FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-and nine-month periods ended March 31, 2012 and 2011
The amortized cost and fair value of available for sale securities and the related gross unrealized gains recognized in accumulated other comprehensive income were as follows:
|
|
|
March 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Amortized
|
|
|
unrealized
|
|
|
unrealized
|
|
|
Fair
|
|
|
|
|
cost
|
|
|
gains
|
|
|
losses
|
|
|
value
|
|
|
|
|
(In thousands)
|
|
|
Equity securities
|
|
$
|
2
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Backed Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal National Mortgage Association participation certificates
|
|
|
147
|
|
|
|
-
|
|
|
|
-
|
|
|
|
147
|
|
|
Government National Mortgage Association participation certificates
|
|
|
10,172
|
|
|
|
150
|
|
|
|
-
|
|
|
|
10,322
|
|
|
Total mortgage-backed securities available for sale
|
|
|
10,319
|
|
|
|
150
|
|
|
|
-
|
|
|
|
10,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,321
|
|
|
$
|
150
|
|
|
$
|
-
|
|
|
$
|
10,471
|
|
|
|
|
June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Amortized
|
|
|
unrealized
|
|
|
unrealized
|
|
|
Fair
|
|
|
|
|
cost
|
|
|
gains
|
|
|
losses
|
|
|
value
|
|
|
|
|
(In thousands)
|
|
|
U.S. Government agency obligations
|
|
$
|
5,999
|
|
|
$
|
20
|
|
|
$
|
-
|
|
|
$
|
6,019
|
|
|
Equity securities
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,001
|
|
|
|
20
|
|
|
|
-
|
|
|
|
6,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Backed Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal National Mortgage Association participation certificates
|
|
|
156
|
|
|
|
1
|
|
|
|
-
|
|
|
|
157
|
|
|
Government National Mortgage Association participation certificates
|
|
|
6,069
|
|
|
|
31
|
|
|
|
-
|
|
|
|
6,100
|
|
|
Total mortgage-backed securities available for sale
|
|
|
6,225
|
|
|
|
32
|
|
|
|
-
|
|
|
|
6,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,226
|
|
|
$
|
52
|
|
|
$
|
-
|
|
|
$
|
12,278
|
|
All mortgage backed securities held by the Corporation at March 31, 2012 and June 30, 2011 had underlying collateral of residential real estate.
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-and nine-month periods ended March 31, 2012 and 2011
|
6.
|
Securities
(continued)
|
The carrying amount, unrecognized gains and losses, and fair value of securities held to maturity were as follows:
|
|
|
March 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Carrying
|
|
|
unrecognized
|
|
|
unrecognized
|
|
|
Fair
|
|
|
|
|
amount
|
|
|
gains
|
|
|
losses
|
|
|
value
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Mortgage Corporation participation certificates
|
|
$
|
41
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
41
|
|
|
Total mortgage-backed securities held to maturity
|
|
$
|
41
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
41
|
|
|
|
|
June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Carrying
|
|
|
unrecognized
|
|
|
unrecognized
|
|
|
Fair
|
|
|
|
|
amount
|
|
|
gains
|
|
|
losses
|
|
|
value
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Mortgage Corporation participation certificates
|
|
$
|
51
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
51
|
|
|
Total mortgage-backed securities held to maturity
|
|
$
|
51
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
51
|
|
No securities were sold during the three or nine months ended March 31, 2012 or 2011.
The fair value and carrying amount of debt securities at March 31, 2012 by contractual maturity were as follows. Securities not due at a single maturity date, which consist primarily of mortgage-backed securities, are shown separately. Equity securities were excluded.
|
|
|
Held to maturity
|
|
|
Available for sale
|
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
|
amount
|
|
|
value
|
|
|
cost
|
|
|
value
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Due from one to five years
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Due from five to ten years
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Due after ten years
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Mortgage-backed
|
|
|
41
|
|
|
|
41
|
|
|
|
10,319
|
|
|
|
10,469
|
|
|
Total
|
|
$
|
41
|
|
|
$
|
41
|
|
|
$
|
10,319
|
|
|
$
|
10,469
|
|
Securities pledged to secure public deposits at March 31, 2012, and June 30, 2011, had carrying amounts of $4.0 million and $5.2 million, respectively.
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-and nine-month periods ended March 31, 2012 and 2011
|
6.
|
Securities
(continued)
|
At March 31, 2012, and June 30, 2011, 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. There were no securities with unrealized losses at March 31, 2012 and June 30, 2011.
|
7.
|
Recent Accounting Developments
|
In May 2011, the Finanical Accounting Standard Board (“FASB”) issued Accounting Standards Update No, 2011-4, "Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement-and Disclosure Requirements in U.S. GAAP and IFRSs." Some amendments in this update clarify the FASB's intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this update are effective during interim and annual reporting periods beginning after December 15, 2011. Adopting this new guidance did not have a material effect on the Corporation's financial statements.
In June 2011, the FASB issued Accounting Standards Update No. 2011-5, "Comprehensive Income (Topic 220), Presentation of Comprehensive Income." This update amends the FASB Accounting Standards Codification (Codification) to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments to the Codification in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and retrospective application is required. Adopting this new guidance did not have a material effect on the Corporation's financial statements.
In December 2011, the FASB issued Accounting Standards Update No. 2011-12, "Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-5." This update defers the specific requirement to present items that are reclassified from accumulated other comprehensive income to net income separately within their respective components of net income and other comprehensive income. As such, the amendments in this update supersede only those paragraphs in Accounting Standards Update No. 2011-5 that pertain to how and where reclassification adjustments are presented. The amendments were effective at the same time as the amendments in Accounting Standards Update 2011-5. Adopting this new guidance did not have a material effect on the Corporation's financial statements.
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-and nine-month periods ended March 31, 2012 and 2011
|
8.
|
Fair Value Measurement
|
Fair value is the price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are 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 how market participants would price an asset or liability.
The Corporation used the following methods and significant assumptions to estimate fair value:
Investment Securities
: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). The Corporation has no Level 3 investment securities.
Loan Servicing Rights
: On a quarterly basis, loan servicing rights are evaluated for impairment in traunches based upon the fair value of the rights as compared to carrying amount. If the carrying amount of an individual tranche exceeds fair value, impairment is recorded on that tranche so that the servicing asset is carried at fair value. Fair value is determined at a tranche level or alternatively based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and that can be validated against available market data (Level 2).
Impaired Loans
: Impaired loans are valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is commonly 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 independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-and nine-month periods ended March 31, 2012 and 2011
|
8.
|
Fair Value Measurement
(continued)
|
Assets Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below:
|
|
|
|
|
|
Fair value measurements
|
|
|
|
|
|
|
|
at March 31, 2012 Using
|
|
|
|
|
|
|
|
Quoted prices in
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
active markets
|
|
|
other
|
|
|
Significant
|
|
|
|
|
|
|
|
for identical
|
|
|
observable
|
|
|
unobservable
|
|
|
|
|
|
|
|
assets
|
|
|
inputs
|
|
|
inputs
|
|
|
|
|
Total
|
|
|
(Level 1
)
|
|
|
(Level 2
)
|
|
|
(Level 3
)
|
|
|
|
|
(in thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. government agency obligations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Equity securities
|
|
|
2
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
Federal National Mortgage Association participation certificates-residential
|
|
|
147
|
|
|
|
-
|
|
|
|
147
|
|
|
|
-
|
|
|
Government National Mortgage Association participation certificates-residential
|
|
|
10,322
|
|
|
|
-
|
|
|
|
10,322
|
|
|
|
-
|
|
|
Total securities available for sale
|
|
$
|
10,471
|
|
|
$
|
2
|
|
|
$
|
10,469
|
|
|
$
|
-
|
|
|
|
|
|
|
|
Fair value measurements
|
|
|
|
|
|
|
|
at June 30, 2011 Using
|
|
|
|
|
|
|
|
Quoted prices in
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
active markets
|
|
|
other
|
|
|
Significant
|
|
|
|
|
|
|
|
for identical
|
|
|
observable
|
|
|
unobservable
|
|
|
|
|
|
|
|
assets
|
|
|
inputs
|
|
|
inputs
|
|
|
|
|
Total
|
|
|
(Level 1
)
|
|
|
(Level 2
)
|
|
|
(Level 3
)
|
|
|
|
|
(in thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. government agency obligations
|
|
$
|
6,019
|
|
|
$
|
-
|
|
|
$
|
6,019
|
|
|
$
|
-
|
|
|
Equity securities
|
|
|
2
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
Federal National Mortgage Association participation certificates-residential
|
|
|
157
|
|
|
|
-
|
|
|
|
157
|
|
|
|
-
|
|
|
Government National Mortgage Association participation certificates-residential
|
|
|
6,100
|
|
|
|
-
|
|
|
|
6,100
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
$
|
12,278
|
|
|
$
|
2
|
|
|
$
|
12,276
|
|
|
$
|
-
|
|
All mortgage backed securities held by the Corporation at March 31, 2012 and June 30, 2011, had underlying collateral of residential real estate.
There were no transfers between Level 1 and Level 2 during fiscal 2012 or fiscal 2011.
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-and nine-month periods ended March 31, 2012 and 2011
|
8.
|
Fair Value Measurement
(continued)
|
Assets Measured on a Non-Recurring Basis
Assets measured at fair value on a non-recurring basis are summarized below:
|
|
|
Fair value measurements
|
|
|
|
|
at March 31, 2012 Using
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted prices in
|
|
|
Significant
|
|
|
|
|
|
|
|
active markets
|
|
|
other
|
|
|
Significant
|
|
|
|
|
for identical
|
|
|
observable
|
|
|
unobservable
|
|
|
|
|
assets
|
|
|
inputs
|
|
|
inputs
|
|
|
|
|
(Level 1
)
|
|
|
(Level 2
)
|
|
|
(Level 3
)
|
|
|
|
|
(in thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Loan servicing rights
|
|
$
|
-
|
|
|
$
|
515
|
|
|
$
|
-
|
|
|
Impaired loans, net of allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential one-to-four-family
|
|
|
-
|
|
|
|
-
|
|
|
|
329
|
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
110
|
|
|
Nonresidential real estate and land
|
|
|
-
|
|
|
|
-
|
|
|
|
207
|
|
|
Commercial loans – secured
|
|
|
-
|
|
|
|
-
|
|
|
|
26
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
515
|
|
|
$
|
672
|
|
The following impairment charges were recognized during the three and nine months ended March 31, 2012:
Impaired loan servicing rights, which are carried at lower of cost or fair value based on stratifying rights into groupings, were written down to a fair value of $515,000, resulting in a valuation allowance of $106,000. Net charges of $54,000 and $65,000 were included in earnings for the three and nine months ended March 31, 2012, respectively. Servicing rights totaling $152,000 were carried at amortized cost as of March 31, 2012.
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal balance of $968,000, with a valuation allowance of $296,000, resulting in an additional provision for loan losses of $5,000 and a reduction in the provision for loan losses of $221,000 for the respective three-and nine-month periods ended March 31, 2012.
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at March 31, 2012.
|
|
|
|
|
|
|
|
|
|
|
|
Range
|
|
|
|
|
|
|
|
Valuation
|
|
|
|
|
|
(Weighted
|
|
|
Impaired Loans
|
|
Fair value
|
|
|
Technique(s)
|
|
|
Unobservable Input(s)
|
|
|
Average)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential one-to-four family
|
|
$
|
329
|
|
|
Sales comparison
approach
|
|
|
Negatively adjusted for selling
costs and changes in market
conditions since appraisal
|
|
|
0%-35% (8.6%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonresidential real estate and land
|
|
|
317
|
|
|
Sales comparison
approach
|
|
|
Negatively adjusted for selling
costs and changes in market
conditions since appraisal
|
|
|
0%-22% (10.6%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans – secured
|
|
|
26
|
|
|
Sales comparison
approach
|
|
|
Negatively adjusted for selling
costs and changes in market
conditions since appraisal
|
|
|
5%-35% (35.8%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
672
|
|
|
|
|
|
|
|
|
|
|
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-and nine-month periods ended March 31, 2012 and 2011
|
8.
|
Fair Value Measurement
(continued)
|
Assets Measured on a Non-Recurring Basis
|
|
|
Fair value measurements
|
|
|
|
|
at June 30, 2011 Using
|
|
|
|
|
Quoted prices in
|
|
|
Significant
|
|
|
|
|
|
|
|
active markets
|
|
|
other
|
|
|
Significant
|
|
|
|
|
for identical
|
|
|
observable
|
|
|
unobservable
|
|
|
|
|
assets
|
|
|
inputs
|
|
|
inputs
|
|
|
|
|
(Level 1
)
|
|
|
(Level 2
)
|
|
|
(Level 3
)
|
|
|
|
|
(in thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Loan servicing rights
|
|
$
|
-
|
|
|
$
|
97
|
|
|
$
|
-
|
|
|
Impaired loans, net of allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential one-to-four-family
|
|
|
-
|
|
|
|
-
|
|
|
|
601
|
|
|
Nonresidential real estate and land
|
|
|
-
|
|
|
|
-
|
|
|
|
365
|
|
|
Commercial loans – secured
|
|
|
-
|
|
|
|
-
|
|
|
|
40
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
97
|
|
|
$
|
1,006
|
|
The following impairment charges were recognized during the year ended June 30, 2011:
Impaired loan servicing rights, which are carried at the lower of cost or fair value based on stratifying rights into groupings, were written down to a fair value of $97,000, resulting in a valuation allowance of $41,000. A net benefit of $67,000 from the recovery of servicing rights fair value was included in earnings for the year ending June 30, 2011. Servicing rights totaling $635,000 were carried at amortized cost.
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $1.57 million, with a valuation allowance of $568,000, resulting in an additional provision for loan losses of $456,000 for the year ended June 30, 2011.
The carrying amounts and estimated fair values of financial instruments, at March 31, 2012 and June 30, 2011 are as follows:
|
|
|
Fair value measurements at
|
|
|
|
|
March 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
(in thousands)
|
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
23,331
|
|
|
$
|
23,331
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
23,331
|
|
|
Investment securities available for sale
|
|
|
2
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
Mortgage-backed securities
|
|
|
10,510
|
|
|
|
-
|
|
|
|
10,510
|
|
|
|
-
|
|
|
|
10,510
|
|
|
Loans, net
|
|
|
193,537
|
|
|
|
-
|
|
|
|
-
|
|
|
|
193,467
|
|
|
|
193,467
|
|
|
Loans held for sale
|
|
|
764
|
|
|
|
-
|
|
|
|
768
|
|
|
|
-
|
|
|
|
768
|
|
|
Federal Home Loan Bank stock
|
|
|
2,422
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Loan servicing rights
|
|
|
667
|
|
|
|
-
|
|
|
|
515
|
|
|
|
-
|
|
|
|
515
|
|
|
Accrued interest receivable
|
|
|
559
|
|
|
|
-
|
|
|
|
27
|
|
|
|
532
|
|
|
|
559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
(202,121
|
)
|
|
$
|
(105,765
|
)
|
|
$
|
(98,021
|
)
|
|
$
|
-
|
|
|
$
|
(203,786
|
)
|
|
Federal Home Loan Bank advances
|
|
|
(12,428
|
)
|
|
|
-
|
|
|
|
(12,879
|
)
|
|
|
-
|
|
|
|
(12,879
|
)
|
|
Other borrowed funds
|
|
|
(566
|
)
|
|
|
-
|
|
|
|
(566
|
)
|
|
|
-
|
|
|
|
(566
|
)
|
|
Accrued interest payable
|
|
|
(102
|
)
|
|
|
(3
|
)
|
|
|
(99
|
)
|
|
|
-
|
|
|
|
(102
|
)
|
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-and nine-month periods ended March 31, 2012 and 2011
|
8.
|
Fair Value Measurement
(continued)
|
|
|
|
June 30, 2011
|
|
|
|
|
Carrying
amount
|
|
|
Fair
value
|
|
|
|
|
(in thousands)
|
|
|
Financial assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,296
|
|
|
$
|
16,296
|
|
|
Investment securities available for sale
|
|
|
6,021
|
|
|
|
6,021
|
|
|
Mortgage-backed securities
|
|
|
6,308
|
|
|
|
6,308
|
|
|
Loans, net,
including loans held for sale
|
|
|
182,226
|
|
|
|
182,004
|
|
|
Federal Home Loan Bank stock
|
|
|
2,422
|
|
|
|
n/a
|
|
|
Loan servicing rights
|
|
|
732
|
|
|
|
97
|
|
|
Accrued interest receivable
|
|
|
515
|
|
|
|
515
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
(185,043
|
)
|
|
$
|
(187,265
|
)
|
|
Federal Home Loan Bank advances
|
|
|
(13,137
|
)
|
|
|
(13,667
|
)
|
|
Other borrowed funds
|
|
|
(630
|
)
|
|
|
(630
|
)
|
|
Accrued interest payable
|
|
|
(118
|
)
|
|
|
(118
|
)
|
The methods and assumptions, not previously presented, used to estimate fair values are described as follows:
Cash and Cash Equivalents: The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.
FHLB Stock: It is not practical to determine the fair value of Federal Home Loan Bank (“FHLB”) stock due to restrictions placed on its transferability.
Loans: Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values, resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, that applies interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent the price at which the loan could be sold.
The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.
Deposits: Fair values for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount), resulting in a Level 1 classification. The carrying amounts of variable rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date, resulting in a Level 2 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits, resulting in a Level 2 classification.
FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-and nine-month periods ended March 31, 2012 and 2011
Other Borrowings: The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements, resulting in a Level 2 classification.
Accrued Interest Receivable/Payable: The carrying amounts of accrued interest approximate fair value. The level of accrued interest is determined by the classification level of the asset/liability they are associated with.
Off-balance Sheet Instruments: Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.
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 Form 10-Q that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve inherent risks and uncertainties, and may address our financial condition, results of operations, plans, objectives, future performance and business. Forward-looking statements may generally be identified by the words “may,” “expected,” “anticipated,” “estimated,” “intends,” “believes,” “plans,” “will,” “would,” “should,” “could,” “might,” “can,” or similar words. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to:
|
|
·
|
general economic conditions and weakening in the economy, specifically the real estate market, either nationally or in the Corporation’s market area;
|
|
|
·
|
deteriorating credit and asset quality;
|
|
|
·
|
political developments, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions;
|
|
|
·
|
changes in the interest rate environment and reductions in interest margins;
|
|
|
·
|
prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions;
|
|
|
·
|
our ability to maintain required capital levels and adequate sources of funding and liquidity;
|
|
|
·
|
competitive pressures among depository institutions;
|
|
|
·
|
effects of critical accounting policies and judgments;
|
|
|
·
|
required changes in accounting policies or procedures;
|
|
|
·
|
legislative or regulatory changes or actions, including the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”);
|
|
|
·
|
our ability to attract and retain key personnel;
|
|
|
·
|
our ability to dividend money from the Bank to the Corporation; and
|
|
|
·
|
our reputation in our primary market.
|
Any forward-looking statements contained in this report, in a report incorporated by reference to this report, or made by our management in other reports and filings, in press releases and in oral statements, involve risks and uncertainties and are subject to change based upon the factors listed above and like items. Actual results could differ materially from those expressed or implied, and therefore the forward-looking statements should be considered in light of these factors.
FFD Financial Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Business Overview
The Corporation was incorporated in Ohio in 1996, and its primary business is the operation of the Bank, its principal subsidiary, which was established in 1898. In late February 2012, the Bank completed its previously announced conversion from a federal savings bank to a national bank. The Bank is now subject to the rules and regulations governing national banks and is subject to regulation by the Office of the Comptroller of the Currency (the “OCC”) and the Federal Deposit Insurance Corporation (the “FDIC”). In connection with the Bank’s conversion to a national bank the Corporation converted from a savings and loan holding company to a bank holding company and is regulated, supervised and examined by the Federal Reserve. .
The Bank is a community-oriented financial institution offering a variety of financial services to meet the needs of the communities it serves. Its business model emphasizes personalized service, clients’ access to decision makers, solution-driven lending and quick execution, efficient use of technology and the convenience of remote deposit, telephone banking, and internet banking. It attracts deposits from the general public and uses the deposits, together with borrowings and other funds, primarily to originate commercial loans, single-family and multi-family residential mortgage loans, commercial real estate loans, vehicle loans, boat loans and home equity lines of credit. The majority of the Bank’s customers are consumers and small businesses.
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.
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 as a critical accounting policy and an understanding of this policy is necessary to understand the financial statements. Footnote 5 (Loans), and Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K for the year ended June 30, 2011 provide detail regarding 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, 2011.
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.
FFD Financial Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 March 31, 2012. Management is not aware of any matters occurring subsequent to March 31, 2012 that would cause the Bank's capital category to change.
The Bank’s actual and required capital amounts (in thousands) and ratios are presented below for March 31, 2012 and at fiscal year end 2011.
|
|
|
|
|
|
|
|
|
|
|
|
To be well
|
|
|
|
|
|
|
|
|
|
|
Required
|
|
|
capitalized under
|
|
|
|
|
|
|
|
|
|
|
for capital
|
|
|
prompt corrective
|
|
|
|
|
Actual
|
|
|
adequacy purposes
|
|
|
action regulations
|
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
As of March 31, 2012
|
|
|
|
|
|
|
|
Total capital to risk weighted assets
|
|
$
|
21,931
|
|
|
|
12.88
|
%
|
|
$
|
13,620
|
|
|
|
8.00
|
%
|
|
$
|
17,025
|
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 (core) capital to risk weighted assets
|
|
|
19,717
|
|
|
|
11.58
|
%
|
|
|
6,810
|
|
|
|
4.00
|
%
|
|
|
10,215
|
|
|
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 (core) capital to adjusted assets
|
|
|
19,717
|
|
|
|
8.42
|
%
|
|
|
9,364
|
|
|
|
4.00
|
%
|
|
|
11,705
|
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible capital (to adjusted total assets)
|
|
|
19,717
|
|
|
|
8.42
|
%
|
|
|
3,512
|
|
|
|
1.50
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To be well
|
|
|
|
|
|
|
|
|
|
|
Required
|
|
|
capitalized under
|
|
|
|
|
|
|
|
|
|
|
for capital
|
|
|
prompt corrective
|
|
|
|
|
Actual
|
|
|
adequacy purposes
|
|
|
action regulations
|
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk weighted assets
|
|
$
|
20,794
|
|
|
|
12.43
|
%
|
|
$
|
13,388
|
|
|
|
8.0
|
%
|
|
$
|
16,735
|
|
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 (core) capital to risk weighted assets
|
|
|
19,137
|
|
|
|
11.44
|
%
|
|
|
6,694
|
|
|
|
4.0
|
%
|
|
|
10,041
|
|
|
|
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 (core) capital to adjusted assets
|
|
|
19,137
|
|
|
|
8.72
|
%
|
|
|
8,779
|
|
|
|
4.0
|
%
|
|
|
10,973
|
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible capital (to adjusted total assets)
|
|
|
19,137
|
|
|
|
8.72
|
%
|
|
|
3,292
|
|
|
|
1.50
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
FFD Financial Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
General
The Corporation’s net income is dependent primarily on net interest income, which is the difference between the interest income earned on loans and securities and the interest paid on deposits and borrowed funds. Net interest income is affected by regulatory, economic and competitive factors, such as federal monetary policy, that influence interest rates, loan demand and deposit flows. Net income is also affected by, among other things, loan fee income, provisions for loan losses, service charges, gains on loan sales, operating expenses, and franchise and income taxes. Operating expenses principally consist of employee compensation and benefits, occupancy, and other general and administrative expenses. In general, results of operations are significantly affected by overall economic and competitive conditions, particularly changes in market interest rates, government policies, and actions of regulatory authorities. Future changes in applicable laws, regulations or government policies may materially impact our performance.
Tuscarawas County and Holmes County in the Bank's primary market area had 7.8% and 5.6% unemployment at March 31, 2012, respectively. This compares favorably to the State of Ohio’s unemployment rate of 7.8% for March 2012. In the Bank’s market area, however, residential real estate sales and construction remain relatively soft. Commercial loan demand is improving and overall loan demand was stronger than in prior quarters. Tuscarawas County, and to a lesser extent Holmes County, is experiencing an elevated level of oil and natural gas related economic activity related to the Marcellus Shale and Utica Shale gas and oil reserves.
Dodd-Frank imposes new restrictions and an expanded framework of regulatory oversight on financial institutions, including depository institutions. Because Dodd-Frank requires various federal agencies to adopt a broad range of regulations with significant discretion, many of the details of the new law and the effects it will have on the Corporation and the Bank will not be known for months or even years. Many provisions of Dodd-Frank will not be implemented immediately and will require interpretation and extensive rule making by federal regulators. The Corporation is closely monitoring all relevant sections of Dodd-Frank to ensure continued compliance with laws and regulations.
Management’s Discussion and Analysis represents a review of the Corporation’s consolidated financial condition and results of operations. This review should be read in conjunction with the Corporation’s Consolidated Financial Statements and related notes.
Discussion of Financial Condition Changes from June 30, 2011 to March 31, 2012
The Corporation’s total assets at March 31, 2012, were $237.2 million, a $17.7 million, or 8.1%, increase from the total at June 30, 2011.
Cash and cash equivalents totaled $23.3 million at March 31, 2012, an increase of $7.0 million, or 43.2%, from the total at June 30, 2011. The Corporation holds a portion of these funds in interest-bearing deposits, which may be invested in securities or loans in the future. The increase was primarily a result of deposit growth and proceeds from calls of investment securities available for sale.
All available for sale investment securities have been called since June 30, 2011. The remaining $2,000 is an equity investment in Federal Agricultural Mortgage Corporation stock.
Primarily from purchases and to a lesser extent from mark to market adjustments, mortgage-backed securities totaled $10.5 million at March 31, 2012, a $4.2 million, or 66.6%, increase from the total June 30, 2011 of $6.3 million. Investments were made in liquid mortgage-backed securities to improve asset yield and provide liquidity until those funds can be used to originate loans.
FFD Financial Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from June 30, 2011 to March 31, 2012
(continued)
Loans receivable, including loans held for sale, totaled $194.3 million at March 31, 2012, an increase of $12.1 million, or 6.6%, from the June 30, 2011 total. Loans secured by nonresidential real estate and land totaled $87.2 million at March 31, 2012, an increase of $5.2 million, or .6.4%, from June 30, 2011. The portfolio of loans secured by one- to four-family residential real estate increased by $5.0 million, or 7.1%, to $74.6 million at March 31, 2012. Commercial loans increased $2.6 million or 11.4%, from June 30, 2011 to a total of $25.4 million at March 31, 2012. Multi-family loans increased by $637,000, or 9.2%, to $7.6 million at March 31, 2012.
During the nine months ended March 31, 2012, loan originations totaling $77.5 million were substantially offset by principal repayments of $67.0 million, adjustments to the allowance for loan losses and net unamortized fees and costs. These loan originations were comprised of $48.1 million of one- to four-family residential real estate loans, $19.7 million of nonresidential real estate loans, $5.8 million of commercial loans, $2.6 million of consumer loans and $1.3 million of multi-family real estate loans. One- to four-family residential real estate originations resulted primarily from refinancings, while demand from home buyers remained soft. The increase in nonresidential real estate and land and commercial loans resulted primarily from increased refinancing of loans from other financial institutions, increased demand for commercial loans and the Banks marketing effort.
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 $2.2 million at March 31, 2012, an increase of $40,000, or 1.8%, from June 30, 2011, and represented 1.13% and 1.18% of total loans at those respective dates. The increase resulted from provisions of $556,000 and recoveries of $1,000, which were partially offset by charge-offs of $517,000, of which $447,000 were impaired loans with specific reserves allocated to them in prior periods.
Nonaccrual loans were $2.6 million at March 31, 2012 and $1.8 million at June 30, 2011, which represented 1.30% and 0.97% of total loans at those respective dates. Non-accruing multi-family residential real estate increased by $691,000, non-residential real estate and land mortgage loans increased by $222,000, commercial loans-secured increased by $27,000, one- to four-family properties secured by first liens decreased by $168,000 and consumer and other loans decreased by $15,000. The decrease in one- to four-family properties was partially due to the resolution of a number of non-performing one- to four-family loans during the period. The overall increase in non-accruing loans was partially the result of increased downgrades on risk ratings within the multi-family residential and nonresidential real estate and land portfolios. Management has reviewed these loans for loss exposure and believes they are adequately collateralized or potential losses are specifically reserved in the event of foreclosure.
Delinquent loans to total loans were 0.74% at March 31, 2012 and 1.19% at June 30, 2011. At March 31, 2012, there were no loans past due over 90 days and still on accrual. .There can be no assurance that increases in nonaccrual and delinquent loans will not occur in future periods.
Impaired loan balances were $2.6 million (with an allowance of $296,000) and $2.5 million (with an allowance of $568,000) at March 31, 2012 and June 30, 2011, respectively. Although management believes that the allowance for loan losses at March 31, 2012, 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.
FFD Financial Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from June 30, 2011 to March 31, 2012
(continued)
Prepaid expenses and other assets totaled $1.5 million at March 31, 2012, a $398,000, or 36.0%, increase from the June 30, 2011 balance of $1.1 million. The increase was the result of prepayments for equipment service contracts and software principally connected with the Bank’s data processing conversion.
Deposits totaled $202.1 million at March 31, 2012, a $17.1 million, or 9.2%, increase from total deposits at June 30, 2011. This increase was attributable to deposit growth at the Bank’s branches resulting from what management believes is our strong banking franchise and reputation in the Bank’s market. Our customers also moved funds into insured deposit accounts from uninsured investment vehicles, such as stocks and mutual funds, further increasing liquidity. We also experienced the continued growth of the Kasasa© program that is designed to attract lower cost transactional deposit relationships, allowing us to reduce reliance on time deposits. The Kasasa© program has an added benefit of enhancing non-interest income through increased point of sale transaction activity. Management also believes that some deposit growth may be attributable to elevated mineral rights leasing payments to land owners related to the Marcellus Shale and Utica Shale natural gas and oil reserves.
FHLB advances decreased $709,000 due to principal repayments from June 30, 2011 to March 31, 2012. Other borrowed money, consisting of a line of credit with another financial institution, decreased $64,000 from June 30, 2011 to March 31, 2012.
Other liabilities totaled $1.8 million at March 31, 2012, a $246,000 increase from the June 30, 2011 balance of $1.6 million. The increase was primarily due to an increase of $213,000 in custodial payments processing accounts.
Shareholders’ equity totaled $19.8 million at March 31, 2012, an increase of $832,000, or 4.4%, from June 30, 2011. The increase was primarily due to net earnings of $1.2 million, and an increase in the unrealized gain on securities designated as available for sale of, net of tax, totaling $64,000, which were partially offset by dividends of $518,000.
FFD Financial Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Nine-Month Periods Ended March 31, 2012 and 2011
General
The Corporation’s net earnings totaled $1.2 million for the nine months ended March 31, 2012, an increase of $162,000, or 15.0%, from the net earnings of $1.1 million recorded in the comparable period in 2011. The increase in net earnings resulted from increases of $389,000, or 6.9%, in net interest income, $61,000, or 6.6%, in noninterest income and a decrease of $96,000, or 14.7%, in the provision for losses on loans, which were partially offset by increases of $299,000, or 7.0%, in noninterest expenses and $85,000, or 15.1%, in the provision for federal income taxes.
Net Interest Income
The Bank experienced an increase in net interest income in the current period as a result of its efforts to grow income generating assets and the favorable re-pricing of time deposits.
Total interest income increased $10,000, or 0.1%, to $8.0 million for the nine months ended March 31, 2012, compared to the same period in 2011. The increase was due primarily to a $20.0 million increase in the average balances outstanding, which was partially offset by a 48 basis point decrease in yield. Interest income on mortgage-backed securities increased by $118,000, due to an increase of $8.6 million in the average balance outstanding. Interest income on interest bearing deposits increased $6,000, or 6.9%, to a total of $93,000 for the nine-months ended March 31, 2012, due to a $8.6 million, or 95.5%, increase in the average balance outstanding, which was partially offset by a 59 basis point decrease in yield. Interest income on investment securities decreased by $94,000, or 71.2%, due to a 46 basis point decrease in yield and a $4.2 million, or 65.1%, decrease in the average balance outstanding. Interest income on loans decreased by $20,000, or 0.3%, due to a 25 basis point decrease in yield, which was partially offset by an increase of $8.0 million, or 4.4%, in the average loan portfolio balance outstanding. Mortgage-backed securities totaling $5.0 million were purchased in the first quarter of fiscal 2012. This purchase was a strategy to improve asset yield and diversify our investment portfolio from step-up callable agency securities to increase the cash flow of the investment portfolio.
Total interest expense decreased by $379,000, or 16.5%, to $1.9 million for the nine months ended March 31, 2012, compared to the 2011 period. Interest expense on deposits decreased by $308,000, or 16.7%, due to a 36 basis point decrease in the average cost of deposits, to 1.05%, for the 2012 period, which was partially offset by a $21.0 million, or 12.1%, increase in the average balance outstanding. Interest expense on borrowings decreased by $71,000, or 15.6%, due to a $636,000, or 4.5%, decrease in the average balance outstanding, and a 50 basis point decrease in the average cost.
As a result of the foregoing, net interest income increased by $389,000, or 6.9%, for the nine months ended March 31, 2012, compared to the same fiscal period in 2011. The interest rate spreads were 3.60% and 3.70%, and the net interest margins were 3.67% and 3.79%, for the nine-month periods ended March 31, 2012 and 2011, respectively. The decrease in the interest rate spread and net interest margin have been the result of interest earning assets re-pricing to lower rates faster than interest costing liabilities, liquid assets having lower yields and holding more interest-bearing deposits over the nine-month period.
FFD Financial Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Nine-Month Periods Ended March 31, 2012 and 2011 (continued)
Provision for Losses on Loans
The Corporation recorded a $556,000 provision for losses on loans during the nine months ended March 31, 2012, and a $652,000 provision for the comparable period in 2011. 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 $516,000 for the nine months ended March 31, 2012 and $172,000 for the comparable nine months in 2011. The increase in net charge-offs was primarily attributable to the charge-off of impaired loans which had $304,000 of specific reserves allocated to them in prior periods. The decision to charge-off these loans was due to continued evaluation of the borrower’s ability to pay and economic circumstances. An increase of $319,000 in general reserves was recorded on non-impaired loans during the nine months ended March 31, 2012 compared to the prior period, largely in response to loan portfolio growth. Although management believes that the provision was adequate at March 31, 2012, 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 $983,000 for the nine months ended March 31, 2012, an increase of $61,000, or 6.6%, from the 2011 total. Net gain on sale of loans increased by $55,000, or 9.3%, to $646,000 for the nine months ended March 31, 2012, compared to $591,000 for the nine months ended March 31, 2011. The increase in gain on sale of loans resulted from an increase in profit on loans sold into the secondary mortgage market and was partially offset by a 20.9% decline in volume due to a decrease in the number of newly originated and refinanced loans. Service charges on deposit accounts increased by $71,000, or 26.9%, to $335,000 for the nine months ended March 31, 2012, compared to $264,000 for the same period in 2011. Mortgage servicing revenue decreased $91,000 in 2012 compared to the same period in 2011, due to greater amortization expense and an impairment charge to servicing rights fair value. The greater amortization expense partially resulted from the refinancing of loans with greater original servicing right values. The impairment charge to servicing rights primarily resulted from declining interest rates in the secondary market in the third fiscal quarter.
Noninterest Expense
Noninterest expense totaled $4.6 million for the nine months ended March 31, 2012, an increase of $299,000, or 7.0%, compared to the same period in 2011. The increase in noninterest expense includes increases of $117,000, or 6.0%, in employee and director compensation and benefits, $103,000, or 18.9%, in other operating expense, $66,000, or 31.9%, in professional and consulting fees, $65,000, or 15.8%, in occupancy and equipment expense, $57,000, or 43.9%, in advertising, $22,000, or 20.4%, in ATM processing and $14,000, or 4.8%, in data processing, which were partially offset by a decrease of $135,000, or 67.5%, in FDIC insurance expense. The increase in employee compensation was due to additional staffing for operations and normal merit increases. The increase in professional and consulting fees resulted from consulting fees for analysis and contract negotiations for data processing services and one-time costs related to the conversions to a national bank and bank holding company. The increase in other operating expense was partially the result of Kasasa© licensing and account fee charges, internet banking fees and increased accrual for bank examination fees. The increase in advertising was partially the result of marketing the Kasasa© checking and savings program. Effective April 1, 2011, the FDIC changed to an asset based assessment from a deposit based assessment for the calculation of FDIC insurance premiums. The Corporation benefitted from the change in the assessment base, which reduced the Bank’s deposit premiums.
Federal Income Taxes
The Corporation recorded a provision for federal income taxes totaling $647,000 for the nine months ended March 31, 2012, an increase of $85,000, or 15.1%, over the same period in 2011. The increase resulted from a $247,000, or 15.1%, increase in earnings before taxes. The Corporation’s effective tax rate was 34.3% for both nine-month periods ended March 31, 2012 and 2011.
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 March 31, 2012 and 2011
General
The Corporation’s net earnings totaled $419,000 for the three months ended March 31, 2012, an increase of $71,000, or 20.4%, from the net earnings of $348,000 recorded in the comparable period in 2011. The increase in net earnings resulted from increases of $144,000, or 7.6%, in net interest income and $141,000, or 65.9%, in noninterest income, which were partially offset by increases of $146,000, or 10.1%, in noninterest expenses, $30,000, or 25.0%, in the provision for losses on loans and $38,000, or 21.1%, in the provision for federal income taxes.
Net Interest Income
Total interest income increased $75,000, or 2.9%, to $2.7 million for the three months ended March 31, 2012, compared to the same period in 2011. The increase was due primarily to a $23.7 million increase in the average balances outstanding of interest earning assets, which was partially offset by a 41 basis point decrease in yield. Interest income on loans increased by $60,000, or 2.4%, due to an increase of $11.6 million, or 6.3%, in the average loan portfolio balance outstanding, which was partially offset by a 20 basis point decrease in yield. Interest income on mortgage-backed securities increased by $43,000, due to an increase of $10.1 million in the average balance outstanding, which was partially offset by a 64 basis point decrease in yield. Interest income on interest bearing deposits increased $5,000, or 16.7%, to a total of $35,000 for the three-months ended March 31, 2012, due to a $7.2 million, or 62.2%, increase in the average balance outstanding, which was partially offset by a 31 basis point decrease in yield. Interest income on investment securities decreased by $33,000, or 94.3%, due to a $5.3 million, or 88.8%, decrease in the average balance outstanding and a 77 basis point decrease in yield.
Total interest expense decreased by $69,000, or 10.0%, to $621,000 for the three months ended March 31, 2012, compared to the three months ended March 31, 2011, primarily due to overall rate decreases. Interest expense on deposits decreased by $45,000, or 8.3%, due to a 24 basis point decrease in the average cost of deposits, to .99% for the 2012 period, which was partially offset by a $24.8 million, or 14.2%, increase in the average balance outstanding. Interest expense on borrowings decreased by $24,000, or 16.2%, due to a $784,000, or 5.6%, decrease in the average balance outstanding, and a 47 basis point decrease in the average cost.
As a result of the foregoing, net interest income increased by $144,000, or 7.6%, for the three months ended March 31, 2012, compared to the same period in 2011. The interest rate spreads were 3.55% and 3.67%, and the net interest margins were 3.61% and 3.75%, for the three-month periods ended March 31, 2012 and 2011, respectively.
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 March 31, 2012 and 2011
(continued)
Provision for Losses on Loans
The Corporation recorded a $150,000 provision for losses on loans during the three months ended March 31, 2012, and a $120,000 provision for the comparable quarter in 2011. The increase 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 for the quarter ended March 31, 2012 were $66,000 and $78,000 for the comparable quarter in 2011. An increase of $145,000 in general reserves was recorded on non-impaired loans during the quarter ended March 31, 2012 as compared to the prior quarter, largely in response to loan portfolio growth. Although management believes that the provision was adequate at March 31, 2012, 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 $355,000 for the three months ended March 31, 2012, an increase of $141,000, or 65.9%, from the 2011 total. Net gain on sale of loans increased by $169,000, or 301.8%, to $225,000 for the three months ended March 31, 2012, compared to $56,000 for the three months ended March 31, 2011. The increase in gain on sale of loans resulted from a 67.3% increase in loans sold into the secondary mortgage market due to a significant increase in the number of newly originated and refinanced loans in the current economic climate. Service charges on deposit accounts increased by $41,000, or 48.8%, to $125,000 for the three months ended March 31, 2012, compared to $84,000 for the same period in 2011. Quarterly mortgage servicing revenue decreased $96,000 as compared to the quarter ending March 31, 2011, due to greater amortization expense and an impairment charge to the fair value of servicing rights. The greater amortization expense partially resulted from the refinancing of loans with greater original servicing right values. The impairment charge to servicing rights fair value primarily resulted from declining interest rates in the secondary market during the third fiscal quarter.
Noninterest Expense
Noninterest expense totaled $1.6 million for the three months ended March 31, 2012, an increase of $146,000, or 10.6%, compared to the same period in 2011. The increase in noninterest expense includes increases of $55,000, or 30.2%, in other operating expense, $45,000, or 36.3%, in occupancy and equipment expense, $37,000, or 5.5%, in employee and director compensation and benefits, $25,000, or 34.7%, in professional and consulting fees, $24,000, or 60.0%, in advertising, and $14,000, or 38.9% in ATM processing, which were partially offset by a decrease of $54,000, or 71.1%, in FDIC insurance expense. The increase in other operating expense was the result of Kasasa© licensing and account fee charges, internet banking fees and increased accrual for bank examination fees. The increase in occupancy and equipment expense was due to increases in maintenance and software contracts expense primarily from the data processing conversion. The increase in employee compensation was due to additional staffing for operations, overtime hours to train for the data processing conversion and normal merit increases. The increase in advertising was partially the result of marketing the Kasasa© checking and savings program. Effective April 1, 2011, the FDIC changed to an asset based assessment from a deposit based assessment for the calculation of FDIC insurance premiums. The Corporation benefitted from the change in the assessment base, which reduced its deposit premiums.
Federal Income Taxes
The Corporation recorded a provision for federal income taxes totaling $218,000 for the three months ended March 31, 2012, an increase of $38,000, or 21.1%, over the same period in 2011. The increase resulted from a $109,000, or 20.6%, increase in earnings before taxes. The Corporation’s effective tax rates were 34.3% and 34.1%, for the three-month periods ended March 31, 2012 and 2011, respectively.
FFD Financial Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
|
ITEM
3:
|
Quantitative and Qualitative Disclosures About
Market Risk
|
Not required.
|
ITEM 4:
|
Controls and Procedure
s
|
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.
FFD Financial Corporation
PART
II
|
ITEM 1.
|
Legal Proceedings
|
None
Not required
|
ITEM 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
|
ITEM 3.
|
Defaults Upon Senior Securities
|
Not applicable
|
ITEM 4.
|
Mine Safety Disclosures
|
None.
|
ITEM 5.
|
Other Information
|
None.
|
|
Section 302 Chief Executive Officer certification
|
|
|
Section 302 Chief Financial Officer certification
|
|
|
Section 906 Chief Executive Officer certification
|
|
|
Section 906 Chief Financial Officer certification
|
|
101
|
Interactive Data File
|
FFD Financial Corporation
SIGNATUR
ES
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:
|
May 15, 2012
|
|
By:
|
/s/Trent B. Troyer
|
|
|
|
|
|
Trent B. Troyer
|
|
|
|
|
|
President and Chief Executive Officer
|
|
|
|
|
|
|
|
|
Date:
|
May 15, 2012
|
|
By:
|
/s/Robert R. Gerber
|
|
|
|
|
|
Robert R. Gerber
|
|
|
|
|
|
Senior Vice President, Treasurer and
|
|
|
|
|
|
Chief Financial Officer
|
|