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 March 31, 1998
----------------------------------------
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)
Registrant's 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 May 12, 1998, the latest practicable date, 1,445,350 shares of the
registrant's common stock, without par value, were issued and outstanding.
Page 1 of 17 pages
<PAGE>
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
<PAGE>
FFD Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
March 31, June 30,
ASSETS 1998 1997
<S> <C> <C>
Cash and due from banks $ 833 $ 533
Interest-bearing deposits in other financial institutions 11,623 3,547
------- ------
Cash and cash equivalents 12,456 4,080
Investment securities available for sale - at market 1,607 9,924
Investment securities - at amortized cost, approximate
market value of $990 and $1,459 as of March 31,
1998 and June 30, 1997 975 1,469
Mortgage-backed securities available for sale - at market 6,571 7,944
Mortgage-backed securities - at amortized cost, approximate
market value of $8,527 and $7,304 as of March 31,
1998 and June 30, 1997 8,353 7,165
Loans receivable - net 67,365 55,504
Office premises and equipment - at depreciated cost 1,409 865
Federal Home Loan Bank stock - at cost 917 642
Accrued interest receivable 238 267
Prepaid expenses and other assets 213 140
------- ------
Total assets $100,104 $88,000
======= ======
LIABILITIES AND SHAREHOLDER' EQUITY
Deposits $ 60,625 $57,090
Advances from the Federal Home Loan Bank 16,420 8,382
Accrued interest payable 113 82
Other liabilities 250 340
Accrued federal income taxes 172 609
Deferred federal income taxes 222 17
------- ------
Total liabilities 77,802 66,520
Shareholders' equity
Common shares - authorized 5,000,000 shares without par or
stated value, 1,454,750 shares issued and outstanding - -
Additional paid-in capital 14,209 14,137
Retained earnings - restricted 9,215 8,957
Unrealized gains on securities designated as available for sale,
net of related tax effects 433 20
Shares acquired by stock benefit plans (1,410) (1,634)
Less 9,400 shares of treasury stock - at cost (145) -
------- -----
Total shareholders' equity 22,302 21,480
------- ------
Total liabilities and shareholders' equity $100,104 $88,000
======= ======
</TABLE>
3
<PAGE>
FFD Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except share data)
For the nine months For the three months
ended March 31, ended March 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest income
Loans $3,489 $2,794 $1,229 $ 952
Mortgage-backed securities 764 932 254 310
Investment securities, interest-bearing
deposits and other 574 650 197 212
----- ----- ----- -----
Total interest income 4,827 4,376 1,680 1,474
Interest expense
Deposits 2,081 1,937 687 642
Borrowings 475 366 210 125
----- ----- ----- -----
Total interest expense 2,556 2,303 897 767
----- ----- ----- -----
Net interest income 2,271 2,073 783 707
Other income (loss)
Loss on sale of investment securities - (6) - (6)
Loss on sale of mortgage-backed securities - (37) - (37)
Other operating 56 41 21 15
----- ----- ----- -----
Total other income (loss) 56 (2) 21 (28)
General, administrative and other expense
Employee compensation and benefits 753 594 282 189
Occupancy and equipment 138 87 53 31
Federal deposit insurance premiums 25 383 7 9
Franchise taxes 143 98 70 42
Other operating 432 314 143 122
----- ----- ----- -----
Total general, administrative and other expense 1,491 1,476 555 393
----- ----- ----- -----
Earnings before income taxes 836 595 249 286
Federal income taxes
Current 292 181 250 95
Deferred (9) 14 (166) (1)
----- ----- ----- -----
Total federal income taxes 283 195 84 94
----- ----- ----- -----
NET EARNINGS $ 553 $ 400 $ 165 $ 192
===== ===== ===== =====
EARNINGS PER SHARE
Basic $.41 $.30 $.12 $.14
=== === === ===
Diluted $.40 $.30 $.12 $.14
=== === === ===
</TABLE>
4
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FFD Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended March 31,
(In thousands)
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net earnings for the period $ 553 $ 400
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 24 5
Amortization of deferred loan origination fees (61) (40)
Depreciation and amortization 78 37
Amortization expense of stock benefit plans 297 -
Federal Home Loan Bank stock dividends (39) (32)
Loss on sale of investment securities - 6
Loss on sale of mortgage-backed securities - 37
Increase (decrease) in cash due to changes in:
Accrued interest receivable 29 (133)
Prepaid expenses and other assets (73) 22
Accrued interest payable 31 84
Other liabilities (90) 149
Federal income taxes
Current (437) 30
Deferred (9) 14
------ ------
Net cash provided by operating activities 303 579
Cash flows provided by (used in) investing activities:
Proceeds from maturity of investment securities 12,929 1,000
Proceeds from sale of investment securities 6,430 994
Purchase of investment securities (9,925) -
Proceeds from sale of mortgage-backed securities - 3,970
Purchase of mortgage-backed securities (1,996) (9,711)
Principal repayments on mortgage-backed securities 2,161 2,748
Purchase of Federal Home Loan Bank stock (236) -
Loan principal repayments 10,045 6,905
Loan disbursements (21,845) (11,343)
Purchase of office premises and equipment (622) (339)
------ ------
Net cash used in investing activities (3,059) (5,776)
------ ------
Net cash used in operating and investing
activities (subtotal carried forward) (2,756) (5,197)
------ ------
</TABLE>
5
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FFD Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the nine months ended March 31,
(In thousands)
1998 1997
<S> <C> <C>
Net cash used in operating and investing
activities (subtotal brought forward) $(2,756) $(5,197)
Cash flows provided by (used in) financing activities:
Net increase in deposit accounts 3,535 2,461
Proceeds from Federal Home Loan Bank advances 11,950 4,600
Repayment of Federal Home Loan Bank advances (3,912) (1,202)
Purchase of shares for recognition and retention plan - (494)
Purchase of treasury shares (154) -
Dividends on common shares (295) (218)
Proceeds from exercise of stock options 8 -
------ -----
Net cash provided by financing activities 11,132 5,147
------ ------
Net increase (decrease) in cash and cash equivalents 8,376 (50)
Cash and cash equivalents at beginning of period 4,080 2,698
------ ------
Cash and cash equivalents at end of period $12,456 $ 2,648
====== ======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 625 $ 168
====== ======
Interest on deposits and borrowings $ 2,525 $ 2,219
====== ======
Supplemental disclosure of noncash investing activities:
Unrealized gains on securities designated as available for
sale, net of related tax effects $ 413 $ 3
====== ======
</TABLE>
6
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FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and nine months ended March 31, 1998 and 1997
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 nine month periods ended March 31,
1998 are not necessarily indicative of the results which may be expected for
the 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 nine months ended March 31, 1998 and 1997
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 effective January 1, 1998, as
required, 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 nine months ended March 31, 1998 and 1997
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 98,861 unallocated ESOP shares, totaled 1,337,910 and
1,346,082 for the nine and three month periods ended March 31, 1998.
Weighted-average common shares deemed outstanding, which gives effect to
116,380 unallocated ESOP shares, totaled 1,338,370 for each of the nine and
three month periods ended March 31, 1997.
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
1,370,258 and 1,384,888 for the nine and three month periods ended March 31,
1998, respectively, and 1,351,307 and 1,353,000 for the nine and three month
periods ended March 31, 1997, respectively.
9
<PAGE>
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 March 31, 1998
The Corporation's total assets at March 31, 1998, amounted to $100.1 million, a
$12.1 million, or 13.8%, 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 $8.0 million and growth in deposits of $3.5 million.
Cash and interest-bearing deposits totaled $12.5 million, an increase of $8.4
million over the total as of June 30, 1997. This increase was due primarily to a
transfer of $4.4 million from the maturity of investment securities to
short-term deposits, as well as $4.0 million of additional FHLB borrowings to
take advantage of favorable rates.
Investment securities totaled $2.6 million at March 31, 1998, a decrease of $8.8
million from the total at June 30, 1997, as maturities and sales of securities
totaling $12.9 million and $6.4 million were partially offset by purchases of
$9.9 million during the period.
Mortgage-backed securities totaled $14.9 million at March 31, 1998, a $185,000,
or 1.2%, decrease from the total at June 30, 1997. This decrease resulted
primarily from principal repayments of $2.2 million, which were partially offset
by purchases totaling $2.0 million.
Loans receivable totaled $67.4 million at March 31, 1998, an increase of $11.9
million, or 21.4%, over the June 30, 1997 total. Loan disbursements during the
period totaled $21.8 million, which were partially offset by principal
repayments of $10.0 million. Loan disbursements during the nine months ended
March 31, 1998, increased by $10.5 million, or 92.6%, compared to the
origination volume during the same period in 1997. Growth in the loan portfolio
consisted of approximately $4.0 million in nonresidential real estate loans and
$7.9 million in loans secured by one- to four-family residential real estate.
The allowance for loan losses totaled $270,000 at both March 31, 1998 and June
30, 1997, which represented .4% and .5% of total loans and 329% and 422% of
nonperforming loans at those respective dates. Nonperforming loans amounted to
$82,000 and $64,000 at March 31, 1998 and June 30, 1997, respectively. Although
management believes that its allowance for loan losses at March 31, 1998, 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 $60.6 million at March 31, 1998, a $3.5 million, or 6.2%,
increase over June 30, 1997. This increase resulted primarily from growth in
deposits at the new branch office location, coupled with management's efforts to
obtain moderate growth through advertising and pricing strategies.
FHLB advances totaled $16.4 million at March 31, 1998, an $8.0 million, or
95.9%, increase over June 30, 1997. Proceeds from the increase in borrowings
were primarily used to restructure debt, fund $1.9 million in loan growth and
$2.0 million in investments and $4.1 million in overnight deposits.
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 March 31, 1998
(continued)
The Savings Bank is required to meet minimum capital standards promulgated by
the Office of Thrift Supervision ("OTS"). At March 31, 1998, the Savings Bank's
regulatory capital was well in excess of such minimum capital requirements.
Comparison of Operating Results for the Nine Month Periods Ended March 31, 1998
and 1997
General
The Corporation's net earnings totaled $553,000 for the nine months ended March
31, 1998, an increase of $153,000, or 38.3%, over the net earnings of $400,000
recorded in the comparable period in 1997. The increase in net earnings resulted
primarily from 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 $82,000 , or 13.2%, due to a $347,000 increase in general,
administrative and other expense and an $88,000 increase in the provision for
federal income taxes, which were partially offset by a $198,000 increase in net
interest income and a $58,000 increase in other income.
Net Interest Income
Total interest income increased by $451,000, or 10.3%, to a total of $4.8
million for the nine months ended March 31, 1998, compared to $4.4 million for
the nine month period ended March 31, 1997. Interest income on loans increased
by $695,000, or 24.9%, due primarily to a $10.7 million increase in the average
loan portfolio balance outstanding. Interest income on mortgage-backed
securities decreased by $168,000, or 18.0%, due primarily to a $1.4 million
decrease in the average balance outstanding, coupled with a decrease in the
yield earned on such securities. Interest income on investment securities and
interest-bearing deposits decreased by $76,000, or 11.7%, due primarily to an
approximate $550,000 decrease in the related investment balance and a decrease
in the yield earned on such investments.
Interest expense on deposits increased by $144,000, or 7.4%, for the nine months
ended March 31, 1998, compared to the same period in fiscal 1997, due primarily
to a $5.4 million increase in the average deposit portfolio balance outstanding.
Interest expense on borrowings increased by $109,000, or 29.8%, due primarily to
a $5.5 million increase in the average balance of advances outstanding.
11
<PAGE>
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, 1998
and 1997 (continued)
Net Interest Income (continued)
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $198,000, or 9.6%, for the nine months ended
March 31, 1998, compared to 1997. The interest rate spread amounted to
approximately 2.23% for the nine months ended March 31, 1998, compared to 2.16%
for the comparable 1997 period, while the net interest margin decreased to
approximately 3.30% in 1998, compared to 3.44% in 1997.
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 nine month periods ended March
31, 1998 and 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 Income
Other income totaled $56,000 for the nine months ended March 31, 1998, an
increase of $58,000 over the 1997 total. The increase resulted primarily from
losses on sales of securities recorded in the 1997 fiscal period totaling
$43,000. 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 increased by $15,000, or 1.0%, for the
nine months ended March 31, 1998, compared to the same period in 1997. The
increase resulted primarily from a $159,000, or 26.8%, increase in employee
compensation and benefits, a $51,000, or 58.6%, increase in occupancy and
equipment expense, a $45,000, or 45.9%, increase in franchise taxes and a
$118,000, or 37.6%, increase in other operating expenses, which were partially
offset by a $358,000, or 93.5%, decrease in federal deposit insurance premiums
due to the $332,000 one-time pre-tax charge to recapitalize the SAIF which was
recorded in the fiscal 1997 period.
12
<PAGE>
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, 1998
and 1997 (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 expense 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 $283,000
for the nine months ended March 31, 1998, an increase of $88,000, or 45.1%, over
the same period in 1997. The increase resulted primarily from a $241,000, or
40.5%, increase in earnings before taxes. The effective tax rates were 33.9% and
32.8% for the nine months ended March 31, 1998 and 1997, respectively.
Comparison of Operating Results for the Three Month Periods Ended March 31, 1998
and 1997
General
The Corporation's net earnings totaled $165,000 for the three months ended March
31, 1998, a decrease of $27,000, or 14.1%, from the comparable period in 1997.
The decrease in net earnings resulted primarily from a $162,000 increase in
general, administrative and other expense, which was partially offset by a
$76,000 increase in net interest income, a $49,000 increase in other income and
a $10,000 decrease in the provision for federal income taxes.
Net Interest Income
Total interest income increased by $206,000, or 14.0%, to a total of $1.7
million for the three months ended March 31, 1998, compared to $1.5 million for
the 1997 quarter. Interest income on loans increased by $277,000, or 29.1%, due
primarily to an increase in the average loan portfolio balance outstanding.
Interest income on mortgage-backed securities decreased by $56,000, or 18.1%,
due primarily to a decrease in the average balance outstanding. Interest income
on investment securities and interest-bearing deposits decreased by $15,000, or
7.1%, due primarily to a decrease in the related investment balances.
13
<PAGE>
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, 1998
and 1997 (continued)
Interest expense on deposits increased by $45,000, or 7.0%, for the three months
ended March 31, 1998, compared to 1997, due primarily to an increase in the
average deposit portfolio balance outstanding.
Interest expense on borrowings increased by $85,000, or 68.0%, due primarily to
an increase in average balance of advances outstanding.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $76,000, or 10.7%, for the three months ended
March 31, 1998, compared to 1997.
Provision for Losses on Loans
As a result of an analysis of 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, 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 periods ended March 31, 1998 and 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 Income
Other income totaled $21,000 for the three months ended March 31, 1998, an
increase of $49,000 over the 1997 total. The increase resulted primarily from
losses on sales of securities recorded in the 1997 quarter totaling $43,000.
Other income consists primarily of fees generated on ATM transactions, late
charges on loans, safety deposit box rentals, NOW account fees and gains or
losses on the sale of investment and mortgage-backed securities.
General, Administrative and Other Expense
General, administrative and other expense increased by $162,000, or 41.2%, for
the three months ended March 31, 1998, compared to the same period in 1997. The
increase resulted primarily from an increase of $93,000, or 49.2%, in employee
compensation and benefits, an increase of $22,000, or 71.0%, in occupancy and
equipment, due primarily to depreciation and other costs attendant to the new
office location, an increase of $28,000, or 66.7%, in franchise taxes due to the
increase in shareholders' equity from year to year, and an increase of $21,000,
or 17.2%, in other operating expenses.
14
<PAGE>
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, 1998
and 1997 (continued)
Federal Income Taxes
The Corporation recorded a provision for federal income taxes totaling $84,000
for the three months ended March 31, 1998, a decrease of $10,000, or 10.6%, from
the same period in 1997. The decrease resulted primarily from a $37,000, or
12.9%, decrease in earnings before taxes. The effective tax rates were 33.7% and
32.9% for the three months ended March 31, 1998 and 1997, respectively.
Other Matters
As with most providers of financial services, the Savings Bank's operations are
heavily 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 (the "IRS") 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:
27.1: Financial data schedule for the nine months
ended March 31, 1998.
27.2: Restated Financial data schedule for the
nine months ended March 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: May 12, 1998 By: /s/Robert R. Gerber
-------------------------- -------------------
Robert R. Gerber
President and
Principal Financial Officer
Date: May 12, 1998 By: /s/Charles A. Bradley
-------------------------- ---------------------
Charles A. Bradley
Treasurer
17
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