.0 11,383 42.8
Mortgage-backed securities
designated as held to maturity 7,165 27.1 7,304 27.4
Mortgage-backed securities
designated as available for sale 7,906 29.9 7,944 29.8
------- ----- ------- -----
Total mortgage-backed securities 15,071 57.0 15,248 57.2
------- ----- ------- -----
Total investment and mortgage-
backed securities $26,471 100.0% $26,631 100.0%
======= ===== ======= =====
</TABLE>
The maturities of First Federal's U. S. Government and agency obligations and
mortgage-backed securities at June 30, 1999, are indicated in the following
table:
<TABLE>
<CAPTION>
After one through After five After ten
five years through ten years years Total
--------------------- -------------------- ---------------------- -----------------------------------
Amortized Average Amortized Average Amortized Average Amortized Market Weighted
cost yield cost yield cost yield cost value average yield
---- ----- ---- ----- ---- ----- ---- ----- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and
agency obligations $2,000 6.0% $ - -% $ 1,000 6.4% $ 3,000 $ 2,924 6.1%
Mortgage-backed
securities 297 6.2 3,172 6.3 12,540 6.7 16,009 15,885 6.6
------ --- ----- --- ------- --- ------- ------- ---
$2,297 6.0% $3,172 6.3% 13,540 6.7% $19,009 $18,809 6.6%
====== === ====== === ======= === ======= ======= ===
</TABLE>
-11-
<PAGE> 12
DEPOSITS AND BORROWINGS
GENERAL. Deposits have traditionally been the primary source of First
Federal's funds for use in lending and other investment activities. In addition
to deposits, First Federal 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 First
Federal'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
First Federal based on First Federal's liquidity requirements, growth goals and
interest rates paid by competitors. First Federal does not use brokers to
attract deposits.
At June 30, 1999, First Federal's certificates of deposit totaled $41.2
million, or 57.2% of total deposits. Of such amount, approximately $28.3 million
in certificates of deposit mature within one year. Based on past experience and
First Federal's prevailing pricing strategies, management believes that a
substantial percentage of such certificates will renew with First Federal at
maturity. If there is a significant deviation from historical experience, First
Federal 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 First Federal at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------
1999 1998 1997
------------------ ------------------- ----------------
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) $ 8,290 11.5% $ 5,954 9.6% $ 5,219 9.1%
Passbook savings accounts (2) 22,557 31.3 18,955 30.6 17,568 30.8
------- ----- ------- ----- ------- -----
Total transaction accounts 30,847 42.8 24,909 40.2 22,787 39.9
Certificates of deposit:
2.01 - 4.00% -- -- -- --
4.01 - 6.00% 38,513 53.5 34,419 55.6 24,420 42.8
6.01 - 8.00% 2,665 3.7 2,628 4.2 9,883 17.3
------- ----- ------- ----- ------- -----
Total certificates of deposit (3) 41,178 57.2 37,047 59.8 34,303 60.1
------- ----- ------- ----- ------- -----
Total deposits $72,025 100.0% $61,956 100.0% $57,090 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
- -----------------------------
(1) The weighted average interest rates on NOW and money market accounts were
0.9% at June 30, 1999, 1.62% at June 30, 1998, and 1.66% at June 30, 1997.
(2) The weighted average interest rate on passbook accounts were 3.54% at June
30, 1999, 3.86% at June 30, 1998, and 3.95% at June 30, 1997.
(3) The weighted average rate on all certificates of deposit was 5.25%, 5.62%
and 5.67%, at June 30, 1999, 1998 and 1997, respectively.
-12-
<PAGE> 13
The following table shows rate and maturity information for First
Federal's certificates of deposit at June 30, 1999:
Amount Due
Over Over
Up to 1 year to 2 years to
Rate one year 2 years 3 years Total
---- -------- ------- ------- -----
(In thousands)
4.01 - 6.00% $25,880 $10,742 $1,891 $38,513
6.01 - 8.00% 2,382 283 - 2,665
------- ------- ------ -------
Total $28,262 $11,025 $1,891 $41,178
======= ======= ====== =======
The following table presents the amount of First Federal's certificates
of deposit of $100,000 or more by the time remaining until maturity at June 30,
1999:
Maturity Amount
-------- ------
(In thousands)
Three months or less $ 536
Over 3 months to 6 months 653
Over 6 months to 12 months 1,234
Over 12 months 1,142
-------
Total $3,565
The following table sets forth First Federal's deposit account balance
activity for the periods indicated:
Year ended June 30,
-------------------------------------
1999 1998 1997
---------- ------------ -----------
(Dollars in thousands)
Beginning balance $ 61,956 $ 57,090 $ 52,208
Deposits 356,315 113,942 96,413
Withdrawals (347,893) (110,996) (93,434)
--------- --------- ---------
Net increase in deposits
before interest credited 8,422 2,946 2,979
Interest credited 1,647 1,920 1,903
--------- --------- ---------
Ending balance $ 72,025 $ 61,956 $ 57,090
========= ========= =========
Net increase $ 10,069 $ 4,866 $ 4,882
========= ========= =========
Percent increase 16.3% 8.5% 9.4%
========= ========= =========
BORROWINGS. First Federal's other sources of funds include advances
from the FHLB. As a member of the FHLB, First Federal 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 First
Federal's FHLB advances at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------
1999 1998 1997
------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C>
FHLB advances $23,616 $12,519 $8,382
Weighted average interest rate of
FHLB advances 5.05% 5.11% 5.76%
</TABLE>
The following table sets forth the maximum balance, the average balance
and the weighted average interest rate of First Federal's FHLB advances during
the periods indicated:
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Maximum balance $23,616 $18,031 $10,782
Average balance 19,637 11,685 8,857
Weighted average interest rate 4.87% 5.62% 5.68%
</TABLE>
First Federal had no other borrowings during the last three fiscal
years.
COMPETITION
First Federal 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, First Federal competes with other savings
associations, commercial banks, consumer finance companies, credit unions,
leasing companies, mortgage companies and other lenders. First Federal 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
First Federal 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 First Federal. The net book value of First Federal's investment in DSC at
June 30, 1999, was approximately $17,000.
PERSONNEL
At June 30, 1999, First Federal had 28 full-time employees and 6
part-time employees. First Federal believes that relations with its employees
are good. First Federal offers health, disability and life insurance benefits.
None of the employees of First Federal are represented by a collective
bargaining unit.
YEAR 2000
As with all providers of financial services, First Federal's operations
are heavily dependent on information technology systems. First Federal has
addressed the potential problems associated with the possibility that the
computers that control or operate the Savings 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.
-14-
<PAGE> 15
As part of the awareness and assessment phases of its action plan
related to the Year 2000 problem, management identified its on-line core account
processing system performed by a third party service provider, Intrieve, Inc.
("Intrieve") as "mission critical." Intrieve has converted its hardware to a new
Year 2000 compliant system and First Federal's conversion to this new system was
completed during the fourth calendar quarter of 1998. Intrieve successfully
performed Year 2000 proxy testing with several of its larger users during early
October 1998 and First Federal performed final testing of its specific equipment
configuration and communications link to Intrieve during November 1998.
First Federal has developed a contingency plan in case any Intrieve
systems actually fail at Year 2000 critical dates. First Federal deems the
likelihood of failure of Intrieve's efforts to renovate Year 2000 changes to the
on-line core account processing system to be remote. The plan, therefore,
primarily addresses action to deal with the possibility that Intrieve's system
would be down for several days or weeks upon arrival of Year 2000. First Federal
has the ability to process transactions manually, if necessary, and through
off-line computer transactions.
First Federal has expended less than $10,000 through June 30, 1999, in
connection with its year 2000 compliance program, and management does not
anticipate additional significant expenditures.
In addition to possible expense related to its own systems, First
Federal could incur losses if loan payments are delayed due to Year 2000
problems affecting any major borrowers 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.
REGULATION
GENERAL. FFD, as the holding company of First Federal, 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, First Federal is also subject to regulatory oversight by
the OTS, and, because First Federal's deposits are insured by the FDIC, First
Federal is also subject to examination and regulation by the FDIC. First Federal
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 First Federal is in compliance with various regulatory
requirements and is operating in a safe and sound manner. First Federal 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
First Federal 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 First Federal may engage and would probably subject
First Federal 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
First Federal's regulatory requirements or charter. Although such legislation
may change the activities in which FFD and First Federal may engage, it is not
anticipated that the current activities of either FFD or First Federal 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
-15-
<PAGE> 16
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. First Federal
has received a satisfactory examination rating under those regulations.
OTS REGULATORY CAPITAL REQUIREMENTS. First Federal 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 First
Federal at June 30, 1999, 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.
At June 30, 1999
------------------------
Amount Percent
------ -------
(In thousands)
Tangible capital $14,274 12.80%
Requirement 1,671 1.50
------- -----
Excess $12,603 11.30%
======= =====
Core capital $14,274 12.80%
Requirement 3,343 3.00
------- -----
Excess $10,931 9.80%
======= =====
Total capital $14,543 21.50%
Risk-based requirement 5,404 8.00
------- -----
Excess $ 9,139 13.50%
======= =====
Current capital requirements call for tangible capital (which for First
Federal is equity capital under generally accepted accounting principles less
the unrealized gain on available-for-sale securities less the applicable
percentage of mortgage servicing rights) of 1.5% of adjusted total assets, core
capital (which for First Federal consists of tangible capital) of 3.0% of
adjusted total assets and risk-based capital (which for First Federal consists
of core capital plus general valuation reserves of $269,000) of 8.0% 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. First Federal does not anticipate that it will be adversely affected if
the core capital requirement regulation is amended as proposed. First Federal's
current core capital level is 12.80% 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. First Federal 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
-16-
<PAGE> 17
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 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. First Federal's capital at June 30,
1999, 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.
First Federal 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, First Federal 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.
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.
-17-
<PAGE> 18
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
First Federal, as computed under current regulations, at June 30, 1999, was
$22.4 million, or 37.4% and exceeded the 4.0% liquidity requirement by
approximately $20.0 million.
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, 1999, First
Federal 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, 1999, First Federal 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. First Federal was in compliance with such restrictions
at June 30, 1999.
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 First Federal. 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. First Federal was in
compliance with these requirements and restrictions at June 30, 1999.
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. First Federal is
a member of the SAIF and
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its deposit accounts are insured by the FDIC, up to the prescribed limits. The
FDIC has examination authority over all insured depository institutions,
including First Federal, and has authority to initiate enforcement actions
against federally insured savings associations, if the FDIC does not believe the
OTS has taken appropriate action to safeguard safety and soundness and the
deposit insurance fund.
The FDIC is required to maintain designated levels of reserves in each
fund. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to its target level
within a reasonable time and may decrease such rates if such target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary based on the risk the
institution poses to its deposit insurance fund. The risk level is determined
based on the institution's capital level and the FDIC's level of supervisory
concern about the institution.
Because of the differing reserve levels of the funds, deposit insurance
assessments paid by healthy 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.
First Federal 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, 1999, First Federal
was in compliance with its reserve requirements.
FEDERAL HOME LOAN BANKS. The FHLBs provide credit to their members in
the form of advances. First Federal 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 First
Federal's residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each year, or 5% of its advances from the FHLB.
First Federal is in compliance with this requirement with an investment in stock
of the FHLB of Cincinnati of $1.2 million at June 30, 1999.
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
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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, 1999, First Federal 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 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 First Federal, 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
First Federal 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
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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 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 First Federal are each subject to the federal tax laws and
regulations which apply to corporations generally. In addition to the regular
income tax, FFD and First Federal 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.
First Federal's average gross receipts for the three tax years ending
on December 31, 1998, is approximately $7.1 million and as a result, First
Federal 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 First Federal , 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
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<PAGE> 22
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, First Federal 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 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 First Federal , 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 First Federal 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 First Federal 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, 1999, the pre-1988 reserves of First
Federal for tax purposes totaled approximately $1.6 million. First Federal
believes it had approximately $7.7 million of accumulated earnings and profits
for tax purposes as of June 30, 1999, 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 First Federal will have current or
accumulated earnings and profits in subsequent years.
The tax returns of First Federal have been audited or closed without
audit through fiscal year 1995. 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 First Federal.
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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.
In computing its tax under the net worth method, FFD may exclude 100%
of its investment in the capital stock of First Federal , 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 First Federal . 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.
First Federal 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 1.4% of the
book net worth of First Federal determined in accordance with generally accepted
accounting principles. For tax year 2000 and years thereafter, however, the
franchise tax on financial institutions will be 1.3% of the book net worth. As a
"financial institution," First Federal 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,
1999, regarding the properties on which the main office of First Federal and a
branch office are located:
Owned Date Net
Location or leased acquired book value(1)
- -------- --------- -------- -------------
321 North Wooster Avenue
Dover, Ohio 44622 Owned 1/96 $565,000
224 West High Avenue
New Philadelphia, OH 44663 Owned 11/97 $404,000
- -----------------------------
(1) At June 30, 1999, First Federal's office premises and equipment had a
total net book value of approximately $1.4 million. For additional
information regarding First Federal's office premises and equipment,
see Notes A-7 and E of Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
Neither FFD nor First Federal is presently involved in any legal
proceedings of a material nature. From time to time, First Federal is a party to
legal proceedings incidental to its business to enforce its security interest in
collateral pledged to secure loans made by First Federal.
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, 1999 (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 6, 1999, 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 1999 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 1999 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, 1999.
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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 24, 1999
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/ Roy O. Mitchell, Jr.
- ---------------------------- ---------------------------------
Robert R. Gerber, , Roy O. Mitchell, Jr.
President and Director Director
Date: September 24, 1999 Date: September 24, 1999
/s/ Stephen G. Clinton /s/ Robert D. Sensel
- ---------------------------- ---------------------------------
Stephen G. Clinton Robert D. Sensel
Director Director
Date: September 24, 1999 Date: September 24, 1999
/s/ J. Richard Gray /s/ Enos L. Loader
- ---------------------------- ---------------------------------
J. Richard Gray Enos L. Loader
Director Director
Date: September 24, 1999 Date: September 24, 1999
/s/ Richard J. Herzig
- ----------------------------
Richard J. Herzig
Director
Date: September 24, 1999
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<PAGE> 27
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
------ ----------- -----------
<S> <C> <C>
3.1 Articles of Incorporation of FFD Financial Incorporated by reference to the Registration Statement on
Corporation Form S-1 filed by FFD on December 15, 1995 (the "S-1") with
the Securities and Exchange Commission (the "SEC"), Exhibit
3.1.
3.2 Certificate of Amendment to Articles of Incorporated by reference to Pre-Effective Amendment No. 1 to
Incorporation of FFD Financial Corporation the S-1 filed with the SEC on February 1, 1996
("Pre-Effective Amendment No. 1"), Exhibit 3.2.
3.3 Certificate of Amendment to Articles of Incorporated by reference to Pre-Effective Amendment No. 1,
Incorporation of FFD Financial Corporation Exhibit 3.3.
3.4 Code of Regulations of FFD Financial Incorporated by reference to the S-1, Exhibit 3.3.
Corporation
10.1 FFD Financial Corporation 1996 Stock Incorporated by reference to the Form 10-KSB for the year ended
Option and Incentive Plan June 30, 1998, as filed with the SEC on September 28, 1998
(the "1998 10-KSB"), Exhibit 10.1.
10.2 First Federal Savings Bank of Dover Incorporated by reference to the 1998 Form 10-KSB, Exhibit 10.2.
Recognition and Retention Plan and Trust
Agreement
13 FFD Financial Corporation 1999 Annual
Report to Shareholders
20 Proxy Statement for 1999 Annual Meeting of
Shareholders
21 Subsidiaries of FFD Financial Corporation Incorporated by reference to the Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1996, filed with the SEC
on September 30, 1996, Exhibit 21.
27 Financial Data Schedule
</TABLE>
-27-
<PAGE> 1
Exhibit 13
1999 FFD FINANCIAL CORPORATION ANNUAL REPORT
"SERVING TUSCARAWAS COUNTY FOR OVER 100 YEARS"
<PAGE> 2
FFD FINANCIAL CORPORATION
321 North Wooster Avenue P.O. BOX 38 DOVER, OHIO 44622
Dear Shareholders:
It is with a great deal of pleasure that we present to you FFD Financial
Corporation's Annual Report to Shareholders for the fiscal year ended June
30, 1999.
FFD Financial Corporation reported consolidated net earnings of $717,000
or $.53 per share, for the fiscal year ended June 30, 1999. Our earnings
for 1999 were driven by a strong increase of $801,000, or 16.8%, in
interest income on loans. This strategic improvement was attained by
increasing the average loan portfolio balance outstanding by $16.2
million, or 25.6%. Securities gains were used to offset some of the
increased costs associated with adding staff to develop new consumer
products, business banking loan products, our branch office servicing
center in New Philadelphia and the decrease in interest income which
resulted from our $6.5 million tax-free return of capital special dividend
in June of 1998.
Asset growth is an essential part of your Corporation's strategic plan for
the future. To achieve this goal, our unprecedented loan orginations of
$40.9 million during fiscal 1999 exceeded the prior fiscal years
originations of $29.2 million by 40.0%. This increase in loan originations
added $16.4 million, or 23.1%, over the June 30, 1998 loan portfolio. Loan
growth was funded partially by increasing deposits by $10.1 million, or
16.3%. Our New Philadelphia office provided $5.9 million of the deposit
increase and ended June 30, 1999 with a deposit base of over $9.6 million.
Our operating success has provided our charter shareholders with a
cumulative return of approximately 280% on their original investment since
the conversion to stock form was completed in April 1996.
First Federal Savings Bank of Dover expects its computer systems and other
technology to operate successfully on January 1, 2000 and beyond. We have
addressed our potential mission critical problems associated with Y2K and
have performed year 2000 proxy transactions successfully. We have also
developed contingency plans to comply with regulatory requirements.
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 102nd year. We
remain committed to maintaining friendly, personalized financial services
in our markets, while continuing the local decision making and focus our
customers have grown to expect.
2
<PAGE> 3
As always, we wish to take this opportunity to thank all our customers and
shareholders for your past and continuing support that has made it
possible for us to prosper.
Sincerely,
Robert R. Gerber
President
3
<PAGE> 4
BUSINESS OF FFD FINANCIAL CORPORATION
================================================================================
FFD Financial Corporation ("FFD" or the "Corporation"), 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" or the "Savings Bank"), 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 or 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 investing activities are obtained primarily
from deposits, which are insured up to applicable limits by the Federal Deposit
Insurance Corporation ("FDIC"), from Federal Home Loan Bank ("FHLB") advances,
and from 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
FHLB of Cincinnati.
MARKET PRICE OF FFD'S
COMMON SHARES AND RELATED SHAREHOLDER MATTERS
================================================================================
There were 1,453,416 common shares of FFD outstanding on September 7, 1999, held
of record by approximately 691 shareholders. Price information with respect to
FFD's common shares is quoted on the Nasdaq SmallCap Market ("Nasdaq") under the
symbol "FFDF."
4
<PAGE> 5
The following table sets forth the high and low trading prices for the common
shares of FFD, as quoted by Nasdaq, together with the respective dividends
declared per share, for each quarter of fiscal 1999 and 1998.
<TABLE>
<CAPTION>
High Trade Low Trade Cash Dividends Declared
---------- --------- -----------------------
<S> <C> <C> <C>
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
FISCAL 1999
Quarter Ended:
September 30, 1998 $19.625 $15.500 $.075
December 31, 1998 16.000 13.500 .075
March 31, 1999 14.750 13.000 .075
June 30, 1999 18.000 13.375 .075
</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 established in connection with 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
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.
5
<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>
SELECTED CONSOLIDATED FINANCIAL At June 30,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
CONDITION: -------- --------- ---------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $112,293 $90,966 $88,000 $79,458 $58,955
Interest-bearing
deposits (1) 2,167 607 3,547 1,793 3,659
Investment securities available for
sale - at market 2,924 2,655 9,924 9,256 903
Investment securities held to
maturity - at cost - 977 1,469 2,460 3,353
Mortgage-backed securities available
for sale - at market 10,978 5,935 7,944 9,007 -
Mortgage-backed securities held to
maturity- at cost 4,779 5,960 7,165 5,932 8,153
Loans receivable - net (2) 87,382 70,990 55,504 48,539 41,494
Deposits 72,025 61,956 57,090 52,208 50,601
Advances from the FHLB 23,616 12,519 8,382 5,184 26
Shareholders' equity, restricted (3)
(4) 16,204 15,825 21,480 21,411 7,787
</TABLE>
<TABLE>
<CAPTION>
SUMMARY OF EARNINGS: For the year ended June 30,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ---------- ---------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income $6,915 $6,460 $5,880 $4,555 $3,718
Interest expense 3,941 3,454 3,101 2,471 1,951
----- ----- ----- ----- -----
Net interest income 2,974 3,006 2,779 2,084 1,767
Provision for losses on loans - - 125 50 -
------ ------ ----- ----- -----
Net interest income after provision
for losses on loans 2,974 3,006 2,654 2,034 1,767
Other income 428 525 1,337 88 37
General, administrative and other
expense 2,317 2,044 1,859 1,163 1,077
----- ----- ----- ----- -----
Earnings before income taxes 1,085 1,487 2,132 959 727
Federal income taxes 368 505 705 327 248
------ ------ ------ ------ ------
Net earnings $ 717 $ 982 $1,427 $ 632 $ 479
====== ===== ===== ====== ======
Earnings per share
Basic $.53 $.73 $1.07 N/A N/A
=== === ====
Diluted $.51 $.71 $1.06 N/A N/A
=== === ====
- -----------------------------------
</TABLE>
(1) Includes short-term interest-bearing deposits in other banks.
(2) Includes loans held for sale.
(3) Consists solely of retained earnings at June 30, 1995.
(4) At June 30, 1999, includes $216,000 of net unrealized losses and at June 30,
1998, 1997 and 1996, includes $140,000, $20,000 and $586,000, respectively,
of net unrealized gains on investment and mortgage-backed securities
designated as available for sale, net of
6
<PAGE> 7
related tax effects, pursuant to Statement of Financial Accounting Standards
("SFAS") No. 115.
7
<PAGE> 8
<TABLE>
<CAPTION>
SELECTED FINANCIAL RATIOS At or for the year ended June 30,
AND OTHER DATA: ---------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Return on average assets 0.69% 1.06% 1.65% 0.99% 0.86%
Return on average equity 5.11 4.65 6.65 5.72 6.86
Interest rate spread 2.37 2.22 2.15 2.41 2.77
Net interest margin 2.92 3.29 3.30 3.28 3.24
General, administrative and other
expense to average assets 2.25 2.20 2.15 1.82 1.93
Average equity to average
assets 13.59 22.75 24.83 17.29 12.49
Nonperforming assets to
total assets 0.01 0.09 0.07 0.15 0.22
Nonperforming loans to total loans
0.02 0.11 0.11 0.24 0.31
Total delinquent loans to total loans
(1) 0.39 0.51 0.69 0.51 1.06
Allowance for loan losses to
total loans 0.30 0.37 0.47 0.29 0.23
Allowance for loan losses to
nonperforming loans 1,793.33 329.27 421.88 124.79 73.28
Net charge-offs to average
loans (2) - - - - 0.01
Average interest-earning
assets to average interest-bearing
liabilities 114.24 128.34 131.46 122.47 113.11
Number of full service offices 2 2 1 1 1
Dividend payout ratio (3) 56.60 41.10 21.03 N/A N/A
- ----------------------------
</TABLE>
(1) Delinquent loans are loans as to which a scheduled payment has not been
made within 30 days after the due date.
(2) For the years ended June 30, 1999, 1998, 1997 and 1996, First Federal did
not have any charge-offs.
(3) Dividend payout ratio for the year ended June 30, 1998, is presented
exclusive of the $4.50 per share special distribution.
8
<PAGE> 9
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, 1998 TO JUNE 30, 1999
- --------------------------------------------------------------------------------
The Corporation's total assets at June 30, 1999, amounted to $112.3 million, a
$21.3 million, or 23.4%, increase over the total at June 30, 1998. This increase
was funded primarily through an increase in advances from the FHLB of $11.1
million and growth in deposits of $9.5 million.
Investment securities totaled $2.9 million at June 30, 1999, a decrease of
$708,000, or 19.5%, from the total at June 30, 1998, as maturities and sales
totaling $3.7 million during the period were partially offset by purchases of
securities totaling $3.0 million.
Mortgage-backed securities totaled $15.8 million at June 30, 1999, a $3.9
million, or 32.5%, increase over the total at June 30, 1998. This increase
resulted primarily from purchases of $9.6 million, which were partially offset
by principal repayments totaling $5.4 million. Purchases of mortgage-backed
securities during the period were comprised of long-term, variable-rate
certificates yielding approximately 6.05%, which were funded by FHLB advances
with a weighted-average cost of approximately 4.83%.
Loans receivable totaled $87.4 million at June 30, 1999, an increase of $16.4
million, or 23.1%, over the June 30, 1998 total. Loan disbursements during the
period totaled $40.9 million, which were partially offset by principal
repayments of $17.2 million and loans sold in the secondary market totaling $7.4
million. Loan disbursements during the year ended June 30, 1999, increased by
$11.7 million, or 40.0%, compared to the origination volume during the same
period in 1998. The growth in loans consisted primarily of loans secured by
nonresidential real estate, which totaled $18.7 million at June 30, 1999,
compared to $6.7 million at June 30, 1998.
The allowance for loan losses totaled $269,000 and $270,000 at June 30, 1999 and
1998, respectively, which represented .30% and .37% of total loans and 1,793.3%
and 329.3% of nonperforming loans at those respective dates. Nonperforming loans
amounted to $15,000 and $82,000 at June 30, 1999, and 1998, respectively.
Although management believes that its allowance for loan losses at June 30,
1999, is adequate based upon the available facts and
9
<PAGE> 10
circumstances, there can be no assurance that additions to such allowance will
not be necessary in future periods, which could adversely affect the
Corporation's results of operations.
Deposits totaled $72.0 million at June 30, 1999, a $10.1 million, or 16.3%,
increase over total deposits at June 30, 1998. This increase resulted primarily
from growth in deposits totaling approximately $5.9 million at the branch office
located in New Philadelphia, Ohio, coupled with management's efforts to generate
growth through advertising and pricing strategies. Proceeds from deposit growth
were used primarily to fund new loan originations during the period.
FHLB advances totaled $23.6 million at June 30, 1999, an $11.1 million, or
88.6%, increase over June 30, 1998. Proceeds from the increase in borrowings
were primarily used to fund purchases of mortgage-backed securities and new loan
originations.
Shareholders' equity totaled $16.2 million at June 30, 1999, an increase of
$379,000, or 2.4%, over June 30, 1998 levels as net earnings of $717,000 were
partially offset by dividends declared totaling $403,000.
COMPARISON OF OPERATING RESULTS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
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 $717,000 for the fiscal year ended June 30,
1999, a decrease of $265,000, or 27.0%, from the net earnings of $982,000
recorded in fiscal 1998. The decrease in net earnings resulted primarily from a
$32,000 decrease in net interest income, a $97,000 decrease in other income and
a $273,000 increase in general, administrative and other expense, which were
partially offset by a $137,000 decrease in the provision for federal income
taxes.
NET INTEREST INCOME. Total interest income increased by $455,000, or 7.0%, to a
total of $6.9 million for the year ended June 30, 1999, compared to $6.5 million
for the year ended June 30, 1998. Interest income on loans increased by
$801,000, or 16.8%, due primarily to a $16.2 million, or 25.6%, increase in the
average loan portfolio balance outstanding, which was partially offset by a 53
basis point decrease in the average yield, to 7.00% in fiscal 1999. Interest
income on mortgage-backed securities increased by $41,000, or 4.4%, due
primarily to a $1.1 million, or 7.8%, increase in the average balance
outstanding, partially offset by a 21 basis point decrease in the yield earned
on such securities to 6.32% in fiscal 1999. Interest income on investment
securities and interest-bearing deposits decreased by $387,000, or 50.5%, due
primarily to an approximate $7.0 million, or 50.5%, decrease in the related
average investment balance.
10
<PAGE> 11
Interest expense on deposits increased by $187,000, or 6.7%, for the year ended
June 30, 1999, compared to fiscal 1998, due primarily to a $9.8 million, or
16.5%, increase in the average deposit portfolio balance outstanding, which was
partially offset by a 40 basis point decrease in the cost of such funds, to
4.30% in fiscal 1999.
Interest expense on borrowings increased by $300,000, or 45.7%, due primarily to
an $8.0 million, or 68.1%, increase in the average balance of advances
outstanding, which was partially offset by a 75 basis point decline in the
average cost of such borrowings, to 4.87% in fiscal 1999.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased by $32,000, or 1.1%, for the fiscal year ended
June 30, 1999, compared to fiscal 1998. The interest rate spread amounted to
approximately 2.37% for the fiscal year ended June 30, 1999, compared to 2.22%
for the comparable 1998 period, while the net interest margin amounted to 2.92%
in 1999, compared to 3.29% in 1998.
PROVISION FOR LOSSES ON LOANS. A provision for losses on loans is charged to
earnings to bring the total allowance for loan losses 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
years ended June 30, 1999 and 1998. 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 $428,000 for the year ended June 30, 1999, a
decrease of $97,000, or 18.5%, from the 1998 total. The decrease resulted
primarily from a $231,000, or 52.4%, decrease in gain on sales of securities,
which was partially offset by a $108,000 gain on sale of loans in fiscal 1999
and a $26,000, or 31.0%, increase in other operating income. 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 $2.3 million for the year ended June 30, 1999, an increase of
$273,000, or 13.4%, compared to the same period in 1998. The increase resulted
primarily from an $83,000, or 8.0%, increase in employee compensation and
benefits, a $44,000, or 22.8%, increase in occupancy and equipment expense, a
$53,000, or 24.9%, increase in franchise taxes, a $73,000, or 70.0%, increase in
data processing and a $16,000, or 3.5%, increase in other operating expenses.
The increase in employee compensation and benefits was due primarily to the
addition of a secondary marketing officer and support staff during fiscal 1998,
coupled with an increase in expense associated with stock benefit plans, normal
merit increases and increased staffing levels related to the opening of the New
Philadelphia office location in November 1997. The increase in occupancy and
equipment and other operating expense resulted primarily from costs associated
with office remodeling and the implementation of new business products and
services,
11
<PAGE> 12
as well as, the start-up of the New Philadelphia office. The increase in
franchise taxes was due to the increase in shareholders' equity year to year.
The increase in data processing costs was due primarily to the increased number
of deposit and loan accounts associated with the Savings Bank's growth.
FEDERAL INCOME TAXES. FFD recorded a provision for federal income taxes totaling
$368,000 for the year ended June 30, 1999, a decrease of $137,000, or 27.1%,
from fiscal 1998. The decrease resulted primarily from a $402,000, or 27.0%,
decrease in earnings before taxes. The effective tax rates were 33.9% and 34.0%
for the years ended June 30, 1999 and 1998, respectively.
COMPARISON OF OPERATING RESULTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
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.
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, or 17.6%, 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, or 5.0%, 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, or 31.9%, 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.
12
<PAGE> 13
PROVISION FOR LOSSES ON LOANS. As a result of an analysis of 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,
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.
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 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 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.
13
<PAGE> 14
AVERAGE BALANCE, YIELD, RATE AND VOLUME DATA
- --------------------------------------------------------------------------------
The following table sets forth certain information relating to FFD's average
balance sheet 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,
------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- --------------------------- -------------------------------
Average Interest Average Interest Average Interest
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 $ 79,497 $5,567 7.00% $63,315 $4,766 7.53% $52,295 $3,807 7.28%
Mortgage-backed securities 15,305 968 6.32 14,202 927 6.53 17,228 1,175 6.82
Investment securities 2,902 177 6.10 5,097 319 6.26 12,198 782 6.41
Interest-bearing deposits
and other 3,978 203 5.10 8,816 448 5.08 2,444 116 4.75
--------- ------ ---- -------- ------- ---- --------- ------- ----
Total interest-earning assets 101,682 6,915 6.80 91,430 6,460 7.07 84,165 5,880 6.99
Non-interest-earning assets 1,517 1,417 2,254
--------- -------- --------
Total assets $103,199 $92,847 $86,419
======= ====== ======
Interest-bearing liabilities:
Deposits $ 69,374 2,984 4.30 $59,554 2,797 4.70 $55,166 2,598 4.71
Advances from the FHLB 19,637 957 4.87 11,685 657 5.62 8,857 503 5.68
-------- ------ ---- -------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities 89,011 3,941 4.43 71,239 3,454 4.85 64,023 3,101 4.84
----- ---- ------ ---- ------- ----
Non-interest-bearing liabilities 166 487 937
---------- --------- --------
Total liabilities 89,177 71,726 64,960
Shareholders' equity 14,022 21,121 21,459
-------- ------ ------
Total liabilities and
shareholders' equity $103,199 $92,847 $86,419
======= ====== ======
Net interest income
$2,974 $3,006 $2,779
===== ===== =====
Interest rate spread 2.37% 2.22% 2.15%
==== ==== ====
Net interest margin (net interest
income as a percent of average
interest-earning assets) 2.92% 3.29% 3.30%
==== ==== ====
Average interest-earning assets to
average interest-bearing liabilities 114.24% 128.34% 131.46%
====== ====== ======
</TABLE>
The table on the following page describes the extent to which changes in
interest rates and changes in volume of interest-earning assets and
interest-bearing liabilities have affected FFD's interest income and expense
during the years indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (changes in volume multiplied by prior year rate), (ii)
changes in rate (changes in rate multiplied by prior year volume) and (iii)
total changes in rate and volume. The combined effects of changes in both volume
and rate, which cannot be separately identified, have been allocated
proportionately to the change due to volume and the change due to rate.
14
<PAGE> 15
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
------------------------------ -------------------------------
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 $1,133 $(332) $801 $824 $135 $959
Mortgage-backed securities 70 (29) 41 (200) (48) (248)
Investment securities (134) (8) (142) (445) (18) (463)
Interest-bearing deposits and other (247) 2 (245) 323 9 332
------ ---- --- --- ----- ---
Total interest income 822 (367) 455 502 78 580
------ ---- --- --- ---- ---
Interest expense attributable to:
Deposits 422 (235) 187 193 6 199
FHLB advances 388 (88) 300 149 5 154
------ ----- --- --- ----- ---
Total interest expense 810 (323) 487 342 11 353
------ ---- --- --- ---- ---
Increase (decrease) in net interest income $ 12 $ (44) $ (32) $160 $ 67 $227
======= ===== ==== === ==== ===
</TABLE>
ASSET AND LIABILITY MANAGEMENT
- --------------------------------------------------------------------------------
First Federal, like other financial institutions, is subject to interest rate
risk to the extent that its interest-earning assets reprice differently than its
interest-bearing liabilities. As part of its effort to monitor and manage
interest rate risk, First Federal uses the "net portfolio value" ("NPV")
methodology adopted by the OTS as part of its capital regulations. Although
First Federal is not currently subject to the NPV regulation because such
regulation does not apply to institutions with less than $300 million in assets
and risk-based capital in excess of 12%, the application of the NPV methodology
illustrates certain aspects of First Federal's interest rate risk.
Generally, NPV is the discounted present value of the difference between
incoming cash flows on interest-earning and other assets and outgoing cash flows
on interest-bearing and other liabilities. The application of the methodology
attempts to quantify interest rate risk as the change in the NPV which would
result from a theoretical 200 basis point (1 basis point equals .01%) change in
market interest rates. Both a 200 basis point increase in market interest rates
and a 200 basis point decrease in market interest rates are considered. If the
NPV would decrease more than 2% of the present value of the institution's assets
with either an increase or a decrease in market rates, the institution must
deduct 50% of the amount of the decrease in excess of such 2% in the calculation
of the institution's risk-based capital. See "Liquidity and Capital Resources."
15
<PAGE> 16
At June 30, 1999, 2% of the present value of First Federal's assets was
approximately $2.2 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 $1.7 million.
Presented below, as of June 30, 1999 and 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, 1999
----------------------------------
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% $ 321 2.46%
+200 +20.0 602 4.63
- - - -
-200 -20.0 (1,721) (13.22)
-400 -40.0 (3,333) (25.60)
</TABLE>
<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
- - - -
-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.
16
<PAGE> 17
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.
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, 1999,
First Federal's regulatory liquidity ratio was 37.4%. At such date, First
Federal had commitments to originate loans, including unused lines of credit,
totaling $6.0 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, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Net earnings $ 717 $ 982 $1,427
Adjustments to reconcile net earnings to
net cash from operating activities (965) (675) (490)
------- ------ ------
Net cash from operating activities (248) 307 937
Net cash used in investing activities (19,213) (4,706) (6,814)
Net cash from financing activities 20,839 1,952 7,259
------- ------ ------
Net change in cash and cash equivalents 1,378 (2,447) 1,382
Cash and cash equivalents at
beginning of year 1,633 4,080 2,698
------- ------ ------
Cash and cash equivalents at
end of year $ 3,011 $1,633 $4,080
======= ====== ======
</TABLE>
First Federal is required by applicable law and regulation to meet certain
minimum capital standards. Such capital standards include a tangible capital
requirement, a core capital requirement, or leverage ratio, and a risk-based
capital requirement.
17
<PAGE> 18
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 $269,000 at June
30, 1999.
First Federal exceeded all of its capital requirements at June 30, 1999. The
following table summarizes First Federal's regulatory capital requirements and
regulatory capital at June 30, 1999:
<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 $14,274 12.8% $1,671 1.5% $12,603 11.3%
Core capital 14,274 12.8 3,343 3.0 10,931 9.8
Risk-based capital 14,543 21.5 5,404 8.0 9,139 13.5
</TABLE>
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------------------------------------------------------
In June 1997, the Financial Accounting Standards Board (the "FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130 established 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
18
<PAGE> 19
income separately from retained earnings and additional paid-in capital. 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. Management adopted SFAS No. 130 effective July
1, 1998, as required, without 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 established 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
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. Management adopted SFAS No. 131 effective July 1, 1998, as
required, without material impact on FFD's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires entities to recognize all
derivatives in their financial statements as either assets or liabilities
measured at fair value. SFAS No. 133 also specifies new methods of accounting
for hedging transactions, prescribes the items and transactions that may be
hedged, and specifies detailed criteria to be met to qualify for hedge
accounting.
The definition of a derivative financial instrument is complex, but in general,
it is an instrument with one or more underlyings, such as an interest rate or
foreign exchange rate, that is applied to a notional amount, such as an amount
of currency, to determine the settlement amount(s). It generally requires no
significant initial investment and can be settled net or by delivery of an asset
that is readily convertible to cash. SFAS No. 133 applies to derivatives
embedded in other contracts, unless the underlying of the embedded derivative is
clearly and closely related to the host contract.
SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years
beginning after June 15, 2000. On adoption, entities are permitted to transfer
held-to-maturity debt securities to the available-for-sale or trading category
without calling into question their intent to hold other debt securities to
maturity in the future. SFAS No. 133 is not expected to have a material impact
on FFD's financial statements.
19
<PAGE> 20
YEAR 2000 COMPLIANCE MATTERS
- --------------------------------------------------------------------------------
As with all providers of financial services, First Federal's operations are
heavily dependent on information technology systems. First Federal has addressed
the potential problems associated with the possibility that the computers that
control or operate the Savings 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.
As part of the awareness and assessment phases of its action plan related to the
Year 2000 problem, management identified its on-line core account processing
system performed by a third party service provider, Intrieve, Inc. ("Intrieve")
as "mission critical." Intrieve has converted its hardware to a new Year 2000
compliant system and First Federal's conversion to this new system was completed
during the fourth calendar quarter of 1998. Intrieve successfully performed Year
2000 proxy testing with several of its larger users during early October 1998
and First Federal performed final testing of its specific equipment
configuration and communications link to Intrieve during November 1998.
First Federal has developed a contingency plan in case any Intrieve systems
actually fail at Year 2000 critical dates. First Federal deems the likelihood of
failure of Intrieve's efforts to renovate Year 2000 changes to the on-line core
account processing system to be remote. The plan, therefore, primarily addresses
action to deal with the possibility that Intrieve's system would be down for
several days or weeks upon arrival of Year 2000. First Federal has the ability
to process transactions manually, if necessary, and through off-line computer
transactions.
First Federal has expended less than $10,000 through June 30, 1999, in
connection with its year 2000 compliance program, and management does not
anticipate additional significant expenditures.
In addition to possible expense related to its own systems, First Federal could
incur losses if loan payments are delayed due to Year 2000 problems affecting
any major borrowers 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.
20
<PAGE> 21
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS AND
CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
CONTENTS
PAGE
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 18
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 19
CONSOLIDATED STATEMENTS OF EARNINGS 20
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 21
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 22
CONSOLIDATED STATEMENTS OF CASH FLOWS 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 25
21
<PAGE> 22
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, 1999 and 1998, and the related
consolidated statements of earnings, comprehensive income, shareholders' equity
and cash flows for each of the years ended June 30, 1999, 1998 and 1997. 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, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the years ended June 30, 1999, 1998
and 1997, in conformity with generally accepted accounting principles.
Cincinnati, Ohio
August 6, 1999
22
<PAGE> 23
FFD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1999 1998
<S> <C> <C>
Cash and due from banks $ 844 $ 1,026
Interest-bearing deposits in other financial institutions 2,167 607
---------- ----------
Cash and cash equivalents 3,011 1,633
Investment securities designated as available for sale - at market 2,924 2,655
Investment securities held to maturity - at cost, approximate market
value of $993 as of June 30, 1998 -- 977
Mortgage-backed securities designated as available for sale - at market 10,978 5,935
Mortgage-backed securities held to maturity - at amortized cost, approximate
market value of $4,907 and $6,073 as of June 30,
1999 and 1998 4,779 5,960
Loans receivable - net 86,417 70,990
Loans held for sale - at lower of cost or market 965 --
Office premises and equipment - at depreciated cost 1,364 1,383
Stock in Federal Home Loan Bank - at cost 1,201 933
Accrued interest receivable 329 279
Prepaid expenses and other assets 209 221
Prepaid federal income taxes 116 --
---------- ----------
Total assets $ 112,293 $ 90,966
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 72,025 $ 61,956
Advances from the Federal Home Loan Bank 23,616 12,519
Accrued interest payable 146 94
Other liabilities 250 258
Accrued federal income taxes -- 197
Deferred federal income taxes 52 117
---------- ----------
Total liabilities 96,089 75,141
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 7,798 7,705
Retained earnings - substantially restricted 9,850 9,536
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects (216) 140
Shares acquired by stock benefit plans (1,207) (1,411)
Less 1,334 and 9,400 treasury shares at June 30, 1999 and 1998 - at cost (21) (145)
---------- ----------
Total shareholders' equity 16,204 15,825
---------- ----------
Total liabilities and shareholders' equity $ 112,293 $ 90,966
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
23
<PAGE> 24
FFD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended June 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Interest income
Loans $ 5,567 $ 4,766 $ 3,807
Mortgage-backed securities 968 927 1,175
Investment securities 177 319 782
Interest-bearing deposits and other 203 448 116
-------- -------- --------
Total interest income 6,915 6,460 5,880
Interest expense
Deposits 2,984 2,797 2,598
Borrowings 957 657 503
-------- -------- --------
Total interest expense 3,941 3,454 3,101
-------- -------- --------
Net interest income 2,974 3,006 2,779
Provision for losses on loans -- -- 125
-------- -------- --------
Net interest income after provision for losses on loans 2,974 3,006 2,654
Other income
Gain on sale of loans 108 -- --
Gain on sale of investment securities designated
as available for sale 210 441 1,284
Gain on sale of real estate acquired through foreclosure -- -- 2
Other operating 110 84 51
-------- -------- --------
Total other income 428 525 1,337
General, administrative and other expense
Employee compensation and benefits 1,117 1,034 777
Occupancy and equipment 237 193 118
Franchise taxes 266 213 144
Federal deposit insurance premiums 38 34 394
Data processing 182 109 75
Other operating 477 461 351
-------- -------- --------
Total general, administrative and other expense 2,317 2,044 1,859
-------- -------- --------
Earnings before income taxes 1,085 1,487 2,132
Federal income taxes
Current 249 311 769
Deferred 119 194 (64)
-------- -------- --------
Total federal income taxes 368 505 705
-------- -------- --------
NET EARNINGS $ 717 $ 982 $ 1,427
======== ======== ========
EARNINGS PER SHARE
Basic $ .53 $ .73 $ 1.07
======== ======== ========
Diluted $ .51 $ .71 $ 1.06
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
24
<PAGE> 25
FFD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net earnings $ 717 $ 982 $ 1,427
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities
during the period, net of tax (217) 411 281
Reclassification adjustment for realized gains
included in earnings, net of tax of $71, $150
and $437 in 1999, 1998 and 1997, respectively (139) (291) (847)
-------- -------- --------
Comprehensive income $ 361 $ 1,102 $ 861
======== ======== ========
Accumulated comprehensive income (loss) $ (216) $ 140 $ 20
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
25
<PAGE> 26
FFD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended June 30, 1999, 1998 and 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
UNREALIZED
SHARES GAINS (LOSSES)
ACQUIRED BY ON SECURITIES
ADDITIONAL STOCK TREASURY DESIGNATED
COMMON PAID-IN BENEFIT SHARES- AS AVAILABLE RETAINED
STOCK CAPITAL PLANS AT COST FOR SALE EARNINGS TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1996 $ -- $ 14,132 $ (1,164) $ -- $ 586 $ 7,857 $ 21,411
Net earnings for the year ended June 30, 1997 -- -- -- -- -- 1,427 1,427
Purchase of shares for stock benefit plan -- -- (494) -- -- -- (494)
Amortization of stock benefit plan expense -- 5 24 -- -- -- 29
Realized gain on securities designated as available
for sale, net of related tax effects -- -- -- -- (566) -- (566)
Dividends of $.225 per share -- -- -- -- -- (327) (327)
-------- -------- -------- -------- -------- -------- --------
Balance at June 30, 1997 -- 14,137 (1,634) -- 20 8,957 21,480
Net earnings for the year ended June 30, 1998 -- -- -- -- -- 982 982
Purchase of treasury shares -- -- -- (154) -- -- (154)
Amortization of stock benefit plan expense -- 71 223 -- -- -- 294
Unrealized gain on securities designated as available
for sale, net of related tax effects -- -- -- -- 120 -- 120
Exercise of stock options -- 1 -- 9 -- -- 10
Capital distribution of $4.50 per share -- (6,504) -- -- -- -- (6,504)
Dividends of $.30 per share -- -- -- -- -- (403) (403)
-------- -------- -------- -------- -------- -------- --------
Balance at June 30, 1998 -- 7,705 (1,411) (145) 140 9,536 15,825
Net earnings for the year ended June 30, 1999 -- -- -- -- -- 717 717
Amortization of stock benefit plan expense -- 141 204 -- -- -- 345
Unrealized loss on securities designated as available
for sale, net of related tax effects -- -- -- -- (356) -- (356)
Exercise of stock options -- (48) -- 124 -- -- 76
Dividends of $.30 per share -- -- -- -- -- (403) (403)
-------- -------- -------- -------- -------- -------- --------
Balance at June 30, 1999 $ -- $ 7,798 $ (1,207) $ (21) $ (216) $ 9,850 $ 16,204
======== ======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
26
<PAGE> 27
FFD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 717 $ 982 $ 1,427
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of premiums and discounts
on investments and mortgage-backed securities - net 53 33 (13)
Amortization of deferred loan origination fees (57) (73) (66)
Gain on sale of loans (46) -- --
Loans originated for sale in the secondary market (8,398) -- --
Proceeds from sale of mortgage loans in the secondary market 7,479 -- --
Depreciation and amortization 131 109 61
Gain on sale of investment and mortgage-backed
securities designated as available for sale (210) (441) (1,284)
Provision for losses on loans -- -- 125
Amortization of stock benefit plan expense 345 294 29
Federal Home Loan Bank stock dividends (74) (55) (44)
Increase (decrease) in cash due to changes in:
Accrued interest receivable (50) (12) 16
Prepaid expenses and other assets 12 (81) --
Other liabilities (8) (82) 136
Accrued interest payable 52 12 45
Federal income taxes
Current (313) (573) 569
Deferred 119 194 (64)
-------- -------- --------
Net cash provided by (used in) operating activities (248) 307 937
Cash flows provided by (used in) investing activities:
Purchase of investment securities designated as available
for sale (3,000) (6,947) (15,391)
Purchase of investment securities designated as
held to maturity -- (1,244) --
Proceeds from maturity of investment securities 3,477 10,157 13,648
Proceeds from sale of investment securities designated
as available for sale 212 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 (9,633) -- (4,737)
Principal repayments on mortgage-backed securities 5,407 3,174 3,257
Proceeds from sale of mortgage-backed securities
designated as available for sale -- -- 3,970
Purchase of Federal Home Loan Bank stock (194) (236) --
Loan principal repayments 17,172 13,826 10,049
Loan disbursements (32,542) (29,239) (17,073)
Purchase of office premises and equipment (115) (627) (381)
Proceeds from sale of office premises and equipment 3 -- --
-------- -------- --------
Net cash used in investing activities (19,213) (4,706) (6,814)
-------- -------- --------
Net cash used in operating and investing
activities (subtotal carried forward) (19,461) (4,399) (5,877)
-------- -------- --------
</TABLE>
27
<PAGE> 28
FFD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net cash used in operating and investing
activities (subtotal brought forward) $(19,461) $ (4,399) $ (5,877)
Cash flows provided by (used in) financing activities:
Net increase in deposit accounts 10,069 4,866 4,882
Proceeds from Federal Home Loan Bank advances 11,133 11,950 8,900
Repayments of Federal Home Loan Bank advances (36) (7,813) (5,702)
Proceeds from exercise of stock options 76 10 --
Purchase of shares for stock benefit plans -- -- (494)
Purchase of treasury shares -- (154) --
Cash distributions paid on common stock (403) (6,907) (327)
-------- -------- --------
Net cash provided by financing activities 20,839 1,952 7,259
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 1,378 (2,447) 1,382
Cash and cash equivalents at beginning of year 1,633 4,080 2,698
-------- -------- --------
Cash and cash equivalents at end of year $ 3,011 $ 1,633 $ 4,080
======== ======== ========
Supplemental disclosure of cash flow information: Cash paid during the year for:
Federal income taxes $ 182 $ 819 $ 116
======== ======== ========
Interest on deposits and borrowings $ 3,889 $ 3,442 $ 3,056
======== ======== ========
Supplemental disclosure of noncash investing activities:
Unrealized gains (losses) on securities designated as
available for sale, net of applicable tax effects $ (356) $ 120 $ (566)
======== ======== ========
Recognition of mortgage servicing rights in accordance
with SFAS No. 125 $ 62 $ -- $ --
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
28
<PAGE> 29
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FFD Financial Corporation (the "Corporation") is a savings and loan holding
company whose activities are primarily limited to holding the stock of First
Federal Savings Bank of Dover (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 accompanying consolidated financial statements include the accounts of
the Corporation, the Savings Bank, and its wholly-owned subsidiary, Dover
Service Corporation ("Dover"). At June 30, 1999 and 1998, 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.
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, 1999, the Corporation's shareholders' equity
reflected a net unrealized loss on securities designated as available for
sale totaling $216,000, while at June 30, 1998, the Corporation's
shareholders' equity reflected a net unrealized gain of $140,000.
29
<PAGE> 30
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2. Investment Securities and Mortgage-backed Securities (continued)
----------------------------------------------------
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.
Loans held for sale are carried at the lower of cost or market, determined
in the aggregate. In computing cost, deferred loan origination fees are
deducted from the principal balances of the related loan. At June 30, 1999,
loans held for sale were carried at cost.
The Savings Bank retains the servicing on loans sold and agrees to remit to
the investor loan principal and interest at agreed-upon rates. The Savings
Bank recognizes rights to service mortgage loans for others pursuant to SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." In accordance with SFAS No. 125, an
institution that acquires mortgage servicing rights through either the
purchase or origination of mortgage loans and sells those loans with
servicing rights retained would allocate some of the cost of the loans to
the mortgage servicing rights.
SFAS No. 125 requires that capitalized mortgage servicing rights and
capitalized excess servicing receivables be assessed for impairment.
Impairment is measured based on fair value.
The Savings Bank recognized $62,000 of pre-tax gains on sales of loans
related to capitalized mortgage servicing rights during the fiscal year
ended June 30, 1999.
30
<PAGE> 31
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
3. Loans Receivable (continued)
----------------
The mortgage servicing rights recorded by the Savings Bank, calculated in
accordance with the provisions of SFAS No. 125, were segregated into pools
for valuation purposes, using as pooling criteria the loan term and coupon
rate. Once pooled, each grouping of loans was evaluated on a discounted
earnings basis to determine the present value of future earnings that a
purchaser could expect to realize from each portfolio. Earnings were
projected from a variety of sources including loan servicing fees, interest
earned on float, net interest earned on escrows, miscellaneous income, and
costs to service the loans. The present value of future earnings is the
"economic" value for the pool, i.e., the net realizable present value to an
acquirer of the acquired servicing.
The Savings Bank recorded amortization related to mortgage servicing rights
totaling approximately $5,000 for the year ended June 30, 1999.
4. Loan Origination Fees
---------------------
The Savings Bank accounts for loan origination fees in accordance with SFAS
No. 91 "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases". Pursuant
to the provisions of SFAS No. 91, origination fees received from loans, net
of certain direct origination costs, are deferred and amortized to interest
income using the level-yield method, giving effect to actual loan
prepayments. Additionally, SFAS No. 91 generally limits the definition of
loan origination costs to the direct costs attributable to originating a
loan, i.e., principally actual personnel costs. Fees received for loan
commitments that are expected to be drawn upon, based on the Savings Bank's
experience with similar commitments, are deferred and amortized over the
life of the loan using the level-yield method. Fees for other loan
commitments are deferred and amortized over the loan commitment period on a
straight-line basis.
5. Allowance for Loan Losses
-------------------------
It is the Savings Bank's policy to provide valuation allowances for
estimated losses on loans based on past loan loss experience, changes in the
composition of the loan portfolio, trends in the level of delinquent and
problem loans, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral and current and
anticipated economic conditions in the primary lending area. When the
collection of a loan becomes doubtful, or otherwise troubled, the Savings
Bank records a charge-off equal to the difference between the fair value of
the property securing the loan and the loan's carrying value. Major loans
and major lending areas are reviewed periodically to determine potential
problems at an early date. The allowance for loan losses is increased by
charges to earnings and decreased by charge-offs (net of recoveries).
31
<PAGE> 32
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. Allowance for Loan Losses (continued)
-------------------------
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 loan's 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, 1999 and 1998, the Savings Bank had no loans that would be
defined as impaired under SFAS No. 114.
6. Real Estate Acquired through Foreclosure
----------------------------------------
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost) or fair value less estimated selling
expenses at the date of acquisition. Real estate loss provisions are
recorded if the properties' fair value subsequently declines below the value
determined at the recording date. In determining the lower of cost or fair
value at acquisition, costs relating to development and improvement of
property are capitalized. Costs relating to holding real estate acquired
through foreclosure, net of rental income, are charged against earnings as
incurred.
7. Office Premises and Equipment
-----------------------------
Office premises and equipment are carried at cost and include expenditures
which extend the useful lives of existing assets. Maintenance, repairs and
minor renewals are expensed as incurred. For financial reporting,
depreciation and amortization are provided on the straight-line method over
the useful lives of the assets, estimated to be 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.
32
<PAGE> 33
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
9. Benefit Plans
-------------
The Corporation has an Employee Stock Ownership Plan ("ESOP"), which
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
$261,000, $228,000 and $120,000 for the fiscal years ended June 30, 1999,
1998 and 1997, respectively.
33
<PAGE> 34
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
9. Benefit Plans (continued)
-------------
Additionally, during fiscal 1997, the Corporation adopted the First Federal
Savings Bank of Dover Recognition and Retention Plan ("RRP"). The Savings
Bank funded the RRP through the purchase of 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 $110,000, $109,000 and $61,000 related to the RRP was charged to expense
for the fiscal years ended June 30, 1999, 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 92,356, 106,515 and 114,044 unallocated shares
held by the ESOP, totaled 1,355,501, 1,340,049 and 1,340,706 for the fiscal
years ended June 30, 1999, 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
1,397,814, 1,376,664 and 1,345,995 for the fiscal years ended June 30, 1999,
1998 and 1997, respectively. Incremental shares related to the assumed
exercise of stock options included in the computation of diluted earnings
per share totaled 42,313, 36,615 and 5,289 for the fiscal years ended June
30, 1999, 1998 and 1997, respectively.
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.
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.
34
<PAGE> 35
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. Fair Value of Financial Instruments
-----------------------------------
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of fair value of financial instruments, both assets and
liabilities, whether or not recognized in the consolidated statement of
financial condition, for which it is practicable to estimate that value. For
financial instruments where quoted market prices are not available, fair
values are based on estimates using present value and other valuation
methods.
The methods used are greatly affected by the assumptions applied, including
the discount rate and estimates of future cash flows. Therefore, the fair
values presented may not represent amounts that could be realized in an
exchange for certain financial instruments.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments at June 30,
1999 and 1998:
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.
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.
35
<PAGE> 36
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. Fair Value of Financial Instruments (continued)
-----------------------------------
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, 1999 and 1998 were 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>
1999 1998
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(In thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 3,011 $ 3,011 $ 1,633 $ 1,633
Investment securities 2,924 2,924 3,632 3,648
Mortgage-backed securities 15,757 15,885 11,895 12,008
Loans receivable 87,382 87,537 70,990 71,595
Federal Home Loan Bank stock 1,201 1,201 933 933
-------- -------- ------- ------
$ 110,275 $ 110,558 $ 89,083 $ 89,817
======== ======== ====== ======
Financial liabilities
Deposits $ 72,025 $ 72,519 $ 61,956 $ 63,017
Advances from the Federal Home Loan Bank 23,616 23,598 12,519 12,519
-------- -------- ------ ------
$ 95,641 $ 96,117 $ 74,475 $ 75,536
======== ======== ====== ======
</TABLE>
13. Comprehensive Income
--------------------
The Corporation adopted SFAS No. 130, "Reporting Comprehensive Income," as
of July 1, 1998. The Statement established standards for reporting and
presentation of comprehensive income and its components in a full set of
general-purpose financial statements. It 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 presented
with the same prominence as other financial statements. SFAS No. 130
requires that companies (i) classify items of other comprehensive income by
their nature in a financial statement and (ii) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital. Financial statements for earlier periods have
been restated for comparative purposes. Accumulated comprehensive income
consists solely of the change in unrealized gains/losses on securities
designated as available for sale in accordance with SFAS No. 115.
36
<PAGE> 37
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
14. Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the 1999
consolidated financial statement presentation.
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, 1999 and 1998,
are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1999
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Government agency obligations $3,000 $ - $ 76 $2,924
===== === ==== =====
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
HELD TO MATURITY:
U.S. Government agency obligations $ 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
===== === == =====
</TABLE>
The amortized cost and estimated fair value of U. S. Government agency
obligations designated as available for sale, at June 30, 1999, by term to
maturity are shown below.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
(In thousands)
<S> <C> <C>
Due after one year through five years $2,000 $1,957
Due after ten years through twenty years 1,000 967
----- ------
$3,000 $2,924
===== =====
</TABLE>
37
<PAGE> 38
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
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, 1999 and
1998, are shown below:
<TABLE>
<CAPTION>
1999
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
HELD TO MATURITY:
Federal Home Loan Mortgage
Corporation participation certificates $ 4,300 $102 $ (1) $ 4,401
Government National Mortgage
Association participation certificates 479 27 - 506
------ ---- -- ------
Total mortgage-backed securities
held to maturity 4,779 129 (1) 4,907
AVAILABLE FOR SALE:
Federal National Mortgage
Association participation certificates 8,256 - (246) 8,010
Federal Home Loan Mortgage
Corporation participation certificates 265 - (1) 264
Government National Mortgage
Association participation certificates 2,709 - (5) 2,704
------ -- ---- ------
Total mortgage-backed securities
available for sale 11,230 - (252) 10,978
------ -- ---- ------
Total mortgage-backed securities $16,009 $129 $(253) $15,885
====== === ==== ======
</TABLE>
<TABLE>
<CAPTION>
1998
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
HELD TO MATURITY:
Federal Home Loan Mortgage
Corporation participation certificates $ 5,367 $ 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
====== === ===== ======
</TABLE>
38
<PAGE> 39
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
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, 1999, by contractual term to maturity are
shown below. Expected maturities will differ from contractual maturities
because borrowers may generally prepay obligations without prepayment
penalties.
<TABLE>
<CAPTION>
AMORTIZED
COST
(In thousands)
<S> <C>
Due within ten years $ 3,469
Due after ten years 12,540
------
$16,009
======
</TABLE>
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at June 30 is as follows:
<TABLE>
<CAPTION>
1999 1998
(In thousands)
<S> <C> <C>
Residential real estate
One- to four-family $65,103 $63,582
Multi-family 721 1,058
Nonresidential real estate and land 18,652 6,722
Consumer and other loans 3,912 1,263
------ ------
88,388 72,625
Less:
Undisbursed portion of loans in process 1,560 1,079
Deferred loan origination fees 142 286
Allowance for losses on loans 269 270
------ ------
$86,417 $70,990
====== ======
</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 $64.3 million, or 74%, of the total loan portfolio at June 30,
1999, and approximately $63.6 million, or 90%, of the total loan portfolio
at June 30, 1998. 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 and officers 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 $444,000 and $423,000 at June
30, 1999 and 1998, respectively.
39
<PAGE> 40
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
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>
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Beginning balance $270 $270 $146
Provision for losses on loans - - 125
Loan charge-offs (1) - (1)
--- --- ---
Ending balance $269 $270 $270
=== === ===
</TABLE>
As of June 30, 1999, 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, 1999, 1998 and 1997, totaled
$15,000, $82,000 and $64,000, respectively. Interest income that would have
been recognized had nonaccrual loans performed pursuant to contractual terms
totaled approximately $1,000, $2,000 and $2,000 for the years ended June 30,
1999, 1998 and 1997, respectively.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at June 30 is comprised of the following:
<TABLE>
<CAPTION>
1999 1998
(In thousands)
<S> <C> <C>
Land $ 323 $ 323
Buildings and improvements 836 833
Furniture and equipment 579 483
----- -----
1,738 1,639
Less accumulated depreciation and
amortization 374 256
----- -----
$1,364 $1,383
===== =====
</TABLE>
40
<PAGE> 41
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
NOTE F - DEPOSITS
Deposits consist of the following major classifications at June 30:
<TABLE>
<CAPTION>
DEPOSIT TYPE AND WEIGHTED-
AVERAGE INTEREST RATE 1999 1998
AMOUNT % AMOUNT %
(Dollars in thousands)
<S> <C> <C> <C> <C>
NOW accounts
1999 - 0.90% $ 8,290 11.5%
1998 - 1.62% $ 5,954 9.6%
Passbook
1999 - 3.54% 22,557 31.3
1998 - 3.86% 18,955 30.6
-------- ----- ------ ------
Total demand, transaction and
passbook deposits 30,847 42.8 24,909 40.2
Certificates of deposit
Original maturities of:
One year or less
1999 - 4.66% 8,511 11.8
1998 - 5.08% 8,687 14.0
12 months to 36 months
1999 - 5.60% 28,040 39.0
1998 - 5.83% 22,375 36.1
Individual retirement accounts
1999 - 5.35% 4,627 6.4
1998 - 5.59% 5,985 9.7
-------- ----- ------- ------
Total certificates of deposit 41,178 57.2 37,047 59.8
-------- ----- ------ -----
Total deposit accounts $ 72,025 100.0% $61,956 100.0%
====== ===== ====== =====
</TABLE>
The Savings Bank had certificate of deposit accounts with balances in excess
of $100,000 totaling $7.3 million and $1.3 million at June 30, 1999 and
1998, respectively.
Interest expense on deposits at June 30 is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Passbook $ 737 $ 702 $ 613
NOW accounts 81 98 85
Certificates of deposit 2,166 1,997 1,900
----- ----- -----
$2,984 $2,797 $2,598
===== ===== =====
</TABLE>
41
<PAGE> 42
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
NOTE F - DEPOSITS (continued)
Maturities of outstanding certificates of deposit at June 30 are summarized
as follows:
<TABLE>
<CAPTION>
1999 1998
(In thousands)
<S> <C> <C>
Less than one year $28,262 $22,833
One year to two years 11,025 11,442
Two years to three years 1,891 2,772
------ ------
$41,178 $37,047
====== ======
</TABLE>
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at June 30, 1999 by
a pledge of certain residential mortgage loans totaling $35.4 million and
the Savings Bank's investment in Federal Home Loan Bank stock, are
summarized as follows:
<TABLE>
<CAPTION>
INTEREST MATURING IN YEAR
RATE ENDING JUNE 30, 1999 1998
(In thousands)
<S> <C> <C> <C>
5.58% - 5.62% 2004 $ 2,500 $ 2,500
8.15% 2005 17 19
4.96% - 5.10% 2008 10,000 10,000
4.50% - 6.10% After 2008 11,099 -
------ ------
$ 23,616 $ 12,519
====== ======
Weighted-average interest rate 5.05% 5.11%
==== ====
</TABLE>
NOTE H - FEDERAL INCOME TAXES
Federal income taxes differ from the amounts computed at the statutory
corporate tax rate for the years ended June 30 as follows:
<TABLE>
<CAPTION>
1999 1998 1997
(Dollars in thousands)
<S> <C> <C> <C>
Federal income taxes at statutory rate $369 $506 $725
Decrease in taxes resulting from:
Other (primarily nontaxable interest income in 1997) (1) (1) (20)
---- ---- ----
Federal income taxes per consolidated
financial statements $368 $505 $705
==== ==== ====
Effective tax rate 33.9% 33.9% 33.1%
==== ==== ====
</TABLE>
42
<PAGE> 43
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
NOTE H - FEDERAL INCOME TAXES (continued)
The composition of the Corporation's net deferred tax liability at June 30
is as follows:
<TABLE>
<CAPTION>
Taxes (payable) refundable on temporary 1999 1998
differences at statutory rate: (In thousands)
<S> <C> <C>
Deferred tax assets:
Deferred loan origination fees $ 48 $ 8
Retirement expense 52 106
General loan loss allowance 91 92
Unrealized losses on securities designated as
available for sale 112 -
Other 1 1
---- ----
Deferred tax assets 304 207
Deferred tax liabilities:
Financed loan origination fees (105) (16)
Federal Home Loan Bank stock dividends (143) (118)
Difference between book and tax depreciation (17) (31)
Percentage of earnings bad debt deduction (72) (87)
Mortgage servicing rights (19) -
Unrealized gains on securities designated
as available for sale - (72)
---- ----
Deferred tax liabilities (356) (324)
---- ----
Net deferred tax liability $ (52) $(117)
==== ====
</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,
1999, include approximately $1.8 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, 1999. See Note K for additional information regarding
the Savings Bank's future percentage of earnings bad debt deductions.
43
<PAGE> 44
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
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, 1999, the Savings Bank had outstanding commitments of
approximately $531,000 to originate loans. Additionally, the Savings Bank
was obligated under unused lines of credit totaling $5.5 million. In the
opinion of management, all loan commitments equaled or exceeded prevalent
market interest rates as of June 30, 1999, and will be funded from normal
cash flow from operations.
NOTE J - REGULATORY CAPITAL
The Savings Bank is subject to minimum regulatory capital standards
promulgated by the Office of Thrift Supervision (the "OTS"). Failure to meet
minimum capital requirements can initiate certain mandatory -- and possibly
additional discretionary -- actions by regulators that, if undertaken, could
have a direct material effect on the consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Savings Bank must meet specific capital guidelines
that involve quantitative measures of the Savings Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Savings Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
The minimum capital standards of the OTS generally require the maintenance
of regulatory capital sufficient to meet each of three tests, hereinafter
described as the tangible capital requirement, the core capital requirement
and the risk-based capital requirement. The tangible capital requirement
provides for minimum tangible capital (defined as shareholders' equity less
all intangible assets) equal to 1.5% of adjusted total assets. The core
capital requirement provides for minimum core capital (tangible capital plus
certain forms of supervisory goodwill 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
44
<PAGE> 45
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
NOTE J - REGULATORY CAPITAL (continued)
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, 1999 and 1998, management believes that the Savings Bank met
all capital adequacy requirements to which it was subject.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
---------------- -------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO
(Dollars in thousands)
<S> <C> <C> <C> <C>
Tangible capital $14,274 12.8% greater than or equal to $1,671 greater than or equal to 1.5%
Core capital $14,274 12.8% greater than or equal to $3,343 greater than or equal to 3.0%
Risk-based capital $14,543 21.5% greater than or equal to $5,404 greater than or equal to 8.0%
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
TO BE "WELL-
CAPITALIZED" UNDER
PROMPT CORRECTIVE
ACTION PROVISIONS
------------------------------------------------------------------
AMOUNT RATIO
<S> <C> <C>
Tangible capital greater than or equal to $5,572 greater than or equal to 5.0%
Core capital greater than or equal to $6,686 greater than or equal to 6.0%
Risk-based capital greater than or equal to $6,755 greater than or equal to 10.0%
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
--------------- -------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO
(Dollars in thousands)
<S> <C> <C> <C> <C>
Tangible capital $14,502 16.0% greater than or equal to $1,361 greater than or equal to 1.5%
Core capital $14,502 16.0% greater than or equal to $2,721 greater than or equal to 3.0%
Risk-based capital $14,772 29.7% greater than or equal to $3,981 greater than or equal to 8.0%
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
TO BE "WELL-
CAPITALIZED" UNDER
PROMPT CORRECTIVE
ACTUAL ACTION PROVISIONS
--------------- ------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C>
Tangible capital $14,502 16.0% greater than or equal to $4,535 greater than or equal to 5.0%
Core capital $14,502 16.0% greater than or equal to $5,442 greater than or equal to 6.0%
Risk-based capital $14,772 29.7% greater than or equal to $4,976 greater than or equal to 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.
45
<PAGE> 46
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
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.
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.
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 amortize the recapture of the bad
debt reserve into taxable income over a six year period, which commenced in
fiscal 1998.
46
<PAGE> 47
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
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, 1999 and 1998, and the
results of its operations and its cash flows for the years ended June 30,
1999, 1998 and 1997.
FFD FINANCIAL CORPORATION
STATEMENTS OF FINANCIAL CONDITION
June 30,
(In thousands)
<TABLE>
<CAPTION>
ASSETS 1999 1998
<S> <C> <C>
Cash and due from banks $ 1,106 $ 103
Loan receivable from ESOP 931 1,047
Investment in First Federal Savings Bank of Dover 14,064 14,642
Accrued interest receivable 14 19
Prepaid federal income tax 72 --
Prepaid expenses and other assets 17 18
-------- --------
Total assets $ 16,204 $ 15,829
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued federal income taxes $ -- $ 4
Shareholders' equity
Common stock -- --
Additional paid-in capital 7,798 7,705
Retained earnings 9,850 9,536
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects (216) 140
Shares acquired by stock benefit plans (1,207) (1,411)
Treasury shares - at cost (21) (145)
-------- --------
Total shareholders' equity 16,204 15,825
-------- --------
Total liabilities and shareholders' equity $ 16,204 $ 15,829
======== ========
</TABLE>
47
<PAGE> 48
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
NOTE L- CONDENSED FINANCIAL STATEMENTS OF FFD FINANCIAL CORPORATION (continued)
FFD FINANCIAL CORPORATION
STATEMENTS OF EARNINGS
Year ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Revenue
Interest income $ 54 $ 377 $ 476
Equity in earnings of subsidiary 833 888 1,243
-------- -------- --------
Total revenue 887 1,265 1,719
General and administrative expenses 229 235 219
-------- -------- --------
Earnings before income taxes (credits) 658 1,030 1,500
Federal income taxes (credits) (59) 48 73
-------- -------- --------
NET EARNINGS $ 717 $ 982 $ 1,427
======== ======== ========
</TABLE>
FFD FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
Year ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Cash provided by (used in) operating activities:
Net earnings for the year $ 717 $ 982 $ 1,427
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Excess distributions from consolidated subsidiary 567 -- --
Undistributed earnings of consolidated subsidiary -- (888) (1,243)
Loss on sale of mortgage-backed and investment securities -- -- 12
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets 6 121 10
Other liabilities (4) -- (3)
Accrued federal income tax (72) (43) --
-------- -------- --------
Net cash provided by operating activities 1,214 172 203
Cash flows provided by (used in) investing activities:
Proceeds from repayment of loan to ESOP 116 84 33
Proceeds from maturities of investment securities -- 11,389 9,948
Purchase of investment securities -- (4,951) (15,391)
Proceeds from sale of investment securities -- -- 994
Principal repayment on mortgage-backed securities -- -- 444
Proceeds from sale of mortgage-backed securities -- -- 3,935
-------- -------- --------
Net cash provided by (used in) investing activities 116 6,522 (37)
Cash flows provided by (used in) financing activities:
Proceeds from exercise of stock options 76 10 --
Purchase of treasury shares -- (154) --
Cash distributions on common stock (403) (6,907) (327)
-------- -------- --------
Net cash used in financing activities (327) (7,051) (327)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 1,003 (357) (161)
Cash and cash equivalents at beginning of year 103 460 621
-------- -------- --------
Cash and cash equivalents at end of year $ 1,106 $ 103 $ 460
======== ======== ========
</TABLE>
48
<PAGE> 49
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
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 $4.6 million to the
Corporation at June 30, 1999.
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.
The Corporation accounts for the Plan in accordance with 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 APB 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, 1999, 1998 and 1997, would
have been reduced to the pro forma amounts indicated below:
49
<PAGE> 50
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
NOTE M- STOCK OPTION PLAN (continued)
<TABLE>
<CAPTION>
1999 1998 1997
(Earnings in thousands)
<S> <C> <C> <C> <C>
Net earnings As reported $717 $981 $1,427
=== === =====
Pro-forma $717 $963 $1,407
=== === =====
Earnings per share
Basic As reported $0.53 $0.73 $1.07
==== ==== ====
Pro-forma $0.53 $0.73 $1.05
==== ==== ====
Diluted As reported $0.51 $0.71 $1.06
==== ==== ====
Pro-forma $0.51 $0.71 $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 1999, 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, 1999, 1998 and 1997, and changes during the years then ended are
presented below:
<TABLE>
<CAPTION>
1999 1998 1997
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 130,329 $ 10.15 118,432 $ 9.40 - $ -
Granted 3,000 14.63 12,635 17.19 122,890 9.39
Exercised (8,066) 9.38 (738) 11.17 - -
Forfeited (10,055) 10.56 - - (4,458) 9.14
------- ------ --------- ------ ------- ----
Outstanding at end of year 115,208 $ 10.28 130,329 $ 10.15 118,432 $9.40
======= ====== ======= ====== ======= ====
Options exercisable at year-end 41,096 $ 9.86 22,948 $ 9.35 - $ -
======= ====== ======== ====== ======= ===
Weighted-average fair value of
options granted during the year $ 1.71 $ 2.01 $1.10
====== ====== ====
</TABLE>
The following information applies to options outstanding at June 30, 1999:
<TABLE>
<S> <C>
Number outstanding 115,208
Range of exercise prices $9.14 - $18.14
Weighted-average exercise price $10.28
Weighted-average remaining contractual life in years 7.2 years
</TABLE>
50
<PAGE> 51
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 Cleary Gull
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
Shirley A. Wallick
Secretary and Treasurer
Larry D. Browning, Jr.
Chief Financial Officer
EXECUTIVE OFFICERS OF
FIRST FEDERAL SAVINGS BANK OF DOVER
Robert R. Gerber
President
Shirley A. Wallick
Secretary and Treasurer
Larry D. Browning, Jr.
Chief Financial Officer
51
<PAGE> 52
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 19, 1999, 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
52
<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 1999 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 19, 1999 at 1:00 p.m., local time (the "Annual Meeting"), for the
following purposes, all of which are more completely set forth in the
accompanying Proxy Statement:
1. To elect three directors of FFD for terms expiring in
2001;
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, 1999, 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 17, 1999
<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 1999 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 19, 1999, at 1:00 p.m., local time,
and at any adjournments thereof (the "Annual Meeting"). Without affecting any
vote previously taken, the Proxy may be revoked by a shareholder executing a
later dated proxy which is received by FFD before the Proxy is exercised or by
giving notice of revocation to FFD in writing or in open meeting before the
Proxy is exercised. Attendance at the Annual Meeting will not, of itself, revoke
a Proxy.
Each properly executed Proxy received prior to the Annual Meeting and
not revoked will be voted as specified thereon or, in the absence of specific
instructions to the contrary, will be voted:
FOR the reelection of J. Richard Gray, Roy O. Mitchell, Jr.
and Robert D. Sensel as directors of FFD for terms expiring in
2001; 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,
1999 (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 1,453,416
votes entitled to be cast at the Annual Meeting.
This Proxy Statement is first being mailed to shareholders of FFD on or
about September 20, 1999.
VOTE REQUIRED
ELECTION OF DIRECTORS
Under Ohio law and FFD's Code of Regulations (the "Regulations"), the
three nominees receiving the greatest number of votes will be elected as
directors. Shares as to which the authority to vote is withheld are not counted
toward the election of directors or toward the election of the individual
nominees specified on the Proxy. If the accompanying Proxy is signed and dated
by the shareholder but no vote is specified thereon, the shares held by such
shareholder will be voted FOR the reelection of the three nominees.
-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, 1999:
<TABLE>
<CAPTION>
Amount and nature of Percent of
Name and address beneficial ownership shares outstanding
- ---------------- -------------------- ------------------
<S> <C> <C>
FFD Financial Corporation 143,042 (1) 9.84%
Employee Stock Ownership Plan
1201 Broadway
Quincy, Illinois 62301
</TABLE>
- ---------------------------
(1) Includes 105,388 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
143,042 shares.
The following table sets forth certain information with respect to the
number of common shares of FFD beneficially owned by each director of FFD and by
all directors and executive officers of FFD as a group as of August 31, 1999:
<TABLE>
<CAPTION>
Amount and nature of beneficial ownership
-----------------------------------------
Sole voting and Shared voting and Percent of
Name and address (1) investment power investment power shares outstanding
- -------------------- ---------------- ---------------- ------------------
<S> <C> <C> <C>
Stephen G. Clinton 10,187 (2) 38,615 (3) 3.34%
Robert R. Gerber 30,526 (4)(5) 41,765 (3) 4.92%
J. Richard Gray 7,437 (2) 20,000 1.88%
Richard J. Herzig 7,437 (2) 12,500 1.37%
Enos L. Loader 3,206 (6) 1,000 0.29%
Roy O. Mitchell, Jr. 7,936 (2) 14,000 1.50%
Robert D. Sensel 17,437 (2) 10,000 1.88%
All directors and executive
officers of FFD as a group
(9 people) 89,195 (7) 101,115 (8) 12.70%
- -----------------------------
</TABLE>
(Footnotes on next page)
-2-
<PAGE> 4
(1) Each of the persons listed on this table may be contacted at the
address of FFD.
(2) This number includes 5,367 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 744
shares which are expected to be earned in the next 60 days pursuant to
the First Federal Savings Bank of Dover Recognition and Retention Plan
Trust (the "RRP").
(3) This number includes 36,765 shares held by the RRP Trust with regard to
which Messrs. Clinton and Gerber have shared voting power as Trustees
of the RRP.
(4) This number includes 15,704 shares that may be acquired upon the
exercise of an option awarded pursuant to the Stock Option Plan and
1,487 shares which are expected to be earned in the next 60 days
pursuant to the RRP.
(5) This number includes 7,683 shares allocated to Mr. Gerber's ESOP
account, with respect to which Mr. Gerber has voting power.
(6) This number includes 1,789 shares that may be acquired upon the
exercise of options awarded pursuant to the Stock Option Plan.
(7) This number includes 45,221 shares that may be acquired upon the
exercise of options awarded pursuant to the Stock Option Plan and 5,727
shares that are expected to be earned in the next 60 days pursuant to
the RRP.
(8) The 36,765 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.
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.
The Board of Directors proposes the reelection of the following persons
to serve as directors of FFD until the annual meeting of shareholders in 2001
and until their successors are duly elected and qualified or until their earlier
resignation, removal from office or death:
-3-
<PAGE> 5
<TABLE>
<CAPTION>
Name Age (1) Position(s) held Director of FFD since
- ---- ------- ---------------- ---------------------
<S> <C> <C> <C>
J. Richard Gray 72 Director 1995
Roy O. Mitchell, Jr. 72 Director 1995
Robert D. Sensel 54 Director 1995
- -----------------------------
</TABLE>
(1) As of August 31, 1999.
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>
Stephen G. Clinton 46 Director 1995 2000
Robert R. Gerber 50 Director and President 1995 2000
Richard J. Herzig 74 Director 1995 2000
Enos L. Leader 62 Director 1998 2000
- -----------------------------
</TABLE>
(1) As of August 31, 1999.
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.
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.
STEPHEN G. CLINTON is a Vice President with Tucker Anthony Cleary Gull,
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.
-4-
<PAGE> 6
MEETINGS OF DIRECTORS
The Board of Directors of FFD met 14 times for regularly scheduled and
special meetings during the fiscal year ended June 30, 1999.
Each director of FFD is also a director of First Federal. The Board of
Directors of First Federal met 14 times for regularly scheduled and special
meetings during the fiscal year ended June 30, 1999.
COMMITTEES OF DIRECTORS
The Board of Directors of FFD has an Audit 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. All six of the non-employee directors serve on
the Committee. The Audit Committee met once during the fiscal year ended June
30, 1999.
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 Directors
Gray, Herzig, Mitchell and Sensel. The Stock Option Committee met three times
during the fiscal year ended June 30, 1999.
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 for loans that exceed management approval authority, although it is
authorized to act on other matters. Any three members of the board may serve as
the Executive Committee. The Executive Committee met 30 times during the fiscal
year ended June 30, 1999.
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 Directors Gray, Herzig, Mitchell and Sensel. The RRP Committee met
three times during the fiscal year ended June 30, 1999.
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>
Larry D. Browning, Jr. 26 Chief Financial Officer of FFD and First Federal
Shirley A. Wallick 54 Treasurer and Secretary of FFD and First Federal
- -----------------------------
</TABLE>
(1) As of August 31, 1999.
LARRY D. BROWNING, JR. was appointed the Chief Financial Officer of
First Federal and FFD in August 1999. Prior to joining FFD, Mr. Browning worked
for Ormet Aluminum Corporation in the credit and funding accounting area from
April 1998 to May 1999. From August 1995 to April 1998, Mr. Browning served as
assistant chief financial officer and internal auditor at a community national
bank.
-5-
<PAGE> 7
SHIRLEY A. WALLICK is the Treasurer and the Secretary of First Federal
and FFD. She is responsible for personnel records and bookkeeping. 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, 1999, 1998 and 1997. No other executive officer of FFD or First
Federal earned salary and bonus in excess of $100,000 during such periods.
Summary Compensation Table
--------------------------
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
All Other
Annual Compensation(1) Long term Compensation Compensation
- -----------------------------------------------------------------------------------------------------------
Name and Principal Year Salary ($) Bonus ($) Awards
---------------------------------------------
Position Restricted Stock Securities Underlying
Awards ($) Options/SARs (#)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert R. Gerber 1999 $89,000 - - - $50,193 (2)
President 1998 $87,500 $5,400 - - $62,486 (5)
1997 $84,000 $8,000 $64,020 (3) 26,174 (4) $15,546 (6)
- -------------------------
</TABLE>
(1) Does not include amounts attributable to other miscellaneous benefits
received by Mr. Gerber, the cost of which was less than 10% of his
compensation.
(2) Consists of the aggregate value at the date of allocation of 3,718
shares allocated to Mr. Gerber's ESOP account.
(3) 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.
-6-
<PAGE> 8
(4) 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.
(5) Consists of the aggregate value at the date of allocation of 3,423.89
shares allocated to Mr. Gerber's ESOP account.
(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.
The following table sets forth information regarding the number and
value of unexercised options held by Mr. Gerber at June 30, 1999:
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and 6/30/99 Option/SAR Values
---------------------------------------------------------------------------------
Number of Securities Underlying Value of Unexercised
Shares Acquired on Unexercised Options/SARs at "In The Money" Options/
Exercise(#) Value 6/30/99(#) SARs at 6/30/99($)(1)
Name Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------------ ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Robert R. Gerber -0- N/A 10,470/15,704 $56,119/$84,173
- ---------------------------
</TABLE>
(1) For purposes of this table, the value of the option was determined by
multiplying the number of shares subject to unexercised options by the
difference between the $9.14 exercise price and the fair market value
of FFD's common shares, which was $14.50 on June 30, 1999, based on the
closing bid price reported by Nasdaq.
-7-
<PAGE> 9
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, 36,879 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.
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.
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
-8-
<PAGE> 10
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 2000 Annual Meeting of Shareholders should be sent to FFD by
certified mail and must be received by FFD not later than May 21, 2000. In
addition, if a shareholder intends to present a proposal at the 2000 Annual
Meeting without including the proposal in the proxy materials related to that
meeting, and if the proposal is not received by August 4, 2000, then the proxies
designated by the Board of Directors of FFD for the 2000 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 17, 1999
-9-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 844
<INT-BEARING-DEPOSITS> 2,167
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,902
<INVESTMENTS-CARRYING> 4,779
<INVESTMENTS-MARKET> 4,907
<LOANS> 87,382
<ALLOWANCE> 269
<TOTAL-ASSETS> 112,293
<DEPOSITS> 72,025
<SHORT-TERM> 0
<LIABILITIES-OTHER> 448
<LONG-TERM> 23,616
0
0
<COMMON> 0
<OTHER-SE> 16,204
<TOTAL-LIABILITIES-AND-EQUITY> 112,293
<INTEREST-LOAN> 5,567
<INTEREST-INVEST> 1,145
<INTEREST-OTHER> 203
<INTEREST-TOTAL> 6,915
<INTEREST-DEPOSIT> 2,984
<INTEREST-EXPENSE> 3,941
<INTEREST-INCOME-NET> 2,974
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 210
<EXPENSE-OTHER> 2,317
<INCOME-PRETAX> 1,085
<INCOME-PRE-EXTRAORDINARY> 717
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 717
<EPS-BASIC> .53
<EPS-DILUTED> .51
<YIELD-ACTUAL> 2.92
<LOANS-NON> 0
<LOANS-PAST> 15
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 270
<CHARGE-OFFS> 1
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 269
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 269
</TABLE>
