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. Since its formation in 1996, 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, and 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, loan sales
and principal repayments on loans and mortgage-backed securities. First Federal
conducts business from its main office in Dover, Ohio, branches in Dover and New
Philadelphia, Ohio, and lending offices in Sugarcreek and Coshocton, Ohio.
Additionally, the Bank provides access to its products and services via the
Internet at xxx.xxxxxxxxxxxxxx.xxx.
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 1,190,844 common shares of FFD outstanding on September 2, 2005.
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 2004 and 2005.
High Trade Low Trade Cash Dividends Declared
Fiscal 2004
Quarter Ended
September 30, 2003 $15.32 $13.25 $.100
December 31, 2003 15.30 14.59 .105
March 31, 2004 15.50 13.64 .105
June 30, 2004 15.65 13.00 .105
High Trade Low Trade Cash Dividends Declared
Fiscal 2005
Quarter Ended
September 30, 2004 $16.50 $13.05 $.105
December 31, 2004 16.40 13.44 .110
March 31, 2005 16.75 14.26 .110
June 30, 2005 18.39 13.50 .110
FFD's income 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. 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 to stock form 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: 2005 2004 2003 2002 2001
(In thousands)
Total amount of:
Assets $148,559 $135,892 $136,408 $130,303 $133,097
Interest-bearing deposits 5,672 8,821 10,398 11,726 8,024
Investment securities available for sale -
at market 3,485 4,402 1,502 2,047 1,000
Mortgage-backed securities available
for sale - at market 500 630 832 1,551 7,799
Mortgage-backed securities held to
maturity - at cost 220 395 651 1,606 3,721
Loans receivable - net (1) 131,493 114,505 115,966 107,055 107,467
Deposits 111,495 105,446 104,351 95,542 91,018
Advances from the FHLB 17,880 12,669 13,891 17,553 24,732
Shareholders' equity, restricted 17,402 16,738 16,918 16,541 16,604
For the year ended June 30,
Summary of earnings: 2005 2004 2003 2002 2001
(In thousands, except per share data)
Interest income $ 7,073 $ 6,360 $ 6,758 $ 8,005 $ 9,549
Interest expense 2,521 2,487 2,966 3,893 5,498
-------- -------- -------- -------- --------
Net interest income 4,552 3,873 3,792 4,112 4,051
Provision for losses on loans 11 25 131 150 201
-------- -------- -------- -------- --------
Net interest income after provision
for losses on loans 4,541 3,848 3,661 3,962 3,850
Other income 917 616 1,038 536 262
General, administrative and other
expense 3,813 3,423 3,133 2,812 2,451
-------- -------- -------- -------- --------
Earnings before income taxes 1,645 1,041 1,566 1,686 1,661
Federal income taxes 559 354 534 573 560
-------- -------- -------- -------- --------
Net earnings $ 1,086 $ 687 $ 1,032 $ 1,113 $ 1,101
======== ======== ======== ======== ========
Earnings per share
Basic $ .94 $ .59 $ .88 $ .94 $ .86
======== ======== ======== ======== ========
Diluted $ .92 $ .58 $ .86 $ .92 $ .86
======== ======== ======== ======== ========
-----------------------------------
(1) Includes loans held for sale.
3
Selected financial ratios At or for the year ended June 30,
and other data: 2005 2004 2003 2002 2001
Return on average assets 0.78% 0.50% 0.77% 0.84% 0.86%
Return on average equity 6.39 4.05 6.17 6.75 6.69
Interest rate spread 3.24 2.79 2.62 2.85 2.75
Net interest margin 3.41 2.97 2.95 3.22 3.26
General, administrative and other
expense to average assets 2.73 2.50 2.34 2.13 1.91
Average equity to average
assets 12.14 12.40 12.50 12.50 12.81
Nonperforming and impaired assets
to total assets 0.82 0.84 1.76 0.48 0.08
Nonperforming and impaired loans to
total loans 0.90 0.98 1.88 0.58 0.10
Delinquent loans to total loans (1) 1.02 1.18 1.28 2.57 0.96
Allowance for loan losses to
total loans 0.57 0.67 0.68 0.66 0.52
Allowance for loan losses to
nonperforming and impaired loans 62.99 68.09 36.45 114.63 537.14
Average interest-earning assets
to average interest-bearing liabilities 108.86 109.27 114.63 112.05 111.49
Dividend payout ratio 46.28 70.34 44.89 39.89 41.86
Number of full service offices 3 3 3 3 2
----------------------------
(1) Delinquent loans are loans as to which a scheduled payment has not been
made within 30 days after the due date.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
GENERAL
--------------------------------------------------------------------------------
The principal business of FFD is owning all of First Federal's stock issued in
its 1996 conversion from mutual to stock form. 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.
Forward-Looking Statements are Subject to Change
Certain statements contained in this report that are not historical facts are
forward looking statements that are subject to certain risks and uncertainties.
When used herein, the terms "anticipates," "plans," "expects," "believes," and
similar expressions as they relate to FFD or its management are intended to
identify such forward looking statements. FFD's actual results, performance or
achievements may materially differ from those expressed or implied in the
forward-looking statements. Risks and uncertainties that could cause or
contribute to such material differences include, but are not limited to, general
economic conditions, interest rate environment, competitive conditions in the
financial services industry, changes in law, governmental policies and
regulations, and rapidly changing technology affecting financial services.
Critical Accounting Policies
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to use judgments in making estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses. The
following critical accounting policy is based upon judgments and assumptions by
management that includes inherent risks and uncertainties.
The allowance for loan losses is an accounting estimate of probable but
unconfirmed asset impairment that has occurred in the Corporation's loan
portfolio as of the date of the consolidated financial statements before losses
have been confirmed via a recorded charge-off or write-down. It is the
Corporation's policy to provide valuation allowances for estimated losses on
loans based upon past loss experience, adjusted for changes in trends and
conditions of certain items, including:
o Local market areas and national economic developments;
o Levels of and trends in delinquencies and impaired loans;
o Levels of and trends in recoveries of prior charge-offs;
o Adverse situations that may affect specific borrowers' ability to
repay;
o Effects of any changes in lending policies and procedures;
o Credit concentrations;
o Volume and terms of loans; and
o Current collateral values, where appropriate.
When the collection of a loan becomes doubtful, or otherwise troubled, the
Corporation records a loan loss provision 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).
5
The Corporation accounts for its allowance for losses on loans in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 5, "Accounting for
Contingencies," and SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan." Both Statements require the Corporation to evaluate the collectibility of
both contractual interest and principal loan payments. SFAS No. 5 requires the
accrual of a loss when it is probable that a loan has been impaired and the
amount of the loss can be reasonably estimated. SFAS No. 114 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.
A loan is impaired under SFAS No. 114 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 Corporation considers its investment in one- to
four-family residential loans and consumer loans to be homogeneous and therefore
excluded from separate identification for evaluation of impairment. These
homogeneous loan groups are evaluated for impairment in accordance with SFAS No.
5. With respect to nonresidential real estate and other loans, management
believes such loans are adequately collateralized and as a result impaired loans
are carried at the lower of cost or fair value.
It is the Corporation's policy to charge off unsecured credits that are more
than ninety days delinquent. Similarly, once a collateral dependent loan becomes
more than ninety days delinquent, it is considered to constitute more than a
minimum delay in repayment and is evaluated for impairment under SFAS No. 114 at
that time.
CHANGES IN FINANCIAL CONDITION FROM JUNE 30, 2004 TO JUNE 30, 2005
--------------------------------------------------------------------------------
The Corporation's assets at June 30, 2005, totaled $148.6 million, a $12.7
million, or 9.3%, increase from the June 30, 2004 total. This increase was
comprised primarily of a $17.0 million increase in loans receivable, which was
partially offset by a $4.3 million decrease in cash, interest-bearing deposits,
mortgage-backed securities and investment securities.
Cash and interest-bearing deposits totaled $7.8 million at June 30, 2005, a
decrease of $3.0 million, or 28.0%, from June 30, 2004. Investment securities
totaled $3.5 million at June 30, 2005, a decrease of $917,000. Maturities and
calls of investment securities totaled $1.0 million.
Mortgage-backed securities totaled $720,000 at June 30, 2005, a $305,000, or
29.8%, decrease from the total at June 30, 2004, due primarily to principal
repayments. Repayments of mortgage-backed securities during fiscal 2005 totaled
$308,000.
Loans receivable, including loans held for sale, totaled $131.5 million at June
30, 2005, an increase of $17.0 million, or 14.8%, from the June 30, 2004 total.
Loan disbursements during fiscal 2005 totaled $66.6 million, which were offset
by principal repayments of $36.2 million and loans sold in the secondary market
totaling $10.5 million. Loan origination volume during the year ended June 30,
2005, decreased by $3.2 million, or 4.6%, compared to fiscal 2004. During fiscal
2005, 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 2005 decreased by $19.3 million, or 64.8%, from fiscal 2004. The
portfolio of loans secured by one- to four-family residential real estate
increased by $4.1 million to $61.1 million at June 30, 2005. Loans secured by
nonresidential real estate and land totaled $42.8 million at June 30, 2005,
compared to $35.0 million at June 30, 2004. Commercial loans totaled $16.7
million at June 30, 2005, compared to $15.4 million at June 30, 2004.
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
6
reduce such risk by evaluating the credit history and past performance of the
borrower, the quality of the borrower's 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.
The allowance for loan losses totaled $766,000 and $779,000 at June 30, 2005 and
2004, respectively, which represented .57% and .68% of total loans and 63.0% and
68.1% of nonperforming and impaired loans at those respective dates.
Nonperforming and impaired loans amounted to $1.2 million and $1.1 million at
June 30, 2005 and 2004, respectively. Management believes that the Bank's
nonperforming and impaired loans at June 30, 2005 are adequately collateralized
and no unreserved loss is anticipated on such loans. Although management
believes that the allowance for loan losses at June 30, 2005, 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 $111.5 million at June 30, 2005, a $6.1 million, or 5.7%,
increase over total deposits at June 30, 2004. This increase resulted primarily
from management's efforts to generate deposit growth through advertising and
pricing strategies. Proceeds from deposit growth were used primarily to fund new
loan originations.
FHLB advances totaled $17.9 million at June 30, 2005, a $5.2 million, or 41.1%,
increase from June 30, 2004. The increase in FHLB advances was primarily used to
fund loan growth.
Shareholders' equity totaled $17.4 million at June 30, 2005, an increase of
$664,000, or 4% from June 30, 2004 levels. This increase was due primarily to
net earnings of $1.1 million, a $110,000 reduction in the shares acquired by
benefit plans, and $267,000 in proceeds from the exercise of stock options,
which were partially offset by dividends totaling $517,000 and purchases of
treasury shares totaling $411,000.
COMPARISON OF OPERATING RESULTS
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
--------------------------------------------------------------------------------
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 $1.1 million for the fiscal year ended June
30, 2005, an increase of $399,000 or 58.1% compared to fiscal 2004. The increase
in net earnings resulted primarily from a $679,000 increase in net interest
income, a $329,000 gain on redemption of securities, and a $93,000 increase in
other operating income, which were partially offset by a $390,000 increase in
general, administrative and other expense, a $128,000 decrease in gain on sale
of loans, and a $205,000 increase in the provision for federal income tax.
Net Interest Income. Total interest income increased by $713,000, or 11.2%, to a
total of $7.1 million for the year ended June 30, 2005, compared to $6.4 million
for the fiscal year ended June 30, 2004. Interest income on loans increased by
$640,000, or 10.6%, due primarily to a 24 basis point increase in the average
yield, to 5.51% in fiscal 2005, and a $6.7 million, or 5.9%, increase in the
average loan portfolio balance outstanding year to year. Interest income on
mortgage-backed securities decreased by $22,000, or 37.9%, due primarily to a
$405,000, or 32.4%, decrease in the average balance outstanding, and a 34 basis
point decrease in the average yield earned on such securities, to 4.29% in
fiscal 2005. Interest income on investment securities increased by $38,000 due
primarily to a 23 basis point increase in the average yield earned on such
securities, to 4.17%, and a $725,000 increase in the average balance
outstanding. Interest income on interest-
7
bearing deposits increased by $51,000, or 44.9%, due primarily to a 136 basis
point increase in the average yield, which was partially offset by a $4.0
million, or 35.1%, decrease in the average balance outstanding year to year.
Increases in the average yields on interest-earning assets were due primarily to
the overall increase interest rates in the economy.
Interest expense on deposits increased by $18,000, or 0.9%, for the year ended
June 30, 2005, compared to fiscal 2004, due primarily to a $3.9 million, or
3.76%, increase in the average deposit portfolio balance outstanding year to
year, partially offset by a decrease in the average cost of deposits of 5 basis
points to 1.76% for fiscal 2005.
Interest expense on borrowings increased by $16,000, or 2.7%, due primarily to a
32 basis point increase in the average cost of such borrowings, to 4.35% in
fiscal 2005, partially offset by a $706,000, or 4.8%, decrease in the average
balance of advances outstanding.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $679,000, or 17.5%, for the fiscal year ended
June 30, 2005, compared to fiscal 2004. The interest rate spread amounted to
3.24% for the fiscal year ended June 30, 2005, compared to 2.79% for fiscal
2004, while the net interest margin was 3.41% in fiscal 2005, compared to 2.97%
in fiscal 2004.
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 $11,000 for the year ended June 30, 2005, a decrease of $14,000,
or 56.0%, compared to fiscal 2004. First Federal's fiscal 2005 provision was
predicated primarily on industry loss ratio analysis applied to the loan
portfolio in accordance with Statement of Financial Accounting Standards
("SFAS") No. 5 and SFAS No. 114. There can be no assurance that First Federal's
loan loss allowance will be adequate to cover losses on nonperforming assets in
the future.
Other Income. Other income totaled $917,000 for the fiscal year ended June 30,
2005, an increase of $301,000 or 48.9% from fiscal 2004. An increase in gain on
redemption of securities resulted from a $329,000 pre-tax gain on the sale of
Intrieve, Incorporated shares to Xxxxxxx Financial Solutions. This increase
resulted from the gain on redemption of securities and an increase in other
operating income, which were partially offset by a $128,000, or 36.2%, decrease
in gain on sale of loans. The increase in other operating income of $93,000
consisted primarily of a decrease in the amortization of mortgage servicing
rights and increases in miscellaneous operating income.
General, Administrative and Other Expense. General, administrative and other
expense totaled $3.8 million for the fiscal year ended June 30, 2005, an
increase of $390,000, or 11.4%, compared to fiscal 2004. The increase resulted
from increases of $218,000, or 14.2%, in employee compensation and benefits and
$177,000, or 17.7%, in other operating expense, which were slightly offset by a
$7,000 decrease in occupancy and equipment.
The increase in employee compensation and benefits included increases of $90,000
in wages and related benefit expenses, $50,000 in employee stock ownership and
stock option plans, and an $82,000 decrease in deferred loan origination costs,
which were slightly offset by a decrease of $4,000 in the cost of the reward and
recognition and stock option plans. The increase in wages and related expenses
was due to increases in staff, salaries, and benefit plans. The increase in
employee stock ownership and stock option expense was the result of higher
average stock trading prices and increased administrative expense. The reduction
in deferred loan origination costs was related to the reduction in the number of
loans originated. The decrease in the cost of reward, recognition, and stock
option plans occurred because benefits have fully vested or have been forfeited.
The remaining $177,000 increase in other operating expenses was comprised
primarily of pro-rata
8
increases related to the Corporation's overall growth year to year, including
the opening of two new loan production offices.
Federal Income Taxes. The provision for federal income taxes totaled $559,000
for the fiscal year ended June 30, 2005, an increase of $205,000, or 57.9%,
compared to fiscal 2004. The increase resulted primarily from a $604,000, or
58.0%, increase in earnings before taxes. The effective tax rates were 34.0% for
both of the fiscal years ended June 30, 2005 and 2004.
COMPARISON OF OPERATING RESULTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
--------------------------------------------------------------------------------
General. FFD's net earnings totaled $687,000 for the fiscal year ended June 30,
2004, a decrease of $345,000, or 33.4%, compared to fiscal 2003. The decrease in
net earnings resulted primarily from a $554,000 decrease in gain on sale of
loans and a $290,000 increase in general administrative and other expense, which
were partially offset by increases of $81,000 in net interest income and
$139,000 in other operating income, and a $180,000 decrease in the provision for
federal income taxes.
Net Interest Income. Total interest income decreased by $398,000, or 5.9%, to a
total of $6.4 million for the year ended June 30, 2004, compared to $6.8 million
for the fiscal year ended June 30, 2003. Interest income on loans decreased by
$330,000, or 5.2%, due primarily to a 50 basis point decrease in the average
yield, to 5.27% in fiscal 2004, which was offset slightly by a $4.2 million, or
3.8%, increase in the average loan portfolio balance outstanding year to year.
Decreases in the average yield on loan assets was due primarily to the low
interest rates that prevailed throughout the 2004 fiscal year. Interest income
on mortgage-backed securities decreased by $41,000, or 41.4%, due primarily to a
$1.0 million, or 44.8%, decrease in the average balance outstanding, which was
partially offset by a 27 basis point increase in the average yield earned on
such securities, to 4.63% in fiscal 2004. Interest income on investment
securities increased by $23,000 due primarily to a 77 basis point increase in
the average yield earned on such securities, to 3.94%, which was partially
offset by an $88,000 decrease in the average balance outstanding. The yields on
mortgage-backed and investment securities began to rise in 2004 in anticipation
of the Federal Reserve Board's June 2004 decision to increase rates. Interest
income on interest-bearing deposits decreased by $50,000, or 28.2%, due
primarily to a 33 basis point decrease in the average yield and a $862,000, or
7.1%, decrease in the average balance outstanding year to year.
Interest expense on deposits decreased by $483,000, or 20.3% for the year ended
June 30, 2004, compared to fiscal 2003, due primarily to a decrease in the
average cost of deposits of 65 basis points, to 1.81%, which was partially
offset by an $8.0 million, or 8.2%, increase in the average deposit portfolio
balance outstanding year to year. Decreases in the average cost of deposits were
due primarily to the sustained low level of interest rates in the economy.
Interest expense on borrowings increased by $4,000, or 0.1%, due primarily to a
16 basis point increase in the average cost of such borrowings, to 4.03%, which
was partially offset by a $478,000, or 3.2%, decrease in the average balance of
advances outstanding, During fiscal year 2004, the Bank repaid $2.7 million of
maturing advances and replaced them with $1.5 million of new fixed rate
borrowings for match funding purposes and interest rate risk management. At June
30, 2004, the Bank had a total of $12.7 million in advances with rates ranging
from 1.11% to 6.10%. Prepayments of the higher cost advances are unlikely
because of the significant penalties involved.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $81,000, or 2.1%, for the fiscal year ended
June 30, 2004, compared to fiscal 2003. The interest rate spread amounted to
2.79% for the fiscal year ended June 30, 2004, compared to 2.62% for fiscal
2003, while the net interest margin was 2.97% in fiscal 2004, compared to 2.95%
in fiscal 2003.
9
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 $25,000 for the year ended June 30, 2004, a decrease of $106,000,
or 80.9%, compared to fiscal 2003. First Federal's fiscal 2004 provision was
predicated primarily on industry loss ratio analysis applied to the loan
portfolio in accordance with Statement of Financial Accounting Standards
("SFAS") No. 5 and SFAS No. 114. 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 $616,000 for the fiscal year ended June 30,
2004, a decrease of $422,000, or 40.7%, from fiscal 2003. The decrease resulted
primarily from a $554,000, or 61.0%, decrease in gain on sale of loans and a
$7,000 loss on sale of real estate owned, which were partially offset by an
increase of $139,000 in other operating income. The decrease in gain on sale of
loans was due primarily to a $14.4 million, or 32.6%, decrease in sales volume
year to year. The increase in other operating income was due primarily to an
increase in service fee income from loans sold of $55,000 and a $21,000 increase
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 continue to
decrease.
General, Administrative and Other Expense. General, administrative and other
expense totaled $3.4 million for the fiscal year ended June 30, 2004, an
increase of $290,000, or 9.3%, compared to fiscal 2003. The increase resulted
primarily from a $285,000, or 22.8%, increase in employee compensation and
benefits.
The increase in employee compensation and benefits included increases of
$143,000 in wages and related benefit expenses, and $5,000 in stock benefit plan
expense, and a $137,000 decrease in deferred loan origination costs. The
increase in wages and related expenses was due to increases in staff, salaries,
and benefit plans. The increase in stock benefit plan expenses was the result of
a $31,000 increase in ESOP expense due to higher average trading prices for
FFD's stock, which was substantially offset by $3,000 expense reduction due to
the completion of vesting of the Bank's recognition and retention plan and
$23,000 due to the forfeiture of stock options by a former employee. The
decrease in deferred loan origination costs was related to the reduction in the
number of loans originated. The remaining $5,000 increase in all other operating
expense categories was comprised primarily of immaterial increases in a variety
of expenses from year to year
Federal Income Taxes. The provision for federal income taxes totaled $354,000
for the fiscal year ended June 30, 2004, a decrease of $180,000, or 33.7%,
compared to fiscal 2003. The decrease resulted primarily from a $525,000, or
33.5%, decrease in earnings before taxes. The Corporation's effective tax rates
were 34.0% and 34.1% for the fiscal years ended June 30, 2004 and 2003,
respectively.
10
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,
2005 2004
Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate
(Dollars in thousands)
Interest-earning assets:
Loans receivable $ 121,282 $ 6,683 5.51% $ 114,573 $ 6,043 5.27%
Mortgage-backed securities 847 36 4.29 1,252 58 4.63
Investment securities 4,072 170 4.17 3,347 132 3.94
Interest-bearing deposits
and other 7,369 184 2.48 11,360 127 1.12
------------ -------- -------- ------------ -------- --------
Total interest-earning assets 133,570 7,073 5.29 130,532 6,360 4.87
Non-interest-earning assets 6,287 6,220
------------ ------------
Total assets $ 139,857 $ 136,752
============ ============
Interest-bearing liabilities:
Deposits $ 108,820 1,917 1.76 $ 104,872 1,899 1.81
Borrowings 13,882 604 4.35 14,588 588 4.03
------------ -------- -------- ------------ -------- --------
Total interest-bearing
liabilities 122,702 2,521 2.05 119,460 2,487 2.08
-------- -------- -------- --------
Non-interest-bearing liabilities 170 334
------------ ------------
Total liabilities 122,872 119,794
Shareholders' equity 16,985 16,958
------------ ------------
Total liabilities and
shareholders' equity $ 139,857 $ 136,752
============ ============
Net interest income $ 4,552 $ 3,873
======== ========
Interest rate spread 3.24% 2.79%
====== ======
Net interest margin (net interest
income as a percent of average
interest-earning assets) 3.41% 2.97%
====== ======
Average interest-earning assets to
average interest-bearing liabilities 108.86% 109.27%
====== ======
Year ended June 30,
2003
Average Interest
outstanding earned/ Yield/
balance paid rate
(Dollars in thousands)
Interest-earning assets:
Loans receivable $ 110,406 $ 6,373 5.77%
Mortgage-backed securities 2,270 99 4.36
Investment securities 3,435 109 3.17
Interest-bearing deposits
and other 12,222 177 1.45
------------ -------- --------
Total interest-earning assets 128,333 6,758 5.27
Non-interest-earning assets 5,382
------------
Total assets $ 133,715
============
Interest-bearing liabilities:
Deposits $ 96,886 2,382 2.46
Borrowings 15,066 584 3.87
------------ -------- --------
Total interest-bearing
liabilities 111,952 2,966 2.65
-------- --------
Non-interest-bearing liabilities 5,050
------------
Total liabilities 117,002
Shareholders' equity 16,713
------------
Total liabilities and
shareholders' equity $ 133,715
============
Net interest income $ 3,792
========
Interest rate spread 2.62%
========
Net interest margin (net interest
income as a percent of average
interest-earning assets) 2.95%
========
Average interest-earning assets to
average interest-bearing liabilities 114.63%
========
11
The table below describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected FFD's interest income and expense during the years indicated. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in volume multiplied by prior year rate), (ii) changes in rate (changes
in rate multiplied by prior year volume) and (iii) total changes in rate and
volume. The combined effects of changes in both volume and rate, which cannot be
separately identified, have been allocated proportionately to the change due to
volume and the change due to rate.
Year ended June 30,
2005 vs. 2004 2004 vs. 2003
Increase Increase
(decrease) (decrease)
due to due to
Volume Rate Total Volume Rate Total
(In thousands)
Interest income attributable to:
Loans receivable $ 360 $ 280 $ 640 $ 235 $(565) $(330)
Mortgage-backed securities (18) (4) (22) (46) 5 (41)
Investment securities 30 8 38 (3) 26 23
Interest-bearing deposits and other (57) 114 57 (12) (38) (50)
----- ----- ----- ----- ----- -----
Total interest income 315 398 713 174 (572) (398)
----- ----- ----- ----- ----- -----
Interest expense attributable to:
Deposits 71 (53) 18 185 (668) (483)
Borrowings (29) 45 16 (19) 23 4
----- ----- ----- ----- ----- -----
Total interest expense 42 (8) 34 166 (645) (479)
----- ----- ----- ----- ----- -----
Increase in net interest income $ 273 $ 406 $ 679 $ 8 $ 73 $ 81
===== ===== ===== ===== ===== =====
12
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, 2005 and 2004, 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, -200, -300 basis points
in market interest rates. Due to the improbability of negative rate adjustments
greater than 100 basis points, in the fiscal 2004 interest rate environment,
shocks greater than negative 100 basis points were not presented.
June 30, 2005
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 $6,218 $1,168 23.13% $22,827 $3,125 15.86%
+200 5,917 867 17.17 22,107 2,406 12.21
+100 5,508 458 9.08 21,102 1,401 7.11
Base 5,050 -- -- 19,702 -- --
-100 4,575 (475) (9.41) 18,003 (1,699) (8.62)
-200 3,911 (1,139) (22.55) 16,008 (3,694) (18.75)
-300 3,239 (1,811) (35.86) 14,003 (5,699) (28.93)
June 30, 2004
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 $4,909 $ 903 22.54% $19,318 $2,417 14.30%
+200 4,670 664 16.57 18,742 1,842 10.90
+100 4,360 354 8.83 17,940 1,039 6.15
Base 4,006 -- -- 16,901 -- --
-100 3,609 (397) (9.91) 15,342 (1,559) (9.22)
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.
13
LIQUIDITY AND CAPITAL RESOURCES
--------------------------------------------------------------------------------
First Federal's principal sources of funds are deposits, proceeds from loan
sales, principal repayments on loan and mortgage-backed securities, maturities
of investment 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 principal 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, 2005, First Federal had commitments to originate loans, including
unused lines of credit, totaling $35.6 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,
2005, 2004 and 2003:
Year ended June 30,
2005 2004 2003
(In thousands)
Net earnings $ 1,086 $ 687 $ 1,032
Adjustments to reconcile net earnings to
net cash from operating activities 3,666 1,621 (395)
-------- -------- --------
Net cash from operating activities 4,752 2,308 637
Net cash used in investing activities (18,386) (2,645) (5,956)
Net cash from (used in) financing activities 10,599 (1,086) 4,346
-------- -------- --------
Net change in cash and cash equivalents (3,035) (1,423) (973)
Cash and cash equivalents at beginning of year 10,820 12,243 13,216
-------- -------- --------
Cash and cash equivalents at end of year $ 7,785 $ 10,820 $ 12,243
======== ======== ========
14
The following table sets forth information regarding the Bank's obligations and
commitments including undisbursed loans in process, to make future payments
under contract as of June 30, 2005:
Payments due by period
Less More
than 1-3 3-5 than
1 year years years 5 years Total
(In thousands)
Contractual obligations:
Advances from the Federal Home Loan Bank $ 2,452 $ 7,813 $ 6,914 $701 $ 17,880
Certificates of deposit 27,831 24,600 3,427 -- 55,858
Amount of commitments expiring per period
Commitments to originate loans:
Overdraft lines of credit 703 -- -- -- 703
Home equity lines of credit 13,381 -- -- -- 13,381
Commercial lines of credit 13,698 -- -- -- 13,698
One- to four-family and multi-family loans 2,626 -- -- -- 2,626
Non-residential real estate and land loans 3,766 -- -- -- 3,766
Non-mortgage loans 50 -- -- -- 50
Purchase loans 485 -- -- -- 485
-------- -------- -------- ---- ---------
Total contractual obligations $ 64,992 $ 32,413 $ 10,341 $701 $ 108,447
======== ======== ======== ==== =========
First Federal is required by applicable law and regulation to meet certain
minimum capital standards, which include a tangible capital requirement, a core
capital requirement or leverage ratio, and a risk-based capital requirement.
The tangible capital requirement requires a savings 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 loss allowance of $565,000 at June 30, 2005.
First Federal exceeded all of its capital requirements and was
"well-capitalized" under OTS regulations at June 30, 2005. The following table
summarizes First Federal's regulatory capital requirements and regulatory
capital at June 30, 2005:
Excess over current
Regulatory capital Current requirement requirement
Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
Tangible capital $16,471 11.1% $2,225 1.5% $14,246 9.6%
Core capital $16,471 11.1% $5,934 4.0% $10,537 7.1%
Risk-based capital $17,036 14.8% $9,222 8.0% $7,814 6.8%
15
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
FFD Financial Corporation
We have audited the accompanying consolidated statements of financial condition
of FFD Financial Corporation as of June 30, 2005 and 2004, 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, 2005.
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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Corporation is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Corporation's internal control over
financial reporting. Accordingly, we express no such opinion. 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, 2005 and 2004, and the results of its operations and
its cash flows for each of the three years in the period ended June 30, 2005, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Xxxxx Xxxxxxxx LLP
Cincinnati, Ohio
August 18, 2005 (except for Note M, as to which the date is September 15, 2005)
16
FFD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 2005 and 2004
(In thousands, except share data)
ASSETS 2005 2004
Cash and due from banks $ 2,113 $ 1,999
Interest-bearing deposits in other financial institutions 5,672 8,821
--------- ---------
Cash and cash equivalents 7,785 10,820
Investment securities designated as available for sale - at market 3,485 4,402
Mortgage-backed securities designated as available for sale - at market 500 630
Mortgage-backed securities held to maturity - at amortized cost,
approximate market value of $225 and $411 as of June 30,
2005 and 2004, respectively 220 395
Loans receivable - net 131,168 114,288
Loans held for sale - at lower of cost or market 325 217
Office premises and equipment - at depreciated cost 2,031 2,028
Stock in Federal Home Loan Bank - at cost 2,140 2,047
Accrued interest receivable 450 381
Prepaid expenses and other assets 239 275
Prepaid federal income taxes 252 409
--------- ---------
Total assets $ 148,595 $ 135,892
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 111,495 $ 105,446
Advances from the Federal Home Loan Bank 17,880 12,669
Accrued interest payable 155 97
Other liabilities 1,385 719
Deferred federal income taxes 242 223
--------- ---------
Total liabilities 131,157 119,154
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 7,987 7,910
Retained earnings - restricted 12,954 12,385
Accumulated comprehensive loss; unrealized losses on
securities designated as available for sale, net of related tax effects (9) (66)
Shares acquired by stock benefit plans (334) (444)
Less 264,773 and 266,757 treasury shares at June 30, 2005 and 2004,
respectively - at cost (3,160) (3,047)
--------- ---------
Total shareholders' equity 17,438 16,738
--------- ---------
Total liabilities and shareholders' equity $ 148,595 $ 135,892
========= =========
The accompanying notes are an integral part of these statements.
17
FFD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Years ended June 30, 2005, 2004 and 2003
(In thousands, except per share data)
2005 2004 2003
Interest income
Loans $ 6,683 $ 6,043 $6,373
Mortgage-backed securities 36 58 99
Investment securities 170 132 109
Interest-bearing deposits and other 184 127 177
------- ------- ------
Total interest income 7,073 6,360 6,758
Interest expense
Deposits 1,917 1,899 2,382
Borrowings 604 588 584
------- ------- ------
Total interest expense 2,521 2,487 2,966
------- ------- ------
Net interest income 4,552 3,873 3,792
Provision for losses on loans 11 25 131
------- ------- ------
Net interest income after provision for losses on loans 4,541 3,848 3,661
Other income
Gain on sale of loans 226 354 908
Loss on sale of real estate acquired through foreclosure -- (7) --
Gain on redemption of securities 329 -- --
Other operating 362 269 130
------- ------- ------
Total other income 917 616 1,038
General, administrative and other expense
Employee compensation and benefits 1,755 1,537 1,252
Occupancy and equipment 384 391 387
Franchise taxes 209 210 191
Data processing 288 285 269
Other operating 1,177 1,000 1,034
------- ------- ------
Total general, administrative and other expense 3,813 3,423 3,133
------- ------- ------
Earnings before income taxes 1,645 1,041 1,566
Federal income taxes
Current 569 311 520
Deferred (10) 43 14
------- ------- ------
Total federal income taxes 559 354 534
------- ------- ------
NET EARNINGS $ 1,086 $ 687 $1,032
======= ======= ======
EARNINGS PER SHARE
Basic $ .94 $ .59 $ .88
======= ======= ======
Diluted $ .92 $ .58 $ .86
======= ======= ======
The accompanying notes are an integral part of these statements.
18
FFD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended June 30, 2005, 2004 and 2003
(In thousands)
2005 2004 2003
Net earnings $ 1,086 $ 687 $ 1,032
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities during
the period, net of taxes (benefits) of $29, $(38)
and $(5) in 2005, 2004 and 2003, respectively 57 (74) (11)
------- ----- -------
Comprehensive income $ 1,143 $ 613 $ 1,021
======= ===== =======
Accumulated comprehensive income (loss) $ (9) $ (66) $ 8
======= ===== =======
The accompanying notes are an integral part of these statements.
19
FFD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended June 30, 2005, 2004 and 2003
(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, 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
Net earnings for the year ended June 30, 2004 -- -- 687 --
Purchase of treasury shares -- -- --
Amortization expense of stock benefit plans -- 51 -- --
Unrealized losses on securities designated as available
for sale, net of related tax effects -- -- -- (74)
Exercise of stock options -- (30) --
Dividends of $.415 per share -- -- (504) --
-------- -------- -------- -----
Balance at June 30, 2004 -- 7,910 12,385 (66)
Net earnings for the year ended June 30, 2005 -- -- 1,086 --
Purchase of treasury shares -- -- -- --
Amortization expense of stock benefit plans -- 72 -- --
Unrealized gains on securities designated as available
for sale, net of related tax effects -- -- -- 57
Exercise of stock options -- 5 -- --
Dividends of $.435 per share -- -- (517) --
-------- -------- -------- -----
Balance at June 30, 2005 $ -- $ 7,987 $ 12,954 $ (9)
======== ======== ======== =====
Shares
acquired by
stock Treasury
benefit shares-
plans at cost Total
Balance at July 1, 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
Net earnings for the year ended June 30, 2004 -- -- 687
Purchase of treasury shares -- (769) (769)
Amortization expense of stock benefit plans 115 -- 166
Unrealized losses on securities designated as available
for sale, net of related tax effects -- -- (74)
Exercise of stock options -- 344 314
Dividends of $.415 per share -- -- (504)
-------- ----------- --------
Balance at June 30, 2004 (444) (3,047) 16,738
Net earnings for the year ended June 30, 2005 -- -- 1,086
Purchase of treasury shares -- (411) (411)
Amortization expense of stock benefit plans 110 -- 182
Unrealized gains on securities designated as available
for sale, net of related tax effects -- -- 57
Exercise of stock options -- 298 303
Dividends of $.435 per share -- -- (517)
-------- ----------- --------
Balance at June 30, 2005 $ (334) $ (3,160) $ 17,438
======== =========== ========
The accompanying notes are an integral part of these statements.
20
FFD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 2005, 2004 and 2003
(In thousands)
2005 2004 2003
Cash flows from operating activities:
Net earnings for the year $ 1,086 $ 687 $ 1,032
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Amortization of premiums and discounts on investments and
mortgage-backed securities - net -- 5 67
Amortization of deferred loan origination (fees) costs 48 39 (24)
Depreciation and amortization 175 187 201
Gain on redemption of investment securities (329) -- --
Provision for losses on loans 11 25 131
Gain on sale of loans (65) (62) (443)
Loans originated for sale (10,530) (28,202) (45,602)
Proceeds from sale of mortgage loans in the secondary market 10,487 29,814 44,615
Proceeds from sale of loans to other financial institutions 2,921 -- --
Loss on sale of real estate acquired through foreclosure -- 7 --
Amortization expense of stock benefit plans 182 166 157
Federal Home Loan Bank stock dividends (93) (80) (82)
Tax benefit of stock options exercised 36 32 --
Increase (decrease) in cash due to changes in:
Accrued interest receivable (69) 5 68
Prepaid expenses and other assets 21 (24) 44
Other liabilities 666 (216) 522
Accrued interest payable 58 1 (4)
Federal income taxes
Current 157 (87) (59)
Deferred (10) 43 14
-------- -------- --------
Net cash provided by operating activities 4,752 2,340 637
Cash flows used in investing activities:
Purchase of investment securities designated as available for sale -- (5,500) (7,510)
Proceeds from maturity of investment securities 1,000 2,500 8,000
Proceeds from redemption of investment securities 344 -- --
Purchase of mortgage-backed securities designated as available for sale -- -- (956)
Principal repayments on mortgage-backed securities 308 442 2,602
Loan principal repayments 36,188 41,633 41,319
Loan disbursements (56,048) (41,639) (49,068)
Purchase of office premises and equipment (178) (81) (343)
-------- -------- --------
Net cash used in investing activities (18,386) (2,645) (5,956)
-------- -------- --------
Net cash used in operating and investing
activities (subtotal carried forward) (13,634) (305) (5,319)
-------- -------- --------
The accompanying notes are an integral part of these statements.
21
FFD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended June 30, 2005, 2004 and 2003
(In thousands)
2005 2004 2003
Net cash used in operating and investing
activities (subtotal brought forward) $(13,634) $ (305) $ (5,319)
Cash flows provided by (used in) financing activities:
Net increase in deposit accounts 6,049 1,095 8,809
Proceeds from Federal Home Loan Bank advances 10,495 1,525 --
Repayments of Federal Home Loan Bank advances (5,284) (2,747) (3,662)
Proceeds from exercise of stock options 267 282 38
Purchase of treasury shares (411) (769) (380)
Cash dividends paid on common stock (517) (504) (459)
-------- -------- --------
Net cash provided by (used in) financing activities 10,599 (1,118) 4,346
-------- -------- --------
Net decrease in cash and cash equivalents (3,035) (1,423) (973)
Cash and cash equivalents at beginning of year 10,820 12,243 13,216
-------- -------- --------
Cash and cash equivalents at end of year $ 7,785 $ 10,820 $ 12,243
======== ======== ========
Supplemental disclosure of cash flow information: Cash paid during the year for:
Federal income taxes $ 376 $ 390 $ 600
======== ======== ========
Interest on deposits and borrowings $ 2,463 $ 2,486 $ 2,970
======== ======== ========
Supplemental disclosure of noncash investing activities:
Unrealized gains (losses) on securities designated as
available for sale, net of applicable tax effects $ 57 $ (74) $ (11)
======== ======== ========
Recognition of mortgage servicing rights in accordance
with SFAS No. 140 $ 161 $ 292 $ 465
======== ======== ========
Transfers from loans to real estate acquired through foreclosure $ -- $ -- $ 161
======== ======== ========
Loans originated upon sale of real estate acquired through
foreclosure $ -- $ 147 $ --
======== ======== ========
The accompanying notes are an integral part of these statements.
22
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005, 2004 and 2003
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 consolidated financial statements include the accounts of the
Corporation, the Bank, and Dover Service Corporation ("Dover Service"),
the Bank's wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
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.
In addition to investment securities, Dover Service was incorporated for
the primary purpose of holding shares in the Bank's data processing
provider, Intrieve, Incorporated ("Intrieve"). The principal assets of
Dover at June 30, 2004, consisted of an investment in common stock of
Intrieve totaling approximately $15,000. In April 2005, Intrieve was
acquired by Xxxxxxx Financial Solutions. As a result, Dover received cash
consideration of approximately $344,000 for its shares of Intrieve, Inc.
resulting in a pretax gain on redemption totaling $329,000.
23
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2005, 2004 and 2003
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 both June 30,
2005 and 2004, 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 $108,000, $175,000 and $174,000 for the fiscal
years ended June 30, 2005, 2004 and 2003, respectively. Additionally, the
Bank recovered previously recorded impairment charges on mortgage
servicing rights totaling $48,000 in the fiscal year ended June 30, 2005.
At June 30, 2005, the carrying value of the Corporation's mortgage
servicing rights, which approximated fair value totaled $687,000. At June
30, 2004, the carrying value of the Corporation's mortgage servicing
rights, which approximated fair value was $633,000.
24
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2005, 2004 and 2003
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, which are 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.
25
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2005, 2004 and 2003
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:
2005 2004
(In thousands)
Impaired loans with related allowance $266 $371
Impaired loans with no related allowance 707 403
---- ----
Total impaired loans $973 $774
==== ====
The Bank's average balance of impaired loans was $914,000 in fiscal 2005.
Interest income recognized on impaired loans totaled $50,000 and $49,000
for the fiscal years ended June 30, 2005 and 2004, respectively. The Bank
had allocated $201,000 of its general valuation allowance to the impaired
loans at June 30, 2005.
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
26
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2005, 2004 and 2003
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
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 related to the ESOP totaled approximately
$202,000, $191,000 and $167,000 for the fiscal years ended June 30, 2005,
2004 and 2003, 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 had previously awarded 30,871 shares under the RRP which vested over
a five year period. A provision of $3,000, $7,000 and $10,000 related to
the RRP was charged to expense for the fiscal years ended June 30, 2005,
2004 and 2003, 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 26,339, 39,513 and 52,687 unallocated shares held by
the ESOP for the fiscal years ended June 30, 2005, 2004 and 2003,
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:
2005 2004 2003
Weighted-average common shares
outstanding (basic) 1,153,561 1,162,085 1,167,450
Dilutive effect of assumed exercise
of stock options 20,464 29,016 27,290
--------- --------- ---------
Weighted-average common shares
outstanding (diluted) 1,174,025 1,191,101 1,194,740
========= ========= =========
27
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2005, 2004 and 2003
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 $42,000, $3,000 and $26,000 in fiscal 2005,
2004 and 2003, respectively.
The Corporation applies APB Opinion No. 25 and related Interpretations in
accounting for the 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, 2005, 2004 and 2003, would
have been reduced to the pro forma amounts indicated below:
2005 2004 2003
Net earnings (In thousands) As reported $1,086 $ 687 $1,032
====== ====== ======
Pro-forma $1,062 $ 654 $1,021
====== ====== ======
Earnings per share
Basic As reported $ .94 $ .59 $ .88
====== ====== ======
Pro-forma $ .92 $ .56 $ .87
====== ====== ======
Diluted As reported $ .92 $ .58 $ .86
====== ====== ======
Pro-forma $ .90 $ .55 $ .85
====== ====== ======
28
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2005, 2004 and 2003
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. No options were
granted in fiscal 2005. The following weighted-average assumptions were
used for grants in fiscal 2004 and 2003: dividend yield of 3.0% and 2.8%;
expected volatility of 38.2% and 31.6% ; a risk-free interest rate of 4.3%
and 4.1%, respectively, and an expected life of ten years for all grants.
A summary of the status of the Plan as of June 30, 2005, 2004 and 2003,
and changes during the years then ended are presented below:
2005 2004 2003
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
Outstanding at beginning of year 89,998 $ 9.84 115,183 $ 9.47 104,385 $ 9.25
Granted -- -- 4,500 14.87 14,920 10.94
Exercised (29,305) 9.15 (28,365) 9.15 (4,122) 9.17
Forfeited (75) 12.48 (1,320) 9.54 -- --
--------- --------- --------- --------- --------- ---------
Outstanding at end of year 60,618 $ 10.17 89,998 $ 9.84 115,183 $ 9.47
========= ========= ========= ========= ========= =========
Options exercisable at year-end 46,831 $ 9.66 68,755 $ 9.33 91,809 $ 9.22
========= ========= ========= ========= ========= =========
Weighted-average fair value of
options granted during the year N/A $ 4.36 $ 3.92
========= ========= =========
The following information applies to options outstanding at June 30, 2005:
Number outstanding 45,466
Range of exercise prices $8.38-$10.10
Number outstanding 15,152
Range of exercise prices $11.17-$14.88
Weighted-average exercise price $10.17
Weighted-average remaining contractual life in years 4.5 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.
29
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2005, 2004 and 2003
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, 2005 and 2004:
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 fair value of outstanding loan
commitments at June 30, 2005 and 2004 was not material.
30
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2005, 2004 and 2003
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, 2005 and
2004 were as follows:
2005 2004
Carrying Fair Carrying Fair
value value value value
(In thousands)
Financial assets
Cash and cash equivalents $ 7,785 $ 7,785 $ 10,820 $ 10,820
Investment securities 3,485 3,485 4,402 4,402
Mortgage-backed securities 720 725 1,025 1,041
Loans receivable 131,493 129,109 114,505 110,976
Federal Home Loan Bank stock 2,140 2,140 2,047 2,047
-------- -------- -------- --------
$145,623 $143,244 $132,799 $129,286
======== ======== ======== ========
Financial liabilities
Deposits $111,495 $106,605 $105,446 $101,271
Advances from the Federal Home Loan Bank 17,880 18,003 12,669 13,242
-------- -------- -------- --------
$129,375 $124,608 $118,115 $114,513
======== ======== ======== ========
14. Advertising
-----------
Advertising costs are expensed when incurred. The Corporation's
advertising expense for the fiscal years ended June 30, 2005, 2004 and
2003 totaled $122,000, $99,000 and $140,000, respectively.
15. Effects of Recent Accounting Pronouncements
-------------------------------------------
In December 2004, the Financial Accounting Standards Board (the "FASB")
issued a revision to Statement of Financial Accounting Standards ("SFAS")
No. 123 which establishes standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods or services,
primarily on accounting for transactions in which an entity obtains
employee services in share-based transactions. This Statement, SFAS No.
123(R), requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the
grant-date fair value of the award, with limited exceptions. That cost
will be recognized over the period during which an employee is required to
provide services in exchange for the award - the requisite service period.
No compensation cost is recognized for equity instruments for which
employees do not render the requisite service. Employee share purchase
plans will not result in recognition of compensation cost if certain
conditions are met.
31
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2005, 2004 and 2003
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
15. Effects of Recent Accounting Pronouncements (continued)
-------------------------------------------
Initially, the cost of employee services received in exchange for an award
of equity instruments will be measured based on current fair value; the
fair value of that award will be remeasured subsequently at each reporting
date through the settlement date. Changes in fair value during the
requisite service period will be recognized as compensation cost over that
period. The grant-date fair value of employee share options and similar
instruments will be estimated using option-pricing models adjusted for the
unique characteristics of those instruments (unless observable market
prices for the same or similar instruments are available). If an equity
award is modified after the grant date, incremental compensation cost will
be recognized in an amount equal to the excess of the fair value of the
modified award over the fair value of the original award immediately
before the modification.
Excess tax benefits, as defined by SFAS No. 123(R) will be recognized as
an addition to additional paid in capital. Cash retained as a result of
those excess tax benefits will be presented in the statement of cash flows
as financing cash inflows. The write-off of deferred tax assets relating
to unrealized tax benefits associated with recognized compensation cost
will be recognized as income tax expense unless there are excess tax
benefits from previous awards remaining in additional paid in capital
against which it can be offset.
Compensation cost is required to be recognized in the beginning of the
annual period that begins after December 31, 2005, or July 1, 2006 as to
the Corporation.
Management currently believes the effect of SFAS No. 123(R) on operations
will approximate the annual economic effects set forth in the pro-forma
stock option disclosure set forth above.
16. Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the 2005
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, 2005 and 2004,
were as follows:
June 30, 2005
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Available for sale:
U.S. Government agency obligations $3,500 $-- $(15) $3,485
====== === ==== ======
32
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2005, 2004 and 2003
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
June 30, 2004
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Available for sale:
U.S. Government agency obligations $4,499 $-- $ (97) $4,402
====== === ===== ======
The U. S. Government agency obligations designated as available for sale
at June 30, 2005 and 2004, are scheduled to mature in fiscal 2013 and
thereafter.
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair value of mortgage-backed securities at June 30, 2005 and
2004, are shown below:
2005
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Held to maturity:
Federal Home Loan Mortgage
Corporation participation certificates $184 $ 3 $ -- $187
Government National Mortgage
Association participation certificates 36 2 -- 38
---- ---- ---- ----
Total mortgage-backed securities
held to maturity 220 5 -- 225
Available for sale:
Federal National Mortgage
Association participation certificates 380 -- -- 380
Government National Mortgage
Association participation certificates 120 -- -- 120
---- ---- ---- ----
Total mortgage-backed securities
available for sale 500 -- -- 500
---- ---- ---- ----
Total mortgage-backed securities $720 $ 5 $ -- $725
==== ==== ==== ====
33
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2005, 2004 and 2003
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
2004
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Held to maturity:
Federal Home Loan Mortgage
Corporation participation certificates $ 313 $ 9 $ -- $ 322
Government National Mortgage
Association participation certificates 82 7 -- 89
------ ----- ------ ------
Total mortgage-backed securities
held to maturity 395 16 -- 411
Available for sale:
Federal National Mortgage
Association participation certificates 424 2 (5) 421
Federal Home Loan Mortgage
Corporation participation certificates 41 - -- 41
Government National Mortgage
Association participation certificates 167 1 -- 168
------ ----- ------ ------
Total mortgage-backed securities
available for sale 632 3 (5) 630
------ ----- ------ ------
Total mortgage-backed securities $1,027 $ 19 $ (5) $1,041
====== ===== ====== ======
The tables below indicates the length of time individual securities had
been in a continuous unrealized loss position at June 30, 2005 and 2004.
June 30, 2005
Less than 12 months 12 - 24 months Total
Description of Fair Unrealized Fair Unrealized Fair Unrealized
securities value losses value losses value losses
(Dollars in thousands)
Investments available
for sale $3,485 $ 15 $-- $-- $3,485 $ 15
====== ==== === === ====== ====
June 30, 2004
Less than 12 months 12 - 24 months Total
Description of Fair Unrealized Fair Unrealized Fair Unrealized
securities value losses value losses value losses
(Dollars in thousands)
Investments available
for sale $4,402 $ 97 $-- $-- $4,402 $ 97
Mortgage-backed
securities available
for sale 630 5 -- -- 630 5
------ ---- --- --- ------ ----
Total temporarily impaired
securities $5,032 $102 $-- $-- $5,032 $102
====== ==== === === ====== ====
Management has the intent to hold these securities for the foreseeable
future and the declines in the fair value are primarily due to increases
in market interest rates. The fair values are expected to recover as
securities approach the maturity date.
34
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2005, 2004 and 2003
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, 2005, 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 $ 60
Due within five to ten years 18
Due after ten years 642
----
Total $720
====
As of June 30, 2005, mortgage-backed securities and investment securities
totaling $2.9 million were pledged to secure public deposits.
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at June 30, 2005 and 2004 was as
follows:
2005 2004
(In thousands)
Residential real estate
One- to four-family $61,157 $56,972
Multi-family 9,082 6,056
Nonresidential real estate and land 42,763 34,968
Commercial loans - secured 16,388 15,111
Commercial loans - unsecured 279 269
Consumer and other loans 4,896 2,769
Deferred loan origination costs 139 138
-------- --------
134,704 116,283
Less:
Undisbursed portion of loans in process 2,770 1,216
Allowance for loan losses 766 779
-------- --------
$131,168 $114,288
======== ========
35
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2005, 2004 and 2003
NOTE C - LOANS RECEIVABLE (continued)
The Bank's lending efforts have historically focused on one- to
four-family and multi-family residential real estate loans, which comprise
approximately $67.5 million, or 51%, of the total loan portfolio at June
30, 2005, and approximately $61.8 million, or 54%, of the total loan
portfolio at June 30, 2004. 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.
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 $74.9 million and $73.0 million at June 30, 2005 and 2004,
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 made on market terms, are consistent
with sound lending practices and are within applicable regulatory lending
limitations. The balance of such loans totaled approximately $2.2 million
at both June 30, 2005 and 2004.
NOTE D - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is summarized as follows for
the years ended June 30, 2005, 2004 and 2003:
2005 2004 2003
(In thousands)
Beginning balance $ 779 $ 818 $ 713
Provision for losses on loans 11 25 131
Loan charge-offs (24) (64) (26)
----- ----- -----
Ending balance $ 766 $ 779 $ 818
===== ===== =====
As of June 30, 2005, the Bank's allowance for loan losses was comprised of
a general loan loss allowance component totaling $565,000, which is
includible as a component of regulatory risk-based capital and an
allowance totaling $201,000 allocated to impaired loans.
Nonperforming and impaired loans totaled $1.2 million, $1.1 million and
$2.2 million, respectively at June 30, 2005, 2004 and 2003. Interest
income that would have been recognized had nonaccrual loans performed
pursuant to contractual terms totaled approximately $37,000, $49,000 and
$45,000 for the fiscal years ended June 30, 2005, 2004 and 2003,
respectively.
36
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2005, 2004 and 2003
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at June 30, 2005 and 2004 was comprised of the
following:
2005 2004
(In thousands)
Land $ 488 $ 488
Buildings and improvements 1,518 1,446
Furniture and equipment 1,148 1,042
------ ------
3,154 2,976
Less accumulated depreciation and
amortization 1,123 948
------ ------
$2,031 $2,028
====== ======
37
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2005, 2004 and 2003
NOTE F - DEPOSITS
Deposits consist of the following major classifications at June 30, 2005
and 2004:
Deposit type and weighted- 2005 2004
average interest rate Amount % Amount %
(Dollars in thousands)
Demand deposit accounts $ 9,386 8.4% $ 10,805 10.3%
NOW accounts
2005 - 0.38% 13,998 12.6
2004 - 0.17% 12,888 12.2
Passbook
2005 - 1.14% 32,253 28.9
2004 - 0.84% 33,526 31.8
-------- ------ -------- ------
Total demand, transaction and
passbook deposits 55,637 49.9 57,219 54.3
Certificates of deposit
Original maturities of:
Less than 12 months
2005 - 2.28% 1,885 1.7
2004 - 0.92% 1,843 1.7
12 months to 29 months
2005 - 2.75% 17,532 15.7
2004 - 1.77% 13,002 12.3
30 months to 47 months
2005 - 3.99% 13,343 12.0
2004 - 4.09% 16,189 15.4
48 months to 60 months
2005 - 3.81% 3,915 3.5
2004 - 3.63% 2,250 2.1
Balances in excess of $100,000
2005 - 3.37% 12,562 11.3
2004 - 3.01% 8,525 8.1
Individual retirement accounts
2005 - 3.21% 6,621 5.9
2004 - 3.03% 6,418 6.1
-------- ------ -------- ------
Total certificates of deposit 55,858 50.1 48,227 45.7
-------- ------ -------- ------
Total deposit accounts $111,495 100.0% $105,446 100.0%
======== ====== ======== ======
Interest expense on deposits for the years ended June 30, 2005, 2004 and
2003 is summarized as follows:
2005 2004 2003
(In thousands)
Passbook $ 316 $ 300 $ 365
NOW accounts 33 20 38
Certificates of deposit 1,568 1,579 1,979
------ ------ ------
$1,917 $1,899 $2,382
====== ====== ======
38
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2005, 2004 and 2003
NOTE F - DEPOSITS (continued)
Maturities of outstanding certificates of deposit at June 30, 2005 and
2004 are summarized as follows:
2005 2004
(In thousands)
Less than one year $27,831 $25,826
One year to three years 24,600 19,163
Three years to five years 3,427 2,771
More than five years -- 467
------- -------
$55,858 $48,227
======= =======
At June 30, 2005 and 2004, FFD had $13.7 million and $9.5 million,
respectively, in certificates of deposit greater than $100,000.
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at June 30, 2005
by a pledge of certain residential mortgage loans totaling $22.4 million
and the Bank's investment in Federal Home Loan Bank stock, are summarized
as follows:
Interest Maturing in year
rate ending June 30, 2005 2004
(Dollars in thousands)
8.15% 2005 $ -- $ 1
3.15%-3.53% 2006 2,000 --
3.10%-5.65% 2010 8,209 5,906
3.26%-6.10% After 2010 7,671 6,762
------- -------
$17,880 $12,669
======= =======
Weighted-average interest rate 4.32% 4.50%
==== ====
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, 2005, 2004 and 2003 as
follows:
2005 2004 2003
(Dollars in thousands)
Federal income taxes at statutory rate $ 559 $ 354 $ 532
Increase (decrease) in taxes resulting primarily from:
Nontaxable interest income (2) (3) (2)
Other 2 3 4
----- ----- -----
Federal income taxes per consolidated
financial statements $ 559 $ 354 $ 534
===== ===== =====
Effective tax rate 34.0% 34.0% 34.1%
===== ===== =====
39
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2005, 2004 and 2003
NOTE H - FEDERAL INCOME TAXES (continued)
The composition of the Corporation's net deferred tax liability at June
30, 2005 and 2004 is as follows:
Taxes (payable) refundable on temporary 2005 2004
differences at statutory rate: (In thousands)
Deferred tax assets:
Retirement expense $ 106 $ 88
General loan loss allowance 261 265
Unrealized loss on securities designated as available for sale 4 33
Other 18 9
----- -----
Deferred tax assets 389 395
Deferred tax liabilities:
Deferred loan origination costs (56) (67)
Federal Home Loan Bank stock dividends (342) (310)
Difference between book and tax depreciation -- (26)
Mortgage servicing rights (233) (215)
----- -----
Deferred tax liabilities (631) (618)
----- -----
Net deferred tax liability $(242) $(223)
===== =====
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, 2005, 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, 2005.
NOTE I - 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.
40
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2005, 2004 and 2003
NOTE I - COMMITMENTS (continued)
At June 30, 2005, the Bank had outstanding commitments of approximately
$3.7 million, net of undisbursed loans in process, to originate loans.
Additionally, the Bank was obligated under unused lines of credit under
home equity loans totaling $13.4 million, unused lines of credit under
commercial loans of $13.7 million and overdraft lines of credit totaling
$703,000. In the opinion of management, all loan commitments equaled or
exceeded prevailing market interest rates as of June 30, 2005, and will be
funded from normal cash flow from operations.
At June 30, 2005, the Bank had outstanding commitments to purchase
$485,000 in loans and outstanding commitments to sell $325,000 of loans.
The Corporation has entered into lease agreements during the current
fiscal year for office premises under operating leases which expire at
various dates through the fiscal year ended June 30, 2008. The following
table summarizes minimum annual payments due under lease agreements by
year:
Year ending
June 30, (In thousands)
2006 $18
2007 13
2008 11
---
$42
===
Rental expense under operating leases totaled approximately $5,000 for the
year ended June 30, 2005.
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
41
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2005, 2004 and 2003
NOTE J - REGULATORY CAPITAL (continued)
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%.
During fiscal 2005, 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, 2005 and 2004, management believes that the Bank met all
capital adequacy requirements to which it was subject.
As of June 30, 2005
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 $16,471 11.1% =>$2,225 =>1.5% =>$ 7,418 => 5.0%
Core capital $16,471 11.1% =>$5,934 =>4.0% =>$ 8,901 => 6.0%
Risk-based capital $17,036 14.8% =>$9,222 =>8.0% =>$11,527 =>10.0%
As of June 30, 2004
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 $15,883 11.7% =>$2,034 =>1.5% =>$6,781 => 5.0%
Core capital $15,883 11.7% =>$5,425 =>4.0% =>$8,137 => 6.0%
Risk-based capital $16,314 17.4% =>$7,515 =>8.0% =>$9,393 =>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.
42
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2005, 2004 and 2003
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, 2005 and 2004, and
the results of its operations and its cash flows for the years ended June
30, 2005, 2004 and 2003.
FFD FINANCIAL CORPORATION
STATEMENTS OF FINANCIAL CONDITION
June 30, 2005 and 2004
(In thousands)
ASSETS 2005 2004
Cash and due from banks $ 167 $ 103
Loan receivable from ESOP 278 404
Investment in First Federal Community Bank 16,531 15,880
Accrued interest receivable 3 6
Prepaid federal income taxes 445 336
Prepaid expenses and other assets 14 9
-------- --------
Total assets $ 17,438 $ 16,738
======== ========
SHAREHOLDERS' EQUITY
Shareholders' equity
Common stock and additional paid-in capital $ 7,987 $ 7,910
Retained earnings 12,954 12,385
Unrealized losses on securities designated as available
for sale, net of related tax effects (9) (66)
Shares acquired by stock benefit plans (334) (444)
Treasury shares - at cost (3,160) (3,047)
-------- --------
Total shareholders' equity $ 17,438 $ 16,738
======== ========
FFD FINANCIAL CORPORATION
STATEMENTS OF EARNINGS
Years ended June 30, 2005, 2004 and 2003
(In thousands)
2005 2004 2003
Revenue
Interest income $ 7 $ 6 $ 17
Equity in earnings of subsidiary 1,228 813 1,153
------- ----- -------
Total revenue 1,235 819 1,170
General and administrative expenses 223 197 196
------- ----- -------
Earnings before income tax credits 1,012 622 974
Federal income tax credits (74) (65) (58)
------- ----- -------
NET EARNINGS $ 1,086 $ 687 $ 1,032
======= ===== =======
43
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2005, 2004 and 2003
NOTE K - CONDENSED FINANCIAL STATEMENTS OF FFD FINANCIAL CORPORATION
(continued)
FFD FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
Years ended June 30, 2005, 2004 and 2003
(In thousands)
2005 2004 2003
Cash provided by (used in) operating activities:
Net earnings for the year $ 1,086 $ 687 $ 1,032
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Undistributed earnings of subsidiary (466) (86) (403)
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets 52 32 (7)
Prepaid federal income taxes (73) (97) (58)
------- ----- -------
Net cash provided by operating activities 599 536 564
Cash flows provided by investing activities:
Proceeds from repayment of loan to ESOP 126 119 112
Cash flows provided by (used in) financing activities:
Proceeds from other borrowed money -- -- 405
Repayments of other borrowed money -- -- (405)
Proceeds from exercise of stock options 267 314 38
Purchase of treasury shares (411) (769) (380)
Cash dividends paid on common stock (517) (504) (459)
------- ----- -------
Net cash used in financing activities (661) (959) (801)
------- ----- -------
Net increase (decrease) in cash and cash equivalents 64 (304) (125)
Cash and cash equivalents at beginning of year 103 407 532
------- ----- -------
Cash and cash equivalents at end of year $ 167 $ 103 $ 407
======= ===== =======
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, during fiscal 2003. A principal of the contracting
company also serves as an outside director of the Corporation.
44
FFD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2005, 2004 and 2003
NOTE M - STOCK SPLIT
During fiscal 2005, the Corporation's directors approved a motion to
effect a split of the Corporation's common shares. A special meeting of
shareholders was scheduled for September 2005 to consider a proposal to
amend the Corporation's Articles of Incorporation thereby enabling a
1-for-350 reverse stock split and the repurchase of all resulting
fractional shares; followed immediately by a forward 350-for-1 forward
stock split of the Corporation's common shares. As a result of the stock
splits, each shareholder owning less than 350 common shares of the
Corporation immediately prior to the stock split would receive $19.00 per
share in cash for each common share owned and will no longer be a
shareholder. The Corporation expected to expend $1.5 million in cash to
redeem all fractional shares created by the 1-for-350 stock split with an
attendant reduction in shareholders' equity.
Prior to the special meeting of shareholders, large numbers of individuals
purchased blocks of FFD shares in quantities less than 350. The dramatic
increase in the number of shareholders increased the costs of the stock
splits from an estimated $1.5 million to an estimated $4.5 million. Due to
the substantially increased cost of effecting the stock splits, the Board
announced on September 15, 2005 to withdraw the splits from the agenda of
the special meeting. The Board concluded that the expenditure of
approximately $4.5 million to complete the stock splits would not be
prudent.
The purpose of the stock splits were to enable the Corporation to
deregister its common shares under the Securities and Exchange Act of 1934
(the Act), as amended. Management believes that deregistration of the
Corporation's common shares will result in future cost savings that more
than offset any benefits derived from maintaining registration of the
Corporation's shares under the Act.
45
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
Xxxxxxx X. Xxxxxxxx, Xx. Xxxxx X. Xxxxxx
CEO President and Chief Executive Officer
AAA of Tuscarawas County
Xxxxx X. Xxxxxxx
Xxxxxxx X. Xxxxxxx Executive Vice President
President
Capital Market Securities Xxxxxx X. Xxxxxx
Vice President, Treasurer and Chief
Xxxxxxx X. Xxxxx Financial Officer
President
Benchmark Construction, Inc. Xxxxx X. X'Xxxxxxx
Senior Vice President and Corporate Secretary
Xxxx X. Loader
Chairman of the Board
and Executive Officers of
Retired Senior Bank Officer First Federal Community Bank
Xxxxxx X. Xxxxxx Xxxxx X. Xxxxxx
President and Chief Executive Officer President and Chief Executive Officer
Dover Hydraulics, Inc.
Xxxxx X. Xxxxxxx
. Executive Vice President
Director Emeritus
FFD Financial Corporation and Xxxxxx X. Xxxxxx
First Federal Community Bank Vice President, Treasurer and Chief Financial
Officer
J. Xxxxxxx Xxxx
Chairman Xxxxx X. X'Xxxxxxx
Hanhart Agency, Inc. Senior Vice President and Corporate Secretary
Xxxxxxx X. Xxxxxx
Chairman - Retired Other Officers of
Xxxxxx-Xxxxxx Funeral Homes, Inc. First Federal Community Bank
Xxx X. Xxxxxxxx, Xx. Xxxxxxx X. Xxxxxx
Managing Officer - Retired Vice President
First Federal Community Bank
Xxxx X. Xxxxxxxx
Banking Officer
46
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
00 Xxxxxxxx Xxxxx
Xxxxxxxx, Xxx Xxxxxx 00000-0000
(000) 000-0000
ANNUAL MEETING
================================================================================
The Annual Meeting of Shareholders of FFD Financial Corporation will be held on
October 25, 2005, at 1:00 p.m., Eastern Time, at the Xxxxxxx Xxxxxx, 000
Xxxxxxxxx, Xxxxx, Xxxx 00000. Shareholders are cordially invited to attend.
ANNUAL REPORT ON FORM 10-KSB
================================================================================
A copy of FFD's Annual Report on Form 10-KSB will be available at no charge to
shareholders upon request to:
FFD Financial Corporation
000 Xxxxx Xxxxxxx Xxxxxx
Xxxxx, Xxxx 00000
Attention: Secretary
47
