FedFirst Financial 10-Q 2011 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

	x	QUARTERLY REPORT PERSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011
OR
	o	TRANSITION REPORT PERSUANT 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	80-0578993
(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 November 9, 2011, the issuer had 2,984,802 shares of common stock outstanding.

 

FORM 10-Q

INDEX

			Page
PART I – FINANCIAL INFORMATION
	Item 1.	Financial Statements	1
	Consolidated Statements Of Financial Condition at September 30, 2011 (Unaudited) and December 31, 2010		1
	Consolidated Statements Of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2011 and 2010		2
	Consolidated Statements Of Changes In Stockholders’ Equity And Comprehensive Income for the Nine Months Ended September 30, 2011 And 2010 (Unaudited)		3
	Consolidated Statements Of Cash Flows for the Nine Months Ended September 30, 2011 and 2010 (Unaudited)		5
	Notes to the Unaudited Consolidated Financial Statements		6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47
	Item 4.	Controls and Procedures	47
PART II – OTHER INFORMATION
	Item 1.	Legal Proceedings	47
	Item 1A.	Risk Factors	48
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
	Item 3.	Defaults Upon Senior Securities	48
	Item 4.	[Removed and Reserved]	48
	Item 5.	Other Information	48
	Item 6.	Exhibits	49
SIGNATURES

 

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	September 30,			December 31,
	2011			2010
(Dollars in thousands, except share data)	(UNAUDITED)
Assets:
Cash and cash equivalents:
Cash and due from banks	$	1,323		$	1,626
Interest-earning deposits		8,367			7,694
Total cash and cash equivalents		9,690			9,320
Securities available-for-sale		59,405			78,708
Loans, net		245,771			230,055
Federal Home Loan Bank (“FHLB”) stock, at cost		5,621			6,556
Accrued interest receivable - loans		1,032			1,038
Accrued interest receivable - securities		262			327
Premises and equipment, net		2,246			2,281
Bank-owned life insurance		8,199			7,998
Goodwill		1,080			1,080
Real estate owned		393			426
Deferred tax assets		2,541			3,017
Other assets		6,088			2,267
Total assets	$	342,328		$	343,073
Liabilities and Stockholders’ Equity:
Deposits:
Noninterest-bearing	$	19,911		$	15,612
Interest-bearing		203,400			187,950
Total deposits		223,311			203,562
Borrowings		50,632			76,893
Advance payments by borrowers for taxes and insurance		197			455
Accrued interest payable - deposits		223			298
Accrued interest payable - borrowings		202			300
Other liabilities		8,041			2,978
Total liabilities		282,606			284,486
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; 2,989,802 and 2,991,461 shares issued and outstanding		30			30
Additional paid-in-capital		42,059			42,016
Retained earnings - substantially restricted		18,682			18,140
Accumulated other comprehensive income (loss), net of deferred taxes (benefit) of $211 and $(82)		326			(128	)
Unearned Employee Stock Ownership Plan (“ESOP”)		(1,426	)		(1,555	)
Total FedFirst Financial Corporation stockholders’ equity		59,671			58,503
Noncontrolling interest in subsidiary		51			84
Total stockholders’ equity		59,722			58,587
Total liabilities and stockholders’ equity	$	342,328		$	343,073

See Notes to the Unaudited Consolidated Financial Statements.

 1

 

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
(Dollars in thousands, except per share data)	2011			2010			2011			2010
Interest income:
Loans	$	3,298		$	3,338		$	9,788		$	10,113
Securities		603			832			1,953			2,645
Other interest-earning assets		3			8			8			17
Total interest income		3,904			4,178			11,749			12,775
Interest expense:
Deposits		695			810			2,129			2,584
Borrowings		504			807			1,670			2,696
Total interest expense		1,199			1,617			3,799			5,280
Net interest income		2,705			2,561			7,950			7,495
Provision for loan losses		325			200			775			600
Net interest income after provision for loan losses		2,380			2,361			7,175			6,895
Noninterest income:
Fees and service charges		175			134			433			392
Insurance commissions		482			497			1,665			1,790
Income from bank-owned life insurance		66			71			201			212
Net loss on sales of available-for-sale securities		—			—			(1	)		(5	)
Net loss on sales of real estate owned		—			(34	)		(14	)		(24	)
Other		4			4			33			15
Total noninterest income		727			672			2,317			2,380
Noninterest expense:
Compensation and employee benefits		1,559			1,463			4,763			4,400
Occupancy		370			353			1,105			1,069
FDIC insurance premiums		52			99			209			283
Data processing		140			121			392			360
Professional services		194			184			597			501
Other		374			363			1,167			1,092
Total noninterest expense		2,689			2,583			8,233			7,705
Income before income tax expense and noncontrolling interest in net income of consolidated subsidiary		418			450			1,259			1,570
Income tax expense		133			152			432			557
Net income before noncontrolling interest in net (loss) income of consolidated subsidiary		285			298			827			1,013
Noncontrolling interest in net (loss) income of consolidated subsidiary		(5	)		3			23			49
Net income of FedFirst Financial Corporation	$	290		$	295		$	804		$	964
Earnings per share:
Basic and diluted	$	0.10		$	0.10		$	0.28		$	0.33
Weighted-average shares outstanding:
Basic		2,912,853			2,902,104			2,909,045			2,893,437
Diluted		2,922,052			2,902,104			2,918,012			2,893,437

See Notes to the Unaudited Consolidated Financial Statements.

 2

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME FOR THE NINE MONTHS ENDED

SEPTEMBER 30, 2011 AND 2010 (UNAUDITED)

									Accumulated						Common
				Additional					Other						Stock			Noncontrolling			Total
	Common			Paid-in-			Retained		Comprehensive			Unearned			Held in			Interest in			Stockholders’			Comprehensive
(Dollars in thousands)	Stock			Capital			Earnings		Gain (Loss)			ESOP			Treasury			Subsidiary			Equity			Income
Balance at January 1, 2010	$	67		$	29,558		$	17,619	$	(39	)	$	(1,728	)	$	(3,113	)	$	79		$	42,443
Comprehensive income (loss):
Net income		—			—			964		—			—			—			49			1,013		$	1,013
Unrealized gain on securities available-for-sale, net of tax of $464		—			—			—		720			—			—			—			720			720
Reclassification adjustment on sales of securities available-for-sale,net of tax $(62)		—			—			—		(96	)		—			—			—			(96	)		(96	)
Corporate reorganization
Exchange of common stock held by FedFirst Financial Mutual Holding Company		(36	)		19			—		—			—			—			—			(17	)
Retirement of common stock held in treasury		(4	)		(3,145	)		—		—			—			3,149			—			—
Exchange of common stock		(14	)		15			—		—			—			—			—			1
Stock offering proceeds, net of offering expenses		17			15,351			—		—			—			—			—			15,368
Purchase of common stock to be held in treasury		—			—			—		—			—			(16	)		—			(16	)
ESOP shares committed to be released		—			(65	)		—		—			130			—			—			65
Stock-based compensation expense		—			221			—		—			—			—			—			221
Stock awards forfeited		—			20			—		—			—			(20	)		—			—
Distribution to noncontrolling shareholder		—			—			—		—			—			—			(51	)		(51	)
Total comprehensive income																									1,637
Less: Comprehensive income attributable to the noncontrolling interest in subsidiary																									49
Comprehensive income attributable to FedFirst Financial Corporation																								$	1,588
Balance at September 30, 2010	$	30		$	41,974		$	18,583	$	585		$	(1,598	)	$	—		$	77		$	59,651

See Notes to the Unaudited Consolidated Financial Statements.

 3

 

									Accumulated
			Additional						Other						Noncontrolling			Total
(Dollars in thousands, except	Common		Paid-in-			Retained			Comprehensive			Unearned			Interest in			Stockholders’			Comprehensive
per share data)	Stock		Capital			Earnings			Gain (Loss)			ESOP			Subsidiary			Equity			Income
Balance at January 1, 2011	$	30	$	42,016		$	18,140		$	(128	)	$	(1,555	)	$	84		$	58,587
Comprehensive income (loss):
Net income		—		—			804			—			—			23			827		$	827
Unrealized gain on securities available-for-sale, net of tax of $316		—		—			—			489			—			—			489			489
Reclassification adjustment on sales of securities available-for-sale, net of tax of $(23)		—		—			—			(35	)		—			—			(35	)		(35	)
Stock repurchases		—		(23	)		—			—			—			—			(23	)
ESOP shares committed to be released		—		(42	)		—			—			129			—			87
Stock-based compensation expense		—		187			—			—			—			—			187
Stock awards issued		—		(79	)		—			—			—			—			(79	)
Distribution to noncontrolling shareholder		—		—			—			—			—			(56	)		(56	)
Dividends paid ($0.09 per share)		—		—			(262	)		—			—			—			(262	)
Total comprehensive income																						1,281
Less: Comprehensive income attributable to the noncontrolling interest in subsidiary																						23
Comprehensive income attributable to FedFirst Financial Corporation																					$	1,258
Balance at September 30, 2011	$	30	$	42,059		$	18,682		$	326		$	(1,426	)	$	51		$	59,722

See Notes to the Unaudited Consolidated Financial Statements.

 4

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the Nine Months
	Ended September 30,
(Dollars in thousands)	2011			2010
Cash flows from operating activities:
Net income of FedFirst Financial Corporation	$	804		$	964
Adjustments to reconcile net income to net cash provided by operating activities:
Noncontrolling interest in net income of consolidated subsidiary		23			49
Provision for loan losses		775			600
Depreciation		420			395
Amortization of intangibles		82			83
Net loss on sales of available-for-sale securities		1			5
Net loss on sale of real estate owned		14			24
Net amortization of security premiums and loan costs		293			97
Noncash expense for ESOP		87			65
Noncash expense for stock-based compensation		187			221
Increase in bank-owned life insurance		(201	)		(212	)
Decrease (increase) in other assets		1,142			(46	)
Increase (decrease) in other liabilities		100			(382	)
Net cash provided by operating activities		3,727			1,863
Cash flows from investing activities:
Net loan (originations) repayments		(16,838	)		7,377
Proceeds from maturities of and principal repayments of securities available-for-sale		17,733			15,584
Proceeds from sales of securities available-for-sale		2,006			8,096
Purchases of securities available-for-sale		—			(8,146	)
Purchases of premises and equipment		(385	)		(346	)
Decrease in FHLB stock, at cost		935			—
Proceeds from sales of real estate owned		280			292
Net cash provided by investing activities		3,731			22,857
Cash flows from financing activities:
Net decrease in short-term borrowings		(4,200	)		(1,800	)
Proceeds from long-term borrowings		—			12,000
Repayments of long-term borrowings		(22,061	)		(47,122	)
Net increase in deposits		19,749			11,813
Decrease in advance payments by borrowers for taxes and insurance		(258	)		(258	)
Purchases of common stock to be held in treasury		—			(16	)
Proceeds from stock offering, net of expenses		—			15,368
Dividends paid		(262	)		—
Distribution to noncontrolling shareholder		(56	)		(51	)
Net cash used in financing activities		(7,088	)		(10,066	)
Net increase in cash and cash equivalents		370			14,654
Cash and cash equivalents, beginning of period		9,320			7,496
Cash and cash equivalents, end of period	$	9,690		$	22,150
Supplemental cash flow information:
Cash paid for:
Interest on deposits and borrowings	$	3,972		$	5,521
Income tax expense		66			488
Real estate acquired in settlement of loans		364			934
Retirement of common stock held in treasury		—			3,149
Securities purchased not settled		4,790			—

See Notes to the Unaudited Consolidated Financial Statements.

 5

 

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.

The Company completed its conversion from the mutual holding company form of organization to the stock holding company form on September 21, 2010. As a result of the conversion, FedFirst Financial Corporation, a newly formed state-chartered corporation, became the holding company for First Federal Savings Bank, and FedFirst Financial Mutual Holding Company and the former FedFirst Financial Corporation ceased to exist. As part of the conversion, all outstanding shares of the former FedFirst Financial Corporation common stock (other than those owned by FedFirst Financial Mutual Holding Company) were converted into the right to receive 0.4735 of a share of the newly formed FedFirst Financial Corporation common stock resulting in 1,270,484 shares issued in the exchange. In addition, a total of 1,722,185 shares of common stock were sold in the subscription, community and syndicated community offerings at the price of $10.00 per share or $17.2 million in the aggregate. The completion of the Company’s public offering raised $15.4 million in proceeds, net of $1.9 million in offering expenses.

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 eight locations in southwestern Pennsylvania. Pursuant to its notice filed with the Office of Thrift Supervision (“OTS”) on July 15, 2011, the Bank closed its Park Centre office on October 21, 2011. 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. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“the Act”), on July 21, 2011 the Office of the Comptroller of the Currency (“OCC”) assumed responsibility from the OTS for the ongoing examination, supervision, and regulation of federal savings associations and rulemaking for all savings associations. In addition, the Act transferred OTS functions related to the supervision of savings association holding companies to the Board of Governors of the Federal Reserve System.

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, 2010. The results of operations for the three and nine months ended September 30, 2011 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.

 6

 

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 2011-02 A Creditor’s Determination of Whether A Restructuring Is a Troubled Debt Restructuring. In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-02, A Creditor’s Determination of Whether A Restructuring Is a Troubled Debt Restructuring, which clarifies when a loan modification or restructuring is considered a troubled debt restructuring (TDR). In evaluating whether a modification or restructuring constitutes a TDR, a creditor must separately conclude that both the restructuring constitutes a concession and the borrower is experiencing financial difficulties. To provide greater consistency and transparency in reporting TDRs, this ASU clarifies the guidance on a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. For public companies, the new guidance is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption. Early application is permitted.The Company has determined that the adoption of this ASU did not have a material impact on its financial condition and results of operations.

ASU 2011-04 Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.  The ASU is the result of joint efforts by the FASB and International Accounting Standards Board (“IASB”) to develop a single, converged fair value framework on how (not when) to measure fair value and on what disclosures to provide about fair value measurements. While the ASU is largely consistent with existing fair value measurement principles in U.S. GAAP, it expands existing disclosure requirements for fair value measurements and makes other amendments to ASC 820, Fair Value Measurement. Many of these amendments were made to eliminate unnecessary wording differences between U.S. GAAP and IFRSs. However, some could change how the fair value measurement guidance in ASC 820 is applied. The ASU is effective for interim and annual periods beginning after December 15, 2011. The Company has determined the adoption of this ASU will not have a material impact on its financial condition and results of operation.

ASU 2011-05 Presentation of Comprehensive Income. In September 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, which revises the manner in which entities present comprehensive income in their financial statements. The new guidance eliminates the option to present components of other comprehensive income as part of the Statements of Changes to Stockholders’ Equity and requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. Under the two-statement approach, the first statement would include components of net income, which is consistent with the income statement format used today, and the second statement would include components of other comprehensive income (OCI). The ASU does not change the items that must be reported in OCI. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Guidance must be applied retrospectively for all periods presented in the financial statements. Early adoption is permitted. The Company has determined the adoption of this ASU will not have a material impact on its financial condition and results of operation.

 7

 

ASU 2011-08 Testing for Goodwill for Impairment. In September 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment, which amends the guidance on testing goodwill impairment. Under the revised guidance, entities testing goodwill for impairment have the option of performing a qualitative assessment before calculating the fair value of the reporting unit (i.e. step 1 of the goodwill impairment test). If entities determine, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, the two-step impairment test would be required. The ASU does not change how goodwill is calculated or assigned to reporting units, nor does it revise the requirement to test goodwill annually for impairment. In addition, the ASU does not amend the requirement to test goodwill for impairment between annual tests if events or circumstances warrant; however, it does revise the examples of events and circumstances that an entity should consider. This ASU is effective for annual and interim goodwill impairment tests performed for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The Company has  determined the adoption of this ASU will not have a material impact on its 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
September 30, 2011	Cost		Gains		Losses		Value
Municipal bonds	$	3,374	$	386	$	—	$	3,760
Mortgage-backed		24,903		1,434		1		26,336
REMICs		26,592		1,292		1		27,883
Corporate debt		3,995		—		2,573		1,422
Equities		4		—		—		4
Total securities available-for-sale	$	58,868	$	3,112	$	2,575	$	59,405
December 31, 2010
Government-Sponsored Enterprises	$	7,580	$	36	$	2	$	7,614
Municipal bonds		4,012		284		—		4,296
Mortgage-backed		32,747		1,306		64		33,989
REMICs		30,580		1,095		110		31,565
Corporate debt		3,995		—		2,755		1,240
Equities		4		—		—		4
Total securities available-for-sale	$	78,918	$	2,721	$	2,931	$	78,708

The amortized cost and fair value of securities at September 30, 2011 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 in one year or less	$	—	$	—
Due from one to five years		3,382		3,767
Due from five to ten years		9,211		9,431
Due after ten years		46,271		46,203
No scheduled maturity		4		4
Total	$	58,868	$	59,405

 8

 

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
September 30, 2011	Securities		Value		Losses			Securities		Value		Losses			Securities		Value		Losses
Mortgage-backed		1	$	7		$	1		—	$	—		$	—		1	$	7		$	1
REMICs - Government-sponsored enterprises		1		1,614			1		—		—			—		1		1,614			1
Corporate debt		—		—			—		3		1,422			2,573		3		1,422			2,573
Total securities temporarily impaired		2	$	1,621		$	2		3	$	1,422		$	2,573		5	$	3,043		$	2,575
	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, 2010	Securities		Value		Losses			Securities		Value		Losses			Securities		Value		Losses
Government-sponsored enterprises		1	$	2,292		$	2		—	$	—		$	—		1	$	2,292		$	2
Mortgage-backed		3		8,168			64		—		—			—		3		8,168			64
REMICs - Government-sponsored enterprises		2		4,895			110		—		—			—		2		4,895			110
Corporate debt		—		—			—		3		1,240			2,755		3		1,240			2,755
Total securities temporarily impaired		6	$	15,355		$	176		3	$	1,240		$	2,755		9	$	16,595		$	2,931

The Company reviews its investment portfolio on a quarterly basis for indications of impairment. 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.

Corporate Debt – At September 30, 2011, the Company had three securities that were in an unrealized loss position for 12 months or greater at an amount of $2.6 million. These securities consist of two pools of insurance company-issued preferred trust obligations. These securities were downgraded from their original rating issuance to below investment grade. 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.

 9

 

The following table provides additional information related to the Company’s pooled preferred trust obligations at September 30, 2011 (dollars in thousands):

Pool	Class	Tranche		Amortized Cost		Fair Value		Unrealized Loss			S&P / Fitch 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	$	527	$	(973	)	B+/CCC		17	$	193,500	$	32,500	$	161,000	$	89,942	$	41,500
I-PreTSL II	Mezzanine		B-3		2,495		895		(1,600	)	B+/B		28		358,500		17,500		341,000		146,545		125,000
				$	3,995	$	1,422	$	(2,573	)

(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 all of the 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 and 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 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 is no OTTI on these securities at September 30, 2011.

 10

 

Other Securities – This category may include Government-Sponsored Enterprises (“GSE”) municipal bonds, mortgage-backed securities and GSE - REMICS.  At September 30, 2011, the Company had a total of two GSE - REMICS with an unrealized loss of $2,000 in these categories. These two securities were in an unrealized loss position of less than 12 months. An evaluation of the individual securities was performed whereby we reviewed all credit ratings and noted all remain at investment grade. Additionally, these securities are issued and backed by a Government-Sponsored Enterprise (“FHLMC”). The Company believes the unrealized losses are due to changes in market interest rates. The Company does not intend to sell the securities and it is more likely than not to not be required to sell the securities before their recovery. The Company expects to recover the entire amortized cost basis of these securities and concluded that there is no OTTI on these securities.

FHLB Stock – The Company is a member of the FHLB of Pittsburgh. As a member, the Company is required to purchase and hold stock in the FHLB to satisfy membership and borrowing requirements in order to obtain low cost products and services offered by the FHLB. Unlike investment securities, FHLB stock does not provide its holders with an opportunity for appreciation because by regulation FHLB stock can only be purchased, redeemed and transferred at par value. At September 30, 2011 and December 31, 2010, the Company’s FHLB stock totaled $5.6 million and $6.6 million, respectively.

The Company evaluates impairment in FHLB stock when certain conditions warrant further consideration. In December 2008, the FHLB voluntarily suspended dividend payments on its stock as well as the repurchase of excess stock from members. The FHLB stated that this was due to a reduction in core earnings and concern over the FHLB’s capital position. In October 2010, the FHLB initiated a repurchase program based on outstanding excess capital stock. The amount of excess capital stock repurchased from any member was the lesser of five percent of the member’s total capital stock outstanding or its excess capital stock outstanding. Based on this evaluation, the FHLB repurchased 5% of our capital stock on a quarterly basis since the fourth quarter of 2010. Future repurchases of excess capital stock will be determined on a quarterly basis. After evaluating such factors as the capital adequacy of the FHLB, its overall operating performance and the FHLB’s liquidity and funding position, the Company concluded that the par value was ultimately recoverable and no impairment charge was recognized at September 30, 2011.

 11

 

Note 4.  Loans

The following table sets forth the composition of our loan portfolio at the dates indicated (dollars in thousands).

	September 30, 2011						December 31, 2010
	Amount			Percent			Amount			Percent
Real estate-mortgage:
One-to-four family residential
Originated	$	120,975			47.5	%	$	121,376			51.3	%
Purchased		16,930			6.6			20,591			8.7
Total one-to-four family residential		137,905			54.1			141,967			60.0
Multi-family
Originated		13,237			5.2			4,082			1.7
Purchased		5,156			2.0			5,261			2.2
Total multi-family		18,393			7.2			9,343			3.9
Commercial		34,252			13.4			33,732			14.2
Total real estate-mortgage		190,550			74.7			185,042			78.1
Real estate-construction:
Residential		6,078			2.4			6,787			2.9
Commercial		5,175			2.0			736			0.3
Total real estate-construction		11,253			4.4			7,523			3.2
Consumer:
Home equity
Loan-to-value ratio of 80% or less		29,402			11.5			22,628			9.6
Loan-to-value ratio of greater than 80%		8,005			3.2			8,624			3.6
Total home equity		37,407			14.7			31,252			13.2
Other		1,887			0.7			2,090			0.9
Total consumer		39,294			15.4			33,342			14.1
Commercial business		13,889			5.5			10,875			4.6
Total loans	$	254,986			100.0	%	$	236,782			100.0	%
Net premiums on loans purchased		127						116
Net deferred loan costs		669						697
Loans in process		(6,892	)					(4,716	)
Allowance for loan losses		(3,119	)					(2,824	)
Loans, net	$	245,771					$	230,055

 12

 

One-to-Four Family Residential Mortgage Loans. We originate mortgage loans to enable borrowers to purchase or refinance existing homes located in the greater Pittsburgh metropolitan area. We offer fixed and adjustable rate mortgage loans with terms up to 30 years.

We generally do not make conventional loans with loan-to-value ratios exceeding 97%. Loans with loan-to-value ratios in excess of 80% generally require private mortgage insurance or additional collateral. We require all properties securing mortgage loans to be appraised by a board-approved, independent appraiser. We generally require title insurance on all first mortgage loans. Borrowers must obtain hazard insurance, and flood insurance for loans on property located in a flood zone, before closing the loan.

Prior to 2006, we purchased newly originated single family, fixed-rate mortgage loans to supplement our origination activities. The properties securing the loans are located in 13 states around the country. We underwrote all of the purchased loans to the same standards as loans originated by us.

Commercial and Multi-Family Real Estate Loans. We offer a variety of fixed and adjustable rate mortgage loans secured by commercial property and multi-family real estate. These loans generally have terms of ten years with a 20 year amortization and are typically secured by apartment buildings, office buildings, or manufacturing facilities. Loans are secured by first mortgages, and amounts generally do not exceed 80% of the property’s appraised value. In addition to originating these loans, we also participate in loans originated at other financial institutions in the region.

Prior to 2006, we purchased newly originated multi-family real estate loans as part of our efforts to increase our loan portfolio. The properties securing the loans are located in six states throughout the country. We underwrote all of the purchased loans to the same standards as loans originated by us.

We have generally required that the properties securing these real estate loans have a debt service coverage ratio (cash flow available to service debt / debt service) of at least 1.25x and a leverage ratio (debt to worth) of less than 3.0x. Environmental surveys are obtained for requests greater than $1.0 million or when circumstances suggest the possibility of the presence of hazardous materials.

We underwrite all commercial loan participations to the same standards as loans originated by us. In addition, we also consider the financial strength and reputation of the lead lender. We require the lead lender to provide a full closing package as well as annual financial statements for the borrower and related entities so that we can conduct an annual loan review for all loan participations.

Construction Loans. We originate loans to individuals to finance the construction of residential dwellings. We also make loans for the construction of commercial properties, including apartment buildings and owner-occupied properties used for businesses. Our construction loans generally provide for the payment of interest-only during the construction phase, which is usually 12 months. At the end of the construction phase, the loan generally converts to a permanent mortgage loan. Loans generally can be made with a maximum loan-to-value ratio of 97% on residential construction and 80% on commercial construction. Loans with loan-to-value ratios in excess of 80% on residential construction generally require private mortgage insurance or additional collateral. Before making a commitment to fund a construction loan, we require an appraisal of the property by an independent licensed appraiser. We also will require an inspection of the property before disbursement of funds during the term of the construction loan.

Consumer Loans. Our consumer loans include home equity installment loans and lines of credit as well as other consumer loans including loans on savings accounts and personal lines of credit and installment loans.

The procedures for underwriting consumer loans include an assessment of the applicant’s payment history on other debts and ability to meet existing obligations and payments on the proposed loan. Although the applicant’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount.

We offer home equity installment loans and home equity lines of credit. In 2007, we discontinued offering home equity loans with a maximum loan-to-value ratio greater than 100%. Home equity lines of credit have adjustable rates of interest that are indexed to the prime rate as reported in The Wall Street Journal. Home equity installment loans have fixed interest rates and terms that range up to 30 years. Home equity loans with a loan-to-value ratio greater than 80% are considered higher risk given the pressure on property values and reduced credit alternatives available to leveraged borrowers.

 13

 

We offer secured consumer loans in amounts up to $20,000. These loans have fixed interest rates and terms that range from one to 10 years. We offer unsecured consumer loans in amounts up to $10,000. These loans have fixed interest rates and terms that range from one to five years.

Commercial Business Loans. We originate commercial business loans to professionals and small businesses in our market area. We offer installment loans for a variety of business needs including capital improvements and equipment acquisition. Other commercial loans are secured by business assets such as accounts receivable, inventory, and equipment, and are typically backed by the personal guarantee of the borrower. We originate working capital lines of credit to finance the short-term needs of businesses. These credit lines are repaid by seasonal cash flows from operations and are also typically backed by the personal guarantee of the borrower. We also originate commercial leases through a Pittsburgh area machinery and equipment leasing company. These leases are secured by machinery and equipment.

When evaluating commercial business loans, we perform a detailed financial analysis of the borrower and/or guarantor which includes, but is not limited to: cash flow and balance sheet analysis, debt service capabilities, review of industry (geographic and economic conditions) and collateral analysis. We independently underwrite in accordance with our commercial loan policy all of the equipment leases that we originate through the third-party leasing company.

Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself. A debt service coverage ratio of at least 1.25x and a leverage ratio of less than 3.0x are also applicable to commercial business loans. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value. We also maintain allowable advance rates for each collateral type to ensure coverage.

 14

 

Nonperforming Assets.  The following table provides information with respect to our nonperforming assets at the dates indicated (dollars in thousands).

	September 30,			December 31,
	2011			2010
Nonaccrual loans:
Real estate - mortgage loans
One-to-four family residential
Originated	$	—		$	332
Purchased		1,759			394
Total one-to-four family residential		1,759			726
Multi-family
Originated		—			—
Purchased		—			—
Total multi-family		—			—
Commercial		568			493
Total real estate - mortgage		2,327			1,219
Real estate - construction loans
Residential		—			—
Commercial		—			—
Total real estate - construction		—			—
Consumer loans
Home equity
Loan-to-value ratio of 80% or less		123			—
Loan-to-value ratio of greater than 80%		33			—
Total home equity		156			—
Other		—			—
Total consumer		156			—
Commercial business		—			—
Total nonaccrual loans		2,483			1,219
Accruing loans past due 90 days or more		—			—
Total nonaccrual loan and accruing loans past due 90 days or more		2,483			1,219
Real estate owned		393			426
Total nonperforming assets	$	2,876		$	1,645
Troubled debt restructurings
In nonaccrual status		465			493
Performing under modified terms		659			672
Troubled debt restructurings	$	1,124		$	1,165
Total nonperforming loans to total loans		0.97	%		0.51	%
Total nonperforming assets to total assets		0.84			0.48

 15

 

At September 30, 2011 nonaccrual loans consisted primarily of 10 purchased residential mortgage loans that totaled $1.8 million. The nonaccrual purchased residential loans include one relationship comprised of six loans totaling $1.3 million. Eight of the nonaccrual residential mortgage loans were in process of foreclosure at September 30, 2011. Additionally, nonaccrual loans included two commercial real estate relationships, which consisted of three loans in the amount of $568,000, and two home equity loans in the amount of $156,000.

At December 31, 2010 nonaccrual loans consisted primarily of seven residential mortgage loans that totaled $726,000, of which four were originated internally in the amount of $332,000 and three were purchased in the amount of $394,000. Of these loans, one internally originated and one purchased residential mortgage loan in the amounts of $160,000 and $231,000, respectively, were in process of foreclosure at December 31, 2010. Additionally, nonaccrual loans included one commercial real estate relationship which consisted of two loans totaling $493,000.

Loans whose contractual terms have been restructured in a manner which grants a concession to a borrower experiencing financial difficulties are considered troubled debt restructurings (TDRs). TDRs typically result from our loss mitigation activities and could include rate reductions, principal forgiveness, forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of collateral.

The Bank had two relationships classified as troubled debt restructurings at September 30, 2011 and December 31, 2010 summarized as follows:

● One relationship composed of two commercial real estate loans with a total balance of $465,000 and $493,000 at September 30, 2011 and December 31, 2010, respectively. The borrower was experiencing financial difficulties and was given a six month interest-only payment concession in 2010. After conclusion of the interest-only period in 2011, the borrower was unable to consistently make regular loan payments and defaulted on the loans. The Bank is in the process of foreclosing on the collateral securing the loans. This relationship was evaluated for impairment and it was determined based on an appraisal of the underlying loan collateral that a specific allowance was not necessary because there was sufficient collateral to cover the outstanding loan balance. These loans are included in total nonaccrual loans in the previous table.

● One commercial real estate participation loan with a balance of $659,000 and $672,000 at September 30, 2011 and December 31, 2010, respectively. Because the borrower believed they would be unable to obtain financing to pay the loan in full upon original maturity in 2010, the loan was modified through a forbearance agreement in 2010 by extending the maturity date by three years to 2013. This loan has demonstrated performance under the modified terms and therefore was in a performing (accrual) status.  This relationship was evaluated for impairment and it was determined that a $170,000 specific allowance was necessary due to a decline in the underlying collateral as determined by a recent appraisal on the property.

Once a loan is classified as a TDR, the determination of income recognition is based on the status of the loan prior to classification. If a loan is in nonaccrual status, then it will remain in that classification for a minimum of six months until uncertainty with respect to collectability no longer exist. Loans that are current at the time of classification will remain on an accrual basis and monitored. If restructured contractual terms of a loan are not met, then the loan will be placed on nonaccrual status.

 16

 

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
September 30, 2011		Investment		Balance		Allowance		Investment		Recognized
Impaired loans with no related allowance recorded
One-to-four family purchased residential	��	$	1,287	$	1,287	$	—	$	1,290	$	11
Commercial real estate			689		689		—		706		13
Other consumer			11		11		—		12		1
Impaired loans with an allowance recorded
Commercial real estate			1,078		1,078		193		1,089		44
Home equity (loan-to-value ratio of 80% or less)			142		142		9		143		7
Commercial business			353		353		43		361		12
One-to-four family purchased residential		$	1,287	$	1,287	$	—	$	1,290	$	11
Commercial real estate			1,767		1,767		193		1,795		57
Home equity (loan-to-value ratio of 80% or less)			142		142		9		143		7
Other consumer			11		11		—		12		1
Commercial business			353		353		43		361		12
Total impaired loans		$	3,560	$	3,560	$	245	$	3,601	$	88

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
December 31, 2010	Investment		Balance		Allowance		Investment		Recognized
Impaired loans with no related allowance recorded
Commercial real estate	$	493	$	493	$	—	$	547	$	4
Impaired loans with an allowance recorded
Commercial real estate		672		672		170		680		32
Total impaired loans
Commercial real estate	$	1,165	$	1,165	$	170	$	1,227	$	36

Federal regulations require us to review and classify our assets on a regular basis. In addition, the OCC has the authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. “Substandard” assets have one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. “Doubtful” assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified “loss” is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. The regulations also provide for a “special mention” category, described as assets which do not currently expose us to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving our close attention. When we classify an asset as substandard or doubtful, we establish a general valuation allowance for loan losses and in some cases charge-off a portion of loans classified as doubtful. If we classify an asset as loss, we charge-off an amount equal to 100% of the portion of the asset classified loss.

 17

 

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
	One-to-		One-to-												Home		Home
	four		four												equity (loan-		equity (loan-
	family		family		Multi-		Multi-								to-value		to-value ratio				Com-
	residential		residential		family		family		Com-		Resi-		Com-		ratio of		of greater		Other		mercial		Loans
September 30, 2011	(originated)		(purchased)		(originated)		(purchased)		mercial		dential		mercial		80% or less)		than 80%)		Consumer		business		Total
Grade:
Pass	$	120,712	$	15,171	$	13,237	$	5,156	$	30,259	$	6,078	$	5,175	$	29,137	$	7,972	$	1,876	$	13,536	$	248,309
Special Mention		263		—		—		—		2,122		—		—		—		—		—		—		2,385
Substandard		—		1,759		—		—		1,871		—		—		265		33		11		353		4,292
Doubtful		—		—		—		—		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—		—		—		—		—
Total	$	120,975	$	16,930	$	13,237	$	5,156	$	34,252	$	6,078	$	5,175	$	29,402	$	8,005	$	1,887	$	13,889	$	254,986

	Real estate - mortgage										Real estate- construction				Consumer
	One-to-		One-to-												Home		Home
	four		four												equity (loan-		equity (loan-
	family		family		Multi-		Multi-								to-value		to-value ratio				Com-
	residential		residential		family		family		Com-		Resi-		Com-		ratio of		of greater		Other		mercial		Loans
December 31, 2010	(originated)		(purchased)		(originated)		(purchased)		mercial		dential		mercial		80% or less)		than 80%)		Consumer		business		Total
Grade:
Pass	$	121,044	$	20,197	$	4,082	$	5,261	$	29,518	$	6,787	$	736	$	22,483	$	8,624	$	2,077	$	10,196	$	231,005
Special Mention		—		—		—		—		2,319		—		—		145		—		13		679		3,156
Substandard		332		394		—		—		1,895		—		—		—		—		—		—		2,621
Doubtful		—		—		—		—		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—		—		—		—		—
Total	$	121,376	$	20,591	$	4,082	$	5,261	$	33,732	$	6,787	$	736	$	22,628	$	8,624	$	2,090	$	10,875	$	236,782

 18

 

At September 30, 2011, special mention assets were $2.4 million and consisted of three relationships. The three relationships consisted of four commercial real estate loans and one mortgage loan totaling $2.1 million and $263,000, respectively. Substandard assets were $4.3 million and consisted of $2.5 million of non-accrual loans, two commercial real estate loans in the amount of $884,000 and one relationship that totaled $924,000 and consisted of two commercial real estate loans totaling $419,000, three business loans totaling $353,000 and two consumer loans totaling $153,000. Nonaccrual loans consisted of $1.8 million of residential mortgage loans, $568,000 of commercial real estate loans, and $156,000 of home equity loans. The nonaccrual residential loans included one purchased relationship comprised of six loans totaling $1.3 million.

At December 31, 2010, special mention assets were $3.2 million and consisted of five relationships. One relationship totaled $970,000 and consisted of three commercial real estate loans, three business loans and two consumer loans. The remaining four relationships consist of five commercial real estate loans totaling $2.1 million. Substandard assets were $2.6 million and consisted of $1.2 million of non-accrual loans and two commercial real estate loans in the amount of $1.4 million. Nonaccrual loans consisted of $726,000 of residential mortgage loans and $493,000 of commercial real estate loans.

 19

 

Delinquencies. The following table provides information about delinquencies in our loan portfolio at the dates indicated (dollars in thousands).

	September 30, 2011						December 31, 2010
	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	$	—	$	—	$	—	$	1,109	$	59	$	332
Purchased		—		140		1,759		260		168		394
Total one-to-four family residential		—		140		1,759		1,369		227		726
Multi-family
Originated		—		—		—		—		—		—
Purchased		—		—		—		—		—		—
Total multi-family		—		—		—		—		—		—
Commercial		—		—		568		753		—		68
Total real estate - mortgage		—		140		2,327		2,122		227		794
Real estate - construction
Residential		—		—		—		—		—		—
Commercial		—		—		—		—		—		—
Total real estate - construction		—		—		—		—		—		—
Consumer
Home equity
Loan-to-value ratio of 80% or less		20		—		123		89		133		—
Loan-to-value ratio of greater than 80%		—		—		33		—		32		—
Total home equity		20		—		156		89		165		—
Other		9		—		—		2		—		—
Total consumer		29		—		156		91		165		—
Commercial business		—		286		—		—		—		—
Total delinquencies	$	29	$	426	$	2,483	$	2,213	$	392	$	794

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.

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Allowance on Impaired Loans. We establish an allowance for loans that are individually evaluated and determined to be impaired. The allowance is determined by utilizing one of the three impairment measurement methods. A loan is impaired when, based upon current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest according to the contractual terms of the loan agreement. Management performs individual assessments of larger impaired loans to determine the existence of loss exposure and, where applicable, the extent of loss exposure based upon the present value of expected future cash flows available to pay the loan, or based upon the estimated realizable collateral where a loan is collateral dependent. Generally, loans excluded from the individual impairment analysis are collectively evaluated by management to estimate reserves for loan losses inherent in those loans.

At September 30, 2011, there were five loan relationships that were individually evaluated for impairment, of which two are considered TDRs. The two relationships that are considered TDRs are summarized as follows:

● One relationship composed of two commercial real estate loans with a total balance of $465,000 in which the borrower was experiencing financial difficulties and was given a six month interest-only payment concession in 2010. After conclusion of the interest-only period in 2011, the borrower was unable to consistently make regular loan payments and defaulted on the loans. The Bank is in the process of foreclosing on the collateral securing the loans. This relationship was evaluated for impairment and it was determined based on an appraisal of the underlying loan collateral that a specific allowance was not necessary because there was sufficient collateral to cover the outstanding loan balance. These loans are included in total nonaccrual loans.

● One commercial real estate participation loan with a balance of $659,000. Because the borrower believed they would be unable to obtain financing to pay the loan in full upon original maturity in 2010, the loan was modified through a forbearance agreement in 2010 by extending the maturity date by three years to 2013. This loan has demonstrated performance under the modified terms and therefore was in a performing (accrual) status.  This relationship was evaluated for impairment and it was determined that a $170,000 specific allowance was necessary due to a decline in the underlying collateral as determined by a recent appraisal on the property.

The three relationships that are not considered TDRs are summarized as follows:

● One relationship that totaled $924,000 and consisted of two commercial real estate loans totaling $419,000, three business loans totaling $353,000 and two consumer loans totaling $153,000 that has been deemed impaired based on the current financial standing of the borrower. It was determined based on appraisals of the underlying loan collateral and valuation of the other business assets securing the commercial business loans that a $75,000 specific allowance was necessary. The specific allowance was based on the current information available and the Company is in the process of obtaining updated property appraisals and business asset valuations. Once updated information is received, a further analysis will be performed to determine whether the specific allowance is appropriate.

● One purchased residential mortgage relationship consisting of six loans totaling $1.3 million that has been deemed impaired due to the borrower no longer making payments. It was determined based on an appraisal of the underlying loan collateral that there was sufficient collateral to cover the outstanding loan balance and, therefore, a specific allowance was not established.

● One commercial real estate relationship totaling $225,000 that has been deemed impaired based on the current financial standing of the borrower. It was determined based on an appraisal of the underlying loan collateral that there was sufficient collateral to cover the outstanding loan balance and, therefore, a specific allowance was not established.

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Allowance on the Remainder of the Loan Portfolio. We establish another 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.

● 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, including: changes in lending policies and procedures; changes in the nature and volume of the loan portfolio; changes in experience, ability and depth of loan management; changes in the volume and severity of past due loans, nonaccrual loans and adversely graded or classified loans; changes in the quality of the loan review system; changes in the value of underlying collateral for collateral dependent loans; existence of or changes in concentrations of credit; changes in economic or business conditions; and effect of competition, legal and regulatory requirements on estimated credit losses.

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. In 2011, the qualitative factor related to changes in adversely graded loans was adjusted to include a factor for special mention loans. In addition, in 2011 and 2010, the historical loss factors were adjusted for each group of loans to place more emphasis on recent loss and expected experience instead of a utilizing a historical three to four year average. In addition, the qualitative factor related to changes in underlying collateral was adjusted in 2010 due to the current real estate conditions outside the Bank’s footprint, specifically in the Michigan area where the majority of our delinquent purchased loans are located.

At September 30, 2011, the allowance for loan losses to total loans ratio was 1.22% compared to 1.19% at December 31, 2010. The increase is primarily due to loan growth and the qualitative factor change related to special mention loans previously noted.

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The following table summarizes the activity in the allowance for loan losses for the three and nine months ended September 30, 2011 (dollars in thousands):

	Real estate - mortgage														Real estate-construction							Consumer
	One-to- four family residential (originated)			One-to- four family residential (purchased)			Multi- family (originated)			Multi- family (purchased)			Com- mercial			Resi- dential			Com- mercial				Home equity (loan- to-value ratio of 80% or less)			Home equity (loan- to-value ratio of greater than 80%)			Other Consumer			Com- mercial business			Unal- located			Total
Loan Balance	$	120,975		$	16,930		$	13,237		$	5,156		$	34,252		$	6,078		$	5,175			$	29,402		$	8,005		$	1,887		$	13,889					$	254,986
Allowance for loan losses:
June 30, 2011	$	553		$	392		$	28		$	126		$	895		$	11		$	1			$	370		$	279		$	25		$	198		$	116		$	2,994
Charge-offs		—			136			—			—			—			—			—				—			64			—			—			—			200
Recoveries		—			—			—			—			—			—			—				—			—			—			—			—			—
Provision		(17	)		186			12			(1	)		(24	)		(2	)		7				16			60			(1	)		57			32			325
September 30, 2011	$	536		$	442		$	40		$	125		$	871		$	9		$	8			$	386		$	275		$	24		$	255		$	148		$	3,119
December 31, 2010	$	558		$	433		$	12		$	127		$	804		$	10		$	1			$	294		$	292		$	26		$	171		$	96		$	2,824
Charge-offs		—			411			—			—			—			—			—				—			64			7			—			—			482
Recoveries		—			1			—			—			—			—			—				—			—			1			—			—			2
Provision		(22	)		419			28			(2	)		67			(1	)		7				92			47			4			84			52			775
September 30, 2011	$	536		$	442		$	40		$	125		$	871		$	9		$	8			$	386		$	275		$	24		$	255		$	148		$	3,119
Individually evaluated for impairment	$	—		$	—		$	—		$	—		$	193		$	—		$	—			$	9		$	—		$	—		$	43		$	—		$	245
Collectively evaluated on historical loss experience		160			215			—			79			58			—			—				101			120			18			2			—			753
Collectively evaluated on qualitative factors		376			227			40			46			620			9			8				276			155			6			210			—			1,973
Unallocated		—			—			—			—			—			—			—				—			—			—			���			148			148
Total allowance for loan losses	$	536		$	442		$	40		$	125		$	871		$	9		$	8			$	386		$	275		$	24		$	255		$	148		$	3,119
Percent of Allowance		17.2	%		14.2	%		1.3	%		4.0	%		27.9	%		0.3	%		0.3	%			12.4	%		8.8	%		0.8	%		8.2	%		4.6	%		100.0	%
Percent of Loans (1)		47.5	%		6.6	%		5.2	%		2.0	%		13.4	%		2.4	%		2.0	%			11.5	%		3.2	%		0.7	%		5.5	%					100.0	%

(1) Represents percentage of loans in each category to total loans.

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          The following table summarizes the activity in the allowance for loan losses for the three and nine months ended September 30, 2010 (dollars in thousands):

	Real estate - mortgage														Real estate-construction							Consumer
	One-to- four family residential (originated)			One-to- four family residential (purchased)			Multi- family (originated)			Multi- family (purchased)			Com- mercial			Resi- dential			Com- mercial				Home equity (loan- to-value ratio of 80% or less)			Home equity (loan- to-value ratio of greater than 80%)			Other Consumer			Com- mercial business			Unal- located			Total
Loan Balance	$	125,598		$	21,040		$	4,365		$	5,293		$	30,614		$	3,296		$	2,415			$	20,345		$	8,742		$	2,030		$	11,580					$	235,318
Allowance for loan losses:
June 30, 2010	$	629		$	322		$	13		$	115		$	783		$	4		$	5			$	175		$	315		$	28		$	159		$	154		$	2,702
Charge-offs		64			139			—			—			—			—			—				8			19			—			—			—			230
Recoveries		—			—			—			—			—			—			—				—			—			—			—			—			—
Provision		40			192			—			—			(97	)		1			(1	)			35			13			(1	)		20			(2	)		200
September 30, 2010	$	605		$	375		$	13		$	115		$	686		$	5		$	4			$	202		$	309		$	27		$	179		$	152		$	2,672
December 31, 2009	$	641		$	323		$	12		$	117		$	647		$	4		$	4			$	168		$	321		$	31		$	160		$	81		$	2,509
Charge-offs		82			181			—			46			—			—			—				29			86			13			—			—			437
Recoveries		—			—			—			—			—			—			—				—			—			—			—			—			—
Provision		46			233			1			44			39			1			—				63			74			9			19			71			600
September 30, 2010	$	605		$	375		$	13		$	115		$	686		$	5		$	4			$	202		$	309		$	27		$	179		$	152		$	2,672
Individually evaluated for impairment	$	—		$	—		$	—		$	—		$	—		$	—		$	—			$	—		$	—		$	—		$	—		$	—		$	—
Collectively evaluated on historical loss experience		210			113			—			67			78			—			—				13			134			21			—			—			636
Collectively evaluated on qualitative factors		395			262			13			48			608			5			4				189			175			6			179			—			1,884
Unallocated		—			—			—			—			—			—			—				—			—			—			—			152			152
Total allowance for loan losses	$	605		$	375		$	13		$	115		$	686		$	5		$	4			$	202		$	309		$	27		$	179		$	152		$	2,672
Percent of Allowance		22.6	%		14.0	%		0.5	%		4.3	%		25.7	%		0.2	%		0.1	%			7.6	%		11.6	%		1.0	%		6.7	%		5.7	%		100.0	%
Percent of Loans (1)		53.4	%		8.9	%		1.9	%		2.2	%		13.0	%		1.4	%		1.0	%			8.7	%		3.7	%		0.9	%		4.9	%					100.0	%

(1) Represents percentage of loans in each category to total loans.

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Note 5.  Deposits

Deposits are summarized as follows (dollars in thousands).

	September 30, 2011					December 31, 2010
	Amount		Percent			Amount		Percent
Noninterest-bearing demand deposits	$	19,911		8.9	%	$	15,612		7.7	%
Interest-bearing demand deposits		14,506		6.5			13,584		6.7
Savings accounts		22,648		10.1			21,320		10.5
Money market accounts		60,926		27.3			58,949		29.0
Certificates of deposit		105,320		47.2			94,097		46.1
Total deposits	$	223,311		100.0	%	$	203,562		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 September 30, 2011 and December 31, 2010, we had $48.3 million and $74.7 million, respectively, in outstanding FHLB advances and $3.0 million in repurchase agreements. Our FHLB advances were comprised of fixed rate and convertible select advances. The FHLB convertible select advances are long-term borrowings that have a fixed rate for the first three or five years of the term. After the fixed rate term expires, and quarterly thereafter, the FHLB may convert the advance to an adjustable rate advance at its option. If the advance is converted to an adjustable rate advance, the Bank has the option at the conversion date or on any future quarterly rate reset date to prepay the advance with no prepayment fee. At December 31, 2010, the Company had a $1.5 million convertible select advance, which matured in March 2011. As a result, the Company did not have any convertible select advances at September 30, 2011.

In July 2010, the Company modified a $12.0 million convertible select advance that had an interest rate of 4.79% into a new five year fixed rate FHLB advance with an effective interest rate of 3.82%. The debt modification resulted in an $864,000 prepayment penalty which is deferred and amortized in future periods on a straight-line basis over the life of the new borrowing in accordance with ASC 470-50-40/55 (formerly EITF 96-19) Debtor’s Accounting for a Modification or Exchange of Debt Instruments. Based on ASC 470-50-40/55, the Company concluded that the revised terms constituted a debt modification rather than a debt extinguishment because the change in the present value of cash flows of the new borrowing changed by less than 10% compared to the present value of the remaining cash flows of the old borrowing.

 25

 

The following table sets forth borrowings based on their stated maturities and weighted average rates at the dates indicated.

	September 30, 2011						December 31, 2010
				Weighted						Weighted
				Average						Average
(Dollars in thousands)	Balance			Rate			Balance			Rate
Due in one year or less	$	8,723			4.16	%	$	22,159			3.02	%
Due in one to two years		7,567			3.72			9,805			4.22
Due in two to three years		18,000			3.60			15,717			3.68
Due in three to four years		17,000			3.56			18,000			3.41
Due in four to five years		—			—			12,000			3.82
Advances	$	51,290					$	77,681
Less: deferred premium on modification		(658	)					(788	)
Total advances	$	50,632			3.70	%	$	76,893			3.52	%

The following table sets forth information concerning our borrowings for the periods indicated.

	Nine Months			Year
	Ended			Ended
	September 30,			December 31,
(Dollars in thousands)	2011			2010
Maximum amount outstanding at any month end during the period	$	72,864		$	110,456
Average amounts outstanding during the period		60,833			90,455
Weighted average rate during the period		3.66	%		3.75	%

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.

 26

 

The following table sets forth basic and diluted earnings per common share at September 30, 2011 and 2010.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Dollars in thousands, except per share amounts)	2011		2010		2011		2010
Net income of FedFirst Financial Corporation	$	290	$	295	$	804	$	964
Weighted-average shares outstanding:
Basic		2,912,853		2,902,104		2,909,045		2,893,437
Effect of dilutive stock options and restrictive stock awards		9,199		—		8,967		—
Diluted		2,922,052		2,902,104		2,918,012		2,893,437
Earnings per share:
Basic and diluted	$	0.10	$	0.10	$	0.28	$	0.33

The dilutive effect on average shares outstanding is the result of stock options outstanding. At September 30, 2011 and September 30, 2010, options to purchase 104,334 and 98,961 shares of common stock, respectively, at a weighted average exercise price of $19.53 and $19.13 per share, respectively, were outstanding but were 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 have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of September 30, 2011 and December 31, 2010 and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to September 30, 2011 and December 31, 2010 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 majority of the Company’s securities are included in Level 2 of the fair value hierarchy. Fair values were determined by a third party pricing service using both quoted prices for similar assets, when available, and model-based valuation techniques that derive fair value based on market-corroborated data, such as instruments with similar prepayment speeds and default interest rates. In some instances, the fair value of certain securities cannot be determined using these techniques due to the lack of relevant market data. As such, these securities are valued using an alternative technique and classified within Level 3 of the fair value hierarchy.

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At September 30, 2011, Level 3 includes 10 securities with a fair value of $1.5 million. This balance is comprised of seven odd-lot mortgage-backed securities at $34,000 and three corporate debt securities at $1.4 million, which are pooled trust preferred insurance company term obligations. The mortgage-backed securities, which were AAA rated at purchase, do not have an active market due to their size and nature and as such the Company has used an alternative method to determine the fair value of these securities. The fair value has been determined using a discounted cash flow model using market assumptions, which generally include cash flow, collateral and other market assumptions. The corporate debt securities, which were rated A at purchase 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. Fair values for trust preferred securities were obtained from pricing sources with reasonable pricing transparency, taking into account other unobservable inputs related to the risks for each issuer. The pooled trust preferred corporate term obligations owned are collateralized by the trust preferred securities of insurance companies in the United States. 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. Determining the appropriate discount rate for the discounted cash flow analysis combined current and observable market spreads for comparable structured credit products with specific risks identified within each issue. The observable market spreads incorporated both credit and liquidity premiums.

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 September 30, 2011.

(Dollars in thousands)	September 30, 2011		December 31, 2010
Significant other observable inputs (Level 2)
Government-sponsored enterprises	$	—	$	7,614
Municipal bonds		3,760		4,296
Mortgage-backed		26,302		33,951
REMICs		27,883		31,565
Equities		4		4
Total significant other observerable inputs (Level 2)		57,949		77,430
Significant unobservable inputs (Level 3)
Mortgage-backed		34		38
Corporate debt		1,422		1,240
Total significant unobservable inputs (Level 3)		1,456		1,278
Total securities	$	59,405	$	78,708

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	Significant
	Unobservable Inputs
(Dollars in thousands)	(Level 3)
December 31, 2010	$	1,278
Total unrealized gains		183
Paydowns and maturities		(5	)
September 30, 2011	$	1,456

(Dollars in thousands)	September 30, 2011		December 31, 2010
The amount of total unrealized gains (losses) for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains (losses) relating to assets still held at period end	$	183	$	(836	)

The fair value of Level 2 securities at September 30, 2011 decreased $19.5 million to $57.9 million compared to $77.4 million at December 31, 2010. The decrease in fair value was primarily due to $17.7 million of calls and paydowns and $2.0 million of sales of mortgage backed securities. There were no transfers in or transfers out of Level 2 securities.

For financial assets measured at fair value on a nonrecurring basis, the following table sets forth the fair value measurements by fair value hierarchy (dollars in thousands):

Level 2	September 30, 2011		December 31, 2010
Impaired loans	$	3,315	$	995
Real estate owned		393		426

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 Level 2 inputs based on property appraisals or financial statements. The fair value of real estate owned was estimated using Level 2 inputs based on property appraisals less any projected selling costs.

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 September 30, 2011 and December 31, 2010.

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Cash and Cash Equivalents

The carrying amounts approximate the asset’s fair values.

Securities (Including Mortgage-Backed Securities)

The fair value of securities are determined by a third party pricing service using both quoted prices for similar assets, when available, and model-based valuation techniques that derive fair value based on market-corroborated data, such as instruments with similar prepayment speeds and default interest rates (Level 2). In some instances, the fair value of certain securities cannot be determined using these techniques due to the lack of relevant market data. As such, these securities are valued using an alternative technique and classified within Level 3 of the fair value hierarchy. Alternative techniques include using a discounted cash flow model using market assumptions, which generally include cash flow, collateral and other market assumptions or obtaining fair values from pricing sources with reasonable pricing transparency, taking into account other unobservable inputs related to the risks for each issuer.

Loans

The fair values for 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.

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. The FHLB of Pittsburgh issues a valuation report for convertible select advances.

Commitments to Extend Credit

These financial instruments are generally not subject to sale and estimated fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment, and the fair value determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, are not considered material for disclosure purposes. The contractual amounts of unfunded commitments are presented in the Liquidity and Capital Management section in Part I, Item 2 of this report.

 30

 

The following table sets forth the carrying amount and estimated fair value of financial instruments (dollars in thousands).

	September 30, 2011				December 31, 2010
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	9,690	$	9,690	$	9,320	$	9,320
Securities		59,405		59,405		78,708		78,708
Loans, net		245,771		255,732		230,055		236,463
FHLB stock		5,621		5,621		6,556		6,556
Accrued interest receivable		1,294		1,294		1,365		1,365
Financial liabilities:
Deposits		223,311		225,376		203,562		205,204
Borrowings		50,632		53,687		76,893		79,764
Accrued interest payable		425		425		598		598

Note 9.  Subsidiary/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.

 31

 

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
September 30, 2011
Assets	$	342,300		$	977		$	59,696		$	(60,645	)	$	342,328
Liabilities		295,393			387			24			(13,198	)		282,606
Stockholders’ equity		46,907			590			59,672			(47,447	)		59,722
December 31, 2010
Assets	$	343,469		$	1,422		$	58,695		$	(60,513	)	$	343,073
Liabilities		297,977			667			192			(14,350	)		284,486
Stockholders’ equity		45,492			755			58,503			(46,163	)		58,587
Three Months Ended September 30, 2011
Total interest income	$	3,903		$	1		$	26		$	(26	)	$	3,904
Total interest expense		1,225			—			—			(26	)		1,199
Net interest income		2,678			1			26			—			2,705
Provision for loan losses		325			—			—			—			325
Net interest income after provision for loan losses		2,353			1			26			—			2,380
Noninterest income		245			482			—			—			727
Noninterest expense		2,123			510			56			—			2,689
Undistributed net (loss) gain of subsidiary		(22	)		—			310			(288	)		—
Income (loss) before income tax expense (benefit) and noncontrolling interest in net income (loss) of consolidated subsidiary		453			(27	)		280			(288	)		418
Income tax expense (benefit)		148			(5	)		(10	)		—			133
Net income (loss) before noncontrolling interest in net loss of consolidated subsidiary		305			(22	)		290			(288	)		285
Less: Noncontrolling interest in net loss of consolidated subsidiary		(5	)		—			—			—			(5	)
Net income (loss)	$	310		$	(22	)	$	290		$	(288	)	$	290
Nine Months Ended September 30, 2011
Total interest income	$	11,746		$	3		$	77		$	(77	)	$	11,749
Total interest expense		3,876			—			—			(77	)		3,799
Net interest income		7,870			3			77			—			7,950
Provision for loan losses		775			—			—			—			775
Net interest income after provision for loan losses		7,095			3			77			—			7,175
Noninterest income		651			1,665			1			—			2,317
Noninterest expense		6,565			1,446			222			—			8,233
Undistributed net gain of subsidiary		116			—			899			(1,015	)		—
Income before income tax expense (benefit) and noncontrolling interest in net income of consolidated subsidiary		1,297			222			755			(1,015	)		1,259
Income tax expense (benefit)		375			106			(49	)		—			432
Net income before noncontrolling interest in net income of consolidated subsidiary		922			116			804			(1,015	)		827
Less: Noncontrolling interest in net income of consolidated subsidiary		23			—			—			—			23
Net income	$	899		$	116		$	804		$	(1,015	)	$	804

 32

 

(Dollars in thousands)	First Federal Savings Bank		Exchange Underwriters, Inc.		FedFirst Financial Corporation			Net Eliminations			Consolidated
Three Months Ended September 30, 2010
Total interest income	$	4,176	$	2	$	28		$	(28	)	$	4,178
Total interest expense		1,645		—		—			(28	)		1,617
Net interest income		2,531		2		28			—			2,561
Provision for loan losses		200		—		—			—			200
Net interest income after provision for loan losses		2,331		2		28			—			2,361
Noninterest income		176		496		—			—			672
Noninterest expense		2,070		462		51			—			2,583
Undistributed net gain of subsidiary		17		—		310			(327	)		—
Income before income tax expense (benefit) and noncontrolling interest in net income of consolidated subsidiary		454		36		287			(327	)		450
Income tax expense (benefit)		141		19		(8	)		—			152
Net income before noncontrolling interest in net income of consolidated subsidiary		313		17		295			(327	)		298
Less: Noncontrolling interest in net income of consolidated subsidiary		3		—		—			—			3
Net income	$	310	$	17	$	295		$	(327	)	$	295
Nine Months Ended September 30, 2010
Total interest income	$	12,769	$	6	$	83		$	(83	)	$	12,775
Total interest expense		5,363		—		—			(83	)		5,280
Net interest income		7,406		6		83			—			7,495
Provision for loan losses		600		—		—			—			600
Net interest income after provision for loan losses		6,806		6		83			—			6,895
Noninterest income		590		1,790		—			—			2,380
Noninterest expense		6,195		1,353		157			—			7,705
Undistributed net gain of subsidiary		248		—		1,013			(1,261	)		—
Income before income tax expense (benefit) and noncontrolling interest in net income of consolidated subsidiary		1,449		443		939			(1,261	)		1,570
Income tax expense (benefit)		387		195		(25	)		—			557
Net income before noncontrolling interest in net income of consolidated subsidiary		1,062		248		964			(1,261	)		1,013
Less: Noncontrolling interest in net income of consolidated subsidiary		49		—		—			—			49
Net income	$	1,013	$	248	$	964		$	(1,261	)	$	964

Note 10.  Stock Based Compensation

In 2006, the Company’s stockholders approved the 2006 Equity Incentive Plan (the “2006 Plan”). The purpose of the 2006 Plan is to promote the Company’s success and enhance its value by linking the personal interests of its employees, officers, directors and directors emeritus to those of the Company’s stockholders, and by providing participants with an incentive for outstanding performance. All of the Company’s salaried employees, officers and directors are eligible to participate in the 2006 Plan. The 2006 Plan authorizes the granting of options to purchase shares of the Company’s stock, which may be non-statutory stock options or incentive stock options, and restricted stock which is subject to restrictions on transferability and subject to forfeiture. The 2006 Plan reserved an aggregate number of 214,787 shares of which 153,419 may be issued in connection with the exercise of stock options and 61,367 may be issued as restricted stock.

In 2011, the Company’s stockholders approved the 2011 Equity Incentive Plan (the “2011 Plan”). The 2011 Plan’s details related to purpose, eligibility, and granting of shares are the same as noted above for the 2006 Plan. The 2011 Plan reserved an aggregate number of 204,218 shares of which 145,870 may be issued in connection with the exercise of stock options and 58,348 may be issued as restricted stock.

 33

 

On May 26, 2011, two directors of the Company were awarded an aggregate of 5,000 restricted shares of common stock and 12,500 options to purchase shares of common stock. The awards vest over five years at the rate of 20% per year and the stock options have a 10 year contractual life from the date of grant. The Company’s common stock closed at $15.375 per share on May 26, 2011, which is the exercise price of the options granted on that date. The market value of the restricted stock awards was approximately $77,000, before the impact of income taxes. The estimated value of the stock options was $39,000, before the impact of income taxes. The per share weighted-average fair value of stock options granted with an exercise price equal to the market value on May 26, 2011 was $3.14 using the following Black-Scholes-Merton option pricing model assumptions: expected life of seven years, expected dividend rate of 0.85%, risk-free interest rate of 2.44% and an expected volatility of 16.0%, based on historical results.

On September 27, 2011, five nonemployee directors and five executive officers of the Company were awarded an aggregate of 40,500 options to purchase shares of common stock. The awards vest over five years at the rate of 20% per year and the stock options have a 10 year contractual life from the date of grant. The Company’s common stock closed at $13.10 per share on September 27, 2011, which is the exercise price of the options granted on that date. The estimated value of the stock options was $132,000, before the impact of income taxes. The per share weighted-average fair value of stock options granted with an exercise price equal to the market value on September 27, 2011 was $3.27 using the following Black-Scholes-Merton option pricing model assumptions: expected life of seven years, expected dividend rate of 0.69%, risk-free interest rate of 1.02% and an expected volatility of 24.4%, based on historical results.

The Company recognizes expense associated with the awards over the five-year vesting period in accordance with ASC 718 Compensation - Stock Compensation and ASC 505-50 Equity-Based Payments to Non-Employees. Compensation expense was $40,000 for the three months ended September 30, 2011 compared to $72,000 for the three months ended September 30, 2010. For the nine months ended September 30, 2011, compensation expense was $187,000 compared to $221,000 for the nine months ended September 30, 2010. As of September 30, 2011, there was $344,000 of total unrecognized compensation cost related to nonvested stock-based compensation compared to $282,000 at December 31, 2010. The compensation expense at September 30, 2011 is expected to be recognized ratably over the weighted average remaining service period of 3.98 years.

	Stock Options
			Weighted		Weighted
	Number		Average		Average
	of		Exercise		Remaining
Stock-Based Compensation	Shares		Price		Term
Outstanding at January 1, 2011		98,936	$	19.13		6.06
Granted		53,000		13.64
Exercised or converted		—		—
Forfeited		—		—
Expired		—		—
Outstanding at September 30, 2011		151,936	$	17.21		6.92
Exercisable at September 30, 2011		87,914	$	20.06		5.09

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	Stock Options				Restricted Stock Awards
	Number of		Fair-Value		Number of		Fair-Value
	Shares		Price		Shares		Price
Nonvested at January 1, 2011		30,812	$	5.86		13,201	$	16.81
Granted		53,000		3.24		5,000		15.38
Vested		19,790		6.31		8,569		19.24
Forfeited		—		—		—		—
Nonvested at September 30, 2011		64,022	$	3.55		9,632	$	13.90

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, 2010.

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.

The Company completed its conversion from the mutual holding company form of organization to the stock holding company form on September 21, 2010. As a result of the conversion, FedFirst Financial Corporation, a newly formed state-chartered corporation, became the holding company for First Federal Savings Bank, and FedFirst Financial Mutual Holding Company and the former FedFirst Financial Corporation ceased to exist. As part of the conversion, all outstanding shares of the former FedFirst Financial Corporation common stock (other than those owned by FedFirst Financial Mutual Holding Company) were converted into the right to receive 0.4735 of a share of the newly formed FedFirst Financial Corporation common stock resulting in 1,270,484 shares issued in the exchange. In addition, a total of 1,722,185 shares of common stock were sold in the subscription, community and syndicated community offerings at the price of $10.00 per share. The completion of the Company’s public offering raised $15.4 million in proceeds, net of $1.9 million in offering expenses.

 35

 

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 eight locations in southwestern Pennsylvania. The Bank closed its Park Centre office on October 21, 2011. 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 September 30, 2011 were $342.3 million, a decrease of $745,000, or 0.2%, from total assets of $343.1 million at December 31, 2010.

Securities available-for-sale decreased $19.3 million, or 24.5%, to $59.4 million at September 30, 2011 compared to $78.7 million at December 31, 2010. The decrease was primarily the result of $17.7 million of calls and paydowns, including $7.6 million of calls on Government Sponsored Enterprise securities and a $635,000 partial call of a municipal bond. Other securities-related activity included the sales of $2.0 million of mortgage-backed securities. In addition, the securities portfolio reflects an unrealized gain of $537,000 at September 30, 2011 compared to an unrealized loss of $210,000 at December 31, 2010.

Loans, net, increased $15.7 million, or 6.8%, to $245.8 million at September 30, 2011 compared to $230.1 million at December 31, 2010  primarily due to an  increase of $9.1 million in multi-family loans, $6.2 million in home equity loans, and $3.0 million in commercial business loans, partially offset by a decrease of $4.1 million in residential mortgage loans

Other assets increased $3.8 million to $6.1 million at September 30, 2011 compared to $2.3 million at December 31, 2010 primarily due to the purchase of $4.8 million in securities that have not settled which included a $2.8 million municipal bond and a $2.0 million GSE.

Liabilities.  Total liabilities at September 30, 2011 were $282.6 million, compared to $284.5 million at December 31, 2010, a decrease of $1.9 million, or 0.7%.

Total deposits increased $19.7 million, or 9.7%, to $223.3 million at September 30, 2011 compared to $203.6 million at December 31, 2010. Certificates of deposit increased $11.2 million, primarily due to a 13 month certificates of deposit promotion offered in the second quarter. In addition, noninterest-bearing demand deposits increased $4.3 million, money market accounts increased $2.0 million, and savings accounts increased $1.3 million.

Borrowings decreased $26.3 million, or 34.2%, to $50.6 million at September 30, 2011 compared to $76.9 million at December 31, 2010 primarily due to the maturity of $17.5 million of long-term borrowings and $4.2 million of short-term borrowings. Funds generated through deposit growth were used to reduce borrowings.

Other liabilities increased $5.1 million to $8.0 million at September 30, 2011 compared to $3.0 million at December 31, 2010 primarily due to the purchase of $4.8 million in securities that had not settled at the end of the quarter.

Stockholders’ Equity.  Stockholders’ equity was $59.7 million at September 30, 2011, an increase of $1.1 million from December 31, 2010. Stockholders’ equity increased primarily as a result of $804,000 in net income for the nine months ended September 30, 2011 and a $454,000 increase in the fair value of the securities portfolio, net of tax. The increase was partially offset by $262,000 of dividends paid to stockholders.

 36

 

Results of Operations for the Three Months Ended September 30, 2011 and 2010

Overview.  The Company had net income of $290,000 for the three months ended September 30, 2011, compared to $295,000 for the same period in 2010.

	Three Months Ended
	September 30,
(Dollars in thousands)	2011			2010
Net income of FedFirst Financial Corporation	$	290		$	295
Return on average assets		0.34	%		0.34	%
Return on average equity		1.89			2.55
Average equity to average assets		17.85			13.24

Net Interest Income.  Net interest income for the three months ended September 30, 2011 increased $144,000 to $2.7 million compared to $2.6 million for the three months ended September 30, 2010. Net interest margin was 3.41% for the three months ended September 30, 2011 compared to 3.24% for the three months ended September 30, 2010. The improvement in net interest margin is primarily attributable to a funding shift on the Company’s balance sheet whereby a reduction in borrowings resulted in a $303,000 decrease in borrowings expense and, despite an increase in overall deposits, interest rate reductions on deposits resulted in a $115,000 decrease in deposits expense that together more than offset the decline in interest income from securities and loans.

Interest income decreased $274,000, or 6.6%, to $3.9 million for the three months ended September 30, 2011 compared to the three months ended September 30, 2010 primarily due to a decrease of 35 basis points in yield on interest-earning assets. Interest income on securities decreased $229,000 due to a decrease of 114 basis points in yield, primarily due to paydowns and sales of higher yielding mortgage-backed and REMIC securities, which were reinvested in lower yielding securities with shorter durations. Interest income on loans decreased $40,000 due to a decrease of 27 basis points in yield, which was primarily driven by payoffs and paydowns of higher yielding residential real estate and home equity loans that were replaced by originations at lower yields. The decrease in yield on loans was partially offset by an $8.7 million increase in the average balance, primarily in multifamily, home equity, and commercial business loans.

Interest expense decreased $418,000, or 25.9%, to $1.2 million for the three months ended September 30, 2011 compared to the three months ended September 30, 2010 due to a decrease of $22.2 million in the average balance and 45 basis points in cost of interest-bearing liabilities. Interest expense on borrowings decreased $303,000 due to a decrease of $32.8 million in the average balance, as funds generated from deposit growth were used to reduce borrowings. Interest expense on deposits decreased $115,000 due to a decrease of 31 basis points in cost, primarily related to the repricing of maturing certificates of deposit and money market accounts at lower rates, partially offset by an increase of $10.6 million in the average balance, primarily in certificates of deposit and money market accounts.

 37

 

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 September 30,
			2011							2010
			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)	$	242,434	$	3,298		5.44	%	$	233,690	$	3,338		5.71	%
Securities (3)		65,216		603		3.70			68,722		832		4.84
Other interest-earning assets		9,346		3		0.13			14,002		8		0.23
Total interest-earning assets		316,996		3,904		4.93			316,414		4,178		5.28
Noninterest-earning assets		26,610							32,936
Total assets	$	343,606						$	349,350
Liabilities and Stockholders’ equity:
Interest-bearing liablities:
Interest-bearing demand deposits	$	14,040		9		0.26	%	$	13,676		9		0.26	%
Savings accounts		22,930		26		0.45			22,417		28		0.50
Money market accounts		61,743		114		0.74			60,573		155		1.02
Certificates of deposit		104,809		546		2.08			96,269		618		2.57
Total interest-bearing deposits		203,522		695		1.37			192,935		810		1.68
Borrowings		53,251		504		3.79			86,048		807		3.75
Total interest-bearing liabilities		256,773		1,199		1.87			278,983		1,617		2.32
Noninterest-bearing liabilities		25,497							24,128
Total liabilities		282,270							303,111
Stockholders’ equity		61,336							46,239
Total liabilities and stockholders’ equity	$	343,606						$	349,350
Net interest income			$	2,705						$	2,561
Interest rate spread						3.06	%						2.96	%
Net interest margin						3.41							3.24
Average interest-earning assets to average interest-bearing liabilities						123.45	%						113.42	%

(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.

 38

 

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 September 30, 2011
	Compared To
	Three Months Ended September 30, 2010
	Increase (decrease) due to
(Dollars in thousands)	Volume			Rate			Total
Interest and dividend income:
Loans, net	$	121		$	(161	)	$	(40	)
Securities		(41	)		(188	)		(229	)
Other interest-earning assets		(2	)		(3	)		(5	)
Total interest-earning assets		78			(352	)		(274	)
Interest expense:
Deposits		42			(157	)		(115	)
Borrowings		(312	)		9			(303	)
Total interest-bearing liablities		(270	)		(148	)		(418	)
Change in net interest income	$	348		$	(204	)	$	144

Provision for Loan Losses.  The provision for loan losses was $325,000 for the three months ended September 30, 2011 compared to $200,000 for the three months ended September 30, 2010. The provision for loan losses was determined based on our evaluation of the loan portfolio, which considers several components to determine adequacy including, but not limited to, the quantitative and qualitative attributes of the portfolio. In the current period, the primary driver of the provision was loan growth as well as adjustments to the qualitative factors used in determining the necessary allowance for loan losses. Net charge-offs were $200,000 for the three months ended September 30, 2011 compared to $230,000 for the three months ended September 30, 2010. Charge-offs in both periods were composed primarily of purchased residential mortgage loans.

Noninterest Income.  Noninterest income increased $55,000, or 8.2%, to $727,000 for the three months ended September 30, 2011 compared to $672,000 for the three months ended September 30, 2010. Fees and service charges increased $41,000 primarily due to a prepayment penalty received on a commercial real estate loan in the current period. In addition, the prior period included a loss on the sale of real estate owned properties of $34,000.

 39

 

Noninterest Expense.  The following table summarizes noninterest expense for the periods indicated.

	Three Months Ended
	September 30,
(Dollars in thousands)	2011		2010
Compensation and employee benefits	$	1,559	$	1,463
Occupancy		370		353
FDIC insurance premiums		52		99
Data processing		140		121
Professional services		194		184
Advertising		24		26
Stationary, printing and supplies		23		27
Telephone		13		12
Postage		34		34
Correspondent bank fees		35		45
Real estate owned expense		34		23
Amortization of intangibles		27		27
All other		184		169
Total noninterest expense	$	2,689	$	2,583

Noninterest expense increased $106,000, or 4.1%, to $2.7 million for the three months ended September 30, 2011 compared to $2.6 million for the three months ended September 30, 2010. Compensation expense increased $96,000 primarily due to the Company’s supplemental executive retirement plan, which was impacted by lower interest rates, partially offset by a decrease in stock-based compensation expense due to the final vesting of 2006 restricted stock awards and options. In addition, data processing expense increased $19,000 primarily due to the utilization of additional services from the Company’s core banking service provider. Occupancy expense increased $17,000 primarily due to costs associated with the acquisition of an office building for the Company’s insurance subsidiary, Exchange Underwriters, Inc. This was partially offset by a $47,000 decrease in insurance premiums due to the Federal Deposit Insurance Corporation’s revised assessment methodology implemented in the current year.

Income Tax Expense.  Income tax expense for the three months ended September 30, 2011 decreased to $133,000 compared to $152,000 for the same period in 2010 primarily due to a $32,000 decrease in income before income tax expense.

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Results of Operations for the Nine Months Ended September 30, 2011 and 2010

Overview.  The Company had net income of $804,000 for the nine months ended September 30, 2011 compared to $964,000 for the nine months ended September 30, 2010.

	Nine Months Ended
	September 30,
(Dollars in thousands)	2011			2010
Net income of FedFirst Financial Corporation	$	804		$	964
Return on average assets		0.31	%		0.37	%
Return on average equity		1.78			2.90
Average equity to average assets		17.49			12.63

Net Interest Income. Net interest income for the nine months ended September 30, 2011 increased $455,000 to $8.0 million compared to $7.5 million for the nine months ended September 30, 2010. Net interest margin was 3.33% for the nine months ended September 30, 2011 compared to 3.11% for the nine months ended September 30, 2010. The improvement in net interest margin is primarily attributable to a funding shift on the Company’s balance sheet whereby a reduction in borrowings resulted in a $1.0 million decrease in borrowings expense and, despite an increase in overall deposits, interest rate reductions on deposits resulted in a $455,000 decrease in deposits expense that together more than offset the decline in interest income from securities and loans.

Interest income decreased $1.0 million, or 8.0%, to $11.7 million for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. Interest income on securities decreased $692,000 due to a decrease of $3.7 million in the average balance and 106 basis points in yield, primarily due to paydowns and sales of higher yielding mortgage-backed and REMIC securities, which were reinvested in lower yielding securities with shorter durations. Interest income on loans decreased $325,000 due to a decrease of 27 basis points in yield, which was primarily driven by payoffs and paydowns of higher yielding residential real estate and home equity loans that were replaced by originations at lower yields.

Interest expense decreased $1.5 million, or 28.0%, to $3.8 million for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010 due to a decrease of $24.1 million in the average balance and 52 basis points in cost of interest-bearing liabilities. Interest expense on borrowings decreased $1.0 million due to a decrease of $35.0 million in the average balance as deposit growth and funds from the completion of the stock offering were used to reduce borrowings. Interest expense on deposits decreased $455,000  due to a decrease of 41 basis points in cost, primarily related to the repricing of maturing certificates of deposit and money market accounts at lower rates, partially offset by an increase of $10.9 million in the average balance, primarily in certificates of deposit and money market accounts.

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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.

	Nine Months Ended September 30,
			2011							2010
			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)	$	238,184	$	9,788		5.48	%	$	234,488	$	10,113		5.75	%
Securities (3)		69,821		1,953		3.73			73,550		2,645		4.79
Other interest-earning assets		9,909		8		0.11			13,122		17		0.17
Total interest-earning assets		317,914		11,749		4.93			321,160		12,775		5.30
Noninterest-earning assets		26,174							29,910
Total assets	$	344,088						$	351,070
Liabilities and Stockholders’ equity:
Interest-bearing liablities:
Interest-bearing demand deposits	$	13,752		26		0.25	%	$	13,895		30		0.29	%
Savings accounts		22,457		81		0.48			22,239		83		0.50
Money market accounts		61,432		378		0.82			58,773		528		1.20
Certificates of deposit		101,947		1,644		2.15			93,792		1,943		2.76
Total interest-bearing deposits		199,588		2,129		1.42			188,699		2,584		1.83
Borrowings		60,833		1,670		3.66			95,833		2,696		3.75
Total interest-bearing liabilities		260,421		3,799		1.95			284,532		5,280		2.47
Noninterest-bearing liabilities		23,482							22,210
Total liabilities		283,903							306,742
Stockholders’ equity:		60,185							44,328
Total liabilities and stockholders’ equity	$	344,088						$	351,070
Net interest income			$	7,950						$	7,495
Interest rate spread						2.98	%						2.83	%
Net interest margin						3.33							3.11
Average interest-earning assets to average interest-bearing liabilities						122.08	%						112.87	%

(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.

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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.

	Nine Months Ended September 30, 2011
	Compared To
	Nine Months Ended September 30, 2010
	Increase (decrease) due to
(Dollars in thousands)	Volume			Rate			Total
Interest and dividend income:
Loans, net	$	155		$	(480	)	$	(325	)
Securities		(131	)		(561	)		(692	)
Other interest-earning assets		(4	)		(5	)		(9	)
Total interest-earning assets		20			(1,046	)		(1,026	)
Interest expense:
Deposits		142			(597	)		(455	)
Borrowings		(962	)		(64	)		(1,026	)
Total interest-bearing liablities		(820	)		(661	)		(1,481	)
Change in net interest income	$	840		$	(385	)	$	455

Provision for Loan Losses.  The provision for loan losses was $775,000 for the nine months ended September 30, 2011 compared to $600,000 for the nine months ended September 30, 2010. The provision for loan losses was determined based on our evaluation of the loan portfolio, which considers several components to determine adequacy including, but not limited to, the quantitative and qualitative attributes of the portfolio. In the current period, the primary driver of the provision was loan growth as well as adjustments to the qualitative factors used in determining the necessary allowance for loan losses. Net charge-offs were $480,000 for the nine months ended September 30, 2011 and were composed primarily of purchased residential mortgage loans.  In comparison, net charge-offs were $437,000 for the nine months ended September 30, 2010 and were composed primarily of residential mortgage loans and home equity loans.

Noninterest Income.  Noninterest income decreased $63,000, or 2.6%, to $2.3 million for the nine months ended September 30, 2011 compared to $2.4 million for the nine months ended September 30, 2010. Insurance commission decreased $125,000 primarily due to a decrease in contingency fee income on insurance policies. This was partially offset by a $41,000 increase in fees and service charges primarily due to a prepayment penalty received on a commercial real estate loan in the current period.

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Noninterest Expense.  The following table summarizes noninterest expense for the periods indicated.

	Nine Months Ended
	September 30,
(Dollars in thousands)	2011		2010
Compensation and employee benefits	$	4,763	$	4,400
Occupancy		1,105		1,069
FDIC insurance premiums		209		283
Data processing		392		360
Professional services		597		501
Advertising		113		105
Stationary, printing and supplies		73		88
Telephone		38		37
Postage		115		110
Correspondent bank fees		112		131
Real estate owned expense		74		25
Amortization of intangibles		82		83
All other		560		513
Total noninterest expense	$	8,233	$	7,705

Noninterest expense increased $528,000, or 6.9%, to $8.2 million for the nine months ended September 30, 2011 compared to $7.7 million for the nine months ended September 30, 2010. The change was primarily due to an increase of $363,000 in compensation expense related to the Company’s supplemental executive retirement plan, which was impacted by lower interest rates. Professional services expense increased $96,000 primarily due to costs associated with a branch facilities assessment, the annual meeting of stockholders, and fees related to the implementation of XBRL reporting requirements. In addition, real estate owned expenses increased $49,000 as a result of additional declines in property values. This was partially offset by a $74,000 decrease in insurance premiums due to the Federal Deposit Insurance Corporation’s revised assessment methodology implemented in the current year.

Income Tax Expense.  Income tax expense for the nine months ended September 30, 2011 decreased to $432,000 compared to $557,000 for the same period in 2010 primarily due to a $311,000 decrease in net income before income tax expense.

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.

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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 September 30, 2011, cash and cash equivalents totaled $9.7 million. At September 30, 2011, securities classified as available-for-sale totaled $59.4 million, which provides an additional source of liquidity. In addition, at September 30, 2011, the maximum remaining borrowing capacity at the FHLB of Pittsburgh was approximately $124.7 million. The Bank also has the ability to borrow $2.6 million from the Federal Reserve based upon eligible collateral. At September 30, 2011 and December 31, 2010, the Bank had no borrowings with the Federal Reserve.

Certificates of deposit due within one year of September 30, 2011 totaled $62.0 million, or 58.9% 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.

	September 30,
(Dollars in thousands)	2011
Loans in process	$	6,892
Unused revolving lines of credit		3,238
Unused commercial business lines of credit		8,537
Consumer commitments		547
Commercial commitments		1,622
Purchases of securities available-for-sale, not settled		4,790
Total commitments outstanding	$	25,626

In the third quarter of 2011, the Bank made a $2.1 million commercial construction loan to an affiliate of a director of the Company of which $277,000 was disbursed and the remaining $1.8 million is included as loans in process as of September 30, 2011. In addition, subsequent to September 30, 2011, the Bank signed a $1.2 million commercial real estate loan commitment with another affiliate of the same director. This loan is expected to be funded in the second quarter of 2012.

Capital Management.  The Bank is subject to various regulatory capital requirements administered by the Office of the Comptroller of the Currency (“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 September 30, 2011, 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).

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											To Be Well
						For Capital					Capitalized
						Adequacy					Under Prompt
	Actual					Purposes					Corrective Action
September 30, 2011	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital (to risk weighted assets)	$	47,674		24.86	%	$	15,342		8.00	%	$	19,177		10.00	%
Tier 1 capital (to risk weighted assets)		45,268		23.61			7,671		4.00			11,506		6.00
Tier 1 capital (to adjusted total assets)		45,268		13.28			13,632		4.00			17,040		5.00
Tangible capital (to tangible assets)		45,268		13.28			5,112		1.50			N/A		N/A
December 31, 2010	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital (to risk weighted assets)	$	46,565		25.44	%	$	14,641		8.00	%	$	18,302		10.00	%
Tier 1 capital (to risk weighted assets)		44,277		24.19			7,321		4.00			10,981		6.00
Tier 1 capital (to adjusted total assets)		44,277		12.95			13,681		4.00			17,102		5.00
Tangible capital (to tangible assets)		44,277		12.95			5,130		1.50			N/A		N/A

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Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“the Act”), on July 21, 2011 the OCC assumed responsibility from the Office of Thrift Supervision (“OTS”) for the ongoing examination, supervision, and regulation of federal savings associations and rulemaking for all savings associations. In addition, the Act transferred OTS functions related to the supervision of savings association holding companies to the Board of Governors of the Federal Reserve System.

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 nine months ended September 30, 2011, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

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 September 30, 2011, 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.

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Item 1A.  Risk Factors.

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, 2010, 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.

On September 28, 2011, the Company announced that the Board of Directors had approved a program allowing the Company to repurchase up to 150,000 shares of the Company’s outstanding common stock, which was approximately 5% of outstanding shares. This repurchase program is scheduled to expire on November 2, 2012. As of September 30, 2011, the Company had not repurchased any shares of common stock under this program.

The Company made the following purchases of its common stock during the three months ended September 30, 2011.

Period	Total Number of Shares Purchased (1)		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
July 1-31, 2011		66	$	15.00		—		—
August 1-31, 2011		1,593		13.80		—		—
September 1-30, 2011		—		—		—		—
Total		1,659		13.85		—

(1) In July and August 2011, the Company purchased 1,593 shares that were not made pursuant to a publicly announced program. It was the Company’s obligation to purchase shares from participants in the Company’s Equity Incentive Plan to cover income taxes on vested shares.

Item 3.  Defaults Upon Senior Securities.

Not applicable.

Item 4.  [Removed and Reserved]

Item 5.  Other Information.

None.

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Item 6.  Exhibits.

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 September 30, 2011, 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 and Comprehensive Income, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Unaudited Consolidated Financial Statements, tagged as blocks of text
		* Furnished, not filed.

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SIGNATURES

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:	November 14, 2011	/s/ Patrick G. O’Brien
		Patrick G. O’Brien
		President and Chief Executive Officer
Date:	November 14, 2011	/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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