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| FFDF > SEC Filings for FFDF > Form 10-Q on 15-May-2009 | All Recent SEC Filings |
15-May-2009
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," "intends," "expects," "believes," and similar expressions as they relate to FFD or its management are intended to identify such forward looking statements. FFD's actual results, performance or achievements may materially differ from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general and local economic conditions, changes in the interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, and rapidly changing technology affecting financial services.
Critical Accounting Policies
The financial condition and results of operations for the Corporation presented in the Consolidated Financial Statements, accompanying notes to the Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations are, to a large degree, dependent upon the Corporation's accounting policies. The selection and application of these accounting policies involve judgments, estimates and uncertainties that are susceptible to change.
The 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. Critical accounting policies are those policies that require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Footnote A (Securities and Allowance for Loan Losses), footnote C (Loans) and Management's Discussion and Analysis of Financial Condition and Results of Operations in the 2008 Form 10-KSB provide detail with regard to the Corporation's accounting for the allowance for loan losses. There have been no significant changes in the application of accounting policies since June 30, 2008.
Liquidity
The objective of liquidity management is to ensure adequate cash flows to accommodate the demands of our customers and provide adequate flexibility for the Corporation to take advantage of market opportunities under both normal operating conditions and under unpredictable circumstances. Cash is used to fund loans, purchase investments, fund the maturity of liabilities, fund deposit outflows and, at times, for operating activities. The Corporation's principal sources of funds are deposits, amortization, prepayments, maturities and sales of loans maturities and sales of 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.
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 result in regulatory action that could have a direct material effect on the Corporation's financial statements. The Bank was considered "well capitalized" under Office of Thrift Supervision regulations at March 31, 2009. Management is not aware of any matters occurring subsequent to March 31, 2009, that would cause the Bank's capital category to change.
Discussion of Financial Condition Changes from June 30, 2008 to March 31, 2009
The Corporation's total assets at March 31, 2009, were $188.4 million, a $6.7 million, or 3.7%, increase from the total at June 30, 2008.
Cash and cash equivalents totaled $14.4 million at March 31, 2009, an increase of $1.4 million, or 10.7%, from the total at June 30, 2008. Investment securities totaled $6.8 million at March 31, 2009, a $1.1 million, or 20.1%, increase from the total at June 30, 2008, resulting from the purchase of three investment securities and mark-to-market adjustments under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities., which were partially offset by the call of two investment securities. Mortgage-backed securities totaled $298,000 at March 31, 2009, a $25,000, or 7.7%, decrease compared to the total at June 30, 2008, which resulted from principal repayments and a $1,000 mark-to-market adjustment under SFAS No. 115.
Loans receivable totaled $159.9 million at March 31, 2009, an increase of $3.6 million, or 2.3%, from the June 30, 2008 total. During the period, the Corporation originated $58.1 million of loans, which were substantially offset by principal repayments of $53.9 million. During the nine-month period ended March 31, 2009, loan originations were comprised of $39.1 million of one- to four-family residential real estate loans, $14.1 million of nonresidential real estate loans, $2.3 million of consumer loans, $2.2 million of commercial loans, and $500,000 of multifamily real estate loans. Residential loan demand during the quarter ended March 31, 2009, remained strong due to relatively low interest rates. Nonresidential real estate and commercial lending have historically demonstrated a higher degree of risk than one- to four-family residential real estate lending due to the relatively larger loan amounts and the effects of general economic conditions on the successful operation of income-producing properties and businesses. The Corporation endeavors to reduce this risk by evaluating the credit history and past performance of the borrower, the location of the real estate, the quality of the management operating the property or business, the debt service ratio, the quality and characteristics of the income stream generated by the property or business and appraisals supporting the real estate or collateral valuation. To further reduce risk, First Federal has not and does not originate sub-prime real estate loans.
The allowance for loan losses totaled $1.6 million at March 31, 2009, an increase of $150,000, or 10.1%, from the June 30, 2008, balance of $1.5 million and represented 1.01% and .94% of total loans at each of those respective dates. The increase resulted from a provision of $371,000 and recoveries of $9,000, which were partially offset by charge-offs of $230,000. Although management believes that the allowance for loan losses at March 31, 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. The allowance for loan losses as a percentage of loans was higher at March 31, 2009 than June 30, 2008 due to net charge offs, general economic conditions and concerns related to the overall economy of the Corporation's market area.
Premises and equipment, net totaled $2.8 million at March 31, 2009, a $181,000, or 7.0%, increase from the June 30, 2008, balance of $2.6 million. The increase was primarily the result of the construction of a new branch office in Berlin, Ohio. Construction started in the third quarter of fiscal 2009 is expected to be completed in the first quarter of fiscal 2010.
Deposits totaled $151.8 million at March 31, 2009, a $10.5 million, or 7.4%, increase from total deposits at June 30, 2008. The increase in deposits was the result of time deposit growth due to their higher yields over savings accounts, and investors choosing to move to FDIC insured accounts over uninsured investment options from other sources. A portion of the increased deposits was used to repay part of First Federal's FHLB advances, which totaled $16.5 million at March 31, 2009, a $4.1 million, or 20.1%, decrease from the June 30, 2008 total. Other borrowed money increased $800,000 as a result of an advance under the Corporation's $1.0 million line of credit with another financial institution, which was used to repurchase a large block of shares in a previously announced privately negotiated transaction.
Discussion of Financial Condition Changes from June 30, 2008 to March 31, 2009
(continued)
Shareholders' equity totaled $17.8 million at March 31, 2009, a decrease of $356,000, or 2.0%, over June 30, 2008. The decrease was due primarily the purchase of 65,833 treasury shares for $794,000 and dividends paid of $531,000, which were partially offset by period net earnings of $735,000, a decrease in the unrealized loss on securities designated as available for sale of $83,000, the return of previously paid recognition and retention plan dividends of $65,000 to retained earnings, and $49,000 from the exercise of stock options.
Comparison of Operating Results for the Nine-Month Periods Ended March 31, 2009 and 2008
General
The Corporation's net earnings totaled $735,000 for the nine months ended March 31, 2009, a decrease of $194,000, or 20.9%, from the net earnings of $929,000 recorded in the comparable period in 2008. The decrease in net earnings resulted from an increase of $261,000, or 7.6%, in general, administrative and other expenses, and decreases of $233,000, or 4.7%, in net interest income, and $24,000, or 5.2%, in other operating income, which were partially offset by a decreases of $236,000, or 38.9%, in the provision for losses on loans and $88,000 in federal income tax expense.
Net Interest Income
Total interest income decreased by $1.1 million, or 11.8%, to $7.9 million for the nine months ended March 31, 2009, compared to the same period in 2008. Interest income on loans decreased by $1.0 million, or 11.8%, due to a 93 basis point decrease in yield, which was partially offset by an increase of $1.8 million, or 1.1%, in the average loan portfolio balance outstanding. Interest income on investment securities increased by $69,000, or 52.7%, due to a $2.1 million, or 58.5%, increase in the average balance outstanding, which was partially offset by a 17 basis point decrease in yield. Interest-bearing deposits and other decreased by $106,000, or 47.1%, to a total of $119,000, due to a $723,000, or 10.5%, decrease in the average balance outstanding and a 226 basis point decrease in yield.
Total interest expense decreased by $826,000, or 20.7%, to $3.2 million for the nine months ended March 31, 2009, compared to the nine months ended March 31, 2008. Interest expense on deposits decreased by $835,000, or 24.4%, due to a 88 basis point decrease in the average cost, to 2.41% for the 2009 period, which was partially offset by a $4.4 million, or 3.2%, increase in the average balance of deposits outstanding period to period. Interest expense on borrowings increased by $9,000, or 1.6%, due to an increase of $1.9 million, or 11.7%, in the average balance of borrowings outstanding, which was partially offset by a 38 basis point decrease in the average cost.
The above described changes were the result of a decline in interest rates during the period, and as a result of the foregoing changes in interest income and interest expense, net interest income decreased by $233,000, or 4.7%, for the nine months ended March 31, 2009, compared to the same period in 2008. The interest rate spreads were 3.50% and 3.70%, and the net interest margins were 3.67% and 3.95%, for the nine-month periods ended March 31, 2009 and 2008, respectively.
Comparison of Operating Results for the Nine-Month Periods Ended March 31, 2009 and 2008 (continued)
Provision for Losses on Loans
The Corporation recorded a $371,000 provision for losses on loans during the nine months ended March 31, 2009, and a $607,000 provision for the comparable period in 2008. The Corporation substantially increased its provision in the third quarter of fiscal 2008 in response to the acceleration of declining real estate markets, declining general economic conditions, loan portfolio growth and downgrades in the classification of certain loans. Net charge offs have declined period over period from $259,000 for the 2008 period to $221,000 for the 2009 period. Most of the provision for loan losses for the nine months ended March 31, 2009, replaced net charge-offs and increased general allocations of the allowance. Specific loss allocation remained consistent with the specific loss allocations at June 30, 2008. The provision for loan losses for the nine months ended March 31, 2008, was primarily to replace net charge-offs and establish specific allocations on impaired loans. 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 additional provisions for losses and adversely affect the Corporation's results of operations.
Other Income
Other income totaled $438,000 for the nine months ended March 31, 2009, a decrease of $24,000, or 5.2%, from the 2008 total. The decrease was primarily due to decreases of $213,000, or 317.9%, in mortgage servicing rights revenue (net of amortization and impairment charges) and $28,000, or 25.0%, in other operating income, which were partially offset by increases of $223,000, or 259.3%, in gain on sale of loans and $3,000, or 1.5%, in service charges on deposit accounts. An impairment charge of $175,000 to reduce the carrying value of mortgage servicing rights to the lower of cost or fair value in the third fiscal quarter negatively impacted the mortgage servicing rights revenue. The impairment charge on mortgage servicing rights is a function of lower interest rates and increased prepayment speed assumptions.
General, Administrative and Other Expense
General, administrative and other expense totaled $3.7 million for the nine months ended March 31, 2009, an increase of $261,000, or 7.6%, compared to the same period in 2008. The increase in general, administrative and other expense includes increases of $113,000, or 7.4%, in employee compensation and benefits, $91,000, or 758.3%, in FDIC insurance premium expense, $82,000, or 20.8%, in other operating expense, $7,000, or 3.6%, in professional and consulting fees, $6,000, or 2.3%, in data processing, $3,000, or 2.4%, in postage and stationary supplies, and $1,000, or 0.6%, in checking account maintenance expense, which were partially offset by decreases of $30,000, or 24.6%, in advertising, $7,000, or 6.7%, in ATM processing, and $5,000, or 1.4%, in occupancy and equipment expense. The increase in employee compensation and benefits was the result of growth in the number of employees year over year and a slight increase in wage rates, offset by a decrease in bonus compensation. The increase in other noninterest expense was the result of increases in internet banking expense. The FDIC insurance premium increase was the result of generally increased FDIC premiums and the depletion in the fourth quarter of fiscal 2008 of the FDIC credit related to the FDIC Reform Act of 2005.
Federal Income Taxes
The Corporation recorded a provision for federal income taxes totaling $395,000 for the nine months ended March 31, 2009, a decrease of $88,000, or 18.2%, over the same period in 2008. The decrease resulted from a $282,000, or 20.0%, decrease in earnings before taxes. The Corporation's effective tax rates were 35.0% and 34.2%, for the nine-month periods ended March 31, 2009 and 2008, respectively.
Comparison of Operating Results for the Three-Month Periods Ended March 31, 2009 and 2008
General
The Corporation's net earnings totaled $122,000 for the three months ended March 31, 2009, a decrease of $37,000, or 23.3%, from the net earnings of $159,000 recorded in the comparable period in 2008. The decrease in net earnings resulted from an increase of $101,000, or 8.8%, in general, administrative and other expenses and decreases of $147,000, or 8.9%, in net interest income, and $50,000, or 32.1%, in other operating income, which were partially offset by decreases of $241,000, or 59.1%, in the provision for losses on loans and $20,000 in federal income tax expense.
Net Interest Income
Total interest income decreased by $363,000, or 12.5%, to $2.5 million for the three months ended March 31, 2009, compared to the same period in 2008. Interest income on loans decreased by $340,000, or 12.2%, due to a 92 basis point decrease in yield, which was partially offset by an increase of $1.9 million, or 1.2%, in the average loan portfolio balance outstanding. Interest income on investment securities increased by $11,000, or 23.4%, due to a $1.8 million, or 44.5%, increase in the average balance outstanding, which was partially offset by a 71 basis point decrease in yield. Interest income on interest bearing deposits and other decreased by $32,000, or 51.6%, to a total of $30,000, due to a 224 basis point decrease in the yield, which was partially offset by a $1.9 million, or 27.0%, increase in the average balance outstanding.
Total interest expense decreased by $216,000, or 17.1%, to $1.0 million for the three months ended March 31, 2009, compared to the three months ended March 31, 2008. Interest expense on deposits decreased by $196,000, or 18.4%, due to a 74 basis point decrease in the average cost of deposits, to 2.33% for the 2009 quarter, which was partially offset by a $10.8 million, or 7.8%, increase in the average balance of deposits outstanding period to period. Interest expense on borrowings decreased by $20,000, or 10.2%, due to decreases of $1.9 million, or 9.8%, in the average balance of borrowings outstanding and a 1 basis point decrease in the average cost of borrowings.
As a result of the foregoing changes in interest income and interest expense, net interest income decreased by $147,000, or 8.9%, for the three months ended March 31, 2009, compared to the same period in 2008. The interest rate spreads were 3.26% and 3.62%, and the net interest margins were 3.39% and 3.85%, for the three-month periods ended March 31, 2009 and 2008, respectively.
Provision for Losses on Loans
The Corporation recorded a $167,000 provision for losses on loans during the three months ended March 31, 2009, and a $408,000 provision for the comparable quarter in 2008, a $241,000, or 59.1%, decrease from the prior period. The Corporation significantly increased the provision in the third quarter of fiscal 2008 in response to the acceleration of declining real estate markets, declining general economic conditions, loan portfolio growth and downgrades in the classifications of certain loans. Net charge offs have declined period over period with $163,000 for the 2008 period compared to $92,000 for the 2009 period. There can be no assurance that the loan loss allowance will be adequate to cover losses on nonperforming assets in the future, which could result in additional provisions for losses and adversely affect the Corporation's results of operations.
Comparison of Operating Results for the Three-Month Periods Ended March 31, 2009 and 2008 (continued)
Other Income
Other income totaled $106,000 for the three months ended March 31, 2009, a decrease of $50,000, or 32.1%, from the 2008 total. The decrease was primarily due to decreases of $264,000, or 507.7%, in mortgage servicing rights revenue net of amortization and impairment charges and $4,000, or 5.7%, in service charges on deposit accounts, which were partially offset by increases of $214,000, in gain on sale of loans and $4,000, or 16.7%, in other operating income. An impairment charge of $175,000 negatively impacted the mortgage servicing rights revenue. The impairment charge on mortgage servicing rights is a function of lower interest rates and increased prepayment speed assumptions.
General, Administrative and Other Expense
General, administrative and other expense totaled $1.3 million for the three months ended March 31, 2009, an increase of $101,000, or 8.8%, compared to the same period in 2008. The increase in general, administrative and other expense includes increases of $49,000, or 38.3%, in other operating expense, $42,000 in FDIC insurance premium expense, $38,000, or 7.3%, in employee compensation and benefits, $4,000, or 7.4%, in checking account maintenance expense, and $1,000 in occupancy and equipment, franchise tax, and postage and stationary supplies, which were partially offset by decreases of $18,000, or 26.1%, in professional and consulting fees, $10,000, or 32.3%, in advertising, $5,000, or 5.6% in data processing, and $2,000, or 6.3% in ATM processing. The increase in employee compensation and benefits was the result of growth in the number of employees period over period and a slight increase in wage rates, offset by a decrease in bonus compensation. The FDIC insurance premium increase was the result of generally increased FDIC premiums and the depletion in the fourth quarter of fiscal 2008 the FDIC credit related to the FDIC Reform Act of 2005.
Federal Income Taxes
The Corporation recorded a provision for federal income taxes totaling $63,000 for the three months ended March 31, 2009, a decrease of $20,000, or 24.1%, over the same period in 2008. The decrease resulted from a $57,000, or 23.6%, decrease in earnings before taxes. The Corporation's effective tax rates were 34.1% and 34.3%, for the three month periods ended March 31, 2009 and 2008, respectively.
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