UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to _______________
Commission File Number: 0-27916
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FFD FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Ohio 34-1821148
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
321 North Wooster Avenue, Dover, Ohio 44622
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(Address of principal executive offices) (Zip Code)
(330) 364-7777
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
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 [ ] Accelerated filer [ ] Smaller reporting company [X]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: November 12, 2008 - 1,072,294
common shares, no par value
1
INDEX
Page
----
PART I Item 1- FINANCIAL INFORMATION
Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Comprehensive Income 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 4T Controls and Procedures 14
PART II - OTHER INFORMATION 15
SIGNATURES 16
2
FFD Financial Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
September 30, June 30,
ASSETS 2008 2008
(Unaudited)
Cash and due from financial institutions $ 1,486 $ 1,702
Interest-bearing deposits in other financial institutions 5,569 6,347
Federal Funds Sold - 5,000
-------- --------
Cash and cash equivalents 7,055 13,049
Investment securities available for sale 5,581 5,623
Mortgage-backed securities available for sale 235 243
Mortgage-backed securities held to maturity,
fair value of $75 and $81 of September 30,
2008 and June 30, 2008, respectively 75 80
Loans receivable - net of allowance of $1,529 and $1,482 156,599 156,232
Loans held for sale 267 -
Premises and equipment, net 2,546 2,589
Federal Home Loan Bank, at cost 2,422 2,389
Loan Servicing Rights 686 663
Accrued interest receivable 633 621
Prepaid expenses and other assets 196 249
-------- --------
Total assets $176,295 $181,738
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non interest bearing $ 11,744 $ 10,729
Interest bearing 124,252 130,603
-------- --------
Total deposits 135,996 141,332
Federal Home Loan Bank advances 20,430 20,595
Accrued interest payable 156 186
Accrued and deferred federal income tax 335 174
Other liabilities 1,041 1,271
-------- --------
Total liabilities 157,958 163,558
Commitments - -
Shareholders' equity
Preferred stock - authorized 1,000,000 shares without par
value; no shares issued - -
Common stock - authorized 5,000,000 shares without par or
stated value; 1,454,750 shares issued - -
Additional paid-in capital 8,291 8,274
Retained earnings 15,486 15,331
Accumulated comprehensive loss; net (115) (83)
Treasury stock, at cost (382,456 and 384,456 treasury shares
at September 30, 2008 and June 30, 2008, respectively) (5,325) (5,342)
-------- --------
Total shareholders' equity 18,337 18,180
-------- --------
Total liabilities and shareholders' equity $176,295 $181,738
======== ========
The accompanying notes are an integral part of these statements.
3
FFD Financial Corporation
CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended September 30, 2008 and 2007
(In thousands, except per share data)
(Unaudited)
2008 2007
Interest and dividend income
Loans, including fees $2,592 $2,962
Mortgage-backed securities 5 6
Investment securities 71 42
Interest-bearing deposits and other 56 77
------ ------
2,724 3,087
Interest expense
Deposits 873 1,190
Borrowings 203 190
------ ------
1,076 1,380
------ ------
Net interest income 1,648 1,707
Provision for loan losses 105 88
------ ------
Net interest income after provision for loan losses 1,543 1,619
Noninterest income
Net gain on sale of loans 67 38
Service charges on deposit accounts 66 67
Impairment loss on securities (9) -
Other 42 33
------ ------
166 138
Noninterest expense
Employee and director compensation and benefits 552 515
Occupancy and equipment 113 134
Franchise taxes 58 58
Data processing 91 84
ATM processing 34 28
Professional and consulting fees 71 58
Postage and stationary supplies 42 27
Advertising 34 46
Checking account maintenance expense 54 53
Other 152 135
------ ------
1,201 1,138
------ ------
Income before income taxes 508 619
Income tax expense 177 211
------ ------
Net Income $ 331 $ 408
====== ======
Earnings per share
Basic $ .31 $ .37
====== ======
Diluted $ .31 $ .37
====== ======
Dividends declared per share $ .165 $ .14
====== ======
The accompanying notes are an integral part of these statements.
4
FFD Financial Corporation
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended September 30, 2008 and 2007
(In thousands)
(Unaudited)
2008 2007
Net income $331 $408
Other comprehensive income, net of related tax effects:
Unrealized holding gains (losses) on securities during
the period, net of taxes (benefits) of $(16) and $13 in
2008 and 2007, respectively (32) 25
---- ----
Comprehensive income $299 $433
==== ====
The accompanying notes are an integral part of these statements.
5
FFD Financial Corporation
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended September 30, 2008 and 2007
(In thousands)
(Unaudited)
2008 2007
Cash flows from operating activities:
Net cash from operating activities $ 182 $ 1,163
Cash flows from investing activities:
Purchase of equity investment securities (11) -
Principal repayments on mortgage-backed securities 9 11
Loan originations and payments, net (523) (3,095)
Proceeds from participation loan sales
to other financial institutions 13 1,063
Additions to premises and equipment (5) (397)
-------- -------
Net cash from investing activities (517) (2,418)
Cash flows financing activities:
Net change in deposits (5,336) (2,808)
Net change in short-term Federal Home Loan
Bank advances 1,000 3,000
Proceeds from Federal Home Loan Bank advances - 1,000
Repayments of Federal Home Loan Bank advances (1,165) (1,135)
Proceeds from exercise of stock options 18 9
Purchase of treasury stock - (148)
Cash dividends paid (176) (156)
-------- -------
Net cash from financing activities (5,659) (238)
-------- -------
Net change in cash and cash equivalents (5,994) (1,493)
Beginning cash and cash equivalents 13,049 9,033
-------- -------
Ending cash and cash equivalents $ 7,055 $ 7,540
======== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 125 $ 220
======== =======
Interest paid $ 1,106 $ 1,403
======== =======
The accompanying notes are an integral part of these statements.
6
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three-month periods ended September 30, 2008 and 2007
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements were prepared in
accordance with the instructions for Form 10-Q and, therefore, do not include
information or footnotes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with United States
generally accepted accounting principles. Accordingly, these financial
statements should be read in conjunction with the Consolidated Financial
Statements and Notes thereto of FFD Financial Corporation (the "Corporation")
included in the Corporation's Annual Report on Form 10-KSB for the year ended
June 30, 2008. However, in the opinion of management, all adjustments
(consisting of only normal recurring accruals) which are necessary for a fair
presentation of the financial statements have been included. The results of
operations for the three-month period ended September 30, 2008, are not
necessarily indicative of the results which may be expected for the entire
fiscal year.
2. Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts of the
Corporation, First Federal Community Bank (the "Bank") and Dover Service
Corporation, a wholly owned subsidiary of the Bank. All significant
intercompany items have been eliminated.
3. Earnings Per Share
------------------
Basic earnings per share is computed based upon the weighted-average common
shares outstanding during the period. Diluted earnings per common share include
the dilutive effect of additional potential common shares issuable under the
Corporation's stock option plan. Stock options for 5,700 shares of common stock
were not considered in computing diluted earnings per share for the three
months ended September 30, 2008 because they were antidilutive. The
computations are as follows:
2008 2007
Weighted-average common shares
outstanding (basic) 1,071,077 1,093,295
Dilutive effect of assumed exercise
of stock options 3,045 6,738
--------- ---------
Weighted-average common shares
outstanding (diluted) 1,074,122 1,100,033
========= =========
4. Stock Option Plan
-----------------
The FFD Financial Corporation 1996 Stock Option and Incentive Plan (the "Plan")
expired in October of 2006. Options granted prior to the expiration date remain
exercisable for ten years from the grant date, unless terminated in accordance
with the Plan or the applicable award agreement.
7
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended September 30, 2008 and 2007
4. Stock Option Plan (continued)
-----------------
A summary of the activity in the stock option plan for the quarter ended
September 30, 2008 follows:
Weighted
Weighted average
average remaining Aggregate
exercise contractual intrinsic
Shares price term value
------ -------- ----------- ---------
Outstanding at beginning of period 27,780 $10.85
Granted - -
Exercised (2,000) 9.25
Forfeited or expired - -
------ ------
Outstanding at end of period 25,780 $10.98 3.6 yrs $37,445
====== ======
Exercisable at end of period 25,780 $10.98 3.6 yrs $37,445
====== ====== =======
Options available for grant -
======
Information related to the stock option plan during the quarter ended
September 30, 2008 follows:
Intrinsic value of options exercised $ 6,000
Cash received from options exercised 18,000
Tax benefit from options exercised -
A summary of the activity in the stock option plan for the year ended June
30, 2008 follows:
Weighted
Weighted average
average remaining Aggregate
exercise contractual intrinsic
Shares price term value
------ -------- ----------- ---------
Outstanding at beginning of year 29,780 $10.75
Granted - -
Exercised (2,000) 9.25
Forfeited or expired - -
------ ------
Outstanding at end of year 27,780 $10.85 3.8 yrs $57,888
====== ====== =======
Exercisable at end of year 27,780 $10.85 3.8 yrs $57,888
====== ====== =======
Options available for grant -
======
Information related to the stock option plan for the year ended June 30, 2008
follows:
Intrinsic value of options exercised $12,000
Cash received from options exercised 18,000
Tax benefit from options exercised -
8
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended September 30, 2008 and 2007
5. Recent Accounting Developments
------------------------------
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements..
The Statement defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. The Statement
establishes a fair value hierarchy about the assumptions used to measure fair
value and clarifies assumptions about risk and the effect of a restriction on
the sale or use of an asset. The standard is effective for fiscal years
beginning after November 15, 2007. In February 2008, the FASB issued Staff
Position (FSP) 157-2, Effective Date of FASB Statement No. 157. This FSP delays
the effective date of FAS 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value on a
recurring basis (at least annually) to fiscal years beginning after November
15, 1008, and interim periods within those fiscal years. The impact of the
adoption was not material.
In January 2007, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard (`SFAS") No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities, which gives entities the
option to measure at fair value on an instrument by instrument basis eligible
financial assets and financial liabilities, that are otherwise not permitted to
be accounted for at fair value under other accounting standards. The election
to use the fair value option is available when an entity recognizes a financial
asset or financial liability. Subsequent changes in fair value must be recorded
in earnings. This statement was effective for the Corporation as of July 1,
2008. The Corporation did not elect the fair value option for any financial
assets or liabilities.
6. Fair Value Measurement
----------------------
As discussed within Note 5 - Recent Accounting Developments, the Corporation
adopted fair value accounting standard Statement No. 157 effective July 1,
2008. Statement No. 157 defines fair value as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. Statement No.
157 also establishes a fair value hierarchy which requires an entity to
maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. The standard describes three levels of inputs
that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in
active markets that the entity has the ability to access as of the measurement
date.
Level 2: Significant other observable inputs other than Level 1 prices such as
quoted prices for similar assets or liabilities; quoted prices in markets that
are not active; or other inputs that are observable or can be corroborated by
observable market data.
Level 3: Significant unobservable inputs that reflect a company's own
assumptions about the assumptions that market participants would use in pricing
an asset or liability.
The Corporation used the following methods and significant assumptions to
estimate the fair value of items:
Securities. Where available, the fair values of available-for-sale securities
are determined by obtaining quoted prices on nationally recognized securities
exchanges (Level 1 inputs). If quoted market prices are not available, fair
values are estimated using matrix pricing, which is a mathematical technique
widely used in the industry to value debt securities without relying
exclusively on quoted prices for the specific securities, but rather by relying
on the securities' relationship to other benchmark quoted securities (Level 2
inputs).
9
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended September 30, 2008 and 2007
Federal bank and other restricted stocks includes stock acquired for regulatory
purposes, such as Federal Home Loan Bank stock and Federal Reserve Bank stock
that are accounted for at cost; and therefore, are not subject to the
disclosure requirements of Statement No. 157.
Assets and Liabilities Measured on a Recurring Basis:
- -----------------------------------------------------
Assets and liabilities measured at fair value on a recurring basis, including
financial liabilities for which the Corporation has elected the fair value
option, are summarized below:
Fair Value Measurements at
September 30, 2008 Using
Balance at
September 30,
2008 Level 1 Level 2 Level 3
Assets:
Available-for-sale
securities $5,816 $ 2 $5,814 $ -
Assets and Liabilities Measured on a Non-Recurring Basis
- --------------------------------------------------------
Certain assets and liabilities may be required to be measured at fair value on
a nonrecurring basis in periods subsequent to their initial recognition.
Generally, nonrecurring valuation is the result of the application of other
accounting pronouncements which require assets and liabilities to be assessed
for impairment or recorded at the lower of cost or fair value.
Evaluating impaired loan collateral is based on level 3 inputs utilizing
independent outside appraisals adjusted by management for sales costs and other
assumptions regarding market conditions to arrive at fair value. As of
September 30, 2008, impaired loans had a principal balance of $1.7 million with
a valuation allowance of $326,000. The change in the valuation allowance for
impaired loans and the resulting impact on the provision for loan losses was
not material for the three months ended September 30, 2008.
Mortgage servicing assets represent the value of retained servicing rights on
loans sold. Servicing assets are valued at the lower of cost or fair value and
are based upon an independent third party appraisal. Accordingly, the
Corporation classifies the fair value portion of its mortgage servicing assets
as nonrecurring Level 3. The fair value of mortgage servicing assets includes a
reversal of $28,000 in prior impairment losses for the three months ended
September 30, 2008 and the valuation allowance at September 30, 2008 was
$11,000. Mortgage servicing assets of $553,000 are valued at amortized cost.
10
FFD Financial Corporation
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements
- --------------------------
Certain statements contained in this report that are not historical facts are
forward-looking statements that are subject to certain risks and uncertainties.
When used herein, the terms "anticipates," "plans," "expects," "believes," and
similar expressions as they relate to FFD or its management are intended to
identify such forward looking statements. FFD's actual results, performance or
achievements may materially differ from those expressed or implied in the
forward-looking statements. Risks and uncertainties that could cause or
contribute to such material differences include, but are not limited to,
general and local economic conditions, changes in the interest rate
environment, competitive conditions in the financial services industry, changes
in law, governmental policies and regulations, and rapidly changing technology
affecting financial services.
Critical Accounting Policies
- ----------------------------
The financial condition and results or operations for the Corporation presented
in the Consolidated Financial Statements, accompanying notes to the
Consolidated Financial Statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations are, to a large degree, dependent
upon the Corporation's accounting policies. The selection and application of
these accounting policies involve judgments, estimates and uncertainties that
are susceptible to change.
The Company has identified the appropriateness of the allowance for loan losses
and the valuation of securities as critical accounting policies and an
understanding of these policies are necessary to understand the financial
statements. Critical accounting policies are those policies that require
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain. Footnote A (Securities and Allowance for Loan Losses), footnote B
(Securities), footnote C (Loans) and Management Discussion and Analysis of
Financial Condition and Results from Operations in the 2008 Form 10-KSB provide
detail with regard to the Corporation's accounting for the allowance for loan
losses and valuation of securities. There have been no significant changes in
the application of accounting policies since June 30, 2008.
Liquidity
- ---------
The objective of liquidity management is to ensure adequate cash flows to
accommodate the demands of our customers and provide adequate flexibility for
the Corporation to take advantage of market opportunities under both normal
operating conditions and under unpredictable circumstances of industry or
market stress. Cash is used to fund loan purchase investments, fund the
maturity of liabilities, and at times to fund deposit outflows and operating
activities. The Corporation's principal sources of funds are deposits;
amortization and prepayments of loans; maturities, sales and principal receipt
from securities: borrowings; and operations. Management considers the asset
position of the Corporation to be sufficiently liquid to meet normal operating
needs and conditions. The Corporation's earning assets are mainly comprised of
loans and investment securities. Management continually strives to obtain the
best mix of loans and investments to both maximize yield and insure the
soundness of the portfolio, as well as to provide funding for loan demand as
needed.
Capital Resources
- -----------------
The Bank is subject to various regulatory capital requirements administered by
federal regulatory agencies. Capital adequacy guidelines and prompt
corrective-action regulations involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory
accounting practices. Failure to meet various capital requirements can initiate
regulatory action that could have a direct material effect on the Corporation's
financial statements. The Bank is considered well capitalized under the Federal
Deposit Insurance Act at September 30, 2008. Management is not aware of any
matters occurring subsequent to September 30, 2008 that would cause the Bank's
capital category to change.
11
FFD Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from June 30, 2008 to
- ---------------------------------------------------------------
September 30, 2008
- ------------------
The Corporation's total assets at September 30, 2008, were $176.3 million, a
$5.4 million, or 3.0%, decrease from the total at June 30, 2008.
Cash and cash equivalents totaled $7.1 million at September 30, 2008, a
decrease of $6.0 million, or 45.9%, from the total at June 30, 2008. Investment
securities totaled $5.6 million at September 30, 2008, a $42,000, or .75%,
decrease from the total at June 30, 2008, which resulted primarily from
mark-to-market adjustments under SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Mortgage-backed securities totaled
$310,000 at September 30, 2008, a $13,000, or 4.03% decrease compared to the
total at June 30, 2008, which resulted from principal repayments and a $4,000
mark-to-market adjustment under SFAS No. 115.
Loans receivable totaled $156.6 million at September 30, 2008, an increase of
$367,000, or .24%, from the June 30, 2008 total. Loan originations during the
period totaling $16.5 million were substantially offset by principal repayments
of $13.7 million, loans sold in the secondary market of $2.0 million and loans
sold to other financial institutions of $13,000. During the three-month period
ended September 30, 2008, loan originations were comprised of $11.5 million of
one- to four-family residential real estate loans, $3.6 million of
nonresidential real estate loans, $800,000 of consumer loans, $500,000 of
commercial loans, and $70,000 of multifamily real estate loans. Nonresidential
real estate and commercial lending generally involve a higher degree of risk
than one- to four-family residential real estate lending due to the relatively
larger loan amounts and the effects of general economic conditions on the
successful operation of income-producing properties and businesses. The
Corporation endeavors to reduce this risk by evaluating the credit history and
past performance of the borrower, the location of the real estate, the quality
of the management operating the property or business, the debt service ratio,
the quality and characteristics of the income stream generated by the property
or business and appraisals supporting the real estate or collateral valuation.
The allowance for loan losses totaled $1,529,000 at September 30, 2008, an
increase of $47,000, or 3.2%, from the June 30, 2008 balance of $1,482,000, and
represented .97% and .94% of total loans at each of those respective dates. The
increase resulted from a provision of $105,000 and recoveries of $2,000, which
were partially offset by charge-offs of $60,000. Although management believes
that the allowance for loan losses at September 30, 2008, is adequate based
upon the available facts and circumstances, there can be no assurance that
additions to the allowance will not be necessary in future periods, which could
adversely affect the Corporation's results of operations. The allowance for
loan losses as a percentage of loans was higher at September 30, 2008 than June
30, 2008 due to general economic concerns of the Corporation's market area.
Deposits totaled $136.0 million at September 30, 2008, a $5.3 million, or 3.8%,
decrease from total deposits at June 30, 2008. The decrease in deposits was the
result of significant interest rate pressure from a couple of large
competitors. The Corporation chose to prudently manage interest rate risk by
not "paying-up" for deposits to match the large competitors. FHLB advances
totaled $20.4 million at September 30, 2008, a $165,000, or .8%, decrease from
the June 30, 2008 total. The FHLB advances were primarily used to fund loan
growth.
12
FFD Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from June 30, 2008 to
- ---------------------------------------------------------------
September 30, 2008 (continued)
- ------------------
Shareholders' equity totaled $18.3 million at September 30, 2008, an increase
of $157,000, or .9%, over June 30, 2008. The increase was due primarily to
period net earnings of $331,000, proceeds from the exercise of stock options
totaling $18,000, which were partially offset by dividends paid of $176,000 and
an increase in the unrealized losses on securities designated as available for
sale of $32,000. At September 30, 2008, the Bank's regulatory capital exceeded
the requirements to be considered "well capitalized."
Comparison of Operating Results for the Three-Month Periods Ended
- -----------------------------------------------------------------
September 30, 2008 and 2007
- ---------------------------
General
- -------
The Corporation's net earnings totaled $331,000 for the three months ended
September 30, 2008, a decrease of $77,000, or 18.9%, from the net earnings of
$408,000 recorded in the comparable period in 2007. The decrease in net
earnings resulted from increases of $63,000, or 5.5%, in general,
administrative and other expenses and $17,000 in the provision for losses on
loans and a decrease of $59,000, or 3.5%, in net interest income, which were
partially offset by an increase of $28,000, or 20.3%, in other operating income
and a decrease in federal income tax expense of $34,000.
Net Interest Income
- -------------------
Total interest income decreased by $363,000, or 11.8%, to $2.7 million for the
three months ended September 30, 2008, compared to the same period in 2007.
Interest income on loans decreased by $370,000, or 12.5%, due to an increase of
$1.9 million, or 1.2%, in the average loan portfolio balance outstanding, which
was more than offset by a 98 basis point decrease in yield. Interest income on
investment securities, interest-bearing deposits and other increased by $8,000,
or 6.7%, to a total of $127,000 for the three months ended September 30, 2008,
due to a $2.8 million, or 29.1%, increase in the average balance outstanding,
which was partially offset by a 83 basis point decrease in yield. Interest
income on mortgage-backed securities decreased by $1,000, or 16.7%, due to a
decrease of $40,000, or 11.1%, in the average balance outstanding and a 61
basis point decrease in yield.
Total interest expense decreased by $304,000, or 22.0%, to $1.1 million for the
three months ended September 30, 2008, compared to the three months ended
September 30, 2007. Interest expense on deposits decreased by $317,000, or
26.6%, due to a 92 basis point decrease in the average cost of deposits, to
2.51% for the 2008 quarter, which was offset slightly by a $453,000, or .3%,
increase in the average balance of deposits outstanding period to period.
Interest expense on borrowings increased by $13,000, or 6.8%, due to a 109
basis point decrease in the average cost of borrowings, which was more than
offset by an increase of $5.5 million, or 36.4%, in the average balance of
borrowings outstanding.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased by $59,000, or 3.5%, for the three months ended
September 30, 2008, compared to the same period in 2007. The interest rate
spreads were 3.67% and 3.79%, and the net interest margins were 3.85% and
4.06%, for the three-month periods ended September 30, 2008 and 2007,
respectively.
13
FFD Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three-Month Periods Ended
- -----------------------------------------------------------------
September 30, 2008 and 2007 (continued)
- ---------------------------
Provision for Losses on Loans
- -----------------------------
The Corporation recorded a $105,000 provision for losses on loans during the
three months ended September 30, 2008, and a $88,000 provision for the
comparable quarter in 2007. The increase in the allowance for losses on loans
was primarily due to identified problem loans, changes in the portfolio mix
from residential real estate to nonresidential real estate, loan charge-offs
and management's assessment of general economic conditions. There can be no
assurance that the loan loss allowance will be adequate to cover losses on
nonperforming assets in the future, which can adversely affect the
Corporation's results of operations.
Other Income
- ------------
Other income totaled $166,000 for the three months ended September 30, 2008, an
increase of $28,000, or 20.3%, from the 2007 total. The increase was primarily
due to a $28,000 reversal of a valuation allowance for mortgage servicing
rights. The reversal of the valuation allowance for mortgage servicing rights
was attributable to rising market interest rates and a seasoned portfolio of
serviced mortgages.
General, Administrative and Other Expense
- -----------------------------------------
General, administrative and other expense totaled $1.2 million for the three
months ended September 30, 2008, an increase of $63,000, or 5.5%, compared to
the same period in 2007. The increase in general, administrative and other
expense includes increases of $37,000, or 7.2%, in employee compensation and
benefits, $17,000, or 12.6%, in other operating expense, $15,000, or 55.6%, in
postage and stationary supplies and $13,000, or 22.4%, in professional and
consulting fees, which were partially offset by decreases of $21,000, or 15.7%,
in occupancy and equipment expense and $12,000, or 26.1%, in advertising. The
increase in employee compensation was due to normal merit increases and
additional staffing. A portion of the increase in other operating expense was a
$20,000 increase in FDIC insurance premiums. This increase was the result of
the completion in the fourth quarter of fiscal 2008 of the FDIC credit from the
FDIC Reform Act of 2005.
Federal Income Taxes
- --------------------
The Corporation recorded a provision for federal income taxes totaling $177,000
for the three months ended September 30, 2008, a decrease of $34,000, or 16.1%,
over the same period in 2007. The decrease resulted from a $111,000, or 17.9%,
decrease in earnings before taxes. The Corporation's effective tax rates were
34.8% and 34.1%, for the three month periods ended September 30, 2008 and 2007,
respectively.
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Not required.
ITEM 4T: Controls and Procedures
-----------------------
The Corporation's Chief Executive Officer and Chief Financial Officer have
evaluated the Corporation's disclosure controls and procedures (as defined
under Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as
amended) as of the end of the period covered by this report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Corporation's disclosure controls and procedures are
effective. There were no changes in the Corporation's internal controls which
materially affected, or are reasonably likely to materially effect, the
Corporation's internal controls over financial reporting.
14
FFD Financial Corporation
PART II
ITEM 1. Legal Proceedings
-----------------
Not applicable
ITEM 1A: Risk Factors
------------
Not required
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
(a) During the quarter ended September 30, 2008, the Corporation
issued a total of 2,000 unregistered shares upon the exercise of
stock options for an aggregate purchase price of $18,500. The
sales were exempt from registration pursuant to Section 4(2) of
the Securities Act of 1933, as amended.
(b) None
(c) None
ITEM 3. Defaults Upon Senior Securities
-------------------------------
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable
ITEM 5. Other Information
-----------------
None
ITEM 6. Exhibits
--------
31.1 Section 302 Chief Executive Officer certification
31.2 Section 302 Chief Financial Officer certification
32.1 Section 906 Chief Executive Officer certification
32.2 Section 906 Chief Financial Officer certification
15
FFD Financial Corporation
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FFD FINANCIAL CORPORATION
Date: November 14, 2008 By: /s/ Trent B. Troyer
----------------------- -------------------------------------
Trent B. Troyer
President and Chief Executive Officer
Date: November 14, 2008 By: /s/ Robert R. Gerber
----------------------- -------------------------------------
Robert R. Gerber
Senior Vice President, Treasurer and
Chief Financial Officer
16