FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
-------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________
Commission File No. 0-27916
FFD FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Ohio 34-1921148
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
321 North Wooster Avenue
Dover, Ohio 44622
(Address of principal (Zip Code)
executive office)
Issuers' telephone number, including area code: (330) 364-7777
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
As of February 9, 1998, the latest practicable date, 1,444,750 shares of the
registrant's common stock, without par value, were issued and outstanding.
Page 1 of 17 pages
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INDEX
Page
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10
PART II - OTHER INFORMATION 16
SIGNATURES 17
2
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<TABLE>
FFD Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
December 31, June 30,
ASSETS 1997 1997
<S> <C> <C>
Cash and due from banks $ 1,355 $ 533
Interest-bearing deposits in other financial institutions 7,326 3,547
------- -------
Cash and cash equivalents 8,681 4,080
Investment securities available for sale - at market 1,533 9,924
Investment securities - at amortized cost, approximate
market value of $1,487 and $1,459 as of
December 31, 1997 and June 30, 1997 1,473 1,469
Mortgage-backed securities - at amortized cost, approximate
market value of $6,925 and $7,304 as of
December 31, 1997 and June 30, 1997 6,733 7,165
Mortgage-backed securities designated as available for sale - at market 7,376 7,944
Loans receivable - net 64,197 55,504
Office premises and equipment - at depreciated cost 1,340 865
Federal Home Loan Bank stock - at cost 655 642
Accrued interest receivable 276 267
Prepaid expenses and other assets 100 140
-------- --------
Total assets $92,364 $88,000
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $58,769 $57,090
Advances from the Federal Home Loan Bank 10,031 8,382
Accrued interest payable 100 82
Other liabilities 308 340
Accrued federal income taxes 547 609
Deferred federal income taxes 384 17
-------- ---------
Total liabilities 70,139 66,520
Shareholders' equity
Preferred stock - authorized 1,000,000 shares without par
value; no shares issued - -
Common stock - authorized 5,000,000 shares without par or
stated value, 1,454,750 shares issued - -
Additional paid-in capital 14,217 14,137
Retained earnings - restricted 9,159 8,957
Unrealized gains on securities designated as available for sale,
net of related tax effects 427 20
Shares acquired by stock benefit plans (1,424) (1,634)
Less 10,000 shares of treasury stock -at cost (154) -
-------- ------
Total shareholders' equity 22,225 21,480
------ ------
Total liabilities and shareholders' equity $92,364 $88,000
====== ======
</TABLE>
3
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<TABLE>
FFD Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except share data)
For the six months For the three months
ended December 31, ended December 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Interest income
Loans $2,260 $1,842 $1,170 $ 899
Mortgage-backed securities 510 622 250 329
Investment securities, interest-bearing
deposits and other 377 438 162 254
------ ------ ------ ------
Total interest income 3,147 2,902 1,582 1,482
Interest expense
Deposits 1,394 1,295 702 657
Borrowings 265 241 144 134
------ ------ ------ ------
Total interest expense 1,659 1,536 846 791
----- ----- ------ ------
Net interest income 1,488 1,366 736 691
Other operating income 35 26 23 16
General, administrative and other expense
Employee compensation and benefits 471 405 265 199
Occupancy and equipment 85 56 49 34
Federal deposit insurance premiums 18 374 6 12
Franchise taxes 73 56 33 25
Other operating 289 192 158 94
------ ------ ------ -------
Total general, administrative and other expense 936 1,083 511 364
------ ----- ------ ------
Earnings before income taxes 587 309 248 343
Federal income taxes
Current 42 86 55 96
Deferred 157 15 29 17
------ ------- ------- -------
Total federal income taxes 199 101 84 113
------ ------ ------- ------
NET EARNINGS $ 388 $ 208 $ 164 $ 230
====== ===== ====== ======
EARNINGS PER SHARE
Basic $.29 $.16 $.12 $.17
=== === === ===
Diluted $.28 $.15 $.12 $.17
=== === === ===
</TABLE>
4
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<TABLE>
FFD Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended December 31,
(In thousands)
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net earnings for the period $ 388 $ 208
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of discounts and premiums on loans,
investments and mortgage-backed securities - net 14 1
Amortization of deferred loan origination fees (32) (28)
Depreciation and amortization 45 23
Amortization expense of stock benefit plans 290 -
Federal Home Loan Bank stock dividends (24) (21)
Increase (decrease) in cash due to changes in:
Accrued interest receivable 2 (50)
Prepaid expenses and other assets 40 91
Accrued interest payable 18 61
Other liabilities (32) 337
Federal income taxes
Current (62) (24)
Deferred 157 15
-------- -------
Net cash provided by operating activities 804 613
Cash flows provided by (used in) investing activities:
Proceeds from maturity of investment securities 12,429 1,000
Proceeds from sale of investment securities designated as
available for sale 6,430 -
Purchase of investment securities (9,925) -
Purchase of mortgage-backed securities - (4,737)
Principal repayments on mortgage-backed securities 1,056 1,842
Loan principal repayments 5,240 4,627
Loan disbursements (13,901) (7,395)
Purchase of office premises and equipment (520) (159)
-------- ------
Net cash provided by (used in) investing activities 809 (4,822)
Cash flows provided by (used in) financing activities:
Net increase in deposit accounts 1,679 2,242
Proceeds from Federal Home Loan Bank advances 1,950 4,600
Repayment of Federal Home Loan Bank advances (301) (701)
Purchase of shares for Recognition and Retention Plan - (419)
Purchase of treasury shares (154) -
Dividends on common stock (186) (145)
-------- ------
Net cash provided by financing activities 2,988 5,577
------- -----
Net increase in cash and cash equivalents 4,601 1,368
Cash and cash equivalents at beginning of period 4,080 2,698
------- -----
Cash and cash equivalents at end of period $ 8,681 $4,066
======= =====
</TABLE>
5
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<TABLE>
FFD Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the six months ended December 31,
(In thousands)
1997 1996
<S> <C> <C>
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Federal income taxes $ 148 $ 128
====== ======
Interest on deposits and borrowings $1,641 $1,475
===== =====
Supplemental disclosure of noncash investing activities:
Unrealized gains on securities designated as available for
sale, net of related tax effects $ 407 $ 148
====== ======
</TABLE>
6
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FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and six months ended December 31, 1997 and 1996
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared
in accordance with instructions for Form 10-QSB and, therefore, do not
include information or footnotes necessary for a complete presentation of
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. Accordingly, these financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto of FFD Financial Corporation (the
"Corporation") included in the Annual Report on Form 10-KSB for the year
ended June 30, 1997. However, in the opinion of management, all adjustments
(consisting of only normal recurring accruals) which are necessary for a
fair presentation of the financial statements have been included. The
results of operations for the three and six month periods ended December 31,
1997 and 1996 are not necessarily indicative of the results which may be
expected for an entire fiscal year.
2. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Corporation and First Federal Savings Bank of Dover (the "Savings
Bank"). All significant intercompany items have been eliminated.
3. Effects of Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities", that provides accounting guidance on transfers of financial
assets, servicing of financial assets, and extinguishment of liabilities.
SFAS No. 125 introduces an approach to accounting for transfers of financial
assets that provides a means of dealing with more complex transactions in
which the seller disposes of only a partial interest in the assets, retains
rights or obligations, makes use of special purpose entities in the
transaction, or otherwise has continuing involvement with the transferred
assets. The new accounting method, known as the financial components
approach, provides that the carrying amount of the financial assets
transferred be allocated to components of the transaction based on their
relative fair values. SFAS No. 125 provides criteria for determining whether
control of assets has been relinquished and whether a sale has occurred. If
the transfer does not qualify as a sale, it is accounted for as a secured
borrowing. Transactions subject to the provisions of SFAS No. 125 include,
among others, transfers involving repurchase agreements, securitizations of
financial assets, loan participations, factoring arrangements, and transfers
of receivables with recourse.
7
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FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three and six months ended December 31, 1997 and 1996
3. Effects of Recent Accounting Pronouncements (continued)
An entity that undertakes an obligation to service financial assets
recognizes either a servicing asset or liability for the servicing contract
(unless related to a securitization of assets, and all the securitized
assets are retained and classified as held-to-maturity). A servicing asset
or liability that is purchased or assumed is initially recognized at its
fair value. Servicing assets and liabilities are amortized in proportion to,
and over the period of, estimated net servicing income or net servicing loss
and are subject to subsequent assessments for impairment based on fair
value.
SFAS No. 125 provides that a liability is removed from the balance sheet
only if the debtor either pays the creditor and is relieved of its
obligation for the liability or is legally released from being the primary
obligor.
SFAS No. 125 is effective for transfers and servicing of financial assets
and extinguishment of liabilities occurring after December 31, 1997, and is
to be applied prospectively. Earlier or retroactive application is not
permitted. Management adopted SFAS No. 125 without material effect on the
Corporation's consolidated financial position or results of operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. SFAS No. 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. It does not require a specific format for that financial
statement but requires that an enterprise display an amount representing
total comprehensive income for the period in that financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section
of a statement of financial position. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is
required. SFAS No. 130 is not expected to have a material impact on the
Corporation's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 significantly changes
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about reportable segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. SFAS No. 131 uses a
8
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FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three and six months ended December 31, 1997 and 1996
3. Effects of Recent Accounting Pronouncements (continued)
"management approach" to disclose financial and descriptive information
about the way that management organizes the segments within the enterprise
for making operating decisions and assessing performance. For many
enterprises, the management approach will likely result in more segments
being reported. In addition, SFAS No. 131 requires significantly more
information to be disclosed for each reportable segment than is presently
being reported in annual financial statements and also requires that
selected information be reported in interim financial statements. SFAS No.
131 is effective for fiscal years beginning after December 15, 1997. SFAS
No. 131 is not expected to have a material impact on the Corporation's
financial statements.
4. Earnings Per Share
Basic earnings per share is computed based upon the weighted-average shares
outstanding during the period less shares in the FFD Financial Corporation
Employee Stock Ownership Plan (the ESOP) that are unallocated and not
committed to be released. Weighted-average common shares deemed outstanding,
which gives effect to 114,044 unallocated ESOP shares, totaled 1,333,913 and
1,330,706 for the three and six month periods ended December 31, 1997.
Weighted-average common shares deemed outstanding, which gives effect to
116,380 unallocated ESOP shares, totaled 1,338,370 for each of the three and
six month periods ended December 31, 1996.
Diluted earnings per share is computed taking into consideration common
shares outstanding and dilutive potential common shares to be issued under
the Corporation's stock option plan. Weighted-average common shares deemed
outstanding for purposes of computing diluted earnings per share totaled
1,362,089 and 1,364,056 for the six and three month periods ended December
31, 1997, respectively, and 1,348,521 for each of the six and three month
periods ended December 31, 1996.
9
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FFD Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Discussion of Financial Condition Changes from June 30, 1997 to December 31,
1997
The Corporation's total assets at December 31, 1997, amounted to $92.4 million,
a $4.4 million, or 5.0%, increase over the total at June 30, 1997. This increase
was funded primarily through an increase in advances from the Federal Home Loan
Bank ("FHLB") of $1.6 million and growth in deposits of $1.7 million.
Cash and interest-bearing deposits totaled $8.7 million, an increase of $4.6
million over the total as of June 30, 1997. This increase was due primarily to a
transfer of funds from the maturity of investment securities to short-term
deposits.
Investment securities totaled $3.0 million at December 31, 1997, a decrease of
$8.4 million, from the total at June 30, 1997, as maturities and sales of
securities totaling $12.4 million and $6.4 million were partially offset by
purchases of $9.9 million during the period.
Mortgage-backed securities totaled $14.1 million at December 31, 1997, a $1.0
million, or 6.6%, decrease from the total at June 30, 1997. This decrease
resulted primarily from principal repayments of $1.1 million.
Loans receivable totaled $64.2 million at December 31, 1997, an increase of $8.7
million, or 15.7%, over the June 30, 1997 total. Loan disbursements during the
period totaled $13.9 million, which were partially offset by principal
repayments of $5.2 million. Loan disbursements during the six months ended
December 31, 1997, increased by $6.5 million, or 88.0%, compared to the
origination volume during the same period in 1996. Growth in the loan portfolio
consisted of approximately $3.7 million in nonresidential real estate loans and
$5.0 million in loans secured by one- to four-family residential real estate.
The allowance for loan losses totaled $270,000 at both December 31, 1997 and
June 30, 1997, which represented .4% and .5% of total loans and 643% and 422% of
nonperforming loans at those respective dates. Nonperforming loans amounted to
$42,000 and $64,000 at December 31, 1997 and June 30, 1997, respectively.
Although management believes that its allowance for loan losses at December 31,
1997, is adequate based upon the available facts and circumstances, there can be
no assurance that additions to such allowance will not be necessary in future
periods, which could adversely affect the Corporation's results of operations.
Deposits totaled $58.8 million at December 31, 1997, a $1.7 million, or 2.9%,
increase over June 30, 1997. This increase resulted primarily from $1.4 million
of new deposits at the new branch office location, coupled with management's
efforts to obtain moderate growth through advertising and pricing strategies.
FHLB advances increased by $1.6 million as management elected to fund a $1.9
million non-residential real estate loan with an advance of similar amount and
term, partially offset by normal repayments during the period.
10
<PAGE>
FFD Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from June 30, 1997 to December 31,
1997 (continued)
The Savings Bank is required to meet each of three minimum capital standards
promulgated by the Office of Thrift Supervision (OTS), hereinafter described as
the tangible capital requirement, the core capital requirement and the
risk-based capital requirement. The tangible capital requirement mandates
maintenance of shareholders' equity less all intangible assets equal to 1.5% of
adjusted total assets. The core capital requirement provides for the maintenance
of tangible capital plus certain forms of supervisory goodwill equal to 3% of
adjusted total assets, while the risk-based capital requirement mandates
maintenance of core capital plus general loan loss allowances equal to 8% of
risk-weighted assets as defined by OTS regulations.
At December 31, 1997, the Savings Bank's tangible and core capital totaled $14.0
million, or 16.4% of adjusted total assets, which exceeded the minimum
requirements of $1.3 million and $2.6 million by $15.2 million and $11.4
million, respectively. The Savings Bank's risk-based capital of $14.2 million,
or 32.7% of risk-weighted assets, exceeded the current 8% requirement by $10.7
million.
Comparison of Operating Results for the Six Month Periods Ended December 31,
1997 and 1996
General
The Corporation's net earnings totaled $388,000 for the six months ended
December 31, 1997, an increase of $180,000, or 86.5%, over the net earnings of
$208,000 recorded in the comparable period in 1996. The increase in net earnings
resulted primarily from the absence of a $219,000 after tax one-time charge
recorded at September 30, 1996, as a result of the legislative mandate to
recapitalize the Savings Association Insurance Fund ("SAIF") of the Federal
Deposit Insurance Corporation (FDIC). Absent the effects of the SAIF
recapitalization assessment, net earnings declined by $39,000, or 9.1%, due to a
$185,000 increase in general, administrative and other expense and a $98,000
increase in the provision for federal income taxes which were partially offset
by a $122,000 increase in net interest income and a $9,000 increase in other
income.
Net Interest Income
Total interest income increased by $245,000, or 8.4%, to a total of $3.1 million
for the six months ended December 31, 1997. Interest income on loans increased
by $418,000, or 22.7%, due primarily to a $9.6 million increase in the average
loan portfolio balance outstanding. Interest income on mortgage-backed
securities decreased by $112,000, or 18.0%, due primarily to a $2.6 million
decrease in the average balance outstanding. Interest income on investment
securities and interest-bearing deposits decreased by $61,000, or 13.9%, due
primarily to a $1.5 million decrease in the related investment balance.
11
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FFD Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six Month Periods Ended December 31,
1997 and 1996 (continued)
Net Interest Income (continued)
Interest expense on deposits increased by $99,000, or 7.6%, for the six months
ended December 31, 1997, compared to 1996, due primarily to a $4.3 million
increase in the average deposit portfolio balance outstanding.
Interest expense on borrowings increased by $24,000 due primarily to a $1.0
million increase in average advances outstanding, as management elected to fund
the origination of a nonresidential loan with such advances, as previously
discussed.
As a result of the foregoing, net interest income increased by $122,000, or
8.9%, for the six months ended December 31, 1997, compared to 1996. The interest
rate spread amounted to approximately 2.24% for the six months ended December
31, 1997, compared to 2.09% for the comparable 1996 period, while the net
interest margin increased to approximately 3.41% in 1997, compared to 3.34% in
1996.
Provision for Losses on Loans
A provision for losses on loans is charged to earnings to bring the total
allowance for losses on loans to a level considered appropriate by management
based on historical loss experience, the volume and type of lending conducted by
the Savings Bank, the status of past due principal and interest payments,
general economic conditions, particularly as such conditions relate to the
Savings Bank's market area, and other factors related to the collectibility of
the Savings Bank's loan portfolio. As a result of such analysis, management
concluded that the allowance for loan losses was adequate and therefore did not
record a provision for losses on loans during the six month period ended
December 31, 1997. There can be no assurance that the loan loss allowance of the
Savings Bank will be adequate to cover losses on nonperforming assets in the
future.
Other Operating Income
Other operating income totaled $35,000 for the six months ended December 31,
1997, an increase of $9,000, or 34.6%, over the 1996 total. Other income
consists primarily of fees generated from ATM transactions, late charges on
loans, safety deposit box rentals and negotiable order of withdrawal (NOW)
account fees.
General, Administrative and Other Expense
General, administrative and other expense decreased by $147,000, or 13.6%, for
the six months ended December 31, 1997, compared to the same period in 1996. The
decrease resulted primarily from the $332,000 one-time pre-tax charge to
recapitalize the SAIF recorded in the 1996 period, coupled with a $24,000
decrease in premium rates for SAIF insurance, which were partially offset by a
$66,000, or 16.3%, increase in employee compensation and benefits, a $29,000, or
51.8%, increase in occupancy and equipment, a $17,000, or 30.4%, increase in
franchise taxes and an increase of $97,000, or 50.5%, in other operating
expenses.
12
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FFD Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six Month Periods Ended December 31,
1997 and 1996 (continued)
General, Administrative and Other Expense (continued)
The increase in employee compensation and benefits was due primarily to
increased staffing levels related to the opening of the New Philadelphia office
location in November 1997, and the addition of a commercial lending officer
during fiscal 1997, coupled with an increase in costs associated with stock
benefit plans and normal merit increases. The increase in occupancy and
equipment and other operating expense resulted primarily from costs associated
with the start-up of the New Philadelphia office. The increase in franchise
taxes was due to the increase in shareholders' equity year to year.
Federal Income Taxes
The Corporation recorded a provision for federal income taxes totaling $199,000
for the six months ended December 31, 1997, an increase of $98,000, or 97.0%,
over the same period in 1996. The decrease resulted primarily from a $278,000,
or 90.0%, increase in earnings before taxes. The effective tax rates were 33.9%
and 32.7% for the six months ended December 31, 1997 and 1996, respectively.
Comparison of Operating Results for the Three Month Periods Ended December 31,
1997 and 1996
General
The Corporation's net earnings totaled $164,000 for the three months ended
December 31, 1997, a decrease of $66,000, or 28.7%, from the comparable period
in 1996. The decrease in net earnings resulted primarily from a $147,000
increase in general, administrative and other expense, which was partially
offset by a $45,000 increase in net interest income, a $7,000 increase in other
income and a $29,000 decrease in the provision for federal income taxes.
Net Interest Income
Total interest income increased by $100,000, or 6.7%, to a total of $1.6 million
for the three months ended December 31, 1997. Interest income on loans increased
by $271,000, or 30.1%, due primarily to an increase in the average loan
portfolio balance outstanding. Interest income on mortgage-backed securities
decreased by $79,000, or 24.0%, due primarily to a decrease in the average
balance outstanding. Interest income on investment securities and
interest-bearing deposits decreased by $92,000, or 36.2%, due primarily to a
decrease in the related investment balances.
13
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FFD Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods Ended December 31,
1997 and 1996 (continued)
Interest expense on deposits increased by $45,000, or 6.8%, for the three months
ended December 31, 1997, compared to 1996, due primarily to an increase in the
average deposit portfolio balance outstanding.
Interest expense on borrowings increased by $10,000 due primarily to an increase
in average advances outstanding, as management elected to fund the origination
of a nonresidential loan with such advances, as previously discussed.
As a result of the foregoing, net interest income increased by $45,000, or 6.5%,
for the three months ended December 31, 1997, compared to 1996.
Provision for Losses on Loans
A provision for losses on loans is charged to earnings to bring the total
allowance for losses on loans to a level considered appropriate by management
based on historical loss experience, the volume and type of lending conducted by
the Savings Bank, the status of past due principal and interest payments,
general economic conditions, particularly as such conditions relate to the
Savings Bank's market area, and other factors related to the collectibility of
the Savings Bank's loan portfolio. As a result of such analysis, management
concluded that the allowance for loan losses was adequate and therefore did not
record a provision for losses on loans during the three month period ended
December 31, 1997. There can be no assurance that the loan loss allowance of the
Savings Bank will be adequate to cover losses on nonperforming assets in the
future.
Other Operating Income
Other operating income totaled $23,000 for the three months ended December 31,
1997, an increase of $7,000, or 43.8 %, over the 1996 total. Other income
consists primarily of fees generated on ATM transactions, late charges on loans,
safety deposit box rentals and NOW account fees.
General, Administrative and Other Expense
General, administrative and other expense increased by $147,000, or 40.4%, for
the three months ended December 31, 1997, compared to the same period in 1996.
The increase resulted primarily from an increase of $66,000, or 33.2%, in
employee compensation and benefits, an increase of $15,000, or 44.1%, in
occupancy and equipment, due primarily to depreciation and other costs attendant
to the new office location, and an increase of $64,000, or 68.1%, in other
operating expenses. These increases were partially offset by a decline of
$6,000, or 50.0%, in federal deposit insurance premiums, reflecting a reduction
in premium rates following the recapitalization assessment.
14
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FFD Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods Ended December 31,
1997 and 1996 (continued)
Federal Income Taxes
The Corporation recorded a provision for federal income taxes totaling $84,000
for the three months ended December 31, 1997, a decrease of $29,000, or 25.7%,
over the same period in 1996. The decrease resulted primarily from a $95,000, or
27.7%, decrease in earnings before taxes. The effective tax rates were 33.9% and
32.9% for the three months ended December 31, 1997 and 1996, respectively.
Other Matters
As with most providers of financial services, the Savings Bank's operations are
almost entirely dependent on information technology systems. The Savings Bank is
addressing the potential problems associated with the possibility that the
computers that control or operate the Savings Bank's information technology
system and infrastructure may not be programmed to read four-digit date codes
and, upon arrival of the year 2000, may recognize the two-digit code "00" as the
year 1900, causing systems to fail to function or to generate erroneous data.
The Savings Bank is working with the companies that supply or service its
information technology systems to identify and remedy any year 2000 related
problems.
As of the date of this Form 10-QSB, the Corporation has not identified any
specific expenses that are reasonably likely to be incurred by the Savings Bank
in connection with this issue and does not expect to incur significant expense
to implement the necessary corrective measures. No assurance can be given,
however, that significant expense will not be incurred in future periods. In the
event that the Savings Bank is ultimately required to purchase replacement
computer systems, programs and equipment, or incur substantial expense to make
the Savings Bank's current systems, programs and equipment year 2000 compliant,
the Corporation's net earnings and financial condition could be adversely
affected. While the Savings Bank is endeavoring to ensure that its
computer-dependent operations are year 2000 compliant, no assurance can be given
that some year 2000 problems will not occur.
In addition to possible expense related to its own systems, the Corporation
could incur losses if year 2000 issues adversely affect the Savings Bank's
depositors or borrowers. Such problems could include delayed loan payments due
to year 2000 problems affecting any significant borrowers or impairing the
payroll systems of large employers in the Savings Bank's primary market area.
Because the Savings Bank's loan portfolio is highly diversified with regard to
individual borrowers and types of businesses and the Savings Bank's primary
market area is not significantly dependent upon one employer or industry, the
Savings Bank does not expect any significant or prolonged difficulties that will
affect net earnings or cash flow.
15
<PAGE>
FFD Financial Corporation
PART II
ITEM 1. Legal Proceedings
Not applicable
ITEM 2. Changes in Securities and Use of Proceeds
Not applicable
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable
ITEM 5. Other Information
In June 1997, the Corporation announced that it is taking steps
toward the payment of a capital distribution to its shareholders,
with the expectation that a significant portion of the
distribution would be nontaxable. A prerequisite to the
nontaxable nature of the distribution is the discontinuation of
the consolidated filing group that included Dover Service
Corporation, an inactive subsidiary of the Savings Bank. At the
time of the announcement, the Corporation anticipated that the
deconsolidation would be completed by September 30, 1997. As a
result of the procedures being utilized by the Internal Revenue
Service to simultaneously process deconsolidation requests
submitted by a large number of filers, the deconsolidation
process has not yet been completed. The Corporation has received
a draft from the IRS of the agreement to be entered into to
complete the deconsolidation, and the Corporation is not aware of
any issues which would adversely affect the completion of the
deconsolidation. However, because the Corporation's application
remains part of a larger group of deconsolidation applicants, the
Corporation expects that the deconsolidation process may not be
completed for several months. At this time, the Board intends to
defer action on the proposed capital distribution until the
deconsolidation process has been completed.
ITEM 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K: None
Exhibits: Financial data schedule for the six
months ended December 31, 1997
16
<PAGE>
FFD Financial Corporation
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 9, 1998 By: /s/Robert R. Gerber
--------------------------- -------------------
Robert R. Gerber
President and
Principal Financial Officer
Date: February 9, 1998 By: /s/Charles A. Bradley
----------------------------- ---------------------
Charles A. Bradley
Treasurer
17
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0
0
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