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| FFDF > SEC Filings for FFDF > Form 10-Q on 14-Nov-2008 | All Recent SEC Filings |
14-Nov-2008
Quarterly Report
Forward-Looking Statements
Certain statements contained in this report that are not historical facts are forward-looking statements that are subject to certain risks and uncertainties. When used herein, the terms "anticipates," "plans," "expects," "believes," and similar expressions as they relate to FFD or its management are intended to identify such forward looking statements. FFD's actual results, performance or achievements may materially differ from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general and local economic conditions, changes in the interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, and rapidly changing technology affecting financial services.
Critical Accounting Policies
The financial condition and results or operations for the Corporation presented in the Consolidated Financial Statements, accompanying notes to the Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations are, to a large degree, dependent upon the Corporation's accounting policies. The selection and application of these accounting policies involve judgments, estimates and uncertainties that are susceptible to change.
The Company has identified the appropriateness of the allowance for loan losses and the valuation of securities as critical accounting policies and an understanding of these policies are necessary to understand the financial statements. Critical accounting policies are those policies that require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Footnote A (Securities and Allowance for Loan Losses), footnote B (Securities), footnote C (Loans) and Management Discussion and Analysis of Financial Condition and Results from Operations in the 2008 Form 10-KSB provide detail with regard to the Corporation's accounting for the allowance for loan losses and valuation of securities. There have been no significant changes in the application of accounting policies since June 30, 2008.
Liquidity
The objective of liquidity management is to ensure adequate cash flows to accommodate the demands of our customers and provide adequate flexibility for the Corporation to take advantage of market opportunities under both normal operating conditions and under unpredictable circumstances of industry or market stress. Cash is used to fund loan purchase investments, fund the maturity of liabilities, and at times to fund deposit outflows and operating activities. The Corporation's principal sources of funds are deposits; amortization and prepayments of loans; maturities, sales and principal receipt from securities: borrowings; and operations. Management considers the asset position of the Corporation to be sufficiently liquid to meet normal operating needs and conditions. The Corporation's earning assets are mainly comprised of loans and investment securities. Management continually strives to obtain the best mix of loans and investments to both maximize yield and insure the soundness of the portfolio, as well as to provide funding for loan demand as needed.
Capital Resources
The Bank is subject to various regulatory capital requirements administered by federal regulatory agencies. Capital adequacy guidelines and prompt corrective-action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the Corporation's financial statements. The Bank is considered well capitalized under the Federal Deposit Insurance Act at September 30, 2008. Management is not aware of any matters occurring subsequent to September 30, 2008 that would cause the Bank's capital category to change.
Discussion of Financial Condition Changes from June 30, 2008 to
September 30, 2008
The Corporation's total assets at September 30, 2008, were $176.3 million, a $5.4 million, or 3.0%, decrease from the total at June 30, 2008.
Cash and cash equivalents totaled $7.1 million at September 30, 2008, a decrease of $6.0 million, or 45.9%, from the total at June 30, 2008. Investment securities totaled $5.6 million at September 30, 2008, a $42,000, or .75%, decrease from the total at June 30, 2008, which resulted primarily from mark-to-market adjustments under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Mortgage-backed securities totaled $310,000 at September 30, 2008, a $13,000, or 4.03% decrease compared to the total at June 30, 2008, which resulted from principal repayments and a $4,000 mark-to-market adjustment under SFAS No. 115.
Loans receivable totaled $156.6 million at September 30, 2008, an increase of $367,000, or .24%, from the June 30, 2008 total. Loan originations during the period totaling $16.5 million were substantially offset by principal repayments of $13.7 million, loans sold in the secondary market of $2.0 million and loans sold to other financial institutions of $13,000. During the three-month period ended September 30, 2008, loan originations were comprised of $11.5 million of one- to four-family residential real estate loans, $3.6 million of nonresidential real estate loans, $800,000 of consumer loans, $500,000 of commercial loans, and $70,000 of multifamily real estate loans. Nonresidential real estate and commercial lending generally involve a higher degree of risk than one- to four-family residential real estate lending due to the relatively larger loan amounts and the effects of general economic conditions on the successful operation of income-producing properties and businesses. The Corporation endeavors to reduce this risk by evaluating the credit history and past performance of the borrower, the location of the real estate, the quality of the management operating the property or business, the debt service ratio, the quality and characteristics of the income stream generated by the property or business and appraisals supporting the real estate or collateral valuation.
The allowance for loan losses totaled $1,529,000 at September 30, 2008, an increase of $47,000, or 3.2%, from the June 30, 2008 balance of $1,482,000, and represented .97% and .94% of total loans at each of those respective dates. The increase resulted from a provision of $105,000 and recoveries of $2,000, which were partially offset by charge-offs of $60,000. Although management believes that the allowance for loan losses at September 30, 2008, is adequate based upon the available facts and circumstances, there can be no assurance that additions to the allowance will not be necessary in future periods, which could adversely affect the Corporation's results of operations. The allowance for loan losses as a percentage of loans was higher at September 30, 2008 than June 30, 2008 due to general economic concerns of the Corporation's market area.
Deposits totaled $136.0 million at September 30, 2008, a $5.3 million, or 3.8%, decrease from total deposits at June 30, 2008. The decrease in deposits was the result of significant interest rate pressure from a couple of large competitors. The Corporation chose to prudently manage interest rate risk by not "paying-up" for deposits to match the large competitors. FHLB advances totaled $20.4 million at September 30, 2008, a $165,000, or .8%, decrease from the June 30, 2008 total. The FHLB advances were primarily used to fund loan growth.
Discussion of Financial Condition Changes from June 30, 2008 to
September 30, 2008 (continued)
Shareholders' equity totaled $18.3 million at September 30, 2008, an increase of $157,000, or .9%, over June 30, 2008. The increase was due primarily to period net earnings of $331,000, proceeds from the exercise of stock options totaling $18,000, which were partially offset by dividends paid of $176,000 and an increase in the unrealized losses on securities designated as available for sale of $32,000. At September 30, 2008, the Bank's regulatory capital exceeded the requirements to be considered "well capitalized."
Comparison of Operating Results for the Three-Month Periods Ended
September 30, 2008 and 2007
General
The Corporation's net earnings totaled $331,000 for the three months ended September 30, 2008, a decrease of $77,000, or 18.9%, from the net earnings of $408,000 recorded in the comparable period in 2007. The decrease in net earnings resulted from increases of $63,000, or 5.5%, in general, administrative and other expenses and $17,000 in the provision for losses on loans and a decrease of $59,000, or 3.5%, in net interest income, which were partially offset by an increase of $28,000, or 20.3%, in other operating income and a decrease in federal income tax expense of $34,000.
Net Interest Income
Total interest income decreased by $363,000, or 11.8%, to $2.7 million for the three months ended September 30, 2008, compared to the same period in 2007. Interest income on loans decreased by $370,000, or 12.5%, due to an increase of $1.9 million, or 1.2%, in the average loan portfolio balance outstanding, which was more than offset by a 98 basis point decrease in yield. Interest income on investment securities, interest-bearing deposits and other increased by $8,000, or 6.7%, to a total of $127,000 for the three months ended September 30, 2008, due to a $2.8 million, or 29.1%, increase in the average balance outstanding, which was partially offset by a 83 basis point decrease in yield. Interest income on mortgage-backed securities decreased by $1,000, or 16.7%, due to a decrease of $40,000, or 11.1%, in the average balance outstanding and a 61 basis point decrease in yield.
Total interest expense decreased by $304,000, or 22.0%, to $1.1 million for the three months ended September 30, 2008, compared to the three months ended September 30, 2007. Interest expense on deposits decreased by $317,000, or 26.6%, due to a 92 basis point decrease in the average cost of deposits, to 2.51% for the 2008 quarter, which was offset slightly by a $453,000, or .3%, increase in the average balance of deposits outstanding period to period. Interest expense on borrowings increased by $13,000, or 6.8%, due to a 109 basis point decrease in the average cost of borrowings, which was more than offset by an increase of $5.5 million, or 36.4%, in the average balance of borrowings outstanding.
As a result of the foregoing changes in interest income and interest expense, net interest income decreased by $59,000, or 3.5%, for the three months ended September 30, 2008, compared to the same period in 2007. The interest rate spreads were 3.67% and 3.79%, and the net interest margins were 3.85% and 4.06%, for the three-month periods ended September 30, 2008 and 2007, respectively.
Comparison of Operating Results for the Three-Month Periods Ended
September 30, 2008 and 2007 (continued)
Provision for Losses on Loans
The Corporation recorded a $105,000 provision for losses on loans during the three months ended September 30, 2008, and a $88,000 provision for the comparable quarter in 2007. The increase in the allowance for losses on loans was primarily due to identified problem loans, changes in the portfolio mix from residential real estate to nonresidential real estate, loan charge-offs and management's assessment of general economic conditions. There can be no assurance that the loan loss allowance will be adequate to cover losses on nonperforming assets in the future, which can adversely affect the Corporation's results of operations.
Other Income
Other income totaled $166,000 for the three months ended September 30, 2008, an increase of $28,000, or 20.3%, from the 2007 total. The increase was primarily due to a $28,000 reversal of a valuation allowance for mortgage servicing rights. The reversal of the valuation allowance for mortgage servicing rights was attributable to rising market interest rates and a seasoned portfolio of serviced mortgages.
General, Administrative and Other Expense
General, administrative and other expense totaled $1.2 million for the three months ended September 30, 2008, an increase of $63,000, or 5.5%, compared to the same period in 2007. The increase in general, administrative and other expense includes increases of $37,000, or 7.2%, in employee compensation and benefits, $17,000, or 12.6%, in other operating expense, $15,000, or 55.6%, in postage and stationary supplies and $13,000, or 22.4%, in professional and consulting fees, which were partially offset by decreases of $21,000, or 15.7%, in occupancy and equipment expense and $12,000, or 26.1%, in advertising. The increase in employee compensation was due to normal merit increases and additional staffing. A portion of the increase in other operating expense was a $20,000 increase in FDIC insurance premiums. This increase was the result of the completion in the fourth quarter of fiscal 2008 of the FDIC credit from the FDIC Reform Act of 2005.
Federal Income Taxes
The Corporation recorded a provision for federal income taxes totaling $177,000 for the three months ended September 30, 2008, a decrease of $34,000, or 16.1%, over the same period in 2007. The decrease resulted from a $111,000, or 17.9%, decrease in earnings before taxes. The Corporation's effective tax rates were 34.8% and 34.1%, for the three month periods ended September 30, 2008 and 2007, respectively.
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