FORM 10-QSB
U. S. 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, 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 small business issuer 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)
Issuer's telephone number: (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 12, 1999, the latest practicable date, 1,448,850 shares of the
registrant's common stock, without par value, were issued and outstanding.
Page 1 of 18 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 Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
PART II - OTHER INFORMATION 17
SIGNATURES 18
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 1998 1998
<S> <C> <C>
Cash and due from banks $ 971 $ 1,026
Interest-bearing deposits in other financial institutions 4,043 607
------- ------
Cash and cash equivalents 5,014 1,633
Investment securities available for sale - at market 216 2,655
Investment securities - at amortized cost, approximate
market value of $993 as of June 30, 1998 - 977
Mortgage-backed securities available for sale - at market 15,578 5,935
Mortgage-backed securities - at amortized cost, approximate
market value of $5,310 and $6,073 as of December 31,
1998 and June 30, 1998 5,155 5,960
Loans receivable - net 78,434 70,990
Office premises and equipment - at depreciated cost 1,409 1,383
Federal Home Loan Bank stock - at cost 1,118 933
Accrued interest receivable 244 279
Prepaid expenses and other assets 60 221
Prepaid federal income taxes 244 -
------- ------
Total assets $107,472 $90,966
======= ======
LIABILITIES AND SHAREHOLDER' EQUITY
Deposits $ 67,780 $61,956
Securities sold under agreements to repurchase 435 -
Advances from the Federal Home Loan Bank 22,018 12,519
Other borrowed money 300 -
Accrued interest payable 126 94
Other liabilities 214 258
Accrued federal income taxes - 197
Deferred federal income taxes 280 117
------- ------
Total liabilities 91,153 75,141
Shareholders' equity
Preferred stock - authorized 1,000,000 shares without par
value; no shares issued - -
Common shares - authorized 5,000,000 shares without par or
stated value, 1,454,750 shares issued - -
Additional paid-in capital 7,850 7,705
Retained earnings - restricted 9,565 9,536
Unrealized gains on securities designated as available for sale,
net of related tax effects 198 140
Shares acquired by stock benefit plans (1,219) (1,411)
Less 6,000 and 9,400 shares of treasury stock - at cost (75) (145)
------- ------
Total shareholders' equity 16,319 15,825
------- ------
Total liabilities and shareholders' equity $107,472 $90,966
======= ======
</TABLE>
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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,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest income
Loans $2,677 $2,260 $1,359 $1,170
Mortgage-backed securities 517 510 279 250
Investment securities, interest-bearing
deposits and other 128 377 59 162
----- ----- ----- -----
Total interest income 3,322 3,147 1,697 1,582
Interest expense
Deposits 1,507 1,394 755 702
Borrowings 391 265 224 144
----- ----- ----- -----
Total interest expense 1,898 1,659 979 846
----- ----- ----- -----
Net interest income 1,424 1,488 718 736
Other income
Gain on sale of loans 43 - 43 -
Other operating 74 35 49 23
----- ----- ----- -----
Total other income 117 35 92 23
General, administrative and other expense
Employee compensation and benefits 623 471 315 265
Occupancy and equipment 115 85 56 49
Federal deposit insurance premiums 18 18 9 6
Franchise taxes 134 73 64 33
Data processing 88 62 45 30
Other operating 196 227 115 128
----- ----- ----- -----
Total general, administrative and other expense 1,174 936 604 511
----- ----- ----- -----
Earnings before income taxes 367 587 206 248
Federal income taxes
Current (12) 42 57 55
Deferred 133 157 9 29
----- ----- ----- -----
Total federal income taxes 121 199 66 84
----- ----- ----- -----
NET EARNINGS $ 246 $ 388 $ 140 $ 164
===== ===== ===== =====
EARNINGS PER SHARE
Basic $.18 $.29 $.10 $.12
=== === === ===
Diluted $.18 $.28 $.10 $.12
=== === === ===
</TABLE>
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<TABLE>
FFD Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
For the six months For the three months
ended December 31, ended December 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net earnings $246 $388 $140 $164
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities
during the period 58 407 (10) 375
--- --- --- ---
Comprehensive income $304 $795 $130 $539
=== === === ===
</TABLE>
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<TABLE>
FFD Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended December 31,
(In thousands)
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net earnings for the period $ 246 $ 388
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 18 14
Amortization of deferred loan origination fees (40) (32)
Depreciation and amortization 66 45
Amortization expense of stock benefit plans 375 290
Gain on sale of loans (6) -
Proceeds from sale of loans 4,633 -
Loans originated for sale in the secondary market (4,627) -
Federal Home Loan Bank stock dividends (34) (24)
Increase (decrease) in cash due to changes in:
Accrued interest receivable 35 2
Prepaid expenses and other assets 161 40
Accrued interest payable 32 18
Other liabilities (44) (32)
Federal income taxes
Current (441) (62)
Deferred 133 157
------ ------
Net cash provided by operating activities 507 804
Cash flows provided by (used in) investing activities:
Proceeds from maturity of investment securities 4,975 12,429
Proceeds from sale of investment securities designated as
available for sale - 6,430
Purchase of investment securities (1,500) (9,925)
Purchase of mortgage-backed securities (9,633) -
Principal repayments on mortgage-backed securities 806 1,056
Loan principal repayments 5,955 5,240
Loan disbursements (13,359) (13,901)
Purchase of stock in Federal Home Loan Bank (151) -
Purchase of office premises and equipment (92) (520)
------ ------
Net cash provided by (used in) investing activities (12,999) 809
Cash flows provided by (used in) financing activities:
Net increase in deposit accounts 5,824 1,679
Proceeds from securities sold under agreements to repurchase 435 -
Proceeds from Federal Home Loan Bank advances 9,500 1,950
Repayment of Federal Home Loan Bank advances (1) (301)
Proceeds from other borrowed money 300 -
Proceeds from exercise of stock options 32 -
Purchase of treasury shares - (154)
Dividends on common stock (217) (186)
------ ------
Net cash provided by financing activities 15,873 2,988
------ ------
Net increase in cash and cash equivalents 3,381 4,601
Cash and cash equivalents at beginning of period 1,633 4,080
------ ------
Cash and cash equivalents at end of period $ 5,014 $ 8,681
====== ======
</TABLE>
6
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<TABLE>
FFD Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the six months ended December 31,
(In thousands)
1998 1997
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 434 $ 148
===== =====
Interest on deposits and borrowings $1,866 $1,641
===== =====
Supplemental disclosure of noncash investing activities:
Unrealized gains on securities designated as available for
sale, net of related tax effects $ 58 $ 407
===== =====
Recognition of mortgage servicing rights in accordance
with SFAS No. 125 $ 37 $ -
===== =====
</TABLE>
7
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FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six and three months ended December 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, 1998. 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 six and three month periods ended December 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 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("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. Management adopted SFAS No. 130 effective July 1, 1998, as
required, without material impact on the Corporation's financial statements.
8
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FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended December 31, 1998 and 1997
3. Effects of Recent Accounting Pronouncements (continued)
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 "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.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires entities to recognize
all derivatives in their financial statements as either assets or
liabilities measured at fair value. SFAS No. 133 also specifies new methods
of accounting for hedging transactions, prescribes the items and
transactions that may be hedged, and specifies detailed criteria to be met
to qualify for hedge accounting.
The definition of a derivative financial instrument is complex, but in
general, it is an instrument with one or more underlyings, such as an
interest rate or foreign exchange rate, that is applied to a notional
amount, such as an amount of currency, to determine the settlement
amount(s). It generally requires no significant initial investment and can
be settled net or by delivery of an asset that is readily convertible to
cash. SFAS No. 133 applies to derivatives embedded in other contracts,
unless the underlying of the embedded derivative is clearly and closely
related to the host contract.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. On
adoption, entities are permitted to transfer held-to-maturity debt
securities to the available-for-sale or trading category without calling
into question their intent to hold other debt securities to maturity in the
future. SFAS No. 133 is not expected to have a material impact on the
Corporation's financial statements.
9
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FFD Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended December 31, 1998 and 1997
4. Earnings Per Share
Basic earnings per share is computed based upon the weighted-average common
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
1,346,965 and 1,347,441 for the six and three month periods ended December
31, 1998. 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 six and three month periods ended December 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
1,394,981 and 1,388,912 for the six three month periods ended December 31,
1998, and 1,362,089 and 1,364,056 for the six and three month periods ended
December 31, 1997.
10
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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, 1998 to December 31,
1998
The Corporation's total assets at December 31, 1998, amounted to $107.5 million,
a $16.5 million, or 18.1%, increase over the total at June 30, 1998. This
increase was funded primarily through an increase in advances from the Federal
Home Loan Bank ("FHLB") of $9.5 million and growth in deposits of $5.8 million.
Investment securities totaled $216,000 at December 31, 1998, a decrease of $3.4
million, or 94.1%, from the total at June 30, 1998, as purchases of securities
totaling $1.5 million were partially offset by maturities of $5.0 million during
the period.
Mortgage-backed securities totaled $20.7 million at December 31, 1998, an $8.8
million, or 74.3%, increase over the total at June 30, 1998. This increase
resulted primarily from purchases of $9.6 million, which were partially offset
by principal repayments totaling $806,000. Purchases of mortgage-backed
securities during the period were comprised of long-term, variable rate
certificates yielding approximately 6.00%, which were funded by Federal Home
Loan Bank advances with a weighted-average cost of approximately 4.82%.
Loans receivable totaled $78.4 million at December 31, 1998, an increase of $7.4
million, or 10.5%, over the June 30, 1998 total. Loan disbursements during the
period totaled $18.0 million, which were partially offset by principal
repayments of $6.0 million and loans sold in the secondary market totaling $4.6
million. Loan disbursements during the three months ended December 31, 1998,
increased by $4.1 million, or 29.4%, compared to the origination volume during
the same period in 1997.
The allowance for loan losses totaled $269,000 and $270,000 at December 31, 1998
and June 30, 1998, which represented .4% and .3% of total loans and 289.2% and
329.3% of nonperforming loans at those respective dates. Nonperforming loans
amounted to $93,000 and $82,000 at December 31, 1998, and June 30, 1998,
respectively. Although management believes that its allowance for loan losses at
December 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 $67.8 million at December 31, 1998, a $5.8 million, or 9.4%,
increase over June 30, 1998. This increase resulted primarily from growth in
deposits at the new branch office location in New Philadelphia, Ohio, coupled
with management's efforts to obtain moderate growth through advertising and
pricing strategies. Proceeds from deposit growth were used to fund new loan
originations during the period.
FHLB advances totaled $22.0 million at December 31, 1998, a $9.5 million, or
75.9%, increase over June 30, 1998. Proceeds from the increase in borrowings
were primarily used to fund purchases of mortgage-backed securities, as well as
to originate loans.
The Savings Bank is required to meet minimum capital standards promulgated by
the Office of Thrift Supervision ("OTS"). At December 31, 1998, the Savings
Bank's regulatory capital was well in excess of such minimum capital
requirements.
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,
1998 and 1997
General
The Corporation's net earnings totaled $246,000 for the six months ended
December 31, 1998, a decrease of $142,000, or 36.6%, from the net earnings of
$388,000 recorded in the comparable period in 1997. The decrease in net earnings
resulted primarily from a decrease of $64,000 in net interest income and an
increase of $238,000 in general, administrative and other expenses, which were
partially offset by an increase of $82,000 in other income and a decrease of
$78,000 in the provision for federal income taxes.
Net Interest Income
Total interest income increased by $175,000, or 5.6%, to a total of $3.3 million
for the six months ended December 31, 1998, compared to the six month period
ended December 31, 1997. Interest income on loans increased by $417,000, or
18.5%, due primarily to a $15.0 million increase in the average loan portfolio
balance outstanding. Interest income on mortgage-backed securities increased by
$7,000, or 1.4%, due primarily to an increase in the average balance
outstanding. Interest income on investment securities and interest-bearing
deposits decreased by $249,000, or 66.0%, due primarily to a decrease of
approximately $7.4 million in the related investment balance, coupled with a
decrease in the yield earned on such investments.
Interest expense on deposits increased by $113,000, or 8.1%, for the six months
ended December 31, 1998, compared to the same period in 1997, due primarily to a
$7.2 million increase in the average deposit portfolio balance outstanding.
Interest expense on borrowings increased by $126,000, or 47.5%, due primarily to
an increase in the average balance of advances outstanding.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased by $64,000, or 4.3%, for the six months ended
December 31, 1998, compared to the same period in 1997. The interest rate spread
was approximately 2.31% for the six months ended December 31, 1998, compared to
2.24% for the comparable 1997 period, while the net interest margin increased to
approximately 3.46% in 1998, compared to 3.41% in 1997.
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,
1998 and 1997 (continued)
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 periods ended
December 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 $117,000 for the six months ended December 31, 1998, an
increase of $82,000 over the 1997 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 increased by $238,000, or 25.4%, for
the six months ended December 31, 1998, compared to the same period in 1997. The
increase in general, administrative and other expense resulted primarily from an
increase of $152,000, or 32.3%, in compensation expense as additional personnel
were hired to staff the New Philadelphia branch coupled with an increase in
stock benefit plan expense, an increase of $30,000, or 35.3%, in occupancy and
equipment expense, primarily related to the New Philadelphia branch and an
increase in Ohio franchise tax totaling $61,000, or 83.6%, due to an increase in
the Company's equity.
Federal Income Taxes
The Corporation recorded a provision for federal income taxes totaling $121,000
for the six months ended December 31, 1998, a decrease of $78,000, or 39.2%,
from the same period in 1997. The decrease resulted primarily from a $220,000,
or 37.5%, decrease in earnings before taxes. The effective tax rates were 33.0%
and 33.9% for the six months ended December 31, 1998 and 1997, respectively.
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,
1998 and 1997
General
The Corporation's net earnings totaled $140,000 for the three months ended
December 31, 1998, a decrease of $24,000, or 14.6%, from the net earnings of
$164,000 recorded in the comparable period in 1997. The decrease in net earnings
resulted primarily from a decrease of $18,000 in net interest income and an
increase of $93,000 in general, administrative and other expenses, which were
partially offset by an increase of $69,000 in other income and a decrease of
$18,000 in the provision for federal income taxes.
Net Interest Income
Total interest income increased by $115,000, or 7.3%, to a total of $1.7 million
for the three months ended December 31, 1998, compared to the three month period
ended December 31, 1997. Interest income on loans increased by $189,000, or
16.2%, due primarily to an increase of approximately $14.7 million in the
average loan portfolio balance outstanding. Interest income on mortgage-backed
securities increased by $29,000, or 11.6%, due primarily to an increase 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 $103,000, or 63.6%, due primarily to a decrease in the
related investment balance and a decrease in the yield earned on such
investments.
Interest expense on deposits increased by $53,000, or 7.5%, for the three months
ended December 31, 1998, compared to the same period in 1997, due primarily to
an approximate $8.3 million increase in the average deposit portfolio balance
outstanding.
Interest expense on borrowings increased by $80,000, or 55.6%, due primarily to
an increase in the average balance of advances outstanding.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased by $18,000, or 2.4%, for the three months ended
December 31, 1998, compared to the same period in 1997.
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,
1998 and 1997 (continued)
Provision for Losses on Loans
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, 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 December 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 Operating Income
Other operating income totaled $92,000 for the three months ended December 31,
1998, an increase of $69,000 over the 1997 total. The increase was due primarily
to a $43,000 gain on sale of loans in the 1998 six month period, coupled with a
$26,000, or 113.0%, increase in other operating income.
General, Administrative and Other Expense
General, administrative and other expense increased by $93,000, or 18.2%, for
the three months ended December 31, 1998, compared to the same period in 1997.
The increase in general, administrative and other expense resulted primarily
from an increase of $50,000, or 18.9%, in compensation expense as additional
personnel were hired to staff the New Philadelphia branch coupled with an
increase in stock benefit plan expense, an increase of $7,000, or 14.3%, in
occupancy and equipment expense, for the New Philadelphia branch and an increase
in Ohio franchise tax totaling $31,000, or 93.9%, as the Company's equity has
increased.
Federal Income Taxes
The Corporation recorded a provision for federal income taxes totaling $66,000
for the three months ended December 31, 1998, a decrease of $18,000, or 21.4%,
from the same period in 1997. The decrease resulted primarily from a $42,000, or
16.9%, decrease in earnings before taxes. The effective tax rates were 32.0% and
33.9% for the three months ended December 31, 1998 and 1997, respectively.
15
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FFD Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Year 2000 Compliance Matters
As with all 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 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.
As part of the awareness and assessment phases of its action plan related to the
Year 2000 problem, management identified the operating systems that it considers
critical to the on-going operations of the Savings Bank. The Savings Bank is
working with companies that supply or service its information technology systems
to remedy any year 2000 problems.
Of the systems that the Savings Bank identified as mission-critical, the most
significant is the on-line core account processing system that is performed by a
third party service provider, Intrieve, Inc. The service provider is converting
its hardware to a new Year 2000 compliant system. The Savings Bank's conversion
to this new system was completed during the fourth calendar quarter of 1998. The
service provider successfully performed Year 2000 proxy testing with several of
its larger users during early October 1998. The Savings Bank performed final
customer testing, which was designed to test the Savings Bank's unique equipment
configuration and communications link to the service provider during November
1998.
The Savings Bank has developed a contingency plan in case the mission-critical
systems are not successfully renovated in a timely manner or if they actually
fail at Year 2000 critical dates. The contingency plan states that the Savings
Bank deems the likelihood of failure of the service provider's efforts to
renovate Year 2000 changes to the on-line core account processing system to be
remote; however, a more likely scenario is that the service provider's system
will be down for several days or weeks upon arrival of Year 2000. The plan,
therefore, primarily addresses action to deal with the latter possibility rather
than with a catastrophic event. The Savings Bank has the ability to process
transactions manually, if necessary. The Savings Bank does not consider
contingency planning to be a static process; therefore, the plan will be amended
to address a catastrophic event if testing results indicate greater concern.
Management of the Savings Bank has developed an estimate of expenses that are
reasonably likely to be incurred by the Savings Bank in connection with this
issue; however, the Savings Bank does not expect to incur significant expense to
implement the necessary corrective measures. The Savings Bank has expended less
than $10,000 through December 31, 1998 in connection with its year 2000
compliance program. 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 Savings Bank's net
earnings and financial condition could be adversely affected.
In addition to possible expense related to its own systems, the Savings Bank
could incur losses if loan payments are delayed due to Year 2000 problems
affecting any major borrowers 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.
16
<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
None.
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K: None.
Exhibits 27: Financial data schedule for the six
months ended December 31, 1998.
17
<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 12, 1999 By: /s/Robert R. Gerber
------------------------- ------------------------------
Robert R. Gerber
President and
Principal Financial Officer
Date: February 12, 1999 By: /s/Charles A. Bradley
------------------------- ------------------------------
Charles A. Bradley
Treasurer
18
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<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 971
<INT-BEARING-DEPOSITS> 4,043
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
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<INVESTMENTS-CARRYING> 5,155
<INVESTMENTS-MARKET> 5,310
<LOANS> 78,434
<ALLOWANCE> 269
<TOTAL-ASSETS> 107,472
<DEPOSITS> 67,780
<SHORT-TERM> 435
<LIABILITIES-OTHER> 620
<LONG-TERM> 22,318
0
0
<COMMON> 0
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<EXPENSE-OTHER> 1,174
<INCOME-PRETAX> 367
<INCOME-PRE-EXTRAORDINARY> 246
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 246
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
<YIELD-ACTUAL> 3.46
<LOANS-NON> 83
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