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,
2000.
FFD Financial Corporation reported consolidated net earnings of $922,000, or
$.69 per share, for the fiscal year ended June 30, 2000, an increase of
$205,000, or 28.6%, over reported net earnings of $717,000 for the fiscal year
ended June 30, 1999. The increase in net earnings is primarily attributable to a
$595,000, or 20.0%, increase in net interest income and a $55,000 decrease in
general, administrative and other expense.
We believe asset growth is a strategic imperative for our Corporation. This
strategic objective was attained in fiscal year 2000 by increasing net loans
receivable by $15.6 million, or 17.8%. Growth in commercial loans was a key to
increasing net loans receivable, as commercial loans increased by $11.7 million
from $19.0 million at June 30, 1999, to $30.7 million at June 30, 2000, a 61.8%
increase. Our multi-faceted strategic plan also included offering business
banking and consumer deposit products to provide funds for loan growth. Deposits
increased by $6.0 million from June 30, 1999 to June 30, 2000, an increase of
8.3%. Our New Philadelphia office provided $3.7 million of the deposit increase
and ended its second fiscal year of operations on June 30, 2000 with a deposit
base of over $14.3 million.
We continue to take steps to position FFD Financial and First Federal Savings
Bank of Dover for continued growth and profitability through our financial
products and customer services, which include electronic delivery channels for
our customers with our ATMs and telephone banking. Our next step in electronic
delivery is the addition of Internet banking and bill paying to simplify the
lives of our customers by providing financial services in a convenient manner.
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 103rd 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.
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,
/s/Robert R. Gerber
Robert R. Gerber
President
<PAGE>
BUSINESS OF FFD FINANCIAL CORPORATION
==============================================================================
FFD Financial Corporation ("FFD" or the "Corporation"), a unitary savings and
loan holding company incorporated in 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 federal savings bank. 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 principally engaged in the business of making fixed-rate and
adjustable-rate first mortgage loans, secured by one- to four-family residential
real estate located in First Federal's primary lending area, to be held in
portfolio or sold in the secondary mortgage market. 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.
FFD is subject to regulation, supervision and examination by the Office of
Thrift Supervision of the United States Department of the Treasury (the "OTS").
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 1,412,383 common shares of FFD outstanding on August 31, 2000, held
of record by approximately 660 shareholders. Price information for FFD's common
shares is quoted on the Nasdaq SmallCap Market ("Nasdaq") under the symbol
"FFDF."
1
<PAGE>
The following table sets forth the high and low trading prices for the common
shares of FFD, as quoted by Nasdaq, together with the dividends declared per
share, for each quarter of fiscal 2000 and 1999.
<TABLE>
<CAPTION>
High Trade Low Trade Cash Dividends Declared
Fiscal 1999
<S> <C> <C> <C>
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
Fiscal 2000
Quarter Ended:
September 30, 1999 $15.750 $11.875 $.085
December 31, 1999 12.563 10.500 .085
March 31, 2000 11.500 9.125 .085
June 30, 2000 9.875 8.625 .085
</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.
2
<PAGE>
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,
----------------------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(In thousands)
Total amount of:
<S> <C> <C> <C> <C> <C>
Assets $125,147 $112,293 $90,966 $88,000 $79,458
Interest-bearing deposits 1,485 2,167 607 3,547 1,793
Investment securities available for
sale - at market 2,875 2,924 2,655 9,924 9,256
Investment securities held to maturity
- at cost - - 977 1,469 2,460
Mortgage-backed securities available
for sale - at market 9,135 10,978 5,935 7,944 9,007
Mortgage-backed securities held to
maturity - at cost 4,189 4,779 5,960 7,165 5,932
Loans receivable - net (1) 102,939 87,382 70,990 55,504 48,539
Deposits 77,987 72,025 61,956 57,090 52,208
Advances from the FHLB and other
borrowings 30,412 23,616 12,519 8,382 5,184
Shareholders' equity, restricted (2) 16,265 16,204 15,825 21,480 21,411
</TABLE>
<TABLE>
<CAPTION>
For the year ended June 30,
----------------------------------------------------------------
2000 1999 1998 1997 1996
Summary of earnings: ------- ------- ------- ------- ------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Interest income $8,323 $6,915 $6,460 $5,880 $4,555
Interest expense 4,754 3,941 3,454 3,101 2,471
----- ----- ----- ----- -----
Net interest income 3,569 2,974 3,006 2,779 2,084
Provision for losses on loans 106 - - 125 50
----- ----- ----- ----- -----
Net interest income after provision
for losses on loans 3,463 2,974 3,006 2,654 2,034
Other income 179 428 525 1,337 88
General, administrative and other
expense 2,262 2,317 2,044 1,859 1,163
----- ----- ----- ----- -----
Earnings before income taxes 1,380 1,085 1,487 2,132 959
Federal income taxes 458 368 505 705 327
----- ----- ----- ----- -----
Net earnings $ 922 $ 717 $ 982 $1,427 $ 632
===== ===== ===== ===== =====
Earnings per share
Basic $.69 $.53 $.73 $1.07 N/A
=== === === ==== ===
Diluted $.68 $.51 $.71 $1.06 N/A
=== === === ==== ===
</TABLE>
-----------------------------------
(1) Includes loans held for sale.
(2) At June 30, 2000 and 1999, includes $335,000 and $216,000 of net unrealized
losses, respectively, 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 related tax effects, pursuant to Statement of Financial Accounting
Standards ("SFAS") No. 115.
3
<PAGE>
<TABLE>
<CAPTION>
Selected financial ratios At or for the year ended June 30,
and other data: ----------------------------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Return on average assets 0.77% 0.69% 1.06% 1.65% 0.99%
Return on average equity 6.07 5.11 4.65 6.65 5.72
Interest rate spread 2.51 2.37 2.22 2.15 2.41
Net interest margin 3.06 2.92 3.29 3.30 3.28
General, administrative and other expense
to average assets 1.90 2.25 2.20 2.15 1.82
Average equity to average
assets 12.75 13.59 22.75 24.83 17.29
Nonperforming assets to
total assets 0.18 0.01 0.09 0.07 0.15
Nonperforming loans to total loans 0.22 0.02 0.11 0.11 0.24
Delinquent loans to total loans (1) 0.61 0.39 0.51 0.69 0.51
Allowance for loan losses to
total loans 0.36 0.30 0.37 0.47 0.29
Allowance for loan losses to
nonperforming loans 166.67 1,793.33 329.27 421.88 124.79
Average interest-earning
assets to average interest-bearing
liabilities 113.53 114.24 128.34 131.46 122.47
Number of full service offices 2 2 2 1 1
Dividend payout ratio (2) 49.28 56.60 41.10 21.03 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) Dividend payout ratio for the year ended June 30, 1998, excludes the $4.50
per share special capital distribution.
4
<PAGE>
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, 1999 TO JUNE 30, 2000
------------------------------------------------------------------------------
The Corporation's assets at June 30, 2000, totaled $125.1 million, a $12.9
million, or 11.4%, increase over the total at June 30, 1999. This increase was
funded primarily through an increase in advances from the FHLB of $6.8 million
and growth in deposits of $6.0 million.
Investment securities totaled $2.9 million at June 30, 2000, a decrease of
$49,000 from June 30, 1999. The decrease was due primarily to the decline in
market value on available for sale securities, which are carried at fair value.
Mortgage-backed securities totaled $13.3 million at June 30, 2000, a $2.4
million, or 15.4%, decrease from the total at June 30, 1999. This decrease
resulted from principal repayments totaling $2.3 million and a decrease in
market value on available for sale securities of approximately $131,000.
Loans receivable, including loans held for sale, totaled $102.9 million at June
30, 2000, an increase of $15.6 million, or 17.8%, over the June 30, 1999 total.
Loan disbursements during fiscal 2000 totaled $35.3 million, which were
partially offset by principal repayments of $17.3 million and proceeds from
loans sold in the secondary market totaling $2.4 million. Loan disbursements
during the year ended June 30, 2000, decreased by $13.8 million, or 33.7%,
compared to the origination volume during the same period in fiscal 1999 due
primarily to a decrease in customer demand following the increase in interest
rates year to year. The growth in loans consisted primarily of commercial loans,
which totaled $30.7 million at June 30, 2000, compared to $19.0 million at June
30, 1999.
The allowance for loan losses totaled $375,000 and $269,000 at June 30, 2000 and
1999, respectively, which represented .36% and .30% of total loans and 166.67%
and 1,793.33% of nonperforming loans at those respective dates. Nonperforming
loans amounted to $225,000 and $15,000 at June 30, 2000, and 1999, respectively.
Although management believes that the allowance for loan losses at June 30,
5
<PAGE>
2000, was adequate based upon the available facts and circumstances, there can
be no assurance that additions to such allowance will not be necessary in future
periods, which could adversely affect the Corporation's net earnings.
Deposits totaled $78.0 million at June 30, 2000, a $6.0 million, or 8.3%,
increase over total deposits at June 30, 1999. This increase resulted primarily
from growth in deposits totaling approximately $3.7 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 $30.4 million at June 30, 2000, a $6.8 million, or 28.8%,
increase over June 30, 1999. Proceeds from the increase in borrowings were
primarily used to fund new loan originations.
Shareholders' equity totaled $16.3 million at June 30, 2000, an increase of
$61,000, or .4%, over June 30, 1999 levels as net earnings of $922,000 were
partially offset by dividends paid totaling $484,000, purchases of treasury
shares totaling $529,000, and a $119,000 increase in the unrealized loss on
securities designated as available for sale.
COMPARISON OF OPERATING RESULTS
FOR THE YEARS ENDED JUNE 30, 2000 AND 1999
------------------------------------------------------------------------------
The consolidated net 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 $922,000 for the fiscal year ended June 30,
2000, an increase of $205,000, or 28.6%, over the net earnings of $717,000
recorded in fiscal 1999. The increase in net earnings resulted primarily from a
$595,000 increase in net interest income and a $55,000 decrease in general,
administrative and other expense, which were partially offset by a $249,000
decrease in other operating income, a $106,000 increase in the provision for
losses on loans, and a $90,000 increase in the provision for federal income
taxes.
Net Interest Income. Total interest income increased by $1.4 million, or 20.4%,
to a total of $8.3 million for the year ended June 30, 2000, compared to $6.9
million for the year ended June 30, 1999. Interest income on loans increased by
$1.5 million, or 26.8%, due primarily to a $16.6 million, or 20.9%, increase in
the average loan portfolio balance outstanding, coupled with a 34 basis point
increase in the average yield, to 7.34% in fiscal 2000. Interest income on
mortgage-backed securities decreased by $32,000, or 3.3%, due primarily to a
$706,000, or 4.6%, decrease in the average balance outstanding, offset somewhat
by a 9 basis point increase in the yield earned on such securities, to 6.41% in
fiscal 2000. Interest income on investment securities and interest-bearing
deposits decreased by $51,000, or 13.4%, due primarily to an approximate $1.0
million, or 14.9%, decrease in the related average investment balance.
6
<PAGE>
Interest expense on deposits increased by $188,000, or 6.3%, for the year ended
June 30, 2000, compared to fiscal 1999, due primarily to a $4.9 million, or
7.0%, increase in the average deposit portfolio balance outstanding.
Interest expense on borrowings increased by $625,000, or 65.3%, due primarily to
an $8.8 million, or 44.7%, increase in the average balance of advances
outstanding, coupled with a 70 basis point increase in the average cost of such
borrowings, to 5.57% in fiscal 2000.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $595,000, or 20.0%, for the fiscal year ended
June 30, 2000, compared to fiscal 1999. The interest rate spread was
approximately 2.51% for the fiscal year ended June 30, 2000, compared to 2.37%
for the 1999 fiscal year, while the net interest margin was 3.06% in 2000,
compared to 2.92% in 1999.
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. The provision for losses on
loans totaled $106,000 for the year ended June 30, 2000. For the fiscal year
ended June 30, 1999, management concluded that the allowance for loan losses was
adequate and did not record a provision for losses on loans. First Federal
recorded the provision during fiscal 2000 primarily due to the growth in the
commercial and nonresidential loan portfolios. 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 $179,000 for the year ended June 30, 2000, a
decrease of $249,000, or 58.2%, from the 1999 total. The decrease resulted
primarily from the absence of a $210,000 gain on sales of securities recorded
during fiscal 1999, and an $83,000, or 76.9%, decrease in gain on sale of loans
in fiscal 2000, which were partially offset by a $44,000, or 40.0%, 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, 2000, a decrease of
$55,000, or 2.4%, compared to the same period in 1999. The decrease resulted
primarily from a $41,000, or 3.7%, decrease in employee compensation and
benefits and a $52,000, or 19.5%, decrease in franchise taxes, which were
partially offset by a $55,000, or 11.5%, increase in other operating expenses.
The decrease in employee compensation and benefits was due primarily to the
decrease in expense associated with stock benefit plans. The decrease in
franchise taxes resulted from a reduction in the tax rate. The increase in other
operating expense consisted primarily of a $40,000 increase in ATM related costs
and pro-rata increases in other expenses due to the Corporation's overall growth
year to year.
7
<PAGE>
Federal Income Taxes. FFD recorded a provision for federal income taxes totaling
$458,000 for the year ended June 30, 2000, an increase of $90,000, or 24.5%,
over fiscal 1999. The increase resulted primarily from a $295,000, or 27.2%,
increase in earnings before taxes. The effective tax rates were 33.2% and 33.9%
for the years ended June 30, 2000 and 1999, respectively.
COMPARISON OF OPERATING RESULTS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
------------------------------------------------------------------------------
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.
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 was
approximately 2.37% for the fiscal year ended June 30, 1999, compared to 2.22%
for the 1998 fiscal year, while the net interest margin was 2.92% in 1999,
compared to 3.29% in 1998.
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
8
<PAGE>
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
years ended June 30, 1999 and 1998.
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.
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 1999,
and 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, the implementation of new business products and
services, and the opening of the New Philadelphia office. The increase in
franchise taxes was due to the increase in First Federal's capital year to year.
The increase in data processing costs was due primarily to the increased number
of deposit and loan accounts associated with the First Federal'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 rate was 33.9% for each of
the years ended June 30, 1999 and 1998.
9
<PAGE>
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,
-------------------------------------------------------------------------------------
2000 1999 1998
-------------------------- --------------------------- --------------------------
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 $ 96,101 $7,058 7.34% $ 79,497 $5,567 7.00% $63,315 $4,766 7.53%
Mortgage-backed securities 14,599 936 6.41 15,305 968 6.32 14,202 927 6.53
Investment securities 3,000 191 6.37 2,902 177 6.10 5,097 319 6.26
Interest-bearing deposits
and other 2,858 138 4.82 3,978 203 5.10 8,816 448 5.08
------- ------ ---- ------- ----- ---- ------ ----- ----
Total interest-earning assets 116,558 8,323 7.14 101,682 6,915 6.80 91,430 6,460 7.07
Non-interest-earning assets 2,516 1,517 1,417
------- ------- ------
Total assets $119,074 $103,199 $92,847
======= ======= ======
Interest-bearing liabilities:
Deposits $ 74,254 3,172 4.27 $ 69,374 2,984 4.30 $59,554 2,797 4.70
Borrowings 28,413 1,582 5.57 19,637 957 4.87 11,685 657 5.62
------- ----- ---- ------- ----- ---- ------ ----- ----
Total interest-bearing
liabilities 102,667 4,754 4.63 89,011 3,941 4.43 71,239 3,454 4.85
------- ----- ------- ----- ------ -----
Non-interest-bearing liabilities 1,222 166 487
------- ------- ------
Total liabilities 103,889 89,177 71,726
Shareholders' equity 15,185 14,022 21,121
------- ------- ------
Total liabilities and
shareholders' equity $119,074 $103,199 $92,847
======= ======= ======
Net interest income $3,569 $2,974 $3,006
===== ===== =====
Interest rate spread 2.51% 2.37% 2.22%
==== ==== ====
Net interest margin (net interest
income as a percent of average
interest-earning assets) 3.06% 2.92% 3.29%
==== ==== ====
Average interest-earning assets to
average interest-bearing liabilities 113.53% 114.24% 128.34%
====== ====== ======
</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.
10
<PAGE>
<TABLE>
<CAPTION>
Year ended June 30,
2000 vs. 1999 1999 vs. 1998
------------------------- -----------------------
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 $1,210 $281 $1,491 $1,133 $(332) $801
Mortgage-backed securities (45) 13 (32) 70 (29) 41
Investment securities 6 8 14 (134) (8) (142)
Interest-bearing deposits and other
(54) (11) (65) (247) 2 (245)
----- --- ----- ----- ---- ---
Total interest income 1,117 291 1,408 822 (367) 455
----- --- ----- ----- ---- ---
Interest expense attributable to:
Deposits 208 (20) 188 422 (235) 187
Borrowings 473 152 625 388 (88) 300
----- --- ----- ----- ---- ---
Total interest expense 681 132 813 810 (323) 487
----- --- ----- ----- ---- ---
Increase (decrease) in net interest income
$ 436 $159 $ 595 $ 12 $ (44) $(32)
===== === ===== ===== ==== ===
</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 change in market interest rates. Both an increase in
market interest rates and a decrease in market interest rates are considered.
11
<PAGE>
Presented below, as of June 30, 2000 and 1999, is an analysis of First Federal's
interest rate risk as measured by changes in NPV for instantaneous and sustained
parallel shifts of 200 and 300 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, 2000
Change in interest rate Board limit $ change % change
(basis points) % change in NPV in NPV
---------------- --------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C>
+300 +30.0% $(472) (3.14)%
+200 +20.0 (137) (0.91)
- - - -
-200 -20.0 (495) (3.30)
-300 -30.0 (964) (6.42)
</TABLE>
<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>
+300 +30.0% $ 566 4.38%
+200 +20.0 602 4.63
- - - -
-200 -20.0 (1,721) (13.22)
-300 -30.0 (2,648) (20.47)
</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.
12
<PAGE>
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, 2000,
First Federal's regulatory liquidity ratio was 28.9%. At such date, First
Federal had commitments to originate loans, including unused lines of credit,
totaling $8.7 million and no commitments to purchase or sell loans.
Cash and cash equivalents, which is a component of liquidity, 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,
2000, 1999 and 1998:
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------------
2000 1999 1998
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Net earnings $ 922 $ 717 $ 982
Adjustments to reconcile net earnings to
net cash from operating activities 608 (965) (675)
------ ------ -----
Net cash from (used in) operating activities 1,530 (248) 307
Net cash used in investing activities (13,894) (19,213) (4,706)
Net cash from financing activities 11,772 20,839 1,952
------ ------ -----
Net change in cash and cash equivalents (592) 1,378 (2,447)
Cash and cash equivalents at
beginning of year 3,011 1,633 4,080
------ ------ -----
Cash and cash equivalents at
end of year $ 2,419 $ 3,011 $1,633
====== ====== =====
</TABLE>
13
<PAGE>
First Federal is required by applicable law and regulation to meet certain
minimum capital standards, which include a tangible capital requirement, a core
capital requirement, or leverage ratio, and a risk-based capital requirement.
The tangible capital requirement requires a savings association 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 generally require savings
associations to maintain core capital of at least 4% of the association's total
assets, 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 $366,000 at June
30, 2000.
First Federal exceeded all of its capital requirements at June 30, 2000. The
following table summarizes First Federal's regulatory capital requirements and
regulatory capital at June 30, 2000:
<TABLE>
<CAPTION>
Excess 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 $15,519 12.3% $1,897 1.5% $13,622 10.8%
Core capital 15,519 12.3 5,058 4.0 10,461 8.3
Risk-based capital 15,885 19.4 6,550 8.0 9,335 11.4
</TABLE>
EFFECT OF Recent ACCOUNTING PRONOUNCEMENTS
------------------------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board (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.
14
<PAGE>
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. FFD adopted SFAS No. 133 effective July 1, 2000, as
required, without material effect on FFD's financial condition and results of
operations.
15
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS AND
CONSOLIDATED FINANCIAL STATEMENTS
=============================================================================
CONTENTS
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 17
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 18
CONSOLIDATED STATEMENTS OF EARNINGS 19
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 20
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 21
CONSOLIDATED STATEMENTS OF CASH FLOWS 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 24
16
<PAGE>
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, 2000 and 1999, and the related
consolidated statements of earnings, comprehensive income, shareholders' equity
and cash flows for each of the years ended June 30, 2000, 1999 and 1998. 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, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the years ended June 30, 2000, 1999
and 1998, in conformity with generally accepted accounting principles.
/s/GRANT THORNTON LLP
Cincinnati, Ohio
August 18, 2000
17
<PAGE>
FFD Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30,
(In thousands, except share data)
ASSETS 2000 1999
<S> <C> <C>
Cash and due from banks $ 934 $ 844
Interest-bearing deposits in other financial institutions 1,485 2,167
------- -------
Cash and cash equivalents 2,419 3,011
Investment securities designated as available
for sale - at market 2,875 2,924
Mortgage-backed securities designated as available for
sale - at market 9,135 10,978
Mortgage-backed securities held to maturity - at amortized cost,
approximate market value of $4,188 and $4,907 as of June 30,
2000 and 1999 4,189 4,779
Loans receivable - net 102,118 86,417
Loans held for sale - at lower of cost or market 821 965
Office premises and equipment - at depreciated cost 1,253 1,364
Stock in Federal Home Loan Bank - at cost 1,652 1,201
Accrued interest receivable 429 329
Prepaid expenses and other assets 181 209
Prepaid federal income taxes 61 116
Deferred federal income taxes 14 -
------- -------
Total assets $125,147 $112,293
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 77,987 $ 72,025
Advances from the Federal Home Loan Bank 30,412 23,616
Accrued interest payable 202 146
Other liabilities 281 250
Deferred federal income taxes - 52
------- -------
Total liabilities 108,882 96,089
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 7,850 7,798
Retained earnings - substantially restricted 10,288 9,850
Accumulated comprehensive loss; unrealized losses on securities designated
as available for sale, net of related tax effects (335) (216)
Shares acquired by stock benefit plans (1,028) (1,207)
Less 42,367 and 1,334 treasury shares at June 30, 2000 and 1999 - at cost (510) (21)
------- -------
Total shareholders' equity 16,265 16,204
------- -------
Total liabilities and shareholders' equity $125,147 $112,293
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE>
FFD Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended June 30,
(In thousands, except per share data)
2000 1999 1998
<S> <C> <C> <C>
Interest income
Loans $7,058 $5,567 $4,766
Mortgage-backed securities 936 968 927
Investment securities 191 177 319
Interest-bearing deposits and other 138 203 448
----- ----- -----
Total interest income 8,323 6,915 6,460
Interest expense
Deposits 3,172 2,984 2,797
Borrowings 1,582 957 657
----- ----- -----
Total interest expense 4,754 3,941 3,454
----- ----- -----
Net interest income 3,569 2,974 3,006
Provision for losses on loans 106 - -
----- ----- -----
Net interest income after provision for losses on loans 3,463 2,974 3,006
Other income
Gain on sale of loans 25 108 -
Gain on sale of investment securities designated
as available for sale - 210 441
Other operating 154 110 84
----- ----- -----
Total other income 179 428 525
General, administrative and other expense
Employee compensation and benefits 1,076 1,117 1,034
Occupancy and equipment 229 237 193
Franchise taxes 214 266 213
Federal deposit insurance premiums 26 38 34
Data processing 185 182 109
Other operating 532 477 461
----- ----- -----
Total general, administrative and other expense 2,262 2,317 2,044
----- ----- -----
Earnings before income taxes 1,380 1,085 1,487
Federal income taxes
Current 463 249 311
Deferred (5) 119 194
----- ----- -----
Total federal income taxes 458 368 505
----- ----- -----
NET EARNINGS $ 922 $ 717 $ 982
===== ===== =====
EARNINGS PER SHARE
Basic $.69 $.53 $.73
=== === ===
Diluted $.68 $.51 $.71
=== === ===
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE>
FFD Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended June 30,
(In thousands)
2000 1999 1998
<S> <C> <C> <C>
Net earnings $ 922 $ 717 $ 982
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities
during the period, net of tax of $(61), $(112)
and $212 in 2000, 1999 and 1998, respectively (119) (217) 411
Reclassification adjustment for realized gains
included in earnings, net of tax of $71 and
$150 in 1999 and 1998, respectively - (139) (291)
---- ---- -----
Comprehensive income $ 803 $ 361 $1,102
==== ==== =====
Accumulated comprehensive income (loss) $(335) $(216) $ 140
==== ==== =====
</TABLE>
The accompanying notes are an integral part of these statements.
20
<PAGE>
FFD Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended June 30, 2000, 1999 and 1998
(In thousands, except per share data)
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, 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
Net earnings for the year ended June 30, 2000 - - - - - 922 922
Purchase of treasury shares - - - (529) - - (529)
Amortization of stock benefit plan expense - 65 179 - - - 244
Unrealized loss on securities designated as available
for sale, net of related tax effects - - - - (119) - (119)
Exercise of stock options - (13) - 40 - - 27
Dividends of $.34 per share - - - - - (484) (484)
--- ------ ------ ---- ---- ------ ------
Balance at June 30, 2000 $ - $ 7,850 $(1,028) $(510) $(335) $10,288 $16,265
=== ====== ====== ==== ==== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE>
FFD Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30,
(In thousands)
2000 1999 1998
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 922 $ 717 $ 982
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 40 53 33
Amortization of deferred loan origination fees (25) (57) (73)
Gain on sale of loans (8) (46) -
Loans originated for sale in the secondary market (2,206) (8,398) -
Proceeds from sale of mortgage loans in the secondary market 2,358 7,479 -
Depreciation and amortization 138 131 109
Gain on sale of investment and mortgage-backed
securities designated as available for sale - (210) (441)
Provision for losses on loans 106 - -
Amortization of stock benefit plan expense 244 345 294
Federal Home Loan Bank stock dividends (104) (74) (55)
Increase (decrease) in cash due to changes in:
Accrued interest receivable (100) (50) (12)
Prepaid expenses and other assets 28 12 (81)
Other liabilities 31 (8) (82)
Accrued interest payable 56 52 12
Federal income taxes
Current 55 (313) (573)
Deferred (5) 119 194
------ ------ ------
Net cash provided by (used in) operating activities 1,530 (248) 307
Cash flows provided by (used in) investing activities:
Purchase of investment securities designated as available
for sale - (3,000) (6,947)
Purchase of investment securities designated as
held to maturity - - (1,244)
Proceeds from maturity of investment securities - 3,477 10,157
Proceeds from sale of investment securities designated
as available for sale - 212 6,430
Purchase of mortgage-backed securities designated
as available for sale - (9,633) -
Principal repayments on mortgage-backed securities 2,262 5,407 3,174
Purchase of Federal Home Loan Bank stock (347) (194) (236)
Loan principal repayments 17,338 17,172 13,826
Loan disbursements (33,120) (32,542) (29,239)
Purchase of office premises and equipment (27) (115) (627)
Proceeds from sale of office premises and equipment - 3 -
------ ------ ------
Net cash used in investing activities (13,894) (19,213) (4,706)
------ ------ ------
Net cash used in operating and investing
activities (subtotal carried forward) (12,364) (19,461) (4,399)
------ ------ ------
</TABLE>
22
<PAGE>
FFD Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended June 30,
(In thousands)
2000 1999 1998
<S> <C> <C> <C>
Net cash used in operating and investing
activities (subtotal brought forward) $(12,364) $(19,461) $(4,399)
Cash flows provided by (used in) financing activities:
Net increase in deposit accounts 5,962 10,069 4,866
Proceeds from Federal Home Loan Bank advances 39,491 11,133 11,950
Repayments of Federal Home Loan Bank advances (32,695) (36) (7,813)
Proceeds from exercise of stock options 27 76 10
Purchase of treasury shares (529) - (154)
Cash distributions paid on common stock (484) (403) (6,907)
------- ------- ------
Net cash provided by financing activities 11,772 20,839 1,952
------- ------- ------
Net increase (decrease) in cash and cash equivalents (592) 1,378 (2,447)
Cash and cash equivalents at beginning of year 3,011 1,633 4,080
------- ------- ------
Cash and cash equivalents at end of year $ 2,419 $ 3,011 $ 1,633
======= ======= ======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 442 $ 182 $ 819
======= ======= ======
Interest on deposits and borrowings $ 4,698 $ 3,889 $ 3,442
======= ======= ======
Supplemental disclosure of noncash investing activities:
Unrealized gains (losses) on securities designated as
available for sale, net of applicable tax effects $ (119) $ (356) $ 120
======= ======= ======
Recognition of mortgage servicing rights in accordance
with SFAS No. 125 $ 17 $ 62 $ -
======= ======= ======
</TABLE>
The accompanying notes are an integral part of these statements.
23
<PAGE>
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000, 1999 and 1998
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, 2000 and 1999, 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
24
<PAGE>
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2. Investment Securities and Mortgage-backed Securities (continued)
are carried at fair value with resulting unrealized gains or losses recorded
to operations or shareholders' equity, respectively. At June 30, 2000 and
1999, the Corporation's shareholders' equity reflected a net unrealized loss
on securities designated as available for sale totaling $335,000 and
$216,000, respectively.
Realized gains and losses on sales of securities are recognized using the
specific identification method.
3. Loans Receivable
Loans are stated at the principal balance outstanding, reduced by deferred
loan origination fees and the allowance for loan losses. Interest is accrued
as earned unless the collectibility of the loan is in doubt. Interest on
loans that are contractually past due is charged off, or an allowance is
established based on management's periodic evaluation. The allowance is
established by a charge to interest income equal to all interest previously
accrued, and income is subsequently recognized only to the extent that cash
payments are received until, in management's judgment, the borrower's
ability to make periodic interest and principal payments has returned to
normal, in which case the loan is returned to accrual status. If the
ultimate collectibility of the loan is in doubt, in whole or in part, all
payments received on nonaccrual loans are applied to reduce principal until
such doubt is eliminated.
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, 2000,
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 must 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 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
25
<PAGE>
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
3. Loans Receivable (continued)
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 $10,000 and $5,000 for the years ended June 30, 2000
and 1999, respectively. At June 30, 2000 and 1999, the fair value of the
Corporation's mortgage servicing rights approximated the carrying value of
$65,000 and $57,000, respectively.
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).
26
<PAGE>
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
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 nonresidential, commercial and multi-family
residential real estate loans, and its evaluation of impairment thereof,
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, 2000 and 1999, 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 buildings, 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.
27
<PAGE>
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
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.
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
$145,000, $261,000 and $228,000 for the fiscal years ended June 30, 2000,
1999 and 1998, respectively.
Additionally, during fiscal 1997, the Savings Bank 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 Savings Bank has awarded
29,300 shares under the RRP which vest over a five year period. A provision
of $62,000, $110,000 and $109,000 related to the RRP was charged to expense
for the fiscal years ended June 30, 2000, 1999 and 1998, respectively.
28
<PAGE>
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 85,744, 92,356 and 106,515 unallocated shares held
by the ESOP, totaled 1,343,818, 1,355,501 and 1,340,049 for the fiscal years
ended June 30, 2000, 1999 and 1998, 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
1,356,727, 1,397,814 and 1,376,664 for the fiscal years ended June 30, 2000,
1999 and 1998, respectively. Incremental shares related to the assumed
exercise of stock options included in the computation of diluted earnings
per share totaled 12,909, 42,313 and 36,615 for the fiscal years ended June
30, 2000, 1999 and 1998, respectively.
Options to purchase 5,952 shares of common stock with a weighted-average
exercise price of $12.89 were outstanding at June 30, 2000, but were
excluded from the computation of common share equivalents for the year ended
June 30, 2000, because the exercise prices were greater than the average
market price of the common shares.
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.
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.
29
<PAGE>
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. Fair Value of Financial Instruments (continued)
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,
2000 and 1999:
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.
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, 2000 and 1999 was not material.
30
<PAGE>
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. Fair Value of Financial Instruments (continued)
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>
2000 1999
Carrying Fair Carrying Fair
value value value value
(In thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 2,419 $ 2,419 $ 3,011 $ 3,011
Investment securities 2,875 2,875 2,924 2,924
Mortgage-backed securities 13,324 13,323 15,757 15,885
Loans receivable 102,939 103,425 87,382 87,537
Federal Home Loan Bank stock 1,652 1,652 1,201 1,201
------- ------- ------- -------
$123,209 $123,694 $110,275 $110,558
======= ======= ======= =======
Financial liabilities
Deposits $ 77,987 $ 77,401 $ 72,025 $ 72,519
Advances from the Federal Home Loan Bank 30,412 30,177 23,616 23,598
------- ------- ------- -------
$108,399 $107,578 $ 95,641 $ 96,117
======= ======= ======= =======
</TABLE>
13. Advertising
Advertising costs are expensed when incurred. The Corporation's advertising
expense for the fiscal years ended June 30, 2000, 1999 and 1998 totaled
$56,000, $65,000 and $69,000, respectively.
14. Reclassifications
Certain prior year amounts have been reclassified to conform to the 2000
consolidated financial statement presentation.
31
<PAGE>
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
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, 2000 and 1999,
are as follows:
<TABLE>
<CAPTION>
June 30, 2000
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 $- $125 $2,875
===== == === =====
</TABLE>
<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>
The amortized cost and estimated fair value of U. S. Government agency
obligations designated as available for sale at June 30, 2000, 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 $1,923
Due after five years through twenty years 1,000 952
----- -----
$3,000 $2,875
===== =====
</TABLE>
32
<PAGE>
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
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, 2000 and
1999, are shown below:
<TABLE>
<CAPTION>
2000
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 $ 3,779 $ 19 $ (34) $ 3,764
Government National Mortgage
Association participation certificates 410 14 - 424
------ --- ---- ------
Total mortgage-backed securities
held to maturity 4,189 33 (34) 4,188
Available for sale:
Federal National Mortgage
Association participation certificates 7,435 - (347) 7,088
Federal Home Loan Mortgage
Corporation participation certificates 189 - (1) 188
Government National Mortgage
Association participation certificates 1,894 - (35) 1,859
------ --- ---- ------
Total mortgage-backed securities
available for sale 9,518 - (383) 9,135
------ --- ---- ------
Total mortgage-backed securities $13,707 $ 33 $(417) $13,323
====== === ==== ======
</TABLE>
<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>
33
<PAGE>
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
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, 2000, 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 five years $ 214
Due within five to ten years 3,338
Due after ten years 10,155
------
$13,707
======
</TABLE>
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at June 30 is as follows:
<TABLE>
<CAPTION>
2000 1999
(In thousands)
<S> <C> <C>
Residential real estate
One- to four-family $ 67,761 $65,103
Multi-family 785 721
Nonresidential real estate and land 1,504 1,925
Commercial loans 30,723 18,989
Consumer and other loans 2,966 1,650
------- ------
103,739 88,388
Less:
Undisbursed portion of loans in process 1,200 1,560
Deferred loan origination fees 46 142
Allowance for loan losses 375 269
------- ------
$102,118 $86,417
======= ======
</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 $67.3 million, or 66%, of the total loan portfolio at June 30,
2000, and approximately $64.3 million, or 74%, of the total loan portfolio
at June 30, 1999. 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.
34
<PAGE>
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE C - LOANS RECEIVABLE (continued)
As discussed previously, the Savings Bank has sold whole loans and
participating interests in loans in the secondary market, generally
retaining servicing on the loans sold. Loans sold and serviced for others
totaled approximately $9.1 million and $7.4 million at June 30, 2000 and
1999, respectively.
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 $294,000 and $444,000 at June
30, 2000 and 1999, respectively.
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>
2000 1999 1998
(In thousands)
<S> <C> <C> <C>
Beginning balance $269 $270 $270
Provision for losses on loans 106 - -
Loan charge-offs - (1) -
--- --- ---
Ending balance $375 $269 $270
=== === ===
</TABLE>
As of June 30, 2000, the Savings Bank's allowance for loan losses was
comprised of a general loan loss allowance totaling $366,000, which is
includible as a component of regulatory risk-based capital and a specific
allowance totaling $9,000.
Nonperforming and nonaccrual loans at June 30, 2000, 1999 and 1998, totaled
$225,000, $15,000 and $82,000, respectively. Interest income that would have
been recognized had nonaccrual loans performed pursuant to contractual terms
totaled approximately $12,000, $1,000 and $2,000 for the years ended June
30, 2000, 1999 and 1998, respectively.
35
<PAGE>
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at June 30 is comprised of the following:
<TABLE>
<CAPTION>
2000 1999
(In thousands)
<S> <C> <C>
Land $ 323 $ 323
Buildings and improvements 836 836
Furniture and equipment 606 579
------ ------
1,765 1,738
Less accumulated depreciation and
amortization 512 374
------ ------
$1,253 $1,364
===== =====
</TABLE>
36
<PAGE>
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE F - DEPOSITS
Deposits consist of the following major classifications at June 30:
<TABLE>
<CAPTION>
Deposit type and weighted-
average interest rate 2000 1999
Amount % Amount %
(Dollars in thousands)
<S> <C> <C> <C> <C>
NOW accounts
2000 - 0.40% $ 9,543 12.3%
1999 - 0.90% $ 8,290 11.5%
Passbook
2000 - 4.08% 24,666 31.6
1999 - 3.54% 22,557 31.3
------ ----- ------ -----
Total demand, transaction and
passbook deposits 34,209 43.9 30,847 42.8
Certificates of deposit Original maturities of:
One year or less
2000 - 5.87% 14,316 18.3
1999 - 4.66% 8,511 11.8
12 months to 36 months
2000 - 6.30% 24,469 31.4
1999 - 5.60% 28,040 39.0
Individual retirement accounts
2000 - 5.79% 4,993 6.4
1999 - 5.35% 4,627 6.4
------ ----- ------ -----
Total certificates of deposit 43,778 56.1 41,178 57.2
------ ----- ------ -----
Total deposit accounts $77,987 100.0% $72,025 100.0%
====== ===== ====== =====
</TABLE>
The Savings Bank had certificate of deposit accounts with balances in excess
of $100,000 totaling $3.9 million and $2.7 million at June 30, 2000 and
1999, respectively.
Interest expense on deposits at June 30 is summarized as follows:
<TABLE>
<CAPTION>
2000 1999 1998
(In thousands)
<S> <C> <C> <C>
Passbook $ 885 $ 737 $ 702
NOW accounts 68 81 98
Certificates of deposit 2,219 2,166 1,997
----- ----- -----
$3,172 $2,984 $2,797
===== ===== =====
</TABLE>
37
<PAGE>
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE F - DEPOSITS (continued)
Maturities of outstanding certificates of deposit at June 30 are summarized
as follows:
<TABLE>
<CAPTION>
2000 1999
(In thousands)
<S> <C> <C>
Less than one year $28,650 $28,262
One year to two years 12,736 11,025
Two years to three years 2,392 1,891
------ ------
$43,778 $41,178
====== ======
</TABLE>
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at June 30, 2000 by
a pledge of certain residential mortgage loans totaling $45.6 million and
the Savings Bank's investment in Federal Home Loan Bank stock, are
summarized as follows:
<TABLE>
<CAPTION>
Interest Maturing in year
rate ending June 30, 2000 1999
(Dollars in thousands)
<S> <C> <C> <C>
6.83% - 7.35% 2001 $12,000 $ -
4.93% - 6.58% 2004 2,500 2,500
8.15% 2005 14 17
4.96% - 5.10% 2008 - 10,000
5.06% - 6.32% After 2008 15,898 11,099
------ ------
$30,412 $23,616
====== ======
Weighted-average interest rate 6.48% 5.05%
==== ====
</TABLE>
38
<PAGE>
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
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>
2000 1999 1998
(Dollars in thousands)
<S> <C> <C> <C>
Federal income taxes at statutory rate $469 $369 $506
Decrease in taxes resulting from:
Other, primarily nontaxable interest income in 2000 (11) (1) (1)
--- --- ---
Federal income taxes per consolidated
financial statements $458 $368 $505
=== === ===
Effective tax rate 33.2% 33.9% 33.9%
==== ==== ====
</TABLE>
The composition of the Corporation's net deferred tax asset (liability) at
June 30 is as follows:
<TABLE>
<CAPTION>
Taxes (payable) refundable on temporary 2000 1999
differences at statutory rate: (In thousands)
<S> <C> <C>
Deferred tax assets:
Deferred loan origination fees $ 15 $ 48
Retirement expense 46 52
General loan loss allowance 124 91
Unrealized losses on securities designated as
available for sale 173 112
Other 3 1
--- ---
Deferred tax assets 361 304
Deferred tax liabilities:
Financed loan origination fees (70) (105)
Federal Home Loan Bank stock dividends (179) (143)
Difference between book and tax depreciation (20) (17)
Percentage of earnings bad debt deduction (56) (72)
Mortgage servicing rights (22) (19)
--- ---
Deferred tax liabilities (347) (356)
--- ---
Net deferred tax asset (liability) $ 14 $(52)
=== ===
</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 qualified 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,
2000, include approximately $1.8 million for which federal income taxes have
not been provided. The amount of unrecognized deferred tax liability
relating to the cumulative bad debt deduction was approximately $550,000 at
June 30, 2000.
39
<PAGE>
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE H - FEDERAL INCOME TAXES (continued)
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 began to amortize the
recapture of the bad debt reserve into taxable income over a six year period
in fiscal 1998.
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, 2000, the Savings Bank had outstanding commitments of
approximately $636,000 to originate loans. Additionally, the Savings Bank
was obligated under unused lines of credit totaling $8.1 million. In the
opinion of management, all loan commitments equaled or exceeded prevalent
market interest rates as of June 30, 2000, 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.
40
<PAGE>
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE J - REGULATORY CAPITAL (continued)
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) generally equal to 4.0% of adjusted total assets, except for those
associations with the highest examination rating and acceptable levels of
risk. The risk-based capital requirement provides for the maintenance of
core capital plus general loss allowances equal to 8.0% of risk-weighted
assets. In computing risk-weighted assets, the Savings Bank multiplies the
value of each asset on its statement of financial condition by a defined
risk-weighting factor, e.g., one- to four-family residential loans carry a
risk-weighted factor of 50%.
During the 2000 fiscal year, the Savings Bank was notified from its
regulator that it was categorized as "well-capitalized" under the regulatory
framework for prompt corrective action. To be categorized as
"well-capitalized" the Savings Bank must maintain minimum capital ratios as
set forth in the following tables.
As of June 30, 2000 and 1999, management believes that the Savings Bank met
all capital adequacy requirements to which it was subject.
<TABLE>
<CAPTION>
As of June 30, 2000
To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $15,519 12.3% =>$1,897 =>1.5% =>$6,323 => 5.0%
Core capital $15,519 12.3% =>$5,058 =>4.0% =>$7,587 => 6.0%
Risk-based capital $15,885 19.4% =>$6,550 =>8.0% =>$8,188 =>10.0%
</TABLE>
<TABLE>
<CAPTION>
As of June 30, 1999
To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $14,274 12.8% =>$1,671 =>1.5% =>$5,572 => 5.0%
Core capital $14,274 12.8% =>$4,457 =>4.0% =>$6,686 => 6.0%
Risk-based capital $14,543 21.5% =>$5,404 =>8.0% =>$6,755 =>10.0%
</TABLE>
41
<PAGE>
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE J - REGULATORY CAPITAL (continued)
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.
NOTE K- CONDENSED FINANCIAL STATEMENTS OF FFD FINANCIAL CORPORATION
The following condensed financial statements summarize the financial
position of FFD Financial Corporation as of June 30, 2000 and 1999, and the
results of its operations and its cash flows for the years ended June 30,
2000, 1999 and 1998.
FFD Financial Corporation
<TABLE>
<CAPTION>
STATEMENTS OF FINANCIAL CONDITION
June 30,
(In thousands)
ASSETS 2000 1999
<S> <C> <C>
Cash and due from banks $ 136 $ 1,106
Loan receivable from ESOP 838 931
Investment in First Federal Savings Bank of Dover 15,190 14,064
Accrued interest receivable 12 14
Prepaid federal income tax 57 72
Prepaid expenses and other assets 32 17
------ ------
Total assets $16,265 $16,204
====== ======
SHAREHOLDERS' EQUITY
Shareholders' equity
Common stock $ - $ -
Additional paid-in capital 7,850 7,798
Retained earnings 10,288 9,850
Unrealized losses on securities designated as available
for sale, net of related tax effects (335) (216)
Shares acquired by stock benefit plans (1,028) (1,207)
Treasury shares - at cost (510) (21)
------ ------
Total shareholders' equity $16,265 $16,204
====== ======
</TABLE>
42
<PAGE>
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE K - CONDENSED FINANCIAL STATEMENTS OF FFD FINANCIAL CORPORATION (continued)
FFD Financial Corporation
<TABLE>
<CAPTION>
STATEMENTS OF EARNINGS
Year ended June 30,
(In thousands)
2000 1999 1998
<S> <C> <C> <C>
Revenue
Interest income $ 60 $ 54 $ 377
Equity in earnings of subsidiary 1,002 833 888
----- --- -----
Total revenue 1,062 887 1,265
General and administrative expenses 181 229 235
----- --- -----
Earnings before income taxes (credits) 881 658 1,030
Federal income taxes (credits) (41) (59) 48
----- --- -----
NET EARNINGS $ 922 $717 $ 982
===== === =====
</TABLE>
FFD Financial Corporation
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
Year ended June 30,
(In thousands)
2000 1999 1998
<S> <C> <C> <C>
Cash provided by (used in) operating activities:
Net earnings for the year $ 922 $ 717 $ 982
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Distributions from subsidiary in excess of earnings - 567 -
Undistributed earnings of subsidiary (1,001) - (888)
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets (13) 6 121
Other liabilities - (4) -
Prepaid federal income taxes 15 (72) (43)
----- ----- ------
Net cash provided by (used in) operating activities (77) 1,214 172
Cash flows provided by (used in) investing activities:
Proceeds from repayment of loan to ESOP 93 116 84
Proceeds from maturities of investment securities - - 11,389
Purchase of investment securities - - (4,951)
----- ----- ------
Net cash provided by investing activities 93 116 6,522
Cash flows provided by (used in) financing activities:
Proceeds from exercise of stock options 27 76 10
Purchase of treasury shares (529) - (154)
Cash distributions on common stock (484) (403) (6,907)
----- ----- ------
Net cash used in financing activities (986) (327) (7,051)
----- ----- ------
Net increase (decrease) in cash and cash equivalents (970) 1,003 (357)
Cash and cash equivalents at beginning of year 1,106 103 460
----- ----- ------
Cash and cash equivalents at end of year $ 136 $1,106 $ 103
===== ===== ======
</TABLE>
43
<PAGE>
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE K - CONDENSED FINANCIAL STATEMENTS OF FFD FINANCIAL CORPORATION (continued)
As a condition to regulatory approval of the 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 OTS
impose limitations on the payment of dividends and other capital
distributions by savings associations. Generally, the Savings Bank's payment
of dividends is limited, without prior OTS approval, to net income for the
current calendar year plus the two preceding calendar years, less capital
distributions paid over the comparable time period. The Savings Bank is
required to submit a notice of dividends payable with the OTS prior to
payment. Insured institutions are required to file an application with the
OTS for capital distributions in excess of this limitation. During fiscal
2000, the Savings Bank received OTS approval to make up to $400,000 in
capital distributions during fiscal 2001.
NOTE L - STOCK OPTION PLAN
The FFD Financial Corporation 1996 Stock Option and Incentive Plan (the
"Plan") provides for the issuance of 145,475 shares of authorized, but
unissued shares of common stock.
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 Plan. Accordingly, no compensation cost has been
recognized with respect to the Plan. Had compensation cost for the 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, 2000, 1999 and 1998, would have been reduced to the pro forma
amounts indicated below:
44
<PAGE>
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE L - STOCK OPTION PLAN (continued)
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C> <C>
Net earnings (In thousands) As reported $922 $717 $982
=== === ===
Pro-forma $920 $717 $963
=== === ===
Earnings per share
Basic As reported $.69 $.53 $.73
=== === ===
Pro-forma $.68 $.53 $.72
=== === ===
Diluted As reported $.68 $.51 $.71
=== === ===
Pro-forma $.68 $.51 $.70
=== === ===
</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 2000, 1999 and 1998:
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, 2000, 1999 and 1998, and changes during the years then ended are
presented below:
<TABLE>
<CAPTION>
2000 1999 1998
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 117,883 $10.26 130,329 $10.15 118,432 $ 9.40
Granted 18,635 10.11 3,000 14.63 12,635 17.19
Exercised (2,967) 9.14 (8,066) 9.38 (738) 11.17
Forfeited (24,013) 14.38 (7,380) 11.07 - -
------- ----- ------- ----- ------- -----
----------
Outstanding at end of year 109,538 $ 9.36 117,883 $10.26 130,329 $10.15
======= ===== ======= ===== ======= =====
Options exercisable at year-end 52,017 $ 9.20 41,096 $ 9.86 22,948 $ 9.35
======= ===== ======= ===== ======= =====
Weighted-average fair value of
options granted during the year $ 1.18 $ 1.71 $ 2.01
===== ===== =====
</TABLE>
The following information applies to options outstanding at June 30, 2000:
Number outstanding 109,538
Range of exercise prices $9.14 - $14.59
Weighted-average exercise price $9.20
Weighted-average remaining contractual life in years 6.8 years
45
<PAGE>
FFD FINANCIAL CORPORATION
AND
FIRST FEDERAL SAVINGS BANK OF DOVER
DIRECTORS AND EXECUTIVE OFFICERS
=============================================================================
Board of Directors of
FFD Financial Corporation and Executive Officers of
First Federal Savings Bank of Dover FFD Financial Corporation
Stephen G. Clinton Robert R. Gerber
Vice President President
Tucker Anthony Cleary Gull
Shirley A. Wallick
Robert R. Gerber Secretary and Treasurer
President
First Federal Savings Bank of Dover and Executive Officers of
FFD Financial Corporation First Federal Savings Bank of Dover
J. Richard Gray Robert R. Gerber
Chairman President
Hanhart Agency, Inc.
Shiley A. Wallick
Richard J. Herzig Secretary and Treasurer
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.
46
<PAGE>
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 17, 2000, 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
47
