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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 for the Fiscal Year Ended June 30, 2003
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 for the transition period from ______________ to ________________
Commission File Number: 0-27916
FFD FINANCIAL CORPORATION
(Name of small business issuer in its charter)
Ohio 34-1921148
(State or other jurisdiction of (I.R.S. Employer
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, 2003, were $7.8
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 $14.8 million on September 22, 2003.
1,212,997 of the issuer's common shares were issued and outstanding on
September 22, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Portions of the Annual Report to Shareholders
for the fiscal year ended June 30, 2003.
Part III of Form 10-KSB - Portions of the Proxy Statement
for the 2003 Annual Meeting of Shareholders.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
PART I
Item 1. Description of Business
General
FFD Financial Corporation ("FFD"), an Ohio corporation formed in 1996, is
a savings and loan holding company which owns all of the issued and outstanding
common shares of First Federal Community Bank, a federal savings bank ("First
Federal"). FFD acquired all of the common shares issued by First Federal upon
its conversion from a mutual savings bank to a stock savings bank in April 1996
(the "Conversion").
First Federal has conducted business in Tuscarawas County, Ohio 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 name "First Federal Savings Bank of Dover" was adopted. In August
2001 First Federal adopted its present name.
FFD is subject to regulation and examination by the Office of Thrift
Supervision of the United States Department of the Treasury (the "OTS") and the
United States Securities and Exchange Commission (the "SEC"). 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's business involves attracting deposits from individual and
business customers and using such deposits to originate loans to individuals and
businesses in its market area consisting of Tuscarawas and contiguous counties
in Ohio. First Federal provides deposit products including checking, savings,
money market, and individual retirement accounts as well as certificates of
deposit. Additionally, First Federal provides access to its products and
services via the Internet at www.onlinefirstfed.com. First Federal originates
residential and home equity loans, construction loans, nonresidential real
estate loans, business loans, and consumer loans. Loan funds are obtained
primarily from deposits and loan repayments. First Federal obtains advances from
the FHLB of Cincinnati 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 First Federal's net interest income, 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 activities are the origination
of real estate loans secured by one- to four-family residential properties,
nonresidential real estate loans, and business loans in First Federal's primary
market area. First Federal also originates loans secured by multifamily
properties containing five units or more, construction loans, and various types
of consumer loans.
Loan Portfolio Composition. The following table presents certain
information regarding the composition of First Federal's loan portfolio at the
dates indicated:
At June 30,
--------------------------------------------------------------------
2003 2002 2001
-------------------- -------------------- --------------------
Percent Percent Percent
of total of total of total
Amount loans Amount loans Amount loans
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
One- to four-family (1) $ 62,396 53.0% $ 64,560 59.9% $ 67,643 62.1%
Multifamily 4,905 4.2 5,354 5.0 7,603 7.0
Nonresidential and land (1) 28,488 24.2 24,917 23.1 24,645 22.6
Commercial - secured 19,002 16.1 10,818 10.1 6,939 6.4
Commercial - unsecured 452 0.4 448 0.4 471 0.4
Consumer 2,352 2.0 1,604 1.5 1,623 1.5
Deferred loan origination costs 121 0.1 -- -- 1 --
-------- ----- -------- ----- -------- -----
Total loans 117,716 100.0% 107,701 100.0% 108,925 100.0%
======== ===== ======== ===== ======== =====
Less:
Undisbursed portion of loans in
process 2,699 269 1,134
Deferred loan origination fees -- 1 --
Allowance for loan losses 818 713 564
-------- -------- --------
Loans receivable, net $114,199 $106,718 $107,227
======== ======== ========
(1) Includes construction loans.
Loan Maturity Schedule. The following table sets forth certain information
as of June 30, 2003, 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.
Due 11-or
Due during the year ending Due 4-5 Due 6-10 more
June 30, years years years
--------------------------- after after after
2004 2005 2006 6/30/03 6/30/03 6/30/03 Total
------- ------ ------ ------- -------- --------- --------
(In thousands)
Residential real estate(1)(2) $ 9,596 $2,998 $3,167 $ 6,882 $20,909 $23,805 $ 67,357
Nonresidential and land(2) 2,719 2,230 2,352 5,092 15,352 773 28,518
Commercial loans(2) 5,145 3,490 3,679 7,173 -- -- 19,487
Consumer loans(2) 614 619 661 460 -- -- 2,354
------- ------ ------ ------- ------- ------- --------
Total loans $18,074 $9,337 $9,859 $19,607 $36,261 $24,578 $117,716
======= ====== ====== ======= ======= ======= ========
- ----------
(1) Includes one- to four-family and multifamily loans.
(2) Includes applicable deferred loan origination costs.
The following table sets forth the dollar amount of all loans due after
June 30, 2004, which have fixed interest rates and which have floating or
adjustable interest rates:
Due after June 30, 2004
-----------------------
(In thousands)
Fixed rate of interest $17,603
Adjustable rate of interest 82,039
-------
$99,642
=======
2
One- to Four-Family Residential Real Estate Loans. First Federal makes
permanent conventional loans secured by first mortgages on existing one- to
four-family residences, primarily single-family residences, located in
Tuscarawas County, Ohio. First Federal also originates 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 was $62.4 million, or 53.0% of total loans, at June 30, 2003.
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 increases 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 30 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 also 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 a
mortgage on the borrower's principal residence. Basic home equity lines of
credit typically do not exceed 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. Premier lines of credit to certain high net worth
borrowers are made for amounts which may exceed the estimated value of the real
estate. Home equity loans are secured by a 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, 2003, First Federal's
total one- to four-family residential real estate loan portfolio included $13.8
million in home equity loans. First Federal had three nonperforming loans one-
to four-family residential real estate loans in the amount of $108,000.
Multifamily Residential Real Estate Loans. First Federal originates loans
secured by multifamily properties containing five or more units. The majority of
such loans are made with adjustable interest rates and a maximum LTV of 85% for
terms of up to 20 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, 2003, First Federal had one impaired and
nonperforming multifamily residential real estate in the amount of $232,000.
At June 30, 2003, loans secured by multifamily properties totaled
approximately $4.9 million, or 4.2% of total loans.
Construction Loans. First Federal makes loans for the construction of
residential and non-residential real estate. These loans are typically
structured as permanent loans with adjustable or fixed rates of interest and
terms from 15 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, construction loans to developers for the construction of
single-family homes, and construction loans for the construction of
non-residential real estate.
3
Construction loans generally involve greater underwriting and default
risks than do loans secured by mortgages on existing properties. First Federal
advances loan funds upon the security of the project under construction, which
is more difficult to value before the completion of construction. Because of the
uncertainties inherent in estimating construction costs, in the event a default
on a construction loan occurs and foreclosure follows, First Federal must take
control of the project and attempt either to arrange for completion of
construction or dispose of the unfinished project.
At June 30, 2003, a total of $3.4 million, or approximately 2.9%, 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 15 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, for example, leases are not
obtained or renewed, the cash flow on the property may be reduced and 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. At June 30, 2003, First Federal had five
impaired nonresidential real estate and land loans in the amount of $930,000, of
which two were nonperforming in the amount of $260,000.
At June 30, 2003, First Federal had a total of $28.5 million, or 24.2% of
total loans, invested in nonresidential real estate and land loans. Federal
regulations limit the amount of nonresidential mortgage and land loans which an
association may make to 400% of its capital. At June 30, 2003, First Federal's
nonresidential mortgage loans totaled 181.2% 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 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 not more than 85% and have
adjustable interest rates.
Commercial loans generally 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. At June 30, 2003, First Federal had 16 impaired commercial
loans in the amount of $1.09 million, of which three were nonperforming in the
amount of $209,000.
At June 30, 2003, First Federal had approximately $19.5 million, or 16.5%
of total loans, invested in commercial loans. OTS regulations limit the amount
of commercial loans that FFD may invest in to 20% of the FFD's total assets,
provided that amounts in excess of 10% may only be used for small business
loans. At June 30, 2003, FFD was in compliance with this restriction.
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 in the future. First Federal had three
nonperforming consumer loans in the amount of $8,000.
At June 30, 2003, First Federal had approximately $2.4 million, or 2.0% of
its total loans, invested in consumer loans.
Loan Solicitation and Processing. Loan originations are developed from a
number of sources, including continuing business with depositors, borrowers and
real estate developers, periodic newspaper, television, and radio
advertisements, solicitations by First Federal's lending staff and walk-in
customers.
4
Loan applications for real estate loans are taken by First Federal's 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 be given as security for the loan is prepared by a staff appraiser or a fee
appraiser approved by the Board of Directors. For construction loans, an
appraiser also evaluates the building plans, construction specifications and
estimates of construction costs, and First Federal evaluates the feasibility of
the proposed construction project and the experience and record of the builder.
Upon the completion of the appraisal or evaluation and the receipt of
information on the credit history of the borrower, the loan application is
submitted for review in accordance with First Federal's underwriting guidelines.
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, if applicable, flood
insurance and to name First Federal as an insured mortgagee.
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
originates both adjustable-rate and fixed-rate loans for its portfolio. First
Federal sells a majority of its fixed-rate real estate loans to the Federal Home
Loan Mortgage Corporation ("FHLMC"). When a mortgage loan is sold, First Federal
services the loan in exchange for a servicing fee. During the year ended June
30, 2003, First Federal sold approximately $41.7 million in loans to the FHLMC
and $2.5 million in loans to other financial institutions.
The following table presents the activity in First Federal's loan
portfolio, 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.
Year ended June 30,
--------------------------------
2003 2002 2001
-------- -------- --------
(In thousands)
Loans originated:
One- to four-family $ 55,037 $ 28,847 $ 17,510
Construction 4,706 1,288 902
Nonresidential and land 11,787 16,587 42
Commercial 21,438 3,915 24,660
Consumer 1,702 533 1,630
-------- -------- --------
Total loans originated 94,670 51,170 44,744
Principal repayments 41,319 32,238 30,639
Loans sold 44,172 19,210 9,257
Decrease in other items, net (1) (268) (134) (320)
-------- -------- --------
Net increase (decrease) in loans receivable $ 8,911 $ (412) $ 4,528
======== ======== ========
- ----------
(1) Other items consist of amortization of deferred loan origination fees, the
provision for losses on loans, transfers to real estate acquired through
foreclosure, 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 loss
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 may permit exceptions to the lending limit on a
case-by-case basis under certain circumstances.
Based on the 15% limit, First Federal was able to lend approximately $2.5
million to one borrower at June 30, 2003. The largest amount First Federal had
outstanding to one borrower at June 30, 2003, was $2.1 million.
5
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 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 or collection, 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 or collection
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 or repossession occurs, the real estate or other
collateral 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, or any other collateral it initially records the property
or collateral at the lower of cost or fair value, less estimated selling costs.
First Federal records a loss provision if the collateral'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 one REO property totaling $161,000 at
June 30, 2003.
The following table reflects the amount of loans in a delinquent status as
of the dates indicated:
June 30, 2003 June 30, 2002 June 30, 2001
-------------------------- -------------------------- --------------------------
Percent Percent Percent
of total of total of total
Number Amount loans Number Amount loans Number Amount loans
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in thousands)
Loans delinquent for:
30 - 59 days 11 $ 636 0.53% 13 $1,247 1.15% 5 $ 754 0.69%
60 - 89 days 7 313 0.26% 13 904 0.84% 7 177 0.16%
90 days and over 12 808 0.68% 9 622 0.58% 1 105 0.10%
-- ------ ---- -- ------ ---- -- ------ ----
Total delinquent loans 30 $1,757 1.47% 35 $2,773 2.57% 13 $1,036 0.95%
== ====== ==== == ====== ==== == ====== ====
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, in the opinion of management, the collateral value is not
adequate 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 contractually past due is unlikely.
6
The following table sets forth information with respect to First Federal's
nonaccruing, impaired and nonperforming loans and nonperforming assets at the
dates indicated.
At June 30,
-------------------------------
2003 2002 2001
------- ------- -------
(Dollars in thousands)
Impaired and nonperforming loans $ 692 $ 38 $ --
Impaired and performing loans 1,552 421 --
------- ------- -------
Total impaired loans 2,244 459 --
Other nonperforming loans 116 584 105
------- ------- -------
Total nonperforming and impaired loans 2,360 1,043 105
Real estate acquired through foreclosure 161 -- --
------- ------- -------
Total nonperforming and impaired assets $ 2,521 $ 1,043 $ 105
======= ======= =======
Total nonperforming and impaired loans as a
percent of total loans 1.98% 0.97% 0.10%
Allowance for loan losses as a percent of
nonperforming and impaired loans 36.45% 114.63% 537.14%
Total nonperforming and impaired assets to
total assets 1.85% 0.80% 0.08%
For the year ended June 30, 2003, interest income of $45,000 would have
been recorded on nonaccruing loans had such loans been accruing pursuant to
contractual terms. No interest income was recorded on such loans during the
year.
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 as "loss" is
considered uncollectible and of such little value that its continuance as an
asset of the institution is not warranted. If an asset, or portion thereof, is
classified as loss, the association must either establish a specific allowance
for losses in the amount of 100% of the portion of the asset classified loss or
charge off such amount. 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. At
June 30, 2003, First Federal had $4.3 million in special mention assets.
The aggregate amounts of First Federal's classified assets at the dates
indicated were as follows:
At June 30,
--------------------------
2003 2002 2001
---- ---- ----
(In thousands)
Classified assets:
Substandard $431 -- --
Doubtful 552 -- --
---- ---- ----
Total $983 $ -- $ --
==== ==== ====
7
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.
Allowance for Loan Losses. First Federal maintains an allowance for loan
losses 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, loan charge-offs, current and anticipated
economic conditions in the primary lending area, past loss experience and
possible losses arising from specific problem assets.
The single largest component of First Federal's loan portfolio consists of
one- to four-family residential real estate loans. Substantially all of these
loans are secured by property in First Federal's lending area of Tuscarawas
County, which has a fairly stable economy. First Federal's practice of making
loans primarily in its local market area has contributed to a historically low
charge-off rate. Substantially all of First Federal's other real estate loans
are also secured by properties 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.
Nonresidential real estate loans and commercial loans are generally deemed
to entail significantly greater risk than residential real estate loans. The
repayment of such 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 loan losses for the periods indicated:
Year ended June 30,
---------------------------
2003 2002 2001
----- ----- -----
(Dollars in thousands)
Balance at beginning of period $ 713 $ 564 $ 375
Charge-offs (26) (1) (12)
Provision for losses on loans 131 150 201
----- ----- -----
Balance at end of period $ 818 $ 713 $ 564
===== ===== =====
Ratio of net charge-offs to average loans
outstanding during the period 0.02% --% 0.01%
Ratio of allowance for loan losses to total
loans 0.68% 0.66% 0.52%
8
The following table sets forth the allocation of First Federal's allowance
for loan losses by type of loan at the dates indicated:
At June 30,
----------------------------------------------------------------------
2003 2002 2001
---------------------- --------------------- ----------------------
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)
Balance at year end
applicable to:
Real estate loans $489 81.5% $255 88.0% $403 91.7%
Commercial loans 300 16.5 396 10.5 122 6.8
Consumer loans 29 2.0 62 1.5 39 1.5
Unallocated -- -- -- -- -- --
---- ----- ---- ----- ---- -----
Total $818 100.0% $713 100.0% $564 100.0%
==== ===== ==== ===== ==== =====
Because the loan loss allowance is based on estimates, it is monitored
quarterly and adjusted as necessary to provide an adequate allowance.
Investment Activities
First Federal is 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 other investments permitted by federal regulations.
First Federal maintains a significant portfolio of mortgage-backed
securities in the form of FHLMC, Government National Mortgage Association
("GNMA") and Federal National Mortgage Association ("FNMA") participation
certificates. Mortgage-backed securities generally entitle First Federal to
receive a portion of the cash flows from an identified pool of mortgages. FHLMC,
GNMA and FNMA securities are guaranteed by the issuing agency as to principal
and interest. Although mortgage-backed securities generally yield less than
individual loans originated by First Federal, management believes they are a
prudent investment alternative.
9
The following table sets forth information regarding First Federal's
investment securities and mortgage-backed securities at the dates indicated:
At June 30,
2003 2002 2001
-------------------------------- ---------------------------------- ---------------------------------
Amortized % of Market % of Amortized % of Market % of Amortized % of Market % of
cost total Value total cost total value total cost total value total
--------- ----- ------ ----- --------- ----- ------ ----- --------- ----- ------- -----
(Dollars in thousands)
Investment securities
designated as available
for sale:
U.S. Government and
agency obligations $1,501 50.5% $1,502 49.7% $2,038 39.4% $2,047 39.0% $ 1,000 8.0% $ 1,000 7.9%
------ ----- ------ ----- ------ ----- ------ ----- ------- ----- ------- -----
Mortgage-backed securities
designated as held to
maturity 651 21.9 687 22.8 1,606 31.0 1,648 31.4 3,721 29.9 3,804 30.2
Mortgage-backed securities
designated as available
for sale 820 27.6 832 27.5 1,531 29.6 1,551 29.6 7,715 62.1 7,799 61.9
------ ----- ------ ----- ------ ----- ------ ----- ------- ----- ------- -----
Total mortgage-backed
securities 1,471 49.5 1,519 50.3 3,137 60.6 3,199 61.0 11,436 92.0 11,603 92.1
------ ----- ------ ----- ------ ----- ------ ----- ------- ----- ------- -----
Total investment securities
and mortgage-backed
securities $2,972 100.0% $3,021 100.0% $5,175 100.0% $5,246 100.0% $12,436 100.0% $12,603 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ======= ===== ======= =====
The maturities of First Federal's U. S. Government and agency obligations
and mortgage-backed securities at June 30, 2003, are indicated in the following
table:
After one through After five After ten
Less than one year five years through ten years years Total
------------------ ------------------ ------------------ ------------------ ------------------------------
Weighted-
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Market average
Cost yield cost yield cost yield cost yield cost value yield
--------- ------- --------- ------- --------- ------- --------- ------- --------- ------ ---------
(Dollars in thousands)
U.S. Government and
agency obligations $ -- --% $ -- --% $1,000 3.00% $ 501 6.19%(1) $1,501 $1,502 4.06%
Mortgage-backed
securities -- -- 102 7.25 191 9.23 1,178 4.80 1,471 1,519 5.55
---- ---- ---- ---- ------ ---- ------ ---- ------ ------ ----
$ -- --% $102 7.25% $1,191 4.00% $1,679 5.21% $2,972 $3,021 4.80%
==== ==== ==== ==== ====== ==== ====== ==== ====== ====== ====
- ----------
(1) Subject to call on July 10, 2003 with a yield to call of 3.03%.
10
Deposits and Borrowings
Deposits. Deposits have traditionally been the primary source of First
Federal's funds for use in lending and other investment activities. Deposits are
attracted principally from within First Federal's primary market area through
the offering of a broad selection of deposit instruments, including negotiable
order of withdrawal ("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, 2003, First Federal's certificates of deposit totaled $51.3
million, or 49.1% of total deposits. Of such amount, approximately $24.0 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:
At June 30,
-------------------------------------------------------------
2003 2002 2001
------------------ ------------------ ------------------
Percent Percent Percent
of total of total of total
Amount deposits Amount deposits Amount deposits
------ -------- ------ -------- ------ --------
(Dollars in thousands)
Transaction accounts:
Demand deposit accounts $ 7,867 7.5% $ 4,908 5.1% $ 3,487 3.8%
NOW and money market accounts (1) 12,981 12.5 11,343 11.9 9,995 11.0
Passbook savings accounts (2) 32,229 30.9 29,623 31.0 26,467 29.1
-------- ----- ------- ----- ------- -----
Total transaction accounts 53,077 50.9 45,874 48.0 39,949 43.9
Certificates of deposit:
.50 - 1.00% 429 .4 -- -- -- --
1.01 - 2.00% 11,571 11.1 2,871 3.0 -- --
2.01 - 4.00% 18,895 18.1 23,816 24.9 2,013 2.2
4.01 - 6.00% 18,726 17.9 14,473 15.2 21,071 23.2
6.01 - 8.00% 1,653 1.6 8,508 8.9 27,985 30.7
-------- ----- ------- ----- ------- -----
Total certificates of deposit (3) 51,274 49.1 49,668 52.0 51,069 56.1
-------- ----- ------- ----- ------- -----
Total deposits $104,351 100.0% $95,542 100.0% $91,018 100.0%
======== ===== ======= ===== ======= =====
- ----------
(1) The weighted-average interest rates on NOW and money market accounts were
0.20% at June 30, 2003, 0.35% at June 30, 2002 and 0.25% at June 30, 2001.
(2) The weighted-average interest rates on passbook accounts were 0.83% at
June 30, 2003, 1.59% at June 30, 2002 and 3.34% at June 30, 2001.
(3) The weighted-average rates on all certificates of deposit were 3.43% at
June 30, 2003, 3.93% at June 30, 2002 and 6.05% at June 30, 2001.
11
The following table shows rate and maturity information for First
Federal's certificates of deposit at June 30, 2003:
Amount Due
----------
Over Over
Up to 1 year to 2 years to Over
Rate One year 2 years 3 years 3 years Total
- ---- -------- --------- ---------- ------- -------
(In thousands)
0.50 - 1.00% $ 410 $ 19 $ -- $ -- $ 429
1.01 - 2.00% 9,654 1,917 -- -- 11,571
2.01 - 4.00% 8,516 7,731 2,544 104 18,895
4.01 - 6.00% 3,790 4,856 8,248 1,832 18,726
6.01 - 8.00% 1,653 -- -- -- 1,653
------- ------- ------- ------- -------
Total $24,023 $14,523 $10,792 $ 1,936 $51,274
======= ======= ======= ======= =======
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,
2003:
Maturity Amount
- -------- ------
(In thousands)
Three months or less $ 877
Over 3 months to 6 months 100
Over 6 months to 12 months 3,338
Over 12 months 5,277
------
Total $9,592
======
The following table sets forth First Federal's deposit account balance
activity for the periods indicated:
Year ended June 30,
---------------------------------------
2003 2002 2001
--------- --------- ---------
(Dollars in thousands)
Beginning balance $ 95,542 $ 91,018 $ 77,987
Deposits 701,797 540,187 414,186
Withdrawals (694,954) (538,233) (404,244)
--------- --------- ---------
Net increase in deposits before
interest credited 6,843 1,954 9,942
Interest credited 1,966 2,570 3,089
--------- --------- ---------
Ending balance $ 104,351 $ 95,542 $ 91,018
========= ========= =========
Net increase $ 8,809 $ 4,524 $ 13,031
========= ========= =========
Percent increase 9.2% 5.0% 16.7%
========= ========= =========
Borrowings. First Federal's other sources of funds include advances from
the FHLB. 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% 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, and 5% of its advances from the FHLB. First Federal
complies with this requirement with an investment in stock of the FHLB of
Cincinnati of $2.0 million at June 30, 2003.
12
FHLB advances are secured by collateral in one or more of the following
categories: fully-disbursed, whole first mortgage loans on improved residential
property or securities representing a whole interest in such loans; securities
issued, insured, or guaranteed by the U.S. Government or an agency thereof;
deposits in any FHLB; or other real estate related collateral acceptable to the
FHLB, if such collateral has a readily ascertainable value and the FHLB can
perfect its security interest in the collateral. At June 30, 2003, First Federal
had $13.9 million outstanding in advances from the FHLB. First Federal had no
other borrowings during the last three fiscal years.
The following table sets forth certain information as to First Federal's
FHLB advances at the dates indicated:
At June 30,
---------------------------------
2003 2002 2001
------- ------- -------
(Dollars in thousands)
FHLB advances $13,891 $17,553 $24,732
Weighted-average interest rate of
FHLB advances 3.95% 3.67% 4.78%
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:
Year ended June 30,
---------------------------------
2003 2002 2001
------- ------- -------
(Dollars in thousands)
Maximum balance $17,553 $25,667 $29,903
Average balance $15,066 $20,548 $26,094
Weighted-average interest rate 3.87% 3.77% 6.01%
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, 2003, was approximately $15,025.
Personnel
At June 30, 2003, First Federal had 41 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 is represented by a collective bargaining unit.
13
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 an
Ohio corporation, FFD is subject to provisions of the Ohio Revised Code
applicable to corporations generally.
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.
Office of Thrift Supervision Regulations
General. The OTS is an office of the Department of the Treasury and is
responsible for the regulation and supervision of all federally-chartered
savings associations and all other savings associations the deposits of which
are insured by the FDIC in the SAIF. The OTS issues regulations governing the
operation of savings associations, regularly examines such associations and
imposes assessments on savings associations based on their asset size to cover
the costs of general supervision and examination. The OTS also may initiate
enforcement actions against savings associations and certain persons affiliated
with them for violations of laws or regulations or for engaging in unsafe or
unsound practices. If the grounds provided by law exist, the OTS may appoint a
conservator or receiver for a savings association.
Savings associations are subject to regulatory oversight under various
consumer protection and fair lending laws. These laws govern, among other
things, truth-in-lending disclosures, equal credit opportunity, fair credit
reporting and community reinvestment. Community reinvestment regulations
evaluate how well and to what extent an institution lends and invests in its
designated service area, with particular emphasis on low- to moderate-income
communities and borrowers in that area. Failure to abide by federal laws and
regulations governing community reinvestment could limit the ability of an
association to open a new branch or engage in a merger.
Regulatory Capital Requirements. First Federal is required by OTS
regulations to meet certain minimum capital requirements. All savings
associations must have tangible capital of 1.5% of adjusted total assets, core
capital of 4% of adjusted total assets, except for associations with the highest
examination rating and acceptable levels of risk, and risk-based capital equal
to 8% of risk-weighted assets. Assets and certain off-balance sheet items are
weighted at percentage levels ranging from 0% to 100% depending on their
relative risk. First Federal exceeded these requirements with tangible capital
of 11.5%, core capital of 11.5% and risk-based capital of 18.4% at June 30,
2003.
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. An undercapitalized association will be subject to
increased monitoring and asset growth restrictions and will be required to
obtain prior approval for acquisitions, branching and engaging in new lines of
business. Critically undercapitalized institutions must be placed in
conservatorship or receivership within 90 days of reaching that capitalization
level, except under limited circumstances. First Federal's capital at June 30,
2003, met the standards for the highest category, a "well-capitalized"
institution.
Federal law prohibits a savings association from making a capital
distribution to anyone or paying management fees to any person having control of
the association if, after such distribution or payment, the association would be
undercapitalized. In addition, each company controlling an undercapitalized
association must guarantee that the association will comply with its capital
plan until the association has been adequately capitalized on an average during
each of four preceding calendar quarters and must provide adequate assurances of
performance.
14
Limitations on Capital Distributions. The OTS imposes various restrictions
or requirements on the ability of savings 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.
A subsidiary of a savings and loan holding company must file a notice or
an application with the OTS before it can pay a dividend. An application must be
submitted to and approved by the OTS 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
retained net income for the preceding two years; (ii) if the savings association
will not be at least adequately capitalized following the capital distribution;
or (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 notice with the OTS.
Qualified Thrift Lender Test. If a savings association fails to meet one
of the two tests in order to be a qualified thrift lender ("QTL"), the
association and its holding company become subject to certain operating and
regulatory restrictions. 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 first test, at least 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 if at least 60% of such institution's assets
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. At June 30, 2003, First Federal qualified as a QTL.
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, 2003.
All transactions between savings associations and their affiliates must
comport with Sections 23A and 23B of the Federal Reserve Act ("FRA") and the
Federal Reserve Board's Regulation W. 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 up 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 up 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, acceptance of securities issued by an affiliate as
collateral for an extension of credit to any person, 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, 2003.
Federal Deposit Insurance Corporation
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 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.
15
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 savings associations maintain
reserves of 3% of net transaction accounts (primarily NOW accounts) up to $42.1
million (subject to an exemption of up to $6.0 million), and of 10% of net
transaction accounts in excess of $42.1 million. At June 30, 2003, First Federal
was in compliance with its reserve requirements.
Holding Company Regulation
As a unitary savings and loan holding company, FFD generally has no
restrictions on its activities. If, however, 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 safety,
soundness or stability of its subsidiary savings association, the OTS may impose
such restrictions as deemed necessary to address such risk, including limiting
(i) payment of dividends by the savings association, (ii) transactions between
the savings association and its affiliates, and (iii) any activities of the
savings association that might create a serious risk that the liabilities of FFD
and its affiliates may be imposed on the savings association. If the savings
association subsidiary of a holding company fails to meet the QTL test, then the
holding company would become subject to the activities restrictions applicable
to multiple holding companies. At June 30, 2003, First Federal qualified as a
QTL.
Federal law generally prohibits a savings and loan holding company from
controlling any other savings association or savings and loan holding company,
without prior approval of the OTS, or from acquiring or retaining more than 5%
of the voting shares of a savings association or holding company thereof, which
is not a subsidiary. Under certain circumstances, a savings and loan holding
company is permitted to acquire, with the approval of the OTS, up to 15% of the
previously unissued voting shares of an undercapitalized savings association for
cash without such savings association being deemed to be controlled by the
holding company. Except with the prior approval of the OTS, no director or
officer of a savings and loan holding company or person owning or controlling by
proxy or otherwise more than 25% of such 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.
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. In
addition, OTS approval must be obtained for any merger involving either FFD or
First Federal.
Ohio Corporation Law
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) one of the specified exceptions applies (2) the holders of
at least two-thirds of the voting shares, and at least a majority of the voting
shares not beneficially owned by the Interested Shareholders, approve the
business combination at a meeting called for such purpose; or
16
(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. FFD has
not opted out of the protection afforded by Chapter 1704.
Control Share Acquisition Statute. Section 1701.831 of the Ohio Revised
Code (the "Control Share Acquisition Statute") requires that, with certain
exceptions, acquisitions of voting securities which would result in the
acquiring shareholder owning 20%, 33 1/3%, or 50% of the outstanding voting
securities of an Ohio corporation (a "Control Share Acquisition") must be
approved in advance by (a) the holders of at least a majority of the outstanding
voting shares of such corporation represented at a meeting at which a quorum is
present, and (b) a majority of the portion of the outstanding voting shares
represented at such a meeting excluding the voting shares owned by the acquiring
shareholder, by certain other persons who acquire or transfer voting shares
after public announcement of the acquisition or by certain officers of the
corporation or directors of the corporation who are employees of the
corporation. The Control Share Acquisition Statute was intended, in part, to
protect shareholders of Ohio corporations from coercive tender offers.
Takeover Bid Statute. Ohio law provides that an offeror may not make a
tender offer or request or invitation for tenders that would result in the
offeror beneficially owning more than ten percent of any class of the target
company's equity securities unless such offeror files certain information with
the Ohio Division of Securities (the "Securities Division") and provides such
information to the target company and the offerees within Ohio. The Securities
Division may suspend the continuation of the control bid if the Securities
Division determines that the offeror's filed information does not provide full
disclosure to the offerees of all material information concerning the control
bid. The statute also provides that an offeror may not acquire any equity
security of a target company within two years of the offeror's previous
acquisition of any equity security of the same target company pursuant to a
control bid unless the Ohio offerees may sell such security to the offeror on
substantially the same terms as provided by the previous control bid. The
statute does not apply to a transaction if either the offeror or the target
company is a savings and loan holding company and the proposed transaction
requires federal regulatory approval.
Sarbanes-Oxley Act of 2002. On July 30, 2002, President Bush signed into
law the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"). The
Sarbanes-Oxley Act represents a comprehensive revision of laws affecting
corporate governance, accounting obligations and corporate reporting. The
Sarbanes-Oxley Act is applicable to all companies with equity securities
required to file reports under the Securities Exchange Act of 1934. The
Sarbanes-Oxley Act establishes, among other things: (i) new requirements for
audit committees, including independence, expertise, and responsibilities; (ii)
additional responsibilities regarding financial statements for the Chief
Executive Officer and Chief Financial Officer of the reporting company; (iii)
new standards for auditors and regulation of audits; (iv) increased disclosure
and reporting obligations for the reporting company and its directors and
executive officers; and (v) new and increased civil and criminal penalties for
violations of the securities laws. Many of the provisions were effective
immediately while other provisions become effective over a period of time and
are subject to rulemaking by the SEC. Because FFD's common stock is registered
with the SEC, it is subject to the Sarbanes-Oxley Act, and any future rules or
regulations promulgated under such act.
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. In
addition, 75% of the amount by which a corporation's "adjusted current earnings"
exceeds its alternative minimum taxable income computed without regard to
preference items 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. The Taxpayer Relief Act of 1997 repealed the
alternative minimum tax for certain "small corporations" for tax years beginning
after December 31, 1997, but First Federal does not qualify as a small
corporation exempt from the alternative minimum tax.
17
Certain thrift institutions, such as First Federal, are allowed deductions
for bad debts under methods more favorable than those granted to other
taxpayers. Qualified thrift institutions may compute deductions for bad debts
using either the specific charge-off method of Section 166 of the Code or the
experience method of Section 593 of the Code. The "experience" method is also
available to small banks. Under the experience method, a thrift institution is
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. 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, commencing with the first
taxable year beginning after 1995, subject to the residential loan requirement
described below. In the case of a thrift institution that is treated as a large
bank, the amount of the institution's applicable excess reserves generally is
the excess of (i) the balances of its reserve for losses on qualifying real
property loans (generally loans secured by improved real estate) and its reserve
for losses on nonqualifying loans (all other types of loans) as of the close of
its last taxable year beginning before January 1, 1996, over (ii) the balances
of such reserves as of the close of its last taxable year beginning before
January 1, 1988 (i.e., the "pre-1988 reserves"). In the case of a thrift
institution that is treated as a small bank, like First Federal, the amount of
the institution's applicable excess reserves generally is the excess of (i) the
balances of its reserve for losses on qualifying real property loans and its
reserve for losses on nonqualifying loans as of the close of its last taxable
year beginning before January 1, 1996, over (ii) the greater of the balance of
(a) its pre-1988 reserves or (b) what the thrift's reserves would have been at
the close of its last year beginning before January 1, 1996, had the thrift
always used the experience method.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e), 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, 2003, the pre-1988 reserves of First Federal for tax purposes totaled
approximately $1.6 million. First Federal believes it had approximately $8.4
million of accumulated earnings and profits for tax purposes as of June 30,
2003, which would be available for dividend distributions, provided regulatory
restrictions applicable to the payment of dividends are met. See Notes A-8 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 1999. 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) 0.4% of
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.
18
FFD may elect to be a "qualifying holding company" and as such be exempt
from the net worth tax. A corporation franchise tax based solely on net earnings
would still apply. To be exempt, FFD must satisfy all of the requirements of the
applicable statute, including making related member adjustments that could
affect the taxable net worth of First Federal. FFD has made such an election for
fiscal 2003.
First Federal is a "financial institution" for State of Ohio tax purposes.
As such, it is subject to the Ohio corporate franchise tax on "financial
institutions," which is imposed at a rate of 1.3% of the taxable 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.
CRITICAL ACCOUNTING POLICIES
General. The preparation of consolidated financial statements under
accounting principles generally accepted in the United States of America ("US
GAAP") requires FFD to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses. Several factors are
considered in determining whether or not a policy is critical in the preparation
of financial statements. These factors include, among other things, whether the
estimates are significant to the financial statements, the nature of the
estimates, the ability to readily validate the estimates with other information,
and sensitivity of the estimates to changes in economic conditions and whether
alternative accounting methods may be utilized under US GAAP. Management has
discussed the development and the selection of critical accounting policies with
FFD's audit committee.
Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the allowance for loan losses
and the valuation of mortgage servicing assets. Actual results could differ from
those estimates.
Management has discussed the development and selection of the following
critical accounting estimates with the audit committee of the board of directors
and the audit committee has reviewed FFD's disclosures relating to them in this
Annual Report on Form 10-KSB.
Allowance for Loan Losses. FFD has developed policies and procedures for
assessing the adequacy of the allowance for loan losses that reflect the
evaluation of credit risk after careful consideration of all information
available. In developing this assessment, management must rely on estimates and
exercise judgment regarding matters where the ultimate outcome is unknown, such
as economic factors, developments affecting companies in specific industries and
issues with respect to single borrowers. Depending on changes in circumstances,
future assessments of credit risk may yield materially different results, which
may require an increase or a decrease in the allowance for loan losses.
The allowance is regularly reviewed by management to determine whether the
amount is considered adequate to absorb probable losses. This evaluation
includes specific loss estimates on certain individually reviewed loans,
statistical loss estimates for loan pools that are based on historical loss
experience, and general loss estimates that are based upon the size, quality,
and concentration characteristics of the various loan portfolios, adverse
situations that may affect a borrower's ability to repay, and current economic
and industry conditions. Also considered as part of that judgment is a review of
the Bank's trends in delinquencies and loan losses, as well as trends in
delinquencies and losses for the region and nationally, and economic factors.
While FFD strives to reflect all known risk factors in its evaluations,
judgment errors may occur. If different assumptions or conditions were to
prevail, the amount and timing of loan losses could be materially different.
The allowance for loan losses is maintained at a level believed adequate
by management to absorb probable losses inherent in the loan portfolio.
Management's evaluation of the adequacy of the allowance is an estimate based on
management's current judgment about the credit quality of the loan portfolio.
Mortgage Servicing Assets. Mortgage servicing assets are recognized as
separate assets when loans are sold with servicing retained. A pooling
methodology to the servicing valuation, in which loans with similar
characteristics were "pooled" together, is applied for valuation purposes. Once
pooled, each grouping of loans is evaluated on a discounted earnings basis to
determine the present value of future earnings that a purchaser could expect to
realize from the portfolio. Earnings are projected from a variety of sources
including loan service fees, interest earned on float, net interest earned on
escrow balances, miscellaneous income and costs to service the loans. The
present value of future earnings is the estimated market value for the pool.
Events that may significantly affect the estimates used are changes in interest
rates and the related impact on mortgage loan prepayment speeds and the payment
performance of the underlying loans. If the fair value is less than carrying
value, impairment is recognized through a valuation allowance for each impaired
pool.
19
Item 2. Description of Property
The following table sets forth certain information at June 30, 2003,
regarding the properties on which the main office and branch offices of First
Federal are located:
Owned Date Net
Location or leased acquired book value(1)
-------- --------- -------- -------------
(In thousands)
321 North Wooster Avenue
Dover, Ohio 44622 Owned 1/96 $553
224 West High Avenue
New Philadelphia, OH 44663 Owned 11/97 $330
902 Boulevard
Dover, Ohio 44622 Owned 12/01 $807
- ----------
(1) At June 30, 2003, First Federal's office premises and equipment had a
total net book value of approximately $2.1 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, 2003 (the "Annual
Report"), under the caption "Market Price of FFD's Common Shares and Related
Shareholder Matters" is incorporated herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
The information contained in the Annual Report under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is incorporated herein by reference.
Item 7. Financial Statements
The Consolidated Financial Statements appearing in the Annual Report
and the report of Grant Thornton LLP dated August 21, 2003, are incorporated
herein by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
20
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
2003 Annual Meeting of Shareholders of FFD (the "Proxy Statement") under the
captions "Board of Directors," "Executive Officers," "Ownership of FFD Stock"
and "Section 16(a) Beneficial Ownership Reporting Compliance" 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
"Ownership of FFD Stock," "The Directors Plan" and "Equity Compensation Plan
Information" is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
The information contained in the Proxy Statement under the caption
"Certain Transactions" is incorporated by reference.
Item 13. Exhibits and Reports on Form 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
10.3 FFD Financial Corporation 2002 Stock Option Plan for
Non-Employee Directors
13 2003 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 2003 Annual Meeting of Shareholders
21 Subsidiaries of FFD Financial Corporation
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
21
(b) Reports on Form 8-K
On April 25, 2003, FFD filed a Form 8-K to report the issuance of a press
release regarding its earnings for the quarter ended March 31, 2003.
Item 14. Controls and Procedures
The Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of FFD's disclosure controls and procedures (as
defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as
amended) as of the end of the period covered by this report. Based upon the
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that FFD's disclosure controls and procedures are effective. There
were no changes in FFD's internal controls which materially affected, or are
reasonably likely to materially affect, FFD's internal controls over financial
reporting.
22
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/ Trent B. Troyer
--------------------------------
Trent B. Troyer
President and Chief Executive Officer
Date: September 29, 2003
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/ Stephen G. Clinton
- ---------------------------------- ---------------------------------
Stephen G. Clinton Roy O. Mitchell, Jr.
Director Director
Date: September 29, 2003 Date: September 29, 2003
/s/ J. Richard Gray /s/ Robert D. Sensel
- ---------------------------------- --------------------
J. Richard Gray Robert D. Sensel
Director Director
Date: September 29, 2003 Date: September 29, 2003
/s/ Leonard L. Gundy /s/ Enos L. Loader
- ---------------------------------- ------------------
Leonard L. Gundy Enos L. Loader
Director Director
Date: September 29, 2003 Date: September 29, 2003
/s/ Robert R. Gerber /s/ Trent B. Troyer
- ---------------------------------- -------------------
Robert R. Gerber Trent B. Troyer
Vice President, Chief Financial President and Chief Executive Officer
Officer and Treasurer (Principal (Principal Executive Officer)
Financial Officer and Principal
Accounting Officer)
Date: September 29, 2003 Date: September 29, 2003
23
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Articles of Incorporation of FFD Incorporated by reference to the Registration
Financial Corporation Statement on 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
Incorporation of FFD Financial No. 1 to the S-1 filed with the SEC on February 1,
Corporation 1996 ("Pre-Effective Amendment No. 1"), Exhibit 3.2.
3.3 Certificate of Amendment to Articles of Incorporated by reference to Pre-Effective Amendment
Incorporation of FFD Financial No. 1, Exhibit 3.3.
Corporation
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
Option and Incentive Plan year ended June 30, 1998, as filed with the SEC on
EDGAR on September 28, 1998 (SEC File No. 000-27916)
(the "1998 10-KSB"), Exhibit 10.1.
10.2 First Federal Savings Bank of Dover Incorporated by reference to the 1998 Form 10-KSB,
Recognition and Retention Plan and Trust Exhibit 10.2.
Agreement
10.3 FFD Financial Corporation 2002 Stock
Option Plan for Non-Employee Directors
13 FFD Financial Corporation 2003 Annual
Report to Shareholders
20 Proxy Statement for 2003 Annual Meeting Incorporated by reference to the Proxy Statement for
of Shareholders the 2003 Annual Meeting of Shareholders filed with
the SEC on September 22, 2003.
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 EDGAR on September 27, 1996
(SEC File No. 000-27916), Exhibit 21.
31.1 Certification of Chief Executive Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
24
BUSINESS OF FFD FINANCIAL CORPORATION
================================================================================
FFD Financial Corporation ("FFD" or the "Corporation") is the holding company
for First Federal Community Bank ("First Federal" or the "Bank"), a federal
savings bank.
FFD was formed in 1996 in connection with the conversion of First Federal from a
mutual savings bank to a stock savings bank (the "Conversion"). Since its
formation, FFD's activities have been limited primarily to holding the common
shares of First Federal.
First Federal's business involves attracting deposits from individual and
business customers and using such deposits to originate loans to individuals and
businesses in its market area consisting of Tuscarawas and contiguous counties
in Ohio. The Bank provides a full array of deposit products including checking,
savings, money market, and individual retirement accounts as well as
certificates of deposit. First Federal originates residential and home equity
loans, construction loans, commercial real estate loans, business loans and
consumer loans. The Bank also invests in securities consisting primarily of
United States government and government agency obligations 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 sales and loan and mortgage-backed securities repayments. First Federal
conducts business from three locations, two in Dover, Ohio and one in New
Philadelphia, Ohio. Additionally, the Bank provides access to its products and
services via the Internet at www.onlinefirstfed.com.
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.
1
MARKET PRICE OF FFD'S
COMMON SHARES AND RELATED SHAREHOLDER MATTERS
================================================================================
There were 1,212,997 common shares of FFD outstanding on September 10, 2003,
held of record by approximately 603 shareholders. Price information for FFD's
common shares is quoted on the Nasdaq SmallCap Market ("Nasdaq") under the
symbol "FFDF."
The following table sets forth the high and low trading prices for the common
shares of FFD, as quoted by Nasdaq, together with the dividends declared per
share, for each quarter of fiscal years 2003 and 2002.
High Trade Low Trade Cash Dividends Declared
Fiscal 2002
Quarter Ended
September 30, 2001 $11.55 $9.60 $.090
December 31, 2001 12.50 9.61 .095
March 31, 2002 12.25 11.95 .095
June 30, 2002 14.95 11.50 .095
High Trade Low Trade Cash Dividends Declared
Fiscal 2003
Quarter Ended
September 30, 2002 $14.00 $11.50 $.095
December 31, 2002 13.25 10.00 .100
March 31, 2003 14.50 11.20 .100
June 30, 2003 14.50 11.44 .100
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
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.
Selected consolidated financial At June 30,
condition data: 2003 2002 2001 2000 1999
(In thousands)
Total amount of:
Assets $136,408 $130,303 $133,097 $125,147 $112,293
Interest-bearing deposits 10,398 11,726 8,024 1,485 2,167
Investment securities available for sale -
at market 1,502 2,047 1,000 2,875 2,924
Mortgage-backed securities available
for sale - at market 832 1,551 7,799 9,135 10,978
Mortgage-backed securities held to
maturity - at cost 651 1,606 3,721 4,189 4,779
Loans receivable - net (1) 115,966 107,055 107,467 102,939 87,382
Deposits 104,351 95,542 91,018 77,987 72,025
Advances from the FHLB and other
borrowings 13,891 17,553 24,732 30,412 23,616
Shareholders' equity, restricted 16,918 16,541 16,604 16,265 16,204
For the year ended June 30,
Summary of earnings: 2003 2002 2001 2000 1999
(In thousands, except per share data)
Interest income $ 6,758 $ 8,005 $ 9,549 $ 8,323 $ 6,915
Interest expense 2,966 3,893 5,498 4,754 3,941
-------- -------- -------- -------- --------
Net interest income 3,792 4,112 4,051 3,569 2,974
Provision for losses on loans 131 150 201 106 --
-------- -------- -------- -------- --------
Net interest income after provision
for losses on loans 3,661 3,962 3,850 3,463 2,974
Other income 1,038 536 262 179 428
General, administrative and other
expense 3,133 2,812 2,451 2,262 2,317
-------- -------- -------- -------- --------
Earnings before income taxes 1,566 1,686 1,661 1,380 1,085
Federal income taxes 534 573 560 458 368
-------- -------- -------- -------- --------
Net earnings $ 1,032 $ 1,113 $ 1,101 $ 922 $ 717
======== ======== ======== ======== ========
Earnings per share
Basic $ .88 $ .94 $ .86 $ .69 $ .53
======== ======== ======== ======== ========
Diluted $ .86 $ .92 $ .86 $ .68 $ .51
======== ======== ======== ======== ========
- ----------
(1) Includes loans held for sale.
3
Selected financial ratios At or for the year ended June 30,
and other data: 2003 2002 2001 2000 1999
Return on average assets 0.77% 0.84% 0.86% 0.77% 0.69%
Return on average equity 6.17 6.75 6.69 6.07 5.11
Interest rate spread 2.62 2.85 2.75 2.51 2.37
Net interest margin 2.95 3.22 3.26 3.06 2.92
General, administrative and other
expense to average assets 2.34 2.13 1.91 1.90 2.25
Average equity to average
assets 12.50 12.50 12.81 12.75 13.59
Nonperforming and impaired assets
to total assets 1.76 0.48 0.08 0.18 0.01
Nonperforming and impaired loans to
total loans 1.88 0.58 0.10 0.22 0.02
Delinquent loans to total loans (1) 1.28 2.57 0.96 0.61 0.39
Allowance for loan losses to
total loans 0.68 0.66 0.52 0.36 0.30
Allowance for loan losses to
nonperforming and impaired loans 36.45 114.63 537.14 166.67 1,793.33
Average interest-earning assets
to average interest-bearing liabilities 114.63 112.05 111.49 113.53 114.24
Dividend payout ratio 44.89 39.89 41.86 49.28 56.60
Number of full service offices (2) 3 3 2 2 2
- ----------
(1) Delinquent loans are loans as to which a scheduled payment has not been
made within 30 days after the due date.
(2) The Bank's third full service office opened on July 3, 2002.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
GENERAL
- --------------------------------------------------------------------------------
FFD was incorporated in 1996 for the purpose of owning all of First Federal's
outstanding stock after the conversion. 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, 2002 TO JUNE 30, 2003
- --------------------------------------------------------------------------------
The Corporation's assets at June 30, 2003, totaled $136.4 million, a $6.1
million, or 4.7%, increase over the total at June 30, 2002. This increase was
comprised primarily of an $8.9 million increase in loans receivable, partially
offset by decreases in cash, interest-bearing deposits, mortgage backed
securities and investment securities. The funding for the asset growth was
primarily from an $8.8 million increase in deposits which was partially offset
by a decrease in advances from the Federal Home Loan Bank of $3.7 million.
Cash and interest-bearing deposits totaled $12.2 million at June 30, 2003, a
decrease of $1.0 million, or 7.4%, from June 30, 2002. Investment securities
totaled $1.5 million at June 30, 2003, a decrease of $500,000. Maturities and
calls of investment securities totaling $8.0 million were substantially offset
by purchases of $7.5 million of U. S. Government agency securities.
Mortgage-backed securities totaled $1.5 million at June 30, 2003, a $1.7
million, or 53.0%, decrease from the total at June 30, 2002, due primarily to
principal repayments. Repayments of mortgage-backed securities totaled $2.6
million, which were partially offset by purchases totaling $1.0 million.
Loans receivable, including loans held for sale, totaled $116.0 million at June
30, 2003, an increase of $8.9 million, or 8.3%, over the June 30, 2002 total.
Loan disbursements during fiscal 2003 totaled $94.7 million, which were
substantially offset by principal repayments of $41.3 million and loans sold in
the secondary market totaling $44.2 million. Loan origination volume during the
year ended June 30, 2003, increased by $43.5 million, or 85.0%, compared to
fiscal 2002. During fiscal 2003, management continued to meet consumer
preference for fixed-rate loans in the prevailing low interest rate environment,
by selling lower-yielding fixed-rate mortgage loans in the secondary market. The
volume of loans sold during fiscal 2003 increased by $25.0 million, or 129.9%,
over fiscal 2002. As a result, the portfolio of loans secured by one- to
four-family residential real estate declined by $2.2 million to $62.4 million at
June 30, 2003. Loans secured by nonresidential real estate and land totaled
$28.5 million at June 30, 2003, compared to $24.9 million at June 30, 2002.
Commercial loans totaled $19.5 million at June 30, 2003, compared to $11.3
million at June 30, 2002. Nonresidential real estate and commercial lending is
generally considered to involve a higher degree of risk than residential real
estate lending due to the relatively larger loan amounts and the effects of
general economic conditions on the successful operation of the related business
or income-producing properties. The Bank has endeavored to reduce such risk by
evaluating the credit history and past performance of the borrower, the quality
of the borrowers' management, the debt service ratio, the quality and
characteristics of the income stream generated by the business and the property
and appraisals supporting the property's valuation, as applicable.
5
The allowance for loan losses totaled $818,000 and $713,000 at June 30, 2003 and
2002, respectively, which represented .68% and .66% of total loans and 36.5% and
114.6% of nonperforming and impaired loans at those respective dates.
Nonperforming and impaired loans amounted to $2.2 million and $622,000 at June
30, 2003 and 2002, respectively. The increase in the nonperforming and impaired
loans is due to the results of individual loan testing on certain commercial
loans as of June 30, 2003. Management believes that the Bank's nonperforming and
impaired loans at June 30, 2003 are adequately collateralized and no unreserved
loss is anticipated on such loans. Although management believes that the
allowance for loan losses at June 30, 2003, was adequate based upon the
available facts and circumstances, there can be no assurance that additions to
the allowance will not be necessary in future periods, which could adversely
affect the Corporation's net earnings.
Deposits totaled $104.4 million at June 30, 2003, an $8.8 million, or 9.2%,
increase over total deposits at June 30, 2002. This increase resulted primarily
from management's efforts to generate growth through advertising and pricing
strategies, and the opening of a new branch in July 2002. Proceeds from deposit
growth were used primarily to fund new loan originations and to repay FHLB
advances during the period.
FHLB advances totaled $13.9 million at June 30, 2003, a $3.7 million, or 20.1%,
decrease from June 30, 2002. The repayment of FHLB advances was funded primarily
by the increase in deposits and proceeds from sales and repayments of
mortgage-backed securities.
Shareholders' equity totaled $16.9 million at June 30, 2003, an increase of
$377,000, or 2.3%, over June 30, 2002 levels, as net earnings of $1.0 million
and a $118,000 reduction in the shares acquired by benefit plans were partially
offset by dividends paid totaling $459,000 and purchases of treasury shares
totaling $380,000.
COMPARISON OF OPERATING RESULTS
FOR THE YEARS ENDED JUNE 30, 2003 AND 2002
- --------------------------------------------------------------------------------
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 $1.0 million for the fiscal year ended June
30, 2003, a decrease of $81,000, or 7.3%, compared to fiscal 2002. The decrease
in net earnings resulted primarily from a $320,000 decrease in net interest
income and a $321,000 increase in general administrative and other expense,
which were partially offset by a $502,000 increase in other income and a $39,000
decrease in the provision for federal income taxes.
Net Interest Income. Total interest income decreased by $1.2 million, or 15.6%,
to a total of $6.8 million for the year ended June 30, 2003, compared to $8.0
million for the fiscal year ended June 30, 2002. Interest income on loans
decreased by $1.0 million, or 13.9%, due primarily to a 101 basis point decrease
in the average yield, to 5.77% in fiscal 2003, which was offset slightly by a
$1.2 million, or 1.1%, increase in the average loan portfolio balance
outstanding year to year. Interest income on mortgage-backed securities
decreased by $289,000, or 74.5%, due primarily to a $5.1 million, or 69.4%,
decrease in the average balance outstanding, and an 87 basis point decrease in
the average yield earned on such securities, to 4.36% in fiscal 2003. Interest
income on investment securities increased by $95,000 due primarily to a $3.0
million increase in the average balance outstanding, which was partially offset
by a 40 basis point decrease in the average yield year to year. Interest income
on interest-bearing deposits decreased by $20,000, or 10.2%, due primarily to a
6
42 basis point decrease in the average yield, which was partially offset by a
$1.7 million, or 15.7%, increase in the average balance outstanding year to
year. Decreases in the average yields on interest-earning assets were due
primarily to the overall reduction in interest rates in the economy.
Interest expense on deposits decreased by $736,000 or 23.6%, for the year ended
June 30, 2003, compared to fiscal 2002, due primarily to a decrease in the
average cost of deposits of 88 basis points, to 2.46% for fiscal 2003, which was
partially offset by a $3.6 million, or 3.8%, increase in the average deposit
portfolio balance outstanding year to year. Decreases in the average cost of
deposits were due primarily to the overall decline in interest rates in the
economy.
Interest expense on borrowings decreased by $191,000, or 24.6%, due primarily to
a $5.5 million, or 26.7%, decrease in the average balance of advances
outstanding, which was partially offset by a 10 basis point increase in the
average cost of such borrowings, to 3.87% in fiscal 2003. The Bank elected to
prepay certain advances that could be prepaid without penalty. Additional
prepayments of the remaining higher cost advances are unlikely because of the
significant penalties.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased by $320,000, or 7.8%, for the fiscal year ended
June 30, 2003, compared to fiscal 2002. The interest rate spread amounted to
2.62% for the fiscal year ended June 30, 2003, compared to 2.85% for fiscal
2002, while the net interest margin was 2.95% in fiscal 2003, compared to 3.22%
in fiscal 2002.
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 $131,000 for the year ended June 30, 2003, a decrease of $19,000,
or 12.7%, compared to fiscal 2002. First Federal's fiscal 2003 provision was
predicated primarily on the growth in the commercial and nonresidential loan
portfolios and the increase in nonperforming loans. 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 $1.0 million for the fiscal year ended June
30, 2003, an increase of $502,000, or 93.7%, over fiscal 2002. The increase
resulted primarily from a $688,000, or 312.7%, increase in gain on sale of
loans, partially offset by decreases of $119,000, or 47.8%, in other operating
income and $67,000 in gain on sale of mortgage-backed securities. The increase
in gain on sale of loans was due primarily to a $25.0 million, or 129.9%,
increase in sales volume year to year. The decrease in other operating income
was due primarily to an increase in amortization of mortgage servicing rights of
$135,000 and a $61,000 impairment charge recorded on the mortgage servicing
rights asset based upon a fair value analysis of this asset. These charges were
partially offset by an increase of $85,000 in fees on deposit accounts and
transactions. As interest rates rise, the volume of loan sales and the amount of
gain on sale of loans is likely to decline.
General, Administrative and Other Expense. General, administrative and other
expense totaled $3.1 million for the fiscal year ended June 30, 2003, an
increase of $321,000, or 11.4%, compared to fiscal 2002. The increase resulted
primarily from a $226,000, or 28.0%, increase in other operating expense, a
$102,000, or 35.8%, increase in occupancy and equipment, and $41,000, or 27.3%,
increase in franchise taxes, which were partially offset by a $51,000, or 15.9%,
decrease in data processing.
The increase in other operating expenses included increases of $45,000 in check
printing charges, and $35,000 in NOW account expense, primarily related to the
Bank's growth in deposits and home equity loans, costs incurred in connection
with the opening of the new Boulevard office, including increases of $39,000 in
advertising expense, $27,000 in stationery and office supplies and $14,000 in
legal fees. The remaining
7
$66,000 increase in other operating expense was comprised primarily of pro-rata
increases related to the Corporation's overall growth year to year. The increase
in occupancy and equipment expense was due primarily to an increase in
depreciation expense related to the new office that opened in July of 2002. The
increase in franchise taxes was due to the effect of refunds received in fiscal
2002. The decrease in data processing fees resulted from nonrecurring costs
associated with the data conversion in fiscal 2002.
Federal Income Taxes. The provision for federal income taxes totaled $534,000
for the fiscal year ended June 30, 2003, a decrease of $39,000, or 6.8%,
compared to fiscal 2002. The decrease resulted primarily from a $120,000, or
7.1%, decrease in earnings before taxes. The effective tax rates were 34.1% and
34.0% for the fiscal years ended June 30, 2003 and 2002, respectively.
COMPARISON OF OPERATING RESULTS
FOR THE YEARS ENDED JUNE 30, 2002 AND 2001
- --------------------------------------------------------------------------------
General. FFD's net earnings totaled $1.1 million for the fiscal year ended June
30, 2002, an increase of $12,000, or 1.1%, over the net earnings recorded in
fiscal 2001. The increase in net earnings resulted from a $61,000 increase in
net interest income, a $51,000 decrease in the provision for losses on loans and
a $274,000 increase in other operating income, which were substantially offset
by a $361,000 increase in general, administrative and other expense and a
$13,000 increase in the provision for federal income taxes.
Net Interest Income. Total interest income decreased by $1.5 million, or 16.2%,
to a total of $8.0 million for the year ended June 30, 2002, compared to $9.5
million for the year ended June 30, 2001. Interest income on loans decreased by
$915,000, or 11.0%, due primarily to a 116 basis point decrease in the average
yield, to 6.78% in fiscal 2002, which was partially offset by a $4.4 million, or
4.2%, increase in the average loan portfolio balance outstanding year to year.
Interest income on mortgage-backed securities decreased by $458,000, or 54.1%,
due primarily to a $4.9 million, or 39.7%, decrease in the average balance
outstanding, and a 165 basis point decrease in the average yield earned on such
securities, to 5.23% in fiscal 2002. Interest income on investment securities
decreased by $128,000, or 90.1%, due primarily to a $1.9 million, or 83.2%,
decrease in the average balance outstanding and a 250 basis point decrease in
the weighted-average yield year to year. Interest income on interest-bearing
deposits decreased by $43,000, or 17.9%, due primarily to a 320 basis point
decrease in the weighted-average yield, which was partially offset by a $5.8
million, or 123.0%, increase in the average balance outstanding year to year.
Interest expense on deposits decreased by $812,000, or 20.7%, for the year ended
June 30, 2002, compared to fiscal 2001, due primarily to a decrease in the
average cost of deposits of 127 basis points, to 3.34% for fiscal 2002, which
was partially offset by an $8.1 million, or 9.5%, increase in the average
deposit portfolio balance outstanding year to year.
Interest expense on borrowings decreased by $793,000, or 50.6%, due primarily to
a $5.5 million, or 21.3%, decrease in the average balance of advances
outstanding and a 224 basis point decrease in the average cost of such
borrowings, to 3.77% in fiscal 2002. Decreases in the average yields on
interest-earning assets and the average costs of interest-bearing liabilities
were due primarily to the overall reductions in interest rates in the economy
during 2001. This low interest rate environment continued through the first six
months of 2002.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $61,000, or 1.5%, for the fiscal year ended
June 30, 2002, compared to fiscal 2001. The interest rate spread amounted to
2.85% for the fiscal year ended June 30, 2002, compared to 2.75% for fiscal
2001, while the net interest margin was 3.22% in fiscal 2002, compared to 3.26%
in fiscal 2001.
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
8
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 $150,000 for the year ended June 30, 2002,
a decrease of $51,000, or 25.4%, compared to fiscal 2001. First Federal's fiscal
2002 provision was predicated primarily on the growth in the commercial and
nonresidential loan portfolios and the increase in nonperforming loans.
Other Income. Other income totaled $536,000 for the year ended June 30, 2002, an
increase of $274,000, or 104.6%, over the 2001 total. The increase resulted
primarily from a $115,000, or 109.5%, increase in gain on sale of loans in
fiscal 2002, a $92,000, or 58.6%, increase in other operating income and a
$67,000 gain on sale of mortgage-backed securities. The increase in gain on sale
of loans was due primarily to a $10.0 million, or 107.5%, increase in sales
volume year to year. The increase in other operating income consisted primarily
of increases in fees generated from ATM transactions, late charges on loans and
negotiable order of withdrawal ("NOW") account fees.
General, Administrative and Other Expense. General, administrative and other
expense totaled $2.8 million for the year ended June 30, 2002, an increase of
$361,000, or 14.7%, compared to fiscal 2001. The increase resulted primarily
from a $135,000, or 12.1%, increase in employee compensation and benefits, a
$58,000, or 25.6%, increase in occupancy and equipment, an $83,000, or 35.0%,
increase in data processing and a $145,000, or 21.9%, increase in other
operating expenses, which were partially offset by a $60,000, or 28.6%, decrease
in franchise taxes.
The increase in employee compensation and benefits resulted primarily from
overtime compensation paid in connection with the installation of, and training
related to, a new data processing system, as well as normal merit increases and
an increase in costs related to the employee stock ownership plan and other
benefit plans, which were partially offset by an increase in the level of
deferred loan origination costs due to the increase in loan origination volume
year to year. The increase in occupancy and equipment was due primarily to
expenses incurred in connection with the data processing conversion. The
increase in data processing expense was also due primarily to costs associated
with the data conversion, as well as increased costs associated with the Bank's
growth year to year. The conversion to the new data processing platform is
expected to facilitate the Bank's expansion of its product offerings and
accommodate future growth. The increase in other operating expense included an
increase of $52,000 in advertising costs, an increase of $22,000 in internet
banking costs and $40,000 in costs associated with NOW account processing. The
remaining $31,000 increase in other operating expense was comprised primarily of
pro-rata increases related to the Corporation's overall growth year to year. The
decrease in franchise taxes was due primarily to refund claims filed on prior
year taxes.
Federal Income Taxes. The provision for federal income taxes totaled $573,000
for the year ended June 30, 2002, an increase of $13,000, or 2.3%, over fiscal
2001. The increase resulted primarily from a $25,000, or 1.5%, increase in
earnings before taxes. The effective tax rates were 34.0% and 33.7% for the
years ended June 30, 2002 and 2001, respectively.
9
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.
Year ended June 30,
2003 2002 2001
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)
Interest-earning assets:
Loans receivable $110,406 $6,373 5.77% $109,208 $7,406 6.78% $104,771 $8,321 7.94%
Mortgage-backed securities 2,270 99 4.36 7,413 388 5.23 12,295 846 6.88
Investment securities 3,435 109 3.17 392 14 3.57 2,338 142 6.07
Interest-bearing deposits
and other 12,222 177 1.45 10,563 197 1.87 4,737 240 5.07
-------- ------ ------ -------- ------ ------ -------- ------ ------
Total interest-earning assets 128,333 6,758 5.27 127,576 8,005 6.27 124,141 9,549 7.69
Non-interest-earning assets 5,382 4,400 4,412
-------- -------- --------
Total assets $133,715 $131,976 $128,553
======== ======== ========
Interest-bearing liabilities:
Deposits $ 96,886 2,382 2.46 $ 93,311 3,118 3.34 $ 85,249 3,930 4.61
Borrowings 15,066 584 3.87 20,548 775 3.77 26,094 1,568 6.01
-------- ------ ------ -------- ------ ------ -------- ------ ------
Total interest-bearing
liabilities 111,952 2,966 2.65 113,859 3,893 3.42 111,343 5,498 4.94
------ ------ ------ ------ ------ ------
Non-interest-bearing liabilities 5,050 1,620 741
-------- -------- --------
Total liabilities 117,002 115,479 112,084
Shareholders' equity 16,713 16,497 16,469
-------- -------- --------
Total liabilities and
shareholders' equity $133,715 $131,976 $128,553
======== ======== ========
Net interest income $3,792 $4,112 $4,051
====== ====== ======
Interest rate spread 2.62% 2.85% 2.75%
====== ====== ======
Net interest margin (net interest
income as a percent of average
interest-earning assets) 2.95% 3.22% 3.26%
====== ====== ======
Average interest-earning assets to
average interest-bearing liabilities 114.63% 112.05% 111.49%
====== ====== ======
10
The table below describes the extent to which changes in interest rates and
hanges 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.
Year ended June 30,
2003 vs. 2002 2002 vs. 2001
Increase Increase
(decrease) (decrease)
due to due to
Volume Rate Total Volume Rate Total
(In thousands)
Interest income attributable to:
Loans receivable $ 81 $(1,114) $(1,033) $ 341 $(1,256) $ (915)
Mortgage-backed securities (232) (57) (289) (286) (172) (458)
Investment securities 97 (2) 95 (86) (42) (128)
Interest-bearing deposits and other 29 (49) (20) 172 (215) (43)
------- ------- ------- ------- ------- -------
Total interest income (25) (1,222) (1,247) 141 (1,685) (1,544)
------- ------- ------- ------- ------- -------
Interest expense attributable to:
Deposits 114 (850) (736) 346 (1,158) (812)
Borrowings (211) 20 (191) (288) (505) (793)
------- ------- ------- ------- ------- -------
Total interest expense (97) (830) (927) 58 (1,663) (1,605)
------- ------- ------- ------- ------- -------
Increase (decrease) in net interest income $ 72 $ (392) $ (320) $ 83 $ (22) $ 61
======= ======= ======= ======= ======= =======
11
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 interest income" ("NII") and
"net portfolio value" ("NPV") methodologies. 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. Interest rate risk is estimated as the percent and dollar changes
in NII and NPV projected to occur should the yield curve instantaneously shift
up or down in a parallel fashion from its beginning or base position. The base
case rate scenario is defined by the rate environment and is held constant
throughout the simulation. Rate shock scenarios are derived by adding to or
subtracting from base case rates.
Presented below, as of June 30, 2003 and 2002, is an analysis of First Federal's
interest rate risk as measured by changes in NII and NPV for instantaneous and
sustained parallel shifts of +100, +200, +300 and -100 basis points in market
interest rates. In consideration of the interest rate environment and the
improbability of negative rate adjustments greater than 100 basis points, shocks
greater than negative 100 basis points are not presented.
June 30, 2003
Net Interest Income Net Portfolio Value
Projected Change Percent Change Percent
interest rate Estimated from change Estimated from change
scenario NII base from base value base from base
+300 $4,755 $ 980 25.95% $16,152 $ 3,501 27.68%
+200 4,483 708 18.74 15,337 2,687 21.24
+100 4,153 378 10.01 14,193 1,542 12.19
Base 3,775 -- -- 12,651 -- --
-100 3,400 (375) (9.94) 11,137 (1,513) (11.96)
June 30, 2003
Net Interest Income Net Portfolio Value
Projected Change Percent Change Percent
interest rate Estimated from change Estimated from change
scenario NII base from base value base from base
+300 $4,089 480 13.30% $16,871 $1,448 9.39%
+200 3,962 353 9.78 16,557 1,134 7.35
+100 3,796 187 5.19 16,061 639 4.14
Base 3,609 -- -- 15,423 -- --
-100 3,447 (162) (4.49) 14,688 (735) (4.76)
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the NII and NPV approaches. 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
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
First Federal's principal sources of funds are deposits, proceeds from loan
sales, 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, loan sales 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. At
June 30, 2003, First Federal had commitments to originate loans, including
unused lines of credit, totaling $27.0 million. Management anticipates that such
loan commitments will be funded from normal cash flows from operations and
existing excess liquidity.
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,
2003, 2002 and 2001:
Year ended June 30,
2003 2002 2001
(In thousands)
Net earnings $ 1,032 $ 1,113 $ 1,101
Adjustments to reconcile net earnings to
net cash from operating activities (395) 42 901
------- ------- -------
Net cash from operating activities 637 1,155 2,002
Net cash from investing activities (5,956) 6,707 (1,093)
Net cash from financing activities 4,346 (3,986) 6,012
------- ------- -------
Net change in cash and cash equivalents (973) 3,876 6,921
Cash and cash equivalents at beginning of year 13,216 9,340 2,419
------- ------- -------
Cash and cash equivalents at end of year $12,243 $13,216 $ 9,340
======= ======= =======
First Federal, a savings association, 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 institution to maintain
"tangible capital" of not less than 1.5% of the institution'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
institutions to maintain core capital of at least 4% of the institution's total
assets, except for those institutions with the highest examination rating and
acceptable levels of risk.
OTS regulations require that savings institutions 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 for
First Federal includes a general loan loss allowance of $818,000 at June 30,
2003.
13
First Federal exceeded all of its capital requirements and met the definition of
"well-capitalized" under OTS regulations at June 30, 2003. The following table
summarizes First Federal's regulatory capital requirements and regulatory
capital at June 30, 2003:
Excess over current
Regulatory capital Current requirement requirement
Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
Tangible capital $15,666 11.5% $2,035 1.5% $13,631 10.0%
Core capital $15,666 11.5 $5,428 4.0 $10,238 7.5
Risk-based capital $16,439 18.4 $7,177 8.0 $ 9,262 10.4
14
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, 2003 and 2002, and the related
consolidated statements of earnings, comprehensive income, shareholders' equity
and cash flows for each of the three years in the period ended June 30, 2003.
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 auditing standards generally accepted
in the United States of America. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FFD Financial
Corporation as of June 30, 2003 and 2002, and the results of its operations and
its cash flows for each of the three years in the period ended June 30, 2003, in
conformity with accounting principles generally accepted in the United States of
America.
Cincinnati, Ohio
August 21, 2003
15
FFD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 2003 and 2002
(In thousands, except share data)
ASSETS 2003 2002
Cash and due from banks $ 1,845 $ 1,490
Interest-bearing deposits in other financial institutions 10,398 11,726
-------- --------
Cash and cash equivalents 12,243 13,216
Investment securities designated as available for sale - at market 1,502 2,047
Mortgage-backed securities designated as available for sale - at market 832 1,551
Mortgage-backed securities held to maturity - at amortized cost,
approximate market value of $687 and $1,648 as of June 30,
2003 and 2002, respectively 651 1,606
Loans receivable - net 114,199 106,718
Loans held for sale - at lower of cost or market 1,767 337
Real estate acquired through foreclosure 161 --
Office premises and equipment - at depreciated cost 2,134 1,992
Stock in Federal Home Loan Bank - at cost 1,967 1,885
Accrued interest receivable 386 454
Prepaid expenses and other assets 244 288
Prepaid federal income taxes 322 209
-------- --------
Total assets $136,408 $130,303
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $104,351 $ 95,542
Advances from the Federal Home Loan Bank 13,891 17,553
Accrued interest payable 96 100
Other liabilities 935 413
Deferred federal income taxes 217 154
-------- --------
Total liabilities 119,490 113,762
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 7,889 7,861
Retained earnings - restricted 12,202 11,629
Accumulated comprehensive income; unrealized gains on securities
designated as available for sale, net of related tax effects 8 19
Shares acquired by stock benefit plans (559) (677)
Less 241,753 and 217,072 treasury shares at June 30, 2003 and 2002,
respectively - at cost (2,622) (2,291)
-------- --------
Total shareholders' equity 16,918 16,541
-------- --------
Total liabilities and shareholders' equity $136,408 $130,303
======== ========
The accompanying notes are an integral part of these statements.
16
FFD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended June 30, 2003, 2002 and 2001
(In thousands, except per share data)
2003 2002 2001
Interest income
Loans $6,373 $7,406 $8,321
Mortgage-backed securities 99 388 846
Investment securities 109 14 142
Interest-bearing deposits and other 177 197 240
------ ------ ------
Total interest income 6,758 8,005 9,549
Interest expense
Deposits 2,382 3,118 3,930
Borrowings 584 775 1,568
------ ------ ------
Total interest expense 2,966 3,893 5,498
------ ------ ------
Net interest income 3,792 4,112 4,051
Provision for losses on loans 131 150 201
------ ------ ------
Net interest income after provision for losses on loans 3,661 3,962 3,850
Other income
Gain on sale of loans 908 220 105
Gain on sale of mortgage-backed securities designated
as available for sale -- 67 --
Other operating 130 249 157
------ ------ ------
Total other income 1,038 536 262
General, administrative and other expense
Employee compensation and benefits 1,252 1,249 1,114
Occupancy and equipment 387 285 227
Franchise taxes 191 150 210
Data processing 269 320 237
Other operating 1,034 808 663
------ ------ ------
Total general, administrative and other expense 3,133 2,812 2,451
------ ------ ------
Earnings before income taxes 1,566 1,686 1,661
Federal income taxes
Current 520 598 549
Deferred 14 (25) 11
------ ------ ------
Total federal income taxes 534 573 560
------ ------ ------
NET EARNINGS $1,032 $1,113 $1,101
====== ====== ======
EARNINGS PER SHARE
Basic $ .88 $ .94 $ .86
====== ====== ======
Diluted $ .86 $ .92 $ .86
====== ====== ======
The accompanying notes are an integral part of these statements.
17
FFD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended June 30, 2003, 2002 and 2001
(In thousands)
2003 2002 2001
Net earnings $1,032 $1,113 $1,101
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities during
the period, net of taxes (benefits) of $(5), $4
and $201 in 2003, 2002 and 2001, respectively (11) 8 390
Reclassification adjustment for realized gains included in
earnings, net of taxes of $23 in 2002 -- (44) --
------ ------ ------
Comprehensive income $1,021 $1,077 $1,491
====== ====== ======
Accumulated comprehensive income $ 8 $ 19 $ 55
====== ====== ======
The accompanying notes are an integral part of these statements.
18
FFD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended June 30, 2003, 2002 and 2001
(In thousands, except per share data)
Unrealized
gains (losses)
on securities
Additional designated
Common paid-in Retained as available
stock capital earnings for sale
Balance at July 1, 2000 $ -- $ 7,850 $ 10,288 $(335)
Net earnings for the year ended June 30, 2001 -- -- 1,101 --
Purchase of treasury shares -- -- -- --
Amortization expense of stock benefit plans -- 11 -- --
Unrealized gains on securities designated as available
for sale, net of related tax effects -- -- -- 390
Dividends of $.36 per share -- -- (427) --
------ ------- -------- -----
Balance at June 30, 2001 -- 7,861 10,962 55
Net earnings for the year ended June 30, 2002 -- -- 1,113 --
Purchase of treasury shares -- -- -- --
Amortization expense of stock benefit plans -- 16 -- --
Unrealized losses on securities designated as available
for sale, net of related tax effects -- -- -- (36)
Exercise of stock options -- (16) -- --
Dividends of $.375 per share -- -- (446) --
------ ------- -------- -----
Balance at June 30, 2002 -- 7,861 11,629 19
Net earnings for the year ended June 30, 2003 -- -- 1,032 --
Purchase of treasury shares -- -- -- --
Amortization expense of stock benefit plans -- 39 -- --
Unrealized losses on securities designated as available
for sale, net of related tax effects -- -- -- (11)
Exercise of stock options -- (11) -- --
Dividends of $.395 per share -- -- (459) --
------ ------- -------- -----
Balance at June 30, 2003 $ -- $ 7,889 $ 12,202 $ 8
====== ======= ======== =====
Shares
acquired by
stock Treasury
benefit shares-
plans at cost Total
Balance at July 1, 2000 $(1,028) $ (510) $ 16,265
Net earnings for the year ended June 30, 2001 -- -- 1,101
Purchase of treasury shares -- (912) (912)
Amortization expense of stock benefit plans 176 -- 187
Unrealized gains on securities designated as available
for sale, net of related tax effects -- -- 390
Dividends of $.36 per share -- -- (427)
------- ------- --------
Balance at June 30, 2001 (852) (1,422) 16,604
Net earnings for the year ended June 30, 2002 -- -- 1,113
Purchase of treasury shares -- (936) (936)
Amortization expense of stock benefit plans 175 -- 191
Unrealized losses on securities designated as available
for sale, net of related tax effects -- -- (36)
Exercise of stock options -- 67 51
Dividends of $.375 per share -- -- (446)
------- ------- --------
Balance at June 30, 2002 (677) (2,291) 16,541
Net earnings for the year ended June 30, 2003 -- -- 1,032
Purchase of treasury shares -- (380) (380)
Amortization expense of stock benefit plans 118 -- 157
Unrealized losses on securities designated as available
for sale, net of related tax effects -- -- (11)
Exercise of stock options -- 49 38
Dividends of $.395 per share -- -- (459)
------- ------- --------
Balance at June 30, 2003 $ (559) $(2,622) $ 16,918
======= ======= ========
The accompanying notes are an integral part of these statements.
19
FFD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30, 2003, 2002 and 2001
(In thousands)
2003 2002 2001
Cash flows from operating activities:
Net earnings for the year $ 1,032 $ 1,113 $ 1,101
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 67 47 23
Amortization of deferred loan origination fees (24) (16) (6)
Depreciation and amortization 201 127 118
Provision for losses on loans 131 150 201
Gain on sale of loans (443) (18) (31)
Loans originated for sale in the secondary market (45,602) (19,307) (8,676)
Proceeds from sale of mortgage loans in the secondary market 44,615 19,228 9,288
Loss on sale of real estate acquired through foreclosure -- -- 1
Gain on sale of mortgage-backed securities designated as
available for sale -- (67) --
Amortization expense of stock benefit plans 157 191 187
Federal Home Loan Bank stock dividends (82) (99) (134)
Increase (decrease) in cash due to changes in:
Accrued interest receivable 68 (3) (22)
Prepaid expenses and other assets 44 (83) (24)
Other liabilities 522 16 116
Accrued interest payable (4) (47) (55)
Federal income taxes
Current (59) (52) (96)
Deferred 14 (25) 11
-------- -------- --------
Net cash provided by operating activities 637 1,155 2,002
Cash flows provided by (used in) investing activities:
Purchase of investment securities designated as available for sale (7,510) (2,050) --
Proceeds from maturity of investment securities 8,000 1,000 2,000
Purchase of mortgage-backed securities designated as available for sale (956) -- --
Proceeds from sale of mortgage-backed securities designated
as available for sale -- 5,107 --
Principal repayments on mortgage-backed securities 2,602 3,223 2,248
Loan principal repayments 41,319 32,238 30,639
Loan disbursements (49,068) (31,863) (36,068)
Proceeds from sale of real estate acquired through foreclosure -- -- 124
Purchase of office premises and equipment (343) (948) (36)
-------- -------- --------
Net cash provided by (used in) investing activities (5,956) 6,707 (1,093)
-------- -------- --------
Net cash provided by (used in) operating and investing
activities (subtotal carried forward) (5,319) 7,862 909
-------- -------- --------
The accompanying notes are an integral part of these statements.
20
FFD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended June 30, 2003, 2002 and 2001
(In thousands)
2003 2002 2001
Net cash provided by (used in) operating and investing
activities (subtotal brought forward) $ (5,319) $ 7,862 $ 909
Cash flows provided by (used in) financing activities:
Net increase in deposit accounts 8,809 4,524 13,031
Proceeds from Federal Home Loan Bank advances -- 11,000 24,000
Repayments of Federal Home Loan Bank advances (3,662) (18,179) (29,680)
Proceeds from exercise of stock options 38 51 --
Purchase of treasury shares (380) (936) (912)
Cash dividends paid on common stock (459) (446) (427)
-------- -------- --------
Net cash provided by (used in) financing activities 4,346 (3,986) 6,012
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (973) 3,876 6,921
Cash and cash equivalents at beginning of year 13,216 9,340 2,419
-------- -------- --------
Cash and cash equivalents at end of year $ 12,243 $ 13,216 $ 9,340
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 600 $ 250 $ 651
======== ======== ========
Interest on deposits and borrowings $ 2,970 $ 3,940 $ 5,553
======== ======== ========
Supplemental disclosure of noncash investing activities:
Unrealized gains (losses) on securities designated as
available for sale, net of applicable tax effects $ (11) $ (36) $ 390
======== ======== ========
Recognition of mortgage servicing rights in accordance
with SFAS No. 140 $ 465 $ 202 $ 74
======== ======== ========
Transfers from loans to real estate acquired through foreclosure $ 161 $ -- $ 125
======== ======== ========
The accompanying notes are an integral part of these statements.
21
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003, 2002 and 2001
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 its wholly-owned subsidiary, First Federal Community Bank (the
"Bank"). The 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 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 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 accounting principles generally accepted in the United
States of America ("U. S. GAAP") and general accounting practices within
the financial services industry. In preparing consolidated financial
statements in accordance with U. S. 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 Bank and the Bank's wholly-owned subsidiary, Dover
Service Corporation ("Dover"). At June 30, 2003 and 2002, Dover's
principal assets consisted of an investment in the stock of the Bank's
data processor and a deposit account in the Bank. All intercompany
balances and transactions have been eliminated in the accompanying
consolidated financial statements.
2. Investment Securities and Mortgage-backed Securities
The Corporation accounts for investment and mortgage-backed securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No.
115 "Accounting for Certain Investments in Debt and Equity Securities."
SFAS No. 115 requires that investments be categorized as held-to-maturity,
trading, or available for sale. Securities classified as held-to-maturity
are carried at cost only if the Corporation has the positive intent and
ability to hold these securities to maturity. Trading securities and
securities designated as available for sale are carried at fair value with
resulting unrealized gains or losses recorded to operations or
shareholders' equity, respectively.
Realized gains and losses on sales of securities are recognized using the
specific identification method.
22
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2003, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 balance of the related loan. At June 30, 2003
and 2002, loans held for sale were carried at cost.
The Bank retains the servicing on loans sold and agrees to remit to the
investor loan principal and interest at agreed-upon rates. The Bank
recognizes rights to service mortgage loans for others pursuant to SFAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." In accordance with SFAS No. 140, 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.
Capitalized mortgage servicing rights and capitalized excess servicing
receivables are required to be assessed for impairment. Impairment is
measured based on fair value. The mortgage servicing rights recorded by
the Bank were segregated into pools for valuation purposes, using as
pooling criteria the loan term and coupon rate. Once pooled, each grouping
of loans was evaluated on a discounted earnings basis to determine the
present value of future earnings that a purchaser could expect to realize
from each portfolio. Earnings were projected from a variety of sources
including loan servicing fees, interest earned on float, net interest
earned on escrows, miscellaneous income, and costs to service the loans.
The present value of future earnings is the "economic" value for the pool,
i.e., the net realizable present value to an acquirer of the acquired
servicing.
The Bank recorded amortization related to mortgage servicing rights
totaling approximately $174,000, $39,000 and $15,000 for the fiscal years
ended June 30, 2003, 2002 and 2001, respectively. Additionally, the Bank
recorded an impairment charge on mortgage servicing rights totaling
$61,000 in the fiscal year ended June 30, 2003. At June 30, 2003, the
carrying value of the Corporation's mortgage servicing rights, which
approximated fair value was $517,000. At June 30, 2002, the fair value and
carrying value of the Corporation's mortgage servicing rights were
$298,000 and $287,000, respectively.
23
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2003, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
4. Loan Origination Fees
The 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 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 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 Bank
records a charge-off equal to the difference between the fair value of the
property securing the loan and the loan's carrying value. Major loans and
major lending areas are reviewed periodically to determine potential
problems at an early date. The allowance for loan losses is increased by
charges to earnings and decreased by charge-offs (net of recoveries).
The 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 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 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.
24
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2003, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. Allowance for Loan Losses (continued)
The Bank's impaired loan information is as follows at June 30:
2003 2002
(In thousands)
Impaired loans with related allowance $2,244 $ 459
Impaired loans with no related allowance -- --
------ ------
Total impaired loans $2,244 $ 459
====== ======
The Bank's average balance of impaired loans was $561,000 in fiscal 2003.
Interest income recognized on impaired loans totaled $100,000 for the
fiscal year ended June 30, 2003. The Bank allocated $448,000 of its
general valuation allowance to the impaired loans.
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.
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
25
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2003, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
8. Federal Income Taxes (continued)
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, mortgage servicing rights, 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 $167,000, $155,000 and $119,000 for the fiscal years ended
June 30, 2003, 2002 and 2001, respectively.
Additionally, during fiscal 1997, the Bank adopted a Recognition and
Retention Plan ("RRP"). The Bank funded the RRP through the purchase of
40,600 shares of the Corporation's common stock in the open market. The
Bank has awarded 30,871 shares under the RRP which vest over a five-year
period. A provision of $10,000, $32,000 and $66,000 related to the RRP was
charged to expense for the fiscal years ended June 30, 2003, 2002 and
2001, respectively.
10. Earnings 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 gives effect
to a reduction for 52,687, 65,861 and 79,035 unallocated shares held by
the ESOP for the fiscal years ended June 30, 2003, 2002 and 2001,
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. The
computations are as follows:
2003 2002 2001
Weighted-average common shares
outstanding (basic) 1,167,450 1,183,697 1,278,968
Dilutive effect of assumed exercise
of stock options 27,290 22,862 227
--------- --------- ---------
Weighted-average common shares
outstanding (diluted) 1,194,740 1,206,559 1,279,195
========= ========= =========
26
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2003, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
10. Earnings Per Share (continued)
Options to purchase 105,563 shares of common stock with a weighted-average
exercise price of $9.24 were outstanding at June 30, 2001, but were
excluded from the computation of common share equivalents for the fiscal
year ended June 30, 2001, because the exercise prices were greater than
the average market price of the common shares.
11. Stock Option Plan
The FFD Financial Corporation 1996 Stock Option and Incentive Plan (the
"Plan") provides for the issuance of 169,838 adjusted 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.
During fiscal 2001, the Corporation canceled and reissued grants of stock
options to certain option grant holders. The Corporation recorded expense
related to these grants totaling $26,000, $24,000 and $3,000 in fiscal
2003, 2002 and 2001, respectively.
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 original grants of shares under 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, 2003, 2002 and
2001, would have been reduced to the pro forma amounts indicated below:
2003 2002 2001
Net earnings (In thousands) As reported $1,032 $1,113 $1,101
====== ====== ======
Pro-forma $1,021 $1,095 $1,045
====== ====== ======
Earnings per share
Basic As reported $ .88 $ .94 $ .86
====== ====== ======
Pro-forma $ .87 $ .92 $ .82
====== ====== ======
Diluted As reported $ .86 $ .92 $ .86
====== ====== ======
Pro-forma $ .85 $ .90 $ .81
====== ====== ======
27
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2003, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
11. Stock Option Plan (continued)
The fair value of each option grant is estimated on the date of grant
using the modified Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in fiscal 2003, 2002 and
2001: dividend yield of 2.8%, 3.5% and 4.0%; expected volatility of 31.6%,
36.7% and 23.5%; a risk-free interest rate of 4.1%, 3.0% and 5.0%,
respectively, and an expected life of ten years for all grants.
A summary of the status of the Corporation's stock option plan as of June
30, 2003, 2002 and 2001, and changes during the years then ended are
presented below:
2003 2002 2001
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
Outstanding at beginning of year 104,385 $ 9.25 108,563 $ 9.22 109,538 $ 9.36
Granted 14,920 10.94 2,000 12.00 3,000 8.38
Exercised (4,122) 9.17 (5,578) 9.14 -- --
Forfeited -- -- (600) 14.59 (3,975) 12.43
-------- ------ -------- ------ -------- ------
Outstanding at end of year 115,183 $ 9.47 104,385 $ 9.25 108,563 $ 9.22
======== ====== ======== ====== ======== ======
Options exercisable at year-end 91,809 $ 9.22 90,604 $ 9.21 73,612 $ 9.14
======== ====== ======== ====== ======== ======
Weighted-average fair value of
options granted during the year $ 3.92 $ 3.59 $ 1.82
====== ====== ======
The following information applies to options outstanding at June 30, 2003:
Number outstanding 115,183
Range of exercise prices $8.375-$12.48
Weighted-average exercise price $9.47
Weighted-average remaining contractual life in years 4.8 years
12. Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents includes
cash and due from banks and interest-bearing deposits in other financial
institutions with original terms to maturity of less than ninety days.
28
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2003, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
13. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value of financial instruments, both assets
and liabilities, whether or not recognized in the consolidated statement
of financial condition, for which it is practicable to estimate that
value. For financial instruments where quoted market prices are not
available, fair values are based on estimates using present value and
other valuation methods.
The methods used are greatly affected by the assumptions applied,
including the discount rate and estimates of future cash flows. Therefore,
the fair values presented may not represent amounts that could be realized
in an exchange for certain financial instruments.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments at June
30, 2003 and 2002:
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 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, 2003 and 2002 was not material.
29
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2003, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
13. 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, 2003 and
2002 are as follows:
2003 2002
Carrying Fair Carrying Fair
value value value value
(In thousands)
Financial assets
Cash and cash equivalents $ 12,243 $ 12,243 $ 13,216 $ 13,216
Investment securities 1,502 1,502 2,047 2,047
Mortgage-backed securities 1,483 1,519 3,157 3,199
Loans receivable 115,966 111,147 107,055 105,034
Federal Home Loan Bank stock 1,967 1,967 1,885 1,885
-------- -------- -------- --------
$133,161 $128,378 $127,360 $125,381
======== ======== ======== ========
Financial liabilities
Deposits $104,351 $102,609 $ 95,542 $ 92,977
Advances from the Federal Home Loan Bank 13,891 14,298 17,553 17,942
-------- -------- -------- --------
$118,242 $116,907 $113,095 $110,919
======== ======== ======== ========
14. Advertising
Advertising costs are expensed when incurred. The Corporation's
advertising expense for the fiscal years ended June 30, 2003, 2002 and
2001 totaled $140,000, $101,000 and $49,000, respectively.
15. Effects of Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 carries
over the recognition and measurement provisions in SFAS No. 121.
Accordingly, an entity must recognize an impairment loss if the carrying
value of a long-lived asset or asset group (a) is not recoverable and (b)
exceeds its fair value. Similar to SFAS No. 121, SFAS No. 144 requires an
entity to test an asset or asset group for impairment whenever events or
changes in circumstances indicate that its carrying amount may not be
recoverable. SFAS No. 144 differs from SFAS No. 121 in that it provides
guidance on estimating future cash flows to test recoverability. An entity
may use either a probability-weighted approach or best-estimate approach
in developing estimates of cash flows to test recoverability. SFAS No. 144
is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and interim periods within those fiscal years.
Management adopted SFAS No. 144 effective July 1, 2002, without material
effect on the Corporation's financial condition or results of operations.
30
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2003, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
15. Effects of Recent Accounting Pronouncements (continued)
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 provides
financial accounting and reporting guidance for costs associated with exit
or disposal activities, including one-time termination benefits, contract
termination costs other than for a capital lease, and costs to consolidate
facilities or relocate employees. SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002. Management adopted
SFAS No. 146 effective January 1, 2003, without material effect on the
Corporation's financial condition or results of operations.
In October 2002, the FASB issued SFAS No. 147, "Accounting for Certain
Financial Institutions: An Amendment of FASB Statements No. 72 and 144 and
FASB Interpretation No. 9," which removes acquisitions of financial
institutions from the scope of SFAS No. 72, "Accounting for Certain
Acquisitions of Banking and Thrift Institutions," except for transactions
between mutual enterprises. Accordingly, the excess of the fair value of
liabilities assumed over the fair value of tangible and intangible assets
acquired in a business combination should be recognized and accounted for
as goodwill in accordance with SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 147 also requires that the acquisition of a less-than-whole
financial institution, such as a branch, be accounted for as a business
combination if the transferred assets and activities constitute a
business. Otherwise, the acquisition should be accounted for as the
acquisition of net assets.
SFAS No. 147 also amends the scope of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," to include long-term
customer relationship assets of financial institutions (including mutual
enterprises) such as depositor- and borrower-relationship intangible
assets and credit cardholder intangible assets.
The provisions of SFAS No. 147 related to unidentifiable intangible assets
and the acquisition of a less-than-whole financial institution are
effective for acquisitions for which the date of acquisition is on or
after October 1, 2002. The provisions related to impairment of long-term
customer relationship assets are effective October 1, 2002. Transition
provisions for previously recognized unidentifiable intangible assets are
effective on October 1, 2002, with earlier application permitted.
Management adopted SFAS No. 147 effective October 1, 2002, without
material effect on the Corporation's financial condition or results of
operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends
SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123
to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS
No. 148 is effective for fiscal years beginning after December 15, 2002.
The interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after
December 15, 2002. Management adopted the disclosure provisions of SFAS
No. 148 effective March 31, 2003, without material effect on the
Corporation's financial position, results of operations or cash flows.
31
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2003, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
15. Effects of Recent Accounting Pronouncements (continued)
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject
to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual
returns, or both. FIN 46 also requires disclosures about variable interest
entities that a company is not required to consolidate, but in which it
has a significant variable interest. The consolidation requirements of FIN
46 apply immediately to variable interest entities created after January
31, 2003. The consolidation requirements apply to existing entities in the
first fiscal year or interim period beginning after June 15, 2003. Certain
of the disclosure requirements apply in all financial statements issued
after January 31, 2003, regardless of when the variable interest entity
was established. The Corporation adopted the disclosure provisions of FIN
46 effective January 31, 2003. The Corporation has no variable interest
entities, therefore management does not expect FIN 46 to have a material
effect on the Corporation's financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities" which clarifies certain
implementation issues raised by constituents and amends SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," to include
the conclusions reached by the FASB on certain FASB Staff Implementation
Issues that, while inconsistent with Statement 133's conclusions, were
considered by the Board to be preferable; amends SFAS No. 133's discussion
of financial guarantee contracts and the application of the shortcut
method to an interest-rate swap agreement that includes an embedded option
and amends other pronouncements.
The guidance in Statement 149 is generally effective for new contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after that date.
Management does not expect SFAS No. 149 to have a material effect on the
Corporation's financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity," which changes the classification in the statement of financial
position of certain common financial instruments from either equity or
mezzanine presentation to liabilities and requires an issuer of those
financial statements to recognize changes in fair value or redemption
amount, as applicable, in earnings. SFAS No. 150 requires an issuer to
classify certain financial instruments as liabilities, including
mandatorily redeemable preferred and common stocks.
32
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2003, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
15. Effects of Recent Accounting Pronouncements (continued)
SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003 and, with one exception, is effective at the
beginning of the first interim period beginning after June 15, 2003 (July
1, 2003 as to the Corporation). The effect of adopting SFAS No. 150 must
be recognized as a cumulative effect of an accounting change as of the
beginning of the period of adoption. Restatement of prior periods is not
permitted. Management does not expect SFAS No. 150 to have a material
effect on the Corporation's financial statements.
16. Reclassifications
Certain prior year amounts have been reclassified to conform to the 2003
consolidated financial statement presentation.
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of investment securities at June 30, 2003 and 2002,
are as follows:
June 30, 2003
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Available for sale:
U.S. Government agency obligations $1,501 $ 1 $ -- $1,502
====== ====== ==== ======
June 30, 2002
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Available for sale:
U.S. Government agency obligations $2,038 $ 9 $ -- $2,047
====== ====== ==== ======
The U. S. Government agency obligations designated as available for sale
at June 30, 2003, are scheduled to mature in fiscal 2009 and thereafter.
The U. S. Government agency obligations designated as available for sale
at June 30, 2002, were scheduled to mature in the fiscal year ended June
30, 2011.
33
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2003, 2002 and 2001
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, 2003 and
2002, are shown below:
2003
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Held to maturity:
Federal Home Loan Mortgage
Corporation participation certificates $ 491 $ 20 $ -- $ 511
Government National Mortgage
Association participation certificates 160 16 -- 176
------ ------ ------ ------
Total mortgage-backed securities
held to maturity 651 36 -- 687
Available for sale:
Federal National Mortgage
Association participation certificates 490 5 (2) 493
Federal Home Loan Mortgage
Corporation participation certificates 42 1 -- 43
Government National Mortgage
Association participation certificates 288 8 -- 296
------ ------ ------ ------
Total mortgage-backed securities
available for sale 820 14 (2) 832
------ ------ ------ ------
Total mortgage-backed securities $1,471 $ 50 $ (2) $1,519
====== ====== ====== ======
2002
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Held to maturity:
Federal Home Loan Mortgage
Corporation participation certificates $1,041 $ 16 $ (1) $1,056
Government National Mortgage
Association participation certificates 565 27 -- 592
------ ------ ------ ------
Total mortgage-backed securities
held to maturity 1,606 43 (1) 1,648
Available for sale:
Federal National Mortgage
Association participation certificates 858 11 (3) 866
Federal Home Loan Mortgage
Corporation participation certificates 129 -- -- 129
Government National Mortgage
Association participation certificates 544 12 -- 556
------ ------ ------ ------
Total mortgage-backed securities
available for sale 1,531 23 (3) 1,551
------ ------ ------ ------
Total mortgage-backed securities $3,137 $ 66 $ (4) $3,199
====== ====== ====== ======
34
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2003, 2002 and 2001
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, 2003, by contractual term to
maturity are shown below. Expected maturities will differ from contractual
maturities because borrowers may generally prepay obligations without
prepayment penalties.
Amortized
cost
(In thousands)
Due within five years $ 102
Due within five to ten years 191
Due after ten years 1,178
------
$1,471
======
As of June 30, 2003, mortgage-backed securities and investment securities
totaling $2.2 million were pledged to secure public deposits.
Proceeds from sales of mortgage-backed securities amounted to $5.1 million
during the fiscal year ended June 30, 2002, resulting in gross realized
gains of $67,000.
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at June 30, 2003 and 2002 is as
follows:
2003 2002
(In thousands)
Residential real estate
One- to four-family $ 62,396 $ 64,560
Multi-family 4,905 5,354
Nonresidential real estate and land 28,488 24,917
Commercial loans - secured 19,002 10,818
Commercial loans - unsecured 452 448
Consumer and other loans 2,352 1,604
Deferred loan origination costs 121 --
-------- --------
117,716 107,701
Less:
Undisbursed portion of loans in process 2,699 269
Deferred loan origination fees -- 1
Allowance for loan losses 818 713
-------- --------
$114,199 $106,718
======== ========
The Bank's lending efforts have historically focused on one- to
four-family and multi-family residential real estate loans, which comprise
approximately $64.6 million, or 57%, of the total loan portfolio at June
30, 2003, and approximately $69.6 million, or 65%, of the total loan
portfolio at June 30, 2002. Generally, such loans have been underwritten
on the basis of no more than an 80% loan-to-value ratio, which has
historically provided the Bank with adequate collateral coverage in the
event of default. Nevertheless, the 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 Bank's primary lending area are presently stable.
35
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2003, 2002 and 2001
NOTE C - LOANS RECEIVABLE (continued)
As discussed previously, the 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 $58.9 million and $31.8 million at June 30, 2003 and 2002,
respectively.
In the ordinary course of business, the 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 $2.2 million and $409,000 at
June 30, 2003 and 2002, 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, 2003, 2002 and 2001:
2003 2002 2001
(In thousands)
Beginning balance $ 713 $ 564 $ 375
Provision for losses on loans 131 150 201
Loan charge-offs (26) (1) (12)
----- ----- -----
Ending balance $ 818 $ 713 $ 564
===== ===== =====
As of June 30, 2003, the Bank's allowance for loan losses was comprised
solely of a general loan loss allowance, which is includible as a
component of regulatory risk-based capital.
Nonperforming and impaired loans totaled $2.2 million, $622,000 and
$105,000, respectively at June 30, 2003, 2002 and 2001. Interest income
that would have been recognized had nonaccrual loans performed pursuant to
contractual terms totaled approximately $45,000, $13,000 and $3,000 for
the fiscal years ended June 30, 2003, 2002 and 2001, respectively.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at June 30, 2003 and 2002 is comprised of
the following:
2003 2002
(In thousands)
Land $ 488 $ 488
Buildings and improvements 1,424 1,389
Furniture and equipment 1,160 851
------ ------
3,072 2,728
Less accumulated depreciation and
amortization 938 736
------ ------
$2,134 $1,992
====== ======
36
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2003, 2002 and 2001
NOTE F - DEPOSITS
Deposits consist of the following major classifications at June 30, 2003
and 2002:
Deposit type and weighted- 2003 2002
average interest rate Amount % Amount %
(Dollars in thousands)
Demand deposit accounts $ 7,867 7.5% $ 4,908 5.1%
NOW accounts
2003 - 0.20% 12,981 12.5
2002 - 0.35% 11,343 11.9
Passbook
2003 - 0.83% 32,229 30.9
2002 - 1.59% 29,623 31.0
-------- ----- -------- -----
Total demand, transaction and
passbook deposits 53,077 50.9 45,874 48.0
Certificates of deposit
Original maturities of:
Less than 12 months
2003 - 1.29% 2,174 2.1
2002 - 2.07% 3,993 4.2
12 months to 29 months
2003 - 2.50% 14,524 13.9
2002 - 4.08% 19,550 20.5
30 months to 47 months
2003 - 4.42% 19,082 18.3
2002 - 4.74% 13,024 13.6
48 months to 60 months
2003 - 3.60% 984 0.9 -- --
Balances in excess of $100,000
2003 - 3.39% 7,832 7.5
2002 - 3.40% 8,047 8.4
Individual retirement accounts
2003 - 3.44% 6,678 6.4
2002 - 4.60% 5,054 5.3
-------- ----- -------- -----
Total certificates of deposit 51,274 49.1 49,668 52.0
-------- ----- -------- -----
Total deposit accounts $104,351 100.0% $ 95,542 100.0%
======== ===== ======== =====
Interest expense on deposits for the years ended June 30, 2003, 2002 and
2001 is summarized as follows:
2003 2002 2001
(In thousands)
Passbook $ 365 $ 586 $ 960
NOW accounts 38 36 39
Certificates of deposit 1,979 2,496 2,931
------ ------ ------
$2,382 $3,118 $3,930
====== ====== ======
37
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2003, 2002 and 2001
NOTE F - DEPOSITS (continued)
Maturities of outstanding certificates of deposit at June 30, 2003 and
2002 are summarized as follows:
2003 2002
(In thousands)
Less than one year $24,023 $29,351
One year to three years 25,315 20,317
Three years to five years 1,936 --
------- -------
$51,274 $49,668
======= =======
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at June 30, 2003
by a pledge of certain residential mortgage loans totaling $17.4 million
and the Bank's investment in Federal Home Loan Bank stock, are summarized
as follows:
Interest Maturing in year
rate ending June 30, 2003 2002
(Dollars in thousands)
1.11% - 1.77% 2004 $ 2,500 $ 2,500
8.15% 2005 5 8
5.06% - 5.65% 2009 5,626 5,727
1.94% - 6.10% After 2009 5,760 9,318
------- -------
$13,891 $17,553
======= =======
Weighted-average interest rate 3.95% 3.67%
==== ====
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, 2003, 2002 and 2001 as
follows:
2003 2002 2001
(Dollars in thousands)
Federal income taxes at statutory rate $ 532 $ 573 $ 565
Increase (decrease) in taxes resulting primarily from:
Nontaxable interest income (2) (4) (6)
Other 4 4 1
----- ----- -----
Federal income taxes per consolidated
financial statements $ 534 $ 573 $ 560
===== ===== =====
Effective tax rate 34.1% 34.0% 33.7%
===== ===== =====
38
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2003, 2002 and 2001
NOTE H - FEDERAL INCOME TAXES (continued)
The composition of the Corporation's net deferred tax liability at June
30, 2003 and 2002 is as follows:
Taxes (payable) refundable on temporary 2003 2002
differences at statutory rate: (In thousands)
Deferred tax assets:
Retirement expense $ 81 $ 72
General loan loss allowance 278 243
Other 12 6
----- -----
Deferred tax assets 371 321
Deferred tax liabilities:
Deferred loan origination costs (85) (54)
Federal Home Loan Bank stock dividends (283) (255)
Difference between book and tax depreciation (32) (35)
Unrealized gains on securities designated as available
for sale (5) (10)
Percentage of earnings bad debt deduction (8) (24)
Mortgage servicing rights (175) (97)
----- -----
Deferred tax liabilities (588) (475)
----- -----
Net deferred tax liability $(217) $(154)
===== =====
Prior to fiscal 1997, the 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, 2003, include approximately $1.7 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, 2003.
The 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 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.
39
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2003, 2002 and 2001
NOTE I - LOAN COMMITMENTS
The 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 Bank's involvement in such financial instruments.
The 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 Bank uses the same credit policies in making commitments and
conditional obligations as those utilized for on-balance-sheet
instruments.
At June 30, 2003, the Bank had outstanding commitments of approximately
$7.5 million to originate loans. Additionally, the Bank was obligated
under unused lines of credit under home equity loans totaling $10.5
million and unused lines of credit under commercial loans of $9.0 million.
In the opinion of management, all loan commitments equaled or exceeded
prevailing market interest rates as of June 30, 2003, and will be funded
from normal cash flow from operations.
NOTE J - REGULATORY CAPITAL
The 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 Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
The minimum capital standards of the OTS generally require the maintenance
of regulatory capital sufficient to meet each of three tests, hereinafter
described as the tangible capital requirement, the core capital
requirement and the risk-based capital requirement. The tangible capital
requirement provides for minimum tangible capital (defined as
shareholders' equity less all intangible assets) equal to 1.5% of adjusted
total assets. The core capital requirement provides for minimum core
capital (tangible capital plus certain forms of supervisory goodwill and
other qualifying intangible assets) 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 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%.
40
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2003, 2002 and 2001
NOTE J - REGULATORY CAPITAL (continued)
During fiscal 2003, the Bank was notified by the OTS that it was
categorized as "well-capitalized" under the regulatory framework for
prompt corrective action. Management does not believe there have been any
changes in facts and circumstances that would change the Bank's capital
category. To be categorized as "well-capitalized" the Bank must maintain
minimum capital ratios as set forth in the following tables.
As of June 30, 2003 and 2002, management believes that the Bank met all
capital adequacy requirements to which it was subject.
As of June 30, 2003
To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
---------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Tangible capital $15,666 11.5% =>$2,035 =>1.5% =>$6,785 => 5.0%
Core capital $15,666 11.5% =>$5,428 =>4.0% =>$8,142 => 6.0%
Risk-based capital $16,484 18.4% =>$7,177 =>8.0% =>$8,971 =>10.0%
As of June 30, 2002
To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
---------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Tangible capital $15,129 11.6% =>$1,956 =>1.5% =>$6,519 => 5.0%
Core capital $15,129 11.6% =>$5,215 =>4.0% =>$7,822 => 6.0%
Risk-based capital $15,842 17.5% =>$7,225 =>8.0% =>$9,031 =>10.0%
The Bank's management believes that, under the current regulatory capital
regulations, the Bank will continue to meet its minimum capital
requirements in the foreseeable future. However, events beyond the control
of the Bank, such as increased interest rates or a downturn in the economy
in the Bank's market area, could adversely affect future earnings and,
consequently, the ability to meet future minimum regulatory capital
requirements.
41
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2003, 2002 and 2001
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, 2003 and 2002, and
the results of its operations and its cash flows for the years ended June
30, 2003, 2002 and 2001.
FFD FINANCIAL CORPORATION
STATEMENTS OF FINANCIAL CONDITION
June 30, 2003 and 2002
(In thousands)
ASSETS 2003 2002
Cash and due from banks $ 407 $ 532
Loan receivable from ESOP 523 635
Investment in First Federal Community Bank 15,726 15,176
Accrued interest receivable 12 12
Prepaid federal income taxes 239 181
Prepaid expenses and other assets 11 5
------- -------
Total assets $16,918 $16,541
======= =======
SHAREHOLDERS' EQUITY
Shareholders' equity
Common stock and additional paid-in capital $ 7,889 $ 7,861
Retained earnings 12,202 11,629
Unrealized gains on securities designated as available
for sale, net of related tax effects 8 19
Shares acquired by stock benefit plans (559) (677)
Treasury shares - at cost (2,622) (2,291)
------- -------
Total shareholders' equity $16,918 $16,541
======= =======
FFD FINANCIAL CORPORATION
STATEMENTS OF EARNINGS
Year ended June 30, 2003, 2002 and 2001
(In thousands)
2003 2002 2001
Revenue
Interest income $ 17 $ 30 $ 34
Equity in earnings of subsidiary 1,153 1,221 1,233
------ ------ ------
Total revenue 1,170 1,251 1,267
General and administrative expenses 196 194 234
------ ------ ------
Earnings before income tax credits 974 1,057 1,033
Federal income tax credits (58) (56) (68)
------ ------ ------
NET EARNINGS $1,032 $1,113 $1,101
====== ====== ======
42
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2003, 2002 and 2001
NOTE K - CONDENSED FINANCIAL STATEMENTS OF FFD FINANCIAL CORPORATION (continued)
FFD FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
Year ended June 30, 2003, 2002 and 2001
(In thousands)
2003 2002 2001
Cash provided by (used in) operating activities:
Net earnings for the year $ 1,032 $ 1,113 $ 1,101
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Distributions from subsidiary in excess of earnings -- -- 967
Undistributed earnings of subsidiary (403) (221) --
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets (7) (2) 29
Prepaid federal income taxes (58) (56) (68)
------- ------- -------
Net cash provided by operating activities 564 834 2,029
Cash flows provided by investing activities:
Proceeds from repayment of loan to ESOP 112 105 98
Cash flows provided by (used in) financing activities:
Proceeds from other borrowed money 405 -- 225
Repayments of other borrowed money (405) -- (225)
Proceeds from exercise of stock options 38 51 --
Purchase of treasury shares (380) (936) (912)
Cash dividends paid on common stock (459) (446) (427)
------- ------- -------
Net cash used in financing activities (801) (1,331) (1,339)
------- ------- -------
Net increase (decrease) in cash and cash equivalents (125) (392) 788
Cash and cash equivalents at beginning of year 532 924 136
------- ------- -------
Cash and cash equivalents at end of year $ 407 $ 532 $ 924
======= ======= =======
Regulations of the OTS impose limitations on the payment of dividends and
other capital distributions by savings associations. Generally, the Bank's
payment of dividends is limited, without prior OTS approval, to net
earnings for the current calendar year plus the two preceding calendar
years, less capital distributions paid over the comparable time period.
The 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.
NOTE L - RELATED PARTY TRANSACTIONS
In connection with construction work performed, the Bank paid a contractor
approximately $187,000. A principal of the contracting company also serves
as an outside director to FFD Financial Corporation.
43
FFD FINANCIAL CORPORATION
AND
FIRST FEDERAL COMMUNITY BANK
DIRECTORS AND EXECUTIVE OFFICERS
================================================================================
Board of Directors of Executive Officers of
FFD Financial Corporation and FFD Financial Corporation
First Federal Community Bank
Trent B. Troyer
Stephen G. Clinton President and Chief Executive Officer
President
Capital Market Securities Scott C. Finnell
and Executive Vice President
Vice-President
Young and Associates Robert R. Gerber
Vice President, Treasurer and Chief Financial
J. Richard Gray Officer
Chairman
Hanhart Agency, Inc. Shirley A. Wallick
Corporate Secretary
Leonard L. Gundy
President Executive Officers of
Benchmark Construction, Inc. First Federal Community Bank
Enos L. Loader Trent B. Troyer
Chairman of the Board and President and Chief Executive Officer
Retired Senior Bank Officer
. Scott C. Finnell
Roy O. Mitchell, Jr. Executive Vice President
Managing Officer - Retired
First Federal Community Bank Robert R. Gerber
Vice President, Treasurer and Chief Financial
Robert D. Sensel Officer
President and Chief Executive Officer
Dover Hydraulics, Inc. Sally O'Donnell
Senior Vice President
Director Emeritus
FFD Financial Corporation and Shirley A. Wallick
First Federal Community Bank Corporate Secretary
Richard J. Herzig Other Officers of
Chairman - Retired First Federal Community Bank
Toland-Herzig Funeral Homes, Inc.
Michele L. Larkin
Vice President
Jody P. Stoldt
Vice President
Mary M. Mitchell
Banking Officer
Kimberly Law-Montgomery
Assistant Secretary
44
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 21, 2003, at 1:00 p.m., Eastern Time, at the Monarch Center, 831
Boulevard, Dover, Ohio 44622. Shareholders are cordially invited to attend.
ANNUAL REPORT ON FORM 10-KSB
================================================================================
A copy of FFD's Annual Report on Form 10-KSB, excluding exhibits, as filed with
the Securities and Exchange Commission, will be available at no charge to
shareholders upon request to:
FFD Financial Corporation
321 North Wooster Avenue
Dover, Ohio 44622
Attention: Secretary
45