Securities pledged to secure public deposits at September 30, 2009 and June 30, 2009 had carrying amounts of $4.3 million and $4.2 million, respectively
11
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended September 30, 2009 and 2008
5.
Securities
(continued)
At September 30, 2009 and June 30, 2009 and, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.
Securities with unrealized losses at September 30, 2009 and June 30, 2009, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
|
Less than 12 months
|
|
12 months or more
|
|
Total
|
|
Description of
securities
|
|
Fair
value
|
|
Unrealized
losses
|
|
Fair
value
|
|
Unrealized
losses
|
|
Fair
value
|
|
Unrealized
losses
|
|
|
|
(In thousands)
|
|
U.S. Government
agency obligations
|
|
$6,988
|
|
$ (12)
|
|
$ —
|
|
$ —
|
|
$6,988
|
|
$ (12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
|
Less than 12 months
|
|
12 months or more
|
|
Total
|
|
Description of
securities
|
|
Fair
value
|
|
Unrealized
losses
|
|
Fair
value
|
|
Unrealized
losses
|
|
Fair
value
|
|
Unrealized
losses
|
|
|
|
(In thousands)
|
|
U.S. Government
agency obligations
|
|
$5,863
|
|
$(137)
|
|
$ —
|
|
$ —
|
|
$5,863
|
|
$(137)
|
6.
Recent Accounting Developments
In June 2009, the Financial Accounting Standards Board (“FASB”) established the FASB Accounting Standards Codification (“ASC”) as the source of authoritative accounting principles for financial statements of non-governmental entities that are presented in conformity with generally accepted accounting principles in the United States. This pronouncement was effective for financial statements issued for interim and annual periods ending after September 15, 2009. We do not expect the adoption of this standard to have an impact on our financial position or results of operation although the adoption has had an impact on the accounting literature references in this report.
ASC 855-10, Subsequent Events, establishes general standards of accounting for and disclosure of subsequent events. Subsequent events are events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The Statement is effective for interim or annual periods ending after June 5, 2009. The impact of this new Statement was not material to the Corporation’s consolidated financial statements. Management has evaluated events occurring subsequent to the balance sheet date through the financial statement issuance date of November 16, 2009 determining no events require adjustment to, or additional disclosure in the financial statements.
12
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended September 30, 2009 and 2008
7.
Effect of Newly Issued But Not Yet Effective Accounting Standards
In June 2009, the FASB issued a pronouncement that removes the concept of qualifying special-purpose entity from ASC 810-10, modifies the financial-components approach and limits circumstances in which a transferor derecognizes a portion or component of a financial asset when the transferor has a continuing involvement with the financial asset. It clarifies the principle of whether a transferor and all the entities included in the transferor’s financial statements being presented have surrendered control over transferred financial assets. This pronouncement is effective for the first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The adoption of this pronouncement is not expected to have a material effect on the Company’s consolidated financial statements.
In June 2009, the FASB issued a pronouncement impacting several topics in the ASC that requires an enterprise to perform an analysis to determine whether the enterprise’s variable purpose interest or interests give it a controlling financial interest in a variable interest entity, and requires ongoing reassessments of whether the entity is the primary beneficiary of a variable interest entity. This pronouncement is effective for the first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The adoption of this pronouncement is not expected to have a material effect on the Company’s consolidated financial statements.
8.
Fair Value Measurement
ACS 820-10 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 the entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Corporation determines fair values of securities available for sale by (i) obtaining quoted prices on nationally recognized securities exchanges, which are Level 1 inputs, or (ii) matrix pricing, which are Level 2 inputs. Matrix pricing is a mathematical technique widely used to in the industry to value debt securities by relying on the securities’ relationship to other benchmark quoted securities.
The fair value of loan servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. The Corporation is able to compare the valuation model inputs and results to widely available published industry data for reasonableness (Level 2 inputs).
13
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended September 30, 2009 and 2008
8.
Fair Value Measurement
(continued)
The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available and result in a Level 3 classification for determining fair value.
Assets Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below:
The methods and assumptions used to estimate fair value are described as follows:
Carrying amount is the estimated fair value for cash and cash equivalents, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk
.
Fair value of debt is based on current rates for similar financing. It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability. The fair value of off-balance-sheet items is not considered material.
16
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 the Corporation or its management are intended to identify such forward looking statements. The Corporation’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.
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. The Corporation 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. Footnote 2 (Securities), footnote 3 (Loans), and Management Discussion and Analysis of Financial Condition and Results from Operations in the Form 10-K for the year ended June 30, 2009 provide detail regarding 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, 2009.
Liquidity
The objective of liquidity management is to ensure adequate cash flows to accommodate the demands of 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 purchases, the maturity of liabilities and, at times, 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.
Capital Resources
The Bank is subject to various regulatory capital requirements. 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 result in regulatory action that could have a direct material effect on the Corporation’s financial statements. The Bank exceeded the regulatory requirements to be “well capitalized” at September 30, 2009. Management is not aware of any matters occurring subsequent to September 30, 2009 that would cause the Bank’s capital category to change.
17
FFD Financial Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The Bank’s actual and required capital amounts (in thousands) and ratios are presented below at September 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
Required
For Capital
Adequacy Purposes
|
|
To Be Well
Capitalized Under
Prompt Corrective
Action Regulations
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Total capital to risk
weighted assets
|
$18,826
|
|
12.1%
|
|
$12,470
|
|
8.0%
|
|
$15,588
|
|
10.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 (core) capital to risk
weighted assets
|
17,546
|
|
11.3%
|
|
6,235
|
|
4.0%
|
|
9,353
|
|
6.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 (core) capital to
Adjusted assets
|
17,546
|
|
9.1%
|
|
7,690
|
|
4.0%
|
|
9,613
|
|
5.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible capital (to adjusted
total assets)
|
17,546
|
|
9.1%
|
|
2,884
|
|
1.5%
|
|
N/A
|
|
N/A
|
Discussion of Financial Condition Changes from June 30, 2009 to September 30, 2009
The Corporation’s total assets at September 30, 2009, were $192.4 million, a $3.4 million, or 1.8%, increase from the total at June 30, 2009.
Cash and cash equivalents totaled $13.6 million at September 30, 2009, a decrease of $188,000, or 1.4%, from the total at June 30, 2009. Investment securities totaled $7.0 million at September 30, 2009, a $1.1 million, or 19.2%, increase from the total at June 30, 2009, resulting from the purchase of one investment security. As a result of principal repayments, mortgage-backed securities totaled $288,000 at September 30, 2009, a $5,000, or 1.7% decrease compared to the total at June 30, 2009.
Loans receivable totaled $163.7 million at September 30, 2009, an increase of $2.2 million, or 1.4%, from the June 30, 2009 total. Loan originations during the period totaling $21.8 million were offset by principal repayments of $19.4 million and adjustments to the allowance for loan losses and net unamortized fees and costs . During the three-month period ended September 30, 2009, loan originations were comprised of $12.4 million of one- to four-family residential real estate loans, $7.4 million of nonresidential real estate loans, $900,000 million of consumer loans, $200,000 of commercial loans, and $900,000 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.
18
FFD Financial Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from June 30, 2009 to September 30, 2009
(continued)
The allowance for loan losses totaled $1.7 million at September 30, 2009, an increase of $30,000, or 1.8%, from June 30, 2009, and represented 1.04% of total loans at both dates. The increase resulted from a provision of $81,000 and recoveries of $2,000, which were partially offset by charge-offs of $53,000. Nonaccrual loans were $1.3 million at September 30, 2009 and were $949,000 at June 30, 2009. This represents .79% of loans receivable at September 30, 2009 and .59% of loans receivable on June 30, 2009. The increase was attributable to an increase in one- to four-family properties secured by first liens. Delinquent loans to total loans were 1.81% on September 30, 2009 and 1.69% on June 30, 2009. The increase was attributable to an increase in non-residential properties delinquent 30-89 days and one- to four-family properties secured by first liens on nonaccrual. There were no loans past due over 90 days and still on accrual. The composition of the loan portfolio remained relatively the same from June 30, 2009 to September 30, 2009. Real estate loans consisting of residential real estate, one- to four-family and multifamily and nonresidential real estate and land make up most of the portfolio. Impaired loan balances were $1,777,000 with an allowance of $445,000 and $1,823,000 with an allowance of $413,000 for September 30, 2009 and June 30, 2009 respectively. The 2.6% increase was not considered to be significant. Although management believes that the allowance for loan losses at September 30, 2009, 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.
Deposits totaled $158.7 million at September 30, 2009, a $5.1 million, or 3.3%, increase from total deposits at June 30, 2009. The increase resulted from management’s efforts to generate deposit growth through advertising, relationship banking strategies, consumers moving into insured deposits accounts from uninsured investment products and the opening of the new office in Berlin, Ohio. FHLB advances decreased 1.6% from $13.9 million at June 30, 2009 to $13.7 million at September 30, 2009. Other borrowed money, consisting of a line of credit with another financial institution decreased by $590,000 to $210,000 at September 30, 2009.
Other liabilities totaled $$1.4 million at September 30, 2009, a $1.0 million, or 41.7%, decrease from June 30, 2009. The decrease was primarily due to a $842,000 decrease in deposits in process accounts and a $75,000 decrease in accrued FDIC expense.
Shareholders’ equity totaled $18.0 million at September 30, 2009, an increase of $83,000, or .5%, from June 30, 2009. The increase was due to a decrease in the unrealized losses on securities designated as available for sale of $83,000. Period net earnings of $172,000 were offset by dividends paid of $172,000.
Comparison of Operating Results for the Three-Month Periods Ended September 30, 2009 and 2008
General
The Corporation’s net earnings totaled $172,000 for the three months ended September 30, 2009, a decrease of $159,000, or 48.0%, from the net earnings of $331,000 recorded in the comparable period in 2008. The decrease in net earnings resulted from an increase of $201,000, or 16.7%, in noninterest expense, a decrease of $110,000, or 6.7% in net interest income, which were partially offset by an increase of $41,000, or 24.7%, in noninterest income, and decreases of $24,000 in the provision for losses on loans and $87,000, or 49.2%, in federal income tax expense.
19
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, 2009 and 2008
(continued)
Net Interest Income
Total interest income decreased by $183,000, or 6.7%, to $2.5 million for the three months ended September 30, 2009, compared to the same period in 2008. The decrease was due primarily to decreases on yields across all categories of interest earning assets, despite general increases in average balances outstanding. Interest income on loans decreased by $134,000, or 5.2%, due to a 60 basis point decrease in yield, which more than offset an increase of $6.8 million, or 4.3%, in the average loan portfolio balance outstanding. Interest income on investment securities, decreased by $22,000, or 31.0%, to a total of $49,000, due to a 214 basis point decrease in yield, which was partially offset by a $1.1 million, or 18.9%, increase in the average balance outstanding. Interest income on interest bearing deposits, decreased by $25,000, or 44.6%, to a total of $31,000 for the three months ended September 30, 2009, due to a 197 basis point decrease in yield, which was partially offset by a $3.4 million, or 48.0%, increase in the average balance outstanding. Interest income on mortgage-backed securities decreased by $2,000, or 40.0%, due to a decrease of $60,000, or 18.9%, in the average balance outstanding and a 191 basis point decrease in yield.
Total interest expense decreased by $73,000, or 6.8%, to $1.0 million for the three months ended September 30, 2009, compared to the three months ended September 30, 2008. Interest expense on deposits decreased by $30,000, or 3.4%, due to a 35 basis point decrease in the average cost of deposits, to 2.15% for the 2009 quarter, which was partially offset by a $17.0 million , or 12.2%, increase in the average balance of deposits outstanding period to period. Interest expense on borrowings decreased by $43,000, or 21.2%, due to a $6.7 million, or 32.8%, decrease in the average balance of borrowings outstanding which was partially offset by a 48 basis point increase in the average cost of borrowings.
As a result of the foregoing, net interest income decreased by $110,000, or 6.7%, for the three months ended September 30, 2009, compared to the same period in 2008. The interest rate spreads were 3.23% and 3.67%, and the net interest margins were 3.38% and 3.85%, for the three-month periods ended September 30, 2009 and 2008, respectively.
Provision for Losses on Loans
The Corporation recorded a $81,000 provision for losses on loans during the three months ended September 30, 2009, and a $105,000 provision for the comparable quarter in 2008. The decrease in the provision for losses on loans was due to management’s assessment of the loan portfolio, delinquency rates, net charge-offs, and current economic conditions. Net charge-offs were $51,000 for the quarter ended September 30, 2009 and $58,000 for the comparable quarter in 2008. The allowance for losses on loans as a percentage of loans receivable remained constant at 1.04% for September 30, 2009 and June 30, 2009. There can be no assurance that the loan loss allowance will be adequate to cover losses on nonperforming assets in the future, which could result in additions to the allowance and could adversely affect the Corporation’s results of operations.
Noninterest Income
Noninterest income totaled $28,000 for the three months ended September 30, 2009, an increase of $2,000, or 7.7%, from the 2008 total.
20
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, 2009 and 2008
(continued)
Noninterest Expense
General, administrative and other expense totaled $1.4 million for the three months ended September 30, 2009, an increase of $201,000, or 16.7%, compared to the same period in 2008. The increase in noninterest expense includes increases of $50,000, or 9.1%, in employee compensation and benefits, $45,000, or 35.2%, in other operating expense, $44,000, or 183.3%, in FDIC insurance expense, $19,000, or 55.9%, in advertising, $14,000, in loss on sale of real estate owned, $12,000, or 28.6%, in postage and stationary supplies, $11,000, or 9.7%, in occupancy and equipment expense, $6,000, or 17.7%, in ATM processing, and $4,000, or 7.41% in checking account maintenance expense, which were slightly offset by decreases of $4,000, or 5.6%, in professional and consulting fees. The increase in employee compensation was due to normal merit increases and additional staffing in connection with the opening of the new Berlin, Ohio office. Portions of the increase in other operating expense, advertising, postage and stationary supplies, occupancy and equipment expense were also the result of opening and marketing the new Berlin office.
Federal Income Taxes
The Corporation recorded a provision for federal income taxes totaling $90,000 for the three months ended September 30, 2009, a decrease of $87,000, or 49.2%, over the same period in 2008. The decrease resulted from a $246,000, or 48.4%, decrease in earnings before taxes. The Corporation’s effective tax rates were 34.4% and 34.8%, for the three month periods ended September 30, 2009 and 2008, 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.
21
FFD Financial Corporation
PART II