UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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| þ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year endedDecember 31, 2008
OR
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| o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 0-51153
FEDFIRST FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
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| United States | | 25-1828028 |
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| (State or other jurisdiction of incorporation or organization) | | (IRS Employer Identification No.) |
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| Donner at Sixth Street, Monessen, Pennsylvania | | 15062 |
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| (Address of principal executive offices) | | (Zip Code) |
Issuer’s telephone number: (724) 684-6800
Securities registered under Section 12(b) of the Exchange Act:
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Common Stock, par value $0.01 per share
Title of each class | | Nasdaq Stock Market LLC
Name of each exchange on which registered |
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
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. (Check one):
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer o
(Do not check if a smaller reporting company) | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No þ
The aggregate market value of the voting and non-voting common equity held by nonaffiliates as of June 30, 2008 was approximately $12,988,000.
The number of shares outstanding of the registrant’s common stock as of March 11, 2009 was 6,336,775.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the 2009 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.
This report contains certain “forward-looking statements” within the meaning of the federal securities laws. These statements are not historical facts, rather statements based on FedFirst Financial Corporation’s current expectations regarding its business strategies, intended results and future performance. Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions.
Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could affect actual results include the following: interest rate trends; the general economic climate in the market area in which FedFirst Financial Corporation operates, as well as nationwide; FedFirst Financial Corporation’s ability to control costs and expenses; competitive products and pricing; loan delinquency rates and changes in federal and state legislation and regulation. Additional factors that may affect our results are discussed in this Annual Report onForm 10-K under “Item 1A. Risk Factors.” These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. FedFirst Financial Corporation assumes no obligation to update any forward-looking statements.
PART I
ITEM 1. BUSINESS
General
FedFirst Financial Corporation (“FedFirst Financial” or the “Company”) is a federally chartered savings and loan holding company established in 1999 to be the holding company for First Federal Savings Bank (“First Federal” or the “Bank”). FedFirst Financial’s business activity is the ownership of the outstanding capital stock of First Federal. FedFirst Financial’s wholly owned subsidiaries are First Federal, a federally chartered stock savings bank, and FedFirst Exchange Corporation (“FFEC”). FFEC has an 80% controlling interest in Exchange Underwriters, Inc. Exchange Underwriters, Inc. is a full-service, independent insurance agency that offers property and casualty, commercial liability, surety and other insurance products.
First Federal operates as a community-oriented financial institution offering residential, multi-family and commercial mortgages, consumer loans and commercial business loans as well as a variety of deposit products for individuals and businesses from nine locations in southwestern Pennsylvania. First Federal conducts insurance brokerage activities through Exchange Underwriters, Inc. First Federal is subject to competition from other financial institutions and to the regulations of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities.
FedFirst Financial is a majority owned subsidiary of FedFirst Financial Mutual Holding Company (“FFMHC”), our federally chartered mutual holding company parent. As a mutual holding company, FFMHC is a non-stock company that has as its members the depositors of First Federal. FFMHC does not engage in any business activity other than owning a majority of the common stock of FedFirst Financial. So long as we remain in the mutual holding company form of organization, FFMHC will own a majority of the outstanding shares of FedFirst Financial. FFMHC has virtually no operations or assets other than an investment in the Company and is not included in these financial statements. All significant intercompany transactions have been eliminated.
In April 2005, FedFirst Financial completed its initial public offering. In connection with the offering, the Company sold 3,636,875 shares of common stock to FFMHC. As a result, FFHMC owned 55% of the Company’s original issuance of common stock. At December 31, 2008, FFHMC’s ownership of common stock increased to 57% as a result of the Company’s common stock repurchase programs throughout 2007 and 2008 which reduced the number of outstanding shares.
Our website address iswww.firstfederal-savings.com. Information on our website should not be considered a part of this Annual Report on Form 10-K.
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Market Area
Our primary market area is the mid-Monongahela Valley, which is located in the southern suburban area of metropolitan Pittsburgh. Our nine banking offices are located in Fayette, Washington and Westmoreland counties. Generally, our offices are located in small industrial communities that, in the past, relied extensively on the steel industry. Until the mid-1970s, these communities flourished. However, in the past 30 years, the economy of the mid-Monongahela Valley has diminished in direct correlation with the decline in the United States steel industry. With the decline of the steel industry, Fayette, Washington and Westmoreland counties now have smaller and more diversified economies, with employment in services constituting the primary source of employment in all three counties.
In the past, the communities in which our offices are located provided a stable customer base for traditional thrift products, such as passbook savings, certificates of deposit and residential mortgages. Following the closing of the area’s steel mills, population and employment trends declined. The population in many of the smaller communities in our market area continues to shrink as the younger population leaves to seek better and more reliable employment. As a result, the median age of our customers has been increasing. With an aging customer base and little new real estate development, the lending opportunities in our primary market area are limited. To counter these trends, we expanded into communities that are experiencing population growth and economic expansion. In March 2006, we entered into a five-year lease for a branch in Peters Township in Washington County, which opened in July 2006. In January 2007, we entered into a 10-year lease for a branch located in the downtown area of Washington, Pennsylvania, which opened in June 2007.
Competition
We face significant competition for the attraction of deposits and origination of loans. Our most direct competition for deposits has historically come from the several financial institutions operating in our market area and from other financial service companies, such as brokerage firms, credit unions and insurance companies. We also face competition for investors’ funds from money market funds, mutual funds and other corporate and government securities. At June 30, 2008, which is the most recent date for which data is available from the FDIC, we held approximately 0.25% of the deposits in the Pittsburgh metropolitan area. Banks owned by The PNC Financial Services Group, Inc. and Citizens Financial Group, Inc. also operate in our market area. These institutions are significantly larger than us and, therefore, have significantly greater resources.
Our competition for loans comes primarily from financial institutions in our market area and, to a lesser extent, from other financial service providers, such as mortgage companies and mortgage brokers. Competition for loans also comes from the increasing number of non-depository financial service companies entering the mortgage market, such as insurance companies, securities companies and specialty finance companies.
We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered barriers to entry, allowed banks to expand their geographic reach by providing services over the Internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. Changes in federal law permit affiliation among banks, securities firms and insurance companies, which promotes a competitive environment in the financial services industry. Competition for deposits and the origination of loans could limit our growth in the future.
Lending Activities
General.The largest segment of our loan portfolio is one-to-four family residential mortgage loans. The other significant segments of our loan portfolio are multi-family and commercial real estate loans, construction loans, consumer loans and commercial business loans. We originate loans primarily for investment purposes. From time to time, we have purchased loans to supplement our origination efforts.
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One-to-Four Family Residential Mortgage Loans.Our primary lending activity has historically been the origination of mortgage loans to enable borrowers to purchase or refinance existing homes located in the greater Pittsburgh metropolitan area. We offer fixed and adjustable rate mortgage loans with terms up to 30 years. Borrower demand for adjustable versus fixed rate loans is a function of the level of interest rates, the expectations of changes in the level of interest rates, and the difference between the interest rates and loan fees offered for fixed rate mortgage loans and the initial period interest rates and loan fees for adjustable rate loans. The relative amount of fixed and adjustable rate mortgage loans that can be originated at any time is largely determined by the demand for each in a competitive environment. We currently have a low demand for our adjustable rate mortgage loans. The loan fees charged, interest rates and other provisions of mortgage loans are determined by us on the basis of our own pricing criteria and competitive market conditions.
Interest rates and payments on our adjustable rate mortgage loans generally adjust annually after an initial fixed period that ranges from one to ten years. Interest rates and payments on our adjustable rate loans generally are adjusted to a rate typically equal to 2.75% or 3.00% above the applicable index. We use the one-year constant maturity Treasury index for loans that adjust annually and the three-year constant maturity Treasury index for loans that adjust every three years. The maximum amount by which the interest rate may be increased or decreased is generally 2% per adjustment period and the lifetime interest rate cap is generally 6% over the initial interest rate of the loan.
Prior to 2006, we purchased newly originated single family mortgage loans to supplement our origination activities. The properties securing the loans are located throughout the country. We underwrote all of the purchased loans to the same standards as loans originated by us. We may purchase additional loans in the future to supplement our origination activities. At December 31, 2008, purchased residential loans totaled $29.8 million.
While one-to-four family residential real estate loans are normally originated with up to 30-year terms, such loans may remain outstanding for shorter periods because borrowers often prepay their loans in full upon sale of the property pledged as security or upon refinancing the original loan. Therefore, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans.
We generally do not make conventional loans with loan-to-value ratios exceeding 97%. Loans with loan-to-value ratios in excess of 80% generally require private mortgage insurance or additional collateral. We require all properties securing mortgage loans to be appraised by a Board-approved, independent appraiser. We generally require title insurance on all first mortgage loans. Borrowers must obtain hazard insurance, and flood insurance for loans on property located in a flood zone, before closing the loan.
In an effort to provide financing for low and moderate income and first-time buyers, we offer a special home buyers program. We offer residential mortgage loans through this program to qualified individuals and originate the loans using modified underwriting guidelines, including reduced fees and loan conditions. We do not engage in subprime lending.
Commercial and Multi-Family Real Estate Loans.We offer a variety of fixed and adjustable rate mortgage loans secured by commercial property and multi-family real estate. These loans generally have terms up to 25 years and are typically secured by apartment buildings, office buildings, or manufacturing facilities. Loans are secured by first mortgages, and amounts generally do not exceed 80% of the property’s appraised value. In addition to originating these loans, we also participate in loans originated at other financial institutions in the region.
As part of our efforts to increase our loan portfolio, we had purchased newly originated multi-family real estate loans prior to 2006. The properties securing the loans are located in seven states throughout the country. We desired geographic diversification among the purchased loans so that we would not concentrate exposure to changes in any particular local or regional economy. We underwrote all of the purchased loans to the same standards as loans originated by us. At December 31, 2008, purchased multi-family real estate loans totaled $7.1 million.
At December 31, 2008, our largest multi-family real estate loan was $1.8 million and was secured by multi-family apartment buildings. Our largest commercial real estate loan was $1.6 million and was secured by a commercial property. These loans were performing in accordance with their original terms at December 31, 2008.
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At December 31, 2008, loan participations totaled $6.5 million. All of the properties securing these loans are located in the Pittsburgh metropolitan area. Our largest participation loan was $1.1 million and we are a 12.5% participant.
Construction Loans.We may originate loans to individuals to finance the construction of residential dwellings. We also make construction loans for commercial development projects, including apartment buildings, and owner-occupied properties used for businesses. Our residential construction loans generally provide for the payment of interest only during the construction phase, which is usually 12 months. At the end of the construction phase, the loan generally converts to a permanent mortgage loan. Loans generally can be made with a maximum loan-to-value ratio of 97% on residential construction and 80% on commercial construction. Loans with loan-to-value ratios in excess of 80% on residential construction generally require private mortgage insurance or additional collateral. Before making a commitment to fund a construction loan, we require an appraisal of the property by an independent licensed appraiser. We also will require an inspection of the property before disbursement of funds during the term of the construction loan.
At December 31, 2008, our largest outstanding residential construction loan commitment was for $900,000, of which substantially the entire amount had been disbursed. At December 31, 2008, our largest outstanding commercial construction commitment was for $2.5 million, of which $1.5 million has been disbursed. These loans were performing in accordance with their original terms at December 31, 2008.
Commercial Business Loans.We originate commercial business loans to professionals and small businesses in our market area. We offer installment loans for a variety of business needs including capital improvements and equipment acquisition. These loans are secured by business assets such as accounts receivable, inventory, and equipment, and are typically backed by the personal guarantee of the borrower. We originate working capital lines of credit to finance the short-term needs of businesses. These credit lines are repaid by seasonal cash flows from operations and are also typically backed by the personal guarantee of the borrower.
When evaluating commercial business loans, we perform a detailed financial analysis of the borrower and/or guarantor which includes but is not limited to: cash flow and balance sheet analysis, debt service capabilities, review of industry (geographic and economic conditions) and collateral analysis.
At December 31, 2008, our largest commercial business loan relationship was a $1.9 million line of credit, of which $499,000 was outstanding. This loan was performing in accordance with its original terms at December 31, 2008.
Consumer Loans.Our consumer loans include home equity lines of credit, home equity installment loans, loans on savings accounts, and personal lines of credit.
The procedures for underwriting consumer loans include an assessment of the applicant’s payment history on other debts and ability to meet existing obligations and payments on the proposed loan. Although the applicant’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount.
We offer home equity installment loans and home equity lines of credit with a maximum combined loan-to-value ratio of 100%. In 2007, the Company discontinued offering home equity loans with a maximum loan-to-value ratio greater than 100%. Home equity lines of credit have adjustable rates of interest that are indexed to the prime rate as reported in The Wall Street Journal. Home equity installment loans have fixed interest rates and terms that range up to 30 years.
We offer secured consumer loans in amounts up to $20,000. These loans have fixed interest rates and terms that range from one to 10 years. We offer unsecured consumer loans in amounts up to $10,000. These loans have fixed interest rates and terms that range from one to five years.
We no longer offer home improvement loans. In the past, we offered these loans in amounts up to $25,000 with fixed interest rates and terms that ranged up to 20 years. Our home improvement loans were made under the U.S. Department of Housing and Urban Development’s Title I program and are insured by the Federal Housing Administration against the risk of default for up to 90% of the loan amount.
K-4
Loan Underwriting Risks
Adjustable Rate Loans.While we anticipate that adjustable rate loans will better offset the adverse effects of an increase in interest rates as compared to fixed rate mortgages, the increased mortgage payments required of adjustable rate loan borrowers in a rising interest rate environment could cause an increase in delinquencies and defaults. In addition, although adjustable rate mortgage loans help make our asset base more responsive to changes in interest rates, the extent of this interest sensitivity is limited by the annual and lifetime interest rate adjustment limits.
Commercial and Multi-Family Real Estate Loans.Loans secured by commercial and multi-family real estate generally have larger balances and involve a greater degree of risk than one-to-four family residential mortgage loans. Of primary concern in commercial and multi-family real estate lending is the borrower’s creditworthiness and cash flow potential of the project. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject to a greater extent than residential real estate loans to adverse conditions in the real estate market or the economy. To monitor cash flow on income properties, we require borrowers and/or guarantors to provide annual financial statements regarding the commercial and multi-family real estate. In reaching a decision on whether to grant a commercial or multi-family real estate loan, we consider the cash flow of the property, the borrower’s expertise, credit history and profitability, and the value of the underlying property. We also may look to the financial strength of any related entities in approving the request.
We have generally required that the properties securing these real estate loans have a debt service coverage ratio (cash flow available to service debt / debt service) of at least 1.25x and a leverage ratio (debt to worth) of less than 3.0x. Environmental surveys are obtained for requests greater than $1.0 million when circumstances suggest the possibility of the presence of hazardous materials.
We underwrite all commercial loan participations to the same standards as loans originated by us. In addition, we also consider the financial strength and reputation of the lead lender. We require the lead lender to provide a full closing package as well as annual financial statements for the borrower and related entities so that we can conduct an annual loan review for all loan participations.
Construction Loans.Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the building. If the estimate of value proves to be inaccurate, we may be confronted, at or before the maturity of the loan, with a building having a value which is insufficient to assure full repayment. If we are forced to foreclose on a building before or at completion due to a default, there can be no assurance that we will be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs.
Commercial Business Loans.Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself. A debt service coverage ratio of at least 1.25x and a leverage ratio of less than 3.0x are also applicable to commercial business loans. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value. We also maintain allowable advance rates for each collateral type to ensure coverage.
K-5
Consumer Loans.Consumer loans may entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections depend on the borrower’s continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.
Loan Originations, Purchases and Sales
Loan originations come from a number of sources. The primary source of loan originations are telephone marketing efforts, existing customers, walk-in traffic, loan brokers, advertising and referrals from customers. We generally originate loans for our portfolio and have not sold any loans in recent years with the exception of the sale of a majority of our student loan portfolio in 2006. Prior to 2006, we had purchased loans to supplement our own loan originations.
Loan Approval Procedures and Authority
Our lending activities follow written, nondiscriminatory, underwriting standards and loan origination procedures established by our Board of Directors and management. The Board of Directors has granted certain loan approval authority to a committee of officers. The loan committee approves all one-to-four family mortgages, construction loans and all consumer loans which exceed the authority level of certain officers of the Company. All commercial loans over $500,000 and loans or extensions to insiders require the approval of the Board of Directors. All commercial loans up to $500,000 require majority approval of a committee of three executive officers.
Loans to One Borrower
The maximum amount that we may lend to one borrower and the borrower’s related entities is limited, by regulation, to generally 15.0% of our unimpaired capital and surplus. At December 31, 2008, our regulatory limit on loans to one borrower was $5.1 million. At that date, our largest lending relationship was $3.8 million in commercial business loans. These loans were performing in accordance with their original terms at December 31, 2008.
Loan Commitments
We issue commitments for fixed and adjustable rate mortgage and commercial loans conditioned upon the occurrence of certain events. Commitments to originate mortgage loans are legally binding agreements to lend to our customers. Generally, our loan commitments expire after 45 days.
Investment Activities
We have legal authority to invest in various types of liquid assets, including U.S. Treasury obligations, Government-sponsored enterprise securities and securities of various federal agencies and of state and municipal governments, mortgage-backed securities and certificates of deposit of federally insured institutions. Within certain regulatory limits, we also may invest a portion of our assets in corporate securities and mutual funds. We also are required to maintain an investment in Federal Home Loan Bank (“FHLB”) of Pittsburgh stock. While we have the authority under applicable law and our investment policies to invest in derivative securities, we had no such investments at December 31, 2008.
At December 31, 2008, our investment portfolio consisted primarily of Government-sponsored enterprise securities, mortgage-backed securities issued primarily by Fannie Mae, Freddie Mac and Ginnie Mae, guaranteed and private label REMIC pass-through certificates and corporate debt securities.
Our investment objectives are to provide and maintain liquidity, to provide collateral for pledging requirements, to establish an acceptable level of interest rate and credit risk, to provide an alternate source of investment when demand for loans is weak and to generate a favorable return.
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Our Board of Directors has the overall responsibility for the investment portfolio, including approval of the investment policy and appointment of the Investment Committee. The Investment Committee consists of five of our executive officers. The Investment Committee is responsible for implementation of the investment policy and monitoring our investment performance. Individual investment transactions are reviewed and ratified by the Board of Directors on a monthly basis.
Insurance Activities
We conduct insurance brokerage activities through our 80%-owned subsidiary, Exchange Underwriters, Inc. Exchange Underwriters is a full-service, independent insurance agency that offers property and casualty, commercial general liability, surety and other insurance products. Exchange Underwriters has agents and brokers licensed in more than 35 states. Exchange Underwriters generates revenues primarily from commissions paid by insurance companies with respect to the placement of insurance products.
Deposit Activities and Other Sources of Funds
General.Deposits, borrowings and loan repayments are the major sources of our funds for lending and other investment purposes. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and economic conditions.
Deposit Accounts.Substantially all of our depositors are residents of Pennsylvania. Deposits are attracted from within our market area through the offering of a broad selection of deposit products, including noninterest-bearing demand deposits (such as checking accounts), interest-bearing demand accounts (such as NOW and money market accounts), statement savings accounts and certificates of deposit. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of our deposit accounts, we consider the rates offered by our competition, liquidity needs, profitability, matching deposit and loan products and customer preferences and concerns. We generally review our deposit mix and pricing weekly. Our current strategy is to offer competitive rates on all types of deposit products.
In addition to accounts for individuals, we also offer deposit accounts designed for the businesses operating in our market area. Our business banking deposit products include commercial checking accounts, money market accounts and remote electronic deposit.
Borrowings.We utilize advances from the FHLB and, to a limited extent, repurchase agreements to supplement our supply of investable funds. The FHLB functions as a central reserve bank providing credit for member financial institutions. As a member, we are required to own capital stock in the FHLB and are authorized to apply for advances on the security of such stock and certain of our mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States or Government-sponsored enterprises), provided certain standards related to creditworthiness have been met. Advances are made under several different programs, each having its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s net worth or on the FHLB’s assessment of the institution’s creditworthiness.
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Personnel
At December 31, 2008, we had 87 full-time employees and eight part-time employees, including employees of our insurance agency subsidiary, none of whom is represented by a collective bargaining unit.
Subsidiaries
FedFirst Financial’s only direct subsidiary is First Federal Savings Bank. First Federal Savings Bank’s only direct subsidiary is FedFirst Exchange Corporation. FedFirst Exchange Corporation owns an 80% interest in Exchange Underwriters, Inc.
EXECUTIVE OFFICERS OF THE REGISTRANT
The Board of Directors annually elects the executive officers of FFMHC, FedFirst Financial and First Federal, who serve at the Board’s discretion. Our executive officers are:
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| Name | | Position |
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| John G. Robinson | | President and Chief Executive Officer of FFMHC, FedFirst Financial and First Federal |
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| Patrick G. O’Brien | | Executive Vice President and Chief Operating Officer of FFMHC, FedFirst Financial and First Federal |
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| Robert C. Barry, Jr. | | Senior Vice President and Chief Financial Officer of FFMHC, FedFirst Financial and First Federal |
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| Richard B. Boyer | | Vice President — Insurance of First Federal; President of Exchange Underwriters, Inc. |
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| Henry B. Brown III | | Vice President — Loan Administration of First Federal |
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| Geraldine A. Ferrara | | Vice President — Branch Services and Sales of First Federal |
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| Jennifer L. George | | Vice President — Bank Operations of First Federal |
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| Jamie L. Prah | | Vice President — Controller and Treasurer of First Federal and Vice President of FFMHC and FedFirst Financial |
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| DaCosta Smith, III | | Vice President — Human Resources of First Federal and Vice President of FFMHC and FedFirst Financial |
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Below is information regarding our executive officers who are not also directors. Ages presented are as of December 31, 2008.
Patrick G. O’Brienhas served as Executive Vice President and Chief Operating Officer of FedFirst Financial and First Federal since September 2005. Prior to working with FedFirst Financial, Mr. O’Brien served as Regional President and Senior Lender — Commercial Lending with WesBanco Bank, Inc., Washington, Pennsylvania, from March 2002 to August 2005. Before serving with WesBanco Bank, Mr. O’Brien was Senior Vice President of Commercial Lending with Wheeling National Bank from August 1999 to March 2002, and Vice President and District Manager (Retail Banking) at PNC from 1993 to 1999. Age 47.
Robert C. Barry, Jr.has served as the Senior Vice President and Chief Financial Officer of FedFirst Financial and First Federal since April 1, 2006. Prior to working with FedFirst Financial, Mr. Barry served as Senior Vice President of the PNC Financial Services Group, Inc. Age 65.
Henry B. Brown IIIhas served as Vice President of First Federal since August 2007. Prior to working with First Federal, Mr. Brown served as Senior Vice President — Treasury Management at WesBanco Bank, Inc. from May 2005 to August 2007 and as Owner/Partner of Good Deeds, Inc., a real estate services firm, from May 2002 to May 2005. Prior to working as Owner/Partner of Good Deeds, Inc., Mr. Brown held several positions at PNC Bank until February 2002. Age 57.
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Geraldine A. Ferrarajoined First Federal in October 2005 as Vice President — Consumer Sales Manager. In August 2006, she was named Vice President — Branch Services and Sales. Prior to working with First Federal, Ms. Ferrara served as Vice President — Market Manager at PNC Bank from June 2004 to October 2005 and as Vice President — Sector Service Manager from July 1999 to May 2004. Age 57.
Jennifer L. Georgejoined First Federal in January 2006 as Assistant Controller. In July 2007, she was named Vice President — Bank Operations. Prior to working with First Federal, Ms. George served as Accounts Payable Manager with Del Monte Foods from April 2005 to December 2005 and Accounting Manager at First Commonwealth, formerly Great American Federal, from January 2003 to December 2004. Age 37.
Jamie L. Prahhas served as Vice President — Controller and Treasurer of First Federal since February 2005. Prior to working with First Federal, Mr. Prah served as Corporate Controller of North Side Bank from July 2004 to February 2005. Before serving with North Side Bank, Mr. Prah was Vice President and Controller of Great American Federal from May 2002 to June 2004 and Assistant Vice President — Internal Audit from May 2000 to May 2002. Age 38.
DaCosta Smith, IIIhas served as the Vice President — Director of Human Resources for First Federal since 1992. Age 53.
REGULATION AND SUPERVISION
General
FedFirst Financial is a savings and loan holding company within the meaning of federal law. As such, FedFirst Financial is registered with the Office of Thrift Supervision (“OTS”) and subject to OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over FedFirst Financial and its non-savings association subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association.
The Bank, as an insured federal savings association, is subject to extensive regulation, examination and supervision by the OTS, as its primary federal regulator, and the Federal Deposit Insurance Corporation (“FDIC”), as the deposit insurer. The Bank is a member of the FHLB System and, with respect to deposit insurance, of the Deposit Insurance Fund managed by the FDIC. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition and obtain regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other savings associations. The OTS and/or the FDIC conduct periodic examinations to test the Bank’s safety and soundness and compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the OTS, the FDIC or Congress, could have a material adverse impact on FedFirst Financial, FFMHC, the Bank and their operations.
Certain regulatory requirements applicable to the Bank and to FedFirst Financial are referred to below or elsewhere herein. The summary of statutory provisions and regulations applicable to savings associations and their holding companies set forth below and elsewhere in this document does not purport to be a complete description of such statutes and regulations and their effects on the Bank and Company and is qualified in its entirety by reference to the actual statutes and regulations.
K-9
Holding Company Regulation
Restrictions Applicable to Mutual Holding Companies.Federal law prohibits a savings and loan holding company from acquiring more than 5% of the voting stock of another savings association or savings and loan holding company without prior written approval of the OTS and from acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary holding company or savings association. A savings and loan holding company is also prohibited from acquiring more than 5% of a company engaged in activities other than those authorized by federal law or acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating applications by holding companies to acquire savings associations, the OTS must consider the financial and managerial resources and future prospects of FedFirst Financial and the institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors.
Although savings and loan holding companies are not currently subject to regulatory capital requirements or specific restrictions on the payment of dividends or other capital distributions, federal regulations do prescribe such restrictions on subsidiary savings associations. The Bank must notify the OTS 30 days before declaring any dividend and comply with the additional restrictions described below. In addition, the financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the OTS and the agency has authority to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution.
Stock Holding Company Subsidiary Regulation.The OTS has adopted regulations governing the two-tier mutual holding company form of organization and mid-tier stock holding companies that are controlled by mutual holding companies. Under the rules, the stock holding company subsidiary holds all the shares of the mutual holding company’s savings association subsidiary and issues at least a majority of its own shares to the mutual holding company parent. The stock holding company subsidiary is permitted to engage in activities that are permitted for its mutual holding company parent subject to the same terms and conditions. OTS regulations specify that the stock holding company subsidiary must be federally chartered for supervisory reasons.
Waivers of Dividends by FFMHC.OTS regulations require mutual holding companies to notify the agency if they propose to waive receipt of dividends from their stock subsidiary. The OTS reviews dividend waiver notices on a case-by-case basis and, in general, does not object to a waiver if: (i) the waiver would not be detrimental to the safe and sound operation of the savings association; and (ii) the mutual holding company’s board of directors determines that their waiver is consistent with such directors’ fiduciary duties to the mutual holding company’s members. FedFirst Financial anticipates that FFMHC will waive dividends, if any are paid.
Conversion to Stock Form.OTS regulations permit FFMHC to convert from the mutual form of organization to the capital stock form of organization. There can be no assurance when, if ever, a conversion transaction will occur. In a conversion transaction, a new holding company would be formed as the successor to FFMHC and FedFirst Financial. FFMHC’s corporate existence would end and certain depositors in the Bank would receive a right to subscribe for shares of the new holding company. In a conversion transaction, each share of common stock of FedFirst Financial held by stockholders other than FFMHC would be automatically converted into a number of shares of common stock of the new holding company based on an exchange ratio designed to ensure that stockholders other than FFMHC own the same percentage of common stock in the new holding company as they owned in FedFirst Financial immediately before conversion. The total number of shares held by stockholders other than FFMHC after a conversion transaction would be increased by any purchases by such stockholders in the stock offering conducted as part of the conversion transaction.
Acquisition of FedFirst Financial.Under the Federal Change in Control Act, a notice must be submitted to the OTS if any person (including a company), or group acting in concert, seeks to acquire direct or indirect “control” of a savings and loan holding company or savings association. Under certain circumstances, a change of control may occur, and prior notice is required, upon the acquisition of 10% or more of the outstanding voting stock of the company or institution, unless the OTS has found that the acquisition will not result in a change of control of FedFirst Financial. Under the Change in Control Act, the OTS generally has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition. Any company that acquires control would then be subject to regulation as a savings and loan holding company.
K-10
Federal Savings Bank Regulation
Capital Requirements.The OTS capital regulations require savings associations to meet three minimum capital standards: a 1.5% tangible capital to total assets ratio; a 4% Tier 1 capital to total assets leverage ratio (3% for institutions receiving the highest rating on the CAMELS examination rating system); and an 8% risk-based capital ratio. In addition, the prompt corrective action standards discussed below also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS system) and, together with the risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. The OTS regulations also require that, in meeting the tangible, leverage and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities as principal that are not permissible for a national bank.
The risk-based capital standard for savings associations requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital, less certain specified deductions from total capital such as reciprocal holdings of depository institution capital, instruments and equity investments) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet activities, recourse obligations, residual interests and direct credit substitutes, are multiplied by a risk-weight factor of 0% to 100%, assigned by the OTS capital regulation based on the risks believed inherent in the type of asset. Core (Tier 1) capital is generally defined as common stockholders’ equity (including retained earnings), certain non-cumulative perpetual preferred stock and related surplus, and minority interests in equity accounts of consolidated subsidiaries less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital (Tier 2 capital) include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses, limited to a maximum of 1.25% of risk-weighted assets, and up to 45% of unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital.
The OTS also has authority to establish individual minimum capital requirements in appropriate cases upon a determination that an institution’s capital level is or may become inadequate in light of the particular circumstances. At December 31, 2008, the Bank met each of its capital requirements. See Note 10 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
Prompt Corrective Regulatory Action.The OTS is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s degree of undercapitalization. Generally, a savings association that has a ratio of total capital to risk weighted assets of less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less than 4% or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination rating) is considered to be “undercapitalized.” A savings association that has a total risk-based capital ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be “significantly undercapitalized” and a savings association that has a tangible capital to assets ratio equal to or less than 2% is deemed to be “critically undercapitalized.” Subject to a narrow exception, the OTS is required to appoint a receiver or conservator within specified time frames for an institution that is “critically undercapitalized.” The regulation also provides that a capital restoration plan must be filed with the OTS within 45 days of the date a savings association is deemed to have received notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Compliance with the plan must be guaranteed by any parent holding company up to the lesser of 5% of the savings association’s total assets when it was deemed to be undercapitalized or the amount necessary to achieve compliance with applicable capital regulations. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. The OTS could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Significantly and undercapitalized institutions are subject to additional mandatory and discretionary restrictions.
K-11
Insurance of Deposit Accounts.The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors, with less risky institutions paying lower assessments. An institution’s assessment rate depends upon the category to which it is assigned. For 2008, assessments ranged from five to forty-three basis points of assessable deposits. Due to losses incurred by the Deposit Insurance Fund in 2008 from failed institutions, and anticipated future losses, the FDIC has adopted a seven basis point increase in the assessment range for the first quarter of 2009. The FDIC has adopted further refinements to its risk-based assessment that are effective April 1, 2009 and make the range seven to 77-1/2 basis points. The FDIC has also imposed a special emergency assessment of 20 basis points of assessable deposits as of June 30, 2009 in order to cover losses to the Deposit Insurance Fund. No institution may pay a dividend if in default of the federal deposit insurance assessment.
Deposit insurance per account owner has been raised from $100,000 to $250,000 for all types of accounts until January 1, 2010. In addition, the FDIC adopted an optional Temporary Liquidity Guarantee Program under which, for a fee, noninterest bearing transaction accounts receive unlimited insurance coverage until December 31, 2009 and certain senior unsecured debt issued by institutions and their holding companies between October 13, 2008 and June 30, 2009 are guaranteed by the FDIC through June 30, 2012. The Bank has opted to participate in the unlimited noninterest bearing transaction account coverage, and the Bank and FedFirst Financial have opted to not participate in the unsecured debt guarantee program.
In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund. That payment is established quarterly and during the calendar year ending December 31, 2008 averaged 1.12 basis points of assessable deposits.
The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future.
Loans to One Borrower.Generally, subject to certain exceptions, a savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if secured by specified readily-marketable collateral.
Qualified Thrift Lender Test.Federal law requires savings associations to meet a qualified thrift lender test. Under the test, a savings association is required to either qualify as a “domestic building and loan association” under the Internal Revenue Code or maintain at least 65% of its “portfolio assets” (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed securities but also defined to include education, credit card and small business loans) in at least 9 months out of each 12 month period. A savings association that fails the qualified thrift lender test is subject to certain operating restrictions and may be required to convert to a bank charter. As of December 31, 2008, the Bank met the qualified thrift lender test.
Limitation on Capital Distributions.OTS regulations impose limitations upon all capital distributions by a savings association, including cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. Under the regulations, an application to and prior approval of the OTS is required prior to any capital distribution if the institution does not meet the criteria for “expedited treatment” of applications under OTS regulations (i.e., generally, examination and Community Reinvestment Act ratings in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution, or the distribution would otherwise be contrary to a statute, regulation or agreement with the OTS. If an application is not required, the institution must still provide prior notice to the OTS of the capital distribution if, like the Bank, it is a subsidiary of a holding company. In the event the Bank’s capital fell below its regulatory requirements or the OTS notified it that it was in need of increased supervision, the Bank’s ability to make capital distributions could be restricted. In addition, the OTS could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the OTS determines that such distribution would constitute an unsafe or unsound practice.
K-12
Transactions with Related Parties.The Bank’s authority to engage in transactions with “affiliates” (e.g., any entity that controls or is under common control with an institution, including FedFirst Financial and its other subsidiaries) is limited by federal law. The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the savings association. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings association’s capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type specified by federal law. The purchase of low quality assets from affiliates is generally prohibited. The transactions with affiliates must be on terms and under circumstances that are at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings associations are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings association may purchase the securities of any affiliate other than a subsidiary.
The Sarbanes-Oxley Act of 2002 generally prohibits loans by FFMHC to its executive officers and directors. However, the law contains a specific exception for loans by a depository institution to its executive officers and directors in compliance with federal banking laws. Under such laws, the Bank’s authority to extend credit to executive officers, directors and 10% shareholders (“insiders”), as well as entities such persons control, is limited. The laws limit both the individual and aggregate amount of loans that the Bank may make to insiders based, in part, on the Bank’s capital level and requires that certain board approval procedures be followed. Such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception for loans made pursuant to a program that is widely available to all employees of the institution and does not give preference to insiders over other employees. Loans to executive officers are subject to additional restrictions based on the type of loan involved.
Assessments.Savings associations are required to pay assessments to the OTS to fund the agency’s operations. The general assessments, paid on a semi-annual basis, are computed based upon the savings association’s (including consolidated subsidiaries) total assets, condition and complexity of portfolio. The OTS assessments paid by the Bank for the year ended December 31, 2008 totaled $85,000.
FHLB System.The Bank is a member of the FHLB System, which consists of 12 regional Federal Home Loan Banks. The FHLB provides a central credit facility primarily for member institutions. The Bank, as a member of the FHLB, is required to acquire and hold shares of capital stock in that FHLB. The Bank was in compliance with this requirement with an investment in FHLB stock at December 31, 2008 of $6.9 million. In December 2008, the FHLB of Pittsburgh notified member banks that it was suspending dividend payments and the repurchase of capital stock.
The Federal Home Loan Banks have been required to provide funds for the resolution of insolvent thrifts in the late 1980s and contribute funds for affordable housing programs. These and similar obligations could reduce the amount of dividends that the Federal Home Loan Banks pay to their members and result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members. In December 2008, the FHLB suspended dividend payments, which will reduce the Bank’s net interest income. Future increases to FHLB advances would likely also reduce the Bank’s net interest income.
Federal Reserve System.The Federal Reserve Board regulations require savings associations to maintain non-interest earning reserves against their transaction accounts (primarily Negotiable Order of Withdrawal (NOW) and regular checking accounts). The regulations generally provide that reserves be maintained against aggregate transaction accounts as follows: a 3% reserve ratio is assessed on net transaction accounts up to and including $44.4 million; a 10% reserve ratio is applied above $44.4 million. The first $10.3 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) are exempted from the reserve requirements. The amounts are adjusted annually. The Bank complies with the foregoing requirements.
K-13
FEDERAL AND STATE TAXATION
Federal Income Taxation
General.We report our income on a fiscal year basis using the accrual method of accounting. The federal income tax laws apply to us in the same manner as to other corporations with some exceptions, including particularly our reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to us. Our federal income tax returns have been either audited or closed under the statute of limitations through tax year 2004. For its 2008 year, First Federal’s maximum federal income tax rate was 34%.
FedFirst Financial and First Federal have entered into a tax allocation agreement. Because FedFirst Financial owns 100% of the issued and outstanding capital stock of First Federal, FedFirst Financial and First Federal are members of an affiliated group within the meaning of Section 1504(a) of the Internal Revenue Code, of which group FedFirst Financial is the common parent corporation. As a result of this affiliation, First Federal may be included in the filing of a consolidated federal income tax return with FedFirst Financial and, if a decision to file a consolidated tax return is made, the parties agree to compensate each other for their individual share of the consolidated tax liability and/or any tax benefits provided by them in the filing of the consolidated federal income tax return.
Bad Debt Reserves.For fiscal years beginning before June 30, 1996, thrift institutions that qualified under certain definitional tests and other conditions of the Internal Revenue Code were permitted to use certain favorable provisions to calculate their deductions from taxable income for annual additions to their bad debt reserve. A reserve could be established for bad debts on qualifying real property loans, generally secured by interests in real property improved or to be improved, under the percentage of taxable income method or the experience method. The reserve for nonqualifying loans was computed using the experience method. Federal legislation enacted in 1996 repealed the reserve method of accounting for bad debts and the percentage of taxable income method for tax years beginning after 1995 and requires savings institutions to recapture or take into income certain portions of their accumulated bad debt reserves. Approximately $1.5 million of our accumulated bad debt reserves would not be recaptured into taxable income unless First Federal makes a “non-dividend distribution” to FedFirst Financial as described below.
Distributions.If First Federal makes “non-dividend distributions” to FedFirst Financial, the distributions will be considered to have been made from First Federal’s unrecaptured tax bad debt reserves, including the balance of its reserves as of December 31, 1987, to the extent of the “non-dividend distributions,” and then from First Federal’s supplemental reserve for losses on loans, to the extent of those reserves, and an amount based on the amount distributed, but not more than the amount of those reserves, will be included in First Federal’s taxable income. Non-dividend distributions include distributions in excess of First Federal’s current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock, and distributions in partial or complete liquidation. Dividends paid out of First Federal’s current or accumulated earnings and profits will not be so included in First Federal’s taxable income.
The amount of additional taxable income triggered by a non-dividend is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Therefore, if First Federal makes a non-dividend distribution to FedFirst Financial, approximately one and one-half times the amount of the distribution, not in excess of the amount of the reserves, would be includable in income for federal income tax purposes, assuming a 34% federal corporate income tax rate. First Federal does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserves.
State Taxation
FedFirst Financial and its non-thrift Pennsylvania subsidiaries are subject to the Pennsylvania Corporation Net Income Tax and Capital Stock and Franchise Tax. The state Corporate Net Income Tax rate for fiscal years ended 2008, 2007, and 2006 was 9.99% and was imposed on FedFirst Financial’s and its non-thrift subsidiaries’ unconsolidated taxable income for federal purposes with certain adjustments. In general, the Capital Stock Tax is a property tax imposed at the rate of 0.389% of a corporation’s capital stock value, which is determined in accordance with a fixed formula.
K-14
First Federal is taxed under the Pennsylvania Mutual Thrift Institutions Tax Act (the “MTIT”), as amended, to include thrift institutions having capital stock. Pursuant to the MTIT, First Federal’s tax rate is 11.5%. The MTIT exempts First Federal from all other taxes imposed by the Commonwealth of Pennsylvania for state income tax purposes and from all local taxation imposed by political subdivisions, except taxes on real estate and real estate transfers. The MTIT is a tax upon net earnings, determined in accordance with generally accepted accounting principles with certain adjustments. The MTIT, in computing income, allows for the exclusion of interest earned on Pennsylvania and federal securities, while disallowing a percentage of a thrift’s interest expense deduction in the proportion of interest income on those securities to the overall interest income of First Federal. Net operating losses, if any, thereafter can be carried forward three years for MTIT purposes. Neither FedFirst Financial nor First Federal has been audited by the Commonwealth of Pennsylvania in the last five years.
ITEM 1A. RISK FACTORS
An investment in shares of our common stock involves various risks. Before deciding to invest in our common stock, you should carefully consider the risks described below in conjunction with the other information in this Annual Report onForm 10-K and information incorporated by reference into this Annual Report onForm 10-K, including our consolidated financial statements and related notes. Our business, financial condition and results of operations could be harmed by any of the following risks or by other risks that have not been identified or that we may believe are immaterial or unlikely. The value or market price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements.
Higher loan losses could require us to increase our allowance for loan losses through a charge to earnings.
When we loan money we incur the risk that our borrowers do not repay their loans. We reserve for loan losses by establishing an allowance through a charge to earnings. The amount of this allowance is based on our assessment of loan losses inherent in our loan portfolio. The process for determining the amount of the allowance is critical to our financial results and condition. It requires subjective and complex judgments about the future, including forecasts of economic or market conditions that might impair the ability of our borrowers to repay their loans. We might underestimate the loan losses inherent in our loan portfolio and have loan losses in excess of the amount reserved. We might increase the allowance because of changing economic conditions. For example, in a rising interest rate environment, borrowers with adjustable rate loans could see their payments increase. There may be a significant increase in the number of borrowers who are unable or unwilling to repay their loans, resulting in our charging off more loans and increasing our allowance. In addition, when real estate values decline, the potential severity of loss on a real estate-secured loan can increase significantly, especially in the case of loans with high combined loan-to-value ratios. Our allowance for loan losses may not be sufficient to cover future loan losses, which would require us to build reserves, thus reducing earnings.
Our market area limits our growth potential.
Our offices are located primarily in small industrial communities in the mid-Monongahela Valley, which is located in the southern suburban area of metropolitan Pittsburgh. Most of these communities have experienced population and economic decline as a result of the decline of the United States steel industry. Because we have an aging customer base and there is little new real estate development in the communities where our offices are located, the opportunities for originating loans and growing deposits in our primary market area are limited. We cannot assure you that our deposits and loan portfolio will not decline in the future. If we are unable to grow our business it will be difficult for us to increase our earnings.
K-15
Our expansion strategy may not be successful.
A key component of our strategy to grow and improve profitability is to expand into communities that are experiencing population growth and economic expansion. In July 2006, we opened a new branch in Peters Township in Washington County. In June 2007, we opened a new branch located in the downtown area of Washington, Pennsylvania. We can provide no assurance that we will be successful in increasing the volume of our loans and deposits by expanding our branch network. Building and/or staffing new branch offices will increase our operating expenses. We can provide no assurance that we will be able to manage the costs and implementation risks associated with this strategy so that expansion of our branch network will be profitable.
Changes in interest rates may reduce our profits and asset value.
Our net interest income is the interest we earn on loans and investment less the interest we pay on our deposits and borrowings. Our net interest margin is the difference between the yield we earn on our assets and the interest rate we pay for deposits and our other sources of funding. Changes in interest rates — up or down — could adversely affect our net interest margin and, as a result, our net interest income. Although the yield we earn on our assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, causing our net interest margin to expand or contract. Our liabilities tend to be shorter in duration than our assets, so they may adjust faster in response to changes in interest rates. As a result, when interest rates rise, our funding costs may rise faster than the yield we earn on our assets, causing our net interest margin to contract until the yield catches up. Changes in the slope of the “yield curve” — or the spread between short-term and long-term interest rates — could also reduce our net interest margin. Normally, the yield curve is upward sloping, meaning short-term rates are lower than long-term rates. Because our liabilities tend to be shorter in duration than our assets, when the yield curve flattens or even inverts, we could experience pressure on our net interest margin as our cost of funds increases relative to the yield we can earn on our assets.
Our emphasis on real estate lending exposes us to a risk of loss due to a decline in property values.
Substantially all of our loans are secured by real estate in Western Pennsylvania. Current economic conditions, including declines in the housing market, have resulted in declines in real estate values in our market area. These declines in real estate values could cause some of our mortgage and home equity loans to be inadequately collateralized, which would expose us to a greater risk of loss in the event that we seek to recover on defaulted loans by selling the real estate collateral.
A continuation of recent turmoil in the financial markets could have an adverse effect on our financial position or results of operations.
Beginning in 2008, United States and global markets have experienced severe disruption and volatility, and general economic conditions have declined significantly. Adverse developments in credit quality, asset values and revenue opportunities throughout the financial services industry, as well as general uncertainty regarding the economic, industry and regulatory environment, have had a marked negative impact on the industry. The United States and the governments of other countries have taken steps to try to stabilize the financial system, including investing in financial institutions, and have also been working to design and implement programs to improve general economic conditions. Notwithstanding the actions of the United States and other governments, there can be no assurances that these efforts will be successful in restoring industry, economic or market conditions and that they will not result in adverse unintended consequences. Factors that could continue to pressure financial services companies, including FedFirst Financial, are numerous and include (1) worsening credit quality, leading among other things to increases in loan losses and reserves, (2) continued or worsening disruption and volatility in financial markets, leading among other things to continuing reductions in assets values, (3) capital and liquidity concerns regarding financial institutions generally, (4) limitations resulting from or imposed in connection with governmental actions intended to stabilize or provide additional regulation of the financial system, or (5) recessionary conditions that are deeper or last longer than currently anticipated.
K-16
Strong competition within our market area could reduce our profits and slow growth.
We face intense competition both in making loans and attracting deposits. This competition has made it more difficult for us to make new loans and at times has forced us to offer higher deposit rates. Price competition for loans and deposits might result in us earning less on our loans and paying more on our deposits, which would reduce net interest income. Competition also makes it more difficult to grow loans and deposits. As of June 30, 2008, we held 0.25% of the deposits in the Pittsburgh metropolitan area. Some of the institutions with which we compete have substantially greater resources and lending limits than we have and may offer services that we do not provide. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability depends upon our continued ability to compete successfully in our market area.
Our purchase of out-of-state loans may expose us to increased lending risks.
Between 2002 and 2005, we purchased $95.4 million of newly originated residential and multi-family real estate loans. The purchased loans are secured by properties throughout the country. Rapid repayments, primarily as a result of the lower interest rate environment since the loans were originated, have reduced the aggregate outstanding principal amount of these loans to $36.9 million at December 31, 2008, which was 15.6% of our total loans. It is difficult to assess the future performance of this part of our loan portfolio because the properties securing these loans are located outside of our market area. We can give no assurance that these loans will not have delinquency or charge-off levels above our historical experience, which would adversely affect our future performance.
We operate in a highly regulated environment and we may be adversely affected by changes in laws and regulations.
We are subject to extensive regulation, supervision and examination by the OTS, our chartering authority, and by the FDIC, as insurer of our deposits. FFMHC, FedFirst Financial and First Federal are all subject to regulation and supervision by the OTS. Such regulation and supervision governs the activities in which an institution and its holding company may engage, and are intended primarily for the protection of the insurance fund and the depositors and borrowers of First Federal rather than for holders of FedFirst Financial common stock. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. As a result of the current market turmoil, there is a potential for new laws and regulations regarding lending and funding practices and liquidity standards and bank regulatory agencies are expected to be very aggressive in responding to concerns and trends identified in examinations. In addition, the FDIC, which has imposed a one-time special assessment to increase the balance of the Deposit Insurance Fund, may raise deposit insurance premiums further and/or impose additional special assessments. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations.
FFMHC’s majority control of our common stock will enable it to exercise voting control over most matters put to a vote of stockholders and will prevent stockholders from forcing a sale or a second-step conversion transaction you may find advantageous.
FFMHC owns a majority of FedFirst Financial’s common stock and, through its Board of Directors, will be able to exercise voting control over most matters put to a vote of stockholders. The same directors and officers who manage FedFirst Financial and First Federal also manage FFMHC.
K-17
As a federally chartered mutual holding company, the Board of Directors of FFMHC must ensure that the interests of depositors of First Federal are represented and considered in matters put to a vote of stockholders of FedFirst Financial. Therefore, the votes cast by FFMHC may not be in your personal best interest as a stockholder. For example, FFMHC may exercise its voting control to defeat a stockholder nominee for election to the Board of Directors of FedFirst Financial. In addition, stockholders will not be able to force a merger or second-step conversion transaction without the consent of FFMHC. Some stockholders may desire a sale or merger transaction, since stockholders typically receive a premium for their shares, or a second-step conversion transaction, since fully converted institutions tend to trade at higher multiples than mutual holding companies.
OTS policy on remutualization transactions could prohibit acquisition of FedFirst Financial, which may adversely affect our stock price.
Current OTS regulations permit a mutual holding company to be acquired by a mutual institution in a remutualization transaction. However, the OTS has issued a policy statement indicating that it views remutualization transactions as raising significant issues concerning disparate treatment of minority stockholders and mutual members of the target entity and raising issues concerning the effect on the mutual members of the acquiring entity. Under certain circumstances, the OTS intends to give these issues special scrutiny and reject applications providing for the remutualization of a mutual holding company unless the applicant can clearly demonstrate that the OTS’s concerns are not warranted in the particular case. Should the OTS prohibit or otherwise restrict these transactions in the future, our per share stock price may be adversely affected.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
K-18
ITEM 2. PROPERTIES
We conduct our business through our main office and branch offices. The following table sets forth certain information relating to these facilities at December 31, 2008 (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Date of | | | | | | Net Book Value |
| | | Year | | Square | | Lease | | Owned / | | at |
| Location | | Opened | | Footage | | Expiration | | Leased | | December 31, 2008 |
| |
First Federal Savings Bank: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Donner at Sixth Street
Monessen, PA 15062 | | | 1970 | | | | 11,430 | | | | N/A | | | Owned | | $ | 188 | |
| | | | | | | | | | | | | | | | | | | | | |
557 Donner at Sixth Street
Monessen, PA 15062(1) | | | 1980 | | | | 6,625 | | | | N/A | | | Owned | | | 15 | |
| | | | | | | | | | | | | | | | | | | | | |
235 West Main Street
PO Box 141
Monongahela, PA 15063 | | | 1965 | | | | 6,323 | | | | N/A | | | Owned | | | 51 | |
| | | | | | | | | | | | | | | | | | | | | |
1670 Broad Avenue
Belle Vernon, PA 15012 | | | 1974 | | | | 5,048 | | | | N/A | | | Owned | | | 214 | |
| | | | | | | | | | | | | | | | | | | | | |
545 West Main Street
Uniontown, PA 15401(2) | | | 1975 | | | | 4,160 | | | | N/A | | | Owned | | | 129 | |
| | | | | | | | | | | | | | | | | | | | | |
Park Centre Plaza
1711 Grand Boulevard
Monessen, PA 15062 | | | 1985 | | | | 1,575 | | | | 2/28/10 | | | Leased | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
Meldon at Sixth Street
PO Box 442
Donora, PA 15033 | | | 1980 | | | | 2,609 | | | | N/A | | | Owned | | | 215 | |
| | | | | | | | | | | | | | | | | | | | | |
101 Independence Street
PO Box 625
Perryopolis, PA 15473 | | | 1986 | | | | 1,992 | | | | N/A | | | Owned | | | 38 | |
| | | | | | | | | | | | | | | | | | | | | |
3515 Washington Road
McMurray, PA 15317 | | | 2006 | | | | 2,535 | | | | 2/28/11 | | | Leased | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
95 West Beau Street
Suite 130
Washington, PA 15301 | | | 2007 | | | | 3,355 | | | | 4/30/17 | | | Leased | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
Exchange Underwriters: | | | | | | | | | | | | | | | | | | | | |
121 West Pike Street
Canonsburg, PA 15317 | | | 1982 | | | | 3,500 | | | | 5/31/12 | | | Leased | | | — | |
| |
| | |
| (1) | | Administrative offices. |
| |
| (2) | | The property is subject to a ground lease that expires in 2009. |
K-19
ITEM 3. LEGAL PROCEEDINGS
Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
| | |
| ITEM 5. | | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market, Holder and Dividend Information
The Company’s common stock is listed on the NASDAQ Capital Market under the trading symbol “FFCO.” The following table sets forth the high and low sales prices of the common stock for the four quarters of 2008 and 2007, as reported on the NASDAQ Capital Market.
| | | | | | | | | | | | | | | | | |
| | | 2008 | | 2007 |
| Quarter | | High | | Low | | High | | Low |
| |
| First Quarter | | $ | 9.30 | | | $ | 8.00 | | | $ | 9.70 | | | $ | 8.64 | |
| Second Quarter | | | 8.30 | | | | 5.41 | | | | 9.69 | | | | 8.64 | |
| Third Quarter | | | 8.00 | | | | 5.35 | | | | 9.30 | | | | 8.66 | |
| Fourth Quarter | | | 6.20 | | | | 4.21 | | | | 9.45 | | | | 8.50 | |
| |
FedFirst Financial has not declared or paid any dividends to date to its stockholders. FedFirst Financial’s ability to pay dividends is dependent on dividends received from First Federal. For a discussion of restrictions on the payment of cash dividends by First Federal, see “Business — Regulation and Supervision — Federal Savings Bank Regulation — Limitation on Capital Distributions” in this Annual Report on Form 10-K.
As of March 11, 2009, there were approximately 192 holders of record of the Company’s common stock, excluding the number of persons or entities holding stock in street name through various brokerage firms.
K-20
Purchases of Equity Securities
The Company made the following purchases of its common stock during the three months ended December 31, 2008.
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Total Number of | | |
| | | | | | | | | | | Shares Purchased | | Maximum Number |
| | | | | | | | | | | as Part of the | | of Shares that May |
| | | Total Number | | Average Price | | Publicly | | Yet Be Purchased |
| | | of Shares | | Paid per | | Announced | | Under the |
| Period | | Purchased | | Share | | Programs(1) | | Programs(1) |
| October 2008 | | | 15,000 | | | $ | 5.66 | | | | 15,000 | | | | 83,250 | |
| November 2008 | | | 13,500 | | | | 5.30 | | | | 13,500 | | | | 69,750 | |
| December 2008 | | | — | | | | — | | | | — | | | | 69,750 | |
| | | | | | | | | | | | | | | | | |
| Total | | | 28,500 | | | | 5.49 | | | | 28,500 | | | | | |
| | | | | | | | | | | | | | | | | |
| | |
| (1) | | On May 23, 2008, the Company announced that the board of directors had approved a program allowing the Company to repurchase up to 140,000 shares of the Company’s outstanding common stock, which was approximately 5% of outstanding shares held by persons other than FFMHC on that date. This repurchase program was scheduled to expire on November 30, 2008, but was extended to May 31, 2009. On February 6, 2009, the Company announced the cancellation of this program. At the time of cancellation, the Company had purchased 85,250 shares of common stock under the program at an average price of $5.76. |
ITEM 6. SELECTED FINANCIAL DATA
Not applicable as the Company is a smaller reporting company.
| | |
| ITEM 7. | | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION |
The objective of this section is to help stockholders and potential investors understand our views on our results of operations and financial condition. You should read this discussion in conjunction with the Consolidated Financial Statements and Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
Overview
Income.Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income, which is the income that we earn on our loans and investments, and interest expense, which is the interest that we pay on our deposits and borrowings. Other significant sources of pre-tax income are service charges (mostly from service charges on deposit accounts), commissions from the sale of insurance products and bank-owned life insurance. In some years we may also recognize income from the sale of securities.
Allowance for Loan Losses.The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.
Expenses.The noninterest expenses we incur in operating our business consist of compensation and employee benefits expenses, occupancy expenses which include depreciation, FDIC insurance premiums, data processing expenses and other miscellaneous expenses.
K-21
Compensation and employee benefits consist primarily of: salaries and wages paid to our employees; payroll taxes; and expenses for health insurance, retirement plans, equity compensation plans and other employee benefits.
Occupancy expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of depreciation charges, lease expense, furniture and equipment expenses, maintenance, real estate taxes and costs of utilities.
Federal insurance premiums are payments we make to the FDIC for insurance of our deposit accounts.
Data processing expenses are the fees we pay to third parties for processing customer information, deposits and loans.
Other expenses include advertising, professional services, stationary, printing, and supplies, telephone, postage, correspondent bank fees, real estate owned expenses, and other miscellaneous operating expenses.
Critical Accounting Policies
We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. We consider the following to be our critical accounting policies: allowance for loan losses, deferred income taxes, goodwill, and other than temporary impairment.
Allowance for Loan Losses.The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income.
Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on larger impaired loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance on a quarterly basis and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectibility of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the OTS, as an integral part of its examination process, periodically reviews our allowance for loan losses. Such agency may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively affect earnings. See Notes 1 and 3 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
Deferred Income Taxes.We use the asset and liability method of accounting for income taxes as prescribed in Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to record an additional valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period, which would negatively affect earnings.
K-22
Goodwill.In connection with our acquisition of Exchange Underwriters, we recorded $1.1 million of goodwill. As required by Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” goodwill is no longer amortized but is subject, at a minimum, to annual tests for impairment. The SFAS No. 142 goodwill impairment model is a two-step process. First, it requires a comparison of the book value of net assets to the fair value of the related operations that have goodwill assigned to them. If the fair value is determined to be less than book value, a second step is performed to compute the amount of the impairment. We estimate the fair values of the related operations using discounted cash flows. The forecasts of future cash flows are based on our best estimate of future revenues and operating costs, based primarily on contracts in effect, new accounts and cancellations and operating budgets. The impairment analysis requires management to make subjective judgments concerning how the acquired assets will perform in the future. Events and factors that may significantly affect the estimates include competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures and industry and market trends. Changes in these forecasts could cause a reporting unit to either pass or fail the first step in the SFAS No. 142 goodwill impairment model, which could significantly change the amount of impairment recorded. Our annual assessment of potential goodwill impairment was completed in the fourth quarter of 2008. Based on the results of this assessment, no goodwill impairment was recognized.
Other Than Temporary Impairment.We evaluate securities for impairment based on the three step model outlined in Financial Accounting Standards Board Staff Position FAS 115-1 and 124-1The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The three step model includes identifying impairment, determining whether the impairment is other-than-temporary and, if so, recognizing the impairment loss. An investment is impaired if its fair value is less than its cost basis. We assess impairment at the individual security level on a quarterly basis. Determining the amount of the other-than-temporary impairment involves a high degree of subjective judgments and may include evaluating the following impairment indicators:
| | • | | Significant deterioration in the investee’s earnings performance, credit rating, asset quality, or business prospects. |
| |
| | • | | Significant adverse change in the investee’s regulatory, economic, or technological environment or in the general market conditions of either the geographic area or the industry in which the investee operates. |
| |
| | • | | Bona fide, solicited-or-unsolicited offer to buy the same or a similar security for an amount less than cost or a completed auction process for the same or similar security indicating a decline in the investment’s fair value. |
| |
| | • | | Events or conditions that raise significant concerns about the investee’s ability to continue as a going concern, such as negative cash flows from operations, working-capital deficiencies, or noncompliance with statutory capital requirements or debt covenants. |
An impaired state may end either because fair value recovers at least up to its cost or because the investor recognizes an other-than-temporary impairment loss. Once impairments are identified, a determination is made on whether they are temporary or other-than-temporary. The loss recognized on an identified other-than-temporary impairment is the difference between the investment’s cost and its fair value at the balance-sheet date. This establishes a new cost basis for the investment, which is not adjusted for subsequent recoveries of fair value. We subsequently account for other-than-temporarily impaired debt securities as though those securities had been purchased on the measurement date of the impairment. The discount or reduced premium recorded for the debt security is amortized over the remaining life of the security based on the amount and timing of estimated future cash flows.
K-23
Balance Sheet Analysis
Loans.Our primary lending activity has been the origination of loans secured by real estate. We originate one-to-four family residential loans, commercial and multi-family real estate loans and construction loans. We also originate commercial business and consumer loans. In order to improve the mix and profitability of our loan portfolio, we have recently emphasized the origination of commercial real estate and business loans and home equity loans.
Total loans increased $44.6 million or 23.2%, to $236.9 million at December 31, 2008 compared to $192.3 million at December 31, 2007.
The largest segment of our loan portfolio is one-to-four family residential loans. These loans increased $20.4 million, or 15.1%, to $155.9 million and represented 65.7% of total loans at December 31, 2008, compared to $135.5 million, or 70.4% of total loans, at December 31, 2007.
Commercial real estate loans increased $9.8 million to $24.3 million and represented 10.3% of total loans at December 31, 2008, compared to $14.5 million, or 7.5% of total loans, at December 31, 2007. The increase was the result of the Company’s continued focus on growing its commercial loan portfolio by becoming a greater presence in the business community.
Multi-family real estate loans decreased $1.0 million, or 8.7%, to $10.9 million and represented 4.6% of total loans at December 31, 2008, compared to $12.0 million, or 6.2% of total loans, at December 31, 2007. The decrease was the result of prepayments and pay-downs of purchased multi-family loans.
Construction loans increased $6.6 million, or 99.0%, to $13.3 million and represented 5.7% of total loans at December 31, 2008, compared to $6.7 million, or 3.5% of total loans, at December 31, 2007. Residential construction loans increased $3.2 million, or 47.4% to $9.8 million. At December 31, 2008, there were two commercial construction loans totaling $3.4 million. There were no commercial construction loans at December 31, 2007.
We originate commercial business loans secured by business assets other than real estate, such as business equipment, inventory and accounts receivable. Commercial business loans increased $4.1 million, or 95.2%, to $8.5 million and represented 3.6% of total loans at December 31, 2008, compared to $4.3 million, or 2.3% of total loans, at December 31, 2007. This increase from the prior year represents the Company’s continued focus on developing business relationships and improving the mix and profitability of our loan portfolio.
We also originate a variety of consumer loans, including home equity lines of credit, home equity installment loans, loans on savings accounts, and personal lines of credit. Consumer loans increased $4.6 million, or 23.9%, to $24.1 million at December 31, 2008, compared to $19.4 million at December 31, 2007 and represented 10.1% of total loans both years. Home equity loans, which increased $4.5 million, or 25.1% to $22.3 million, accounted for the majority of the increase in consumer loans.
K-24
The following table sets forth the composition of our loan portfolio at the dates indicated (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, | | 2008 | | 2007 | | 2006 | | 2005 | | 2004 |
| | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real estate — mortgage: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| One-to-four family residential | | $ | 155,871 | | | | 65.7 | % | | $ | 135,453 | | | | 70.4 | % | | $ | 133,821 | | | | 75.2 | % | | $ | 133,189 | | | | 76.3 | % | | $ | 111,333 | | | | 69.5 | % |
| Multi-family | | | 10,946 | | | | 4.6 | | | | 11,985 | | | | 6.2 | | | | 18,410 | | | | 10.3 | | | | 21,552 | | | | 12.3 | | | | 26,995 | | | | 16.9 | |
| Commercial | | | 24,301 | | | | 10.3 | | | | 14,483 | | | | 7.5 | | | | 5,437 | | | | 3.1 | | | | 4,121 | | | | 2.4 | | | | 5,401 | | | | 3.4 | |
| |
| Total real estate — mortgage | | | 191,118 | | | | 80.6 | | | | 161,921 | | | | 84.1 | | | | 157,668 | | | | 88.6 | | | | 158,862 | | | | 91.0 | | | | 143,729 | | | | 89.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real estate — construction: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential | | | 9,833 | | | | 4.2 | | | | 6,671 | | | | 3.5 | | | | 5,021 | | | | 2.8 | | | | 4,366 | | | | 2.5 | | | | 5,584 | | | | 3.5 | |
| Commercial | | | 3,443 | | | | 1.5 | | | | — | | | | | | | | 1,750 | | | | 1.0 | | | | 1,000 | | | | 0.6 | | | | 94 | | | | 0.1 | |
| |
| Total real estate — construction | | | 13,276 | | | | 5.7 | | | | 6,671 | | | | 3.5 | | | | 6,771 | | | | 3.8 | | | | 5,366 | | | | 3.1 | | | | 5,678 | | | | 3.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consumer: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Home equity | | | 22,344 | | | | 9.4 | | | | 17,862 | | | | 9.3 | | | | 9,470 | | | | 5.3 | | | | 6,264 | | | | 3.6 | | | | 6,442 | | | | 4.0 | |
| Loans on savings accounts | | | 886 | | | | 0.4 | | | | 675 | | | | 0.4 | | | | 493 | | | | 0.3 | | | | 416 | | | | 0.2 | | | | 245 | | | | 0.2 | |
| Home improvement | | | 233 | | | | 0.1 | | | | 281 | | | | 0.1 | | | | 381 | | | | 0.2 | | | | 470 | | | | 0.3 | | | | 668 | | | | 0.4 | |
| Other | | | 588 | | | | 0.2 | | | | 592 | | | | 0.3 | | | | 531 | | | | 0.3 | | | | 1,955 | | | | 1.1 | | | | 2,303 | | | | 1.4 | |
| |
| Total consumer | | | 24,051 | | | | 10.1 | | | | 19,410 | | | | 10.1 | | | | 10,875 | | | | 6.1 | | | | 9,105 | | | | 5.2 | | | | 9,658 | | | | 6.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial business | | | 8,474 | | | | 3.6 | | | | 4,341 | | | | 2.3 | | | | 2,616 | | | | 1.5 | | | | 1,271 | | | | 0.7 | | | | 948 | | | | 0.6 | |
| |
| |
| Total loans | | | 236,919 | | | | 100.0 | % | | | 192,343 | | | | 100.0 | % | | | 177,930 | | | | 100.0 | % | | | 174,604 | | | | 100.0 | % | | | 160,013 | | | | 100.0 | % |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net premium on loans purchased | | | 120 | | | | | | | | 191 | | | | | | | | 326 | | | | | | | | 358 | | | | | | | | 401 | | | | | |
| Net deferred loan costs | | | 850 | | | | | | | | 491 | | | | | | | | 432 | | | | | | | | 385 | | | | | | | | 393 | | | | | |
| Loans in process | | | (5,899 | ) | | | | | | | (3,614 | ) | | | | | | | (3,104 | ) | | | | | | | (3,385 | ) | | | | | | | (3,374 | ) | | | | |
| Allowance for losses | | | (1,806 | ) | | | | | | | (1,457 | ) | | | | | | | (866 | ) | | | | | | | (800 | ) | | | | | | | (725 | ) | | | | |
| |
| Loans, net | | $ | 230,184 | | | | | | | $ | 187,954 | | | | | | | $ | 174,718 | | | | | | | $ | 171,162 | | | | | | | $ | 156,708 | | | | | |
| |
K-25
The following table sets forth certain information at December 31, 2008 regarding the dollar amount of loans maturing during the periods indicated. The table does not include any estimate of prepayments, which significantly shorten the average life of loans and may cause our actual repayment experience to differ from that shown below. Demand loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less. Real estate — construction loans will be converted to a real estate — mortgage loan at the end of the construction period and are reported based on the maturity date of the real estate — mortgage loan (dollars in thousands).
| | | | | | | | | | | | | | | | | |
| | | Amounts due in |
| |
| | | One year or | | One to | | After five | | |
| | | less | | five years | | years | | Total |
| |
| Real estate — mortgage | | $ | 1,492 | | | $ | 5,722 | | | $ | 183,904 | | | $ | 191,118 | |
| Real estate — construction | | | — | | | | — | | | | 13,276 | | | | 13,276 | |
| Consumer | | | 1,782 | | | | 947 | | | | 21,322 | | | | 24,051 | |
| Commercial business | | | 3,002 | | | | 4,563 | | | | 909 | | | | 8,474 | |
| |
| Total | | $ | 6,276 | | | $ | 11,232 | | | $ | 219,411 | | | $ | 236,919 | |
| |
The following table sets forth the dollar amount of all loans at December 31, 2008 that are due after December 31, 2009 and have either fixed or adjustable interest rates (dollars in thousands).
| | | | | | | | | | | | | |
| | | Fixed | | Adjustable | | Total |
| |
| Real estate — mortgage | | $ | 171,930 | | | $ | 17,696 | | | $ | 189,626 | |
| Real estate — construction | | | 13,276 | | | | — | | | | 13,276 | |
| Consumer | | | 20,999 | | | | 1,270 | | | | 22,269 | |
| Commercial business | | | 5,155 | | | | 317 | | | | 5,472 | |
| |
| Total | | $ | 211,360 | | | $ | 19,283 | | | $ | 230,643 | |
| |
Our adjustable rate mortgage loans generally do not provide for downward adjustments below the initial contract rate. This feature has prevented some loans from adjusting downwards in a declining interest rate environment. When market interest rates rise, the interest rates on these loans will not increase until the contract rate (the index plus the margin) exceeds the interest rate floor.
Securities.Our securities portfolio consists primarily of Government-sponsored enterprise securities, mortgage-backed securities, guaranteed REMIC pass-through certificates, and corporate debt securities.
REMICs (real estate mortgage investment conduits) represent a participation interest in a pool of mortgages. REMICs are created by redirecting the cash flows from the pool of mortgages underlying those securities to create two or more classes (or tranches) with different maturity or risk characteristics designed to meet a variety of investor needs and preferences. REMICs may be sponsored by private issuers, such as money center banks or mortgage bankers, or by U.S. Government agencies and Government-sponsored enterprises. We believe that these securities represent attractive alternatives relative to other investments due to the wide variety of maturity, repayment and interest rate options available.
The Company reviews its position quarterly to determine if there is an other-than-temporary impairment on any of its securities. The policy of the Company is to recognize an other-than-temporary impairment on equity securities where the fair value has been significantly below cost for three consecutive quarters. For fixed-maturity investments with unrealized losses due to interest rates where the Company has the positive intent and ability to hold the investment for a period of time sufficient to allow a market recovery, declines in value below cost are not assumed to be other-than-temporary. The Company evaluates the creditworthiness of the issuers/guarantors as well as the underlying collateral, if applicable. The Company also monitors the credit ratings of all securities for downgrades as well as placement on negative outlook or credit watch. Management may also evaluate other facts and circumstances that may be indicative of an other-than-temporary impairment condition.
K-26
The Company invests in and is subject to credit risk related to private label mortgage-backed securities that are directly supported by underlying mortgage loans. The Company’s private label mortgage-backed securities are credit-enhanced, senior tranches of securities in which the subordinate classes of the securities provide credit support for the senior class of securities. Losses in the underlying loan pool would generally have to exceed the credit support provided by the subordinate classes of securities before the senior class of securities would experience any credit losses. At December 31, 2008, the Company had a total of 17 private label mortgage-backed securities with an amortized cost of $14.3 million and a fair market value of $9.2 million.
As part of the Company’s review of its available for sale securities at December 31, 2008, it was determined that 11 private label mortgage-backed securities for vintages 2005 through 2007 with an unrealized loss of $4.8 million had other-than-temporary impairment. Of these securities, 9 were significantly downgraded by the rating agencies in December 2008 with all but one accorded below investment grade status. In addition to the decrease in fair market value, the underlying assets reflected further deterioration with respect to delinquencies, foreclosures and payment speed which identified a potential loss of principle based on cash flow analysis.
The Company also invests in corporate debt and is subject to credit risk related to pooled Trust Preferred insurance corporation term obligations. Corporate debt securities generally have greater credit risk than Government-sponsored enterprises securities and generally have higher yields than government securities of similar duration. Therefore, we limit the amount of the portfolio based on these concerns. At December 31, 2008, we held corporate debt securities with a carrying value of $1.7 million.
Securities at amortized cost decreased $1.9 million, or 2.2%, to $87.3 million at December 31, 2008. In 2008, there were security purchases of $49.1 million, which were partially offset by sales of $29.7 million, calls of $4.4 million, and paydowns. In the first quarter of 2008, various sales and purchases were made based on an evaluation of the securities portfolio in light of the current economic environment, whereby the Company determined there were several securities likely to be called. Additional purchases and sales occurred in the fourth quarter of 2008 to improve the overall yield on the securities portfolio. In addition, the REMIC amortized cost was reduced as a result of the recognition of a $4.8 million other-than-temporary impairment.
The following table sets forth the amortized cost and fair value of the securities portfolio at the dates indicated (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, | | 2008 | | 2007 | | 2006 |
| |
| | | Amortized | | Fair | | Amortized | | Fair | | Amortized | | Fair |
| | | Cost | | Value | | Cost | | Value | | Cost | | Value |
| |
| Government-sponsored enterprises | | $ | 9,267 | | | $ | 9,366 | | | $ | 22,321 | | | $ | 22,674 | | | $ | 30,475 | | | $ | 30,036 | |
| Mortgage-backed | | | 41,359 | | | | 41,980 | | | | 34,948 | | | | 35,153 | | | | 14,892 | | | | 14,885 | |
| REMICs | | | 32,590 | | | | 32,383 | | | | 27,875 | | | | 27,477 | | | | 34,831 | | | | 34,121 | |
| Corporate debt | | | 3,995 | | | | 1,655 | | | | 3,995 | | | | 3,720 | | | | 4,010 | | | | 3,954 | |
| Equities | | | 49 | | | | 49 | | | | 49 | | | | 49 | | | | 49 | | | | 49 | |
| |
| Total securities available-for-sale | | $ | 87,260 | | | $ | 85,433 | | | $ | 89,188 | | | $ | 89,073 | | | $ | 84,257 | | | $ | 83,045 | |
| |
At December 31, 2008, we had no investments in a single company or entity (other than with Government-sponsored enterprises) that had an aggregate book value in excess of 10% of our equity.
K-27
The following table sets forth the stated maturities and weighted average yields of our mortgage-backed and debt securities at December 31, 2008. Certain mortgage-backed securities have adjustable interest rates and will reprice periodically within the various maturity ranges. These repricing schedules are not reflected in the table below. At December 31, 2008, mortgage-backed securities and REMICs with adjustable rates totaled $10.0 million (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Amounts due in | |
| |
| | | One year or less | | | One year to five years | | | Five years to ten years | | | After ten years | | | Total | |
| |
| | | | | | | Weighted | | | | | | | Weighted | | | | | | | Weighted | | | | | | | Weighted | | | | | | | Weighted | |
| | | Carrying | | | Average | | | Carrying | | | Average | | | Carrying | | | Average | | | Carrying | | | Average | | | Carrying | | | Average | |
| | | Value | | | Yield | | | Value | | | Yield | | | Value | | | Yield | | | Value | | | Yield | | | Value | | | Yield | |
| |
| Government-sponsored enterprises | | $ | — | | | | — | % | | $ | — | | | | — | % | | $ | 8,357 | | | | 5.64 | % | | $ | 1,009 | | | | 6.03 | % | | $ | 9,366 | | | | 5.68 | % |
| Mortgage-backed | | | 1 | | | | 9.25 | | | | 2 | | | | 9.25 | | | | 404 | | | | 4.65 | | | | 41,573 | | | | 5.47 | | | | 41,980 | | | | 5.47 | |
| REMICs | | | 1 | | | | 4.18 | | | | 1,180 | | | | 5.25 | | | | 4,403 | | | | 5.38 | | | | 26,799 | | | | 5.27 | | | | 32,383 | | | | 5.28 | |
| Corporate debt | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,655 | | | | 4.22 | | | | 1,655 | | | | 4.22 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total available-for-sale debt securities | | $ | 2 | | | | 5.96 | % | | $ | 1,182 | | | | 5.26 | % | | $ | 13,164 | | | | 5.52 | % | | $ | 71,036 | | | | 5.34 | % | | $ | 85,384 | | | | 5.36 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Equity securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 49 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total securities available-for-sale | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 85,433 | | | | | |
| |
K-28
Deposits.Our deposit base is comprised of demand deposits, savings accounts, money market accounts and certificates of deposits. We consider demand deposits, savings accounts and money market accounts to be core deposits. Total deposits increased $17.2 million, or 11.1%, for the year ended December 31, 2008, as money market deposit accounts increased $30.2 million and noninterest-bearing deposits increased $3.1 million, partially offset by a $14.9 million decrease in certificates of deposit. Money market account growth was due to the marketing of select promotional rates. The increase has provided an opportunity for funding loan originations. The increase was partially offset by decreases in short-term certificates of deposit, savings account and interest-bearing demand deposits as customers shifted their funds to accounts with more attractive interest rates. Our focus remains on building and fostering relationships with current customers and attracting new customers.
The following table sets forth the balances of our deposit products at the dates indicated (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | |
| |
| Noninterest-bearing demand deposits | | $ | 12,005 | | | | 6.9 | % | | $ | 8,918 | | | | 5.7 | % | | $ | 5,409 | | | | 3.8 | % |
| Interest-bearing demand deposits | | | 11,336 | | | | 6.6 | | | | 11,864 | | | | 7.6 | | | | 12,530 | | | | 8.7 | |
| Savings accounts | | | 22,477 | | | | 13.0 | | | | 23,056 | | | | 14.8 | | | | 26,525 | | | | 18.5 | |
| Money market accounts | | | 43,873 | | | | 25.4 | | | | 13,676 | | | | 8.8 | | | | 7,663 | | | | 5.3 | |
| Certificates of deposit | | | 83,113 | | | | 48.1 | | | | 98,044 | | | | 63.1 | | | | 91,368 | | | | 63.7 | |
| |
| Total deposits | | $ | 172,804 | | | | 100.0 | % | | $ | 155,558 | | | | 100.0 | % | | $ | 143,495 | | | | 100.0 | % |
| |
The following table indicates the amount of jumbo certificates of deposit by time remaining until maturity at December 31, 2008. Jumbo certificates of deposit require minimum deposits of $100,000 (dollars in thousands).
| | | | | |
| | | Certificates |
| Maturity Period | | of Deposit |
| |
| Three months or less | | $ | 2,631 | |
| Over three through six months | | | 2,340 | |
| Over six through twelve months | | | 1,907 | |
| Over twelve months | | | 7,585 | |
| |
| Total jumbo certificates | | $ | 14,463 | |
| |
The following table sets forth certificates of deposit classified by rates at the dates indicated (dollars in thousands).
| | | | | | | | | | | | | |
| December 31, | | 2008 | | | 2007 | | | 2006 | |
| |
| 1.01 - 2.00% | | $ | — | | | $ | — | | | $ | 5 | |
| 2.01 - 3.00% | | | 24,950 | | | | 4,415 | | | | 9,944 | |
| 3.01 - 4.00% | | | 30,358 | | | | 16,024 | | | | 20,008 | |
| 4.01 - 5.00% | | | 20,674 | | | | 51,507 | | | | 31,152 | |
| 5.01 - 6.00% | | | 4,543 | | | | 23,177 | | | | 24,068 | |
| 6.01 - 7.00% | | | 2,588 | | | | 2,921 | | | | 6,191 | |
| |
| Total certificates of deposits | | $ | 83,113 | | | $ | 98,044 | | | $ | 91,368 | |
| |
K-29
The following table sets forth the amount and maturities of certificates of deposit at December 31, 2008 (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amounts due in |
| | | One year | | One to | | Two to | | Three to | | After | | | | | | Percent of |
| | | or less | | two years | | three years | | four years | | four years | | Total | | total |
| |
| 2.01 - 3.00% | | $ | 23,239 | | | $ | 1,308 | | | $ | 345 | | | $ | 58 | | | $ | — | | | $ | 24,950 | | | | 30.0 | % |
| 3.01 - 4.00% | | | 9,738 | | | | 14,550 | | | | 1,130 | | | | 2,097 | | | | 2,843 | | | | 30,358 | | | | 36.5 | |
| 4.01 - 5.00% | | | 5,783 | | | | 4,065 | | | | 1,305 | | | | 3,192 | | | | 6,329 | | | | 20,674 | | | | 24.9 | |
| 5.01 - 6.00% | | | 2,325 | | | | 557 | | | | 1,025 | | | | 454 | | | | 182 | | | | 4,543 | | | | 5.5 | |
| 6.01 - 7.00% | | | — | | | | 1,729 | | | | 859 | | | | — | | | | — | | | | 2,588 | | | | 3.1 | |
| |
| Total | | $ | 41,085 | | | $ | 22,209 | | | $ | 4,664 | | | $ | 5,801 | | | $ | 9,354 | | | $ | 83,113 | | | | 100.0 | % |
| |
The following table sets forth deposit activity for the periods indicated (dollars in thousands).
| | | | | | | | | | | | | |
| Years Ended December 31, | | 2008 | | | 2007 | | | 2006 | |
| |
| Beginning balance | | $ | 155,558 | | | $ | 143,495 | | | $ | 124,897 | |
| Increase before interest credited | | | 12,019 | | | | 6,801 | | | | 15,105 | |
| Interest credited | | | 5,227 | | | | 5,262 | | | | 3,493 | |
| |
| Net increase in deposits | | | 17,246 | | | | 12,063 | | | | 18,598 | |
| |
| Deposits at end of year | | $ | 172,804 | | | $ | 155,558 | | | $ | 143,495 | |
| |
Borrowings. We utilize borrowings from the FHLB of Pittsburgh and, to a limited extent, repurchase agreements to supplement our funding for loans and securities (dollars in thousands).
| | | | | | | | | | | | | |
| Years Ended December 31, | | 2008 | | 2007 | | 2006 |
| |
| Maximum amount outstanding at any month end during the year | | $ | 135,337 | | | $ | 101,074 | | | $ | 98,766 | |
| Average amounts outstanding during the year | | | 120,704 | | | | 82,880 | | | | 90,308 | |
| Weighted average rate during the year | | | 3.99 | % | | | 4.32 | % | | | 4.04 | % |
| Balance outstanding at end of year | | $ | 132,410 | | | $ | 101,074 | | | $ | 89,323 | |
| Weighted average rate at end of year | | | 3.87 | % | | | 4.30 | % | | | 4.22 | % |
| |
Borrowings increased $31.3 million, or 31.0%, in the year ended December 31, 2008. These advances mature in 2009 through 2014. The increase in borrowings was necessary to fund loan growth. The weighted average interest rate at the end of the year decreased compared to the prior year end as the new advances were at lower rates and any maturing advances were replaced throughout the year with lower cost advances.
Stockholders’ Equity.Stockholders’ equity decreased $4.5 million, or 10.2%, to $39.3 million at December 31, 2008 primarily as a result of net loss for the year, the repurchase of common stock, and a $1.0 million increase in the unrealized loss position of the securities portfolio after recognition of the impairment loss on securities.
K-30
Results of Operations for the Years Ended December 31, 2008 and 2007
Overview.
| | | | | | | | | |
| (Dollars in thousands) | | 2008 | | 2007 |
| |
| Net loss | | $ | (2,145 | ) | | $ | (1,955 | ) |
| Return on average assets | | | (0.64 | )% | | | (0.68 | )% |
| Return on average equity | | | (5.14 | ) | | | (4.30 | ) |
| Average equity to average assets | | | 12.41 | | | | 15.93 | |
| |
The Company had a net loss of $2.1 million for 2008, compared to a net loss of $2.0 million for 2007. The net loss for 2008 was primarily due to the recognition of a $4.8 million impairment on securities. The net loss for 2007 was primarily due to the recognition of a $1.4 million loss from the restructuring of the securities portfolio.
Net Interest Income.Net interest income increased $1.8 million, or 28.1%, to $8.3 million for the year ended December 31, 2008. Our net interest spread and net interest margin were 2.15% and 2.61%, respectively, for the year ended December 31, 2008 as compared to 1.85% and 2.43%, respectively, for the year ended December 31, 2007.
Total interest income increased $2.7 million, or 17.8%, to $18.0 million for the year ended December 31, 2008. Interest income on loans increased $1.8 million, due to the increase in average volume of $28.6 million, of which one-to-four family, commercial real estate, and home equity were the primary contributors. Interest income on securities increased $1.1 million, or 26.9%. This increase was primarily due to an increase in the average volume of $20.4 million related to $49.1 million in purchases partially offset by $29.8 million in sales. This activity was based on an evaluation of the securities portfolio in light of the current economic environment, whereby the Company determined in the first quarter of 2008 that there were several securities likely to be called. Other interest-earning assets income decreased $231,000 or 43.6% primarily as a result of a decrease of 295 basis points in the average yield, partially offset by a $1.9 million increase in the average balance. The key components that comprise other interest-earning assets are the FHLB Stock and our FHLB demand account.
Total interest expense increased $884,000, or 10.1%, to $9.6 million for the year ended December 31, 2008. Interest expense on deposits decreased $350,000, or 6.8%, as a result of a decrease in the average cost of 48 basis points due to declining rates on our certificates of deposit and money market accounts. The decrease in the average cost was partially offset by an increase in the average balance of $11.3 million, primarily related to an increase in money market accounts. Interest expense on borrowings increased $1.2 million primarily due to an increase of $37.8 million in the average balance to fund loan and security growth. The increase in the average balance was partially offset by an decrease in average cost of 33 basis points as new borrowings were added at lower costs.
K-31
Average Balances and Yields.The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | 2008 | | | 2007 | |
| | | | | | | Interest | | | | | | | | | | | Interest | | | | |
| | | Average | | | and | | | Yield/ | | | Average | | | and | | | Yield/ | |
| | | Balance | | | Dividends | | | Cost | | | Balance | | | Dividends | | | Cost | |
| |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Loans, net(1)(2) | | $ | 209,335 | | | $ | 12,347 | | | | 5.90 | % | | $ | 180,781 | | | $ | 10,535 | | | | 5.83 | % |
Securities(3) | | | 97,968 | | | | 5,313 | | | | 5.42 | | | | 77,593 | | | | 4,186 | | | | 5.39 | |
| Other interest-earning assets | | | 11,438 | | | | 299 | | | | 2.61 | | | | 9,534 | | | | 530 | | | | 5.56 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total interest-earning assets | | | 318,741 | | | $ | 17,959 | | | | 5.63 | | | | 267,908 | | | $ | 15,251 | | | | 5.69 | |
| Noninterest-earning assets | | | 17,374 | | | | | | | | | | | | 17,659 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total assets | | $ | 336,115 | | | | | | | | | | | $ | 285,567 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities and Stockholders’ equity: | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing liablities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing demand deposits | | $ | 11,792 | | | $ | 56 | | | | 0.47 | % | | $ | 12,855 | | | $ | 61 | | | | 0.47 | % |
| Savings accounts | | | 23,312 | | | | 183 | | | | 0.79 | | | | 24,887 | | | | 250 | | | | 1.00 | |
| Money market accounts | | | 30,435 | | | | 956 | | | | 3.14 | | | | 11,717 | | | | 464 | | | | 3.96 | |
| Certificates of deposit | | | 91,058 | | | | 3,629 | | | | 3.99 | | | | 95,856 | | | | 4,399 | | | | 4.59 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total interest-bearing deposits | | | 156,597 | | | | 4,824 | | | | 3.08 | | | | 145,315 | | | | 5,174 | | | | 3.56 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Borrowings | | | 120,704 | | | | 4,813 | | | | 3.99 | | | | 82,880 | | | | 3,579 | | | | 4.32 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total interest-bearing liabilities | | | 277,301 | | | | 9,637 | | | | 3.48 | | | | 228,195 | | | | 8,753 | | | | 3.84 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Noninterest-bearing liabilities | | | 17,088 | | | | | | | | | | | | 11,881 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total liabilities | | | 294,389 | | | | | | | | | | | | 240,076 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Stockholders’ equity | | | 41,726 | | | | | | | | | | | | 45,491 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total liabilities and stockholders’ equity | | $ | 336,115 | | | | | | | | | | | $ | 285,567 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | | | | | $ | 8,322 | | | | | | | | | | | $ | 6,498 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate spread(4) | | | | | | | | | | | 2.15 | % | | | | | | | | | | | 1.85 | % |
Net interest margin(5) | | | | | | | | | | | 2.61 | | | | | | | | | | | | 2.43 | |
| Average interest-earning assets to average interest-bearing liablities | | | | | | | | | | | 114.94 | % | | | | | | | | | | | 117.40 | % |
| |
| | |
| (1) | | Amount is net of deferred loan costs, loans in process, and estimated allowance for loan losses. |
| |
| (2) | | Amount includes nonaccrual loans in average balances only. |
| |
| (3) | | Amount does not include effect of unrealized (loss) gain on securities available-for-sale. |
| |
| (4) | | Interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. |
| |
| (5) | | Net interest margin represents net interest income divided by average interest-earning assets. |
K-32
Rate/Volume Analysis.The following table sets forth the effects of changing rates and volumes on our net interest income (dollars in thousands). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The total column represents the sum of change. Changes related to volume/rate are prorated into volume and rate components.
| | | | | | | | | | | | | |
| | | 2008 Compared to 2007 |
| | | Increase (Decrease) Due to |
| | | Volume | | Rate | | Total |
| |
| | | | | | | | | | | | | |
Interest and dividend income: | | | | | | | | | | | | |
| Loans, net | | $ | 1,684 | | | $ | 128 | | | $ | 1,812 | |
| Securities | | | 1,104 | | | | 23 | | | | 1,127 | |
| Other interest-earning assets | | | 91 | | | | (322 | ) | | | (231 | ) |
| |
| Total interest-earning assets | | | 2,879 | | | | (171 | ) | | | 2,708 | |
| |
| | | | | | | | | | | | | |
Interest expense: | | | | | | | | | | | | |
| Deposits | | | 382 | | | | (732 | ) | | | (350 | ) |
| Borrowings | | | 1,526 | | | | (292 | ) | | | 1,234 | |
| |
| Total interest-bearing liablities | | | 1,908 | | | | (1,024 | ) | | | 884 | |
| |
Change in net interest income | | $ | 971 | | | $ | 853 | | | $ | 1,824 | |
| |
Provision for Loan Losses.The following table summarizes the activity in the allowance for loan losses for the years ended December 31, 2008 and 2007 (dollars in thousands).
| | | | | | | | | |
| Years Ended December 31, | | 2008 | | | 2007 | |
| |
| Allowance at beginning of year | | $ | 1,457 | | | $ | 866 | |
| Provision for loan losses | | | 878 | | | | 1,119 | |
| Charge-offs | | | (529 | ) | | | (528 | ) |
| Recoveries | | | — | | | | — | |
| |
| Net charge-offs | | | (529 | ) | | | (528 | ) |
| |
| Allowance at end of year | | $ | 1,806 | | | $ | 1,457 | |
| |
Provisions for loan losses were $878,000 for 2008 compared to $1.1 million for 2007. We had net charge-offs of $529,000 in 2008, primarily in one-to-four family residential loans, compared to $528,000 in 2007, primarily in multi-family and home equity installment loans. The Company maintained an allowance for loan losses to total loans ratio of 0.76% at December 31, 2008 and 2007.
An analysis of the changes in the allowance for loan losses is presented under “Risk Management—Analysis and Determination of the Allowance for Loan Losses.”
K-33
Noninterest Income.The following table summarizes noninterest (loss) income for the years ended December 31, 2008 and 2007 (dollars in thousands).
| | | | | | | | | |
| Years Ended December 31, | | 2008 | | | 2007 | |
| |
| Fees and service charges | | $ | 487 | | | $ | 412 | |
| Insurance commissions | | | 1,929 | | | | 1,639 | |
| Income from bank-owned life insurance | | | 813 | | | | 279 | |
| Impairment loss on securities | | | (4,806 | ) | | | — | |
| Net (gain) loss on sales of securities | | | 202 | | | | (1,412 | ) |
| Other | | | 32 | | | | 15 | |
| | | | | | | |
| Total noninterest (loss) income | | $ | (1,343 | ) | | $ | 933 | |
| |
Noninterest income was ($1.3 million) for the year ended December 31, 2008 compared to $933,000 in income for the same period in 2007. In the current year, the Company recognized a $4.8 million impairment on the securities portfolio and $541,000 in bank owned life insurance income related to the death of a board member. In the previous period, the Company recognized a $1.4 million loss recorded as a result of a securities portfolio restructuring.
Noninterest Expense.The following table summarizes noninterest expense for the years ended December 31, 2008 and 2007 (dollars in thousands).
| | | | | | | | | |
| Years Ended December 31, | | 2008 | | | 2007 | |
| |
| Compensation and employee benefits | | $ | 5,632 | | | $ | 5,606 | |
| Occupancy | | | 1,329 | | | | 1,156 | |
| FDIC insurance premiums | | | 28 | | | | 22 | |
| Data processing | | | 425 | | | | 387 | |
| Professional services | | | 579 | | | | 578 | |
| Advertising | | | 119 | | | | 155 | |
| Stationary, printing and supplies | | | 116 | | | | 132 | |
| Telephone | | | 58 | | | | 57 | |
| Postage | | | 136 | | | | 124 | |
| Correspondent bank fees | | | 153 | | | | 128 | |
| Real estate owned expense | | | 120 | | | | 57 | |
| All other | | | 715 | | | | 712 | |
| | | | | | | |
| Total noninterest expense | | $ | 9,410 | | | $ | 9,114 | |
| |
Noninterest expense increased $296,000, or 3.2%, to $9.4 million for the year ended December 31, 2008 compared to $9.1 million for the same period in 2007. In the current year, the Company incurred a full period of occupancy costs related to the Washington office that opened in June 2007. In addition, the Company incurred increased expenses related to real estate owned properties.
Other significant changes in noninterest expense are as follows: Data processing increased as compared to the prior year due to increased transaction activity related to deposit and loan growth and the recognition of a full year of costs associated with the opening of our new Washington branch in June 2007. Correspondent bank fees increased due to increased transactional activity fees. Real estate owned expense increased due to costs associated with the sale of four properties in the current year.
Income Taxes.In 2008, we had an income tax benefit of $1.2 million, compared to a benefit of $899,000 in 2007. The increase in income tax benefit was due to a decrease in pre-tax income, primarily related to the $4.8 million impairment loss on securities. The Company determined that it was not required to establish a valuation allowance for deferred tax assets since it is more likely than not that the deferred tax assets will be realized through future taxable income and future reversals of existing taxable temporary differences. For more information, see Note 9 of the Notes to Consolidated Financial Statements.
K-34
Risk Management
Overview.Managing risk is an essential part of successfully managing a financial institution. Our most prominent risk exposures are credit risk, interest rate risk and market risk. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan or investment when it is due. Interest rate risk is the potential reduction of interest income as a result of changes in interest rates. Market risk arises from fluctuations in interest rates that may result in changes in the values of financial instruments, such as available-for-sale securities that are accounted for on a mark-to-market basis. Other risks that we face are operational risks, liquidity risks and reputation risk. Operational risks include risks related to fraud, regulatory compliance, processing errors, technology and disaster recovery. Liquidity risk is the possible inability to fund obligations to depositors, lenders or borrowers. Reputation risk is the risk that negative publicity or press, whether true or not, could cause a decline in our customer base or revenue.
Credit Risk Management.Our strategy for credit risk management focuses on having well-defined credit policies and uniform underwriting criteria and providing prompt attention to potential problem loans.
When a borrower fails to make a required loan payment, we take a number of steps to have the borrower cure the delinquency and restore the loan to current status. When the loan becomes 15 days past due a past due notice is generated and sent to the borrower. If the payment is not received within five days, a second past due notice is sent. If payment is not then received by the 30th day of delinquency, additional letters and phone calls generally are made. Generally, when a mortgage loan becomes 60 days past due, we send a letter notifying the borrower that he or she may apply for assistance under a state mortgage assistance program. If the borrower does not apply for assistance within the allotted time period or applies for assistance and is rejected, we will commence foreclosure proceedings. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure. Generally, when a consumer loan becomes 60 days past due, we institute collection proceedings and attempt to repossess any personal property that secures the loan. We may consider loan workout arrangements with certain borrowers under certain circumstances.
Management informs the Board of Directors monthly of the amount of loans delinquent more than 30 days, all loans in foreclosure and all foreclosed and repossessed property that we own.
Market Risk Management.The process by which we manage our interest rate risk is called asset/liability management. The goal of our asset/liability management is to increase net interest income without taking undue interest rate risk while maintaining adequate liquidity. The Asset Liability Committee is responsible for the identification and management of interest rate risk exposure and continuously evaluates strategies to manage our exposure to interest rate fluctuations.
Analysis of Nonperforming and Classified Assets.We consider repossessed assets and loans that are 90 days or more past due to be nonperforming assets. Loans are generally placed on nonaccrual status when they become 90 days delinquent at which time the accrual of interest ceases and all previously accrued and unpaid interest is reversed against earnings.
Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until it is sold. When property is acquired it is recorded at the lower of its cost, which is the unpaid balance of the loan plus foreclosure costs, or fair market value at the date of foreclosure. Holding costs and declines in fair value after acquisition of the property result in charges against income.
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The following table provides information with respect to our nonperforming assets at the dates indicated (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | |
| December 31, | | 2008 | | 2007 | | 2006 | | 2005 | | 2004 |
| |
| Nonaccrual loans: | | | | | | | | | | | | | | | | | | | | |
| Real estate — mortgage | | $ | 632 | | | $ | 1,264 | | | $ | 592 | | | $ | 212 | | | $ | 276 | |
| Real estate — construction | | | — | | | | — | | | | — | | | | — | | | | — | |
| Consumer | | | 4 | | | | 17 | | | | 175 | | | | 43 | | | | 29 | |
| Commercial business | | | — | | | | — | | | | — | | | | — | | | | — | |
| |
| Total | | | 636 | | | | 1,281 | | | | 767 | | | | 255 | | | | 305 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| Accruing loans past due 90 days or more: | | | | | | | | | | | | | | | | | | | | |
| Real estate — mortgage | | | — | | | | — | | | | — | | | | 12 | | | | 2 | |
| Real estate — construction | | | — | | | | — | | | | — | | | | — | | | | — | |
| Consumer | | | — | | | | — | | | | — | | | | 4 | | | | 31 | |
| Commercial business | | | — | | | | — | | | | — | | | | — | | | | — | |
| |
| Total | | | — | | | | — | | | | — | | | | 16 | | | | 33 | |
| |
| Total of nonaccrual and 90 days or more past due loans | | | 636 | | | | 1,281 | | | | 767 | | | | 271 | | | | 338 | |
| Real estate owned | | | 295 | | | | 1,119 | | | | 569 | | | | 21 | | | | — | |
| |
| Total nonperforming assets | | | 931 | | | | 2,400 | | | | 1,336 | | | | 292 | | | | 338 | |
| | | | | | | | | | | | | | | | | | | | | |
| Troubled debt restructurings | | | — | | | | — | | | | — | | | | — | | | | — | |
| |
| Troubled debt restructurings and total nonperforming assets | | $ | 931 | | | $ | 2,400 | | | $ | 1,336 | | | $ | 292 | | | $ | 338 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| Total nonperforming loans to total loans | | | 0.27 | % | | | 0.67 | % | | | 0.43 | % | | | 0.16 | % | | | 0.21 | % |
| Total nonperforming loans to total assets | | | 0.18 | | | | 0.42 | | | | 0.27 | | | | 0.10 | | | | 0.13 | |
| Total nonperforming assets to total assets | | | 0.27 | | | | 0.79 | | | | 0.47 | | | | 0.11 | | | | 0.13 | |
| |
Interest income that would have been recorded for the years ended December 31, 2008 and December 31, 2007 had nonaccruing loans been current according to their original terms amounted to $39,000 and $74,000, respectively. No interest related to nonaccrual loans was included in interest income for the year ended December 31, 2008 and 2007.
Federal regulations require us to review and classify our assets on a regular basis. In addition, the OTS has the authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. “Substandard” assets must have one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. “Doubtful” assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified “loss” is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. The regulations also provide for a “special mention” category, described as assets which do not currently expose us to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving our close attention. When we classify an asset as substandard or doubtful we establish a general valuation allowance for loan losses and in some cases charge-off a portion of loans
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classified as doubtful. If we classify an asset as loss, we charge-off an amount equal to 100% of the portion of the asset classified loss.
The following table shows the aggregate amounts of our classified assets at the dates indicated (dollars in thousands).
| | | | | | | | | | | | | |
| December 31, | | 2008 | | 2007 | | 2006 |
| | | | | | | | | | | | | |
| Special mention assets | | $ | 1,944 | | | $ | 1,061 | | | $ | 319 | |
| Substandard assets | | | 745 | | | | 2,630 | | | | 1,563 | |
| Doubtful assets | | | 187 | | | | — | | | | — | |
| Loss assets | | | — | | | | — | | | | — | |
| |
| Total classified assets | | $ | 2,876 | | | $ | 3,691 | | | $ | 1,882 | |
| |
Delinquencies.The following table provides information about delinquencies in our loan portfolio at the dates indicated (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, | | 2008 | | 2007 | | 2006 |
| | | 30-59 | | 60-89 | | 30-59 | | 60-89 | | 30-59 | | 60-89 |
| | | Days | | Days | | Days | | Days | | Days | | Days |
| | | Past Due | | Past Due | | Past Due | | Past Due | | Past Due | | Past Due |
| |
| Real estate — mortgage | | $ | 2,171 | | | $ | 222 | | | $ | 1,143 | | | $ | 645 | | | $ | 91 | | | $ | 420 | |
| Real estate — construction | | | 872 | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Consumer | | | 181 | | | | 11 | | | | 71 | | | | 6 | | | | 741 | | | | — | |
| Commercial business | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| |
| Total delinquencies | | $ | 3,224 | | | $ | 233 | | | $ | 1,214 | | | $ | 651 | | | $ | 832 | | | $ | 420 | |
| |
The real estate — construction category is comprised of one loan which paid current at the beginning of 2009. Without the effects of this loan, delinquencies at December 31, 2008 increased $720,000 compared to December 31, 2007. The increase is due to current economic conditions.
Analysis and Determination of the Allowance for Loan Losses.The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.
Our methodology for assessing the appropriateness of the allowance for loan losses consists of: (1) a general valuation allowance on impaired loans; and (2) a general valuation allowance on the remainder of the loan portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio.
General Valuation Allowance on Impaired Loans.We establish a general allowance for loans that are individually evaluated and determined to be impaired. The general allowance is determined by utilizing one of the three impairment measurement methods outlined in Statement of Financial Accounting Standard (“SFAS”) No. 114,Accounting by Creditors for Impairment of a Loan.Under SFAS No. 114, a loan is impaired when, based upon current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest according to the contractual terms of the loan agreement. Management performs individual assessments of larger impaired loans to determine the existence of loss exposure and, where applicable, the extent of loss exposure based upon the present value of expected future cash flows available to pay the loan, or based upon the estimated realizable collateral where a loan is collateral dependent. Generally, loans excluded from the individual impairment analysis are collectively evaluated by management to estimate reserves for loan losses inherent in those loans in accordance with SFAS No. 5,Accounting for Contingencies.
General Valuation Allowance on the Remainder of the Loan Portfolio.We establish another general allowance for loans that are not determined to be impaired in accordance with SFAS No. 5. Management determines historical loss experience for each group of loans with similar risk characteristics within the portfolio based on loss experience for loans in each group. Loan categories will represent groups of loans with similar risk characteristics and may include types of loans by product, large credit exposures, concentrations, loan grade, or any other characteristic that causes a loan’s risk profile to be similar to another.
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We also consider qualitative or environmental factors that are likely to cause estimated credit losses associated with the bank’s existing portfolio to differ from historical loss experience including changes in lending policies and procedures; changes in the nature and volume of the loan portfolio; changes in experience, ability and depth of loan management; changes in the volume and severity of past due loans, nonaccrual loans and adversely graded or classified loans; changes in the quality of the loan review system; changes in the value of underlying collateral for collateral dependent loans; existence of or changes in concentrations of credit; changes in economic or business conditions, and; effect of competition, legal and regulatory requirements on estimated credit losses.
We identify loans that may need to be charged-off as a loss by reviewing all delinquent loans, classified loans and other loans that management may have concerns about collectibility. For individually reviewed loans, the borrower’s inability to make payments under the terms of the loan or a shortfall in collateral value would result in our charging off the loan or the portion of the loan that was impaired.
The OTS, as an integral part of its examination process, periodically reviews our allowance for loan losses. The OTS may require us to make additional provisions for loan losses based on judgments different from ours.
At December 31, 2008, our allowance for loan losses represented 0.76% of total loans and 283.96% of nonperforming loans. The allowance for loan losses increased at December 31, 2008 from December 31, 2007 due to deteriorating conditions in the housing and credit markets and the changes in the composition of and increase in the loan portfolio.
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The following table sets forth the allowance for loan losses by loan category at the dates indicated (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, | | 2008 | | 2007 | | 2006 | | 2005 | | 2004 |
| | | | | | | Percent of | | | | | | Percent of | | | | | | Percent of | | | | | | Percent of | | | | | | Percent of |
| | | | | | | Total | | | | | | Total | | | | | | Total | | | | | | Total | | | | | | Total |
| | | Amount | | Loans(1) | | Amount | | Loans(1) | | Amount | | Loans(1) | | Amount | | Loans(1) | | Amount | | Loans(1) |
| |
| Real estate — mortgage | | $ | 1,195 | | | | 80.6 | % | | $ | 868 | | | | 84.1 | % | | $ | 503 | | | | 88.6 | % | | $ | 452 | | | | 91.0 | % | | $ | 440 | | | | 89.8 | % |
| Real estate — construction | | | 20 | | | | 5.7 | | | | 16 | | | | 3.5 | | | | 22 | | | | 3.8 | | | | 10 | | | | 3.1 | | | | 8 | | | | 3.6 | |
| Consumer | | | 424 | | | | 10.1 | | | | 170 | | | | 10.1 | | | | 146 | | | | 6.1 | | | | 71 | | | | 5.2 | | | | 82 | | | | 6.0 | |
| Commercial business | | | 121 | | | | 3.6 | | | | 95 | | | | 2.3 | | | | 74 | | | | 1.5 | | | | 32 | | | | 0.7 | | | | 33 | | | | 0.6 | |
| Unallocated | | | 46 | | | | — | | | | 308 | | | | — | | | | 121 | | | | — | | | | 235 | | | | — | | | | 162 | | | | — | |
| |
| Total allowance for loan losses | | $ | 1,806 | | | | 100.0 | % | | $ | 1,457 | | | | 100.0 | % | | $ | 866 | | | | 100.0 | % | | $ | 800 | | | | 100.0 | % | | $ | 725 | | | | 100.0 | % |
| |
| | |
| (1) | | Represents percentage of loans in each category to total loans. |
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Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and our results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that regulators, in reviewing our loan portfolio, will not request us to increase our allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.
Analysis of Loan Loss Experience.The following table sets forth an analysis of the allowance for loan losses for the periods indicated (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | 2008 | | 2007 | | 2006 | | 2005 | | 2004 |
| |
| Allowance at beginning of year | | $ | 1,457 | | | $ | 866 | | | $ | 800 | | | $ | 725 | | | $ | 725 | |
| Provision for loan losses | | | 878 | | | | 1,119 | | | | 84 | | | | 85 | | | | 144 | |
| Charge-offs: | | | | | | | | | | | | | | | | | | | | |
| Real estate — mortgage | | | (482 | ) | | | (355 | ) | | | (18 | ) | | | (10 | ) | | | — | |
| Real estate — construction | | | — | | | | — | | | | — | | | | — | | | | — | |
| Consumer | | | (47 | ) | | | (173 | ) | | | — | | | | — | | | | (15 | ) |
| Commercial business | | | — | | | | — | | | | — | | | | — | | | | (129 | ) |
| |
| Total charge-offs | | | (529 | ) | | | (528 | ) | | | (18 | ) | | | (10 | ) | | | (144 | ) |
| Recoveries | | | — | | | | — | | | | — | | | | — | | | | — | |
| |
| Net charge-offs | | | (529 | ) | | | (528 | ) | | | (18 | ) | | | (10 | ) | | | (144 | ) |
| |
| Allowance at end of year | | $ | 1,806 | | | $ | 1,457 | | | $ | 866 | | | $ | 800 | | | $ | 725 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| Allowance to nonperforming loans | | | 283.96 | % | | | 113.74 | % | | | 112.91 | % | | | 295.20 | % | | | 214.50 | % |
| Allowance to total loans | | | 0.76 | | | | 0.76 | | | | 0.49 | | | | 0.46 | | | | 0.45 | |
| Net charge-offs to average loans | | | 0.25 | | | | 0.29 | | | | 0.01 | | | | 0.01 | | | | 0.09 | |
| |
Interest Rate Risk Management.We manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment. Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans because of the shorter maturities of deposits. As a result, sharp increases in interest rates may adversely affect our earnings while decreases in interest rates may beneficially affect our earnings. We currently do not participate in hedging programs, interest rate swaps or other activities involving the use of derivative financial instruments.
We have an Asset/Liability Committee, which includes members of executive management, to communicate, coordinate and control all aspects involving asset/liability management. The committee establishes and monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.
We use an interest rate sensitivity analysis prepared by the OTS to review our level of interest rate risk. This analysis measures interest rate risk by computing changes in net portfolio value of our cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. Net portfolio value represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 50 to 300 basis point increase or 50 to 100 basis point decrease in market interest rates with no effect given to any steps that we might take to counter the effect of that interest rate movement.
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Because of the low level of market interest rates, this analysis is not performed for decreases of more than 100 basis points. We measure interest rate risk by modeling the changes in net portfolio value over a variety of interest rate scenarios. The following table, which is based on information that we provide to the OTS, presents the change in our net portfolio value at December 31, 2008 that would occur in the event of an immediate change in interest rates based on OTS assumptions, with no effect given to any steps that we might take to counteract that change (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | NPV as a Percent of |
| December 31, 2008 | | Net Portfolio Value (“NPV”) | | Portfolio Value of Assets |
| |
| Basis Point (“bp”) | | Dollar | | Dollar | | Percent | | | | |
| Change in Rates | | Amount | | Change | | Change | | NPV Ratio | | Change |
| |
| 300 bp | | $ | 21,854 | | | $ | (15,242 | ) | | | (41.1 | )% | | | 6.54 | % | | (377 | )bp |
| 200 | | | 28,650 | | | | (8,446 | ) | | | (22.8 | ) | | | 8.32 | | | | (199 | ) |
| 100 | | | 33,507 | | | | (3,589 | ) | | | (9.7 | ) | | | 9.50 | | | | (81 | ) |
| 50 | | | 35,657 | | | | (1,439 | ) | | | (3.9 | ) | | | 10.00 | | | | (31 | ) |
| Static | | | 37,096 | | | | — | | | | — | | | | 10.31 | | | | — | |
| (50) | | | 37,085 | | | | (11 | ) | | | — | | | | 10.24 | | | | (7 | ) |
| (100) | | | 37,830 | | | | 734 | | | | 2.0 | | | | 10.39 | | | | 8 | |
| |
The OTS uses certain assumptions in assessing the interest rate risk of savings associations. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under differing interest rate scenarios, among others. As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to 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. Additionally, certain assets, such as adjustable rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table.
Liquidity Management.Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of available-for-sale securities and borrowings from the FHLB of Pittsburgh. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of our asset/liability management policy.
Our most liquid assets are cash and cash equivalents and interest-bearing deposits. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At December 31, 2008, cash and cash equivalents totaled $7.8 million. Securities classified as available-for-sale that are not pledged as collateral, and which provide additional sources of liquidity, totaled $75.5 million at December 31, 2008. In addition, at December 31, 2008, we had a maximum remaining borrowing capacity at the FHLB of approximately $90.9 million.
At December 31, 2008, we had $14.1 million of commitments to lend, which was comprised of $5.9 million of loans in process, $1.1 million of mortgage loan commitments, $165,000 of home equity loan commitments, an $880,000 commercial loan commitment, $2.7 million of unused home equity lines of credit and $3.4 million of unused commercial lines of credit. Certificates of deposit due within one year of December 31, 2008 totaled $41.1 million, or 49.4% of certificates of deposit.
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The large percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their funds for long periods in the recent interest rate environment. If these maturing deposits do not remain with us, we will be required to seek other sources of funds including other certificates of deposit and borrowings. We believe, however, based on past experience, that a significant portion of our maturing certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.
The following table presents certain of our contractual obligations as of December 31, 2008 (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | |
| | | Amounts due in |
| |
| | | | | | | One year | | One to | | Three to | | After |
| | | Total | | or less | | three years | | five years | | five years |
| |
Long-term debt obligations(1) | | $ | 132,410 | | | $ | 33,739 | | | $ | 49,165 | | | $ | 46,506 | | | $ | 3,000 | |
Operating lease obligations(2) | | | 922 | | | | 180 | | | | 270 | | | | 181 | | | | 291 | |
| |
| Total | | $ | 133,332 | | | $ | 33,919 | | | $ | 49,435 | | | $ | 46,687 | | | $ | 3,291 | |
| |
| | |
| (1) | | Borrowings. |
| |
| (2) | | Payments are for lease of real property. |
Our primary investing activities are the origination of loans and the purchase of securities. Our primary financing activities consist of activity in deposit accounts and FHLB advances. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive and to increase core deposit relationships. Occasionally, we offer promotional rates on certain deposit products to attract deposits. No further changes in our funding mix are currently planned or expected, other than changes in the ordinary course of business resulting from deposit flows. For information about our costs of funds, see “Results of Operations for the Years Ended December 31, 2008 and 2007—Net Interest Income.”
The following table presents our primary investing and financing activities during the periods indicated (dollars in thousands).
| | | | | | | | | |
| Years Ended December 31, | | 2008 | | | 2007 | |
| |
| Investing activities: | | | | | | | | |
| Loans disbursed or closed | | $ | (75,752 | ) | | $ | (37,574 | ) |
| Loan principal repayments | | | 33,075 | | | | 22,524 | |
| Proceeds from maturities and principal repayments of securities | | | 16,819 | | | | 16,045 | |
| Proceeds from sales of securities available-for-sale | | | 29,783 | | | | 4,569 | |
| Purchases of securities | | | (49,096 | ) | | | (67,370 | ) |
| | | | | | | | | |
| Financing activities: | | | | | | | | |
| Increase in deposits | | | 17,246 | | | | 12,063 | |
| Increase in borrowings | | | 31,336 | | | | 11,751 | |
| |
Capital Management.We are subject to various regulatory capital requirements administered by the OTS, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At December 31, 2008, we exceeded all of our regulatory capital requirements. We are considered “well capitalized” under regulatory guidelines.
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Off-Balance Sheet Arrangements.In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. For information about our loan commitments and unused lines of credit, see Note 13 of the Notes to Consolidated Financial Statements.
For the year ended December 31, 2008, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.
Effect of Inflation and Changing Prices
The Consolidated Financial Statements and related financial data presented in this Annual Report on Form 10-K have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
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| ITEM 7A. | | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The information required by this item is incorporated herein by reference to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation.”
| | |
| ITEM 8. | | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Information required by this item is included herein beginning on page F-1.
| | |
| ITEM 9. | | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
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| ITEM 9A(T). | | CONTROLS AND PROCEDURES |
FedFirst Financial’s management, including FedFirst Financial’s principal executive officer and principal financial officer, have evaluated the effectiveness of FedFirst Financial’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, FedFirst Financial’s disclosure controls and procedures were effective.
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Management’s annual report on internal control over financial reporting is incorporated by reference to FedFirst Financial’s audited Consolidated Financial Statements in this Annual Report on Form 10-K.
There have been no changes in FedFirst Financial’s internal control over financial reporting during the quarter ended December 31, 2008 that have materially affected, or are reasonably likely to materially affect, FedFirst Financial’s internal control over financial reporting.
| | |
| ITEM 9B. | | OTHER INFORMATION |
None.
PART III
| | |
| ITEM 10. | | DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE |
The information relating to the directors and officers of FedFirst Financial and information regarding compliance with Section 16(a) of the Exchange Act is incorporated herein by reference to FedFirst Financial’s Proxy Statement for the 2009 Annual Meeting of Stockholders and to Part I, Item 1, “Business — Executive Officers of the Registrant” to this Annual Report on Form 10-K.
FedFirst Financial has adopted a Code of Ethics and Business Conduct which is available on our website at www.firstfederal-savings.com.
| | |
| ITEM 11. | | EXECUTIVE COMPENSATION |
The information regarding executive compensation is incorporated herein by reference to FedFirst Financial’s Proxy Statement for the 2009 Annual Meeting of Stockholders.
| | |
| ITEM 12. | | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
| | (a) | | Security Ownership of Certain Beneficial Owners |
| |
| | | | Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in FedFirst Financial’s Proxy Statement for the 2009 Annual Meeting of Stockholders. |
| |
| | (b) | | Security Ownership of Management |
| |
| | | | Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in FedFirst Financial’s Proxy Statement for the 2009 Annual Meeting of Stockholders. |
| |
| | (c) | | Changes in Control |
| |
| | | | Management of FedFirst Financial knows of no arrangements, including any pledge by any person or securities of FedFirst Financial’s, the operation of which may at a subsequent date result in a change |
K-44
| | | | in control of the registrant. |
| |
| | (d) | | Equity Compensation Plan Information |
| |
| | | | The following table provides information at December 31, 2008 for compensation plans under which equity securities may be issued. |
| | | | | | | | | | | | | |
| | | | | | | | | | | Number of securities |
| | | | | | | | | | | remaining available for |
| | | Number of securities | | | | | | future issuance under |
| | | to be issued upon | | Weighted-average | | equity compensation |
| | | exercise of | | exercise price of | | plans (excluding |
| | | outstanding options | | outstanding options | | securities reflected |
| Plan Category | | warrants and rights | | warrants and rights | | in column (A)) |
| |
| | | (A) | | (B) | | (C) |
| |
| Equity compensation plans: | | | | | | | | | | | | |
| Approved by stockholders | | | 274,500 | | | $ | 9.62 | | | | 49,512 | |
| Not approved by stockholders | | | — | | | | — | | | | — | |
| |
| Total | | | 274,500 | | | $ | 9.62 | | | | 49,512 | |
| |
| | |
| ITEM 13. | | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information relating to certain relationships and related transactions is incorporated herein by reference to FedFirst Financial’s Proxy Statement for the 2009 Annual Meeting of Stockholders.
| | |
| ITEM 14. | | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information relating to the principal accountant fees and expenses is incorporated herein by reference to FedFirst Financial’s Proxy Statement for the 2009 Annual Meeting of Stockholders.
| | |
| ITEM 15. | | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
| | (1) | | The financial statements required in response to this item are incorporated by reference from Item 8 of this report. |
| |
| | (2) | | Exhibits |
| | 3.1 | | Amended and Restated Charter of FedFirst Financial Corporation(1)
|
| |
| | 3.2 | | Amended and Restated Bylaws of FedFirst Financial Corporation |
| |
| | 4.0 | | Specimen Stock Certificate of FedFirst Financial Corporation(1) |
| |
| | 10.1 | | Form of First Federal Savings Bank Employee Severance Compensation Plan(1)(2) |
K-45
| | 10.2 | | Director Fee Continuation Agreements by and between First Federal Savings Bank and certain Directors(1)(2) |
| |
| | 10.3 | | Executive Supplemental Retirement Plan Agreements by and between First Federal Savings Bank and certain officers(1)(2) |
| |
| | 10.4 | | Executive Supplemental Retirement Plan Agreement by and between First Federal Savings Bank and Richard B. Boyer(1)(2) |
| |
| | 10.5 | | Split Dollar Life Insurance Agreements by and between First Federal Savings Bank and certain Directors(1)(2) |
| |
| | 10.6 | | Split Dollar Life Insurance Agreements by and between First Federal Savings Bank and certain officers(1)(2) |
| |
| | 10.7 | | Split Dollar Life Insurance Agreement by and between First Federal Savings Bank and Richard B. Boyer(1)(2) |
| |
| | 10.8 | | Employment Agreement dated as of October 11, 2005 by and between First Federal Savings Bank, FedFirst Financial Corporation and John G. Robinson(2)(3) |
| |
| | 10.9 | | Employment Agreement dated as of October 11, 2005 by and between First Federal Savings Bank, FedFirst Financial Corporation and Patrick G. O’Brien(2)(3) |
| |
| | 10.10 | | Consulting Agreement between First Federal Savings Bank and Peter D. Griffith(2)(3) |
| |
| | 10.11 | | Employment Agreement between First Federal Savings Bank and Richard B. Boyer(1)(2) |
| |
| | 10.12 | | Lease Agreement between Exchange Underwriters, Inc. and Richard B. and Wendy A. Boyer(1) |
| |
| | 10.13 | | Employment Agreement dated as of March 31, 2006 by and between First Federal Savings Bank, FedFirst Financial Corporation and Robert C. Barry, Jr.(2)(4) |
| |
| | 10.14 | | FedFirst Financial Corporation 2006 Equity Incentive Plan(2)(5) |
| |
| | 10.15 | | Amendment, effective September 19, 2006, to the Employment Agreement dated as of October 11, 2005 by and between First Federal Savings Bank, FedFirst Financial Corporation and John G. Robinson(2)(6) |
| |
| | 10.16 | | Amendment, effective September 19, 2006, to the Employment Agreement dated as of October 11, 2005 by and between First Federal Savings Bank, FedFirst Financial Corporation and Patrick G. O’Brien(2)(6) |
| |
| | 10.17 | | Employment Agreement between Exchange Underwriters, Inc. and Richard B. Boyer(2)(7) |
| |
| | 10.18 | | Form of 409A Amendment to the Director Fee Continuation Agreements, dated June 30, 1999, between First Federal Savings Bank and Joseph U. Frye, John J. LaCarte and Jack M. McGinley(2)(8) |
| |
| | 10.19 | | Amendment, dated July 19, 2002, to the Life Insurance Endorsement Method Split Dollar Plan Agreement by and between First Federal Savings Bank and Richard B. Boyer, effective June 1, 2002(2)(8) |
| |
| | 10.20 | | Amendment, dated July 19, 2002, to the Executive Supplemental Retirement Plan Agreement by and between First Federal Savings Bank and Richard B. Boyer(2)(8) |
| |
| | 10.21 | | Amendment to the Executive Supplemental Retirement Plan Agreement by and between First Federal Savings Bank and Richard B. Boyer, effective June 1, 2002, and to the Life Insurance Endorsement Method Split Dollar Plan Agreement by and between First Federal Savings Bank and Richard B. Boyer, effective June 1, 2002(2)(8) |
| |
| | 10.22 | | 409A Amendment to the Executive Supplemental Retirement Plan Agreement between First Federal Savings Bank and Richard B. Boyer(2)(8) |
| |
| | 21.0 | | Subsidiaries of the Registrant(1) |
| |
| | 23.0 | | Consent of Beard Miller Company LLP |
| |
| | 31.1 | | Rule 13(a)-14(a)/15d-14(a) Certification of Chief Executive Officer |
| |
| | 31.2 | | Rule 13(a)-14(a)/15d-14(a) Certification of Principal Financial Officer |
| |
| | 32.0 | | Section 1350 Certification of Chief Executive Officer and Principal Financial Officer |
| | |
| (1) | | Incorporated herein by reference to the Exhibits to the Registration Statement on Form SB-2, and amendments thereto, initially filed on December 17, 2004, Registration No. 333-121405. |
| |
| (2) | | Management contract or compensation plan or arrangement. |
K-46
| | |
| (3) | | Incorporated herein by reference to the Exhibits to FedFirst Financial Corporation’s Form 10-QSB filed on November 14, 2005. |
| |
| (4) | | Incorporated herein by reference to the Exhibits to FedFirst Financial Corporation’s Form 10-KSB filed on March 30, 2006 |
| |
| (5) | | Incorporated herein by reference to Appendix C to the Proxy Statement for FedFirst Financial Corporation’s 2006 Stockholders Meeting filed on April 13, 2006. |
| |
| (6) | | Incorporated herein by reference to the Exhibits to FedFirst Financial Corporation’s Form 10-KSB filed on March 26, 2007. |
| |
| (7) | | Incorporated herein by reference to the Exhibits to FedFirst Financial Corporation’s Form 10-Q filed on August 8, 2008. |
| |
| (8) | | Incorporated herein by reference to the Exhibits to FedFirst Financial Corporation’s Form 10-Q filed on May 9, 2008. |
K-47
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | |
| | FedFirst Financial Corporation
| |
| Date: March 16, 2009 | By: | /s/ John G. Robinson | |
| | | John G. Robinson | |
| | | President and Chief Executive Officer | |
| |
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
| | | | | |
| Name | | Title | | Date |
| | | | | |
/s/ John G. Robinson John G. Robinson | | President, Chief Executive Officer and Director
(principal executive officer) | | March 16, 2009 |
| | | | | |
/s/ Robert C. Barry, Jr. Robert C. Barry, Jr. | | Senior Vice President and
Chief Financial Officer | | March 16, 2009 |
| | | | | |
/s/ Richard B. Boyer Richard B. Boyer | | Director | | March 16, 2009 |
| | | | | |
/s/ Joseph U. Frye Joseph U. Frye | | Director | | March 16, 2009 |
| | | | | |
/s/ John M. Kish John M. Kish | | Director | | March 16, 2009 |
| | | | | |
/s/ John J. LaCarte John J. LaCarte | | Director | | March 16, 2009 |
| | | | | |
/s/ David L. Wohleber David L. Wohleber | | Director | | March 16, 2009 |
K-48
MONESSEN, PENNSYLVANIA
FINANCIAL STATEMENTS
Contents
| | | |
| | | Page |
| | F-2 |
| | F-3 |
| Consolidated Financial Statements: | | |
| | F-4 |
| | F-5 |
| | F-6 |
| | F-8 |
| | F-10 |
F-1
MANAGEMENT’S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
FedFirst Financial Corporation’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance to management and the board of directors regarding the preparation and fair presentation of financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Management assessed the effectiveness of its internal control over financial reporting as of December 31, 2008 based upon the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in a report entitledInternal Control — Integrated Framework.Based on our assessment, management has concluded FedFirst Financial Corporation maintained effective internal control over financial reporting as of December 31, 2008.
This Annual Report does not include an attestation report of FedFirst Financial Corporation’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by FedFirst Financial Corporation’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit FedFirst Financial Corporation to provide only management’s report in this Annual Report.
F-2
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
FedFirst Financial Corporation
Monessen, Pennsylvania
We have audited the accompanying consolidated statements of financial condition of FedFirst Financial Corporation and Subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive loss, and cash flows for each of the years in the two-year period ended December 31, 2008. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these 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 Company 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 Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 FedFirst Financial Corporation and Subsidiaries as of December 31, 2008 and 2007 and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.
/s/ Beard Miller Company LLP
Pittsburgh, Pennsylvania
March 16, 2009
F-3
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
| | | | | | | | | |
| December 31, | | 2008 | | | 2007 | |
| (Dollars in thousands except share data) | | | | | | | | |
| | | | | | | | | |
Assets: | | | | | | | | |
| |
| Cash and cash equivalents: | | | | | | | | |
| Cash and due from banks | | $ | 2,224 | | | $ | 2,127 | |
| Interest-earning deposits | | | 5,623 | | | | 3,425 | |
| |
| Total cash and cash equivalents | | | 7,847 | | | | 5,552 | |
| | | | | | | | | |
| Securities available-for-sale | | | 85,433 | | | | 89,073 | |
| Loans, net | | | 230,184 | | | | 187,954 | |
| Federal Home Loan Bank (“FHLB”) stock, at cost | | | 6,901 | | | | 5,076 | |
| Accrued interest receivable — loans | | | 1,147 | | | | 966 | |
| Accrued interest receivable — securities | | | 505 | | | | 651 | |
| Premises and equipment, net | | | 2,735 | | | | 2,956 | |
| Bank-owned life insurance | | | 7,431 | | | | 7,538 | |
| Goodwill | | | 1,080 | | | | 1,080 | |
| Real estate owned | | | 295 | | | | 1,119 | |
| Deferred tax assets and tax credit carryforwards | | | 4,930 | | | | 2,942 | |
| Other assets | | | 1,273 | | | | 366 | |
| |
Total assets | | $ | 349,761 | | | $ | 305,273 | |
| |
Liabilities and Stockholders’ Equity: | | | | | | | | |
| |
| Deposits: | | | | | | | | |
| Noninterest-bearing | | | 12,005 | | | | 8,918 | |
| Interest-bearing | | | 160,799 | | | | 146,640 | |
| |
| Total deposits | | | 172,804 | | | | 155,558 | |
| | | | | | | | | |
| Borrowings | | | 132,410 | | | | 101,074 | |
| Advance payments by borrowers for taxes and insurance | | | 474 | | | | 477 | |
| Accrued interest payable — deposits | | | 743 | | | | 1,116 | |
| Accrued interest payable — borrowings | | | 546 | | | | 413 | |
| Other liabilities | | | 3,360 | | | | 2,782 | |
| |
| Total liabilities | | | 310,337 | | | | 261,420 | |
| | | | | | | | | |
| Minority interest in subsidiary | | | 103 | | | | 80 | |
| | | | | | | | | |
| Stockholders’ equity: | | | | | | | | |
| Preferred stock $0.01 par value; 10,000,000 shares authorized; none issued | | | — | | | | — | |
| Common stock $0.01 par value; 20,000,000 shares authorized; 6,707,500 shares issued, 6,351,775 and 6,518,200 shares outstanding | | | 67 | | | | 67 | |
| Additional paid-in-capital | | | 29,291 | | | | 29,084 | |
| Retained earnings — substantially restricted | | | 15,930 | | | | 18,520 | |
| Accumulated other comprehensive loss, net of deferred taxes of $(716) and $(45) | | | (1,111 | ) | | | (70 | ) |
| Unearned Employee Stock Ownership Plan (“ESOP”) | | | (1,901 | ) | | | (2,074 | ) |
| Common stock held in treasury, at cost (355,725 and 189,300 shares) | | | (2,955 | ) | | | (1,754 | ) |
| |
| Total stockholders’ equity | | | 39,321 | | | | 43,773 | |
| |
Total liabilities and stockholders’ equity | | $ | 349,761 | | | $ | 305,273 | |
| |
See Notes to the Consolidated Financial Statements
F-4
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | |
| Years Ended December 31, | | 2008 | | 2007 |
| (Dollars in thousands, except per share amounts) | | | | | | | | |
| |
Interest income: | | | | | | | | |
| Loans | | $ | 12,347 | | | $ | 10,535 | |
| Securities | | | 5,313 | | | | 4,186 | |
| Other interest-earning assets | | | 299 | | | | 530 | |
| |
| Total interest income | | | 17,959 | | | | 15,251 | |
| |
Interest expense: | | | | | | | | |
| Deposits | | | 4,824 | | | | 5,174 | |
| Borrowings | | | 4,813 | | | | 3,579 | |
| |
| Total interest expense | | | 9,637 | | | | 8,753 | |
| |
Net interest income | | | 8,322 | | | | 6,498 | |
| |
| Provision for loan losses | | | 878 | | | | 1,119 | |
| |
Net interest income after provision for loan losses | | | 7,444 | | | | 5,379 | |
| |
Noninterest income: | | | | | | | | |
| Fees and service charges | | | 487 | | | | 412 | |
| Insurance commissions | | | 1,929 | | | | 1,639 | |
| Income from bank-owned life insurance | | | 813 | | | | 279 | |
| Impairment loss on securities | | | (4,806 | ) | | | — | |
| Net gain (loss) on sales of securities | | | 202 | | | | (1,412 | ) |
| Other | | | 32 | | | | 15 | |
| |
| Total noninterest (loss) income | | | (1,343 | ) | | | 933 | |
| |
Noninterest expense: | | | | | | | | |
| Compensation and employee benefits | | | 5,632 | | | | 5,606 | |
| Occupancy | | | 1,329 | | | | 1,156 | |
| FDIC insurance premiums | | | 28 | | | | 22 | |
| Data processing | | | 425 | | | | 387 | |
| Professional services | | | 579 | | | | 578 | |
| Other | | | 1,417 | | | | 1,365 | |
| |
| Total noninterest expense | | | 9,410 | | | | 9,114 | |
| |
| Minority interest in net income of consolidated subsidiary | | | 75 | | | | 52 | |
| |
Loss before income tax benefit | | | (3,384 | ) | | | (2,854 | ) |
| Income tax benefit | | | (1,239 | ) | | | (899 | ) |
| |
Net loss | | $ | (2,145 | ) | | $ | (1,955 | ) |
| |
| |
Loss per share: | | | | | | | | |
| Basic and diluted | | $ | (0.36 | ) | | $ | (0.31 | ) |
| |
See Notes to the Consolidated Financial Statements
F-5
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND
COMPREHENSIVE LOSS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Accumulated | | | | | | | Common | | | | | | | |
| | | | | | | Additional | | | | | | | Other | | | | | | | Stock | | | Total | | | | |
| | | Common | | | Paid-in- | | | Retained | | | Comprehensive | | | Unearned | | | Held in | | | Stockholders’ | | | Comprehensive | |
| | | Stock | | | Capital | | | Earnings | | | Loss | | | ESOP | | | Treasury | | | Equity | | | Loss | |
| |
(Dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at January 1, 2007 | | $ | 67 | | | $ | 28,787 | | | $ | 20,475 | | | $ | (737 | ) | | $ | (2,246 | ) | | $ | — | | | $ | 46,346 | | | | | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | — | | | | — | | | | (1,955 | ) | | | — | | | | — | | | | — | | | | (1,955 | ) | | $ | (1,955 | ) |
| Transfer of securities to held for trading, net of tax of $(553) | | | — | | | | — | | | | — | | | | 857 | | | | — | | | | — | | | | 857 | | | | 857 | |
| Reclassification adjustment on sales of securities available-for-sale, net of tax | | | — | | | | — | | | | — | | | | 2 | | | | — | | | | — | | | | 2 | | | | 2 | |
| Unrealized loss on securities available-for-sale, net of tax of $124 | | | — | | | | — | | | | — | | | | (192 | ) | | | — | | | | — | | | | (192 | ) | | | (192 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Purchase of common stock stock to be held in treasury (191,800 shares) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,775 | ) | | | (1,775 | ) | | | | |
| ESOP shares committed to be released (17,281 shares) | | | — | | | | (14 | ) | | | — | | | | — | | | | 172 | | | | — | | | | 158 | | | | | |
| Stock-based compensation expense | | | — | | | | 333 | | | | — | | | | — | | | | — | | | | — | | | | 333 | | | | | |
| Stock awards issued | | | — | | | | (51 | ) | | | — | | | | — | | | | — | | | | 51 | | | | — | | | | | |
| Stock awards forfeited | | | — | | | | 29 | | | | — | | | | — | | | | — | | | | (30 | ) | | | (1 | ) | | | | |
| | | | | |
| Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | (1,288 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2007 | | $ | 67 | | | $ | 29,084 | | | $ | 18,520 | | | $ | (70 | ) | | $ | (2,074 | ) | | $ | (1,754 | ) | | $ | 43,773 | | | | | |
| | | | | |
See Notes to the Consolidated Financial Statements
F-6
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Accumulated | | | | | | | Common | | | | | | | |
| | | | | | | Additional | | | | | | | Other | | | | | | | Stock | | | Total | | | | |
| | | Common | | | Paid-in- | | | Retained | | | Comprehensive | | | Unearned | | | Held in | | | Stockholders’ | | | Comprehensive | |
| | | Stock | | | Capital | | | Earnings | | | Loss | | | ESOP | | | Treasury | | | Equity | | | Loss | |
| |
| (Dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at January 1, 2008 | | $ | 67 | | | $ | 29,084 | | | $ | 18,520 | | | $ | (70 | ) | | $ | (2,074 | ) | | $ | (1,754 | ) | | $ | 43,773 | | | | | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | — | | | | — | | | | (2,145 | ) | | | — | | | | — | | | | — | | | | (2,145 | ) | | $ | (2,145 | ) |
| Reclassification adjustment on sales of securities available-for-sale, net of tax of $79 | | | — | | | | — | | | | — | | | | (123 | ) | | | — | | | | — | | | | (123 | ) | | | (123 | ) |
| Reclassification adjustment on impairment loss on securities, net of tax of $(1,884) | | | — | | | | — | | | | — | | | | 2,922 | | | | — | | | | — | | | | 2,922 | | | | 2,922 | |
| Unrealized loss on securities available-for-sale, net of tax of $(2,476) | | | — | | | | — | | | | — | | | | (3,840 | ) | | | — | | | | — | | | | (3,840 | ) | | | (3,840 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative effect adjustment on benefit plan reserve | | | — | | | | — | | | | (445 | ) | | | — | | | | — | | | | — | | | | (445 | ) | | | | |
| Purchase of common stock stock to be held in treasury (183,425 shares) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,350 | ) | | | (1,350 | ) | | | | |
| ESOP shares committed to be released (17,281 shares) | | | — | | | | (55 | ) | | | — | | | | — | | | | 173 | | | | — | | | | 118 | | | | | |
| Stock-based compensation expense | | | — | | | | 411 | | | | — | | | | — | | | | — | | | | — | | | | 411 | | | | | |
| Stock awards issued | | | — | | | | (149 | ) | | | — | | | | — | | | | — | | | | 149 | | | | — | | | | | |
| | | | | |
| Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | (3,186 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2008 | | $ | 67 | | | $ | 29,291 | | | $ | 15,930 | | | $ | (1,111 | ) | | $ | (1,901 | ) | | $ | (2,955 | ) | | $ | 39,321 | | | | | |
| | | | | |
See Notes to the Consolidated Financial Statements
F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | |
| Years Ended December 31, | | 2008 | | 2007 |
| (Dollars in thousands) | | | | | | | | |
| | | | | | | | | |
Cash flows from operating activities: | | | | | | | | |
| Net loss | | $ | (2,145 | ) | | $ | (1,955 | ) |
| Adjustments to reconcile net loss to net cash provided by operating activities | | | | | | | | |
| Minority interest in net income of consolidated subsidiary | | | 75 | | | | 52 | |
| Provision for loan losses | | | 878 | | | | 1,119 | |
| Depreciation | | | 506 | | | | 426 | |
| Net (gain) loss on sales of securities | | | (202 | ) | | | 1,412 | |
| Impairment loss on securities | | | 4,806 | | | | — | |
| Proceeds from sales of securities held for trading | | | — | | | | 40,483 | |
| Proceeds from principal repayments of securities held for trading | | | — | | | | 638 | |
| Deferred income tax benefit | | | (1,317 | ) | | | (946 | ) |
| Net amortization of security premiums and loan costs | | | (470 | ) | | | (632 | ) |
| Noncash expense for ESOP | | | 118 | | | | 158 | |
| Noncash expense for stock-based compensation | | | 411 | | | | 333 | |
| Noncash benefit plan reserve | | | 445 | | | | — | |
| Increase in bank-owned life insurance | | | (272 | ) | | | (279 | ) |
| (Increase) decrease in other assets | | | (645 | ) | | | 759 | |
| Increase in other liabilities | | | 14 | | | | 412 | |
| |
| Net cash provided by operating activities | | | 2,202 | | | | 41,980 | |
| | | | | | | | | |
Cash flows from investing activities: | | | | | | | | |
| Net loan originations | | | (42,677 | ) | | | (15,050 | ) |
| Proceeds from sale of student loan portfolio | | | — | | | | 12 | |
| Noncash income for cash surrender value of policy surrendered | | | (541 | ) | | | — | |
| Proceeds from maturities of and principal repayments of securities available-for-sale | | | 16,819 | | | | 16,045 | |
| Proceeds from sales of securities available-for-sale | | | 29,783 | | | | 4,569 | |
| Purchases of securities available-for-sale | | | (49,096 | ) | | | (67,370 | ) |
| Purchases of premises and equipment | | | (285 | ) | | | (1,220 | ) |
| Increase in FHLB stock, at cost | | | (1,825 | ) | | | (175 | ) |
| Proceeds from sales of real estate owned | | | 686 | | | | — | |
| |
| Net cash used in investing activities | | | (47,136 | ) | | | (63,189 | ) |
| | | | | | | | | |
Cash flows from financing activities: | | | | | | | | |
| Net (decrease) increase in short-term borrowings | | | (9,400 | ) | | | 14,400 | |
| Proceeds from long-term borrowings | | | 62,500 | | | | 47,500 | |
| Repayments of long-term borrowings | | | (21,764 | ) | | | (50,149 | ) |
| Net increase in deposits | | | 17,246 | | | | 12,063 | |
| (Decrease) increase in advance payments by borrowers for taxes and insurance | | | (3 | ) | | | 223 | |
| Purchases of common stock to be held in treasury | | | (1,350 | ) | | | (1,775 | ) |
| |
| Net cash provided by financing activities | | | 47,229 | | | | 22,262 | |
| |
| Net increase in cash and cash equivalents | | | 2,295 | | | | 1,053 | |
| Cash and cash equivalents, beginning of year | | | 5,552 | | | | 4,499 | |
| |
Cash and cash equivalents, end of year | | $ | 7,847 | | | $ | 5,552 | |
| |
See Notes to the Consolidated Financial Statements
F-8
| | | | | | | | | |
Supplemental cash flow information: | | | | | | | | |
| Cash paid for: | | | | | | | | |
| Interest on deposits and borrowings | | $ | 9,877 | | | $ | 8,723 | |
| Income tax expense | | | 76 | | | | 49 | |
| Transfer of securities from available-for-sale to held for trading | | | — | | | | 42,531 | |
| Real estate acquired in settlement of loans | | | 595 | | | | 607 | |
| Real estate owned financed | | | 738 | | | | — | |
| Accounts receivable on bank-owned life insurance | | | 920 | | | | — | |
| |
See Notes to the Consolidated Financial Statements
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 1. | | Summary of Significant Accounting Policies |
| |
| | | Nature of Operations |
The accompanying Consolidated Financial Statements include the accounts of FedFirst Financial Corporation, a federally chartered holding company (“FedFirst Financial” or the “Company”), whose wholly owned subsidiaries are First Federal Savings Bank (the “Bank”), a federally chartered stock savings bank, and FedFirst Exchange Corporation (“FFEC”). FFEC has an 80% controlling interest in Exchange Underwriters, Inc. Exchange Underwriters, Inc. is a full-service, independent insurance agency that offers property and casualty, commercial liability, surety and other insurance products. The Company is a majority owned subsidiary of FedFirst Financial Mutual Holding Company (“FFMHC”), a federally chartered mutual holding company. FFMHC has virtually no operations and assets other than an investment in the Company, and is not included in these financial statements. All significant intercompany transactions have been eliminated.
We operate as a community-oriented financial institution offering residential, multi-family and commercial mortgages, consumer loans and commercial business loans as well as a variety of deposit products for individuals and businesses from nine locations in southwestern Pennsylvania. We conduct insurance brokerage activities through Exchange Underwriters, Inc. The Bank is subject to competition from other financial institutions and to the regulations of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities.
In April 2005, FedFirst Financial completed its initial public offering. In connection with the offering, the Company sold 3,636,875 shares of common stock to FFMHC. As a result, FFHMC owned 55% of the Company’s original issuance of common stock. At December 31, 2008, FFHMC’s ownership of common stock increased to 57% as a result of the Company’s common stock repurchase programs throughout 2007 and 2008 which reduced the number of outstanding shares.
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America (“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 income and expenses during the reporting period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to determination of the allowance for losses on loans and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, evaluation of securities for other-than-temporary impairment, goodwill impairment, and the valuation of deferred tax assets.
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | Cash and Cash Equivalents |
For purposes of the statements of cash flows, the Company has defined cash and cash equivalents as those amounts included in the statements of financial condition as cash and due from banks and interest-earning deposits.
The Company classifies securities at the time of purchase as either held-to-maturity, trading or available-for-sale. Securities that the Company has the positive intent and ability to hold to maturity are classified as securities held-to-maturity and are reported at amortized cost. Securities bought and held principally for the purpose of selling them in the near term are classified as securities for trading and reported at fair value with gains and losses included in earnings. The Company had no held-to-maturity or trading securities at December 31, 2008 or 2007. Securities not classified as held-to-maturity or trading securities are classified as securities available-for-sale and are reported at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Interest income includes amortization of purchase premium or discount. Premiums and discounts are amortized and accreted using the level yield method. Net gain or loss on the sale of securities is based on the amortized cost of the specific security sold.
Loans are stated at the outstanding principal amount of the loans, net of premiums and discounts on loans purchased, deferred loan costs, loans in process, and the allowance for loan losses. Interest income on loans is accrued and credited to interest income as earned. Loans are generally placed on nonaccrual status at the earlier of when they become delinquent 90 days or more as to principal or interest or when it appears that principal or interest is uncollectible. Interest accrued prior to a loan being placed on nonaccrual status is subsequently reversed. Interest income on nonaccrual loans is recognized only in the period in which it is ultimately collected. Loans are returned to an accrual status when factors indicating doubtful collectibility no longer exist.
Loan fees, and direct costs of originating loans, are deferred and the net fee or cost is amortized to interest income as a yield adjustment over the contractual lives of the related loans using the interest method. Amortization of deferred loan fees is discontinued when a loan is placed on nonaccrual status.
| | | Allowance for Loan Losses |
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that in management’s judgment should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a quarterly basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, peer group information, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other factors. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
Under SFAS No. 114,Accounting by Creditors for Impairment of a Loan,a loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest according to the contractual terms of the loan agreement.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management performs individual assessments of larger impaired loans to determine the existence of loss exposure and, where applicable, the extent of loss exposure based upon the present value of expected future cash flows available to pay the loan, or based upon the estimated realizable collateral where a loan is collateral dependent. Generally, loans excluded from the individual impairment analysis are collectively evaluated by management to estimate reserves for loan losses inherent in those loans in accordance with SFAS No. 5,Accounting for Contingencies. Management determines historical loss experience for each group of loans with similar risk characteristics within the portfolio based on loss experience for loans in each group. Loan categories will represent groups of loans with similar risk characteristics and may include types of loans by product, large credit exposures, concentrations, loan grade, or any other characteristic that causes a loan’s risk profile to be similar to another. We also consider qualitative or environmental factors that are likely to cause estimated credit losses associated with the bank’s existing portfolio to differ from historical loss experience including changes in lending policies and procedures; changes in the nature and volume of the loan portfolio; changes in experience, ability and depth of loan management; changes in the volume and severity of past due loans, nonaccrual loans and adversely graded or classified loans; changes in the quality of the loan review system; changes in the value of underlying collateral for collateral dependent loans; existence of or changes in concentrations of credit; changes in economic or business conditions, and; effect of competition, legal and regulatory requirements on estimated credit losses.
| | | Other Than Temporary Impairment |
We evaluate securities for impairment based on the three step model outlined in Financial Accounting Standards Board Staff Position FAS 115-1 and 124-1The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The three step model includes identifying impairment, determining whether the impairment is other-than-temporary and, if so, recognizing the impairment loss. An investment is impaired if its fair value is less than its cost basis. Determining the amount of the other-than-temporary impairment involves a high degree of subjective judgments and may include evaluating the following impairment indicators:
| | • | | A significant deterioration in the investee’s earnings performance, credit rating, asset quality, or business prospects. |
| |
| | • | | A significant adverse change in the investee’s regulatory, economic, or technological environment or in the general market conditions of either the geographic area or the industry in which the investee operates. |
| |
| | • | | A bona fide, solicited-or-unsolicited offer to buy the same or a similar security for an amount less than cost or a completed auction process for the same or similar security indicating a decline in the investment’s fair value. |
| |
| | • | | Events or conditions that raise significant concerns about the investee’s ability to continue as a going concern, such as negative cash flows from operations, working-capital deficiencies, or noncompliance with statutory capital requirements or debt covenants. |
An impaired state may end either because fair value recovers at least up to its cost or because the investor recognizes an other-than-temporary impairment loss. Once impairments are identified, a determination is made on whether they are temporary or other-than-temporary. The loss recognized on an identified other-than-temporary impairment is the difference between the investment’s cost and its fair value at the balance-sheet date. This establishes a new cost basis for the investment, which is not adjusted for subsequent recoveries of fair value. We subsequently account for other-than-temporarily impaired debt securities as though those securities had been purchased on the measurement date of the impairment. The discount or reduced premium recorded for the debt security is amortized over the remaining life of the security based on the amount and timing of estimated future cash flows.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company follows the policy of charging the costs of advertising to expense as incurred. Total advertising expense was approximately $119,000 and $155,000 for the years ended December 31, 2008 and 2007, respectively.
When properties are acquired through foreclosure, they are transferred at estimated fair value less estimated selling costs and any required write-downs are charged to the allowance for loan losses. Subsequently, such properties are carried at the lower of the adjusted cost or fair value less estimated selling costs. Estimated fair value of the property is generally based on an appraisal.
Land is carried at cost. Office properties and equipment are carried at cost less accumulated depreciation and amortization. Buildings and leasehold improvements are depreciated using the straight-line method using useful lives ranging from 10 to 40 years.
Furniture, fixtures, and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 10 years. Charges for maintenance and repairs are expensed as incurred.
| | | Bank-Owned Life Insurance |
The Company purchased insurance on the lives of certain key employees which includes executive officers and directors. The policies accumulate asset values to meet future liabilities, including the payment of employee benefits. Increases in the cash surrender value and proceeds upon the death of a key employee are recorded as noninterest income in the Consolidated Statements of Operations. The cash surrender value of bank-owned life insurance is recorded as an asset on the Consolidated Statements of Financial Condition.
The Company adopted the provisions of Statement of Financial Accounting Standard (“SFAS”) No. 142, Goodwill and Other Intangible Assets, which requires that goodwill be reported separate from other intangible assets in the Statement of Financial Condition and not be amortized but tested for impairment annually, or more frequently if impairment indicators arise for impairment. No impairment charge was deemed necessary for the years ended December 31, 2008 and 2007.
The provision for income taxes is the total of the current year income tax due or refundable and the change in the deferred tax assets and liabilities. Deferred tax assets and liabilities are the estimated future tax consequences attributable to differences between the financial statements’ carrying amounts of existing assets and liabilities and their respective tax bases, computed using enacted tax rates. The realization of deferred tax assets is assessed and a valuation allowance provided, when necessary, for that portion of the asset which is not likely to be realized. Management believes, based upon current facts, that it is more likely than not there will be sufficient taxable income in future years to realize the deferred tax assets. The Company and its subsidiaries file a consolidated federal income tax return. The Company had no uncertain tax positions at December 31, 2008 and 2007.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | Investment in Affordable Housing Projects |
The Company accounted for its limited partnership interests in affordable housing projects under the cost-recovery method. The Company received tax credits each year over a ten-year period. The investment was completely amortized at December 31, 2005.
At December 31, 2008 and 2007, there was approximately $1.0 million of credits that have not been utilized. The credits have been reflected as an asset, and are available to be used to offset future taxes payable with the credits expiring in years 2021 through 2025.
| | | Comprehensive Income (Loss) |
The Company is required to present comprehensive income (loss) and its components in a full set of general purpose financial statements for all periods presented. Other comprehensive income (loss) is comprised of net unrealized holding gains (losses) on its available-for-sale securities. The Company has elected to report the effects of its other comprehensive income as part of the Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Loss.
| | | Federal Home Loan Bank System |
The Company is a member of the Federal Home Loan Bank System. As a member, the Bank is required to maintain an investment in the capital stock of the Federal Home Loan Bank of Pittsburgh (“FHLB”). Deficiencies, if any, in the required investment at the end of any reporting period are purchased in the subsequent reporting period. The Company may receive dividends on its FHLB capital stock, which are included in interest income and are recognized when declared. The investment is carried at cost. No ready market exists for the stock, and it has no quoted market value. In December 2008, the FHLB of Pittsburgh notified member banks that it was suspending dividend payments and the repurchase of capital stock.
| | | Earnings (Loss) Per Share |
Basic earnings (loss) per common share is calculated by dividing the net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per common share is computed in a manner similar to basic earnings (loss) per common share except that the weighted-average number of common shares outstanding is increased to include the incremental common shares (as computed using the treasury stock method) that would have been outstanding if all potentially dilutive common stock equivalents were issued during the period. Common stock equivalents include restricted stock awards and stock options. Anti-dilutive shares are common stock equivalents with weighted-average exercise prices in excess of the weighted-average market value for the periods presented. Unallocated common shares held by the Employee Stock Ownership Plan (“ESOP”) are not included in the weighted-average number of common shares outstanding for purposes of calculating both basic and diluted earnings per common share until they are committed to be released.
On May 24, 2006, FedFirst Financial Corporation’s stockholders approved the 2006 Equity Incentive Plan (the “Plan”). The purpose of the Plan is to promote the Company’s success and enhance its value by linking the personal interests of its employees, officers, directors and directors emeritus to those of the Company’s stockholders, and by providing participants with an incentive for outstanding performance. All of the Company’s salaried employees, officers and directors are eligible to participate
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
in the Plan. The Plan authorizes the granting of options to purchase shares of the Company’s stock, which may be non-statutory stock options or incentive stock options, and restricted stock which is subject to restrictions on transferability and subject to forfeiture. The Plan reserved an aggregate number of 453,617 shares of which 324,012 may be issued in connection with the exercise of stock options and 129,605 may be issued as restricted stock.
Awards are typically granted with a 5 year vesting period and a vesting rate of 20% per year. The contractual life of stock options is typically 10 years from the date of grant. The exercise price for options is the closing price on the date of grant. The Company recognizes expense associated with the awards over the vesting period in accordance with SFAS No. 123(R),Share-Based Payment. Unrecognized compensation cost related to nonvested stock-based compensation is recognized ratably over the remaining service period. The per share weighted-average fair value of stock options granted with an exercise price equal to the market value on the date of grant is calculated using the Black-Scholes-Merton option pricing model, using assumptions for expected life, expected dividend rate, risk-free interest rate, and an expected volatility. The Company uses the simplified method because it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time its shares have been publicly traded.
| | | Fair Value of Financial Instruments |
The Company adopted Statement of Financial Accounting Standard (“SFAS”) No. 157 on January 1, 2008. SFAS No. 157 establishes a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Fair values were determined by a third party pricing service using both quoted prices for similar assets, when available, and model-based valuation techniques that derive fair value based on market-corroborated data, such as instruments with similar prepayment speeds and default interest rates. In some instances, the fair value of certain securities cannot be determined using these techniques due to the lack of relevant market data. As such, these securities are valued using an alternative technique and classified within Level 3 of the fair value hierarchy.
| | | Reclassifications of Prior Year’s Statements |
Certain previously reported items have been reclassified to conform to the current year’s classifications.
| | | Recent Accounting Pronouncements |
Fair Value Measurements:In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This Statement does not require any new fair value measurements. However, for some entities the application of this Statement will change current practice. This statement was adopted on January 1, 2008 and did not have a material effect on the Company’s financial condition or results of operations.
Effective Date of FASB Statement No. 157:In February 2008, the FASB issued FASB Staff Position (“FSP”) 157-2,Effective Date of FASB Statement No. 157, that permits a one-year deferral in applying the measurement provisions of SFAS No. 157 to non-financial assets and non-financial liabilities (non-financial items) that are not recognized or disclosed at fair value in an entity’s financial statements on a recurring basis (at least annually). Therefore, if the change in fair value of a non-financial item is not required to be recognized or disclosed in the financial statements on an annual basis or more frequently, the effective date of application of SFAS No. 157 to that item is deferred until fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. This deferral does not apply, however, to an entity that applied
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS No. 157 in interim or annual financial statements prior to the issuance of FSP 157-2. This FSP will not have a material effect on the Company’s financial condition or results of operations upon adoption.
The Fair Value Option for Financial Assets and Financial Liabilities:In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing certain entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 expands the use of fair value accounting but does not affect existing standards which require assets and liabilities to be carried at fair value. The Company adopted the standards but did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008.
Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements:In March 2007, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 06-4,Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements, stating that for an endorsement split-dollar life insurance arrangement, an employer should recognize a liability for future benefits based on the substantive agreement with the employee. The consensus is effective for fiscal years beginning after December 15, 2007. The Company recognized the effects of applying the consensus on this issue through a $445,000 cumulative-effect adjustment to retained earnings at January 1, 2008.
Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.In June 2007, the EITF reached a consensus on Issue No. 06-11,Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards. EITF 06-11 states that an entity should recognize a realized tax benefit associated with dividends on nonvested equity shares, nonvested equity share units and outstanding equity share options charged to retained earnings as an increase in additional paid-in-capital. The amount recognized in additional paid-in-capital should be included in the pool of excess tax benefits available to absorb potential future tax deficiencies on share-based payment awards. EITF 06-11 should be applied prospectively to income tax benefits of dividends on equity-classified share-based payment awards that are declared in fiscal years beginning after December 15, 2007. EITF 06-11 will not have an impact on the Company’s financial condition or results of operations.
Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin (“ARB”) No. 51.In December, 2007 the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51. SFAS 160 establishes standards related to the treatment of noncontrolling interests. A noncontrolling interest, sometimes called a minority interest, is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. SFAS No. 160 will require noncontrolling interests to be treated as a separate component of equity, not as a liability or other item outside permanent equity. The Statement applies to the accounting for noncontrolling interests and transactions with noncontrolling interest holders in consolidated financial statements. The objective of this Statement is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements. Before this Statement was issued, limited guidance existed for reporting noncontrolling interests. As a result, considerable diversity in practice existed. So-called minority interests were reported in the consolidated statement of financial position as liabilities or in the mezzanine section between liabilities and equity. This statement is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2008. Earlier application is prohibited. The Company does not expect this statement to have a material effect on its financial condition or results of operations upon adoption.
Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.In February 2008, the FASB issued FSP FAS 140-3,Accounting for Transfers of Financial Assets and Repurchase Financing Transactions. This FSP addresses the issue of whether or not these transactions should be viewed as two separate transactions or as one linked transaction. The FSP includes a rebuttable presumption that presumes linkage of the two transactions unless the presumption can be overcome by meeting certain
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
criteria. The FSP will be effective for fiscal years beginning after November 15, 2008 and will apply only to original transfers made after that date. Early application is prohibited. This FSP is not expected to have a material effect on the Company’s financial condition or results of operations upon adoption.
The Hierarchy of Generally Accepted Accounting Principles.In May 2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted Accounting Principles.SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. On September 16, 2008, the Securities and Exchange Commission’s approved the Public Company Accounting Oversight Board amendments to AU Section 411,The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles and this Statement became effective on November 15, 2008.This statement did not have a material effect on the Company’s financial condition or results of operations upon adoption.
Accounting for Financial Guarantee Insurance Contracts — an interpretation of SFAS No. 60.In May 2008, the FASB issued SFAS No. 163,Accounting for Financial Guarantee Insurance Contracts — an interpretation of SFAS No. 60.This Statement clarifies how SFAS No. 60,Accounting and Reporting by Insurance Enterprises, applies to financial guarantee insurance contracts issued by insurance enterprises, including the recognition and measurement of premium revenue and claim liabilities. It also requires expanded disclosures about financial guarantee insurance contracts. SFAS No. 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years, except for disclosures about the insurance enterprise’s risk-management activities, which are effective the first period (including interim periods) beginning after May 23, 2008. Except for the required disclosures, earlier application is not permitted. This statement did not have a material effect on the Company’s financial condition or results of operations upon adoption.
Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).In May 2008, the FASB issued FSP Accounting Principals Board 14-1,Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement,which clarifies the accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. The FSP requires issuers to account separately for the liability and equity components of certain convertible debt instruments in a manner that reflects the issuer’s nonconvertible debt borrowing rate when interest cost is recognized. The FSP also requires bifurcation of a component of the debt, classification of that component in equity and the accretion of the resulting discount on the debt to be recognized as part of interest expense. Retrospective application is required to the terms of instruments as they existed for all periods presented. The FSP is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. Early adoption is not permitted. The Company does not expect this FSP to have a material effect on its financial condition or results of operations upon adoption.
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.In June 2008, the FASB issued FSP EITF 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.This FSP clarifies that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders. Awards of this nature are considered participating securities and the two-class method of computing basic and diluted earnings per share must be applied. This FSP is effective for fiscal years beginning after December 15, 2008. The Company does not expect this FSP to have a material effect on its financial condition or results of operations upon adoption.
Determining the Fair Value of a Financial Asset When The Market for That Asset Is Not Active:In October 2008, the FASB issued FSP 157-3,Determining the Fair Value of a Financial Asset When The Market for That Asset Is Not Active, to clarify the application of the provisions of SFAS No. 157 in an inactive market and how an entity would determine fair value in an inactive market. FSP 157-3 was effective immediately and applies to the Company’s December 31, 2008 financial statements. The application of the provisions of FSP 157-3 affected the Company’s financial condition and results of
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | operations as of and for the periods ended December 31, 2008. Refer to Note 2 for discussion on SFAS No. 157. |
| |
| | | Equity Method Investment Accounting Considerations.In November 2008, the FASB ratified EITF 08-6,Equity Method Investment Accounting Considerations. EITF 08-6 clarifies the accounting for certain transactions and impairment considerations involving equity method investments. EITF 08-6 is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. This EITF will not have a material effect on the Company’s financial condition or results of operations upon adoption. |
| |
| | | Amendments to the Impairment Guidance of EITF Issue No. 99-20.In January 2009, the FASB issued FSP EITF 99-20-1,Amendments to the Impairment of Guidance of EITF Issue No. 99-20.FSP EITF 99-20-1 amends the impairment guidance in EITF Issue No. 99-20,Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets, to achieve more consistent determination of whether an other-than-temporary impairment has occurred. FSP EITF 99-20-1 also retains and emphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements in SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, and other related guidance. FSP EITF 99-20-1 is effective for interim and annual reporting periods ending after December 15, 2008, and shall be applied prospectively. Retrospective application to a prior interim or annual reporting period is not permitted. The Company adopted this FSP and used the guidance when evaluating corporate debt securities for other-than-temporary impairment. |
| |
| 2. | | Securities |
| |
| | | The following table sets forth the amortized cost and fair value of securities available-for-sale at the dates indicated (dollars in thousands). |
| | | | | | | | | | | | | | | | | |
| | | | | | | Gross | | Gross | | |
| | | Amortized | | Unrealized | | Unrealized | | Fair |
| December 31, 2008 | | Cost | | Gains | | Losses | | Value |
| |
| Government-sponsored enterprises | | $ | 9,267 | | | $ | 99 | | | $ | — | | | $ | 9,366 | |
| Mortgage-backed | | | 41,359 | | | | 708 | | | | 87 | | | | 41,980 | |
| REMICs | | | 32,590 | | | | 318 | | | | 525 | | | | 32,383 | |
| Corporate debt | | | 3,995 | | | | — | | | | 2,340 | | | | 1,655 | |
| Equities | | | 49 | | | | — | | | | — | | | | 49 | |
| |
| Total securities available-for-sale | | $ | 87,260 | | | $ | 1,125 | | | $ | 2,952 | | | $ | 85,433 | |
| |
| | | | | | | | | | | | | | | | | |
| | | | | | | Gross | | Gross | | |
| | | Amortized | | Unrealized | | Unrealized | | Fair |
| December 31, 2007 | | Cost | | Gains | | Losses | | Value |
| |
| Government-sponsored enterprises | | $ | 22,321 | | | $ | 353 | | | $ | — | | | $ | 22,674 | |
| Mortgage-backed | | | 34,948 | | | | 242 | | | | 37 | | | | 35,153 | |
| REMICs | | | 27,875 | | | | 80 | | | | 478 | | | | 27,477 | |
| Corporate debt | | | 3,995 | | | | — | | | | 275 | | | | 3,720 | |
| Equities | | | 49 | | | | — | | | | — | | | | 49 | |
| |
| Total securities available-for-sale | | $ | 89,188 | | | $ | 675 | | | $ | 790 | | | $ | 89,073 | |
| |
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company reviews its position quarterly to determine if there is an other-than-temporary impairment on any of its securities. The policy of the Company is to recognize an other-than-temporary impairment on equity securities where the fair value has been significantly below cost for three consecutive quarters. For fixed-maturity investments with unrealized losses due to interest rates where the Company has the positive intent and ability to hold the investment for a period of time sufficient to allow a market recovery, declines in value below cost are not assumed to be other-than-temporary. The Company evaluates the creditworthiness of the issuers/guarantors as well as the underlying collateral, if applicable. The Company also monitors the credit ratings of all securities for downgrades as well as placement on negative outlook or credit watch. Management may also evaluate other facts and circumstances that may be indicative of an other-than-temporary impairment condition.
The Company invests in and is subject to credit risk related to private label mortgage-backed securities that are directly supported by underlying mortgage loans. The Company’s private label mortgage-backed securities are credit-enhanced, senior tranches of securities in which the subordinate classes of the securities provide credit support for the senior class of securities. Losses in the underlying loan pool would generally have to exceed the credit support provided by the subordinate classes of securities before the senior class of securities would experience any credit losses. The Company also invests in corporate debt and is subject to credit risk related to pooled trust preferred insurance corporation term obligations.
At December 31, 2008, the Company has a total of 17 private label mortgage-backed securities with an amortized cost of $14.3 million and a fair market value of $9.2 million. Private label mortgage-backed securities held by the Company are summarized in the following table by vintage (year of origination) prior to evaluation for other-than-temporary impairment analysis (dollars in thousands).
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Gross |
| | | Number of | | Amortized | | Fair | | Unrealized |
| Vintage | | Securities | | Cost | | Value | | Losses |
| |
| 2003 | | | 5 | | | $ | 2,713 | | | $ | 2,485 | | | $ | 228 | |
| 2004 | | | 1 | | | | 514 | | | | 397 | | | | 117 | |
| |
| Total 2003-2004 | | | 6 | | | | 3,227 | | | | 2,882 | | | | 345 | |
| 2005 | | | 1 | | | | 610 | | | | 385 | | | | 225 | |
| 2006 | | | 7 | | | | 7,699 | | | | 4,444 | | | | 3,255 | |
| 2007 | | | 3 | | | | 2,811 | | | | 1,485 | | | | 1,326 | |
| |
| Total 2005-2007 | | | 11 | | | | 11,120 | | | | 6,314 | | | | 4,806 | |
| |
| Total 2003-2007 | | | 17 | | | $ | 14,347 | | | $ | 9,196 | | | $ | 5,151 | |
| |
As part of the Company’s review of its available for sale securities at December 31, 2008, it was determined that 11 private label mortgage-backed securities for vintages 2005 through 2007 with an unrealized loss of $4.8 million had other-than-temporary impairment. Of these securities, 9 were significantly downgraded by the rating agencies in December 2008 with all but one accorded below investment grade status. In addition to the decrease in fair market value, the underlying assets reflected further deterioration with respect to delinquencies, foreclosures and payment speed which identified a potential loss of principal based on cash flow analysis.
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents gross unrealized losses and fair value of securities aggregated by category and length of time that individual securities have been in a continuous loss position at the dates indicated (dollars in thousands). The 11 private label mortgage-backed securities that had an other-than-temporary impairment of $4.8 million are not included in this table as they were written down to fair value at December 31, 2008.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Less than 12 months | | 12 months or more | | Total |
| |
| | | Number | | | | | | Gross | | Number | | | | | | Gross | | Number | | | | | | Gross |
| | | of | | Fair | | Unrealized | | of | | Fair | | Unrealized | | of | | Fair | | Unrealized |
| December 31, 2008 | | Securities | | Value | | Losses | | Securities | | Value | | Losses | | Securities | | Value | | Losses |
| |
| Mortgage-backed | | | 71 | | | $ | 9,052 | | | $ | 86 | | | | 2 | | | $ | 14 | | | $ | 1 | | | | 73 | | | $ | 9,066 | | | $ | 87 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| REMICs: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Private label issuer: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Prime fixed and adjustable rate | | | 3 | | | | 1,277 | | | | 137 | | | | 2 | | | | 710 | | | | 185 | | | | 5 | | | | 1,987 | | | | 322 | |
| Alt-A fixed rate | | | 1 | | | | 894 | | | | 23 | | | | — | | | | — | | | | — | | | | 1 | | | | 894 | | | | 23 | |
| Government-sponsored enterprises | | | 7 | | | | 3,406 | | | | 180 | | | | — | | | | — | | | | — | | | | 7 | | | | 3,406 | | | | 180 | |
| |
| Total REMICs | | | 11 | | | | 5,577 | | | | 340 | | | | 2 | | | | 710 | | | | 185 | | | | 13 | | | | 6,287 | | | | 525 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Corporate debt | | | — | | | | — | | | | — | | | | 3 | | | | 1,655 | | | | 2,340 | | | | 3 | | | | 1,655 | | | | 2,340 | |
| |
| Total securities temporarily impaired | | | 82 | | | $ | 14,629 | | | $ | 426 | | | | 7 | | | $ | 2,379 | | | $ | 2,526 | | | | 89 | | | $ | 17,008 | | | $ | 2,952 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Less than 12 months | | 12 months or more | | Total |
| |
| | | Number | | | | | | Gross | | Number | | | | | | Gross | | Number | | | | | | Gross |
| | | of | | Fair | | Unrealized | | of | | Fair | | Unrealized | | of | | Fair | | Unrealized |
| December 31, 2007 | | Securities | | Value | | Losses | | Securities | | Value | | Losses | | Securities | �� | Value | | Losses |
| |
| Mortgage-backed | | | 8 | | | $ | 9,946 | | | $ | 35 | | | | 3 | | | $ | 119 | | | $ | 2 | | | | 11 | | | $ | 10,065 | | | $ | 37 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| REMICs: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Private label issuer: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Prime fixed and adjustable rate | | | 2 | | | | 778 | | | | 2 | | | | 2 | | | | 1,028 | | | | 16 | | | | 4 | | | | 1,806 | | | | 18 | |
| Alt-A fixed rate | | | 7 | | | | 8,390 | | | | 380 | | | | 1 | | | | 766 | | | | 57 | | | | 8 | | | | 9,156 | | | | 437 | |
| Government-sponsored enterprises | | | 3 | | | | 3,277 | | | | 22 | | | | 5 | | | | 130 | | | | 1 | | | | 8 | | | | 3,407 | | | | 23 | |
| |
| Total REMICs | | | 12 | | | | 12,445 | | | | 404 | | | | 8 | | | | 1,924 | | | | 74 | | | | 20 | | | | 14,369 | | | | 478 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Corporate debt | | | — | | | | — | | | | — | | | | 3 | | | | 3,720 | | | | 275 | | | | 3 | | | | 3,720 | | | | 275 | |
| |
| Total securities temporarily impaired | | | 20 | | | $ | 22,391 | | | $ | 439 | | | | 14 | | | $ | 5,763 | | | $ | 351 | | | | 34 | | | $ | 28,154 | | | $ | 790 | |
| |
The Company has concluded that at December 31, 2008 the unrealized losses outlined in the previous table represent temporary declines based on an evaluation of the creditworthiness of the issuers/guarantors as well as the underlying collateral, if applicable, and other facts and circumstances. Additionally, the Company has the ability and intent to hold such securities through to recovery of the unrealized losses. The ability and intent of the Company is demonstrated by the fact that the Company is well capitalized and has no need to sell these securities. As a result of this evaluation, management does not believe it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the individual securities. Therefore, the Company does not consider these securities to be other-than-temporarily impaired at December 31, 2008.
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and fair value of securities at December 31, 2008 by contractual maturity were as follows. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties (dollars in thousands).
| | | | | | | | | |
| | | Amortized | | Fair |
| | | Cost | | Value |
| |
| Due in one year or less | | $ | 2 | | | $ | 2 | |
| Due from one to five years | | | 1,174 | | | | 1,182 | |
| Due from five to ten years | | | 13,083 | | | | 13,164 | |
| Due after ten years | | | 72,952 | | | | 71,036 | |
| No scheduled maturity | | | 49 | | | | 49 | |
| |
| Total | | $ | 87,260 | | | $ | 85,433 | |
| |
Securities with an amortized cost and fair value of $9.9 and $10.0 million, respectively, at December 31, 2008 and $9.0 and $8.9 million, respectively, at December 31, 2007 were pledged to secure public deposits and repurchase agreements.
Proceeds from the sales of securities available-for-sale for the year ended December 31, 2008 were $29.8 million and related gross realized gains totaled $335,000 and gross realized losses totaled $133,000. Proceeds from the sales of securities available-for-sale for the year ended December 31, 2007 were $4.6 million and related realized losses totaled $2,000.
In April 2007, the Company restructured its securities portfolio through the sale of approximately $40.5 million of securities which were yielding an average of 4.08%. Approximately $30.5 million of the proceeds from the sale of these securities were reinvested in securities yielding an average of 5.44% and the remaining $10.0 million was utilized to pay maturing short-term FHLB borrowings. The purpose was to better position the Company for an uncertain interest rate environment, improve interest rate spread and net interest margin without increasing interest rate risk, and reduce leverage. The decision to sell the securities required the Company to reclassify the securities from available-for-sale to held for trading at March 31, 2007. As a result, at March 31, 2007, the Company held $41.1 million of securities held for trading. All of the securities in the trading portfolio were subsequently sold in April 2007. Proceeds from securities restructuring and sale of held-for-trading securities for the year ended December 31, 2007 were $40.5 million with realized losses of $1.4 million. The Company had no sales of held-for-trading securities for the year ended December 31, 2008.
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 3. | | Loans |
| |
| | | The following table sets forth the composition of the Company’s loan portfolio at the dates indicated (dollars in thousands). |
| | | | | | | | | |
| December 31, | | 2008 | | 2007 |
| |
| Real estate — mortgage: | | | | | | | | |
| One-to-four family residential | | $ | 155,871 | | | $ | 135,453 | |
| Multi-family | | | 10,946 | | | | 11,985 | |
| Commercial | | | 24,301 | | | | 14,483 | |
| |
| Total real estate — mortgage | | | 191,118 | | | | 161,921 | |
| |
| | | | | | | | | |
| Real estate — construction: | | | | | | | | |
| Residential | | | 9,833 | | | | 6,671 | |
| Commercial | | | 3,443 | | | | — | |
| |
| Total real estate — construction | | | 13,276 | | | | 6,671 | |
| |
| | | | | | | | | |
| Consumer: | | | | | | | | |
| Home equity | | | 22,344 | | | | 17,862 | |
| Loans on savings accounts | | | 886 | | | | 675 | |
| Home improvement | | | 233 | | | | 281 | |
| Other | | | 588 | | | | 592 | |
| |
| Total consumer | | | 24,051 | | | | 19,410 | |
| |
| | | | | | | | | |
| Commercial business | | | 8,474 | | | | 4,341 | |
| |
| Total loans | | $ | 236,919 | | | $ | 192,343 | |
| |
| | | | | | | | | |
| Net premium on loans purchased | | | 120 | | | | 191 | |
| Net deferred loan costs | | | 850 | | | | 491 | |
| Loans in process | | | (5,899 | ) | | | (3,614 | ) |
| Allowance for loan losses | | | (1,806 | ) | | | (1,457 | ) |
| |
| Loans, net | | $ | 230,184 | | | $ | 187,954 | |
| |
Activity in the allowance for loan losses was as follows (dollars in thousands).
| | | | | | | | | |
| Years Ended December 31, | | 2008 | | 2007 |
| |
| Allowance at beginning of year | | $ | 1,457 | | | $ | 866 | |
| Provision for loan losses | | | 878 | | | | 1,119 | |
| Charge-offs | | | (529 | ) | | | (528 | ) |
| Recoveries | | | — | | | | — | |
| |
| Net charge-offs | | | (529 | ) | | | (528 | ) |
| |
| Allowance at end of year | | $ | 1,806 | | | $ | 1,457 | |
| |
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | The following table sets forth the nonaccrual loans for the years ended December 31, 2008 and 2007 (dollars in thousands). Nonaccrual loans consist primarily of one-to-four family residential and commercial real estate mortgage loans. |
| | | | | | | | | |
| December 31, | | 2008 | | | 2007 | |
| |
| Accruing loans past due 90 or more days | | $ | — | | | $ | — | |
| Nonaccrual loans | | | 636 | | | | 1,281 | |
| |
| Total nonperforming loans | | $ | 636 | | | $ | 1,281 | |
| |
| 4. | | Premises and Equipment |
| |
| | | Premises and equipment are summarized by major classifications as follows (dollars in thousands). |
| | | | | | | | | |
| December 31, | | 2008 | | | 2007 | |
| |
| Land and land improvements | | $ | 450 | | | $ | 450 | |
| Buildings and leasehold improvements | | | 4,492 | | | | 4,442 | |
| Furniture, fixtures and equipment | | | 3,351 | | | | 3,116 | |
| |
| Total, at cost | | | 8,293 | | | | 8,008 | |
| |
| Less: accumulated depreciation | | | 5,558 | | | | 5,052 | |
| |
| Premises and equipment, net | | $ | 2,735 | | | $ | 2,956 | |
| |
| | | Depreciation expense was approximately $506,000 and $426,000 for the years ended December 31, 2008 and 2007, respectively. |
| |
| 5. | | Deposits |
| |
| | | Deposits are summarized as follows (dollars in thousands). |
| | | | | | | | | |
| December 31, | | 2008 | | | 2007 | |
| |
| Noninterest-bearing demand deposits | | $ | 12,005 | | | $ | 8,918 | |
| Interest-bearing demand deposits | | | 11,336 | | | | 11,864 | |
| Savings accounts | | | 22,477 | | | | 23,056 | |
| Money market accounts | | | 43,873 | | | | 13,676 | |
| Certificates of deposit | | | 83,113 | | | | 98,044 | |
| |
| Total deposits | | $ | 172,804 | | | $ | 155,558 | |
| |
Interest expense by deposit category was as follows (dollars in thousands).
| | | | | | | | | |
| Years ended December 31, | | 2008 | | | 2007 | |
| |
| Interest-bearing demand deposits | | $ | 56 | | | $ | 61 | |
| Savings accounts | | | 183 | | | | 250 | |
| Money market accounts | | | 956 | | | | 464 | |
| Certificates of deposit | | | 3,629 | | | | 4,399 | |
| |
| Total interest expense | | $ | 4,824 | | | $ | 5,174 | |
| |
| | | The aggregate amount of certificates of deposit with a minimum denomination of $100,000 totaled $14.5 million and $18.5 million at December 31, 2008 and 2007, respectively. Deposit amounts in excess of |
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | $100,000 are generally not federally insured, with the exception of certain self-directed retirement accounts which are insured up to $250,000. However, deposit insurance per account owner has been raised from $100,000 to $250,000 for all types of accounts until January 1, 2010. In addition, the Bank opted to participate in the FDIC’s Temporary Liquidity Guarantee Program under which, for a fee, noninterest bearing transaction accounts receive unlimited insurance coverage until December 31, 2009. |
| |
| | | Scheduled maturities of certificates of deposit were as follows (dollars in thousands): |
| | | | | | | | | | | |
| December 31, | | 2008 | | | | | 2007 | |
| |
| 2009 | | $ | 41,085 | | | 2008 | | $ | 68,144 | |
| 2010 | | | 22,209 | | | 2009 | | | 11,029 | |
| 2011 | | | 4,664 | | | 2010 | | | 5,223 | |
| 2012 | | | 5,801 | | | 2011 | | | 3,379 | |
| 2013 | | | 2,218 | | | 2012 | | | 3,493 | |
| Thereafter | | | 7,136 | | | Thereafter | | | 6,776 | |
| |
| Total | | $ | 83,113 | | | Total | | $ | 98,044 | |
| |
| 6. | | Borrowings |
| |
| | | We utilize borrowings as a supplemental source of funds for loans and securities. The primary source of borrowings are FHLB advances and, to a limited extent, repurchase agreements. At December 31, 2008 and 2007, we had $126.9 million and $95.6 million, respectively, in outstanding FHLB advances and $5.5 million in repurchase agreements. Our FHLB advances include fixed rate and convertible select advances. The FHLB convertible select advances are long-term borrowings which have a fixed rate for the first three or five years of the term. After the fixed rate term expires, and quarterly thereafter, the FHLB may convert the advance to an adjustable rate advance at its option. If the advance is converted to an adjustable rate advance, the Bank has the option at the conversion date or on any future quarterly rate reset date to prepay the advance with no prepayment fee. At December 31, 2008 and 2007, we had $13.5 million in convertible select advances. |
| |
| | | The following table sets forth borrowings based on their stated maturities and weighted average rates at December 31, 2008 and 2007 (dollars in thousands). |
| | | | | | | | | | | | | | | | | |
| | | Weighted | | | | |
| | | Average Rate | | | Balance | |
| December 31, | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| |
| Due in one year or less | | | 3.39 | % | | | 3.91 | % | | $ | 33,739 | | | $ | 28,856 | |
| Due in one to two years | | | 4.20 | | | | 4.46 | | | | 25,950 | | | | 20,548 | |
| Due in two to three years | | | 3.57 | | | | 4.31 | | | | 23,215 | | | | 21,921 | |
| Due in three to four years | | | 4.53 | | | | 4.29 | | | | 22,803 | | | | 7,205 | |
| Due in four to five years | | | 3.68 | | | | 4.75 | | | | 23,703 | | | | 16,531 | |
| Due after five years | | | 5.13 | | | | 4.38 | | | | 3,000 | | | | 6,013 | |
| |
| Total advances | | | 3.87 | % | | | 4.30 | % | | $ | 132,410 | | | $ | 101,074 | |
| |
| | | Advances from the FHLB are secured by the Bank’s stock in the FHLB and certain qualifying mortgage-backed securities to the extent that the defined statutory value must be at least equal to the advances outstanding. Securities with an amortized cost and fair value of $5.8 million at December 31, 2008 were pledged to adequately secure the repurchase agreements. |
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | The maximum remaining borrowing capacity at the FHLB at December 31, 2008 and 2007 was approximately $90.9 million and $85.5 million, respectively. The advances are subject to restrictions or penalties in the event of prepayment. |
| |
| 7. | | Earnings (Loss) Per Share |
| |
| | | The following table sets forth basic and diluted loss per common share at December 31, 2008 and 2007. There was no dilution from stock options for the years ended December 31, 2008 and 2007. |
| | | | | | | | | |
| Years Ended December 31, | | 2008 | | | 2007 | |
| |
| (Dollars in thousands, except per share amounts) | | | | | | | | |
| | | | | | | | | |
| Net loss | | $ | (2,145 | ) | | $ | (1,955 | ) |
| Weighted-average shares outstanding: | | | | | | | | |
| Basic | | | 5,956,998 | | | | 6,328,239 | |
| Effect of dilutive restricted stock awards | | | — | | | | — | |
| |
| Diluted | | | 5,956,998 | | | | 6,328,239 | |
| | | | | | | | | |
| Loss per share: | | | | | | | | |
| Basic | | $ | (0.36 | ) | | $ | (0.31 | ) |
| Diluted | | | (0.36 | ) | | | (0.31 | ) |
| |
| 8. | | Operating Leases |
| |
| | | The Company leases certain properties under operating leases expiring in various years through 2017. Lease expense was $185,000 and $134,000 for the years ended December 31, 2008 and 2007, respectively. |
| |
| | | Minimum future rental payments under noncancelable operating leases are as follows (dollars in thousands). |
| | | | | |
| December 31, | | 2008 | |
| |
| 2009 | | $ | 180 | |
| 2010 | | | 159 | |
| 2011 | | | 111 | |
| 2012 | | | 94 | |
| 2013 | | | 87 | |
| Thereafter | | | 291 | |
| |
| Total | | $ | 922 | |
| |
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 9. | | Income Taxes |
| |
| | | The difference between actual income tax benefit and the amount computed by applying the federal statutory income tax rate of 34% to loss before income tax benefits were reconciled as follows (dollars in thousands). |
| | | | | | | | | |
| Years ended December 31, | | 2008 | | | 2007 | |
| |
| Computed income tax benefit | | $ | (1,151 | ) | | $ | (970 | ) |
| Increase (decrease) resulting from: | | | | | | | | |
| State taxes (net of federal benefit) | | | 51 | | | | 54 | |
| Nontaxable BOLI income | | | (276 | ) | | | (95 | ) |
| Stock-based compensation (ISO’s) | | | 94 | | | | 85 | |
| Other, net | | | 43 | | | | 27 | |
| |
| Actual income tax benefit | | $ | (1,239 | ) | | $ | (899 | ) |
| |
| | | Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as follows (dollars in thousands). |
| | | | | | | | | |
| December 31, | | 2008 | | | 2007 | |
| |
| Deferred tax assets: | | | | | | | | |
| Allowance for loan losses | | $ | 614 | | | $ | 495 | |
| Investments in affordable housing projects | | | 104 | | | | 104 | |
| Postretirement benefits | | | 725 | | | | 691 | |
| Net operating loss carryforwards — federal | | | 390 | | | | 716 | |
| Stock-based compensation (NSO’s) | | | 85 | | | | 38 | |
| Impairment loss on securities | | | 1,634 | | | | — | |
| Net unrealized loss on securities available-for-sale | | | 716 | | | | 45 | |
| |
| Total deferred tax assets | | | 4,268 | | | | 2,089 | |
| | | | | | | | | |
| Deferred tax liabilities: | | | | | | | | |
| Deferred loan costs | | | (289 | ) | | | (167 | ) |
| Depreciation and amortization | | | (20 | ) | | | (20 | ) |
| |
| Total deferred tax liabilities | | | (309 | ) | | | (187 | ) |
| | | | | | | | | |
| Net deferred tax assets | | | 3,959 | | | | 1,902 | |
| Tax credit carryforwards | | | 971 | | | | 1,040 | |
| |
| Total deferred tax assets and tax credit carryforwards | | $ | 4,930 | | | $ | 2,942 | |
| |
| | | The net operating loss carryforwards and impairment loss on securities are available to offset future taxes payable with the tax credit carryforwards expiring in 2021 and 2022. The Company determined that it was not required to establish a valuation allowance for deferred tax assets since it is more likely than not that the deferred tax assets will be realized through future taxable income and future reversals of existing taxable temporary differences. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. |
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | Income tax benefit is summarized as follows (dollars in thousands). |
| | | | | | | | | |
| Years ended December 31, | | 2008 | | | 2007 | |
| |
| Currently payable | | $ | 78 | | | $ | 47 | |
| Deferred benefit | | | (1,317 | ) | | | (946 | ) |
| |
| Total income tax benefit | | $ | (1,239 | ) | | $ | (899 | ) |
| |
| 10. | | Regulatory Matters |
| |
| �� | | The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possible additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank’s 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. |
| |
| | | Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of Total and Tier I capital to risk-weighted assets and of Tier I capital to average assets. Generally, a savings association is considered to be “undercapitalized” if it has a ratio of total capital to risk weighted assets of less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less than 4% or a ratio of core capital to total assets of less than 4%. At December 31, 2008 and 2007, the Bank met all capital adequacy requirements to which it is subject and notifications from the Regulators categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain Total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes would change the Bank’s categorization. In December 2008, the Company made an additional investment of $6.5 million in the Bank in order to increase the Bank’s capital levels. The following table sets forth the Bank’s regulatory capital amounts and ratios, as well as the minimum amounts and ratios required to be well capitalized (dollars in thousands). |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | To Be Well |
| | | | | | | | | | | For Capital | | Capitalized |
| | | | | | | | | | | Adequacy | | Under Prompt |
| | | Actual | | Purposes | | Corrective Action |
| December 31, 2008 | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| |
| Total capital (to risk weighted assets) | | $ | 35,964 | | | | 19.93 | % | | $ | 14,435 | | | | 8.00 | % | | $ | 18,044 | | | | 10.00 | % |
| Tier I capital (to risk weighted assets) | | | 34,158 | | | | 18.93 | | | | 7,217 | | | | 4.00 | | | | 10,826 | | | | 6.00 | |
| Tier I capital (to adjusted total assets) | | | 34,158 | | | | 9.76 | | | | 13,996 | | | | 4.00 | | | | 17,496 | | | | 5.00 | |
| Tangible capital (to tangible assets) | | | 34,158 | | | | 9.76 | | | | 5,249 | | | | 1.50 | | | | N/A | | | | N/A | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2007 | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| |
| Total capital (to risk weighted assets) | | $ | 31,481 | | | | 21.54 | % | | $ | 11,692 | | | | 8.00 | % | | $ | 14,615 | | | | 10.00 | % |
| Tier I capital (to risk weighted assets) | | | 30,024 | | | | 20.54 | | | | 5,846 | | | | 4.00 | | | | 8,769 | | | | 6.00 | |
| Tier I capital (to adjusted total assets) | | | 30,024 | | | | 9.86 | | | | 12,175 | | | | 4.00 | | | | 15,219 | | | | 5.00 | |
| Tangible capital (to tangible assets) | | | 30,024 | | | | 9.86 | | | | 4,566 | | | | 1.50 | | | | N/A | | | | N/A | |
| |
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a reconciliation of the Bank’s equity under GAAP to regulatory capital at the dates indicated (dollars in thousands).
| | | | | | | | | |
| December 31, | | 2008 | | | 2007 | |
| |
| GAAP equity | | $ | 34,127 | | | $ | 31,034 | |
| Goodwill | | | (1,080 | ) | | | (1,080 | ) |
| Accumulated other comprehensive loss | | | 1,111 | | | | 70 | |
| |
| Tier I capital | | | 34,158 | | | | 30,024 | |
| General regulatory allowance for loan losses | | | 1,806 | | | | 1,457 | |
| |
| Total capital | | $ | 35,964 | | | $ | 31,481 | |
| |
Federal banking regulations place certain restrictions on dividends paid by the Bank to the Company. The total amount of dividends that may be paid at any date is generally limited to the earnings of the Bank for the year to date plus retained earnings for the prior two fiscal years, net of any prior capital distributions. In addition, dividends paid by the Bank to the Company would be prohibited if the distribution would cause the Bank’s capital to be reduced below the applicable minimum capital requirements.
401(k) Plan
The Company maintains a 401(k) plan for all salaried employees and may make a discretionary contribution to the plan based on a computation in relation to net income and compensation expense. The Company also matches the first 5% of employee deferrals on a graduated scale of 100% of the first 1-3%, and 50% thereafter up to a maximum of 4%. Plan expense was approximately $141,000 and $131,000 for the years ended December 31, 2008 and 2007, respectively. A full-time employee is eligible to participate in the plan after three months of employment, the attainment of age 21, and completion of 250 hours of service each Plan year.
Supplemental Executive Retirement Plan
The Company maintains a nonqualified defined contribution supplemental executive retirement plan (“SERP”) for certain key executive officers and a nonqualified defined benefit SERP for certain directors. The present value of estimated supplemental retirement benefits is charged to operations. A set retirement benefit is provided to the directors, but no set retirement is promised to officers, and no deferral of salary or income is required by the participants. Rather, the Company has agreed to place a certain amount of funds into an insurance policy on behalf of the participants. Each year, whatever income the policy generates, in the case of officers, above and beyond a predetermined index rate will be accrued into a retirement account that has been established for the participant. The expense for the years ended December 31, 2008 and 2007 was approximately $133,000 and $278,000, respectively.
Employee Stock Ownership Plan
In April 2005 the Bank established an ESOP that purchased 259,210 shares of FedFirst Financial from proceeds provided by the Company in the form of a loan. The effective date of the ESOP is January 1, 2005 and it is considered a leveraged plan. A full-time employee is eligible to participate in the plan after three months of employment, the attainment of age 21, and completion of 250 hours of service in a plan year. Each plan year, the Bank may, at its discretion, make additional contributions to the plan; however, at a minimum, the Bank has agreed to provide a contribution in the amount necessary to service the debt incurred to acquire the stock.
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Shares are scheduled for release as the loan is repaid based on the interest method. The present amortization schedule calls for 17,281 shares to be released each December 31. There were no dividends declared or paid for the years ended December 31, 2008 or 2007.
In connection with the formation of the ESOP, the Company adopted the American Institute of Certified Public Accountants’ Statement of Position 93-6, Employers’ Accounting for Employee Stock Ownership Plans. As shares in the ESOP are earned and committed to be released, compensation expense is recorded based on their average fair value. The difference between the average fair value of the shares committed to be released and the cost of those shares to the ESOP is charged or credited to additional paid-in capital. The balance of unearned shares held by the ESOP is shown as a reduction of stockholders’ equity. Only those shares in the ESOP which have been earned and are committed to be released are included in the computation of earnings per share.
ESOP compensation expense was $118,000 for the year ended December 31, 2008 compared to $158,000 for the year ended December 31, 2007. There were 17,281 shares earned and committed to be released and 49,240 allocated shares at December 31, 2008. At December 31, 2007, there were 17,281 shares earned and committed to be released and 32,344 allocated shares. The 190,086 and 207,367 remaining unearned/unallocated shares at December 31, 2008 and 2007 had an approximate fair market value of $814,000 and $1.9 million.
| 12. | | Stock-Based Compensation |
In May 2006, FedFirst Financial Corporation’s stockholders approved the 2006 Equity Incentive Plan (the “Plan”). The purpose of the Plan is to promote the Company’s success and enhance its value by linking the personal interests of its employees, officers, directors and directors emeritus to those of the Company’s stockholders, and by providing participants with an incentive for outstanding performance. All of the Company’s salaried employees, officers and directors are eligible to participate in the Plan. The Plan authorizes the granting of options to purchase shares of the Company’s stock, which may be non-statutory stock options or incentive stock options, and restricted stock which is subject to restrictions on transferability and subject to forfeiture. The Plan reserved an aggregate number of 453,617 shares of which 324,012 may be issued in connection with the exercise of stock options and 129,605 may be issued as restricted stock.
On July 24, 2007, a non-employee director was granted 3,000 restricted shares of common stock and 7,500 options to purchase shares of common stock. In addition, certain officers and key employees of the Company were awarded an aggregate of 2,500 restricted shares of common stock and 5,000 options to purchase shares of common stock. The awards vest over five years at the rate of 20% per year and the stock options have a 10 year contractual life from the date of grant. The Company’s common stock closed at $9.00 per share on July 24, 2007, which is the exercise price of the options granted on that date. The market value of the restricted stock awards was approximately $49,500, before the impact of income taxes. The estimated value of the stock options was $35,000, before the impact of income taxes. The per share weighted-average fair value of stock options granted with an exercise price equal to the market value on July 24, 2007 was $2.80 using the following Black-Scholes-Merton option pricing model assumptions: expected life of 7 years, expected dividend rate of 0%, risk-free interest rate of 4.87% and an expected volatility of 13%, based on historical results.
On August 8, 2008, a non-employee director was granted 2,000 restricted shares of common stock and 5,000 options to purchase shares of common stock. In addition, on the same date, certain officers and key employees of the Company were awarded an aggregate of 15,000 restricted shares of common stock and 30,000 options to purchase shares of common stock. The awards vest over five years at the rate of 20% per year and the stock options have a 10 year contractual life from the date of grant. The Company’s common stock closed at $6.70 per share on August 8, 2008, which is the exercise price of the options granted on that date. The market value of the restricted stock awards was approximately $113,900, before the impact of income taxes. The estimated value of the stock options was $100,100, before the impact of income taxes.
F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The per share weighted-average fair value of stock options granted with an exercise price equal to the market value on August 8, 2008 was $2.86, using the Black-Scholes-Merton option pricing model with the following assumptions: expected life of 7 years, expected dividend rate of 0%, risk-free interest rate of 3.94% and an expected volatility of 32.56%, based on historical results.
The Company recognizes expense associated with the awards over the five-year vesting period in accordance with SFAS No. 123(R), Share-Based Payment. Compensation expense was $411,000 for the year ended December 31, 2008 compared to $333,000 for the year ended December 31, 2007. As of December 31, 2008, there was $1.1 million of total unrecognized compensation cost related to nonvested stock-based compensation compared to $1.3 million at December 31, 2007. The compensation expense cost at December 31, 2008 is expected to be recognized ratably over the weighted average remaining service period of 3.0 years. There is no intrinsic value for stock options at December 31, 2008. The realized tax benefit for stock options (NSO’s) was $47,000 and $27,000 for the years ended December 31, 2008 and 2007, respectively.
| | | | | | | | | | | | | |
| | | Stock Options |
| | | | | | | Weighted | | Weighted |
| | | Number | | Average | | Average |
| | | of | | Exercise | | Remaining |
| Stock-Based Compensation | | Shares | | Price | | Term |
| |
| Outstanding at January 1, 2007 | | | 233,000 | | | $ | 10.11 | | | | 9.75 | |
| Granted | | | 12,500 | | | | 9.00 | | | | | |
| Exercised or converted | | | — | | | | — | | | | | |
| Forfeited | | | 6,000 | | | | 10.11 | | | | | |
| Expired | | | — | | | | — | | | | | |
| |
| Outstanding at December 31, 2007 | | | 239,500 | | | $ | 10.05 | | | | 8.80 | |
| Granted | | | 35,000 | | | | 6.70 | | | | | |
| Exercised or converted | | | — | | | | — | | | | | |
| Forfeited | | | — | | | | — | | | | | |
| Expired | | | — | | | | — | | | | | |
| |
| Outstanding at December 31, 2008 | | | 274,500 | | | $ | 9.62 | | | | 7.80 | |
| | | | | | | | | | | | | |
| Exercisable at December 31, 2008 | | | 100,800 | | | $ | 10.08 | | | | 7.52 | |
| |
| | | | | | | | | | | | | | | | | |
| | | Stock Options | | Restricted Stock Awards |
| | | Number of | | Fair-Value | | Number of | | Fair-Value |
| | | Shares | | Price | | Shares | | Price |
| |
| Nonvested at January 1, 2007 | | | 233,000 | | | $ | 3.16 | | | | 95,000 | | | $ | 10.11 | |
| Granted | | | 12,500 | | | | 2.80 | | | | 5,500 | | | | 9.00 | |
| Vested | | | 45,400 | | | | 3.16 | | | | 18,400 | | | | 10.11 | |
| Forfeited | | | 6,000 | | | | 3.16 | | | | 3,000 | | | | 10.11 | |
| |
| Nonvested at December 31, 2007 | | | 194,100 | | | $ | 3.14 | | | | 79,100 | | | $ | 10.03 | |
| Granted | | | 35,000 | | | | 2.86 | | | | 17,000 | | | | 6.70 | |
| Vested | | | 55,400 | | | | 3.14 | | | | 22,500 | | | | 10.06 | |
| Forfeited | | | — | | | | — | | | | — | | | | — | |
| |
| Nonvested at December 31, 2008 | | | 173,700 | | | $ | 3.08 | | | | 73,600 | | | $ | 9.25 | |
| |
F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 13. | | Concentration of Credit Risk |
The risk of loss from lending and investing activities includes the possibility that a loss may occur from the failure of another party to perform according to the terms of the loan or investment agreement. This possibility of loss is known as credit risk. Credit risk can be reduced by diversifying the Company’s assets to prevent imprudent concentrations. The Company has adopted policies designed to prevent imprudent concentrations within its security and loan portfolio.
The primary investment vehicles for the Company for the years ended December 31, 2008 and 2007 were mortgage-backed securities, which are comprised of diversified individual residential mortgage notes, and REMICs (real estate mortgage investment conduits), which represent a participation interest in a pool of mortgages. Mortgage-backed securities are guaranteed as to the timely repayment of principal and interest by a Government-sponsored enterprise. REMICs are created by redirecting the cash flows from the pool of mortgages underlying those securities to create two or more classes (or tranches) with different maturity or risk characteristics designed to meet a variety of investor needs and preferences. REMICs may be sponsored by private issuers, such as money center banks or mortgage bankers, or by U.S. Government agencies and Government-sponsored enterprises. Investments in other securities consist of Government-sponsored securities which are made to provide and maintain liquidity within the guidelines of applicable regulations.
Substantially all of the Company’s loans, excluding those serviced by others, are made to customers located in southwestern Pennsylvania. The Company does not have any other concentration of credit risk representing greater than 10% of loans.
Off-Balance Sheet Risk
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit on consumer and commercial lines of credit and fixed and adjustable rate mortgage, commercial, home equity installment and home equity line of credit commitments and are summarized as follows (dollars in thousands).
| | | | | | | | | |
| December 31, | | 2008 | | | 2007 | |
| |
| Unused revolving lines of credit | | $ | 2,664 | | | $ | 2,207 | |
| Unused commercial lines of credit | | | 3,372 | | | | 802 | |
| One-to-four family residential commitments | | | 1,128 | | | | 2,647 | |
| Commercial commitments | | | 880 | | | | 273 | |
| Home equity commitments | | | 165 | | | | 235 | |
| |
| Total commitments outstanding | | $ | 8,209 | | | $ | 6,164 | |
| |
| 14. | | Fair Value Measurements and Fair Values of Financial Instruments |
Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of December 31, 2008 and 2007 and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to December 31, 2008 and 2007 may be different than the amounts reported at each year-end.
In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value
F-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements. The Company adopted SFAS 157 effective for its fiscal year beginning January 1, 2008.
In December 2007, the FASB issued FSP 157-2,Effective Date of FASB Statement No. 157. FSP 157-2 delays the effective date of SFAS No. 157 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. As such, the Company only partially adopted the provisions of SFAS No. 157, and will begin to account and report for non-financial assets and liabilities in 2009.
In October 2008, the FASB issued FSP 157-3,Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active, to clarify the application of the provisions of SFAS No. 157 in an inactive market and how an entity would determine fair value in an inactive market. FSP 157-3 was effective immediately and applies to the Company’s December 31, 2008 financial statements. The adoption of SFAS 157 and FSP 157-3 had no impact on the amounts reported in the financial statements.
SFAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under SFAS 157 are as follows:
Level 1 — Quoted prices for identical instruments in active markets.
Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are active, and model derived valuations in which significant inputs or significant drivers are observable in active markets.
Level 3 — Valuations derived from valuation techniques in which one or more significant inputs or significant drivers are unobservable.
F-32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For financial assets measured at fair value on a recurring basis, the following tables set forth the fair value measurements by fair value hierarchy at December 31, 2008 (dollars in thousands).
| | | | | | | | | | | | | |
| | | Significant Other | | Significant | | |
| | | Observable Inputs | | Unobservable Inputs | | |
| December 31, 2008 | | (Level 2) | | (Level 3) | | Total |
| |
| Securities available-for-sale | | $ | 80,062 | | | $ | 5,371 | | | $ | 85,433 | |
| |
| | | | | |
| | | Significant |
| | | Unobservable Inputs |
| (Dollars in thousands) | | (Level 3) |
| |
| December 31, 2007 | | $ | 6,390 | |
| Total gross unrealized losses | | | (2,199 | ) |
| Paydowns and maturities | | | (307 | ) |
| Net transfers in (out) of level 3 | | | 1,487 | |
| |
| December 31, 2008 | | $ | 5,371 | |
| |
| | | | | |
| The amount of total gross unrealized losses for the period included in earnings (or changes in net assets) attributable to the change in gross unrealized gains (losses) relating to assets still held at December 31, 2008 | | $ | (2,199 | ) |
| |
The majority of the Company’s securities are included in Level 2 of the fair value hierarchy. Fair values were determined by a third party pricing service using both quoted prices for similar assets, when available, and model-based valuation techniques that derive fair value based on market-corroborated data, such as instruments with similar prepayment speeds and default interest rates. In some instances, the fair value of certain securities cannot be determined using these techniques due to the lack of relevant market data. As such, these securities are valued using an alternative technique and classified within Level 3 of the fair value hierarchy.
At December 31, 2008, Level 3 includes 12 securities totaling $5.4 million. This balance is comprised of nine mortgage-backed securities at $3.7 million and three corporate debt securities at $1.7 million, which are pooled trust preferred insurance corporation term obligations. The mortgage-backed securities which were AAA rated at purchase do not have an active market and as such the Company has used an alternative method to determine the fair value of these securities. The fair value has been determined using a discounted cash flow model using market assumptions, which generally include cash flow, collateral and other market assumptions. The corporate debt securities, which were rated A at purchase, could not be priced using quoted market prices, observable market activity or comparable trades, and the financial market was considered not active. The trust preferred market has been severely impacted by the lack of liquidity in the credit markets and concern over the financial services industry. Fair values for trust preferred securities were obtained from pricing sources with reasonable pricing transparency, taking into account other unobservable inputs related to the risks for each issuer. The pooled trust preferred corporate term obligations owned are collateralized by the trust preferred securities of insurance companies in the U.S. There has been little or no active trading in these securities for approximately six months; therefore it was more appropriate to determine fair value using a discounted cash flow analysis. To determine the appropriate discount rate and cash flows, a review was completed for each of the issuer’s profitability, credit quality, operating efficiency, capital adequacy, leverage and liquidity position. These factors provided an assessment of the probability of default for each underlying piece of collateral for each year until maturity. Determining the appropriate discount rate for the discounted cash flow analysis combined current and observable market
F-33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
spreads for comparable structured credit products with specific risks identified within each issue. The observable market spreads incorporated both credit and liquidity premiums.
The following presents the fair value of financial instruments. In cases where quoted market prices are not available, fair value is based on estimates using present value or other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be sustained by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. In addition, the following information should not be interpreted as an estimate of the fair value of the Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at December 31, 2008 and 2007:
Cash and Cash Equivalents
The carrying amounts approximate the asset’s fair values.
Securities (Including Mortgage-Backed Securities)
The fair value of securities are determined by a third party pricing service using both quoted prices for similar assets, when available, and model-based valuation techniques that derive fair value based on market-corroborated data, such as instruments with similar prepayment speeds and default interest rates (Level 2). In some instances, the fair value of certain securities cannot be determined using these techniques due to the lack of relevant market data. As such, these securities are valued using an alternative technique and classified within Level 3 of the fair value hierarchy. Alternative techniques include using a discounted cash flow model using market assumptions, which generally include cash flow, collateral and other market assumptions or obtaining fair values from pricing sources with reasonable pricing transparency, taking into account other unobservable inputs related to the risks for each issuer.
Loans
The fair values for one-to-four family residential loans are estimated using discounted cash flow analyses using mortgage commitment rates from either FNMA or FHLMC. The fair values of consumer and commercial loans are estimated using discounted cash flow analyses, using interest rates reported in various government releases. The fair values of multi-family and nonresidential mortgages are estimated using discounted cash flow analysis, using interest rates based on national commitment rates on similar loans.
Federal Home Loan Bank Stock
The carrying amount approximates the asset’s fair value.
Accrued Interest Receivable and Accrued Interest Payable
The fair value of these instruments approximates the carrying value.
F-34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deposits
The fair values disclosed for demand deposits (eg., savings accounts) are, by definition, equal to the amount payable on demand at the repricing date (i.e., their carrying amounts). Fair values of certificates of deposits are estimated using a discounted cash flow calculation that applies the FHLB of Pittsburgh advance yield curve to the maturity schedule of the Bank’s certificates of deposit.
Borrowings
The fair value the FHLB advances and repurchase agreements are estimated using a discounted cash flow calculation using the current FHLB advance yield curve. This is the method that the FHLB of Pittsburgh used to determine the cost of terminating the borrowing contract. The FHLB of Pittsburgh issues a valuation report for convertible select advances.
Commitments to Extend Credit
These financial instruments are generally not subject to sale and estimated fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment, and the fair value determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, are not considered material for disclosure purposes. The contractual amounts of unfunded commitments are presented in Note 13 to these financial statements.
The following table sets forth the carrying amount and estimated fair value of financial instruments (dollars in thousands).
| | | | | | | | | | | | | | | | | |
| December 31, | | 2008 | | 2007 |
| | | Carrying | | Estimated | | Carrying | | Estimated |
| | | Amount | | Fair Value | | Amount | | Fair Value |
| |
| Financial assets: | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 7,847 | | | $ | 7,847 | | | $ | 5,552 | | | $ | 5,552 | |
| Securities | | | 85,433 | | | | 85,433 | | | | 89,073 | | | | 89,073 | |
| Loans, net | | | 230,184 | | | | 235,331 | | | | 187,954 | | | | 190,725 | |
| FHLB stock | | | 6,901 | | | | 6,901 | | | | 5,076 | | | | 5,076 | |
| Accrued interest receivable | | | 1,652 | | | | 1,652 | | | | 1,617 | | | | 1,617 | |
| | | | | | | | | | | | | | | | | |
| Financial liabilities: | | | | | | | | | | | | | | | | |
| Deposits | | | 172,804 | | | | 174,565 | | | | 155,558 | | | | 155,821 | |
| Borrowings | | | 132,410 | | | | 135,740 | | | | 101,074 | | | | 102,142 | |
| Accrued interest payable | | | 1,289 | | | | 1,289 | | | | 1,529 | | | | 1,529 | |
| |
F-35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 15. | | Condensed Financial Statements of Parent Company |
Financial information pertaining only to FedFirst Financial Corporation (dollars in thousands).
Statements of Financial Condition
| | | | | | | | | |
| December 31, | | 2008 | | | 2007 | |
| |
| Assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 2,781 | | | $ | 10,444 | |
| Investment in the Bank | | | 34,127 | | | | 31,034 | |
| Loan receivable, ESOP | | | 2,067 | | | | 2,200 | |
| Other assets | | | 370 | | | | 285 | |
| |
| Total assets | | $ | 39,345 | | | $ | 43,963 | |
| |
| | | | | | | | | |
| Liabilities and Stockholders’ Equity: | | | | | | | | |
| Accrued expenses | | | 24 | | | | 190 | |
| Stockholders’ equity | | | 39,321 | | | | 43,773 | |
| |
| Total liabilities and stockholders’ equity | | $ | 39,345 | | | $ | 43,963 | |
| |
Statements of Operations
| | | | | | | | | |
| Years ended December 31, | | 2008 | | | 2007 | |
| |
| Interest income | | $ | 126 | | | $ | 134 | |
| Operating expense | | | 288 | | | | 241 | |
| |
| Loss before undistributed loss of subsidiary and income tax benefit | | | (162 | ) | | | (107 | ) |
| Undistributed net loss of subsidiary | | | (2,035 | ) | | | (1,880 | ) |
| |
| Loss before income tax benefit | | | (2,197 | ) | | | (1,987 | ) |
| |
| Income tax benefit | | | (52 | ) | | | (32 | ) |
| |
| Net loss | | $ | (2,145 | ) | | $ | (1,955 | ) |
| |
F-36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statements of Cash Flows
| | | | | | | | | |
| Years ended December 31, | | 2008 | | | 2007 | |
| |
| Cash flows from operating activities: | | | | | | | | |
| Net loss | | $ | (2,145 | ) | | $ | (1,955 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
| Undistributed net loss in subsidiary | | | 2,035 | | | | 1,880 | |
| Noncash expense for stock-based compensation | | | 411 | | | | 333 | |
| Increase in other assets | | | (81 | ) | | | (129 | ) |
| (Decrease) increase in other liabilities | | | (166 | ) | | | 133 | |
| |
| Net cash provided by operating activities | | | 54 | | | | 262 | |
| |
| | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | |
| ESOP loan principal payments received | | | 133 | | | | 125 | |
| Investment in FFSB | | | (6,500 | ) | | | — | |
| |
| Net cash (used in) provided by investing activities | | | (6,367 | ) | | | 125 | |
| |
| | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | |
| Purchases of common stock to be held in treasury | | | (1,350 | ) | | | (1,775 | ) |
| |
| Net cash used in financing activities | | | (1,350 | ) | | | (1,775 | ) |
| |
| | | | | | | | | |
| Net decrease in cash and cash equivalents | | | (7,663 | ) | | | (1,388 | ) |
| | | | | | | | | |
| Cash and cash equivalents at beginning of year | | | 10,444 | | | | 11,832 | |
| |
| Cash and cash equivalents at end of year | | $ | 2,781 | | | $ | 10,444 | |
| |
F-37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 16. | | Segment and Related Information |
The following table sets forth the segment information for 2008 and 2007 (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | |
| | | First Federal | | Exchange | | | | | | |
| | | Savings Bank | | Underwriters, Inc. | | Other | | Net Eliminations | | Consolidated |
| |
| | | | | | | | | | | | | | | | | | | | | |
December 31, 2008 | | | | | | | | | | | | | | | | | | | | |
| |
| Assets | | $ | 350,517 | | | $ | 1,338 | | | $ | 39,345 | | | $ | (41,439 | ) | | $ | 349,761 | |
| Liabilities | | | 316,262 | | | | 489 | | | | 45 | | | | (6,459 | ) | | | 310,337 | |
| Minority interest in subsidiary | | | 103 | | | | — | | | | — | | | | — | | | | 103 | |
| Stockholders’ equity | | | 34,152 | | | | 849 | | | | 39,300 | | | | (34,980 | ) | | | 39,321 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
December 31, 2007 | | | | | | | | | | | | | | | | | | | | |
| |
| Assets | | $ | 306,010 | | | $ | 1,258 | | | $ | 43,963 | | | $ | (45,958 | ) | | $ | 305,273 | |
| Liabilities | | | 274,873 | | | | 523 | | | | 209 | | | | (14,185 | ) | | | 261,420 | |
| Minority interest in subsidiary | | | 80 | | | | — | | | | — | | | | — | | | | 80 | |
| Stockholders’ equity | | | 31,057 | | | | 735 | | | | 43,754 | | | | (31,773 | ) | | | 43,773 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, 2008 | | | | | | | | | | | | | | | | | | | | |
| |
| Total interest income | | $ | 17,927 | | | $ | 32 | | | $ | 127 | | | $ | (127 | ) | | $ | 17,959 | |
| Total interest expense | | | 9,764 | | | | — | | | | — | | | | (127 | ) | | | 9,637 | |
| |
| Net interest income | | | 8,163 | | | | 32 | | | | 127 | | | | — | | | | 8,322 | |
| Provision for loan losses | | | 878 | | | | — | | | | — | | | | — | | | | 878 | |
| |
| Net interest income after provision for loan losses | | | 7,285 | | | | 32 | | | | 127 | | | | — | | | | 7,444 | |
| Noninterest (loss) income | | | (2,899 | ) | | | 1,929 | | | | — | | | | (373 | ) | | | (1,343 | ) |
| Noninterest expense | | | 7,823 | | | | 1,299 | | | | 288 | | | | — | | | | 9,410 | |
| Undistributed net loss of subsidiary | | | — | | | | — | | | | (2,036 | ) | | | 2,036 | | | | — | |
| Minority interest in net income of consolidated subsidiary | | | 75 | | | | — | | | | — | | | | — | | | | 75 | |
| |
| (Loss) income before income tax (benefit) expense | | | (3,512 | ) | | | 662 | | | | (2,197 | ) | | | 1,663 | | | | (3,384 | ) |
| Income tax (benefit) expense | | | (1,476 | ) | | | 287 | | | | (50 | ) | | | — | | | | (1,239 | ) |
| |
| Net (loss) income | | $ | (2,036 | ) | | $ | 375 | | | $ | (2,147 | ) | | $ | 1,663 | | | $ | (2,145 | ) |
| |
| | | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, 2007 | | | | | | | | | | | | | | | | | | | | |
| |
| Total interest income | | $ | 15,211 | | | $ | 40 | | | $ | 134 | | | $ | (134 | ) | | $ | 15,251 | |
| Total interest expense | | | 8,887 | | | | — | | | | — | | | | (134 | ) | | | 8,753 | |
| |
| Net interest income | | | 6,324 | | | | 40 | | | | 134 | | | | — | | | | 6,498 | |
| Provision for loan losses | | | 1,119 | | | | — | | | | — | | | | — | | | | 1,119 | |
| |
| Net interest income after after provision for loan losses | | | 5,205 | | | | 40 | | | | 134 | | | | — | | | | 5,379 | |
| Noninterest (loss) income | | | (450 | ) | | | 1,639 | | | | — | | | | (256 | ) | | | 933 | |
| Noninterest expense | | | 7,666 | | | | 1,207 | | | | 241 | | | | — | | | | 9,114 | |
| Undistributed net loss of subsidiary | | | — | | | | — | | | | (1,880 | ) | | | 1,880 | | | | — | |
| Minority interest in net income of consolidated subsidiary | | | 52 | | | | — | | | | — | | | | — | | | | 52 | |
| |
| (Loss) income before income tax (benefit) expense | | | (2,963 | ) | | | 472 | | | | (1,987 | ) | | | 1,624 | | | | (2,854 | ) |
| Income tax (benefit) expense | | | (1,083 | ) | | | 212 | | | | (28 | ) | | | — | | | | (899 | ) |
| |
| Net (loss) income | | $ | (1,880 | ) | | $ | 260 | | | $ | (1,959 | ) | | $ | 1,624 | | | $ | (1,955 | ) |
| |
F-38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 17. | | Quarterly Financial Information (Unaudited) |
The following table summarizes selected information regarding the Company’s results of operations for the periods indicated (dollars in thousands). Quarterly earnings (loss) per share data may vary from annual loss per share due to rounding.
| | | | | | | | | | | | | | | | | |
| | | March 31, | | June 30, | | September 30, | | December 31, |
| Three Months Ended | | 2008 | | 2008 | | 2008 | | 2008 |
| |
| Interest income | | $ | 4,306 | | | $ | 4,355 | | | $ | 4,602 | | | $ | 4,696 | |
| Interest expense | | | 2,426 | | | | 2,356 | | | | 2,422 | | | | 2,433 | |
| |
| Net interest income | | | 1,880 | | | | 1,999 | | | | 2,180 | | | | 2,263 | |
| Provision for loan losses | | | 59 | | | | 220 | | | | 260 | | | | 339 | |
| |
| Net interest income after provision for loan losses | | | 1,821 | | | | 1,779 | | | | 1,920 | | | | 1,924 | |
| Noninterest income (loss) | | | 1,045 | | | | 589 | | | | 582 | | | | (3,559 | ) |
| Noninterest expense | | | 2,354 | | | | 2,236 | | | | 2,380 | | | | 2,440 | |
| Minority interest in net income of consolidated subsidiary | | | 43 | | | | 13 | | | | 5 | | | | 14 | |
| |
| Income (loss) before income tax expense (benefit) | | | 469 | | | | 119 | | | | 117 | | | | (4,089 | ) |
| Income tax expense (benefit) | | | 201 | | | | 54 | | | | 51 | | | | (1,545 | ) |
| |
| Net income (loss) | | $ | 268 | | | $ | 65 | | | $ | 66 | | | $ | (2,544 | ) |
| |
| | | | | | | | | | | | | | | | | |
| Earnings (loss) per share basic and diluted | | $ | 0.04 | | | $ | 0.01 | | | $ | 0.01 | | | $ | (0.43 | ) |
| | | | | | | | | | | | | | | | | |
| | | March 31, | | June 30, | | September 30, | | December 31, |
| Three Months Ended | | 2007 | | 2007 | | 2007 | | 2007 |
| |
| Interest income | | $ | 3,638 | | | $ | 3,708 | | | $ | 3,825 | | | $ | 4,080 | |
| Interest expense | | | 2,124 | | | | 2,058 | | | | 2,176 | | | | 2,395 | |
| |
| Net interest income | | | 1,514 | | | | 1,650 | | | | 1,649 | | | | 1,685 | |
| Provision for loan losses | | | 45 | | | | 30 | | | | 395 | | | | 649 | |
| |
| Net interest income after provision for loan losses | | | 1,469 | | | | 1,620 | | | | 1,254 | | | | 1,036 | |
| Noninterest (loss) income | | | (650 | ) | | | 516 | | | | 575 | | | | 492 | |
| Noninterest expense | | | 2,214 | | | | 2,205 | | | | 2,326 | | | | 2,369 | |
| Minority interest in net income (loss) of consolidated subsidiary | | | 31 | | | | 7 | | | | 15 | | | | (1 | ) |
| |
| Loss before income tax benefit | | | (1,426 | ) | | | (76 | ) | | | (512 | ) | | | (840 | ) |
| Income tax benefit | | | (457 | ) | | | (18 | ) | | | (165 | ) | | | (259 | ) |
| |
| Net loss | | $ | (969 | ) | | $ | (58 | ) | | $ | (347 | ) | | $ | (581 | ) |
| |
| | | | | | | | | | | | | | | | | |
| Loss per share basic and diluted | | $ | (0.15 | ) | | $ | (0.01 | ) | | $ | (0.06 | ) | | $ | (0.09 | ) |
F-39
