Description

FFD Financial Corp. (“FFD”) is a holding company that owns First Federal Community Bank, a small independent community based federal savings bank located in Dover, Ohio. The institution has no reason to be public and in fact had recently abandoned an effort to deregister with the SEC via a reverse stock split. Subsequently, activist investor Ancora Advisors LLC acquired over 9 percent of the stock and has made efforts to convince the board of directors to entertain a sale of the bank. The board of directors has not given in to Ancora’s wishes and for the moment they seem determined to remain an independent community bank.

As an acquisition candidate, FFD Financial Corp. (FFD) is worth 30 to 50 percent more than where the stock currently trades. As a continuing independent publicly traded community bank the stock is worth about 15 to 20 percent less than where it currently trades. Accordingly, the merits of this investment idea depend on your assessment of whether or not FFD will be sold and how long it will take.

So…what is the likelihood that Ancora’s activist efforts will prevail and the bank will be sold? I think the chances are pretty good. Here’s why:

• The difference in value between FFD stock as an acquisition candidate and as a stand alone entity is too great. Ancora’s 13D filing sets forth in detail how FFD will likely be valued as an acquisition candidate. Based on comparables, the current per share value would be in the range of $24.00 to $33.00, lets say $26.00 just to focus on a reasonable scenario. Comparatively, the stock would likely sell for between $15.50 and $17.00 per share, which is a slight premium to book value ($14.76), were there to be no sign of an imminent sale. Assuming a sale two years out there would like be an additional $2.50 to $3.00 per share of value as a result of dividends (approximately $1.00 per share), an increase in book value (approximately $1.00 per share) and the extra value derived as a result of an acquirer paying a premium to book value and/or for an increase in core deposits (approximately a $0.50 to $1.00 per share of value increase).

• FFD, by their own admission, is too small to be incurring the costs of being public, particularly when considering the imminent costs of Sarbanes Oxley.

• Insiders only own 16.1 percent (only 13 percent not including options) of the stock, the companies ESOP owns an additional 11 percent.

• FFD’s Board of Directors’ five members do not have staggered terms. The annual meeting is not until next October. There will be plenty of time for favorable changes in the shareholder base. The stock is not super liquid but by the time the record date is set for the meeting it is likely that more than 20 percent of the outstanding shares will have traded hands. Purchasers of stock at these levels are likely supporters of Ancora’s initiatives - they want the bank to be sold. If it comes down to a proxy fight, these shareholders should back Ancora.

• There is cumulative voting. Again this bodes well for Ancora. As it stands now Ancora should be able to secure two of the five board seats. Any additional change in the shareholder base should be favorable. If, as I anticipate, more than 20 percent of the stock turns over before the annual meeting next October, Ancora might be able to gain control of the board.

• Management is very reasonably paid. This is important because a sale of the bank might actually lead to higher salaries and greater career opportunities for FFD employees. The economies of scale and efficiencies generated as a result of a sale of the bank do not flow solely to shareholders. There are other stakeholders that also stand to benefit. Ultimately, the current board members will weigh heavily the qualities of the particular institution that would be the acquirer.

• Ancora is located in Ohio. Accordingly, connections with regional institutions could help make a deal happen. For example, Umberto Fedeli recently joined the Ancora group of investors. Mr. Fedeli has had some previous investments in community banks, at least two of which have been sold to larger banks. For example, he owned 8.7 percent, and was a member of the board of directors, of GLB Financial Corp. GLB was a Cleveland based holding company that controlled Great Lakes Bank. GLB was ultimately sold to Sky Financial in 2003. Mr. Fedeli was very involved in the transaction and accordingly has likely retained contacts at Sky. Other potential acquirers are First Place Financial based out of Youngstown, Ohio, United Community Financial also of Youngstown, Ohio, Park National Corp. of Newark, Ohio, Mainsource Financial Group, Inc. of Greensberg, Indiana and some analysts believe First Merit Bank of Akron, Ohio is actively looking for acquisitions.

• If another activist buys 5 to 10 percent of FFD the board should quickly realize that they have to work with the activists, whether they like it or not. Given the recent volume of trading I would not be surprised to see another filer surface in the near future.

Valuation Issues:

Ancora does a great job laying out comparables and valuation metrics in their 13-D filed on November 7, 2005. In summary, acquisitions of small banking/thift institutions in Ohio have been averaging about 1.7 times book value and/or premiums to book value of 16 percent of core deposits. FFD’s book value as of September 30 was $14.76 per share, which would support a value of $25.00 per share. FFD has approximately $100 million in core deposits and 1,192,000 shares outstanding, which would support a value over $28.00 per share.

FFD is overcapitalized as equity is 11.3 percent of total assets. The bank is positioned to benefit from rising rates. Accordingly, the next couple of years should produce improved financial performance. Return on equity has been sub-par, largely as a result of being overcapitalized. This year’s return on assets should be about 80 or 90 basis points and earnings should be north of $0.90 per share.

In conclusion, the up/down profile is compelling. The worst case scenario is that two years out the stock trades at $17.50 (just over a 10% premium to BV) plus you get $1.00 of dividends. The upside scenario is $28.00 plus $1.00 of dividends. I’m assuming an 80 percent chance up and 20 percent chance down. If my handicapping is accurate, the expected payoff is $26.90, two years out on a $19.50 purchase price. That works out to about a 17.5 percent annualized return over a two year hold. This assessment might prove conservative too as the bank could easily be sold within two years. Plus, even if Ancora’s efforts initially fail, ultimately this bank will be sold within the next three to four years.

Catalyst

Ancora Adivsor's activist efforts prevail resulting in the sale of FFD Financial.