UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended March 31, 2013 |
| 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: 0-54124 |
| FEDFIRST FINANCIAL CORPORATION | |
| (Exact name of registrant as specified in its charter) | |
Maryland | | 25-1828028 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
565 Donner Avenue, Monessen, Pennsylvania | | 15062 |
(Address of principal executive offices) | | (Zip Code) |
| (724) 684-6800 | |
| (Registrant’s telephone number, including area code) | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of May 7, 2013, the issuer had 2,514,939 shares of common stock outstanding.
FORM 10-Q
INDEX
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PART I – FINANCIAL INFORMATION | |
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PART II – OTHER INFORMATION | |
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AT MARCH 31, 2013 (UNAUDITED) AND DECEMBER 31, 2012
| | March 31, | | | December 31, | |
(Dollars in thousands, except share data) | | 2013 | | | 2012 | |
Assets: | | | | | | |
| | | | | | |
Cash and cash equivalents: | | | | | | |
Cash and due from banks | | $ | 1,877 | | | $ | 2,044 | |
Interest-earning deposits | | | 2,949 | | | | 3,830 | |
Total cash and cash equivalents | | | 4,826 | | | | 5,874 | |
| | | | | | | | |
Securities available-for-sale | | | 36,540 | | | | 42,582 | |
Loans, net | | | 252,344 | | | | 249,530 | |
Federal Home Loan Bank ("FHLB") stock, at cost | | | 3,230 | | | | 3,787 | |
Accrued interest receivable - loans | | | 854 | | | | 829 | |
Accrued interest receivable - securities | | | 187 | | | | 206 | |
Premises and equipment, net | | | 1,739 | | | | 1,797 | |
Bank-owned life insurance | | | 8,378 | | | | 8,317 | |
Goodwill | | | 1,080 | | | | 1,080 | |
Real estate owned | | | 251 | | | | 146 | |
Deferred tax assets | | | 2,280 | | | | 2,511 | |
Other assets | | | 1,853 | | | | 2,101 | |
Total assets | | $ | 313,562 | | | $ | 318,760 | |
| | | | | | | | |
Liabilities and Stockholders' Equity: | | | | | | | | |
| | | | | | | | |
Deposits: | | | | | | | | |
Noninterest-bearing | | $ | 27,841 | | | $ | 23,987 | |
Interest-bearing | | | 191,352 | | | | 190,070 | |
Total deposits | | | 219,193 | | | | 214,057 | |
| | | | | | | | |
Borrowings | | | 37,892 | | | | 48,678 | |
Advance payments by borrowers for taxes and insurance | | | 635 | | | | 681 | |
Accrued interest payable - deposits | | | 117 | | | | 144 | |
Accrued interest payable - borrowings | | | 154 | | | | 158 | |
Other liabilities | | | 1,632 | | | | 1,748 | |
Total liabilities | | | 259,623 | | | | 265,466 | |
| | | | | | | | |
Stockholders' equity | | | | | | | | |
FedFirst Financial Corporation 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; 2,525,341 and 2,540,341 shares issued and outstanding | | | 25 | | | | 25 | |
Additional paid-in-capital | | | 34,766 | | | | 34,986 | |
Retained earnings - substantially restricted | | | 20,516 | | | | 19,821 | |
Accumulated other comprehensive loss, net of deferred tax benefit of $(176) and $(250) | | | (272 | ) | | | (388 | ) |
Unearned Employee Stock Ownership Plan ("ESOP") | | | (1,166 | ) | | | (1,210 | ) |
Total FedFirst Financial Corporation stockholders' equity | | | 53,869 | | | | 53,234 | |
Noncontrolling interest in subsidiary | | | 70 | | | | 60 | |
Total stockholders' equity | | | 53,939 | | | | 53,294 | |
Total liabilities and stockholders' equity | | $ | 313,562 | | | $ | 318,760 | |
See Notes to the Unaudited Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (UNAUDITED)
| | Three Months Ended | |
| | March 31, | |
(Dollars in thousands, except per share data) | | 2013 | | | 2012 | |
| | | | | | |
Interest income: | | | | | | |
Loans | | $ | 2,925 | | | $ | 3,150 | |
Securities - taxable | | | 277 | | | | 428 | |
Securities - tax exempt | | | 38 | | | | 35 | |
Other interest-earning assets | | | 4 | | | | 6 | |
Total interest income | | | 3,244 | | | | 3,619 | |
| | | | | | | | |
Interest expense: | | | | | | | | |
Deposits | | | 384 | | | | 602 | |
Borrowings | | | 330 | | | | 454 | |
Total interest expense | | | 714 | | | | 1,056 | |
Net interest income | | | 2,530 | | | | 2,563 | |
| | | | | | | | |
Provision for loan losses | | | - | | | | 160 | |
Net interest income after provision for loan losses | | | 2,530 | | | | 2,403 | |
| | | | | | | | |
Noninterest income: | | | | | | | | |
Fees and service charges | | | 183 | | | | 155 | |
Insurance commissions | | | 1,014 | | | | 626 | |
Income from bank-owned life insurance | | | 61 | | | | 65 | |
Other | | | 11 | | | | 11 | |
Total noninterest income | | | 1,269 | | | | 857 | |
| | | | | | | | |
Noninterest expense: | | | | | | | | |
Compensation and employee benefits | | | 1,520 | | | | 1,377 | |
Occupancy | | | 300 | | | | 317 | |
FDIC insurance premiums | | | 43 | | | | 58 | |
Data processing | | | 143 | | | | 137 | |
Professional services | | | 165 | | | | 252 | |
Advertising | | | 139 | | | | 37 | |
Other | | | 302 | | | | 344 | |
Total noninterest expense | | | 2,612 | | | | 2,522 | |
| | | | | | | | |
Income before income tax expense and noncontrolling interest in net income of consolidated subsidiary | | | 1,187 | | | | 738 | |
Income tax expense | | | 351 | | | | 265 | |
Net income before noncontrolling interest in net income of consolidated subsidiary | | | 836 | | | | 473 | |
Noncontrolling interest in net income of consolidated subsidiary | | | 42 | | | | 17 | |
Net income of FedFirst Financial Corporation | | $ | 794 | | | $ | 456 | |
| | | | | | | | |
Earnings per share: | | | | | | | | |
Basic and diluted | | $ | 0.32 | | | $ | 0.16 | |
| | | | | | | | |
Weighted-average shares outstanding: | | | | | | | | |
Basic | | | 2,457,646 | | | | 2,855,926 | |
Diluted | | | 2,465,233 | | | | 2,860,753 | |
See Notes to the Unaudited Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (UNAUDITED)
| | Three Months Ended | |
| | March 31, | |
(Dollars in thousands) | | 2013 | | | 2012 | |
| | | | | | |
Net income before noncontrolling interest in net income of consolidated subsidiary | | $ | 836 | | | $ | 473 | |
| | | | | | | | |
Other comprehensive income (loss): | | | | | | | | |
Unrealized gain (loss) on securities available-for-sale, net of income tax expense (benefit) | | | 116 | | | | (181 | ) |
Other comprehensive income (loss), net of income tax expense (benefit) | | | 116 | | | | (181 | ) |
Comprehensive income | | | 952 | | | | 292 | |
Less: Comprehensive income attributable to the noncontrolling interest in subsidiary | | | 42 | | | | 17 | |
Comprehensive income attributable to FedFirst Financial Corporation | | $ | 910 | | | $ | 275 | |
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (UNAUDITED)
| | | | | | | | | | | Accumulated | | | | | | | | | | |
| | | | | Additional | | | | | | Other | | | | | | Noncontrolling | | Total | |
| | Common | | | Paid-in- | | | Retained | | | Comprehensive | | | Unearned | | | Interest in | | Stockholders' | |
(Dollars in thousands, except per share data) | | Stock | | | Capital | | | Earnings | | | Loss | | | ESOP | | | Subsidiary | | Equity | |
December 31, 2011 | | $ | 30 | | | $ | 41,630 | | | $ | 18,650 | | | $ | (167 | ) | | $ | (1,382 | ) | | $ | 40 | | | $ | 58,801 | |
Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | - | | | | - | | | | 456 | | | | - | | | | - | | | | 17 | | | | 473 | |
Other comprehensive loss, net of tax of $(117) | | | - | | | | - | | | | - | | | | (181 | ) | | | - | | | | - | | | | (181 | ) |
Purchase and retirement of common stock (45,000 shares) | | | (1 | ) | | | (625 | ) | | | - | | | | - | | | | - | | | | - | | | | (626 | ) |
ESOP shares committed to be released | | | - | | | | (15 | ) | | | - | | | | - | | | | 43 | | | | - | | | | 28 | |
Stock-based compensation expense | | | - | | | | 28 | | | | - | | | | - | | | | - | | | | - | | | | 28 | |
Distribution to noncontrolling shareholder | | | - | | | | - | | | | - | | | | - | | | | - | | | | (12 | ) | | | (12 | ) |
Dividends paid ($0.03 per share) | | | - | | | | - | | | | (85 | ) | | | - | | | | - | | | | - | | | | (85 | ) |
March 31, 2012 | | $ | 29 | | | $ | 41,018 | | | $ | 19,021 | | | $ | (348 | ) | | $ | (1,339 | ) | | $ | 45 | | | $ | 58,426 | |
| | | | | | | | | | | Accumulated | | | | | | | | | | |
| | | | | Additional | | | | | | Other | | | | | | Noncontrolling | | | Total | |
| | Common | | | Paid-in- | | | Retained | | | Comprehensive | | | Unearned | | | Interest in | | | Stockholders' | |
(Dollars in thousands, except per share data) | | Stock | | | Capital | | | Earnings | | | Loss | | | ESOP | | | Subsidiary | | | Equity | |
December 31, 2012 | | $ | 25 | | | $ | 34,986 | | | $ | 19,821 | | | $ | (388 | ) | | $ | (1,210 | ) | | $ | 60 | | | $ | 53,294 | |
Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | - | | | | - | | | | 794 | | | | - | | | | - | | | | 42 | | | | 836 | |
Other comprehensive income, net of tax of $74 | | | - | | | | - | | | | - | | | | 116 | | | | - | | | | - | | | | 116 | |
Purchase and retirement of common stock (15,000 shares) | | | - | | | | (260 | ) | | | - | | | | - | | | | - | | | | - | | | | (260 | ) |
ESOP shares committed to be released | | | - | | | | (8 | ) | | | - | | | | - | | | | 44 | | | | - | | | | 36 | |
Stock-based compensation expense | | | - | | | | 48 | | | | - | | | | - | | | | - | | | | - | | | | 48 | |
Distribution to noncontrolling shareholder | | | - | | | | - | | | | - | | | | - | | | | - | | | | (32 | ) | | | (32 | ) |
Dividends paid ($0.04 per share) | | | - | | | | - | | | | (99 | ) | | | - | | | | - | | | | - | | | | (99 | ) |
March 31, 2013 | | $ | 25 | | | $ | 34,766 | | | $ | 20,516 | | | $ | (272 | ) | | $ | (1,166 | ) | | $ | 70 | | | $ | 53,939 | |
See Notes to the Unaudited Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (UNAUDITED)
| | Three Months Ended | |
| | March 31, | |
(Dollars in thousands) | | 2013 | | | 2012 | |
Cash flows from operating activities: | | | | | | |
Net income of FedFirst Financial Corporation | | $ | 794 | | | $ | 456 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Noncontrolling interest in net income of consolidated subsidiary | | | 42 | | | | 17 | |
Provision for loan losses | | | - | | | | 160 | |
Depreciation | | | 79 | | | | 107 | |
Amortization of intangibles | | | 23 | | | | 27 | |
Net amortization of security premiums and loan costs | | | 129 | | | | 163 | |
Noncash expense for ESOP | | | 36 | | | | 28 | |
Noncash expense for stock-based compensation | | | 48 | | | | 28 | |
Increase in bank-owned life insurance | | | (61 | ) | | | (65 | ) |
Decrease in other assets | | | 376 | | | | 70 | |
Decrease in other liabilities | | | (147 | ) | | | (249 | ) |
Net cash provided by operating activities | | | 1,319 | | | | 742 | |
| | | | | | | | |
Cash flows from investing activities: | | | | | | | | |
Net loan originations | | | (2,965 | ) | | | (808 | ) |
Proceeds from maturities of and principal repayments of securities available-for-sale | | | 6,149 | | | | 5,673 | |
Purchases of securities available-for-sale | | | - | | | | (5,187 | ) |
Purchases of premises and equipment | | | (21 | ) | | | (26 | ) |
Decrease in FHLB stock, at cost | | | 557 | | | | 267 | |
Proceeds from sales of real estate owned | | | - | | | | 145 | |
Net cash provided by investing activities | | | 3,720 | | | | 64 | |
| | | | | | | | |
Cash flows from financing activities: | | | | | | | | |
Net decrease in short-term borrowings | | | (9,800 | ) | | | - | |
Repayments of long-term borrowings | | | (986 | ) | | | (2,209 | ) |
Net increase in deposits | | | 5,136 | | | | 10,521 | |
(Decrease) increase in advance payments by borrowers for taxes and insurance | | | (46 | ) | | | 138 | |
Purchase and retirement of common stock | | | (260 | ) | | | (626 | ) |
Dividends paid | | | (99 | ) | | | (85 | ) |
Distribution to noncontrolling shareholder | | | (32 | ) | | | (12 | ) |
Net cash (used in) provided by financing activities | | | (6,087 | ) | | | 7,727 | |
| | | | | | | | |
Net (decrease) increase in cash and cash equivalents | | | (1,048 | ) | | | 8,533 | |
Cash and cash equivalents, beginning of period | | | 5,874 | | | | 14,571 | |
| | | | | | | | |
Cash and cash equivalents, end of period | | $ | 4,826 | | | $ | 23,104 | |
| | | | | | | | |
Supplemental cash flow information: | | | | | | | | |
Cash paid for: | | | | | | | | |
Interest on deposits and borrowings (including interest credited to deposit accounts of $411 and $630 respectively) | | $ | 789 | | | $ | 1,094 | |
Income tax expense | | | 30 | | | | 284 | |
| | | | | | | | |
Real estate acquired in settlement of loans | | | 105 | | | | - | |
See Notes to the Unaudited Consolidated Financial Statements.
Notes to the Unaudited Consolidated Financial Statements
Note 1. Basis of Presentation/Nature of Operations
The accompanying unaudited Consolidated Financial Statements include the accounts of FedFirst Financial Corporation (“FedFirst Financial” or the “Company”), a stock holding company established in 2010, whose wholly owned subsidiary is First Federal Savings Bank (“First Federal” or the “Bank”), a federally chartered stock savings bank, which owns FedFirst Exchange Corporation (“FFEC”). FFEC has an 80% controlling interest in Exchange Underwriters, Inc. (“Exchange Underwriters”). Exchange Underwriters is a full-service, independent insurance agency that offers property and casualty, commercial liability, surety and other insurance products. All significant intercompany transactions have been eliminated.
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 seven locations in southwestern Pennsylvania. First Federal conducts insurance brokerage activities through Exchange Underwriters. 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.
The unaudited consolidated financial statements were prepared in accordance with instructions to Form 10-Q and, therefore, do not include information or notes necessary for a complete presentation of financial position, results of operations, changes in stockholders’ equity and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). However, all normal recurring adjustments that, in the opinion of management, are necessary to make the consolidated financial statements not misleading have been included. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. The results of operations for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the full year or any other interim period.
The Company evaluated subsequent events through the date the consolidated financial statements were filed with the Securities and Exchange Commission and incorporated into the consolidated financial statements the effect of all material known events determined by Accounting Standards Codification (“ASC”) Topic 855, Subsequent Events, to be recognizable events.
In preparing financial statements in conformity with 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, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, evaluation of securities for other-than-temporary impairment including related cash flow projections, goodwill impairment, and the valuation of deferred tax assets.
Note 2. Recent Accounting Pronouncements
ASU 2012-04 Technical Corrections and Improvements. In October 2012, the FASB issued ASU 2012-04, Technical Corrections and Improvements, which makes certain minor technical corrections to the FASB ASC and includes conforming amendments that are nonsubstantive in nature and identify when the use of fair value should be linked to the definition of fair value in ASC Topic 820, Fair Value Measurement. The amendments affect various ASC topics and include source literature amendments, guidance clarification and reference corrections, and relocated guidance. The amendments that will not have transition guidance were effective upon issuance and the amendments that are subject to the transition guidance will be effective for fiscal period beginning after December 15, 2012. The adoption of this ASU did not have a material impact on the Company’s financial condition and results of operation.
ASU 2013-02 Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires entities to disclose additional information about reclassification adjustments including changes in accumulated other comprehensive income (“AOCI”) balances by component and significant items reclassified out of AOCI. The ASU is intended to help entities improve the transparency of changes in other comprehensive income (“OCI”) and items reclassified out of AOCI in their financial statements. It does not amend any existing requirements for reporting net income or OCI in the financial statements. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2012. The adoption of this ASU did not have a material impact on the Company’s financial condition and results of operation.
Note 3. 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 | |
March 31, 2013 | | Cost | | | Gains | | | Losses | | | Value | |
Municipal bonds | | $ | 8,039 | | | $ | 361 | | | $ | 21 | | | $ | 8,379 | |
Mortgage-backed - GSEs | | | 10,508 | | | | 615 | | | | - | | | | 11,123 | |
REMICs | | | 14,442 | | | | 284 | | | | - | | | | 14,726 | |
Corporate debt | | | 3,995 | | | | - | | | | 1,687 | | | | 2,308 | |
Equities | | | 4 | | | | - | | | | - | | | | 4 | |
Total securities available-for-sale | | $ | 36,988 | | | $ | 1,260 | | | $ | 1,708 | | | $ | 36,540 | |
| | | | | | | | | | | | | | | | |
December 31, 2012 | | | | | | | | | | | | | | | | |
Municipal bonds | | $ | 8,756 | | | $ | 435 | | | $ | 10 | | | $ | 9,181 | |
Mortgage-backed - GSEs | | | 12,120 | | | | 695 | | | | - | | | | 12,815 | |
REMICs | | | 18,345 | | | | 355 | | | | - | | | | 18,700 | |
Corporate debt | | | 3,995 | | | | - | | | | 2,113 | | | | 1,882 | |
Equities | | | 4 | | | | - | | | | - | | | | 4 | |
Total securities available-for-sale | | $ | 43,220 | | | $ | 1,485 | | | $ | 2,123 | | | $ | 42,582 | |
The amortized cost and fair value of securities at March 31, 2013 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.
| | Amortized | | | Fair | |
(Dollars in thousands) | | Cost | | | Value | |
Due from one to five years | | $ | 2,109 | | | $ | 2,414 | |
Due from five to ten years | | | 7,717 | | | | 7,930 | |
Due after ten years | | | 27,158 | | | | 26,192 | |
No scheduled maturity | | | 4 | | | | 4 | |
Total | | $ | 36,988 | | | $ | 36,540 | |
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).
| | Less than 12 months | | | 12 months or more | | | Total |
| | | | | | | | Gross | | | | | | | | | Gross | | | | | | | | | Gross |
| | Number of | | | Fair | | | Unrealized | | | Number of | | | Fair | | | Unrealized | | | Number of | | | Fair | | | Unrealized |
March 31, 2013 | | Securities | | | Value | | | Losses | | | Securities | | | Value | | | Losses | | | Securities | | | Value | | | Losses |
Municipal bonds | | | 1 | | | $ | 1,134 | | | $ | 21 | | | | - | | | $ | - | | | $ | - | | | | 1 | | | $ | 1,134 | | | $ | 21 | |
Corporate debt | | | - | | | | - | | | | - | | | | 3 | | | | 2,308 | | | | 1,687 | | | | 3 | | | | 2,308 | | | | 1,687 | |
Total securities temporarily impaired | | | 1 | | | $ | 1,134 | | | $ | 21 | | | | 3 | | | $ | 2,308 | | | $ | 1,687 | | | | 4 | | | $ | 3,442 | | | $ | 1,708 | |
| | Less than 12 months | | | 12 months or more | | | Total |
| | | | | | | | Gross | | | | | | | | | Gross | | | | | | | | | Gross |
| | Number of | | | Fair | | | Unrealized | | | Number of | | | Fair | | | Unrealized | | | Number of | | | Fair | | | Unrealized |
December 31, 2012 | | Securities | | | Value | | | Losses | | | Securities | | | Value | | | Losses | | | Securities | | | Value | | | Losses |
Municipal bonds | | | 1 | | | $ | 1,151 | | | $ | 10 | | | | - | | | $ | - | | | $ | - | | | | 1 | | | $ | 1,151 | | | $ | 10 | |
Corporate debt | | | - | | | | - | | | | - | | | | 3 | | | | 1,882 | | | | 2,113 | | | | 3 | | | | 1,882 | | | | 2,113 | |
Total securities temporarily impaired | | | 1 | | | $ | 1,151 | | | $ | 10 | | | | 3 | | | $ | 1,882 | | | $ | 2,113 | | | | 4 | | | $ | 3,033 | | | $ | 2,123 | |
The Company reviews its investment portfolio on a quarterly basis for indications of other-than-temporary impairment (“OTTI”). This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term prospects of the issuer including any specific events that may influence the operations of the issuer, and the intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in the market.
Municipal Bonds – At March 31, 2013, the Company had one municipal bond with an unrealized loss of $21,000 in an unrealized loss position of less than 12 months. An evaluation was performed whereby we noted the credit rating remains at investment grade. The Company believes the unrealized loss of this bond is due to changes in market conditions as the economic base of the municipality exhibits strong income indicators and the municipality has sound financial policies and practices. The Company does not intend to sell the bond and it is more likely than not that the Company will not be required to sell the bond before its recovery. The Company expects to recover the entire amortized cost basis and concluded that there was no OTTI on this bond at March 31, 2013.
Corporate Debt – At March 31, 2013, the Company had three securities that were in an unrealized loss position for 12 months or more at an amount of $1.7 million. These securities consist of two pools of trust preferred corporate debt obligations (“CDOs”) collateralized by the trust preferred securities of insurance companies in the United States. These securities were downgraded from their original rating issuance to below investment grade after purchase. The lack of liquidity in the market for this type of security, credit rating downgrades and market uncertainties are factors contributing to the unrealized losses on these securities.
The following table provides additional information related to the Company’s CDOs at March 31, 2013 (dollars in thousands):
Pool | Class | | Tranche | | | Amortized Cost | | | Fair Value | | | Unrealized Loss | | S&P Rating | | Current Number of Insurance Companies | | | Total Collateral | | | Current Deferrals and Defaults | | | Performing Collateral | | | Additional Immediate Deferrals / Defaults Before Causing an Interest Shortfall (a) | | | Additional Immediate Deferrals / Defaults Before Causing a Break in Yield (b) | |
I-PreTSL I | Mezzanine | | | B-3 | | | $ | 1,500 | | | $ | 691 | | | $ | (809 | ) | CCC- | | | 16 | | | $ | 188,500 | | | $ | 32,500 | | | $ | 156,000 | | | $ | 99,981 | | | $ | 45,500 | |
I-PreTSL II | Mezzanine | | | B-3 | | | | 2,495 | | | | 1,617 | | | | (878 | ) | BB+ | | | 24 | | | | 325,500 | | | | 24,500 | | | | 301,000 | | | | 163,767 | | | | 116,500 | |
| | | | | | | $ | 3,995 | | $ | 2,308 | | $ | (1,687 | ) | | | | | | | | | | | | | | | | | | | | | | | | | |
(a) | A temporary interest shortfall is caused by an amount of deferrals/defaults high enough such that there is insufficient cash flow available to pay current interest on the given tranche or by breaching the principal coverage test of the tranche immediately senior to the given tranche. Amounts presented represent additional deferrals/defaults beyond those currently existing that must occur before the security would experience an interest shortfall. |
(b) | A break in yield for a given tranche means that deferrals/defaults have reached such a level that the tranche would not receive all of its contractual cash flows (principal and interest) by maturity (so not just a temporary interest shortfall, but an actual loss in yield on the investment). In other words, the magnitude of the defaults/deferrals has depleted the entire credit enhancement (excess interest and over-collateralization) beneath the given tranche. Amounts presented represent additional deferrals/defaults beyond those currently existing that must occur before the security would experience a break in yield. |
These securities are evaluated for OTTI by determining whether it is probable that an adverse change in estimated cash flows has occurred. Determining whether there has been an adverse change in estimated cash flows involves the calculation of the present value of remaining cash flows compared to previously projected cash flows. We consider the discounted cash flow analysis to be our primary evidence when determining whether credit-related OTTI exists. Additionally, reports are reviewed that provide information for the amount of deferral/defaults that would have to occur to prevent the tranche from collecting contractual cash flows (principal and interest). None of these securities are projecting a cash flow disruption, nor have any of these securities experienced a cash flow disruption. The Company also reviewed each of the issues’ collateral participants, including their financial condition, ratings provided by A. M. Best (for insurance companies), and adverse conditions specifically related to industry or geographic area. This information did not suggest additional deferrals or defaults in the future that would result in the securities not receiving all of their contractual cash flows. Based on the analysis performed and the fact that the Company does not expect to sell these securities, and because it is not more likely than not that the Company will be required to sell the securities before recovery of their amortized cost basis, the Company concluded that there was no OTTI on these securities at March 31, 2013.
Note 4. Loans
The following table sets forth the composition of our loan portfolio at the dates indicated (dollars in thousands).
| | March 31, 2013 | | | December 31, 2012 | |
| | Amount | | | Percent | | | Amount | | | Percent | |
Real estate-mortgage: | | | | | | | | | | | | |
One- to four-family residential | | | | | | | | | | | | |
Originated | | $ | 106,616 | | | | 40.7 | % | | $ | 110,754 | | | | 43.4 | % |
Purchased | | | 9,316 | | | | 3.6 | | | | 10,188 | | | | 4.0 | |
Total one- to four-family residential | | | 115,932 | | | | 44.3 | | | | 120,942 | | | | 47.4 | |
| | | | | | | | | | | | | | | | |
Multi-family | | | | | | | | | | | | | | | | |
Originated | | | 10,989 | | | | 4.2 | | | | 11,101 | | | | 4.3 | |
Purchased | | | 4,193 | | | | 1.6 | | | | 4,226 | | | | 1.7 | |
Total multi-family | | | 15,182 | | | | 5.8 | | | | 15,327 | | | | 6.0 | |
| | | | | | | | | | | | | | | | |
Commercial | | | 45,761 | | | | 17.5 | | | | 45,504 | | | | 17.8 | |
Total real estate-mortgage | | | 176,875 | | | | 67.6 | | | | 181,773 | | | | 71.2 | |
| | | | | | | | | | | | | | | | |
Real estate-construction: | | | | | | | | | | | | | | | | |
Residential | | | 1,763 | | | | 0.7 | | | | 1,931 | | | | 0.8 | |
Commercial | | | 11,981 | | | | 4.6 | | | | 5,231 | | | | 2.0 | |
Total real estate-construction | | | 13,744 | | | | 5.3 | | | | 7,162 | | | | 2.8 | |
| | | | | | | | | | | | | | | | |
Consumer: | | | | | | | | | | | | | | | | |
Home equity | | | | | | | | | | | | | | | | |
Loan-to-value ratio of 80% or less | | | 44,564 | | | | 17.0 | | | | 41,537 | | | | 16.3 | |
Loan-to-value ratio of greater than 80% | | | 8,401 | | | | 3.2 | | | | 7,841 | | | | 3.0 | |
Total home equity | | | 52,965 | | | | 20.2 | | | | 49,378 | | | | 19.3 | |
| | | | | | | | | | | | | | | | |
Other | | | 1,778 | | | | 0.7 | | | | 1,923 | | | | 0.8 | |
Total consumer | | | 54,743 | | | | 20.9 | | | | 51,301 | | | | 20.1 | |
| | | | | | | | | | | | | | | | |
Commercial business | | | 16,182 | | | | 6.2 | | | | 15,055 | | | | 5.9 | |
Total loans | | $ | 261,544 | | | | 100.0 | % | | $ | 255,291 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | |
Net premiums on loans purchased | | | 107 | | | | | | | | 106 | | | | | |
Net deferred loan costs | | | 404 | | | | | | | | 450 | | | | | |
Loans in process | | | (6,848 | ) | | | | | | | (3,431 | ) | | | | |
Allowance for loan losses | | | (2,863 | ) | | | | | | | (2,886 | ) | | | | |
Loans, net | | $ | 252,344 | | | | | | | $ | 249,530 | | | | | |
Delinquencies. The following table provides information about delinquencies in our loan portfolio at the dates indicated (dollars in thousands).
| | March 31, 2013 | | | December 31, 2012 | |
| | 30-59 | | | 60-89 | | | 90 Days | | | 30-59 | | | 60-89 | | | 90 Days | |
| | Days | | | Days | | | or Greater | | | Days | | | Days | | | or Greater | |
| | Past | | | Past | | | Past | | | Past | | | Past | | | Past | |
| | Due | | | Due | | | Due | | | Due | | | Due | | | Due | |
Real estate - mortgage: | | | | | | | | | | | | | | | | | | | | | | |
One- to four-family residential | | | | | | | | | | | | | | | | | | | | | | |
Originated | | $ | 950 | | | $ | 508 | | | $ | 281 | | | $ | 1,052 | | | $ | 138 | | | $ | 281 | |
Purchased | | | 9 | | | | 98 | | | | 556 | | | | - | | | | - | | | | 595 | |
Total one- to four-family residential | | | 959 | | | | 606 | | | | 837 | | | | 1,052 | | | | 138 | | | | 876 | |
Commercial | | | 447 | | | | 34 | | | | 74 | | | | 456 | | | | - | | | | 74 | |
Total real estate - mortgage | | | 1,406 | | | | 640 | | | | 911 | | | | 1,508 | | | | 138 | | | | 950 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Consumer: | | | | | | | | | | | | | | | | | | | | | | | | |
Home equity | | | | | | | | | | | | | | | | | | | | | | | | |
Loan-to-value ratio of 80% or less | | | 82 | | | | - | | | | - | | | | 510 | | | | - | | | | - | |
Loan-to-value ratio of greater than 80% | | | 280 | | | | 22 | | | | - | | | | 406 | | | | 36 | | | | - | |
Total home equity | | | 362 | | | | 22 | | | | - | | | | 916 | | | | 36 | | | | - | |
Other | | | - | | | | - | | | | - | | | | 5 | | | | - | | | | - | |
Total consumer | | | 362 | | | | 22 | | | | - | | | | 921 | | | | 36 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Commercial business | | | - | | | | - | | | | - | | | | 8 | | | | - | | | | - | |
Total delinquencies | | $ | 1,768 | | | $ | 662 | | | $ | 911 | | | $ | 2,437 | | | $ | 174 | | | $ | 950 | |
Nonperforming Assets. The following table provides information with respect to our nonperforming assets at the dates indicated (dollars in thousands).
| | March 31, 2013 | | | December 31, 2012 | |
| | Number of | | | | | | Number of | | | | |
| | Contracts | | | Amount | | | Contracts | | | Amount | |
Nonaccrual loans: | | | | | | | | | | | | |
Real estate - mortgage: | | | | | | | | | | | | |
One- to four-family residential | | | | | | | | | | | | |
Originated | | | 2 | | | $ | 1,264 | | | | 2 | | | $ | 1,269 | |
Purchased | | | 3 | | | | 556 | | | | 5 | | | | 763 | |
Total one- to four-family residential | | | 5 | | | | 1,820 | | | | 7 | | | | 2,032 | |
| | | | | | | | | | | | | | | | |
Commercial | | | 2 | | | | 150 | | | | 2 | | | | 172 | |
Total real estate - mortgage | | | 7 | | | | 1,970 | | | | 9 | | | | 2,204 | |
| | | | | | | | | | | | | | | | |
Total nonaccrual loans | | | 7 | | | | 1,970 | | | | 9 | | | | 2,204 | |
| | | | | | | | | | | | | | | | |
Accruing loans past due 90 days or more | | | - | | | | - | | | | - | | | | - | |
Total nonaccrual loans and accruing loans past due 90 days or more | | | 7 | | | | 1,970 | | | | 9 | | | | 2,204 | |
Real estate owned | | | 3 | | | | 251 | | | | 2 | | | | 146 | |
Total nonperforming assets | | | 10 | | | $ | 2,221 | | | | 11 | | | $ | 2,350 | |
| | | | | | | | | | | | | | | | |
Troubled debt restructurings | | | | | | | | | | | | | | | | |
In nonaccrual status | | | 2 | | | | 1,059 | | | | 3 | | | | 1,254 | |
Performing under modified terms | | | 8 | | | | 1,650 | | | | 7 | | | | 1,501 | |
Troubled debt restructurings | | | 10 | | | $ | 2,709 | | | | 10 | | | $ | 2,755 | |
| | | | | | | | | | | | | | | | |
Total nonperforming loans to total loans | | | | | | | 0.75 | % | | | | | | | 0.86 | % |
Total nonperforming assets to total assets | | | | | | | 0.71 | | | | | | | | 0.74 | |
Total nonperforming assets and troubled debt restructurings performing under modified terms to total assets | | | | | | | 1.23 | | | | | | | | 1.21 | |
Troubled Debt Restructurings. A loan whose contractual terms have been restructured in a manner which grants a concession to a borrower experiencing financial difficulties is considered a troubled debt restructuring (“TDR”). TDRs typically are the result of our loss mitigation activities whereby concessions are granted to minimize loss and avoid foreclosure or repossession of collateral. The concessions granted for the TDRs in our portfolio primarily consist of, but are not limited to, capitalization of principal and interest due, reverting from payment of principal and interest to interest-only, or extending a maturity date through a signed forbearance agreement. Certain TDRs were placed in nonaccrual status at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period which is generally six months. Loans that were current at the time of classification remained on an accrual basis and are monitored to ensure restructured contractual terms are met.
TDRs are typically evaluated for any possible impairment similar to other impaired loans based on the current fair value of the collateral, less selling costs, for collateral dependent loans. If we determine that the value of the modified loan is less than the recorded investment in the loan, impairment is recognized through a specific allowance for loan losses. In periods subsequent to modification, we continue to evaluate all TDRs for any additional impairment and will adjust any specific allowances accordingly.
The following tables provide information related to TDRs at the dates indicated (dollars in thousands). The pre-modification outstanding recorded investment represents the balance outstanding when the loan was determined to be a TDR. The post-modification outstanding recorded investment represents the outstanding balance at period end.
| | In Nonaccrual | | | Performing Under | |
| | Status | | | Modified Terms | |
| | | | | Pre- | | | Post- | | | | | | | | | Pre- | | | Post- | | | | |
| | | | | Modification | | | Modification | | | | | | | | | Modification | | | Modification | | | | |
| | Number | | | Outstanding | | | Outstanding | | | | | | Number | | | Outstanding | | | Outstanding | | | | |
| | of | | | Recorded | | | Recorded | | | Specific | | | of | | | Recorded | | | Recorded | | | Specific | |
March 31, 2013 | | Contracts | | | Investment | | | Investment | | | Allowance | | | Contracts | | | Investment | | | Investment | | | Allowance | |
Real estate - mortgage: | | | | | | | | | | | | | | | | | | | | | | | | |
One- to four-family residential | | | | | | | | | | | | | | | | | | | | | | | | |
Originated | | | 1 | | | $ | 993 | | | $ | 983 | | | $ | - | | | | - | | | $ | - | | | $ | - | | | $ | - | |
Purchased | | | - | | | | - | | | | - | | | | - | | | | 1 | | | | 168 | | | | 167 | | | | - | |
Total one- to four-family residential | | | 1 | | | | 993 | | | | 983 | | | | - | | | | 1 | | | | 168 | | | | 167 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | | 1 | | | | 516 | | | | 76 | | | | - | | | | 5 | | | | 1,441 | | | | 1,341 | | | | - | |
Total real estate - mortgage | | | 2 | | | | 1,509 | | | | 1,059 | | | | - | | | | 6 | | | | 1,609 | | | | 1,508 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Home equity (loan-to-value ratio of 80% or less) | | | - | | | | - | | | | - | | | | - | | | | 1 | | | | 140 | | | | 134 | | | | - | |
Other | | | - | | | | - | | | | - | | | | - | | | | 1 | | | | 11 | | | | 8 | | | | - | |
Total consumer | | | - | | | | - | | | | - | | | | - | | | | 2 | | | | 151 | | | | 142 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total troubled debt restructurings | | | 2 | | | $ | 1,509 | | | $ | 1,059 | | | $ | - | | | | 8 | | | $ | 1,760 | | | $ | 1,650 | | | $ | - | |
| | In Nonaccrual | | | Performing Under | |
| | Status | | | Modified Terms | |
| | | | | Pre- | | | Post- | | | | | | | | | Pre- | | | Post- | | | | |
| | | | | Modification | | | Modification | | | | | | | | | Modification | | | Modification | | | | |
| | Number | | | Outstanding | | | Outstanding | | | | | | Number | | | Outstanding | | | Outstanding | | | | |
| | of | | | Recorded | | | Recorded | | | Specific | | | of | | | Recorded | | | Recorded | | | Specific | |
December 31, 2012 | | Contracts | | | Investment | | | Investment | | | Allowance | | | Contracts | | | Investment | | | Investment | | | Allowance | |
Real estate - mortgage: | | | | | | | | | | | | | | | | | | | | | | | | |
One- to four-family residential | | | | | | | | | | | | | | | | | | | | | | | | |
Originated | | | 1 | | | $ | 993 | | | $ | 988 | | | $ | - | | | | - | | | $ | - | | | $ | - | | | $ | - | |
Purchased | | | 1 | | | | 168 | | | | 168 | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total one- to four-family residential | | | 2 | | | | 1,161 | | | | 1,156 | | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | | 1 | | | | 516 | | | | 98 | | | | - | | | | 5 | | | | 1,441 | | | | 1,357 | | | | - | |
Total real estate - mortgage | | | 3 | | | | 1,677 | | | | 1,254 | | | | - | | | | 5 | | | | 1,441 | | | | 1,357 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Home equity (loan-to-value ratio of 80% or less) | | | - | | | | - | | | | - | | | | - | | | | 1 | | | | 140 | | | | 136 | | | | - | |
Other | | | - | | | | - | | | | - | | | | - | | | | 1 | | | | 11 | | | | 8 | | | | - | |
Total consumer | | | - | | | | - | | | | - | | | | - | | | | 2 | | | | 151 | | | | 144 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total troubled debt restructurings | | | 3 | | | $ | 1,677 | | | $ | 1,254 | | | $ | - | | | | 7 | | | $ | 1,592 | | | $ | 1,501 | | | $ | - | |
Impaired Loans. The following tables summarize information in regards to impaired loans by loan portfolio class at the dates indicated (dollars in thousands).
| | | | | Unpaid | | | | | | Average | | | Interest |
| | Recorded | | | Principal | | | Related | | | Recorded | | | Income |
March 31, 2013 | | Investment | | | Balance | | | Allowance | | | Investment | | | Recognized |
Impaired loans with no related allowance recorded | | | | | | | | | | | | | | | |
One- to four-family originated residential | | $ | 1,521 | | | $ | 1,521 | | | $ | - | | | $ | 1,524 | | | $ | 19 | |
One- to four-family purchased residential | | | 309 | | | | 509 | | | | - | | | | 309 | | | | - | |
Commercial real estate | | | 2,522 | | | | 2,637 | | | | - | | | | 2,546 | | | | 40 | |
Home equity (loan-to-value ratio of 80% or less) | | | 134 | | | | 134 | | | | - | | | | 135 | | | | 2 | |
Other consumer | | | 8 | | | | 8 | | | | - | | | | 8 | | | | - | |
Total impaired loans | | $ | 4,494 | | | $ | 4,809 | | | $ | - | | | $ | 4,522 | | | $ | 61 | |
| | | | | | Unpaid | | | | | | | Average | | | Interest |
| | Recorded | | | Principal | | | Related | | | Recorded | | | Income |
December 31, 2012 | | Investment | | | Balance | | | Allowance | | | Investment | | | Recognized |
Impaired loans with no related allowance recorded | | | | | | | | | | | | | | | | | | | | |
One- to four-family originated residential | | $ | 1,528 | | | $ | 1,528 | | | $ | - | | | $ | 1,625 | | | $ | 16 | |
One- to four-family purchased residential | | | 309 | | | | 509 | | | | - | | | | 411 | | | | 2 | |
Commercial real estate | | | 2,571 | | | | 2,683 | | | | - | | | | 2,799 | | | | 168 | |
Home equity (loan-to-value ratio of 80% or less) | | | 136 | | | | 136 | | | | - | | | | 138 | | | | 9 | |
Other consumer | | | 8 | | | | 8 | | | | - | | | | 10 | | | | - | |
Total impaired loans | | $ | 4,552 | | | $ | 4,864 | | | $ | - | | | $ | 4,983 | | | $ | 195 | |
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 valuation allowance on impaired loans; and (2) a 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.
Allowance on Impaired Loans. We establish an allowance for loans that are individually evaluated and determined to be impaired. The amount of impairment is determined by the difference between the present value of the expected cash flows related to the loan, using current interest rates and its recorded value, or, as a practical measure in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans less estimated selling costs. At March 31, 2013, there were eight loan relationships that were individually evaluated for impairment, of which four were considered TDRs. TDR and impaired loan activity and any related specific allowances were previously discussed in the “Troubled Debt Restructurings” and “Impaired Loans” sections.
Allowance on the Remainder of the Loan Portfolio. We establish an allowance for loans that are not determined to be impaired. 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 categorized 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 utilize previous years’ net charge-off experience by loan category as a basis in determining loss projections. In addition, there are two categories of loans considered to be higher risk concentrations that are evaluated separately when calculating the allowance for loan losses:
· | Loans purchased in the secondary market. Prior to 2006, pools of multi-family and one- to four- family residential mortgage loans located in areas outside of our primary geographic lending area in southwestern Pennsylvania were acquired in the secondary market. Although these loans were underwritten to our lending standards, they are considered higher risk given our unfamiliarity with the geographic areas where the properties are located and ability to timely identify problem loans through servicer correspondence. |
· | Home equity loans with a loan-to-value ratio greater than 80%. These loans are considered higher risk given the pressure on property values and reduced credit alternatives available to leveraged borrowers. |
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. Our historical loss experience and qualitative and environmental factors are reviewed on a quarterly basis to ensure they are reflective of current conditions in our loan portfolio and economy. At March 31, 2013, we utilized six years of loss history and, generally, periods where we did not experience any losses are excluded from determining the historical average loss for each loan class. Certain historical loss factors are annually adjusted when another complete year of loss history is available in order to incorporate recent loss experience in the allowance calculation.
The following table summarizes the activity in the allowance for loan losses for the three months ended March 31, 2013 (dollars in thousands):
| | Real estate - mortgage | | | Real estate-construction | | | Consumer | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | Home equity (loan- | | | | | | | | | | | | | |
| | One- to four-family | | | | | | | | | | | | | | | | | | to-value ratio of | | | | | | | | | | | | | |
| | residential | | | Multi-family | | | | | | | | | | | | 80% | | | greater | | | Other | | | Commercial | | | | | | | |
| | (originated) | | | (purchased) | | | (originated) | | | (purchased) | | | Commercial | | | Residential | | | Commercial | | | or less) | | | than 80%) | | | Consumer | | | business | | | Unallocated | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loan Balance | | $ | 106,616 | | | $ | 9,316 | | | $ | 10,989 | | | $ | 4,193 | | | $ | 45,761 | | | $ | 1,763 | | | $ | 11,981 | | | $ | 44,564 | | | $ | 8,401 | | | $ | 1,778 | | | $ | 16,182 | | | | | | $ | 261,544 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2012 | | $ | 466 | | | $ | 372 | | | $ | 33 | | | $ | 102 | | | $ | 802 | | | $ | 3 | | | $ | 8 | | | $ | 434 | | | $ | 246 | | | $ | 19 | | | $ | 245 | | | $ | 156 | | | $ | 2,886 | |
Charge-offs | | | - | | | | (29 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (29 | ) |
Recoveries | | | 3 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 3 | | | | - | | | | - | | | | 6 | |
Provision | | | (21 | ) | | | (3 | ) | | | - | | | | - | | | | 5 | | | | - | | | | 10 | | | | 30 | | | | 18 | | | | (4 | ) | | | 18 | | | | (53 | ) | | | - | |
March 31, 2013 | | $ | 448 | | | $ | 340 | | | $ | 33 | | | $ | 102 | | | $ | 807 | | | $ | 3 | | | $ | 18 | | | $ | 464 | | | $ | 264 | | | $ | 18 | | | $ | 263 | | | $ | 103 | | | $ | 2,863 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Collectively evaluated on historical loss experience | | | 133 | | | | 152 | | | | - | | | | 64 | | | | 90 | | | | - | | | | - | | | | 64 | | | | 105 | | | | 13 | | | | 9 | | | | - | | | | 630 | |
Collectively evaluated on qualitative factors | | | 315 | | | | 188 | | | | 33 | | | | 38 | | | | 717 | | | | 3 | | | | 18 | | | | 400 | | | | 159 | | | | 5 | | | | 254 | | | | - | | | | 2,130 | |
Unallocated | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 103 | | | | 103 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total allowance for loan losses | | $ | 448 | | | $ | 340 | | | $ | 33 | | | $ | 102 | | | $ | 807 | | | $ | 3 | | | $ | 18 | | | $ | 464 | | | $ | 264 | | | $ | 18 | | | $ | 263 | | | $ | 103 | | | $ | 2,863 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Percent of Allowance | | | 15.6 | % | | | 11.9 | % | | | 1.2 | % | | | 3.6 | % | | | 28.2 | % | | | 0.1 | % | | | 0.6 | % | | | 16.2 | % | | | 9.2 | % | | | 0.6 | % | | | 9.2 | % | | | 3.6 | % | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Percent of Loans (1) | | | 40.7 | % | | | 3.6 | % | | | 4.2 | % | | | 1.6 | % | | | 17.5 | % | | | 0.7 | % | | | 4.6 | % | | | 17.0 | % | | | 3.2 | % | | | 0.7 | % | | | 6.2 | % | | | | | | | 100.0 | % |
(1) | Represents percentage of loans in each category to total loans. |
The following table summarizes the activity in the allowance for loan losses for the three months ended March 31, 2012 (dollars in thousands):
| | Real estate - mortgage | | | Real estate-construction | | | Consumer | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | Home equity (loan- | | | | | | | | | | | | | |
| | One- to four-family | | | | | | | | | | | | | | | | | | to-value ratio of | | | | | | | | | | | | | |
| | residential | | | Multi-family | | | | | | | | | | | | 80% | | | greater | | | Other | | | Commercial | | | | | | | |
| | (originated) | | | (purchased) | | | (originated) | | | (purchased) | | | Commercial | | | Residential | | | Commercial | | | or less) | | | than 80%) | | | Consumer | | | business | | | Unallocated | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loan Balance | | $ | 114,284 | | | $ | 15,055 | | | $ | 12,381 | | | $ | 5,086 | | | $ | 38,008 | | | $ | 3,916 | | | $ | 8,308 | | | $ | 33,511 | | | $ | 7,658 | | | $ | 1,820 | | | $ | 12,996 | | | | | | $ | 253,023 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2011 | | $ | 534 | | | $ | 465 | | | $ | 39 | | | $ | 124 | | | $ | 858 | | | $ | 6 | | | $ | 12 | | | $ | 379 | | | $ | 267 | | | $ | 24 | | | $ | 242 | | | $ | 148 | | | $ | 3,098 | |
Charge-offs | | | - | | | | (106 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (49 | ) | | | - | | | | - | | | | - | | | | (155 | ) |
Recoveries | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Provision | | | 42 | | | | 76 | | | | (2 | ) | | | (1 | ) | | | 64 | | | | - | | | | 1 | | | | (2 | ) | | | 31 | | | | (3 | ) | | | (38 | ) | | | (8 | ) | | | 160 | |
March 31, 2012 | | $ | 576 | | | $ | 435 | | | $ | 37 | | | $ | 123 | | | $ | 922 | | | $ | 6 | | | $ | 13 | | | $ | 377 | | | $ | 249 | | | $ | 21 | | | $ | 204 | | | $ | 140 | | | $ | 3,103 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 170 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 170 | |
Collectively evaluated on historical loss experience | | | 151 | | | | 218 | | | | - | | | | 77 | | | | 97 | | | | - | | | | - | | | | 77 | | | | 104 | | | | 16 | | | | 2 | | | | - | | | | 742 | |
Collectively evaluated on qualitative factors | | | 425 | | | | 217 | | | | 37 | | | | 46 | | | | 655 | | | | 6 | | | | 13 | | | | 300 | | | | 145 | | | | 5 | | | | 202 | | | | - | | | | 2,051 | |
Unallocated | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 140 | | | | 140 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total allowance for loan losses | | $ | 576 | | | $ | 435 | | | $ | 37 | | | $ | 123 | | | $ | 922 | | | $ | 6 | | | $ | 13 | | | $ | 377 | | | $ | 249 | | | $ | 21 | | | $ | 204 | | | $ | 140 | | | $ | 3,103 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Percent of Allowance | | | 18.6 | % | | | 14.0 | % | | | 1.2 | % | | | 4.0 | % | | | 29.7 | % | | | 0.2 | % | | | 0.4 | % | | | 12.1 | % | | | 8.0 | % | | | 0.7 | % | | | 6.6 | % | | | 4.5 | % | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Percent of Loans (1) | | | 45.2 | % | | | 6.0 | % | | | 4.9 | % | | | 2.0 | % | | | 15.0 | % | | | 1.5 | % | | | 3.3 | % | | | 13.2 | % | | | 3.1 | % | | | 0.7 | % | | | 5.1 | % | | | | | | | 100.0 | % |
(1) | Represents percentage of loans in each category to total loans. |
Credit Quality Information. Federal regulations require us to review and classify our assets on a regular basis. In addition, the Office of the Comptroller of the Currency (“OCC”) has the authority to identify problem assets and, if appropriate, require them to be classified. There are four classifications for problem assets: special mention, substandard, doubtful and loss. The following table presents the classes of the loan portfolio and shows our credit risk profile by internally assigned risk rating at the dates indicated (dollars in thousands).
| | Real estate - mortgage | | | Real estate-construction | | | Consumer | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | Home equity (loan- | | | | | | | | | | |
| | One- to four-family | | | | | | | | | | | | | | | | | | to-value ratio of | | | | | | | | | | |
| | residential | | | Multi-family | | | | | | | | | | | | 80% | | | greater | | | Other | | | Commercial | | | Total | |
March 31, 2013 | | (originated) | | | (purchased) | | | (originated) | | | (purchased) | | | Commercial | | | Residential | | | Commercial | | | or less) | | | than 80%) | | | Consumer | | | business | | | loans | |
Grade: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 105,095 | | | $ | 8,593 | | | $ | 10,989 | | | $ | 4,193 | | | $ | 42,557 | | | $ | 1,763 | | | $ | 11,981 | | | $ | 44,430 | | | $ | 8,401 | | | $ | 1,770 | | | $ | 16,117 | | | $ | 255,889 | |
Special Mention | | | - | | | | - | | | | - | | | | - | | | | 441 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 65 | | | | 506 | |
Substandard | | | 1,521 | | | | 723 | | | | - | | | | - | | | | 2,763 | | | | - | | | | - | | | | 134 | | | | - | | | | 8 | | | | - | | | | 5,149 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 106,616 | | | $ | 9,316 | | | $ | 10,989 | | | $ | 4,193 | | | $ | 45,761 | | | $ | 1,763 | | | $ | 11,981 | | | $ | 44,564 | | | $ | 8,401 | | | $ | 1,778 | | | $ | 16,182 | | | $ | 261,544 | |
| | Real estate - mortgage | | | Real estate-construction | | | Consumer | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | Home equity (loan- | | | | | | | | | | |
| | One- to four-family | | | | | | | | | | | | | | | | | | to-value ratio of | | | | | | | | | | |
| | residential | | | Multi-family | | | | | | | | | | | | 80% | | | greater | | | Other | | | Commercial | | | Total | |
December 31, 2012 | | (originated) | | | (purchased) | | | (originated) | | | (purchased) | | | Commercial | | | Residential | | | Commercial | | | or less) | | | than 80%) | | | Consumer | | | business | | | loans | |
Grade: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 109,226 | | | $ | 9,425 | | | $ | 11,101 | | | $ | 4,226 | | | $ | 42,243 | | | $ | 1,931 | | | $ | 5,231 | | | $ | 41,401 | | | $ | 7,841 | | | $ | 1,915 | | | $ | 14,990 | | | $ | 249,530 | |
Special Mention | | | - | | | | - | | | | - | | | | - | | | | 443 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 65 | | | | 508 | |
Substandard | | | 1,528 | | | | 763 | | | | - | | | | - | | | | 2,818 | | | | - | | | | - | | | | 136 | | | | - | | | | 8 | | | | - | | | | 5,253 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 110,754 | | | $ | 10,188 | | | $ | 11,101 | | | $ | 4,226 | | | $ | 45,504 | | | $ | 1,931 | | | $ | 5,231 | | | $ | 41,537 | | | $ | 7,841 | | | $ | 1,923 | | | $ | 15,055 | | | $ | 255,291 | |
Note 5. Deposits
Deposits are summarized as follows (dollars in thousands).
| | March 31, 2013 | | | December 31, 2012 |
| | Amount | | | Percent | | | Amount | | | Percent |
Noninterest-bearing demand deposits | | $ | 27,841 | | | | 12.7 | % | | $ | 23,987 | | | | 11.2 | % |
Interest-bearing demand deposits | | | 19,632 | | | | 9.0 | | | | 17,878 | | | | 8.4 | |
Savings accounts | | | 24,754 | | | | 11.3 | | | | 24,271 | | | | 11.3 | |
Money market accounts | | | 55,947 | | | | 25.5 | | | | 55,047 | | | | 25.7 | |
Certificates of deposit | | | 91,019 | | | | 41.5 | | | | 92,874 | | | | 43.4 | |
Total deposits | | $ | 219,193 | | | | 100.0 | % | | $ | 214,057 | | | | 100.0 | % |
Note 6. Borrowings
We utilize borrowings as a supplemental source of funds for loans and securities. The primary sources of borrowings are FHLB advances and, to a limited extent, repurchase agreements. At March 31, 2013 and December 31, 2012, we had $38.3 million and $49.1 million of borrowings, respectively, of which $35.3 million and $46.1 million, respectively, were FHLB advances and $3.0 million were repurchase agreements. At March 31, 2013 and December 31, 2012, our FHLB advances were comprised of fixed rate advances.
The following table sets forth borrowings based on their stated maturities and weighted average rates at the dates indicated.
| | March 31, 2013 | | December 31, 2012 |
| | | | | Weighted | | | | | Weighted |
| | | | | Average | | | | | Average |
(Dollars in thousands) | | Balance | | | Rate | | Balance | | | Rate |
Due in one year or less | | $ | 8,290 | | | | 2.75 | % | | $ | 19,120 | | | | 1.52 | % |
Due in one to two years | | | 18,000 | | | | 3.41 | | | | 18,000 | | | | 3.41 | |
Due in two to three years | | | 12,000 | | | | 3.82 | | | | 12,000 | | | | 3.82 | |
Advances | | $ | 38,290 | | | | | | | $ | 49,120 | | | | | |
Less: deferred premium on modification | | | (398 | ) | | | | | | | (442 | ) | | | | |
Total advances | | $ | 37,892 | | | | 3.39 | % | | $ | 48,678 | | | | 2.77 | % |
The following table sets forth information concerning our borrowings for the periods indicated.
| Three Months | Year |
| Ended | Ended |
| March 31, | December 31, |
(Dollars in thousands) | 2013 | 2012 |
Maximum amount outstanding at any month end during the period | | $ | 44,020 | | | $ | 48,873 | |
Average amount outstanding during the period | | | 43,351 | | | | 44,348 | |
Weighted average rate during the period | | | 3.04 | % | | | 3.66 | % |
Note 7. Earnings Per Share
Basic earnings per common share is calculated by dividing FedFirst Financial’s net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share is computed in a manner similar to basic earnings 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.
The following table sets forth basic and diluted earnings per common share at the dates indicated.
| | Three Months Ended | |
| | March 31, | |
(Dollars in thousands, except per share amounts) | | 2013 | | | 2012 | |
| | | | | | |
Net income of FedFirst Financial Corporation | | $ | 794 | | | $ | 456 | |
Weighted-average shares outstanding: | | | | | | | | |
Basic | | | 2,457,646 | | | | 2,855,926 | |
Effect of dilutive stock options and restrictive stock awards | | | 7,587 | | | | 4,827 | |
Diluted | | | 2,465,233 | | | | 2,860,753 | |
| | | | | | | | |
Earnings per share: | | | | | | | | |
Basic and diluted | | $ | 0.32 | | | $ | 0.16 | |
The dilutive effect on average shares outstanding is the result of stock options outstanding. At March 31, 2013 and March 31, 2012, options to purchase 163,313 and 133,017 shares of common stock, respectively, at a weighted average exercise price of $17.40 and $17.41 per share, respectively, were outstanding but not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares.
Note 8. 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 realize in a sale transaction on the dates indicated. The estimated fair value amounts were measured as of March 31, 2013 and December 31, 2012 and were not 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 March 31, 2013 and December 31, 2012 may be different than the amounts reported at each period end.
The fair value hierarchy 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 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. |
The following is a discussion of assets and liabilities measured at fair value on a recurring basis and the valuation techniques used:
Securities available for sale. The majority of the Company’s securities are included in Level 2 of the fair value hierarchy. Fair values were primarily 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. The standard inputs that are normally used include benchmark yields of like securities, reportable trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. In some cases, the fair value was determined from a broker who is able to quote a price based on observable inputs in a liquid market for similar securities.
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 March 31, 2013, Level 3 includes three corporate debt securities with a fair value of $2.3 million.
The corporate debt securities are pooled trust preferred CDOs collateralized by the trust preferred securities of insurance companies in the United States. The CDOs, which were rated A at purchase and are currently rated below investment grade, 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. There has been little or no active trading in these securities; therefore it was more appropriate to determine fair value using a discounted cash flow analysis.
The Company utilized a third party pricing service that performed a two-step process to determine the fair value of the CDOs. First, an asset analysis was performed to evaluate the credit quality of the collateral and the deal structure using probability of default values for each underlying issuer and loss given default values by asset type. Probability of default is the likelihood that the issuer of the CDOs will go into default and stop paying and was estimated using an expected default frequency approach, which considers the market value and volatility of a firm’s assets and the threshold for default. Probability of default was combined with correlation assumptions, which is the tendency of companies to default once other companies have defaulted. CDOs are more likely to experience stress at the same time since they are concentrated in the same sector, therefore a 50% asset correlation was assumed for issuers in the same industry. Loss given default is the amount of cash lost to the investor at the time of default and is related to the recovery rate. Loss and recovery estimates determine how much cash remains when an issuer goes into default. Deferrals are a common feature of CDOs and were treated as defaults in the analysis. Loss given default has been historically high for CDOs and therefore a 0% recovery rate was assumed on currently defaulted and deferring assets, which resulted in a 100% loss given default.
Second, a liability analysis was performed in which the expected cash flows produced based off the expected credit events of the asset analysis were allocated across the tranches to determine the tranches that would get paid or incur a loss. These expected cash flows were discounted at a risk free interest rate plus a premium for illiquidity (3 month LIBOR plus 300 basis points) to produce a discounted cash flow valuation and determine an estimated fair value.
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 the dates indicated.
(Dollars in thousands) | | March 31, 2013 | | | December 31, 2012 | |
Significant other observable inputs (Level 2) | | | | | | |
Securities available-for-sale | | | | | | |
Municipal bonds | | $ | 8,379 | | | $ | 9,181 | |
Mortgage-backed - GSEs | | | 11,123 | | | | 12,815 | |
REMICs | | | 14,726 | | | | 18,700 | |
Equities | | | 4 | | | | 4 | |
Total significant other observerable inputs (Level 2) | | | 34,232 | | | | 40,700 | |
| | | | | | | | |
Significant unobservable inputs (Level 3) | | | | | | | | |
Securities available-for-sale | | | | | | | | |
Corporate debt | | | 2,308 | | | | 1,882 | |
Total significant unobservable inputs (Level 3) | | | 2,308 | | | | 1,882 | |
Total securities available-for-sale | | $ | 36,540 | | | $ | 42,582 | |
| | | | | | | | |
Total assets measured at fair value on a recurring basis | | $ | 36,540 | | | $ | 42,582 | |
| | Significant | |
| | Unobservable Inputs | |
(Dollars in thousands) | | (Level 3) | |
December 31, 2011 | | $ | 1,486 | |
Total unrealized gains | | | 428 | |
Paydowns and maturities | | | (14 | ) |
Net transfers out of level 3 | | | (18 | ) |
December 31, 2012 | | $ | 1,882 | |
Total unrealized gains | | | 426 | |
March 31, 2013 | | $ | 2,308 | |
(Dollars in thousands) | | March 31, 2013 | | | December 31, 2012 |
The amount of total unrealized gains for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains relating to assets still held at period end | | $ | 426 | | | $ | 428 | |
We may be required to measure certain assets at fair value on a nonrecurring basis. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or writedowns of individual assets.
The following is a discussion of assets and liabilities measured at fair value on a nonrecurring basis.
Impaired loans. Certain impaired loans over $250,000 are individually reviewed to determine the amount of each loan that may be at risk of noncollection. When repayment is expected solely from the collateral, the impaired loans are reported at the fair value of the underlying collateral using property appraisals less any projected selling costs.
Real estate owned. The fair value of real estate owned is estimated using property appraisals less any projected selling costs.
For financial assets measured at fair value on a nonrecurring basis, the following table sets forth the fair value measurements by fair value hierarchy at the dates indicated.
| | March 31, 2013 | | | December 31, 2012 | |
(Dollars in thousands) | | Carrying Value | | | Fair Value | | | Carrying Value | | | Fair Value | |
Level 3 | | | | | | | | | | | | |
Impaired loans | | $ | - | | | $ | - | | | $ | 4,552 | | | $ | 4,552 | |
Real estate owned | | | 105 | | | | 105 | | | | 146 | | | | 146 | |
Total assets measured at fair value on a nonrecurring basis | | $ | 105 | | | $ | 105 | | | $ | 4,698 | | | $ | 4,698 | |
For Level 3 assets measured at fair value on a recurring and nonrecurring basis as of March 31, 2013, the following table sets forth the significant unobservable inputs used in the fair value measurements.
(Dollars in thousands) | Fair Value | | Valuation Technique | | Significant Unobservable Inputs | | Significant Unobservable Input Value |
Recurring basis | | | | | | | |
Securities available-for-sale: | | | | | | | |
Corporate debt | $2,308 | | Discounted cash flow | | Average probability of default | | 3.71% |
| | | | | Correlation | | 50% for issuers in the same industry |
| | | | | Deferral/default recovery rate | | 0% on currently defaulted/deferring assets and projected defaults |
| | | | | Prepayment | | 0% |
Nonrecurring basis | | | | | | | |
Real estate owned | 105 | | Appraisal value | | Selling costs | | 10-20% |
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 March 31, 2013 and December 31, 2012.
Cash and Cash Equivalents
The carrying amounts approximate the asset’s fair values.
Securities Available-for Sale
See previous discussion on securities available-for-sale measured at fair value on a recurring basis for further details on the valuation techniques used to determine the fair value of securities available-for-sale.
Loans
The fair values for residential real estate loans are estimated using discounted cash flow analyses using mortgage commitment rates from either FNMA or FHLMC. The fair values of consumer and commercial business loans are estimated using discounted cash flow analyses, using interest rates reported in various government releases. The fair values of multi-family and commercial real estate loans are estimated using discounted cash flow analysis, using interest rates based on national commitment rates on similar loans. The carrying value is net of the allowance for loan losses. Due to the significant judgment involved in evaluating credit quality and the allowance for loan losses, loans are classified as Level 3.
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.
Deposits
The fair values disclosed for demand deposits (e.g., 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 of 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.
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 following table sets forth the carrying amount and estimated fair value of financial instruments at the dates indicated (dollars in thousands).
| | Carrying | | | Estimated | | | Fair Value Measurements | |
March 31, 2013 | | Amount | | | Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | |
Financial assets: | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 4,826 | | | $ | 4,826 | | | $ | 4,826 | | | $ | - | | | $ | - | |
Securities available-for-sale | | | 36,540 | | | | 36,540 | | | | - | | | | 34,232 | | | | 2,308 | |
Loans, net | | | 252,344 | | | | 261,643 | | | | - | | | | - | | | | 261,643 | |
FHLB stock | | | 3,230 | | | | 3,230 | | | | - | | | | 3,230 | | | | - | |
Accrued interest receivable | | | 1,041 | | | | 1,041 | | | | - | | | | 1,041 | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | | | | | |
Deposits | | | 219,193 | | | | 220,898 | | | | - | | | | 220,898 | | | | - | |
Borrowings | | | 37,892 | | | | 39,523 | | | | - | | | | 39,523 | | | | - | |
Accrued interest payable | | | 271 | | | | 271 | | | | - | | | | 271 | | | | - | |
| | Carrying | | | Estimated | | | Fair Value Measurements | |
December 31, 2012 | | Amount | | | Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | |
Financial assets: | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 5,874 | | | $ | 5,874 | | | $ | 5,874 | | | $ | - | | | $ | - | |
Securities available-for-sale | | | 42,582 | | | | 42,582 | | | | - | | | | 40,700 | | | | 1,882 | |
Loans, net | | | 249,530 | | | | 260,538 | | | | - | | | | - | | | | 260,538 | |
FHLB stock | | | 3,787 | | | | 3,787 | | | | - | | | | 3,787 | | | | - | |
Accrued interest receivable | | | 1,035 | | | | 1,035 | | | | - | | | | 1,035 | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | | | | | |
Deposits | | | 214,057 | | | | 215,863 | | | | - | | | | 215,863 | | | | - | |
Borrowings | | | 48,678 | | | | 50,347 | | | | - | | | | 50,347 | | | | - | |
Accrued interest payable | | | 302 | | | | 302 | | | | - | | | | 302 | | | | - | |
Note 9. Other Comprehensive Income (Loss)
The following table sets forth the tax effects allocated to each component of the Company’s other comprehensive income (loss) at the dates indicated (dollars in thousands).
| | Before | | | Income | | | Net of | |
| | Income Tax | | | Tax | | | Income Tax | |
Three Months Ended March 31, 2013 | | Expense | | | Expense | | | Expense | |
| | | | | | | | | |
Other comprehensive income: | | | | | | | | | | | | |
Unrealized gain on securities available-for-sale | | $ | 190 | | | $ | 74 | | | $ | 116 | |
| | Before | | | Income | | | Net of | |
| | Income Tax | | | Tax | | | Income Tax | |
Three Months Ended March 31, 2012 | | (Benefit) | | | (Benefit) | | | (Benefit) | |
| | | | | | | | | |
Other comprehensive loss: | | | | | | | | | | | | |
Unrealized loss on securities available-for-sale | | $ | (298 | ) | | $ | (117 | ) | | $ | (181 | ) |
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Note 10. Segment Reporting
The consolidated operating results of FedFirst Financial are presented as a single financial services segment. FedFirst Financial is the parent company of the Bank, which owns FFEC. FFEC has an 80% controlling interest in Exchange Underwriters, Inc. Exchange Underwriters, Inc. is managed separately from the banking and related financial services that the Company offers. Exchange Underwriters, Inc. is an independent insurance agency that offers property and casualty, life, health, commercial general liability, surety and other insurance products.
Following is a table of selected financial data for the Company's subsidiaries and consolidated results for the dates indicated (dollars in thousands).
| | First Federal Savings Bank | | | Exchange Underwriters, Inc. | | | FedFirst Financial Corporation | | | Net Eliminations | | | Consolidated | |
| | | | | | | | | | | | | | | |
March 31, 2013 | | | | | | | | | | | | | | | |
Assets | | $ | 313,513 | | | $ | 1,043 | | | $ | 53,896 | | | $ | (54,890 | ) | | $ | 313,562 | |
Liabilities | | | 267,132 | | | | 358 | | | | 27 | | | | (7,894 | ) | | | 259,623 | |
Stockholders' equity | | | 46,381 | | | | 685 | | | | 53,869 | | | | (46,996 | ) | | | 53,939 | |
| | | | | | | | | | | | | | | | | | | | |
December 31, 2012 | | | | | | | | | | | | | | | | | | | | |
Assets | | $ | 318,576 | | | $ | 1,034 | | | $ | 53,264 | | | $ | (54,114 | ) | | $ | 318,760 | |
Liabilities | | | 273,186 | | | | 401 | | | | 30 | | | | (8,151 | ) | | | 265,466 | |
Stockholders' equity | | | 45,390 | | | | 633 | | | | 53,234 | | | | (45,963 | ) | | | 53,294 | |
| | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2013 | | | | | | | | | | | | | | | | | | | | |
Total interest income | | $ | 3,244 | | | $ | - | | | $ | 21 | | | $ | (21 | ) | | $ | 3,244 | |
Total interest expense | | | 735 | | | | - | | | | - | | | | (21 | ) | | | 714 | |
Net interest income | | | 2,509 | | | | - | | | | 21 | | | | - | | | | 2,530 | |
Provision for loan losses | | | - | | | | - | | | | - | | | | - | | | | - | |
Net interest income after provision for loan losses | | | 2,509 | | | | - | | | | 21 | | | | - | | | | 2,530 | |
Noninterest income | | | 255 | | | | 1,014 | | | | - | | | | - | | | | 1,269 | |
Noninterest expense | | | 1,882 | | | | 656 | | | | 74 | | | | - | | | | 2,612 | |
Undistributed net income of subsidiary | | | 210 | | | | - | | | | 829 | | | | (1,039 | ) | | | - | |
Income before income tax expense (benefit) and noncontrolling interest in net income of consolidated subsidiary | | | 1,092 | | | | 358 | | | | 776 | | | | (1,039 | ) | | | 1,187 | |
Income tax expense (benefit) | | | 221 | | | | 148 | | | | (18 | ) | | | - | | | | 351 | |
Net income before noncontrolling interest in net income of consolidated subsidiary | | | 871 | | | | 210 | | | | 794 | | | | (1,039 | ) | | | 836 | |
Less: Noncontrolling interest in net income of consolidated subsidiary | | | 42 | | | | - | | | | - | | | | - | | | | 42 | |
Net income of FedFirst Financial Corporation | | $ | 829 | | | $ | 210 | | | $ | 794 | | | $ | (1,039 | ) | | $ | 794 | |
| | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2012 | | | | | | | | | | | | | | | | | | | | |
Total interest income | | $ | 3,619 | | | $ | - | | | $ | 23 | | | $ | (23 | ) | | $ | 3,619 | |
Total interest expense | | | 1,079 | | | | - | | | | - | | | | (23 | ) | | | 1,056 | |
Net interest income | | | 2,540 | | | | - | | | | 23 | | | | - | | | | 2,563 | |
Provision for loan losses | | | 160 | | | | - | | | | - | | | | - | | | | 160 | |
Net interest income after provision for loan losses | | | 2,380 | | | | - | | | | 23 | | | | - | | | | 2,403 | |
Noninterest income | | | 230 | | | | 627 | | | | - | | | | - | | | | 857 | |
Noninterest expense | | | 1,903 | | | | 478 | | | | 141 | | | | - | | | | 2,522 | |
Undistributed net income of subsidiary | | | 84 | | | | - | | | | 534 | | | | (618 | ) | | | - | |
Income before income tax expense (benefit) and noncontrolling interest in net loss of consolidated subsidiary | | | 791 | | | | 149 | | | | 416 | | | | (618 | ) | | | 738 | |
Income tax expense (benefit) | | | 240 | | | | 65 | | | | (40 | ) | | | - | | | | 265 | |
Net income before noncontrolling interest in net loss of consolidated subsidiary | | | 551 | | | | 84 | | | | 456 | | | | (618 | ) | | | 473 | |
Less: Noncontrolling interest in net loss of consolidated subsidiary | | | 17 | | | | - | | | | - | | | | - | | | | 17 | |
Net income of FedFirst Financial Corporation | | $ | 534 | | | $ | 84 | | | $ | 456 | | | $ | (618 | ) | | $ | 456 | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This discussion should be read in conjunction with the unaudited consolidated financial statements, notes and tables included in this report. For further information, refer to the consolidated financial statements and notes included in FedFirst Financial Corporation’s Annual Report on Form 10-K for the year ended December 31, 2012.
Forward-Looking Statements
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’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 operates, as well as nationwide; FedFirst Financial’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 FedFirst Financial’s Annual Report on Form 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 assumes no obligation to update any forward-looking statements.
General
FedFirst Financial Corporation is a stock holding company established in 2010 to be the holding company for First Federal Savings 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 Savings 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. All significant intercompany transactions have been eliminated.
First Federal Savings Bank 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 seven locations in southwestern Pennsylvania. First Federal conducts insurance brokerage activities through Exchange Underwriters, Inc.
Our website address is www.firstfederal-savings.com. Information on our website should not be considered a part of this Form 10-Q.
Balance Sheet Analysis
Assets. Total assets at March 31, 2013 were $313.6 million, a decrease of $5.2 million, or 1.6%, from total assets of $318.8 million at December 31, 2012.
Loans, net, increased $2.8 million, or 1.1%, to $252.3 million at March 31, 2013 compared to $249.5 million at December 31, 2012 primarily due to increases of $3.6 million in home equity loans and $1.1 million in commercial business loans as well as disbursements on commercial constructions loans, partially offset by a decrease of $5.0 million in residential mortgage loans. While the Bank continues to generate growth in commercial loans, payoffs and paydowns of residential real estate loans have been partially offset by home equity loan originations at shorter terms and lower yields.
Securities available-for-sale decreased $6.0 million, or 14.2%, to $36.5 million at March 31, 2013 compared to $42.6 million at December 31, 2012. The decrease was primarily the result of $6.1 million of paydowns that includes a $700,000 maturity of a municipal bond. In addition, the securities portfolio reflects an unrealized loss of $448,000 at March 31, 2013 compared to $638,000 at December 31, 2012.
Liabilities. Total liabilities at March 31, 2013 were $259.6 million, compared to $265.5 million at December 31, 2012, a decrease of $5.8 million, or 2.2%.
Total deposits increased $5.1 million, or 2.4%, to $219.2 million at March 31, 2013 compared to $214.1 million at December 31, 2012. There were increases of $3.9 million in noninterest-bearing demand deposits, $1.8 million in interest-bearing demand deposits, $900,000 in money market accounts and $483,000 in savings accounts. These increases were partially offset by a $1.9 million decrease in certificates of deposit, primarily due to customer hesitancy to commit to long-term rates. Due to the low rate environment, the Bank has been selective on promotional rates and has concentrated its efforts on increasing noninterest-bearing accounts by building strong customer relationships.
Borrowings decreased $10.8 million, or 22.2%, to $37.9 million at March 31, 2013 compared to $48.7 million at December 31, 2012 primarily due to a $9.8 million net decrease in short-term borrowings and paydowns on amortizing advances.
Stockholders’ Equity. Stockholders’ equity increased $645,000 to $53.9 million at March 31, 2013 compared to $53.3 million at December 31, 2012. Stockholders’ equity increased primarily due to $794,000 of net income for the three months ended March 31, 2013. This was partially offset by the purchase of 15,000 shares of the Company’s common stock as part of the Company’s stock repurchase program for $260,000 and a $99,000 dividend payment to stockholders.
Results of Operations for the Three Months Ended March 31, 2013 and 2012
Overview. The Company had net income of $794,000 for the three months ended March 31, 2013, compared to $456,000 for the same period in 2012.
| | Three Months Ended | |
| | March 31, | |
(Dollars in thousands) | | 2013 | | | 2012 | |
Net income of FedFirst Financial Corporation | | $ | 794 | | | $ | 456 | |
Return on average assets | | | 1.01 | % | | | 0.54 | % |
Return on average equity | | | 5.85 | | | | 3.07 | |
Average equity to average assets | | | 17.17 | | | | 17.51 | |
Net Interest Income. Net interest income for the three months ended March 31, 2013 decreased $33,000, or 1.3%, to $2.5 million compared to $2.6 million for the three months ended March 31, 2012. Modifications and payoffs of higher yielding loans and securities due to the continued historically low interest rate environment resulted in a $375,000 decline in interest income. This was partially offset by interest rate reductions and decreases in average balances on deposits and borrowings that resulted in a $342,000 decrease in interest expense.
Interest income decreased $375,000, or 10.4%, to $3.2 million for the three months ended March 31, 2013 compared to $3.6 million for the three months ended March 31, 2012 primarily due to decreases of 24 basis points in yield and $16.9 million in average balance of interest-earning assets. Interest income on loans decreased $225,000 due to a decrease of 45 basis points in yield, which was primarily driven by modifications and paydowns of higher yielding residential real estate and replaced by originations of home equity loans at lower yields. The average balance of loans increased $4.4 million and included a change in loan composition in that increases in commercial real estate and home equity loans were partially offset by a decrease in residential real estate. Interest income on securities decreased $148,000 due to decreases of $13.2 million in average balance and 28 basis points in yield, primarily due to paydowns of higher yielding securities.
Interest expense decreased $342,000, or 32.4%, to $714,000 for the three months ended March 31, 2013 compared to $1.1 million for the three months ended March 31, 2012 due to decreases of 46 basis points in cost and $17.9 million in the average balance of interest-bearing liabilities. Interest expense on deposits decreased $218,000 due to decreases of 38 basis points in cost, primarily related to the repricing of all deposit products at lower rates with the majority of the benefit derived from maturing certificates of deposit and money market accounts, and $12.7 million in the average balance. Interest expense on borrowings decreased $124,000 due to decreases of 71 basis points in cost and $5.1 million in average balance, as funds generated from deposit growth and security paydowns were used to payoff higher cost borrowings or replace short-term, lower-cost borrowings.
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 and are expressed in annualized rates.
| | Three Months Ended March 31, |
| | 2013 | | | 2012 | |
| | | | | Interest | | | | | | | | | Interest | | | | |
| | Average | | | and | | | Yield/ | | | Average | | | and | | | Yield/ | |
(Dollars in thousands) | | Balance | | | Dividends | | | Cost | | | Balance | | | Dividends | | | Cost | |
Assets: | | | | | | | | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | | | | | | | | |
Loans, net (1)(2) | | $ | 249,189 | | | $ | 2,925 | | | | 4.70 | % | | $ | 244,782 | | | $ | 3,150 | | | | 5.15 | % |
Securities (3)(4) | | | 40,646 | | | | 335 | | | | 3.29 | | | | 53,852 | | | | 481 | | | | 3.57 | |
Other interest-earning assets | | | 7,599 | | | | 4 | | | | 0.21 | | | | 15,743 | | | | 6 | | | | 0.15 | |
Total interest-earning assets | | | 297,434 | | | | 3,264 | | | | 4.39 | | | | 314,377 | | | | 3,637 | | | | 4.63 | |
Noninterest-earning assets | | | 18,513 | | | | | | | | | | | | 24,516 | | | | | | | | | |
Total assets | | $ | 315,947 | | | | | | | | | | | $ | 338,893 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities and Stockholders' equity: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liablities: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing demand deposits | | $ | 18,745 | | | | 4 | | | | 0.09 | % | | $ | 15,337 | | | | 7 | | | | 0.18 | % |
Savings accounts | | | 24,487 | | | | 3 | | | | 0.05 | | | | 23,212 | | | | 13 | | | | 0.22 | |
Money market accounts | | | 55,175 | | | | 20 | | | | 0.14 | | | | 61,755 | | | | 82 | | | | 0.53 | |
Certificates of deposit | | | 92,059 | | | | 357 | | | | 1.55 | | | | 102,885 | | | | 500 | | | | 1.94 | |
Total interest-bearing deposits | | | 190,466 | | | | 384 | | | | 0.81 | | | | 203,189 | | | | 602 | | | | 1.19 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Borrowings | | | 43,351 | | | | 330 | | | | 3.04 | | | | 48,478 | | | | 454 | | | | 3.75 | |
Total interest-bearing liabilities | | | 233,817 | | | | 714 | | | | 1.22 | | | | 251,667 | | | | 1,056 | | | | 1.68 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Noninterest-bearing liabilities | | | 27,870 | | | | | | | | | | | | 27,894 | | | | | | | | | |
Total liabilities | | | 261,687 | | | | | | | | | | | | 279,561 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Stockholders' equity | | | 54,260 | | | | | | | | | | | | 59,332 | | | | | | | | | |
Total liabilities and stockholders' equity | | $ | 315,947 | | | | | | | | | | | $ | 338,893 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income | | | | | | $ | 2,550 | | | | | | | | | | | $ | 2,581 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate spread | | | | | | | | | | | 3.17 | % | | | | | | | | | | | 2.95 | % |
Net interest margin | | | | | | | | | | | 3.43 | | | | | | | | | | | | 3.28 | |
Average interest-earning assets to average interest-bearing liabilities | | | | | | | | | | | 127.21 | % | | | | | | | | | | | 124.92 | % |
(1) | Amount is net of deferred loan costs, loans in process and allowance for loan losses. |
(2) | Amount includes nonaccrual loans in average balances only. |
(3) | Amount does not include effect of unrealized gain (loss) on securities available-for-sale. |
(4) | Includes municipal bonds; yield and interest are stated on a taxable equivalent basis. |
Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income. 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). Changes related to volume/rate are prorated into volume and rate components. The total column represents the net change in volume and rate.
| | Three Months Ended March 31, 2013 | |
| | Compared To | |
| | Three Months Ended March 31, 2012 | |
| | Increase (decrease) due to | |
(Dollars in thousands) | | Volume | | | Rate | | | Total | |
| | | | | | | | | |
Interest and dividend income: | | | | | | | | | |
Loans, net | | $ | 54 | | | $ | (279 | ) | | $ | (225 | ) |
Securities | | | (110 | ) | | | (36 | ) | | | (146 | ) |
Other interest-earning assets | | | (4 | ) | | | 2 | | | | (2 | ) |
Total interest-earning assets | | | (60 | ) | | | (313 | ) | | | (373 | ) |
| | | | | | | | | | | | |
Interest expense: | | | | | | | | | | | | |
Deposits | | | (35 | ) | | | (183 | ) | | | (218 | ) |
Borrowings | | | (44 | ) | | | (80 | ) | | | (124 | ) |
Total interest-bearing liablities | | | (79 | ) | | | (263 | ) | | | (342 | ) |
Change in net interest income | | $ | 19 | | | $ | (50 | ) | | $ | (31 | ) |
Provision for Loan Losses. There was no provision for loan losses for the three months ended March 31, 2013 compared to $160,000 for the three months ended March 31, 2012. The provision decreased primarily due to a decrease in charge-offs. Net charge-offs were $23,000 for the three months ended March 31, 2013 compared to $155,000 for the three months ended March 31, 2012. The decrease is also attributable to an increase in loans that were separately evaluated for impairment in the current period and did not require a specific reserve.
Noninterest Income. Noninterest income increased $412,000, or 48.1%, to $1.3 million for the three months ended March 31, 2013 compared to $857,000 for the three months ended March 31, 2012. Insurance commissions increased $388,000 primarily due to a $257,000 increase in contingency fee income.
Noninterest Expense. The following table summarizes noninterest expense for the periods indicated.
| | Three Months Ended | |
| | March 31, | |
(Dollars in thousands) | | 2013 | | | 2012 | |
Compensation and employee benefits | | $ | 1,520 | | | $ | 1,377 | |
Occupancy | | | 300 | | | | 317 | |
FDIC insurance premiums | | | 43 | | | | 58 | |
Data processing | | | 143 | | | | 137 | |
Professional services | | | 165 | | | | 252 | |
Advertising | | | 139 | | | | 37 | |
Stationary, printing and supplies | | | 21 | | | | 24 | |
Telephone | | | 12 | | | | 13 | |
Postage | | | 34 | | | | 34 | |
Correspondent bank fees | | | 31 | | | | 35 | |
Real estate owned (income) expense | | | (6 | ) | | | 30 | |
Amortization of intangibles | | | 23 | | | | 27 | |
All other | | | 187 | | | | 181 | |
Total noninterest expense | | $ | 2,612 | | | $ | 2,522 | |
Noninterest expense increased $90,000, or 3.6%, to $2.6 million for the three months ended March 31, 2013 compared to $2.5 million for the three months ended March 31, 2012. Compensation expense increased $143,000 primarily due to the hiring of additional staff at Exchange Underwriters and an increase in stock-based compensation expense. In addition, advertising expense increased $102,000 primarily related to a cooperative marketing agreement that was signed by Exchange Underwriters. This was partially offset by an $87,000 decrease in professional services primarily due to costs associated with strategic planning analysis and initiatives in the prior period.
Income Tax Expense. Income tax expense for the three months ended March 31, 2013 increased to $351,000 compared to $265,000 for the three months ended March 31, 2012 primarily due to a $449,000 increase in income before income tax expense. The effective tax rate was 29.6% for the three months ended March 31, 2013 compared to 29.3% for the three months ended March 31, 2012.
Liquidity and Capital Management
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. 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 March 31, 2013, cash and cash equivalents totaled $4.8 million and securities available-for-sale, which provides an additional source of liquidity, totaled $36.5 million. In addition, at March 31, 2013, the maximum remaining borrowing capacity at the FHLB of Pittsburgh was approximately $123.9 million. We also have the ability to borrow from two unsecured discretionary lines of credit totaling $13.0 million. At March 31, 2013 and December 31, 2012, the Bank had not taken any advances on the line of credits.
Certificates of deposit due within one year of March 31, 2013 totaled $41.0 million, or 45.0% of certificates of deposit. 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 summarizes the Company’s commitments at the date indicated.
| | March 31, | |
(Dollars in thousands) | | 2013 | |
Loans in process | | $ | 6,848 | |
Unused consumer revolving lines of credit | | | 4,186 | |
Unused commercial lines of credit | | | 11,313 | |
Commitments to originate one-to four- family residential loans | | | 219 | |
Commitments to originate consumer loans | | | 1,716 | |
Commitments to originate commercial loans | | | 8,101 | |
Total commitments outstanding | | $ | 32,383 | |
Capital Management. The Bank is subject to various regulatory capital requirements administered by the OCC, 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 March 31, 2013 and December 31, 2012, we exceeded all of our regulatory capital requirements and are considered “well capitalized” under regulatory guidelines. 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 |
March 31, 2013 | | Amount | | | Ratio | | Amount | | | Ratio | | Amount | | | Ratio |
Total capital (to risk weighted assets) | | $ | 47,916 | | | | 24.10 | % | | $ | 15,906 | | | | 8.00 | % | | $ | 19,882 | | | | 10.00 | % |
Tier 1 capital (to risk weighted assets) | | | 45,426 | | | | 22.85 | | | | 7,953 | | | | 4.00 | | | | 11,929 | | | | 6.00 | |
Tier 1 capital (to adjusted total assets) | | | 45,426 | | | | 14.54 | | | | 12,493 | | | | 4.00 | | | | 15,616 | | | | 5.00 | |
Tangible capital (to tangible assets) | | | 45,426 | | | | 14.54 | | | | 4,685 | | | | 1.50 | | | | N/A | | | | N/A | |
December 31, 2012 | | Amount | | | Ratio | | Amount | | | Ratio | | Amount | | | Ratio |
Total capital (to risk weighted assets) | | $ | 47,011 | | | | 23.81 | % | | $ | 15,798 | | | | 8.00 | % | | $ | 19,748 | | | | 10.00 | % |
Tier 1 capital (to risk weighted assets) | | | 44,537 | | | | 22.55 | | | | 7,899 | | | | 4.00 | | | | 11,849 | | | | 6.00 | |
Tier 1 capital (to adjusted total assets) | | | 44,537 | | | | 14.02 | | | | 12,706 | | | | 4.00 | | | | 15,883 | | | | 5.00 | |
Tangible capital (to tangible assets) | | | 44,537 | | | | 14.02 | | | | 4,765 | | | | 1.50 | | | | N/A | | | | N/A | |
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 the three months ended March 31, 2013, we engaged in no off-balance sheet transactions.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable as the registrant is a smaller reporting company.
Item 4. 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 for the purpose of ensuring that the information required to be disclosed in the reports that FedFirst Financial files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to FedFirst Financial’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
There has been no change in FedFirst Financial’s internal control over financial reporting during the quarter ended March 31, 2013, that has materially affected, or is reasonably likely to materially affect, FedFirst Financial’s internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. 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.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The Company made the following purchases of its common stock during the three months ended March 31, 2013. Based upon state of incorporation, shares of common stock are retired upon purchase.
Period | | Total Number of Shares Purchased | | | Average Price Paid per Share | | | Total Number of Shares Purchased as Part of the Publicly Announced Program | | | Maximum Number of Shares That May Yet Be Purchased Under the Program (1) | |
January 1-31, 2013 | | | - | | | $ | - | | | | - | | | | - | |
February 1-28, 2013 | | | - | | | | - | | | | - | | | | 254,000 | |
March 1-31, 2013 | | | 15,000 | | | | 17.33 | | | | 15,000 | | | | 239,000 | |
Total | | | 15,000 | | | | 17.33 | | | | 15,000 | | | | | |
(1) | On January 23, 2013, the Company announced that the board of directors had approved a program allowing the Company to repurchase up to 254,000 shares of the Company’s outstanding common stock, which was approximately 10% of outstanding shares. This repurchase program is scheduled to expire on February 14, 2014. As of March 31, 2013, 15,000 shares of the Company’s common stock had been repurchased under this program. |
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information.
None.
31.1 | Rule 13a-14 (a) / 15d-14 (a) Certification (President and Chief Executive Officer) |
31.2 | Rule 13a-14 (a) / 15d-14 (a) Certification (Chief Financial Officer) |
32.1 | Certification of Patrick G. O’Brien pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 | Certification of Jamie L. Prah pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101.0* | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Changes in Stockholders’ Equity, (iv) the Consolidated Statements of Comprehensive Income, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Unaudited Consolidated Financial Statements |
| _______________________________ |
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | FEDFIRST FINANCIAL CORPORATION |
| | | (Registrant) |
| | | |
Date: | May 13, 2013 | | /s/ Patrick G. O’Brien |
| | | Patrick G. O’Brien |
| | | President and Chief Executive Officer |
| | | |
Date: | May 13, 2013 | | /s/ Jamie L. Prah |
| | | Jamie L. Prah |
| | | Senior Vice President and Chief Financial Officer |
| | | (Principal Financial Officer and Chief Accounting Officer) |
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