FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal Year Ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number: 0-27916
FFD FINANCIAL CORPORATION
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(Name of small business issuer in its charter)
Ohio 34-1921148
-------------------------------- ----------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
321 North Wooster Avenue, Dover, Ohio 44622
---------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number:
(330) 364-7777
----------------------------
Securities registered under Section 12(b) of the Exchange Act:
None None
--------------------- ----------------------
(Title of each class) (Name of each exchange
on which registered)
Securities registered under Section 12(g) of the Exchange Act:
Common Shares, without par value
---------------------------------------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this Form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's revenues for the fiscal year ended June 30, 2000, were $8.5
million.
The aggregate market value of the voting stock held by non-affiliates of
the registrant, computed by reference to the average of the bid and asked prices
quoted by the Nasdaq SmallCap Market, was $10.9 million on September 25, 2000.
1,391,383 of the registrant's common shares were issued and outstanding on
September 25, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Portions of the Annual Report to Shareholders for the
fiscal year ended June 30, 2000.
Part III of Form 10-KSB - Portions of the Proxy Statement for 2000 Annual
Meeting of Shareholders.
<PAGE>
PART I
Item 1. Description of Business
General
FFD Financial Corporation ("FFD") is a unitary savings and loan holding
company organized under Ohio law which owns all of the issued and outstanding
common shares of First Federal Savings Bank of Dover ("First Federal"), a
federal savings bank. On April 2, 1996, FFD acquired all of the common shares
issued by First Federal upon its conversion from a mutual savings bank to a
stock savings bank (the "Conversion").
First Federal has conducted business in Tuscarawas County since it was
incorporated in 1898 as an Ohio savings and loan association under the name
"Dover Building & Loan Company." First Federal obtained a federal savings and
loan charter in 1937 under the name "First Federal Savings & Loan Association."
In 1983, First Federal changed its charter to a federal savings bank charter, at
which time the present name was adopted.
FFD is subject to regulation and examination by the Office of Thrift
Supervision (the "OTS"). First Federal is subject to supervision and regulation
by the OTS and the Federal Deposit Insurance Corporation (the "FDIC") and is a
member of the Federal Home Loan Bank (the "FHLB") of Cincinnati. The deposits of
First Federal are insured up to applicable limits by the Savings Association
Insurance Fund (the "SAIF") administered by the FDIC.
First Federal is principally engaged in the business of making
permanent first mortgage loans secured by one- to four-family residential real
estate located in Tuscarawas County, Ohio. First Federal also originates
construction loans, commercial loans, consumer loans and loans secured by
multifamily real estate (over four units), nonresidential real estate and land.
Loan funds are obtained primarily from savings deposits and loan repayments. In
addition, advances from the FHLB of Cincinnati are utilized when other sources
of funds are inadequate to fund loan demand. First Federal also invests in U.S.
Government agency obligations, interest-bearing deposits in other financial
institutions, mortgage-backed securities and other investments permitted by
applicable law.
Interest on loans, mortgage-backed securities and investments is First
Federal's primary source of income. First Federal's principal expense is
interest paid on deposit accounts and borrowings. Operating results are
dependent to a significant degree on the net interest income of First Federal,
which is the difference between interest earned on loans, mortgage-backed
securities and other investments and interest paid on deposits and borrowings.
Like most thrift institutions, First Federal's interest income and interest
expense are significantly affected by general economic conditions and by the
policies of various regulatory authorities.
Lending Activities
General. First Federal's principal lending activity is the origination
of conventional real estate loans, including construction loans, secured by one-
to four-family homes located in First Federal's primary market area. First
Federal also offers loans secured by multifamily properties containing five
units or more and nonresidential properties. First Federal also originates
commercial loans for businesses located in its primary market area and issues
letters of credit for commercial, business or agricultural purposes, other than
loans secured by real estate, as well as various types of consumer loans.
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<PAGE>
Loan Portfolio Composition. The following table presents certain
information with respect to the composition of First Federal's loan portfolio at
the dates indicated:
<TABLE>
<CAPTION>
At June 30,
2000 1999 1998
-------- -------- ----
Percent Percent Percent
of total of total of total
Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family $ 66,210 63.8% $63,182 71.5% $62,010 85.4%
Multifamily 785 0.8 721 0.8 1,058 1.4
Construction 1,551 1.5 1,921 2.1 1,572 2.2
Nonresidential and land 1,504 1.4 1,925 2.2 763 1.1
Commercial 30,723 29.6 18,989 21.5 8.2
5,959
Consumer and other 2,966 2.9 1,650 1.9 1,263 1.7
------- ----- ------ ----- ------ -----
Total loans 103,739 100.0% 88,388 100.0% 72,625 100.0%
===== ===== =====
Less:
Undisbursed portion of loans in
process 1,200 1,560 1,079
Deferred loan origination fees 46 142 286
Allowance for losses on loans 375 269 270
------- ------ ------
Loans receivable, net $102,118 $86,417 $70,990
======= ====== ======
</TABLE>
Loan Maturity Schedule. The following table sets forth certain
information as of June 30, 2000, regarding the dollar amount of loans maturing
in First Federal's portfolio based on their contractual terms to maturity.
Demand loans and loans having no stated schedule of repayments and no stated
maturity are reported as due in one year or less.
<TABLE>
<CAPTION>
Due during the year ending Due 4-5 Due 6-10 Due 11-15 Due 15 or
June 30, years years years more years
--------------------------- after after after after
2001 2002 2003 6/30/00 6/30/00 6/30/00 6/30/00 Total
---- ---- ---- ------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate (1) $5,533 $ 30 $ 76 $ 251 $2,795 $16,501 $43,360 $ 68,546
Commercial loans 3,668 992 776 2,587 5,162 8,907 8,631 30,723
Nonresidential and land - 11 - 152 222 423 696 1,504
Consumer loans 779 197 226 848 598 170 148 2,966
----- ----- ----- ----- ----- ------ ------ -------
Total loans $9,980 $1,230 $1,078 $3,838 $8,777 $26,001 $52,835 $103,739
===== ===== ===== ===== ===== ====== ====== =======
</TABLE>
--------------------------
(1) Includes one- to four-family, multifamily and construction loans.
The following table sets forth the dollar amount of all loans due after
June 30, 2001, which have predetermined interest rates and which have floating
or adjustable interest rates:
<TABLE>
<CAPTION>
Due after June 30, 2001
-----------------------
(In thousands)
<S> <C>
Fixed rate of interest $17,112
Adjustable rate of interest 76,647
------
$93,759
======
</TABLE>
One- to Four-Family Residential Real Estate Loans. The primary lending
activity of First Federal has been the origination of permanent conventional
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<PAGE>
loans secured by first mortgages on existing one- to four-family residences,
primarily single-family residences, located in Tuscarawas County. First Federal
also originates a limited amount of home equity loans secured by second
mortgages on one- to four-family residential real estate. The aggregate amount
of First Federal's one- to four-family residential real estate loans equaled
approximately $66.2 million, or 63.8% of total loans, at June 30, 2000.
First Federal offers adjustable-rate mortgage loans ("ARMs") for terms
up to 30 years. The interest rate adjustment periods on the ARMs are one year,
three years or five years, although most of the ARMs originated by First Federal
are one-year ARMs. The rates on ARMs are tied to the average monthly mortgage
contract rate for previously occupied homes published by the Federal Housing
Finance Board. The maximum allowable adjustment at each adjustment date is 2%.
Some of First Federal's ARMs have a maximum adjustment of 6% over the term of
the loan.
Adjustable-rate mortgage loans decrease First Federal's interest rate
risk but involve other risks, primarily credit risk, because as interest rates
rise the payment by the borrower rises to the extent permitted by the terms of
the loan, thereby increasing the potential for default. At the same time, the
marketability of the underlying property may be adversely affected by higher
interest rates. First Federal believes that these risks have not had a material
adverse effect on First Federal to date.
First Federal originates fixed-rate loans with terms of up to 15 years,
although the majority of First Federal's fixed-rate loans are sold in the
secondary market.
OTS regulations limit the amount that First Federal may lend in
relationship to the appraised value of the real estate and improvements (the
"Loan-to-Value Ratio" or "LTV") at the time of loan origination. Most of First
Federal's one- to four-family loans have a LTV of 80% or less, although First
Federal will make first mortgage loans on one- to four-family residences up to
89% of the value of the real estate and improvements. First Federal has an
affordable housing loan program under which it originates a small number of
variable-rate loans with LTVs of up to 95%.
Included in one- to four-family loans are lines of credit secured by
the equity in the borrower's principal residence. First Federal makes home
equity lines of credit in an amount which, when added to any prior indebtedness
secured by the real estate, does not exceed 89% of the estimated value of the
real estate. Home equity loans are secured by a second mortgage on the real
estate. First Federal's home equity loans have terms of up to 15 years. The
interest rates charged by First Federal on home equity loans adjust monthly and
are tied to the base rate on corporate loans, posted by at least 75% of the
nation's 30 largest banks, as reported in The Wall Street Journal. At June 30,
2000, First Federal had $4.4 million in home equity loans.
Multifamily Residential Real Estate Loans. In addition to loans on one-
to four-family properties, First Federal originates loans secured by multifamily
properties containing over four units. The majority of such loans are made with
adjustable interest rates and a maximum LTV of 80% for terms of up to 30 years.
Multifamily lending is generally considered to involve a higher degree
of risk because the loan amounts are larger and the borrower typically depends
upon income generated by the project to cover operating expenses and debt
service. The profitability of a project can be affected by economic conditions,
government policies and other factors beyond the control of the borrower. First
Federal attempts to reduce the risk associated with multifamily lending by
evaluating the credit-worthiness of the borrower and the projected income from
the project and by obtaining personal guarantees on loans made to corporations
and partnerships.
At June 30, 2000, loans secured by multifamily properties totaled
approximately $785,000, or 0.8% of total loans.
Construction Loans. First Federal makes loans for the construction of
residential real estate. These loans are typically structured as permanent loans
with adjustable rates of interest and terms of up to 30 years. Construction
loans originated by First Federal are primarily made to owner-occupants for the
construction of single-family homes by a general contractor, although First
Federal also makes construction loans to developers for the construction of
single-family homes.
Construction loans generally involve greater underwriting and default
risks than do loans secured by mortgages on existing properties due to the
concentration of principal in a limited number of loans and borrowers and the
effects of general economic conditions on real estate developments, developers,
managers and builders. In addition, construction loans are more difficult to
evaluate and monitor. First Federal advances loan funds upon the security of the
project under construction, which is more difficult to value before the
completion of construction. Moreover, because of the uncertainties inherent in
estimating construction costs, it is relatively difficult to evaluate accurately
the LTVs and the total loan funds required to complete a project. In the event a
default on a construction loan occurs and foreclosure follows, First Federal
must take control of the project and attempt either to arrange for completion of
construction or dispose of the unfinished project.
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<PAGE>
At June 30, 2000, a total of $1.6 million, or approximately 1.5%, of
First Federal's total loans, consisted of construction loans.
Nonresidential Real Estate and Land Loans. First Federal makes loans
secured by nonresidential real estate consisting of retail stores, office
buildings and other commercial properties. Such loans are originated with terms
of up to 30 years and a maximum LTV of 80%. First Federal also makes loans
secured by improved and unimproved lots for the construction of single-family
residences. Unimproved lot loans have terms of up to five years and a maximum
LTV of 65%. Improved lot loans have terms of up to five years and a maximum LTV
of 89%.
Nonresidential real estate lending is generally considered to involve a
higher degree of risk than residential lending due to the relatively larger loan
amounts and the effects of general economic conditions on the successful
operation of income-producing properties. If the cash flow on the property is
reduced, for example, as leases are not obtained or renewed, the borrower's
ability to repay may be impaired. First Federal has endeavored to reduce such
risk by evaluating the credit history and past performance of the borrower, the
location of the real estate, the quality of the management constructing and
operating the property, the debt service ratio, the quality and characteristics
of the income stream generated by the property and appraisals supporting the
property's valuation. None of First Federal's nonresidential real estate loans
was nonperforming at June 30, 2000, 1999 or 1998.
At June 30, 2000, First Federal had a total of $1.5 million invested in
nonresidential real estate and land loans, including three participation
interests purchased during the 1992 fiscal year. Such loans comprised
approximately 1.4% of First Federal's total loans at such date.
Federal regulations limit the amount of nonresidential mortgage and
land loans which an association may make to 400% of its capital. At June 30,
2000, First Federal's nonresidential mortgage loans totaled 9.9% of First
Federal's capital.
Commercial Loans. First Federal makes commercial loans to businesses in
its primary market area which are secured by a security interest in real estate,
inventory, accounts receivable, machinery or other assets of the borrower. The
LTV ratios for commercial loans depend upon the nature of the underlying
collateral, but generally commercial loans are made with LTVs of at least 85%
and have adjustable interest rates.
At June 30, 2000, First Federal had approximately $30.7 million, or
29.6% of total loans, invested in commercial loans. The increase in commercial
loans from fiscal year ended June 30, 1999, was the result of management's
concerted effort to grow the loan portfolio in order to increase the yield on
interest earning assets.
Commercial loans are generally deemed to entail significantly greater
risk than real estate lending. The repayment of commercial loans is typically
dependent on the income stream and successful operation of a business, which can
be affected by economic conditions. The collateral for commercial loans
generally consists of real estate. At June 30, 2000, none of First Federal's
commercial loans were classified assets under OTS regulations.
Consumer Loans. First Federal makes various types of consumer loans,
including unsecured loans and loans secured by savings accounts and motor
vehicles. Consumer loans are made at fixed or adjustable rates of interest.
Unsecured loans are made with terms of up to two years. Motor vehicle loans are
made with terms of up to five and a half years. Consumer loans may entail
greater credit risk than residential mortgage loans. The risk of default on
consumer loans increases during periods of recession, high unemployment and
other adverse economic conditions. Although First Federal has not had
significant delinquencies on consumer loans, no assurance can be provided that
delinquencies will not increase.
At June 30, 2000, First Federal had approximately $3.0 million, or 2.9%
of its total loans, invested in consumer loans.
Loan Solicitation and Processing. Loan originations are developed from
a number of sources, including continuing business with depositors, borrowers
and real estate developers, periodic newspaper, television, and radio
advertisements, solicitations by First Federal's lending staff and walk-in
customers.
Loan applications for real estate loans are taken by loan personnel.
First Federal typically obtains a credit report, verification of income and
other documentation concerning the creditworthiness of the borrower. An
appraisal or evaluation of the fair market value of the real estate which will
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<PAGE>
be given as security for the loan is prepared by a staff appraiser or a fee
appraiser approved by the Board of Directors. Upon the completion of the
appraisal or evaluation and the receipt of information on the credit history of
the borrower, the application for a loan is submitted for review in accordance
with First Federal's underwriting guidelines. The full Board of Directors
ratifies all loans.
Under First Federal's current loan guidelines, if a real estate loan
application is approved, First Federal usually obtains title insurance on the
real estate which will secure the mortgage loan. In the past, First Federal used
an attorney's opinion for single-family loans. First Federal requires borrowers
to carry satisfactory fire and casualty insurance and flood insurance, if
applicable, and to name First Federal as an insured mortgagee.
The procedure for approval of construction loans is the same as for
permanent real estate loans, except that an appraiser evaluates the building
plans, construction specifications and estimates of construction costs. First
Federal also evaluates the feasibility of the proposed construction project and
the experience and record of the builder.
Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability to repay
the loan and the value of the collateral, if any.
Loan Originations, Purchases and Sales. Currently, First Federal is
originating both fixed-rate and adjustable-rate loans for its portfolio. During
the fiscal year ended June 30, 1999, First Federal began to sell fixed-rate
loans to the Federal Home Loan Mortgage Corporation ("FHLMC"). When a mortgage
loan is sold, First Federal services the loan by collecting monthly payments of
principal and interest and forwarding such payments to the FHLMC, net of a
servicing fee. During the year ended June 30, 2000, First Federal sold
approximately $2.4 million in loans to the FHLMC.
The following table presents the activity in First Federal's loan
portfolio, including loans held for sale, for the periods indicated. First
Federal occasionally purchases participation interests in loans originated by
other financial institutions, but no loans were purchased during the periods
presented. See "Nonresidential Real Estate and Land Loans."
<TABLE>
<CAPTION>
Year ended June 30,
2000 1999 1998
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Loans originated:
One- to four-family $ 9,773 $21,534 $19,424
Construction 1,502 2,880 2,391
Nonresidential and land 2,182 63 867
Commercial 20,191 14,993 5,951
Consumer 1,678 1,470 606
------ ------ ------
Total loans originated 35,326 40,940 29,239
Principal repayments 17,338 17,172 13,826
Principal sold 2,350 7,433 -
Increase (decrease) in other items, net (1) (81) 57 73
------ ------ ------
Net increase in loans receivable $15,557 $16,392 $15,486
====== ====== ======
</TABLE>
-----------------------------
(1) Other items consist of amortization of deferred loan origination fees, the
provision for losses on loans and the recognition and amortization of
mortgage servicing rights.
OTS regulations impose a limit on the aggregate amount that a savings
association may lend to any one borrower to an amount equal to 15% of the
association's total capital for risk-based capital purposes plus any loan
reserves not already included in total capital (the "Lending Limit Capital"). A
savings association may loan to one borrower an additional amount not to exceed
10% of the association's Lending Limit Capital if the additional amount is fully
secured by certain forms of "readily marketable collateral." Real estate is not
considered "readily marketable collateral." In applying this limit, the
regulations require that loans to certain related or affiliated borrowers be
aggregated. An exception to this limit permits loans to one borrower of up to
$500,000. In addition, the OTS, under certain circumstances, may permit
exceptions to the lending limit on a case-by-case basis.
Based on the 15% limit, First Federal was able to lend approximately
$2.4 million to one borrower at June 30, 2000. The largest loan First Federal
had outstanding to one borrower at June 30, 2000, was $1.8 million. This loan
was secured by a hotel in New Philadelphia, Ohio.
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<PAGE>
Loan Origination and Other Fees. First Federal realizes loan
origination fees and other fee income from its lending activities, including
late payment charges, application fees and fees for other miscellaneous
services.
Loan origination fees and other fees are a volatile source of income,
varying with the volume of lending, loan repayments and general economic
conditions. All nonrefundable loan origination fees and certain direct loan
origination costs are deferred and recognized as an adjustment to yield over the
life of the related loan.
Delinquent Loans, Nonperforming Assets and Classified Assets. First
Federal endeavors to maintain a high level of asset quality through sound
underwriting practices and efficient collection practices.
To discourage late payments, First Federal charges a late fee of 5% of
the payment amount after 15 days for fixed-rate loans and 30 days for ARMs. When
a loan is 30 days or more delinquent, the borrower is sent a delinquency notice.
When a loan is 60 days delinquent, First Federal may contact the borrower by
telephone. When a loan becomes 90 days delinquent, it is generally referred to
an attorney for foreclosure, unless the Board of Directors authorizes
appropriate alternative payment arrangements to eliminate the arrearage. First
Federal bases a decision as to whether and when to initiate foreclosure
proceedings on such factors as the amount of the outstanding loan in relation to
the original indebtedness, the extent of the delinquency and the borrower's
ability and willingness to cooperate in curing delinquencies.
If a foreclosure occurs, the real estate is sold at public sale and may
be purchased by First Federal. Real estate acquired by First Federal as a result
of foreclosure proceedings is classified as real estate owned ("REO") until it
is sold. When First Federal acquires a property, it initially records the
property at the lower of cost or fair value of the real estate, less estimated
costs to sell. First Federal records real estate loss provisions if the
property's fair value substantially declines below the value determined at the
recording date. In determining the lower of cost or fair value at acquisition,
costs relating to development and improvement are capitalized. Costs relating to
holding real estate acquired through foreclosure, net of rental income, are
charged against earnings as incurred. First Federal had no REO at June 30, 2000.
The following table reflects the amount of loans in a delinquent status
as of the dates indicated:
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999 June 30, 1998
----------------------------- ---------------------------- ----------------------------
Percent Percent Percent
of total of total of total
Number Amount loans Number Amount loans Number Amount loans
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30 - 59 days 13 $437 .42% 6 $248 .28% 2 $ 75 .10%
60 - 89 days - - - 13 178 .20 7 193 .27
90 days and over 2 225 .22 4 15 .02 5 82 .11
-- --- --- -- --- --- -- --- ---
Total delinquent loans 15 $662 .64% 23 $441 .50% 14 $350 .48%
== === === == === === == === ===
</TABLE>
Nonperforming assets include nonaccruing loans, real estate acquired by
foreclosure or by deed-in-lieu of foreclosure, and repossessed assets. First
Federal ceases to accrue interest on real estate loans that are delinquent 90
days or more. The accrual of interest may stop before a loan is 90 days
delinquent if the collateral value is not adequate, in the opinion of
management, to cover the outstanding principal and interest. First Federal
places a loan on nonaccrual status when, in the judgment of management, the
collection of interest on loans contractually past due is unlikely.
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<PAGE>
The following table sets forth information with respect to First
Federal's nonaccruing loans at the dates indicated. First Federal had no other
nonperforming assets at any of the dates presented.
<TABLE>
<CAPTION>
At June 30,
2000 1999 1998
----- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Total nonaccrual loans $225 $ - $ 82
=== === ===
Total loans delinquent 90 days or more and
still accruing $ - $ 15 $ -
=== === ===
Total nonperforming loans $225 $ 15 $ 82
=== === ===
Allowance for losses on loans $375 $269 $270
=== === ===
Nonperforming loans as a percent of total
loans .22% .02% .13%
Allowance for losses on loans as a percent
of nonperforming loans 166.67% 1,793.33% 329.27%
</TABLE>
For the year ended June 30, 2000, interest income of $12,000 would have
been recorded on nonaccruing loans had such loans been accruing pursuant to
contractual terms. During such period, no interest income was recorded on such
loans.
OTS regulations require that each thrift institution classify its own
assets on a regular basis. Problem assets are classified as "substandard,"
"doubtful" or "loss." "Substandard" assets have one or more defined weaknesses
and are characterized by the distinct possibility that the insured institution
will sustain some loss if the deficiencies are not corrected. "Doubtful" assets
have the same weaknesses as "substandard" assets, with the additional
characteristics that (i) the weaknesses make collection or liquidation in full
on the basis of currently existing facts, conditions and values questionable and
(ii) there is a high possibility of loss. An asset classified "loss" is
considered uncollectible and of such little value that its continuance as an
asset of the institution is not warranted. The regulations also contain a
"special mention" category, consisting of assets which do not currently expose
an institution to a sufficient degree of risk to warrant classification but
which possess credit deficiencies or potential weaknesses deserving management's
close attention.
The aggregate amounts of First Federal's classified assets at the dates
indicated were as follows:
<TABLE>
<CAPTION>
At June 30,
2000 1999 1998
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Classified assets:
Substandard $115 $ - $93
=== === ==
</TABLE>
Federal examiners are authorized to classify an association's assets.
If an association does not agree with an examiner's classification of an asset,
it may appeal the determination to the Regional Director of the OTS. First
Federal had no disagreements with the examiners regarding the classification of
assets at the time of its last examination.
OTS regulations require that First Federal establish prudent general
allowances for loan losses for any loan classified as substandard or doubtful.
If an asset, or portion thereof, is classified as loss, the association must
either establish specific allowances for losses in the amount of 100% of the
portion of the asset classified loss, or charge off such amount.
Allowance for Losses on Loans. First Federal maintains an allowance for
losses on loans based upon a number of relevant factors, including, but not
limited to, growth and changes in the composition of the loan portfolio, trends
in the level of delinquent and problem loans, current and anticipated economic
conditions in the primary lending area, past loss experience and possible losses
arising from specific problem assets.
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The single largest component of First Federal's loan portfolio consists
of one- to four-family residential real estate loans. Substantially all of these
loans are secured by property in First Federal's lending area of Tuscarawas
County, which has a fairly stable economy. First Federal's practice of making
loans primarily in its local market area has contributed to a low historical
charge-off rate. In addition to one- to four-family residential real estate
loans, First Federal makes home equity, multifamily residential real estate,
nonresidential real estate and construction loans. These real estate loans are
also secured by property in First Federal's lending area. First Federal has not
experienced any significant charge-offs from these other real estate loan
categories in recent years.
The commercial loans are generally deemed to entail significantly greater
risk than residential real estate lending. The repayment of commercial loans is
typically dependent on the income stream and successful operation of the
business, which can be affected by economic conditions.
A small portion of First Federal's total loans consists of consumer
loans. Some of these loans are unsecured and others are secured by collateral
that declines in value. Such loans therefore carry a higher degree of risk than
the real estate loans.
Large loans are reviewed periodically to determine potential problems
at an early date. While the Board of Directors believes that it uses the best
information available to determine the allowance for loan losses, unforeseen
market conditions could result in material adjustments, and net earnings could
be significantly adversely affected, if circumstances differ substantially from
the assumptions used in making the final determination.
The following table sets forth an analysis of First Federal's allowance
for losses on loans for the periods indicated:
<TABLE>
<CAPTION>
Year ended June 30,
2000 1999 1998
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period $269 $270 $270
Charge-offs - (1) -
Provision for losses on loans 106 - -
--- --- ---
Balance at end of period $375 $269 $270
=== === ===
Ratio of net charge-offs to average loans
outstanding during the period - - -
Ratio of allowance for loan losses to total
loans 0.36% 0.30% 0.37%
</TABLE>
The following table sets forth the allocation of First Federal's
allowance for loan losses by type of loan at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
2000 1999 1998
------------------------- ------------------------- -------------------------
Percent of Percent of Percent of
loans in each loans in each loans in each
category to category to category to
Amount total loans Amount total loans Amount total loans
------ --------------- ------ ---------------- ------ --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at year end
applicable to:
Real estate loans $140 67.5% $142 76.6% $142 90.1%
Consumer loans 18 2.9 3 1.9 4 1.7
Commercial loans 206 29.6 111 21.5 39 8.2
Unallocated 11 - 13 - 85 -
--- ----- --- ----- --- -----
Total $375 100.0% $269 100.0% $270 100.0%
=== ===== === ===== === =====
</TABLE>
-9-
<PAGE>
Because the loan loss allowance is based on estimates, it is monitored
monthly and adjusted as necessary to provide an adequate allowance.
Investment Activities
OTS regulations require that First Federal maintain a minimum amount of
liquid assets, which may be invested in U. S. Treasury obligations, securities
of various federal agencies, certificates of deposit at insured banks, bankers'
acceptances and federal funds. First Federal is also permitted to make
investments in certain commercial paper, corporate debt securities rated in one
of the four highest rating categories by one or more nationally recognized
statistical rating organizations, and mutual funds, as well as other investments
permitted by federal regulations.
First Federal maintains a significant portfolio of mortgage-backed
securities in the form of FHLMC, Government National Mortgage Association
("GNMA") and FNMA participation certificates. Mortgage-backed securities
generally entitle First Federal to receive a portion of the cash flows from an
identified pool of mortgages. FHLMC, GNMA and FNMA securities are guaranteed by
the issuing agency as to principal and interest. Although mortgage-backed
securities generally yield less than individual loans originated by First
Federal, management believes they are a prudent investment alternative during
periods of decreased loan demand.
-10-
<PAGE>
The following table sets forth the composition of First Federal's
investment securities portfolio, including those designated as available for
sale, and mortgage-backed securities at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
2000 1999
---- ----
Amortized % of Market % of Amortized % of Market % of
cost total value total cost total value total
-------- ----- ------- ----- -------- ----- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities designated
as held to maturity:
U.S. Government agency
obligations $ - - % $ - - % $ - - % $ - - %
Investment securities designated
as available for sale:
U.S. Government and
agency obligations 3,000 18.0 2,875 17.7 3,000 15.8 2,924 15.5
FHLMC stock - - - - - - - -
------ ----- ------ ----- ------ ----- ------ -----
Total investment securities 3,000 18.0 2,875 17.7 3,000 15.8 2,924 15.5
Mortgage-backed securities
designated as held to 4,189 25.1 4,188 25.9 4,779 25.1 4,907 26.1
maturity
Mortgage-backed securities
designated as available
for sale 9,518 56.9 9,135 56.4 11,230 59.1 10,978 58.4
------ ----- ------ ----- ------ ----- ------ -----
Total mortgage-backed
securities 13,707 82.0 13,323 82.3 16,009 84.2 15,885 84.5
------ ----- ------ ----- ------ ----- ------ -----
Total investment securities
and mortgage-backed
securities $16,707 100.0% $16,198 100.0% $19,009 100.0% $18,809 100.0%
====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
At June 30,
1998
----
Amortized % of Market % of
cost total value total
------- ----- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Investment securities designated
as held to maturity:
U.S. Government agency
obligations $ 977 6.4% $ 993 6.3%
Investment securities designated
as available for sale:
U.S. Government and
agency obligations 2,496 16.3 2,498 16.0
FHLMC stock 3 - 157 1.0
------ ----- ------ -----
Total investment securities 3,476 22.7 3,648 23.3
Mortgage-backed securities
designated as held to 5,960 38.9 6,073 38.8
maturity
Mortgage-backed securities
designated as available
for sale 5,879 38.4 5,935 37.9
------ ----- ------ -----
Total mortgage-backed
securities 11,839 77.3 12,008 76.7
------ ----- ------ -----
Total investment securities
and mortgage-backed
securities $15,315 100.0% $15,656 100.0%
====== ===== ====== =====
</TABLE>
The maturities of First Federal's U. S. Government and agency obligations
and mortgage-backed securities at June 30, 2000, are indicated in the following
table:
<TABLE>
<CAPTION>
After one through After five After ten
five years through ten years years Total
------------------- ------------------ ------------------- ------------------------------------
Amortized Average Amortized Average Amortized Average Amortized Market Weighted
cost yield cost yield cost yield cost value average yield
-------- --------- -------- --------- -------- --------- -------- -------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and
agency obligations $2,000 6.37% $1,000 6.38% $ - - % $ 3,000 $ 2,875 6.37%
Mortgage-backed
securities 214 6.05% 3,338 7.69% 10,155 6.87% 13,707 13,323 6.96%
----- ----- ------ ------ ------
$2,214 $4,338 $10,155 $16,707 $16,198
===== ===== ====== ====== ======
</TABLE>
-11-
<PAGE>
Deposits and Borrowings
General. Deposits have traditionally been the primary source of First
Federal's funds for use in lending and other investment activities. In addition
to deposits, First Federal derives funds from interest payments and principal
repayments on loans and mortgage-backed securities, income on interest-earning
assets and service charges. Loan payments are a relatively stable source of
funds, while deposit inflows and outflows fluctuate more in response to changes
in general interest rates and money market conditions.
Deposits. Deposits are attracted principally from within First
Federal's primary market area through the offering of a broad selection of
deposit instruments, including NOW accounts, passbook savings accounts,
individual retirement accounts ("IRAs") and term certificate accounts. Interest
rates paid, maturity terms, service fees and withdrawal penalties for the
various types of accounts are established periodically by the management of
First Federal based on First Federal's liquidity requirements, growth goals and
interest rates paid by competitors. First Federal does not use brokers to
attract deposits.
At June 30, 2000, First Federal's certificates of deposit totaled $43.8
million, or 56.1% of total deposits. Of such amount, approximately $28.7 million
in certificates of deposit mature within one year. Based on past experience and
First Federal's prevailing pricing strategies, management believes that a
substantial percentage of these certificates will renew with First Federal at
maturity. If there is a significant deviation from historical experience, First
Federal can utilize borrowings from the FHLB as an alternative to this source of
funds.
The following table sets forth the dollar amount of deposits in the
various types of accounts offered by First Federal at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
2000 1999 1998
------ ------ ----
Percent Percent Percent
of total of total of total
Amount deposits Amount deposits Amount deposits
------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Transaction accounts:
NOW and money market accounts (1) $ 9,543 12.3% $ 8,290 11.5% $ 5,954 9.6%
Passbook savings accounts (2) 24,666 31.6 22,557 31.3 18,955 30.6
------ ----- ------ ----- ------ -----
Total transaction accounts 34,209 43.9 30,847 42.8 24,909 40.2
Certificates of deposit:
2.01 - 4.00% 189 0.2 - - - -
4.01 - 6.00% 30,307 38.9 38,513 53.5 34,419 55.6
6.01 - 8.00% 13,282 17.0 2,665 3.7 2,628 4.2
------ ----- ------ ----- ------ -----
Total certificates of deposit (3) 43,778 56.1 41,178 57.2 37,047 59.8
------ ----- ------ ----- ------ -----
Total deposits $77,987 100.0% $72,025 100.0% $61,956 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
-----------------------------
(1) The weighted average interest rates on NOW and money market accounts were
0.4% at June 30, 2000, 0.9% at June 30, 1999, and 1.62% at June 30, 1998.
(2) The weighted average interest rates on passbook accounts were 4.08% at June
30, 2000, 3.54% at June 30, 1999, and 3.86% at June 30, 1998.
(3) The weighted average rates on all certificates of deposit were 5.71% at
June 30, 2000, 5.25% at June 30, 1999, and 5.62% at June 30, 1998.
-12-
<PAGE>
The following table shows rate and maturity information for First
Federal's certificates of deposit at June 30, 2000:
<TABLE>
<CAPTION>
Amount Due
Over Over
Up to 1 year to 2 years to
Rate one year 2 years 3 years Total
---- -------- --------- ----------- -------
(In thousands)
<S> <C> <C> <C> <C>
2.01 - 4.00% $ - $ - $ 189 $ 189
4.01 - 6.00% 23,965 6,120 222 30,307
6.01 - 8.00% 4,685 6,616 1,981 13,282
------ ------ ----- ------
Total $28,650 $12,736 $2,392 $43,778
====== ====== ===== ======
</TABLE>
The following table presents the amount of First Federal's certificates
of deposit of $100,000 or more by the time remaining until maturity at June 30,
2000:
<TABLE>
<CAPTION>
Maturity Amount
-------- ------
(In thousands)
<S> <C>
Three months or less $1,019
Over 3 months to 6 months 625
Over 6 months to 12 months 1,409
Over 12 months 1,812
-----
Total $4,865
=====
</TABLE>
The following table sets forth First Federal's deposit account balance
activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended June 30,
2000 1999 1998
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance $ 72,025 $ 61,956 $ 57,090
Deposits 285,965 356,315 113,942
Withdrawals (282,820) (347,893) (110,996)
------- ------- -------
Net increase in deposits before
interest credited 3,145 8,422 2,946
Interest credited 2,817 1,647 1,920
------- ------- -------
Ending balance $ 77,987 $ 72,025 $ 61,956
======= ======= =======
Net increase $ 5,962 $ 10,069 $ 4,866
======= ======= =======
Percent increase 8.3% 16.3% 8.5%
=== ==== ===
</TABLE>
Borrowings. First Federal's other sources of funds include advances
from the FHLB. As a member of the FHLB, First Federal is required to own capital
stock in the FHLB and is authorized to apply for advances from the FHLB. Each
FHLB credit program has its own interest rate, which may be fixed or variable,
and range of maturities. The FHLB may prescribe the acceptable uses for these
advances, as well as limitations on the size of the advances and repayment
provisions.
-13-
<PAGE>
The following table sets forth certain information as to First
Federal's FHLB advances at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
2000 1999 1998
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
FHLB advances $30,412 $23,616 $12,519
Weighted average interest rate of
FHLB advances 6.48% 5.05% 5.11%
</TABLE>
The following table sets forth the maximum balance, the average balance
and the weighted average interest rate of First Federal's FHLB advances during
the periods indicated:
<TABLE>
<CAPTION>
Year ended June 30,
2000 1999 1998
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Maximum balance $31,554 $23,616 $18,031
Average balance 28,413 19,637 11,685
Weighted average interest rate 5.57% 4.87% 5.62%
</TABLE>
First Federal had no other borrowings during the last three fiscal
years.
Competition
First Federal competes for deposits with other savings associations,
commercial banks and credit unions and with the issuers of commercial paper and
other securities, such as shares in money market mutual funds. The primary
factors in competing for deposits are interest rates and convenience of office
location. In making loans, First Federal competes with other savings
associations, commercial banks, consumer finance companies, credit unions,
leasing companies, mortgage companies and other lenders. First Federal competes
for loan originations primarily through the interest rates and loan fees offered
and through the efficiency and quality of services provided. Competition is
affected by, among other things, the general availability of lendable funds,
general and local economic conditions, current interest rate levels and other
factors which are not readily predictable.
Subsidiaries
First Federal owns all of the outstanding shares of Dover Service
Corporation ("DSC"). The principal assets of DSC consist of an investment in a
data processing service center for financial institutions and a savings account
in First Federal. The net book value of First Federal's investment in DSC at
June 30, 2000, was approximately $16,900.
Personnel
At June 30, 2000, First Federal had 29 full-time equivalent employees.
First Federal believes that relations with its employees are good. First Federal
offers health, disability and life insurance benefits. None of the employees of
First Federal are represented by a collective bargaining unit.
REGULATION
General
As a savings and loan holding company, FFD is subject to regulation,
examination and oversight by the OTS and is required to submit periodic reports
to the OTS concerning its activities and financial condition In addition, as a
corporation organized under Ohio law, FFD is subject to provisions of the Ohio
Revised Code applicable to corporations generally.
-14-
<PAGE>
As a federal savings association, First Federal is subject to
regulatory oversight by the OTS and, because First Federal's deposits are
insured by the FDIC, First Federal is subject to examination and regulation by
the FDIC. First Federal must file periodic reports with the OTS concerning its
activities and financial condition. Examinations are conducted periodically by
the OTS and the FDIC to determine whether First Federal is in compliance with
various regulatory requirements and is operating in a safe and sound manner.
First Federal is a member of the FHLB of Cincinnati.
On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was
enacted into law. The GLB Act repealed prior laws that had generally prevented
banks from affiliating with securities and insurance firms and made other
significant changes in the financial services in which various types of
financial institutions may engage.
Prior to the GLB Act, unitary savings and loan holding companies which
met certain requirements were the only financial institution holding companies
that were permitted to engage in any type of business activity, whether or not
the activity was a financial service. The GLB Act continues those broad powers
for unitary thrift holding companies in existence on May 4, 1999, including FFD.
Any thrift holding company formed after May 4, 1999, however, will be subject to
the same restrictions as multiple thrift holding companies, which generally are
limited to activities that are considered incidental to banking. The GLB Act
authorizes a new "financial holding company," which can own banks and thrifts
and which is also permitted to engage in a variety of financial activities,
including insurance and securities underwriting and agency activities, as long
as the depository institutions it owns are well capitalized, well managed and
meet certain other tests.
The GLB Act is not expected to have a material effect on the activities
in which FFD and First Federal currently engage, except to the extent that
competition from other types of financial institutions may increase as they
engage in activities not permitted prior to enactment of the GLB Act.
Office of Thrift Supervision Regulations
Regulatory Capital Requirements. First Federal is required by OTS
regulations to meet certain minimum capital requirements. The tangible capital
requirement requires savings associations to maintain "tangible capital" of not
less than 1.5% of their adjusted total assets. Tangible capital is defined in
OTS regulations as core capital minus any intangible assets.
"Core capital" is comprised of common stockholders' equity (including
retained earnings), noncumulative preferred stock and related surplus, minority
interests in consolidated subsidiaries, certain nonwithdrawable accounts and
pledged deposits of mutual associations. OTS regulations require savings
associations to maintain core capital of at least 4% of their adjusted total
assets, except for 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 their 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. The OTS may adjust the risk-based capital requirement
on an individualized basis to take into account risks due to concentrations of
credit and non-traditional activities.
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings
associations. At each successively lower defined capital category, an
association is subject to more restrictive and more numerous mandatory or
discretionary regulatory actions or limits, and the OTS has less flexibility in
determining how to resolve the problems of the institution. In addition, the OTS
generally can downgrade an association's capital category, notwithstanding its
capital level, if, after notice and opportunity for hearing, the association is
deemed to be engaging in an unsafe or unsound practice because it has not
corrected deficiencies that resulted in it receiving a less than satisfactory
examination rating on matters other than capital or it is deemed to be in an
unsafe or unsound condition. First Federal's capital at June 30, 2000, met the
standards for the highest category, a "well-capitalized" institution.
Limitations on Capital Distributions. The OTS imposes various
restrictions or requirements on the ability of associations to make capital
distributions. Capital distributions include, without limitation, payments of
cash dividends, repurchases and certain other acquisitions by an association of
its shares and payments to stockholders of another association in an acquisition
of such other association.
An application must be submitted and approval from the OTS must be
obtained by a subsidiary of a savings and loan holding company (i) if the
proposed distribution would cause total distributions for the calendar year to
exceed net income for that year to date plus the savings association's retained
-15-
<PAGE>
net income for that year to date plus the retained net income for the preceding
two years; (ii) if the savings association will not be at least adequately
capitalized following the capital distribution; (iii) if the proposed
distribution would violate a prohibition contained in any applicable statute,
regulation or agreement between the savings association and the OTS (or the
FDIC), or violate a condition imposed on the savings association in an
OTS-approved application or notice. If a savings association subsidiary of a
holding company is not required to file an application, it must file a 30-day
notice of the proposed capital distribution with the OTS.
Liquidity. OTS regulations require that each savings association
maintain an average daily balance of liquid assets (such as cash, certain time
deposits, bankers' acceptances and specified United States government, state or
federal agency obligations) of not less than 4% of its net withdrawable savings
deposits plus borrowings payable in one year or less at the end of the preceding
quarter or based on the average daily balance during the preceding quarter.
Monetary penalties may be imposed upon associations failing to meet liquidity
requirements. The eligible liquidity of First Federal at June 30, 2000, was
$20.5 million, or 28.9%, and exceeded the 4.0% liquidity requirement by
approximately $17.6 million.
Qualified Thrift Lender Test. Savings associations must meet one of two
tests in order to be a qualified thrift lender ("QTL"). The first test requires
a savings association to maintain a specified level of investments in assets
that are designated as qualifying thrift investments ("QTIs"). Generally, QTIs
are assets related to domestic residential real estate and manufactured housing
and include credit card, student and small business loans and stock issued by
any FHLB, the FHLMC or the FNMA. Under the QTL test, 65% of an institution's
"portfolio assets" (total assets less goodwill and other intangibles, property
used to conduct business and 20% of liquid assets) must consist of QTI on a
monthly average basis in nine out of every 12 months. The second test permits a
savings association to qualify as a QTL by meeting the definition of "domestic
building and loan association" under the Internal Revenue Code of 1986, as
amended (the "Code"). In order for an institution to meet the definition of a
"domestic building and loan association" under the Code, at least 60% of such
institution's assets must consist of specified types of property, including cash
loans secured by residential real estate or deposits, educational loans and
certain governmental obligations. The OTS may grant exceptions to the QTL tests
under certain circumstances. If a savings association fails to meet one of the
QTL tests, the association and its holding company become subject to certain
operating and regulatory restrictions. A savings association that fails to meet
one of the QTL tests will not be eligible for new FHLB advances. At June 30,
2000, First Federal qualified as a QTL.
Lending Limit. OTS regulations generally limit the aggregate amount
that a savings association can lend to one borrower to an amount equal to 15% of
the association's Lending Limit Capital. A savings association may lend to one
borrower an additional amount not to exceed 10% of the association's Lending
Limit Capital, if the additional amount is fully secured by certain forms of
"readily marketable collateral." Real estate is not considered "readily
marketable collateral." Certain types of loans are not subject to the lending
limit. A general exception to the 15% limit provides that an association may
lend to one borrower up to $500,000, for any purpose. In applying the limit on
loans to one borrower, the regulations require that loans to certain related
borrowers be aggregated. At June 30, 2000, First Federal was in compliance with
this lending limit.
Transactions with Insiders and Affiliates. Loans to executive officers,
directors and principal shareholders and their related interests must conform to
the Lending Limit, and the total of such loans cannot exceed the association's
Lending Limit Capital. Most loans to directors, executive officers and principal
shareholders must be approved in advance by a majority of the "disinterested"
members of board of directors of the association with any "interested" director
not participating. All loans to directors, executive officers and principal
shareholders must be made on terms substantially the same as offered in
comparable transactions with the general public or as offered to all employees
in a company-wide benefit program. Loans to executive officers are subject to
additional restrictions. First Federal was in compliance with such restrictions
at June 30, 2000.
All transactions between savings associations and their affiliates must
comport with Sections 23A and 23B of the Federal Reserve Act ("FRA"). An
affiliate of a savings association is any company or entity that controls, is
controlled by or is under common control with the savings association. FFD is an
affiliate of First Federal. Generally, Sections 23A and 23B of the FRA (i) limit
the extent to which a savings association or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to 10% of such
institution's capital stock and surplus, (ii) limit the aggregate of all such
transactions with all affiliates to an amount equal to 20% of such capital stock
and surplus, and (iii) require that all such transactions be on terms
substantially the same, or at least as favorable to the association, as those
provided in transactions with a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
other similar types of transactions. In addition to the limits in Sections 23A
and 23B, a savings association may not make any loan or other extension of
credit to an affiliate unless the affiliate is engaged only in activities
permissible for a bank holding company and may not purchase or invest in
securities of any affiliate except shares of a subsidiary. First Federal was in
compliance with these requirements and restrictions at June 30, 2000.
-16-
<PAGE>
Federal Deposit Insurance Corporation Regulations
The FDIC is an independent federal agency that insures the deposits of
federally insured banks and thrifts, up to prescribed statutory limits, and
safeguards the safety and soundness of the banking and thrift industries. The
FDIC administers two separate insurance funds, the Bank Insurance Fund ("BIF")
for commercial banks and state savings banks and the SAIF for savings
associations. First Federal is a member of the SAIF and its deposit accounts are
insured by the FDIC, up to the prescribed limits. The FDIC has examination
authority over all insured depository institutions, including First Federal, and
has authority to initiate enforcement actions against federally insured savings
associations, if the FDIC does not believe the OTS has taken appropriate action
to safeguard safety and soundness and the deposit insurance fund.
The FDIC is required to maintain designated levels of reserves in each
fund. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to its target level
within a reasonable time and may decrease such rates if such target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary based on the risk the
institution poses to its deposit insurance fund. The risk level is determined
based on the institution's capital level and the FDIC's level of supervisory
concern about the institution.
FRB Reserve Requirements
FRB regulations currently require that reserves of 3% of net
transaction accounts (primarily NOW accounts) up to $44.3 million (subject to an
exemption of up to $5.0 million), and of 10% of net transaction accounts in
excess of $44.3 million. At June 30, 2000, First Federal was in compliance with
its reserve requirements.
Federal Home Loan Banks
The FHLBs provide credit to their members in the form of advances.
First Federal is a member of the FHLB of Cincinnati and must maintain an
investment in the capital stock of that FHLB in an amount equal to the greater
of 1.0% of the aggregate outstanding principal amount of First Federal's
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or 5% of its advances from the FHLB. First Federal
is in compliance with this requirement with an investment in stock of the FHLB
of Cincinnati of $1.7 million at June 30, 2000.
Upon the origination or renewal of a loan or advance, the FHLB of
Cincinnati is required by law to obtain and maintain a security interest in
collateral in one or more specified categories.
Each FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances from the FHLBs. The standards take into account a member's performance
under the Community Reinvestment Act and its record of lending to first-time
home buyers. All long-term advances by each FHLB must be made only to provide
funds for residential housing finance.
Holding Company Regulation
OTS Regulation. As a unitary savings and loan holding company within
the meaning of the Home Owners' Loan Act (the "HOLA"), FFD has registered with
the OTS and is subject to OTS regulations, examination, supervision and
reporting requirements.
The HOLA generally prohibits a savings and loan holding company from
controlling any other savings association or savings and loan holding company,
without prior approval of the OTS, or from acquiring or retaining more than 5%
of the voting shares of a savings association or holding company thereof, which
is not a subsidiary. Under certain circumstances, a savings and loan holding
company is permitted to acquire, with the approval of the OTS, up to 15% of the
previously unissued voting shares of an undercapitalized savings association for
cash without such savings association being deemed to be controlled by FFD.
Except with the prior approval of the OTS, no director or officer of a savings
and loan holding company or person owning or controlling by proxy or otherwise
more than 25% of such holding company's stock may also acquire control of any
savings institution, other than a subsidiary institution, or any other savings
and loan holding company.
As a unitary savings and loan holding company in existence on May 4,
1999, FFD generally has no restrictions on its activities. If the OTS determines
that there is reasonable cause to believe that the continuation by a savings and
loan holding company of an activity constitutes a serious risk to the financial
-17-
<PAGE>
safety, soundness or stability of its subsidiary savings association, however,
the OTS may impose such restrictions as deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings association, (ii)
transactions between the savings association and its affiliates, and (iii) any
activities of the savings association that might create a serious risk that the
liabilities of FFD and its affiliates may be imposed on the savings association.
Notwithstanding the foregoing rules as to permissible business activities of a
unitary savings and loan holding company, if the savings association subsidiary
of a holding company fails to meet the QTL test, then such unitary savings and
loan holding company would become subject to the activities restrictions
applicable to multiple holding companies. At June 30, 2000, First Federal met
the QTL test.
Federal Regulation of Acquisitions of Control of FFD and First Federal.
In addition to the Ohio law limitations on the merger and acquisition of FFD,
federal limitations generally require regulatory approval of acquisitions at
specified levels. Under pertinent federal law and regulations, no person,
directly or indirectly, or acting in concert with others, may acquire control of
First Federal or FFD without 60 days' prior notice to the OTS. "Control" is
generally defined as having more than 25% ownership or voting power; however,
ownership or voting power of more than 10% may be deemed "control" if certain
factors are in place. If the acquisition of control is by a company, the
acquiror must obtain approval, rather than give notice, of the acquisition.
Merger Moratorium Statute. Chapter 1704 of the Ohio Revised Code
regulates certain takeover bids affecting certain public corporations with
significant ties to Ohio. The statute prohibits, with some exceptions, any
merger, combination or consolidation and any of certain other sales, leases,
distributions, dividends, exchanges, mortgages or transfers between such an Ohio
corporation and any person who has the right to exercise, alone or with others,
10% or more of the voting power of such corporation (an "Interested
Shareholder"), for three years following the date on which such person first
becomes an Interested Shareholder. Such a business combination is permitted only
if, prior to the time such person first becomes an Interested Shareholder, the
Board of Directors of the issuing corporation has approved the purchase of
shares that resulted in such person first becoming an Interested Shareholder.
After the initial three-year moratorium, such a business combination
may not occur unless (1) an exception specifically enumerated in the statute is
applicable to the combination, (2) the combination is approved, at a meeting
held for such purpose, by the affirmative vote of the holders of the issuing
public corporation entitling them to exercise at least two-thirds of the voting
power of the issuing public corporation in the election of directors or of such
different proportion as the articles may provide, provided the combination is
also approved by the affirmative vote of the holders of at least a majority of
the disinterested shares, or (3) the business combination meets certain
statutory criteria designed to ensure that the issuing public corporation's
remaining shareholders receive fair consideration for their shares.
An Ohio corporation may, under certain circumstances, "opt out" of the
statute by specifically providing in its articles of incorporation that the
statute does not apply to any business combination of such corporation. However,
the statute still prohibits for twelve months any business combination that
would have been prohibited but for the adoption of such an opt-out amendment.
The statute also provides that it will continue to apply to any business
combination between a person who became an Interested Shareholder prior to the
adoption of such an amendment as if the amendment had not been adopted. The
Articles of Incorporation of FFD do not opt out of the protection afforded by
Chapter 1704.
Control Share Acquisition. Section 1701.831 of the Ohio Revised Code
(the "Control Share Acquisition Statute") requires that, with certain
exceptions, acquisitions of voting securities which would result in the
acquiring shareholder owning 20%, 33 1/3%, or 50% of the outstanding voting
securities of an Ohio corporation (a "Control Share Acquisition") must be
approved in advance by (a) the holders of at least a majority of the outstanding
voting shares of such corporation represented at a meeting at which a quorum is
present, and (b) a majority of the portion of the outstanding voting shares
represented at such a meeting excluding the voting shares owned by the acquiring
shareholder, by certain other persons who acquire or transfer voting shares
after public announcement of the acquisition or by certain officers of the
corporation or directors of the corporation who are employees of the
corporation. The Control Share Acquisition Statute was intended, in part, to
protect shareholders of Ohio corporations from coercive tender offers.
Takeover Bid Statute. Ohio law provides that an offeror may not make a
tender offer or request or invitation for tenders that would result in the
offeror beneficially owning more than ten percent of any class of the target
company's equity securities unless such offeror files certain information with
the Ohio Division of Securities (the "Securities Division") and provides such
information to the target company and the offerees within Ohio. The Securities
Division may suspend the continuation of the control bid if the Securities
Division determines that the offeror's filed information does not provide full
disclosure to the offerees of all material information concerning the control
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<PAGE>
bid. The statute also provides that an offeror may not acquire any equity
security of a target company within two years of the offeror's previous
acquisition of any equity security of the same target company pursuant to a
control bid unless the Ohio offerees may sell such security to the offeror on
substantially the same terms as provided by the previous control bid. The
statute does not apply to a transaction if either the offeror or the target
company is a savings and loan holding company and the proposed transaction
requires federal regulatory approval.
Federal Taxation
FFD and First Federal are each subject to the federal tax laws and
regulations which apply to corporations generally. In addition to the regular
income tax, FFD and First Federal may be subject to the alternative minimum tax
which is imposed at a minimum tax rate of 20% on "alternative minimum taxable
income" (which is the sum of a corporation's regular taxable income, with
certain adjustments, and tax preference items), less any available exemption.
Such tax preference items include interest on certain tax-exempt bonds issued
after August 7, 1986. In addition, 75% of the amount by which a corporation's
"adjusted current earnings" exceeds its alternative minimum taxable income
computed without regard to this preference item and prior to reduction by net
operating losses, is included in alternative minimum taxable income. Net
operating losses can offset no more than 90% of alternative minimum taxable
income. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax. Payments of alternative minimum tax may be
used as credits against regular tax liabilities in future years. However, the
Taxpayer Relief Act of 1997 repealed the alternative minimum tax for certain
"small corporations" for tax years beginning after December 31, 1997. A
corporation initially qualifies as a small corporation if it had average gross
receipts of $5,000,000 or less for the three tax years ending with its first tax
year beginning after December 31, 1996. Once a corporation is recognized as a
small corporation, it will continue to be exempt from the alternative minimum
tax for as long as its average gross receipts for the prior three-year period
does not exceed $7,500,000. In determining if a corporation meets this
requirement, the first year that it achieved small corporation status is not
taken into consideration.
First Federal's average gross receipts for the three tax years ending
on December 31, 1999, is approximately $7.4 million and as a result, First
Federal does qualify as a small corporation exempt from the alternative minimum
tax.
Prior to the enactment of the Small Business Jobs Protection Act (the
"Act"), which was signed into law on August 21, 1996, certain thrift
institutions, such as First Federal, were allowed deductions for bad debts under
methods more favorable than those granted to other taxpayers. Qualified thrift
institutions could compute deductions for bad debts using either the specific
charge-off method of Section 166 of the Code or one of two reserve methods of
Section 593 of the Code. The reserve methods under Section 593 of the Code
permitted a thrift institution annually to elect to deduct bad debts under
either (i) the "percentage of taxable income" method applicable only to thrift
institutions, or (ii) the "experience" method that also was available to small
banks. Under the "percentage of taxable income" method, a thrift institution
generally was allowed a deduction for an addition to its bad debt reserve equal
to 8% of its taxable income (determined without regard to this deduction and
with additional adjustments). Under the "experience" method, a thrift
institution was generally allowed a deduction for an addition to its bad debt
reserve equal to the greater of (i) an amount based on its actual average
experience for losses in the current and five preceding taxable years, or (ii)
an amount necessary to restore the reserve to its balance as of the close of the
base year. A thrift institution could elect annually to compute its allowable
addition to bad debt reserves for qualifying loans either under the experience
method or the percentage of taxable income method. For tax years 1995, 1994, and
1993, First Federal used the percentage of taxable income method.
The Act eliminated the percentage of taxable income method of
accounting for bad debts by thrift institutions, effective for taxable years
beginning after 1995. Thrift institutions that are treated as small banks are
allowed to utilize the experience method applicable to such institutions, while
thrift institutions that are treated as large banks are required to use only the
specific charge off method.
A thrift institution required to change its method of computing
reserves for bad debt will treat such change as a change in the method of
accounting, initiated by the taxpayer and having been made with the consent of
the Secretary of the Treasury. Section 481(a) of the Code requires certain
amounts to be recaptured with respect to such change. Generally, the amounts to
be recaptured will be determined solely with respect to the "applicable excess
reserves" of the taxpayer. The amount of the applicable excess reserves will be
taken into account ratably over a six-taxable year period, beginning with the
first taxable year beginning after 1995, subject to the residential loan
requirement described below. In the case of a thrift institution that is treated
as a large bank, the amount of the institution's applicable excess reserves
generally is the excess of (i) the balances of its reserve for losses on
qualifying real property loans (generally loans secured by improved real estate)
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<PAGE>
and its reserve for losses on nonqualifying loans (all other types of loans) as
of the close of its last taxable year beginning before January 1, 1996, over
(ii) the balances of such reserves as of the close of its last taxable year
beginning before January 1, 1988 (i.e., the "pre-1988 reserves"). In the case of
a thrift institution that is treated as a small bank, like First Federal, the
amount of the institution's applicable excess reserves generally is the excess
of (i) the balances of its reserve for losses on qualifying real property loans
and its reserve for losses on nonqualifying loans as of the close of its last
taxable year beginning before January 1, 1996, over (ii) the greater of the
balance of (a) its pre-1988 reserves or (b) what the thrift's reserves would
have been at the close of its last year beginning before January 1, 1996, had
the thrift always used the experience method.
For taxable years that begin after December 31, 1995, and before
January 1, 1998, if a thrift meets the residential loan requirement for a tax
year, the recapture of the applicable excess reserves otherwise required to be
taken into account as a Code Section 481(a) adjustment for the year will be
suspended. A thrift meets the residential loan requirement if, for the tax year,
the principal amount of residential loans made by the thrift during the year is
not less than its base amount. The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996. A residential loan is a
loan as described in Section 7701(a)(19)(C)(v) (generally a loan secured by
residential or church property and certain mobile homes), but only to the extent
that the loan is made to the owner of the property.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e), as modified by the Act, which require recapture in the case of
certain excessive distributions to shareholders. The pre-1988 reserves may not
be utilized for payment of cash dividends or other distributions to a
shareholder (including distributions in dissolution or liquidation) or for any
other purpose (except to absorb bad debt losses). Distribution of a cash
dividend by a thrift institution to a shareholder is treated as made: first, out
of the institution's post-1951 accumulated earnings and profits; second, out of
the pre-1988 reserves; and third, out of such other accounts as may be proper.
To the extent a distribution by First Federal to FFD is deemed paid out of its
pre-1988 reserves under these rules, the pre-1988 reserves would be reduced and
the gross income of First Federal for tax purposes would be increased by the
amount which, when reduced by the income tax, if any, attributable to the
inclusion of such amount in its gross income, equals the amount deemed paid out
of the pre-1988 reserves. As of June 30, 2000, the pre-1988 reserves of First
Federal for tax purposes totaled approximately $1.8 million. First Federal
believes it had approximately $8.5 million of accumulated earnings and profits
for tax purposes as of June 30, 2000, which would be available for dividend
distributions, provided regulatory restrictions applicable to the payment of
dividends are met. See Notes A and H to the financial statements. No
representation can be made as to whether First Federal will have current or
accumulated earnings and profits in subsequent years.
The tax returns of First Federal have been audited or closed without
audit through 1996. In the opinion of management, any examination of open
returns would not result in a deficiency which could have a material adverse
effect on the financial condition of First Federal.
Ohio Taxation
FFD is subject to the Ohio corporation franchise tax, which, as applied
to FFD, is a tax measured by both net earnings and net worth. The rate of tax is
the greater of (i) 5.1% on the first $50,000 of computed Ohio taxable income and
8.5% of computed Ohio taxable income in excess of $50,000 or (ii) .400% times
taxable net worth.
In computing its tax under the net worth method, FFD may exclude 100%
of its investment in the capital stock of First Federal, as reflected on the
balance sheet of FFD in computing its taxable net worth as long as it owns at
least 25% of the issued and outstanding capital stock of First Federal. The
calculation of the exclusion from net worth is based on the ratio of the
excludable investment (net of any appreciation or goodwill included in such
investment) to total assets multiplied by the net value of the stock. As a
holding company, FFD may be entitled to various other deductions in computing
taxable net worth that are not generally available to operating companies.
A special litter tax is also applicable to all corporations, including
FFD, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
.22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to .014% times taxable
net worth.
First Federal is a "financial institution" for State of Ohio tax
purposes. As such, it is subject to the Ohio corporate franchise tax on
"financial institutions," which in 1999 was imposed at a rate of 1.4% of the
book net worth, and for tax year 2000 and years thereafter, the rate of tax is
equal to 1.3% of the book net worth. As a "financial institution," First Federal
is not subject to any tax based upon net income or net profits imposed by the
State of Ohio.
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<PAGE>
Item 2. Description of Property
The following table sets forth certain information at June 30,
2000, regarding the properties on which the main office of First Federal and a
branch office are located:
<TABLE>
<CAPTION>
Owned Date Net
Location or leased acquired book value(1)
-------- --------- --------- -------------
<S> <C> <C> <C>
321 North Wooster Avenue
Dover, Ohio 44622 Owned 1/96 $559,000
224 West High Avenue
New Philadelphia, OH 44663 Owned 11/97 $376,000
</TABLE>
-----------------------------
(1) At June 30, 2000, First Federal's office premises and equipment had a total
net book value of approximately $1.3 million. For additional information
regarding First Federal's office premises and equipment, see Notes A-7 and
E of Notes to Consolidated Financial Statements.
Item 3. Legal Proceedings
Neither FFD nor First Federal is presently involved in any legal
proceedings of a material nature. From time to time, First Federal is a party to
legal proceedings incidental to its business to enforce its security interest in
collateral pledged to secure loans made by First Federal.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Market for Common Equity and Related Stockholder Matters
The information contained in the FFD Financial Corporation Annual
Report to Shareholders for the fiscal year ended June 30, 2000 (the "Annual
Report"), under the caption "Market Price of FFD Common Shares and Related
Shareholder Matters" is incorporated herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
The information contained in the Annual Report under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is incorporated herein by reference.
Item 7. Financial Statements
The Consolidated Financial Statements appearing in the Annual
Report and the report of Grant Thornton LLP dated August 18, 2000, are
incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
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<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The information contained in the definitive Proxy Statement for
the 2000 Annual Meeting of Shareholders of FFD (the "Proxy Statement"), under
the caption "Board of Directors" is incorporated herein by reference.
Item 10. Executive Compensation
The information contained in the Proxy Statement under the caption
"Compensation of Executive Officers and Directors" is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information contained in the Proxy Statement under the caption
"Voting Securities and Ownership of Certain Beneficial Owners and Management" is
incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
Not Applicable.
Item 13. Exhibits and Reports on From 8-K
(a) Exhibits
3 Articles of Incorporation and Code of Regulations
10.1 FFD Financial Corporation 1996 Stock Option and Incentive
Plan
10.2 First Federal Savings Bank of Dover Recognition and
Retention Plan and Trust Agreement
13 Annual Report to Shareholders (the following parts of
which are incorporated herein by reference; "Market Price
of FFD's Common Shares and Related Shareholders' Matters,"
"Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Consolidated
Financial Statements).
20 Proxy Statement for 2000 Annual Meeting of Shareholders
21 Subsidiaries of FFD Financial Corporation
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by FFD during the quarter ended
June 30, 2000.
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<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FFD FINANCIAL CORPORATION
By:/s/ Robert R. Gerber
--------------------------------
Robert R. Gerber, President
(Principal Executive Officer)
Date: September 12, 2000
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
/s/ Robert R. Gerber /s/ Roy O. Mitchell, Jr.
---------------------------- ---------------------------
Robert R. Gerber Roy O. Mitchell, Jr.
President, Director and Director
Principal Financial Officer
Date: September 12, 2000 Date: September 12, 2000
/s/ Stephen G. Clinton /s/ Robert D. Sensel
---------------------------- ---------------------------
Stephen G. Clinton Robert D. Sensel
Director Director
Date: September 12, 2000 Date: September 12, 2000
/s/ J. Richard Gray /s/ Enos L. Loader
---------------------------- ---------------------------
J. Richard Gray Enos L. Loader
Director Director
Date: September 12, 2000 Date: September 12, 2000
/s/ Richard J. Herzig
----------------------------
Richard J. Herzig
Director
Date: September 12, 2000
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<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
------ ----------- -----------
<S> <C> <C>
3.1 Articles of Incorporation of FFD Financial Incorporated by reference to the Registration Statement on
Corporation Form S-1 filed by FFD on December 15, 1995 (the "S-1") with
the Securities and Exchange Commission (the "SEC"), Exhibit
3.1.
3.2 Certificate of Amendment to Articles of Incorporated by reference to Pre-Effective Amendment No. 1 to
Incorporation of FFD Financial Corporation the S-1 filed with the SEC on February 1, 1996
("Pre-Effective Amendment No. 1"), Exhibit 3.2.
3.3 Certificate of Amendment to Articles of Incorporated by reference to Pre-Effective Amendment No. 1,
Incorporation of FFD Financial Corporation Exhibit 3.3.
3.4 Code of Regulations of FFD Financial Incorporated by reference to the S-1, Exhibit 3.3.
Corporation
10.1 FFD Financial Corporation 1996 Stock Incorporated by reference to the Form 10-KSB for the year
Option and Incentive Plan ended June 30, 1998, as filed with the SEC on September 28,
1998 (the "1998 10-KSB"), Exhibit 10.1.
10.2 First Federal Savings Bank of Dover Incorporated by reference to the 1998 Form 10-KSB, Exhibit
Recognition and Retention Plan and Trust 10.2.
Agreement
13 FFD Financial Corporation 2000 Annual
Report to Shareholders
20 Proxy Statement for 2000 Annual Meeting of
Shareholders
21 Subsidiaries of FFD Financial Corporation Incorporated by reference to the Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1996, filed with the SEC
on September 30, 1996, Exhibit 21.
27 Financial Data Schedule
</TABLE>
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