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 December 31, 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: February 12, 2009 - 1,009,906
common shares, no par value
1
INDEX
Page
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PART I Item 1- FINANCIAL INFORMATION
Consolidated Statements of Financial Condition 3
Consolidated Statements of Income 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 3 Quantitative and Qualitative Disclosures About Market Risk 16
Item 4T Controls and Procedures 16
PART II - OTHER INFORMATION 17
SIGNATURES 19
2
FFD Financial Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
December 31, June 30,
ASSETS 2008 2008
(Unaudited)
Cash and due from financial institutions $ 1,588 $ 1,702
Interest-bearing deposits in other financial institutions 12,023 6,347
Federal Funds Sold - 5,000
-------- --------
Cash and cash equivalents 13,611 13,049
Investment securities available for sale 4,806 5,623
Mortgage-backed securities available for sale 232 243
Mortgage-backed securities held to maturity,
fair value of $68 and $81 of December 31,
2008 and June 30, 2008, respectively 69 80
Loans receivable - net of allowance of $1,609 and $1,482 158,400 156,232
Loans held for sale 342 -
Premises and equipment, net 2,566 2,589
Federal Home Loan Bank, at cost 2,422 2,389
Loan Servicing Rights 692 663
Accrued interest receivable 552 621
Prepaid expenses and other assets 167 249
-------- --------
Total assets $183,859 $181,738
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non interest bearing $ 10,616 $ 10,729
Interest bearing 134,648 130,603
-------- --------
Total deposits 145,264 141,332
Federal Home Loan Bank advances 17,652 20,595
Other borrowed money 800 -
Accrued interest payable 192 186
Accrued and deferred federal income tax 286 174
Other liabilities 1,792 1,271
-------- --------
Total liabilities 165,986 163,558
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 8,313 8,274
Retained earnings 15,650 15,331
Accumulated comprehensive loss; net 4 (83)
Treasury stock, at cost (445,344 and 384,456 treasury shares
at December 31, 2008 and June 30, 2008, respectively) (6,094) (5,342)
-------- --------
Total shareholders' equity 17,873 18,180
-------- --------
Total liabilities and shareholders' equity $183,859 $181,738
======== ========
The accompanying notes are an integral part of these statements.
3
FFD Financial Corporation
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
For the three months For the six months
ended December 31, ended December 31,
2008 2007 2008 2007
(Unaudited)
Interest income
Loans, including fees $2,546 $2,870 $5,138 $5,815
Mortgage-backed securities 4 6 9 12
Investment securities 71 42 142 84
Interest-bearing deposits and other 33 86 89 163
------ ------ ------ ------
2,654 3,004 5,378 6,074
Interest expense
Deposits 840 1,161 1,713 2,352
Borrowings 200 185 403 374
------ ------ ------ ------
1,040 1,346 2,116 2,726
------ ------ ------ ------
Net interest income 1,614 1,658 3,262 3,348
Provision for losses on loans 99 111 204 199
------ ------ ------ ------
Net interest income after provision
for losses on loans 1,515 1,547 3,058 3,149
Other income
Net gain on sale of loans 48 26 115 64
Service charges on deposit accounts 68 63 134 127
Impairment loss on securities - - (9) -
Other 50 62 92 115
------ ------ ------ ------
166 151 332 306
General, administrative and other expense
Employee and director compensation and benefits 529 491 1,081 1,006
Occupancy and equipment 114 99 227 233
Franchise taxes 57 58 115 116
Data processing 87 83 178 167
ATM processing 34 45 68 73
Professional and consulting fees 38 21 109 79
Postage and stationery supplies 27 42 69 69
Advertising 37 45 71 91
Checking account maintenance expense 58 62 112 115
Other 263 201 415 336
------ ------ ------ ------
1,244 1,147 2,445 2,285
------ ------ ------ ------
Income before income taxes 437 551 945 1,170
Income tax expense 155 189 332 400
------ ------ ------ ------
Net Income $ 282 $ 362 $ 613 $ 770
====== ====== ====== ======
Earnings per share
Basic $ .27 $ .33 $ .58 $ .71
====== ====== ====== ======
Diluted $ .27 $ .33 $ .58 $ .70
====== ====== ====== ======
Dividends declared per share $ .17 $ .165 $ .335 $ .305
====== ====== ====== ======
The accompanying notes are an integral part of these statements.
4
FFD Financial Corporation
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
For the three months For the six months
ended December 31, ended December 31,
2008 2007 2008 2007
(Unaudited)
Net earnings $282 $362 $613 $770
Other comprehensive income, net of related tax effects:
Unrealized holding gains on securities during
the period, net of taxes of $61, $3,
$45 and $16, during the respective periods 119 6 87 31
---- ---- ---- ----
Comprehensive income $401 $368 $700 $801
==== ==== ==== ====
The accompanying notes are an integral part of these statements.
5
FFD Financial Corporation
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended December 31,
(In thousands)
(Unaudited)
2008 2007
Cash flows from operating activities:
Net cash from operating activities $ 1,610 $ 1,728
Cash flows from investing activities:
Purchase of equity investment securities (11) -
Proceeds from maturities/calls of investment
securities designated As available for sale 954 -
Principal repayments on mortgage-backed securities 20 22
Loan originations and payments, net (2,633) (8,113)
Proceeds from participation loan sales
to other financial institutions 13 4,297
Additions to premises and equipment (72) (438)
------- -------
Net cash from investing activities (1,729) (4,232)
Cash flows financing activities:
Net change in deposits 3,932 (1,346)
Net change in short-term Federal Home Loan
Bank advances - 1,500
Proceeds from Federal Home Loan Bank advance - 4,500
Repayments of Federal Home Loan Bank advances (2,943) (1,743)
Proceeds from other borrowed money 800 -
Proceeds from exercise of stock options 45 19
Purchase of treasury stock (794) (242)
Cash dividends paid (359) (337)
------- -------
Net cash from financing activities 681 2,351
------- -------
Net change in cash and cash equivalents 562 (153)
Beginning cash and cash equivalents 13,049 9,033
------- -------
Ending cash and cash equivalents $13,611 $ 8,880
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 265 $ 490
======= =======
Interest paid $ 2,110 $ 2,742
======= =======
The accompanying notes are an integral part of these statements.
6
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six- and three-month periods ended December 31, 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- and six-month periods ended December 31, 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 10,000 shares of common
stock were not considered in computing diluted earnings per share for the three
and six months ended December 31, 2008 because they were antidilutive. Stock
options for 3,500 shares of common stock were not considered in computing
diluted earnings per share for the three months ended December 31, 2007 because
they were antidilutive. The computations are as follows:
For the three months ended For the six months ended
December 31, December 31,
2008 2007 2008 2007
Weighted-average common shares
outstanding (basic) 1,041,385 1,085,403 1,056,231 1,089,314
Dilutive effect of assumed exercise
of stock options 1,876 5,704 2,395 6,288
--------- --------- --------- ---------
Weighted-average common shares
outstanding (diluted) 1,043,261 1,091,107 1,058,626 1,095,602
========= ========= ========= =========
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 six- and three-month periods ended December 31, 2008 and 2007
4. Stock Option Plan (continued)
-----------------
A summary of the activity in the stock option plan for the six months ended
December 31, 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 (4,945) 9.16
Forfeited or expired - -
------ ------
Outstanding at end of period 22,835 $11.22 3.3 yrs $15,306
====== ======
Exercisable at end of period 22,835 $11.22 3.3 yrs $15,306
====== ====== =======
Options available for grant -
======
Information related to the stock option plan during the six months ended
December 31, 2008 and 2007 follows:
Three Months Three Months Six Months Six Months
Ended 12-31-08 Ended 12-31-07 Ended 12-31-08 Ended 12-31-07
Intrinsic value of options exercised $ 4,866 $6,200 $10,866 $12,200
Cash received from options exercised 26,800 9,500 45,300 18,500
Tax benefit from options exercised - - - -
5. Recent Accounting Developments
------------------------------
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 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 SFAS 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, 2008, and interim periods within those fiscal years. In October,
2008, the FASB issued Staff Position (FSP) 157-3, Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active. The Corporation
has adopted this statement and related positions which had no material impact
to the Corporation.
In January 2007, FASB issued 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.
8
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the six- and three-month periods ended December 31, 2008 and 2007
6. Fair Value Measurement
----------------------
As discussed within Note 5 - Recent Accounting Developments, the Corporation
adopted fair value accounting and SFAS No. 157 effective July 1, 2008. SFAS 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. SFAS 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).
Restricted stocks acquired for regulatory purposes, such as Federal Home Loan
Bank stock and Federal Reserve Bank stock, are accounted for at cost and are
not subject to SFAS 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
December 31, 2008 Using
Balance at (in thousands)
December 31,
2008
(in thousands) Level 1 Level 2 Level 3
------- ------- -------
Assets:
Available-for-sale
securities $5,038 $ 1 $5,037 $ -
9
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the six- and three-month periods ended December 31, 2008 and 2007
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. The change in
the valuation allowance for impaired loans and the resulting impact on the
provision for loans losses was not material for the six-month period ended
December 31, 2008. Impaired loans, which are measured for impairment using the
fair value of the collateral for collateral dependent loans, had a carrying
value of $1.7 million, with a valuation allowance of $402,000, resulting in an
additional provision for loan losses of $76,000 for the three-month period
ended December 31, 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 2. The $692,000 carrying value of mortgage servicing
assets includes $130,000 of mortgage servicing rights which have been written
down to fair value through a valuation allowance of $9,000. The six months
ended December 31, 2008 includes a $30,000 reversal of a previously established
valuation allowance and the three months ending December 31, 2008 includes a
$2,000 reversal of a previously established valuation allowance.
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 of operations for the Corporation presented
in the Consolidated Financial Statements, accompanying notes to the
Consolidated Financial Statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations are, to a large degree, dependent
upon the Corporation's accounting policies. The selection and application of
these accounting policies involve judgments, estimates and uncertainties that
are susceptible to change.
The Company has identified the appropriateness of the allowance for loan losses
as a critical accounting policy and an understanding of this policy is
necessary to understand the financial statements. 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 C (Loans) and Management's Discussion and
Analysis of Financial Condition and Results of Operations in the 2008 Form
10-KSB provide detail with regard to the Corporation's accounting for the
allowance for loan losses. There have been no significant changes in the
application of accounting policies since June 30, 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 loans, 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
Corporation's asset position to be sufficiently liquid to meet normal operating
needs and conditions. The Corporation's earning assets are mainly comprised of
loans and investment securities. Management continually strives to obtain the
best mix of loans and investments to both maximize yield and insure the
soundness of the portfolio, as well as to provide funding for loan demand 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 was considered "well capitalized" under Office
of Thrift Supervision regulations at December 31, 2008. Management is not aware
of any matters occurring subsequent to December 31, 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
- ---------------------------------------------------------------
December 31, 2008
- -----------------
The Corporation's total assets at December 31, 2008, were $183.9 million, a
$2.1 million, or 1.2%, increase from the total at June 30, 2008.
Cash and cash equivalents totaled $13.6 million at December 31, 2008, an
increase of $562,000, or 4.3%, from the total at June 30, 2008. Investment
securities totaled $4.8 million at December 31, 2008, a $817,000, or 14.5%,
decrease from the total at June 30, 2008, resulting from a partial call of one
investment security, which was partially offset by mark-to-market adjustments
under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Mortgage-backed securities totaled $301,000 at December 31, 2008,
a $22,000, or 6.8% decrease compared to the total at June 30, 2008, which
resulted from principal repayments and a $2,000 mark-to-market adjustment under
SFAS No. 115.
Loans receivable totaled $158.4 million at December 31, 2008, an increase of
$2.2 million, or 1.4%, from the June 30, 2008 total. During the period, the
Corporation originated $34.1 million of loans, which were substantially offset
by principal repayments of $31.5 million. During the six-month period ended
December 31, 2008, loan originations were comprised of $21.5 million of one- to
four-family residential real estate loans, $9.6 million of nonresidential real
estate loans, $1.6 million of consumer loans, $1.1 million of commercial loans,
and $400,000 of multifamily real estate loans. Nonresidential real estate and
commercial lending have historically demonstrated 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.
To further reduce risk, First Federal has not and does not originate sub-prime
real estate loans.
The allowance for loan losses totaled $1.6 million at December 31, 2008, an
increase of $127,000, or 8.6%, from the June 30, 2008 balance of $1.5 million
and represented 1.01% and .94% of total loans at each of those respective
dates. The increase resulted from a provision of $204,000 and recoveries of
$6,000, which were partially offset by charge-offs of $83,000. Although
management believes that the allowance for loan losses at December 31, 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 December
31, 2008 than June 30, 2008 due to general economic conditions and concerns
related to the economy of the Corporation's market area.
Deposits totaled $145.3 million at December 31, 2008, a $3.9 million, or 2.8%,
increase from total deposits at June 30, 2008. The increase in deposits was the
result of time deposit growth. Time deposits increased due to their higher
yields over savings accounts, and as investors chose to move to FDIC insured
accounts over uninsured investment options. The increased deposits were used to
repay part of First Federal's FHLB advances, which totaled $17.7 million at
December 31, 2008, a $2.9 million, or 14.3%, decrease from the June 30, 2008
total. Other borrowed money increased $800,000 as a result of an advance from
the Corporation's $1.0 million line of credit with another financial
institution, which was used to repurchase a large block of shares in a
previously announced privately negotiated transaction.
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
- ---------------------------------------------------------------
December 31, 2008 (continued)
- -----------------
Shareholders' equity totaled $17.9 million at December 31, 2008, a decrease of
$307,000, or 1.7%, over June 30, 2008. The decrease was due primarily the
purchase of 65,833 treasury shares for $794,000 and dividends paid of $359,000,
which were partially offset by period net earnings of $613,000, a decrease in
the unrealized loss on securities designated as available for sale of $87,000,
the return of previously paid RRP dividends of $65,000 to retained earnings,
and $45,000 from the exercise of stock options. At December 31, 2008, the
Bank's regulatory capital exceeded the requirements to be considered "well
capitalized."
Comparison of Operating Results for the Six-Month Periods Ended
- ---------------------------------------------------------------
December 31, 2008 and 2007
- --------------------------
General
- -------
The Corporation's net earnings totaled $613,000 for the six months ended
December 31, 2008, a decrease of $157,000, or 20.4%, from the net earnings of
$770,000 recorded in the comparable period in 2007. The decrease in net
earnings resulted from increases of $160,000, or 7.0%, in general,
administrative and other expenses and $5,000, or 2.5%, in the provision for
losses on loans, and a decrease of $86,000, or 2.6%, in net interest income,
which were partially offset by an increase of $26,000, or 8.5%, in other
operating income, and a decrease of $68,000 in federal income tax expense.
Net Interest Income
- -------------------
Total interest income decreased by $696,000, or 11.5%, to $5.4 million for the
six months ended December 31, 2008, compared to the same period in 2007.
Interest income on loans decreased by $677,000, or 11.6%, due to a 94 basis
point decrease in yield, which was partially offset by an increase of $1.7
million, or 1.1%, in the average loan portfolio balance outstanding. Interest
income on investment securities, interest-bearing deposits and other decreased
by $16,000, or 6.5%, to a total of $231,000 for the six months ended December
31, 2008, despite a $2.8 million, or 27.8%, increase in the average balance
outstanding, which was more than offset by a 127 basis point decrease in yield.
Interest income on mortgage-backed securities decreased by $3,000, or 25.0%,
due to a decrease of $37,000, or 10.4%, in the average balance outstanding and
a 106 basis point decrease in yield.
Total interest expense decreased by $610,000, or 22.4%, to $2.1 million for the
six months ended December 31, 2008, compared to the six months ended December
31, 2007. Interest expense on deposits decreased by $639,000, or 27.2%, due to
a 94 basis point decrease in the average cost of deposits, to 2.44% for the
2008 period, which was offset slightly by a $1.1 million, or .8%, increase in
the average balance of deposits outstanding period to period. Interest expense
on borrowings increased by $29,000, or 7.8%, due to an increase of $4.0
million, or 25.3%, in the average balance of borrowings outstanding, which was
partially offset by a 66 basis point decrease in the average cost.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased by $86,000, or 2.6%, for the six months ended
December 31, 2008, compared to the same period in 2007. The interest rate
spreads were 3.62% and 3.74%, and the net interest margins were 3.80% and
4.00%, for the six-month periods ended December 31, 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 Six-Month Periods Ended
- ---------------------------------------------------------------
December 31, 2008 and 2007 (continued)
- --------------------------
Provision for Losses on Loans
- -----------------------------
The Corporation recorded a $204,000 provision for losses on loans during the
six months ended December 31, 2008, and a $199,000 provision for the comparable
period in 2007. The small increase in the provision for losses on loans was not
a significant change from the prior period. There can be no assurance that the
loan loss allowance will be adequate to cover losses on nonperforming assets in
the future, which could adversely affect the Corporation's results of
operations.
Other Income
- ------------
Other income totaled $332,000 for the six months ended December 31, 2008, an
increase of $26,000, or 8.5%, from the 2007 total. The increase was primarily
due to a $51,000 increase in the gain on sale of loans, including a $30,000
reversal of a previously established mortgage servicing rights valuation
allowance, which was partially offset by a $23,000 decrease in other operating
income.
General, Administrative and Other Expense
- -----------------------------------------
General, administrative and other expense totaled $2.4 million for the six
months ended December 31, 2008, an increase of $160,000, or 7.0%, compared to
the same period in 2007. The increase in general, administrative and other
expense includes increases of $75,000, or 7.5%, in employee compensation and
benefits, $79,000, or 23.5%, in other operating expense, $30,000, or 38.0%, in
professional and consulting fees, and $11,000, or 6.6%, in data processing,
which were partially offset by decreases of $20,000, or 22.0%, in advertising,
$6,000, or 2.6%, in occupancy and equipment expense, $5,000, or 6.8%, in ATM
processing and $3,000, or 2.6%, in checking account maintenance expense. 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
$49,000 increase in FDIC insurance premiums. This increase was the result of
generally increased FDIC premiums and exhausting in the fourth quarter of
fiscal 2008 the FDIC credit related to the FDIC Reform Act of 2005.
Federal Income Taxes
- --------------------
The Corporation recorded a provision for federal income taxes totaling $332,000
for the six months ended December 31, 2008, a decrease of $68,000, or 17.0%,
over the same period in 2007. The decrease resulted from a $225,000, or 19.2%,
decrease in earnings before taxes. The Corporation's effective tax rates were
35.1% and 34.2%, for the six-month periods ended December 31, 2008 and 2007,
respectively.
Comparison of Operating Results for the Three-Month Periods Ended
- -----------------------------------------------------------------
December 31, 2008 and 2007
- --------------------------
General
- -------
The Corporation's net earnings totaled $282,000 for the three months ended
December 31, 2008, a decrease of $80,000, or 22.1%, from the net earnings of
$362,000 recorded in the comparable period in 2007. The decrease in net
earnings resulted from an increase of $97,000, or 8.5%, in general,
administrative and other expenses and a decrease of $44,000, or 2.7%, in net
interest income, which were partially offset by an increase of $15,000, or
9.9%, in other operating income and decreases of $12,000, or 10.8%, in the
provision for losses on loans and $34,000 in federal income tax expense.
14
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
- -----------------------------------------------------------------
December 31, 2008 and 2007 (continued)
- --------------------------
Net Interest Income
- -------------------
Total interest income decreased by $350,000, or 11.7%, to $2.7 million for the
three months ended December 31, 2008, compared to the same period in 2007.
Interest income on loans decreased by $324,000, or 11.3%, due to an 89 basis
point decrease in yield, which was partially offset by an increase of $1.6
million, or 1.0%, in the average loan portfolio balance outstanding. Interest
income on investment securities, interest-bearing deposits and other decreased
by $24,000, or 18.8%, to a total of $104,000 for the three months ended
December 30, 2008, due to a 167 basis point decrease in yield, which was
partially offset by a $2.5 million, or 24.5%, increase in the average balance
outstanding. Interest income on mortgage-backed securities decreased by $2,000,
or 33.3%, due to a decrease of $34,000, or 9.9%, in the average balance
outstanding and a 150 basis point decrease in yield.
Total interest expense decreased by $306,000, or 22.7%, to $1.0 million for the
three months ended December 31, 2008, compared to the three months ended
December 31, 2007. Interest expense on deposits decreased by $321,000, or
27.6%, due to a 95 basis point decrease in the average cost of deposits, to
2.40% for the 2008 quarter, which was partially offset by a $1.3 million, or
..9%, increase in the average balance of deposits outstanding period to period.
Interest expense on borrowings increased by $15,000, or 8.1%, due to an
increase of $2.7 million, or 16.9%, in the average balance of borrowings
outstanding, which was partially offset by a 30 basis point decrease in the
average cost of borrowings.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased by $44,000, or 2.7%, for the three months ended
December 31, 2008, compared to the same period in 2007. The interest rate
spreads were 3.56% and 3.69%, and the net interest margins were 3.75% and
3.95%, for the three-month periods ended December 31, 2008 and 2007,
respectively.
Provision for Losses on Loans
- -----------------------------
The Corporation recorded a $99,000 provision for losses on loans during the
three months ended December 31, 2008, and a $111,000 provision for the
comparable quarter in 2007. The small decrease in the provision for losses on
loans was not a significant change from the prior period. The Corporation will
continue to identify and review problem loans, changes in the portfolio mix
from residential real estate to nonresidential real estate and loan charge-offs
and consider 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 could adversely affect the
Corporation's results of operations.
Other Income
- ------------
Other income totaled $166,000 for the three months ended December 31, 2008, an
increase of $15,000, or 9.9%, from the 2007 total. The increase was primarily
due to a $22,000, or 84.6%, increase in net gain on sale of loans, which was
partially offset by a $12,000 decrease in other income.
15
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
- -----------------------------------------------------------------
December 31, 2008 and 2007 (continued)
- --------------------------
General, Administrative and Other Expense
- -----------------------------------------
General, administrative and other expense totaled $1.2 million for the three
months ended December 31, 2008, an increase of $97,000, or 8.5%, compared to
the same period in 2007. The increase in general, administrative and other
expense includes increases of $62,000, or 30.8%, in other operating expense,
$38,000, or 7.7%, in employee compensation and benefits, $17,000, or 81.0%, in
professional and consulting fees, $15,000, or 15.2%, in occupancy and equipment
expense, and $4,000, or 4.8% in data processing, which were partially offset by
decreases of $15,000, or 35.7%, in postage and stationary supplies, $8,000, or
17.8%, in advertising and $4,000, or 6.5%, in checking account maintenance
expense. 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 $29,000 increase in FDIC insurance premiums. This increase was
the result of generally increased FDIC premiums and exhausting in the fourth
quarter of fiscal 2008 the FDIC credit related to the FDIC Reform Act of 2005.
Federal Income Taxes
- --------------------
The Corporation recorded a provision for federal income taxes totaling $155,000
for the three months ended December 31, 2008, a decrease of $34,000, or 18.0%,
over the same period in 2007. The decrease resulted from a $114,000, or 20.7%,
decrease in earnings before taxes. The Corporation's effective tax rates were
35.5% and 34.3%, for the three month periods ended December 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.
16
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 December 31, 2008, the Corporation
issued a total of 2,945 unregistered shares upon the exercise of
stock options for an aggregate purchase price of $26,804. The
sales were exempt from registration pursuant to Section 4(2) of
the Securities Act of 1933, as amended.
(b) None
(c)
(d)
(c) Maximum number
Total number (or approximate
(a) of shares dollar amount)
Total (b) purchased as of shares that may
number Average part of publicly yet be purchased
of shares price paid announced plan under the plans
Period purchased per share or programs (1) or programs (1)
- ------ --------- --------- ---------------- ------------------
October 1, 2008
through
October 31, 2008 - $ - - 28,002
November 1, 2008
through
November 30, 2008 65,833(2) $12.06 -(2) 28,002
December 1, 2008
through
December 31, 2008 - $ - - 28,002
- --------------------
(1) The Corporation's Board of Directors approved the repurchase of up to an
aggregate of 55,310 of the Corporation's common shares pursuant to a
program announced May 8, 2007 (the "Program"). Unless earlier terminated by
the Board of Directors, the Program will expire when the Corporation has
repurchased all shares authorized for repurchase under the Program. The
Corporation has no other publicly announced repurchase plans or programs
and no plans or programs expired or were terminated in the reported
periods.
17
FFD Financial Corporation
PART II (CONTINUED)
(2) On November 13, 2008, the Corporation purchased, in a privately negotiated
transaction, 65,833 of the Corporations Common Shares, no par value, from
Bulldog Investors, Kimball and Winthrop, Phillip Goldstein and Andrew
Dakos. The purchase was not part of a publicly announced plan or program.
Further information on this purchase is contained in the Corporation's
Annual Report on Form 8-K for the event on November 13, 2008, filed with
the Securities Exchange Commission on November 17, 2008.
ITEM 3. Defaults Upon Senior Securities
-------------------------------
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On October 21, 2008, the Corporation held its 2008 Annual Meeting of
Shareholders. All of the directors nominated were reelected to terms
expiring in 2010 by the following votes:
For Withheld
David W. Kaufman 846,472 41,902
Enos L. Loader 874,012 14,362
Robert D. Sensel 874,037 14,337
Richard A. Brinkman, Jr., Stephen G. Clinton, and Leonard L. Gundy
continued to serve after the meeting as directors of the Corporation
for terms expiring in 2009.
ITEM 5. Other Information
-----------------
None
ITEM 6. Exhibits
--------
10.1 Stock Purchase Agreement dated November 13, 2008, by and
among FFD Financial Corporation, Bulldog Investors,
Kimball and Winthrop, Phillip Goldstein and Andrew
Dakos (1)
10.2 Commercial Loan Agreement dated October 29, 2008, between
FFD Financial Corporation and The Home Loan Savings
Bank (2)
10.3 Commercial Security Agreement dated October 29, 2008,
between FFD Financial Corporation and The Home Loan
Savings Bank (2)
31.1 Section 302 Chief Executive Officer certification (2)
31.2 Section 302 Chief Financial Officer certification (2)
32.1 Section 906 Chief Executive Officer certification (2)
32.2 Section 906 Chief Financial Officer certification (2)
---------------------------------------------
(1) Incorporated herein by reference to Exhibit 10 to the Corporation's Current
Report on Form 8-K, dated November 13, 2008, and filed with the Securities
and Exchange Commission on November 19, 2008 (File No. 000-27916)
(2) Filed herewith
18
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: February 17, 2009 By: /s/Trent B. Troyer
----------------------- -------------------------------------
Trent B. Troyer
President and Chief Executive Officer
Date: February 17, 2009 By: /s/Robert R. Gerber
----------------------- -------------------------------------
Robert R. Gerber
Senior Vice President, Treasurer and
Chief Financial Officer
19