UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended | September 30, 2011 |
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For the transition period from ____________ to _______________
| Commission File Number: | 0-27916 |
| FFD FINANCIAL CORPORATION |
| (Exact name of registrant as specified in its charter) |
| Ohio | 34-1821148 | |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
| 321 North Wooster Avenue, Dover, Ohio 44622 |
| (Address of principal executive offices) (Zip Code) |
| (330) 364-7777 |
| (Registrant’s telephone number, including area code) |
| (Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer o | Accelerated filer o |
| Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: November 11, 2011 – 1,016,096 common shares, no par value
INDEX
| Page | |||
| PART I | Item 1- | FINANCIAL INFORMATION | |
| 4 | |||
| 5 | |||
| 6 | |||
| 7 | |||
| 8 | |||
| Item 2 | 24 | ||
| Item 3 | 30 | ||
| Item 4 | 30 | ||
| PART II | - | OTHER INFORMATION | 31 |
| 32 | |||
(In thousands, except share data)
| September 30, | June 30, | |||||||
| ASSETS | 2011 | 2011 | ||||||
| (Unaudited) | ||||||||
| Cash and due from financial institutions | $ | 1,068 | $ | 1,352 | ||||
| Interest-bearing deposits in other financial institutions, including overnight deposits | 19,049 | 4,944 | ||||||
| Cash and cash equivalents | 20,117 | 16,296 | ||||||
| Investment securities available for sale | 2,006 | 6,021 | ||||||
| Mortgage-backed securities available for sale | 6,176 | 6,257 | ||||||
| Mortgage-backed securities held to maturity, fair value of $51 at September 30, 2011 and $51 at June 30, 2011 | 50 | 51 | ||||||
| Loans receivable – net of allowance of $1,967 and $2,174 | 187,536 | 182,226 | ||||||
| Loans held for sale | 812 | - | ||||||
| Premises and equipment, net | 3,940 | 3,910 | ||||||
| Federal Home Loan Bank of Cincinnati: stock, at cost | 2,422 | 2,422 | ||||||
| Loan servicing rights | 723 | 732 | ||||||
| Accrued interest receivable | 520 | 515 | ||||||
| Prepaid expenses and other assets | 969 | 1,106 | ||||||
| Total assets | $ | 225,271 | $ | 219,536 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Deposits | ||||||||
| Non-interest bearing | $ | 18,737 | $ | 15,746 | ||||
| Interest bearing | 171,645 | 169,297 | ||||||
| Total deposits | 190,382 | 185,043 | ||||||
| Federal Home Loan Bank advances | 13,083 | 13,137 | ||||||
| Other borrowed funds | 630 | 630 | ||||||
| Accrued interest payable | 109 | 118 | ||||||
| Accrued and deferred federal income tax | 271 | 62 | ||||||
| Other liabilities | 1,553 | 1,575 | ||||||
| Total liabilities | 206,028 | 200,565 | ||||||
| Commitments and contingent liabilities | - | - | ||||||
| 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 | 8,340 | 8,334 | ||||||
| Retained earnings | 16,881 | 16,686 | ||||||
| Accumulated comprehensive income, net | 67 | 35 | ||||||
| Treasury stock, at cost (448,654 and 443,154 treasury shares at September 30, 2011 and June 30, 2011, respectively) | (6,045 | ) | (6,084 | ) | ||||
| Total shareholders’ equity | 19,243 | 18,971 | ||||||
| Total liabilities and shareholders’ equity | $ | 225,271 | $ | 219,536 | ||||
The accompanying notes are an integral part of these statements.
FFD Financial Corporation
CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended September 30, 2011 and 2010
(In thousands, except per share data)
(Unaudited)
| 2011 | 2010 | |||||||
| Interest and dividend income | ||||||||
| Loans, including fees | $ | 2,558 | $ | 2,611 | ||||
| Mortgage-backed securities | 32 | 2 | ||||||
| Investment securities | 28 | 57 | ||||||
| Interest-bearing deposits and other | 28 | 29 | ||||||
| 2,646 | 2,699 | |||||||
| Interest expense | ||||||||
| Deposits | 532 | 710 | ||||||
| Borrowings | 130 | 154 | ||||||
| 662 | 864 | |||||||
| Net interest income | 1,984 | 1,835 | ||||||
| Provision for loan losses | 243 | 186 | ||||||
| Net interest income after provision for loan losses | 1,741 | 1,649 | ||||||
| Noninterest income | ||||||||
| Net gain on sale of loans | 163 | 260 | ||||||
| Mortgage servicing revenue (loss) net of amortization and impairment | (1 | ) | - | |||||
| Service charges on deposit accounts | 109 | 94 | ||||||
| Other | 26 | 27 | ||||||
| 297 | 381 | |||||||
| Noninterest expense | ||||||||
| Employee and director compensation and benefits | 688 | 643 | ||||||
| Occupancy and equipment | 145 | 147 | ||||||
| Franchise taxes | 60 | 57 | ||||||
| FDIC Insurance Premiums | 25 | 63 | ||||||
| Data processing | 102 | 93 | ||||||
| ATM processing | 40 | 39 | ||||||
| Professional and consulting fees | 90 | 54 | ||||||
| Postage and stationary supplies | 29 | 34 | ||||||
| Advertising | 52 | 39 | ||||||
| Checking account maintenance expense | 51 | 54 | ||||||
| Other | 196 | 178 | ||||||
| 1,478 | 1,401 | |||||||
| Income before income taxes | 560 | 629 | ||||||
| Income tax expense | 192 | 215 | ||||||
| Net Income | $ | 368 | $ | 414 | ||||
| Earnings per share | ||||||||
| Basic | $ | .36 | $ | .41 | ||||
| Diluted | $ | .36 | $ | .41 | ||||
| Dividends declared per share | $ | .17 | $ | .17 | ||||
The accompanying notes are an integral part of these statements.
FFD Financial Corporation
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended September 30, 2011 and 2010
(In thousands)
(Unaudited)
| 2011 | 2010 | |||||||
| Net income | $ | 368 | $ | 414 | ||||
| Other comprehensive income, net of related tax effects: | ||||||||
| Unrealized holding gains (losses) on securities available for sale during the period, net of taxes (benefits) of $17 and $(3) in 2011 and 2010, respectively | 32 | (5 | ) | |||||
| Comprehensive income | $ | 400 | $ | 409 | ||||
The accompanying notes are an integral part of these statements.
FFD Financial Corporation
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended September 30, 2011 and 2010
(In thousands)
(Unaudited)
| 2011 | 2010 | |||||||
| Cash flows from operating activities: | ||||||||
| Net cash from operating activities | $ | 200 | $ | 920 | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of investment securities available for sale | - | (4,000 | ) | |||||
| Proceeds from maturities/calls of investment securities available for sale | 4,000 | 5,000 | ||||||
| Principal repayments on mortgage-backed securities | 129 | 5 | ||||||
| Loan originations and payments, net | (5,569 | ) | (2,275 | ) | ||||
| Additions to premises and equipment | (96 | ) | (21 | ) | ||||
| Proceeds from the sale of real estate owned | - | 18 | ||||||
| Net cash from investing activities | (1,536 | ) | (1,273 | ) | ||||
| Cash flows financing activities: | ||||||||
| Net change in deposits | 5,339 | (494 | ) | |||||
| Repayments of Federal Home Loan Bank advances | (54 | ) | (61 | ) | ||||
| Net change in other borrowed funds | - | - | ||||||
| Proceeds from exercise of stock options | 45 | 6 | ||||||
| Cash dividends paid | (173 | ) | (172 | ) | ||||
| Net cash from financing activities | 5,157 | (721 | ) | |||||
| Net change in cash and cash equivalents | 3,821 | (1,074 | ) | |||||
| Beginning cash and cash equivalents | 16,296 | 9,034 | ||||||
| Ending cash and cash equivalents | $ | 20,117 | $ | 7,960 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Federal income taxes | $ | - | $ | 50 | ||||
| Supplemental noncash disclosures: | ||||||||
| Transfer from loans to repossessed assets | $ | - | $ | 31 | ||||
| Interest paid | $ | 671 | $ | 873 | ||||
The accompanying notes are an integral part of these statements.
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three-month periods ended September 30, 2011 and 2010
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared in accordance with the instructions for Form 10-Q and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with United States generally accepted accounting principles. Accordingly, these financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto of FFD Financial Corporation (the “Corporation”) included in the Corporation’s Annual Report on Form 10-K for the year ended June 30, 2011. However, in the opinion of management, all adjustments (consisting of only normal recurring accruals) which are necessary for a fair presentation of the financial statements have been included. The results of operations for the three-month period ended September 30, 2011, are not necessarily indicative of the results which may be expected for the entire fiscal year.
2. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Corporation and First Federal Community Bank (the “Bank). All significant intercompany items have been eliminated.
3. Earnings Per Share
Basic earnings per share is computed based upon the weighted-average common shares outstanding during the period. Diluted earnings per common share include the dilutive effect of additional common shares issuable under the Corporation’s stock option plans. Stock options for 3,500 shares were not considered in computing diluted earnings per share for each of the three months ended September 30, 2011 and 2010 because they were antidilutive. The computations are as follows:
| 2011 | 2010 | |||||||
| Weighted-average common shares outstanding (basic) | 1,015,118 | 1,011,433 | ||||||
Dilutive effect of assumed exercise of stock options | 2,222 | 2,588 | ||||||
Weighted-average common shares outstanding (diluted) | 1,017,340 | 1,014,021 | ||||||
4. Stock Option Plan
The FFD Financial Corporation 1996 Stock Option and Incentive Plan (the “Plan”) expired as to new awards in October of 2006. Options granted prior to expiration remain exercisable for ten years from the grant date, unless terminated in accordance with the Plan or the applicable award agreement. In addition, the Corporation has an option plan in which only one director participates. The director-only plan was adopted to permit an option issuance to a new director because the terms of the Plan at the time limited the aggregate number of options available for awards to directors.
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended September 30, 2011 and 2010
4. Stock Option Plan (continued)
A summary of the activity in the Plan for the quarter ended September 30, 2011 follows:
| Shares | Weighted average | Weighted average | Aggregate intrinsic | ||||||||||
| Outstanding at beginning of period | 18,820 | $ | 11.68 | ||||||||||
| Granted | - | - | |||||||||||
| Exercised | (4,500 | ) | 10.10 | ||||||||||
| Forfeited or expired | - | - | |||||||||||
| Outstanding at end of period | 14,320 | $ | 12.18 | 1.5 yrs | $ | 29,055 | |||||||
| Exercisable at end of period | 14,320 | $ | 12.18 | 1.5 yrs | $ | 29,055 | |||||||
| Options available for grant | - | ||||||||||||
Information related to the Plan during the quarter ended September 30, 2011 and 2010 follows:
| 2011 | 2010 | |||||||
| Intrinsic value of options exercised | $ | 23,850 | $ | 4,406 | ||||
| Cash received from options exercised | 45,450 | 6,281 | ||||||
| Tax benefit from options exercised | - | - | ||||||
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended September 30, 2011 and 2010
5. Loans
Loans at period end and year end were as follows:
September 30, 2011 | June 30, 2011 | |||||||
| (in thousands) | ||||||||
| Residential real estate | ||||||||
| One- to four-family | $ | 72,430 | $ | 69,689 | ||||
| Multi-family | 7,877 | 6,961 | ||||||
| Nonresidential real estate and land | 83,341 | 81,955 | ||||||
| Commercial loans – secured | 23,029 | 22,637 | ||||||
| Commercial loans – unsecured | 193 | 132 | ||||||
| Consumer and other loans | 6,105 | 6,086 | ||||||
| 192,975 | 187,460 | |||||||
| Net deferred loan origination costs | 277 | 293 | ||||||
| Undisbursed portion of loans in process | (3,749 | (3,353 | ) | |||||
| Allowance for loan losses | (1,967 | (2,174 | ) | |||||
| Loans, net | $ | 187,536 | $ | 182,226 | ||||
Activity in the allowance for loan losses was as follows:
The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ending September 30, 2011.
Residential real estate | Nonresidential real estate and land | Commercial secured and unsecured | Consumer and other | Unallocated | Total | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||
| Beginning balance | $ | 935 | $ | 861 | $ | 268 | $ | 110 | $ | - | $ | 2,174 | ||||||||||||
| Provision for loan losses | 149 | 77 | 10 | 7 | - | 243 | ||||||||||||||||||
| Loans charged-off | (298 | ) | (149 | ) | - | (3 | ) | - | (450 | ) | ||||||||||||||
| Recoveries | - | - | - | - | - | - | ||||||||||||||||||
| Ending balance | $ | 786 | $ | 789 | $ | 278 | $ | 114 | $ | - | $ | 1,967 | ||||||||||||
Three months ended September 30, | ||||||||
| 2011 | 2010 | |||||||
| (in thousands) | ||||||||
| Beginning balance | $ | 2,174 | $ | 1,993 | ||||
| Provision for loan losses | 243 | 186 | ||||||
| Loans charged-off | (450 | ) | (78 | ) | ||||
| Recoveries | - | 1 | ||||||
| Ending balance | $ | 1,967 | $ | 2,102 | ||||
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended September 30, 2011 and 2010
5. Loans (continued)
The following tables presents the balance in the allowance for loan losses and loan balances by portfolio segment and based on impairment method as of September 30, 2011 and June 30, 2011:
Residential real estate | Nonresidential real estate and land | Commercial secured and unsecured | Consumer and other | Total | ||||||||||||||||
| September 30, 2011 | (in thousands) | |||||||||||||||||||
| Allowance for loan losses | ||||||||||||||||||||
| Ending allowance balance attributable to loans: | ||||||||||||||||||||
| Individually evaluated for impairment | $ | 124 | $ | 119 | $ | 21 | $ | - | $ | 264 | ||||||||||
| Collectively evaluated for impairment | 662 | 670 | 257 | 114 | 1,703 | |||||||||||||||
| Total ending allowance balance | $ | 786 | $ | 789 | $ | 278 | $ | 114 | $ | 1,967 | ||||||||||
| Loans | ||||||||||||||||||||
| Loans individually evaluated for impairment | $ | 1,612 | $ | 1,209 | $ | 106 | $ | - | $ | 2,927 | ||||||||||
| Loans collectively evaluated for impairment | 77,848 | 80,228 | 22,358 | 6,142 | 186,576 | |||||||||||||||
| Total ending loan balance | $ | 79,460 | $ | 81,437 | $ | 22,464 | $ | 6,142 | $ | 189,503 | ||||||||||
Residential real | Nonresidential real estate | Commercial secured and | Consumer and other | Total | ||||||||||||||||
| June 30, 2011 | (in thousands) | |||||||||||||||||||
| Allowance for loan losses | ||||||||||||||||||||
| Ending allowance balance attributable to loans: | ||||||||||||||||||||
| Individually evaluated for impairment | $ | 323 | $ | 222 | $ | 23 | $ | - | $ | 568 | ||||||||||
| Collectively evaluated for impairment | 612 | 639 | 245 | 110 | 1,606 | |||||||||||||||
| Total ending allowance balance | $ | 935 | $ | 861 | $ | 268 | $ | 110 | $ | 2,174 | ||||||||||
| Loans | ||||||||||||||||||||
| Loans individually evaluated for impairment | $ | 1,802 | $ | 587 | $ | 71 | $ | - | $ | 2,460 | ||||||||||
| Loans collectively evaluated for impairment | 74,707 | 79,211 | 21,897 | 6,125 | 181,940 | |||||||||||||||
| Total ending loan balance | $ | 76,509 | $ | 79,798 | $ | 21,968 | $ | 6,125 | $ | 184,400 | ||||||||||
The recorded investment in the aforementioned disclosure and the next several disclosures do not include accrued interest receivable. Management could not breakout accrued interest receivable by portfolio segment or financial class and it is not considered material. Accrued interest receivable for the total loan portfolio is $491,000.
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended September 30, 2011 and 2010
5. Loans (continued)
Individually impaired loans at period end and year end were as follows:
September 30, 2011 | June 30, 2011 | |||||||
| (in thousands) | ||||||||
| Period-end impaired loans with no allocated allowance for loan losses | $ | 1,801 | $ | 886 | ||||
| Period-end impaired loans with allocated allowance for loan losses | 1,126 | 1,574 | ||||||
| Total | $ | 2,927 | $ | 2,460 | ||||
| Amount of the allowance for loan losses allocated | $ | 264 | $ | 568 | ||||
| Period-end impaired loans on nonaccural | $ | 1,710 | $ | 286 | ||||
| Period-end impaired loans accruing | 1,217 | 2,174 | ||||||
| $ | 2,927 | $ | 2,460 | |||||
The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2011:
Unpaid Principal | Recorded investment | Allowance for loan losses | Average recorded | Interest income | Cash Basis interest | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||||||||||
| Residential | ||||||||||||||||||||||||
| One- to four-family | $ | 1,291 | $ | 1,044 | $ | - | $ | 1,274 | $ | 11 | $ | 11 | ||||||||||||
| Multi-family | - | - | - | - | - | - | ||||||||||||||||||
| Nonresidential real estate and land | 708 | 703 | - | 706 | 3 | 3 | ||||||||||||||||||
| Commercial loans - secured | 49 | 49 | - | 51 | - | - | ||||||||||||||||||
| Commercial loans – unsecured | 5 | 5 | - | 5 | - | - | ||||||||||||||||||
| Consumer and other loans | - | - | - | - | - | - | ||||||||||||||||||
| Total with no related allowance recorded | $ | 2,053 | $ | 1,801 | $ | - | $ | 2,036 | $ | 14 | $ | 14 | ||||||||||||
| With an allowance recorded: | ||||||||||||||||||||||||
| Residential | ||||||||||||||||||||||||
| One- to four-family | $ | 582 | $ | 567 | $ | 124 | $ | 578 | $ | 3 | $ | 3 | ||||||||||||
| Multi-family | - | - | - | - | - | - | ||||||||||||||||||
| Nonresidential real estate and land | 664 | 506 | 119 | 590 | - | - | ||||||||||||||||||
| Commercial loans - secured | 55 | 53 | 21 | 56 | - | - | ||||||||||||||||||
| Commercial loans – unsecured | - | - | - | - | - | - | ||||||||||||||||||
| Consumer and other loans | - | - | - | - | - | - | ||||||||||||||||||
| Total with an allowance recorded | $ | 1,301 | $ | 1,126 | $ | 264 | $ | 1,224 | $ | 3 | $ | 3 | ||||||||||||
| Total | $ | 3,354 | $ | 2,927 | $ | 264 | $ | 3,260 | $ | 17 | $ | 17 | ||||||||||||
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended September 30, 2011 and 2010
5. Loans (continued)
The following table presents loans individually evaluated for impairment by class as of June 30, 2011:
Unpaid principal | Recorded investment | Allowance for loan losses | ||||||||||
| (in thousands) | ||||||||||||
| With no related allowance recorded: | ||||||||||||
| Residential | ||||||||||||
| One- to four-family | $ | 878 | $ | 878 | $ | - | ||||||
| Multi-family | - | - | - | |||||||||
| Nonresidential real estate and land | - | - | - | |||||||||
| Commercial loans - secured | 8 | 8 | - | |||||||||
| Commercial loans – unsecured | - | - | - | |||||||||
| Consumer and other loans | - | - | - | |||||||||
| Total with no related allowance recorded | $ | 886 | $ | 886 | $ | - | ||||||
| With an allowance recorded: | ||||||||||||
| Residential | ||||||||||||
| One- to four-family | $ | 933 | $ | 924 | $ | 323 | ||||||
| Multi-family | - | - | - | |||||||||
| Nonresidential real estate and land | 590 | 587 | 222 | |||||||||
| Commercial loans - secured | 64 | 63 | 23 | |||||||||
| Commercial loans – unsecured | - | - | - | |||||||||
| Consumer and other loans | - | - | - | |||||||||
| Total with an allowance recorded | $ | 1,587 | $ | 1,574 | $ | 568 | ||||||
| Total | $ | 2,473 | $ | 2,460 | $ | 568 | ||||||
At September 30, 2011 and June 30, 2011, there were no loans past due 90 days and still on accrual.
The following table presents information for loans individually evaluated for impairment as of September 30, 2010:
| September 30, 2010 | ||||
| (in thousands) | ||||
| Average of individually impaired loans during the period | $ | 3,076 | ||
| Interest income recognized during the impairment | 30 | |||
| Cash-basis interest income recognized | 30 | |||
Nonaccrual loans were as follows:
September 30, 2011 | June 30, 2011 | |||||||
| (in thousands) | ||||||||
| Residential real estate | ||||||||
| One- to four-family | $ | 936 | $ | 1,073 | ||||
| Multi-family | 46 | - | ||||||
| Nonresidential real estate and land | 956 | 646 | ||||||
| Commercial loans – secured | 95 | 58 | ||||||
| Commercial loans – unsecured | - | - | ||||||
| Consumer and other loans | 14 | 20 | ||||||
| $ | 2,047 | $ | 1,797 | |||||
Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended September 30, 2011 and 2010
5. Loans (continued)
The following table presents the aging of the recorded investment in past due loans as of September 30, 2011:
30-59 days past due | 60-89 days past due | Greater than 90 days | Total past due | Loans not past due | Total | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||
| One- to four-family | $ | 181 | $ | 190 | $ | 302 | $ | 673 | $ | 70,901 | $ | 71,574 | ||||||||||||
| Multifamily | 101 | 591 | - | 692 | 7,194 | 7,886 | ||||||||||||||||||
| Nonresidential real estate and land | 182 | 286 | 216 | 684 | 80,753 | 81,437 | ||||||||||||||||||
| Commercial loans – secured | 54 | - | 37 | 91 | 22,180 | 22,271 | ||||||||||||||||||
| Commercial loans – unsecured | - | - | - | - | 193 | 193 | ||||||||||||||||||
| Consumer and other loans | 45 | 14 | 7 | 66 | 6,076 | 6,142 | ||||||||||||||||||
| Total | $ | 563 | $ | 1,081 | $ | 562 | $ | 2,206 | $ | 187,297 | $ | 189,503 | ||||||||||||
The following table presents the aging of the recorded investment in past due loans as of June 30, 2011:
30-59 days past due | 60-89 days past due | Greater than 90 days | Total past due | Loans not past due | Total | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||
| One- to four-family | $ | 386 | $ | 534 | $ | 300 | $ | 1,220 | $ | 68,320 | $ | 69,540 | ||||||||||||
| Multi-family | 103 | - | - | 103 | 6,866 | 6,969 | ||||||||||||||||||
| Nonresidential real estate and land | 337 | 146 | 181 | 664 | 79,134 | 79,798 | ||||||||||||||||||
| Commercial loans – secured | 2 | 48 | 53 | 103 | 21,733 | 21,836 | ||||||||||||||||||
| Commercial loans – unsecured | - | - | - | - | 132 | 132 | ||||||||||||||||||
| Consumer and other loans | 63 | 28 | 12 | 103 | 6,022 | 6,125 | ||||||||||||||||||
| Total | $ | 891 | $ | 756 | $ | 546 | $ | 2,193 | $ | 182,207 | $ | 184,400 | ||||||||||||
Troubled Debt Restructurings:
The Corporation has allocated $126,000 and $125,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2011 and June 30, 2011. The Corporation had not committed to lend additional amounts as of September 30, 2011 and June 30, 2011 to customers whose loans were classified as troubled debt restructurings.
During the three month period ending September 30, 2011, there were no modifications of loans that would be considered troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.
There were no payment defaults for troubled debt restructurings within twelve months following the modification during the period ending September 30, 2011.
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended September 30, 2011 and 2010
5. Loans (continued)
A commercial or consumer loan is considered to be in payment default once it is 11 days contractually past due under the modified terms. A residential real estate loan is considered to be in payment default once it is 16 days contractually past due under the modified terms.
In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Corporation’s internal underwriting policy.
At September 30, 2011, one- to four-family and nonresidential real estate and land considered to be troubled debt restructurings totaled $955,000 and $474,000.
Credit Quality Indicators:
The Corporation categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Corporation analyzes loans individually by classifying the loans as to credit risk. The Corporation uses the following definitions for risk ratings:
Not rated: Loans that are homogeneous one- to four-family real estate loans that have maintained their contractual payments and are not analyzed.
Pass: Loans that are analyzed but that do not meet the criteria to be considered special mention, substandard or doubtful as defined below.
Special mention: Loans that have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard: Loans that are inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. These loans have a well-defined weakness or weaknesses that jeopardize the collection or liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful: Loans that have all the weaknesses inherent of those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended September 30, 2011 and 2010
5. Loans (continued)
As of September 30, 2011, and based on the most recent analysis performed, the risk category of loans by class is as follows:
| Not rated | Pass | Special mention | Substandard | Doubtful | Total | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||
| One- to four-family | $ | 69,360 | $ | - | $ | 379 | $ | 1,707 | $ | 128 | $ | 71,574 | ||||||||||||
| Multi-family | - | 7,250 | 590 | 46 | - | 7,886 | ||||||||||||||||||
| Nonresidential real estate and land | - | 80,104 | 170 | 1,140 | 23 | 81,437 | ||||||||||||||||||
| Commercial loans – secured | - | 22,122 | 47 | 102 | - | 22,271 | ||||||||||||||||||
| Commercial loans – unsecured | - | 193 | - | - | - | 193 | ||||||||||||||||||
| Consumer and other loans | 6,104 | - | 24 | 14 | - | 6,142 | ||||||||||||||||||
| Total | $ | 75,464 | $ | 109,669 | $ | 1,210 | $ | 3,009 | $ | 151 | $ | 189,503 | ||||||||||||
As of June 30, 2011, and based on the most recent analysis performed, the risk category of loans by class is as follows:
| Not rated | Pass | Special mention | Substandard | Doubtful | Total | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||
| One- to four-family | $ | 67,094 | $ | - | $ | 641 | $ | 1,765 | $ | 40 | $ | 69,540 | ||||||||||||
| Multi-family | - | 6,923 | 46 | - | - | 6,969 | ||||||||||||||||||
| Nonresidential real estate and land | - | 78,625 | 397 | 595 | 181 | 79,798 | ||||||||||||||||||
| Commercial loans – secured | - | 21,715 | 113 | 8 | - | 21,836 | ||||||||||||||||||
| Commercial loans – unsecured | - | 79 | - | - | 53 | 132 | ||||||||||||||||||
| Consumer and other loans | 6,068 | - | 51 | - | 6 | 6,125 | ||||||||||||||||||
| Total | $ | 73,162 | $ | 107,342 | $ | 1,248 | $ | 2,368 | $ | 280 | $ | 184,400 | ||||||||||||
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended September 30, 2011 and 2010
6. Securities
The amortized cost and fair value of available for sale securities and the related gross unrealized gains recognized in accumulated other comprehensive income were as follows:
| September 30, 2011 | ||||||||||||||||
Amortized Cost | Gross Unrealized | Gross Unrealized | Fair Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| U.S. Government agency obligations | $ | 1,999 | $ | 5 | $ | - | $ | 2,004 | ||||||||
| Equity securities | 2 | - | - | 2 | ||||||||||||
| Total | 2,001 | 5 | - | 2,006 | ||||||||||||
| Mortgage Backed Securities: | ||||||||||||||||
| Federal National Mortgage Association participation certificates | 153 | - | - | 153 | ||||||||||||
| Government National Mortgage Association participation certificates | 5,927 | 96 | - | 6,023 | ||||||||||||
| Total mortgage-backed securities available for sale | 6,080 | 96 | - | 6,176 | ||||||||||||
| Total | $ | 8,081 | $ | 101 | $ | - | $ | 8,182 | ||||||||
| June 30, 2011 | ||||||||||||||||
Amortized Cost | Gross Unrealized | Gross Unrealized | Fair Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| U.S. Government agency obligations | $ | 5,999 | $ | 20 | $ | - | $ | 6,019 | ||||||||
| Equity securities | 2 | - | - | 2 | ||||||||||||
| Total | 6,001 | 20 | - | 6,021 | ||||||||||||
| Mortgage Backed Securities: | ||||||||||||||||
| Federal National Mortgage Association participation certificates | 156 | 1 | - | 157 | ||||||||||||
| Government National Mortgage Association participation certificates | 6,069 | 31 | - | 6,100 | ||||||||||||
| Total mortgage-backed securities available for sale | 6,225 | 32 | - | 6,257 | ||||||||||||
| Total | $ | 12,226 | $ | 52 | $ | - | $ | 12,278 | ||||||||
All mortgage backed securities held by the Corporation at September 30, 2011 and June 30, 2011 had underlying collateral of residential real estate.
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended September 30, 2011 and 2010
6. Securities (continued)
The carrying amount, unrecognized gains and losses, and fair value of securities held to maturity were as follows:
| September 30, 2011 | ||||||||||||||||
Carrying Amount | Gross Unrecognized | Gross Unrecognized | Fair Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| Federal Home Loan Mortgage Corporation participation certificates | $ | 50 | $ | 1 | $ | - | $ | 51 | ||||||||
| Total mortgage-backed securities held to maturity | $ | 50 | $ | 1 | $ | - | $ | 51 | ||||||||
| June 30, 2011 | ||||||||||||||||
Carrying Amount | Gross Unrecognized | Gross Unrecognized | Fair Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| Federal Home Loan Mortgage Corporation participation certificates | $ | 51 | $ | - | $ | - | $ | 51 | ||||||||
| Total mortgage-backed securities held to maturity | $ | 51 | $ | - | $ | - | $ | 51 | ||||||||
No securities were sold during the quarter ended September 30, 2011 or 2010.
The fair value of debt securities and carrying amount, if different, at September 30, 2011 by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately. Equity securities were excluded.
| Held to maturity | Available for sale | |||||||||||||||
| Carrying | Fair | Amortized | Fair | |||||||||||||
| amount | value | cost | value | |||||||||||||
| (in thousands) | ||||||||||||||||
| Due in one year or less | $ | - | $ | - | $ | - | $ | - | ||||||||
| Due from one to five years | - | - | - | - | ||||||||||||
| Due from five to ten years | - | - | 999 | 1,002 | ||||||||||||
| Due after ten years | - | - | 1,000 | 1,002 | ||||||||||||
| Mortgage-backed | 50 | 51 | 6,080 | 6,176 | ||||||||||||
| Total | $ | 50 | $ | 51 | $ | 8,079 | $ | 8,180 | ||||||||
Securities pledged to secure public deposits at September 30, 2011, and June 30, 2011, had carrying amounts of $5.4 million and $5.2 million, respectively
At September 30, 2011, and June 30, 2011, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity. There were no securities with unrealized losses at September 30, 2011 and June 30, 2011
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended September 30, 2011 and 2010
7. Recent Accounting Developments
In April 2011, the Financial Accounting Standards Board (“FASB”) amended existing guidance for assisting a creditor in determining whether a restructuring is a troubled debt restructuring. The amendments clarify the guidance for a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. This Accounting Standards Update (“ASU”) clarifies that creditors are precluded from using the effective interest method to determine whether a concession has been granted. In the absence of using the effective interest method, a creditor must now focus on other considerations such as the value of the underlying collateral, evaluation of other collateral or guarantees, the debtor’s ability to access other funds at market rates, interest rate increases and whether the restructuring results in a delay in payment that is insignificant. This guidance is effective for interim and annual reporting periods beginning after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. For purposes of measuring impairment on newly identified troubled debt restructurings, the amendments should be applied prospectively for the first interim or annual period beginning on or after June 15, 2011. The adoption of this guidance did not have a material impact on the Corporation’s consolidated financial statements.
8. Newly Issued But Not Yet Effective Accounting Standards
In May 2011, the FASB issued an amendment to achieve common fair value measurement and disclosure requirements between U.S. and International accounting principles. Overall, the guidance is consistent with existing U.S. accounting principles; however, there are some amendments that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this guidance are effective for interim and annual reporting periods beginning after December 15, 2011. The Company is currently evaluating the impact of this amendment on the consolidated financial statements.
In June 2011, the FASB amended existing guidance and eliminated the option to present the components of other comprehensive income as part of the statement of changes in shareholder’s equity. The amendment requires that comprehensive income be presented in either a single continuous statement or in two separate consecutive statements. The amendments in this guidance are effective as of the beginning of a fiscal reporting year, and interim periods within that year, that begins after December 15, 2011. Early adoption is permitted. The adoption of this amendment will have no impact on the consolidated financial statements as the current presentation of comprehensive income complies with this amendment.
9. Fair Value Measurement
Fair value is the price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect the entity’s own assumptions about how market participants would price an asset or liability.
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended September 30, 2011 and 2010
9. Fair Value Measurement (continued)
The Corporation determines fair values of securities available for sale by either (i) obtaining quoted prices on nationally recognized securities exchanges, which are Level 1 inputs, or (ii) using matrix pricing, which is a Level 2 input. Matrix pricing is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities.
The fair value of loan servicing rights carried at fair value due to impairment is based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. The Corporation is able to compare the valuation model inputs and results to widely published industry data for reasonableness, resulting in a Level 2 classification.
The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available and result in a Level 3 classification.
Assets Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below:
Fair Value Measurements at September 30, 2011 Using | ||||||||||||||||
Carrying Amount | Quoted Prices in Active Markets | Significant Other | Significant Unobservable | |||||||||||||
| (in thousands) | ||||||||||||||||
| Assets: | ||||||||||||||||
| Available for sale securities | ||||||||||||||||
| U. S. government agency obligations | $ | 2,004 | $ | - | $ | 2,004 | $ | - | ||||||||
| Equity securities | 2 | 2 | - | - | ||||||||||||
| Federal National Mortgage Association participation certificates-residential | 153 | - | 153 | - | ||||||||||||
| Government National Mortgage Association participation certificates-residential | 6,023 | - | 6,023 | - | ||||||||||||
| Total securities available for sale | $ | 8,182 | $ | 2 | $ | 8,810 | $ | - | ||||||||
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended September 30, 2011 and 2010
9. Fair Value Measurement (continued)
Fair Value Measurements at June 30, 2011 Using | ||||||||||||||||
Carrying Amount | Quoted Prices in Active Markets | Significant Other | Significant Unobservable | |||||||||||||
| (in thousands) | ||||||||||||||||
| Assets: | ||||||||||||||||
| Available for sale securities | ||||||||||||||||
| U. S. government agency obligations | $ | 6,019 | $ | - | $ | 6,019 | $ | - | ||||||||
| Equity securities | 2 | 2 | - | - | ||||||||||||
| Federal National Mortgage Association participation certificates-residential | 157 | - | 157 | - | ||||||||||||
| Government National Mortgage Association participation certificates-residential | 6,100 | - | 6,100 | - | ||||||||||||
| Total securities available for sale | $ | 12,278 | $ | 2 | $ | 12,276 | $ | - | ||||||||
All mortgage backed securities held by the Corporation at September 30, 2011 and June 30, 2011, had underlying collateral of residential real estate
Assets Measured on a Non-Recurring Basis
Assets measured at fair value on a non-recurring basis are summarized below:
Fair Value Measurements at September 30, 2011 Using | ||||||||||||
Quoted Prices in Active Markets | Significant Other | Significant Unobservable | ||||||||||
| (in thousands) | ||||||||||||
| Assets: | ||||||||||||
| Loan servicing rights | $ | - | $ | 192 | $ | - | ||||||
| Impaired loans, net of allowance | ||||||||||||
| Residential one-to-four-family | - | - | 443 | |||||||||
| Nonresidential real estate and land | - | - | 387 | |||||||||
| Commercial loans – secured | - | - | 32 | |||||||||
| Total | $ | - | $ | 192 | $ | 862 | ||||||
The following impairment charges were recognized during the quarter ended September 30, 2011:
Impaired loan servicing rights, which are carried at lower of cost or fair value based on stratifying rights into groupings, were written down to a fair value of $192,000, resulting in a valuation allowance of $34,000. A net benefit of $8,000 from the recovery of servicing rights fair value was included in earnings for the three months ended September 30, 2011. Servicing rights totaling $531,000 were carried at amortized cost.
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended September 30, 2011 and 2010
9. Fair Value Measurement (continued)
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal balance of $1.1 million, with a valuation allowance of $264,000, resulting in a reduction in the provision for loan losses of $304,000 for the three months ended September 30, 2011.
Fair Value Measurements at June 30, 2011 Using | ||||||||||||
Quoted Prices in Active Markets | Significant Other | Significant Unobservable | ||||||||||
| (in thousands) | ||||||||||||
| Assets: | ||||||||||||
| Loan servicing rights | $ | - | $ | 97 | $ | - | ||||||
| Impaired loans, net of allowance | ||||||||||||
| Residential one-to-four-family | - | - | 601 | |||||||||
| Nonresidential real estate and land | - | - | 365 | |||||||||
| Commercial loans – secured | - | - | 40 | |||||||||
| Total | $ | - | $ | 97 | $ | 1,006 | ||||||
The following represent impairment charges recognized during the year ended June 30, 2011:
Impaired loan servicing rights, which are carried at the lower of cost or fair value based on stratifying rights into groupings, were written down to fair value of $97,000, resulting in a valuation allowance of $41,000. A net benefit of $67,000 from the recovery of servicing rights fair value of was included in earnings for the year ending June 30, 2011. Servicing rights totaling $635,000 were carried at amortized cost.
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $1.57 million, with a valuation allowance of $568,000, resulting in an additional provision for loan losses of $456,000 for the year ended June 30, 2011.
Carrying amount and estimated fair values of financial instruments at period end were as follows:
| September 30, 2011 | June 30, 2011 | |||||||||||||||
| Carrying | Fair | Carrying | Fair | |||||||||||||
| Amount | Value | Amount | Value | |||||||||||||
| (in thousands) | ||||||||||||||||
| Financial assets | ||||||||||||||||
| Cash and cash equivalents | $ | 20,117 | $ | 20,117 | $ | 16,296 | $ | 16,296 | ||||||||
| Investment Securities | 2,006 | 2,006 | 6,021 | 6,021 | ||||||||||||
| Mortgage-backed securities | 6,226 | 6,226 | 6,308 | 6,308 | ||||||||||||
| Loans, net, including loans held for sale | 188,348 | 187,755 | 182,226 | 182,004 | ||||||||||||
| Federal Home Loan Bank stock | 2,422 | n/a | 2,422 | n/a | ||||||||||||
| Accrued interest receivable | 520 | 520 | 515 | 515 | ||||||||||||
| Financial liabilities | ||||||||||||||||
| Deposits | $ | (190,382 | ) | $ | (191,924 | ) | $ | (185,043 | ) | $ | (187,265 | ) | ||||
| Federal Home Loan Bank advances | (13,083 | ) | (13,732 | ) | (13,137 | ) | (13,667 | ) | ||||||||
| Other borrowed funds | (630 | ) | (630 | ) | (630 | ) | (630 | ) | ||||||||
| Accrued interest payable | (109 | ) | (109 | ) | (118 | ) | (118 | ) | ||||||||
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended September 30, 2011 and 2010
9. Fair Value Measurement (continued)
The methods and assumptions used to estimate fair value are described as follows:
Carrying amount is the value of cash and is the estimated fair value for cash equivalents, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair value of debt is based on current rates for similar financing. It was not practicable to determine the fair value of Federal Home Loan Bank (“FHLB”) stock due to restrictions placed on its transferability. The fair value of off-balance-sheet items is not considered material.
FFD Financial Corporation
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements
Certain statements contained in this Form 10-Q that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve inherent risks and uncertainties, and may address our financial condition, results of operations, plans, objectives, future performance and business. Forward-looking statements may generally be identified by words such as “may,” “expected,” “anticipated,” “estimated,” “intends,” “believes,” “plans,” “will,” “would,” “should,” “could,” “might,” “can,” or similar words. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to:
| · | general economic conditions and weakening in the economy, specifically the real estate market, either nationally or in our market area; |
| · | deteriorating credit and asset quality; |
| · | political developments, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; |
| · | changes in the interest rate environment and reductions in interest margins; |
| · | prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions; |
| · | our ability to maintain required capital levels and adequate sources of funding and liquidity; |
| · | competitive pressures among depository institutions; |
| · | effects of critical accounting policies and judgments; |
| · | required changes in accounting policies or procedures; |
| · | legislative or regulatory changes or actions, including the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”); |
| · | our ability to attract and retain key personnel; |
| · | our ability to dividend money from the Bank to the Corporation; and |
| · | our reputation in our primary market. |
Any forward-looking statements contained in this report, in a report incorporated by reference to this report, or made by our management in other reports and filings, in press releases and in oral statements, involve risks and uncertainties and are subject to change based upon the factors listed above and like items. Actual results could differ materially from those expressed or implied, and therefore the forward-looking statements should be considered in light of these factors.
Business Overview
The Corporation is a unitary savings and loan holding company incorporated in Ohio in 1996. Our primary business is the operation of the Bank, our principal subsidiary. The Bank is a federally chartered savings association established in 1898.
The Bank is a community-oriented financial institution offering a variety of financial services to meet the needs of the communities we serve. Its business model emphasizes personalized service, clients’ access to decision makers, solution-driven lending and quick execution, efficient use of technology and the convenience of remote deposit, telephone banking, and online internet banking. It attracts deposits from the general public and uses the deposits, together with borrowings and other funds, primarily to originate commercial and commercial real estate loans, single-family and multi-family residential mortgage loans, vehicle loans, boat loans and home equity lines of credit. The majority of its customers are consumers and small businesses.
FFD Financial Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Critical Accounting Policies
The financial condition and results of operations for the Corporation presented in the Consolidated Financial Statements, accompanying notes to the Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations are, to a large degree, dependent upon the Corporation's accounting policies. The selection and application of these accounting policies involve judgments, estimates and uncertainties that are susceptible to change.
Critical accounting policies are those policies that require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Corporation has identified the appropriateness of the allowance for loan losses as a critical accounting policy and an understanding of this policy is necessary to understand the financial statements. Footnote 5 (Loans), and Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K for the year ended June 30, 2011 provide detail regarding the Corporation's accounting for the allowance for loan losses. There have been no significant changes in the application of accounting policies since June 30, 2011.
Liquidity
The objective of liquidity management is to ensure adequate cash flows to accommodate the demands of customers and provide adequate flexibility for the Corporation to take advantage of market opportunities under both normal operating conditions and under unpredictable circumstances of industry or market stress. Cash is used to fund loan purchases, the maturity of liabilities and, at times, deposit outflows and operating activities. The Corporation's principal sources of funds are deposits, amortization and prepayments of loans, maturities, sales and principal receipt from securities, borrowings, and operations. Management considers the Corporation's asset position to be sufficiently liquid to meet normal operating needs and conditions. The Corporation's earning assets are mainly comprised of loans and investment securities. Management continually strives to obtain the best mix of loans and investments to both maximize yield and insure the soundness of the portfolio, as well as to provide funding for loan demand.
Capital Resources
The Bank is subject to various regulatory capital requirements. Capital adequacy guidelines and prompt corrective-action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Failure to meet various capital requirements can result in regulatory action that could have a direct material effect on the Corporation's financial statements. The Bank exceeded the regulatory requirements to be “well capitalized” at September 30, 2011. Management is not aware of any matters occurring subsequent to September 30, 2011 that would cause the Bank's capital category to change.
FFD Financial Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The Bank’s actual and required capital amounts (in thousands) and ratios at September 30, 2011.
| Actual | Required For Capital | To Be Well Capitalized Under | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
| Total capital to risk weighted assets | $ | 21,018 | 12.40 | % | $ | 13,607 | 8.00 | % | $ | 17,009 | 10.00 | % | ||||||||||||
| Tier 1 (core) capital to risk weighted assets | 19,315 | 11.40 | % | 6,804 | 4.00 | % | 10,205 | 6.00 | % | |||||||||||||||
| Tier 1 (core) capital to Adjusted assets | 19,315 | 8.60 | % | 9,004 | 4.00 | % | 11,255 | 5.00 | % | |||||||||||||||
| Tangible capital (to adjusted total assets) | 19,315 | 8.60 | % | 3,377 | 1.50 | % | N/A | N/A | ||||||||||||||||
General
The Corporation’s net income is dependent primarily on net interest income, which is the difference between the interest income earned on loans and securities and the interest paid on deposits and borrowed funds. Net interest income is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. Net income is also affected by, among other things, loan fee income, provisions for loan losses, service charges, gains on loan sales, operating expenses, and franchise and income taxes. Operating expenses principally consist of employee compensation and benefits, occupancy, and other general and administrative expenses. In general, results of operations are significantly affected by overall economic and competitive conditions, particularly changes in market interest rates, government policies, and actions of regulatory authorities. Future changes in applicable laws, regulations or government policies may also materially impact our performance.
Tuscarawas County and Holmes County in the Bank's primary market area have 8.2% and 6.2% unemployment, respectively. This compares reasonably well to the State of Ohio’s unemployment rate of 9.1% for September 2011. In this market area, residential real estate sales and construction remain relatively soft. Commercial loan demand also remains soft, making finding qualified borrowers a challenge.
On July 21, 2010, President Obama signed Dodd-Frank into law. Dodd-Frank imposes new restrictions and an expanded framework of regulatory oversight on financial institutions, including depository institutions. In addition, Dodd-Frank has changed the jurisdictions of bank regulatory agencies, and in particular transferred the regulation of federal savings associations, such as the Bank, from the Office of Thrift Supervision (“OTS”) to the Office of the Comptroller of the Currency (the “OCC”). Savings and loan holding companies, like the Corporation, are now regulated by the Federal Reserve Board (“FRB”). Because Dodd-Frank requires various federal agencies to adopt a broad range of regulations with significant discretion, many of the details of the new law and the effects it will have on the Corporation and the Bank will not be known for months or even years. Many provisions of Dodd-Frank will not be implemented immediately and will require interpretation and extensive rule making by federal regulators. The Corporation is closely monitoring all relevant sections of Dodd-Frank to ensure continued compliance with laws and regulations.
FFD Financial Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
General (continued)
Management’s Discussion and Analysis represents a review of the Corporation’s consolidated financial condition and results of operations. This review should be read in conjunction with the Corporation’s Consolidated Financial Statements and related notes.
Discussion of Financial Condition Changes from June 30, 2011 to September 30, 2011
The Corporation’s total assets at September 30, 2011, were $225.3 million, a $5.7 million, or 2.6%, increase from the total at June 30, 2011.
Cash and cash equivalents totaled $20.1 million at September 30, 2011, an increase of $3.8 million, or 23.4%, from the total at June 30, 2011. The increase was primarily a result of deposit growth and proceeds from calls of investment securities available for sale. The Corporation also holds funds in interest-bearing deposits that may be invested in securities or loans or used for other purposes.
Investment securities totaled $2.0 million at September 30, 2011, a $4.0 million, or 66.7%, decrease from the total at June 30, 2011, resulting from three investment securities that were called. As a result of principal repayments and mark to market adjustments, mortgage-backed securities totaled $6.2 million at September 30, 2011, a $81,000, or 1.3%, decrease from the total June 30, 2010 of $6.3 million.
Loans receivable, including loans held for sale, totaled $188.3 million at September 30, 2011, an increase of $6.1 million, or 3.4%, from the June 30, 2011 total. The portfolio of loans secured by one- to four-family residential real estate increased by $2.7 million, or 3.9%, to $72.4 million at September 30, 2011. Loans secured by nonresidential real estate and land totaled $83.3 million at September 30, 2011, an increase of $1.4 million, or 1.7%, from June 30, 2011. Commercial loans increased $453,000, or 2.0%, from June 30, 2011 to a total of $23.2 million at September 30, 2011. Loan originations during the period totaling $25.7 million were substantially offset by principal repayments of $20.1 million, adjustments to the allowance for loan losses and net unamortized fees and costs. During the three-month period ended September 30, 2011, loan originations were comprised of $15.4 million of one- to four-family residential real estate loans, $5.9 million of nonresidential real estate loans, $1.1 million of consumer loans, $2.2 million of commercial loans, and $1.1 million of multifamily real estate loans. The increase in one- to four-family residential real estate originations resulted primarily from refinancings, not increased demand from home buyers. Nonresidential real estate and commercial lending generally involve a higher degree of risk than one- to four-family residential real estate lending due to the relatively larger loan amounts and the effects of general economic conditions on the successful operation of income-producing properties and businesses. The Corporation endeavors to reduce this risk by evaluating the credit history and past performance of the borrower, the location of the real estate, the quality of the management operating the property or business, the debt service ratio, the quality and characteristics of the income stream generated by the property or business and appraisals supporting the real estate or collateral valuation.
The allowance for loan losses totaled $2.0 million at September 30, 2011, a decrease of $207,000, or 9.5%, from June 30, 2011, and represented 1.04% of total loans and 1.18% of total loans at those dates, respectively. The decrease resulted from charge-offs of $450,000, $304,000 of which were impaired loans with specific reserves allocated to them in prior periods. The charge-offs were partially offset by provisions of $243,000. An increase of $96,000 in general reserves was recorded on non-impaired loans during the quarter ended September 30, 2011 as compared to the prior quarter largely in response to loan portfolio growth.
FFD Financial Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from June 30, 2011 to September 30, 2011 (continued)
Nonaccrual loans were $2.0 million at September 30, 2011 and $1.8 million at June 30, 2011, which represented 1.08% and .97% of total loans at those respective dates. Non-accruing non-residential real estate and land mortgage loans increased by $310,000, multifamily residential increased by $46,000, commercial loans-secured increased by $37,000, one- to four-family properties secured by first liens decreased by $137,000 and consumer and other loans decreased by $6,000. The decrease in one- to four-family properties was partially due to the resolution of a number of non-performing one- to four-family loans during the quarter. Delinquent loans to total loans were 1.16% at September 30, 2011 and 1.19% at June 30, 2011. At September 30, 2011, there were no loans past due over 90 days and still on accrual. Management has reviewed these loans for loss exposure and believes they are adequately collateralized in the event of foreclosure. There can be no assurance that increases in nonaccrual and delinquent loans will not occur in future periods.
The composition of the loan portfolio remained relatively the same from June 30, 2011 to September 30, 2011. Residential real estate, one- to four-family and multifamily and nonresidential real estate and land loans make up most of the portfolio. Impaired loan balances were $2.9 million (with an allowance of $264,000) and $2.5 million (with an allowance of $568,000) at September 30, 2011 and June 30, 2011, respectively. Although management believes that the allowance for loan losses at September 30, 2011, is 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 results of operations.
Prepaid expenses and other assets totaled $969,000 at September 30, 2011, a $137,000, or 12.4%, decrease from the June 30, 2011 balance of $1.1 million. The amortization of prepaid franchise tax, Federal Deposit Insurance Corporation (“FDIC”) insurance premiums and promotional expense accounted for $116,000 of the decrease and was partially offset by additional prepaid expenses in other operating accounts.
Deposits totaled $190.4 million at September 30, 2011, a $5.3 million, or 2.9%, increase from total deposits at June 30, 2011. This increase was a result of deposit growth at the Bank’s branches and what we believe is our strong banking franchise and reputation in the market. Our customers also moved funds into insured deposit accounts from uninsured investment vehicles, such as stocks and mutual funds, further increasing liquidity. We also experienced the continued growth of the Kasasa© program that is designed to attract lower cost transactional deposit relationships, allowing us to reduce reliance on time deposits. The Kasasa© program has an added benefit of enhancing non-interest income through increased point of sale transaction activity.
FHLB advances decreased $54,000 from June 30, 2011 to September 30, 2011. Other borrowed money, consisting of a line of credit with another financial institution, was unchanged with a balance of $630,000 at both June 30, 2011 and September 30, 2011.
Other liabilities totaled $1.6 million at September 30, 2011, with a $22,000 decrease.
Shareholders’ equity totaled $19.2 million at September 30, 2011, an increase of $272,000, or 1.4%, from June 30, 2011. The increase was due to net earnings of $368,000, a treasury stock issuance of $39,000 from a stock option exercise, an increase in the unrealized gain on securities designated as available for sale of $32,000, and additional paid in capital of $6,000 from a stock option exercise, which were partially offset by dividends of $173,000.
FFD Financial Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three-Month Periods Ended September 30, 2011 and 2010
General
The Corporation’s net earnings totaled $368,000 for the three months ended September 30, 2011, a decrease of $46,000, or 11.1%, from the net earnings of $414,000 recorded in the comparable period in 2010. The decrease in net earnings resulted from increases of $77,000, or 5.5%, in noninterest expense, $57,000, or 30.7%, in the provision for losses on loans and a decrease of $84,000, or 22.1%, in noninterest income which were partially offset by an increase of $149,000, or 8.1%, in net interest income and a decrease of and $23,000, or 10.7%, in federal income tax expense.
Net Interest Income
The Bank experienced an increase in net interest income in the current quarter as a result of its efforts to grow income generating assets and the favorable re-pricing of time deposits.
Total interest expense decreased by $202,000, or 23.4%, to $662,000 for the three months ended September 30, 2011, compared to the three months ended September 30, 2010. Interest expense on deposits decreased by $178,000, or 25.1%, due to a 52 basis point decrease in the average cost of deposits, to 1.13% for the 2011 period, which was partially offset by a $16.2 million, or 9.4%, increase in the average balance outstanding. Interest expense on borrowings decreased by $24,000, or 15.6%, due to a $556,000, or 3.9%, decrease in the average balance outstanding, and a 52 basis point decrease in the average cost.
Total interest income decreased $53,000, or 2.0%, to $2.6 million for the three months ended September 30, 2011, compared to the same period in 2010. The decrease was due primarily to a 46 basis point decrease in yield, which was partially offset by a $17.2 million increase in the average balances outstanding. Interest income on loans decreased by $53,000, or 2.0%, due to a 24 basis point decrease in yield, which was partially offset by an increase of $4.2 million, or 2.3%, in the average loan portfolio balance outstanding. Interest income on investment securities decreased by $29,000, or 50.9%, due to a 60 basis point decrease in yield and a $2.8 million, or 38.0%, decrease in the average balance outstanding. Interest income on interest bearing deposits decreased $1,000, or 3.5%, to a total of $28,000 for the three-months ended September 30, 2011, due to a 116 basis point decrease in yield which was partially offset by a $9.8 million, or 157.4%, increase in the average balance outstanding. Interest income on mortgage-backed securities increased by $30,000, due to an increase of $5.9 million in the average balance outstanding, which was partially offset by a 50 basis point decrease in yield. Mortgage-backed securities totalling $6.0 million were purchased in the fourth quarter of fiscal 2011. This purchase was a strategy to improve asset yield and diversify our investment portfolio from step-up callable agency securities into shorter term cash flow instruments.
As a result of the foregoing, net interest income increased by $149,000, or 8.1%, for the three months ended September 30, 2011, compared to the same period in 2010. The interest rate spreads were 3.63% and 3.62%, and the net interest margins were 3.71% and 3.72%, for the three-month periods ended September 30, 2011 and 2010, respectively.
Provision for Losses on Loans
The Corporation recorded a $243,000 provision for losses on loans during the three months ended September 30, 2011, and a $186,000 provision for the comparable quarter in 2010. The increase in the provision for losses on loans was due to management’s assessment of the loan portfolio, delinquency rates, net charge-offs, and current economic conditions. Net charge-offs were $450,000 for the quarter ended September 30, 2011 and $77,000 for the comparable quarter in 2010. The increase in net charge-offs was primarily attributable to the charge-off of impaired loans which had $304,000 of specific reserves allocated to them in prior periods. The decision to charge-off these loans was due to continued evaluation of the borrower’s ability to pay and economic circumstances. An increase of $96,000 in general reserves was recorded on non-impaired loans during the quarter ended September 30, 2011 as compared to the prior quarter largely in response to loan portfolio growth. Although management believes that the provision was adequate at September 30, 2011, there can be no assurance that the loan loss allowance will be adequate to cover
FFD Financial Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three-Month Periods Ended September 30, 2011 and 2010 (continued)
losses on nonperforming assets in the future, which could result in additions to the allowance and could adversely affect the Corporation’s results of operations.
Noninterest Income
Noninterest income totaled $297,000 for the three months ended September 30, 2011, a decrease of $84,000, or 22.1%, from the 2010 total. Net gain on sale of loans decreased by $97,000, or 37.3%, to $163,000 for the three months ended September 30, 2011, compared to $260,000 for the three months ended September 30, 2010. The decrease in gain on sale of loans resulted from a 52.5% decrease in loans sold into the secondary mortgage market due to a significant decline in the number of newly originated and refinanced loans in the current economic climate. Service charges on deposit accounts increased by $15,000, or 16.0%, to $109,000 for the three months ended September 30, 2011, compared to $94,000 for the same period in 2010. Mortgage servicing revenue decreased $1,000 in 2011 compared to the same period in 2010.
Noninterest Expense
Noninterest expense totaled $1.5 million for the three months ended September 30, 2011, an increase of $77,000, or 5.5%, compared to the same period in 2010. The increase in noninterest expense includes increases of $45,000, or 7.0%, in employee and director compensation and benefits, $36,000, or 66.7%, in professional and consulting fees, $18,000, or 10.1%, in other operating expense, $13,000, or 33.3%, in advertising, $9,000, or 9.7%, in data processing, $3,000, or 5.3%, in franchise tax, $1,000, or 2.6%, in ATM processing, which were partially offset by decreases of $38,000, or 60.3%, in FDIC insurance expense, $5,000, or 14.7%, in postage and stationary supplies, $3,000, or 5.6% in checking account maintenance expense, and $2,000, or 1.4%, in occupancy and equipment expense. The increase in employee compensation was due to additional staffing for operations and normal merit increases. The increase in professional and consulting fees resulted from consulting fees for analysis and contract negotiations for data processing services. The increase in advertising was partially the result of marketing the Kasasa© checking and savings program. Effective April 1, 2011, the FDIC changed to an asset based assessment from a deposit based assessment for the calculation of FDIC insurance premiums. The Corporation benefitted from the change in the assessment base, which reduce its deposit premiums.
Federal Income Taxes
The Corporation recorded a provision for federal income taxes totaling $192,000 for the three months ended September 30, 2011, a decrease of $23,000, or 10.7%, over the same period in 2010. The decrease resulted from a $69,000, or 11.0%, decrease in earnings before taxes. The Corporation’s effective tax rates were 34.3% and 34.2%, for the three-month periods ended September 30, 2011 and 2010, respectively.
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk
Not required.
ITEM 4: Controls and Procedures
The Corporation’s Chief Executive Officer and Chief Financial Officer have evaluated the Corporation’s disclosure controls and procedures (as defined under Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Corporation’s disclosure controls and procedures are effective. There were no changes in the Corporation’s internal controls which materially affected, or are reasonably likely to materially effect, the Corporation’s internal controls over financial reporting.
FFD Financial Corporation
PART II
| ITEM 1. | Legal Proceedings |
None
| ITEM 1A: | Risk Factors |
Not applicable
| ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
| (a) | During the quarter ended September 30, 2011, the Corporation issued a total of 4,500 unregistered shares upon the exercise of stock options for an aggregate purchase price of $45,450.00. The sales were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. |
| (b) | None |
| (c) | None |
ITEM 3. | Defaults Upon Senior Securities |
| Not applicable |
| ITEM 4. | (Removed and Reserved) |
| ITEM 5. | Other Information |
| Not applicable |
| ITEM 6. | Exhibits | |
| Section 302 Chief Executive Officer certification | ||
| Section 302 Chief Financial Officer certification | ||
| Section 906 Chief Executive Officer certification | ||
| Section 906 Chief Financial Officer certification | ||
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase | |
FFD Financial Corporation
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| FFD FINANCIAL CORPORATION | |||||
Date: | November 14, 2011 | By: | /s/Trent B. Troyer | ||
| Trent B. Troyer | |||||
| President and Chief Executive Officer | |||||
Date: | November 14, 2011 | By: | /s/Robert R. Gerber | ||
| Robert R. Gerber | |||||
| Senior Vice President, Treasurer and | |||||
| Chief Financial Officer |
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