-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QrIDIGTh7mfbpG1LabqVFS3ASuXfHpvoAgg2fvBD7MN2loQRWGGW0wRATnzgXLjx FAiFnhpuC21ys/3WMdrjjg== 0000908834-03-000389.txt : 20030926 0000908834-03-000389.hdr.sgml : 20030926 20030926141904 ACCESSION NUMBER: 0000908834-03-000389 CONFORMED SUBMISSION TYPE: ARS PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030926 EFFECTIVENESS DATE: 20030926 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FFW CORP CENTRAL INDEX KEY: 0000895401 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 351875502 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: ARS SEC ACT: 1934 Act SEC FILE NUMBER: 000-21170 FILM NUMBER: 03912131 BUSINESS ADDRESS: STREET 1: 1205 N CASS STREET STREET 2: PO BOX 419 CITY: WABASH STATE: IN ZIP: 46992-1027 BUSINESS PHONE: 2195633185 MAIL ADDRESS: STREET 1: 1205 N CASS ST STREET 2: PO BOX 419 CITY: WABASH STATE: IN ZIP: 46992 ARS 1 ffw_ars.txt FFW CORPORATION Wabash, Indiana INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PRESIDENT'S MESSAGE .................................................... 2 SELECTED CONSOLIDATED FINANCIAL INFORMATION ............................ 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ............................... 4 REPORT OF INDEPENDENT AUDITORS ......................................... 13 CONSOLIDATED BALANCE SHEETS - JUNE 30, 2003 and 2002.................... 14 CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED JUNE 30, 2003, 2002 and 2001 .......................... 15 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY YEARS ENDED JUNE 30, 2003, 2002 and 2001 .......................... 16 CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 2003, 2002 and 2001 .......................... 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.............................. 18 DIRECTORS AND EXECUTIVE OFFICERS ....................................... 34 SHAREHOLDER INFORMATION ................................................ 35 PRESIDENT'S MESSAGE FFW CORPORATION Dear Shareholder: It is my pleasure to present to you the 2003 Annual Report of FFW Corporation and its wholly-owned subsidiary, First Federal Savings Bank. As you will see by reading the accompanying financial statements, FFW Corporation had a record year for net income and earnings per share. Net income for the year ended June 30, 2003 was $2,358,000, or diluted earnings per share of $1.74, compared to $2,048,000 or $1.47 for 2002. The low interest rate environment increased our refinance activity and new loan commitments. The record earnings can be attributed to the increase in loan volume combined with management's continued efforts to control costs. Your Board of Directors and Officers understand the importance of enhancing shareholder value and providing an acceptable return on your investment. In March 2003, the Corporation completed a 5% stock repurchase program that began in February 2002 and, subsequently, initiated another stock buy back program to purchase up to an additional 5% of outstanding shares. In addition, the $0.60 per share dividend paid in 2003 represents a 7.1% increase over the dividend paid in 2002. To better serve our existing market area we introduced our website at www.ffsbwabash.com and in November 2002 added Internet Banking to our services. Introducing Internet Banking and the optional bill payment service, provides our customers the convenience they deserve, allowing them to bank 24 hours a day. The combination of high quality products and high quality people to deliver these products, also contributes to the profitability of FFW Corporation. I would like to take this opportunity to commend and thank the Officers, staff and Directors of the Company and its subsidiaries for all their hard work. It is through their efforts that the Company had such a successful year. The next fiscal year offers many challenges and opportunities for FFW Corporation. The future interest rate environment poses a challenge for all financial institutions, including First Federal Savings Bank. We continue to face competition from larger banking centers; however, we believe that people want to do business with a local institution that is experienced and can provide solid financial products with unparalleled service. We believe that our efforts to expand into new markets and augment our services will be positive for future growth. We look optimistically to the future, confident that we have built a solid foundation. Thank you, our shareholders, employees, and customers for your continued support and encouragement. Sincerely, /s/ Roger K. Cromer Roger K. Cromer President and Chief Executive Officer
SELECTED CONSOLIDATED FINANCIAL INFORMATION AT OR FOR THE YEAR ENDED JUNE 30: 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- (In Thousands) Financial Condition Data: Total assets $242,771 $237,828 $231,186 $219,037 $ 217,489 Loans 128,727 141,858 152,195 150,810 151,491 Securities 89,637 76,345 60,973 52,026 51,029 Deposits 163,446 158,661 144,630 133,105 130,401 Borrowings 52,038 54,363 62,397 64,168 66,300 Equity 23,640 22,409 21,993 19,615 19,357 (In Thousands) Selected Operations Data: Total interest income $ 13,963 $ 16,022 $ 17,544 $ 16,687 $ 16,052 Net interest income 6,607 6,570 6,786 7,072 6,686 Provision for loan losses (1,440) (1,355) (1,715) (1,034) (1,010) Non-interest income 2,488 2,305 1,265 1,689 1,990 Non-interest expense (4,784) (4,804) (4,237) (4,657) (4,591) Income tax expense (513) (668) (476) (799) (964) --------- --------- -------- -------- --------- Net income $ 2,358 $ 2,048 $ 1,623 $ 2,271 $ 2,111 ======== ======== ======== ======== ========= Per Share: Basic earnings per share (1) $ 1.76 $ 1.48 $ 1.14 $ 1.60 $ 1.48 Diluted earnings per share (1) 1.74 1.47 1.13 1.57 1.46 Dividends declared (1) 0.60 0.56 0.52 0.48 0.42 Dividend payout ratio 34.09% 37.84% 45.61% 30.00% 28.38% Other Data: Net interest margin (2) 2.98% 2.96% 3.14% 3.38% 3.28% Average interest-earning assets to average interest-bearing liabilities 1.11x 1.13x 1.12x 1.10x 1.12x Non-performing assets (3) to total assets at end of period 1.13% .90% .70% .13% .39% Equity-to-total assets (end of period) 9.74 9.42 9.51 8.96 8.90 Return on assets (ratio of net income to average total assets) 1.00 .88 .72 1.04 .99 Return on equity (ratio of net income to average equity) 10.08 9.24 7.87 11.83 10.68 Equity-to-assets ratio (ratio of average equity to average total assets) 9.90 9.57 9.13 8.76 9.25 Number of full-service offices 4 4 4 4 4 (1) Restated for 100% stock dividend. (2) Net interest income divided by average interest-earning assets. (3) Includes non-accruing loans, accruing loans delinquent more than 90 days and foreclosed assets.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS When used in this Annual Report and in filings by the Company with the Securities and Exchange Commission, in the Company's press releases or other public or shareholder communications, and in oral statements made with the approval of an authorized executive officer, the word or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to certain risks and uncertainties, including, among other things, changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company's market area and competition, that could cause actual results to differ materially from historical results and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinion or statements expressed with respect to future periods in any current statements. The Company does not undertake - and specifically declines any obligation - to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. GENERAL FFW Corporation (the Company) owns First Federal Savings Bank of Wabash (the Bank or First Federal), and the Company's earnings are primarily dependent on the operations of First Federal. The following discussion relates primarily to the Bank. The principal business of First Federal is attracting deposits from the public and making small business, consumer and mortgage loans. The Bank's earnings are primarily dependent on net interest income, the difference between interest income and interest expense. Interest income is a function of the balances of loans, mortgage-backed securities and investments outstanding during the period and the yield earned on such assets. The balances of deposits and borrowings and the rates paid on such deposits and borrowings determine interest expense. Operating expenses consist of employee compensation and benefits, occupancy and equipment, federal deposit insurance and other general and administrative expenses. Economic conditions as well as federal regulations concerning financial institutions and monetary and fiscal policies affect the Company. Deposit balances are influenced by a number of factors including interest rates paid on competing personal investments and the level of personal income and savings in our market. Deposit balances are influenced by the perceptions of customers regarding the stability of the financial services industry. Lending activities are influenced by the demand for housing and by competition from other lending institutions. The primary sources of funds for lending activities include deposits, loan repayments, borrowings, sales and maturities of securities available for sale and funds provided from operations. FINANCIAL CONDITION Total assets increased $4.9 million during the year to $242.8 million at June 30, 2003. This increase was funded by an increase in deposits of $4.8 million. These funds, along with cash from operations and loan repayments, were used to pay down FHLB advances, invest in government agencies, municipals and other securities and purchase bank-owned life insurance. Total securities available for sale increased from $76.3 million at June 30, 2002 to $89.6 million at June 30, 2003. During fiscal 2003, state and municipal securities increased from $17.1 million at June 30, 2002 to $20.3 million at June 30, 2003. Agency securities increased from $12.9 million at June 30, 2002 to $16.7 million at June 30, 2003. Mortgage backed, equity and other securities increased from $46.3 million at June 30, 2002 to $52.6 million at June 30, 2003. The Company has unrealized appreciation of $721,000, net of tax, at June 30, 2003 on securities available for sale. Net loans decreased $13.1 million, or 9.3%, from $141.9 million at June 30, 2002 to $128.7 million at June 30, 2003. The decreases in the loan portfolio were comprised primarily of $7.1 million in automobile and other consumer loans, $3.7 million in commercial loans and $2.1 million in home equity and improvement loans. The decrease in automobile loans since June 2000, from $31.6 million to $15.0 million, reflects the Bank's decision to reduce indirect automobile loan originations. Approximately 70% of the loan portfolio is comprised of first mortgage loans secured by residential and nonresidential real estate located in the Company's market area. At June 30, 2003, total first mortgage loans secured by real estate comprised $89.7 million, or 69.7% of the net loan portfolio. The consumer and other loan portfolio included $15.1 million of home equity and improvement loans, $8.3 million in commercial loans and $18.2 million in automobile and other consumer loans at June 30, 2003. Total deposits increased $4.8 million, or 3.0%, from $158.6 million at June 30, 2002 to $163.4 million at June 30, 2003. During fiscal 2003, noninterest-bearing accounts increased $1.3 million, or 12.6%, and interest-bearing accounts increased $3.5 million, or 2.4%. The increase resulted from increased savings accounts and noninterest- bearing demand deposits. Management will continue to control the overall increases in interest rates in deposits by targeting certain terms and offering "specials" rather than making across the board increases in interest rates on all deposit products. Total shareholders' equity increased $1.2 million to $23.6 million at June 30, 2003. The increase primarily resulted from net income of $2.4 million and a $582,000 increase in unrealized appreciation on securities available for sale, net of tax, which were offset by cash dividends of $803,000 and $939,000 of treasury stock purchases. RESULTS OF OPERATIONS Comparison of Years Ended June 30, 2003 and June 30, 2002 General. Net income for the year ended June 30, 2003 was $2.4 million; an increase of $311,000 compared to net income of $2.0 million for the year ended June 30, 2002, an increase of 15.2%. The increase was primarily the result of an increase of $183,000 in noninterest income, a $155,000 decrease in income tax expense, a $37,000 increase in net interest income and a $20,000 decrease in noninterest expense. The increase was partially offset by an increase in provisions for loan losses of $85,000. Further details of the changes in these items are discussed below. [GRAPH OMITTED] NET INCOME FROM 1999 TO 2003 1999 2000 2001 2002 2003 $2,111 $2,271 $1,623 $2,048 $2,358 Net Interest Income. Net interest income was approximately the same at $6.6 million for the years ended June 30, 2003 and 2002. The stabilization in net interest income came from interest-earning assets and interest-bearing liabilities repricing similarly throughout the year. Net interest margin, the ratio of net interest income to average earning assets, is affected by movements in interest rates and changes in the mix of earning assets and the liabilities that fund those assets. Net interest margin was 2.98% in 2003 compared to 2.96% in 2002. The net interest margin was stable due primarily to the net impact of changes in yields and rates of interest-earning assets and interest-bearing liabilities. The yield on earning assets in 2003 was 6.30% compared to 7.23% in 2002. Average earning assets decreased 0.2% in 2003, following a 2.9% increase in 2002. The effective rate on interest-bearing liabilities was 3.68% in 2003, compared to 4.79% in 2002. Provision for Loan Losses. The provision for loan losses increased $85,000 from fiscal 2002 to $1.4 million in fiscal 2003. The increased amounts provided during the fiscal year were based on management's quarterly analysis of the allowance for loan losses. In addition, the inherent and identified risks of commercial and consumer loans continue to require a higher level of provisions for loan losses. The Company has monitored the historical increase in net charge-offs in the commercial and consumer loan portfolios and increased the provision for loan losses accordingly. The Company will continue to monitor its allowance for loan losses and make future additions to the allowance through the provision for loan losses based on management's quarterly analysis of the adequacy of the allowance. Although the Company maintains its allowance for loan losses at a level which it considers to be adequate to provide for probable incurred losses, there can be no assurance that future losses will not exceed estimated amounts or that additional provisions for loan losses will not be required in future periods. In addition, the Company's determination as to the amount of the allowance for loan losses is subject to review by regulatory agencies, which can order the establishment of additional general or specific allowances. Noninterest Income. Noninterest income increased 8.0% from $2.3 million in 2002 to $2.5 million in 2003. Net gains on sales of securities decreased $203,000 from 2002 while commission income decreased 31.3% or $91,000 from $290,000 in 2002. Net gains on sales of loans increased by $304,000, or 42.6%, due to record levels of refinance activity. Service charges and fees decreased 15.9% or $164,000 over 2002 due primarily to increased amortization of mortgage servicing rights on loans that were refinanced. Other income increased $336,000 in 2003 due primarily to the Bank's investment in life insurance. Noninterest Expense. During 2003, total noninterest expense remained at $4.8 million. The slight decrease of $20,000 was the result of continued cost control and several offsetting increases and decreases. Increased expenses included 5.9% in salaries and benefits, 3.3% in occupancy and equipment, 6.6% in data processing and 14.8% in printing, postage and supplies. Deposit insurance premium expense increased $47,000 while OTS assessment expense increased $19,000. These increases were offset by decreases of 10.1% in correspondent bank charges and 15.0% in other expense. In 2002, other expense included $292,000 resulting from a one-time increase due to processing errors occurring over a period of time related to the processing of loan sales and payments on serviced loans Effective July 1, 2003, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets". Under this statement the Company ceased amortization of goodwill and periodically reviews the asset for impairment. The asset was determined to not be impaired during 2003 and, accordingly, no expense was recorded. In 2002, amortization of goodwill expense was $94,000. Income Tax Expense. Income tax expense was $513,000 in fiscal 2003 compared to $668,000 in fiscal 2002, a decrease of $155,000 or 23.2%. Income taxes decreased in spite of higher net income before taxes in 2003 due to an increase in federally tax exempt municipal securities income and the tax effects of the Bank's investment in life insurance. The effective tax rates were 17.9% and 24.6% for the years ended June 30, 2003 and 2002. Comparison of Years Ended June 30, 2002 and June 30, 2001 General. Net income for the year ended June 30, 2002 was $2.0 million; an increase of $425,000 compared to net income of $1.6 million for the year ended June 30, 2001, an increase of 26.2%. The increase was primarily the result of an increase of $1.0 million in noninterest income and a $360,000 decrease in provisions for loan losses which was partially offset by an increase in noninterest expense of $567,000 and a decrease in net interest income of $216,000. Further details of the changes in these items are discussed below. Net Interest Income. Net interest income decreased $216,000, or 3.2%, from $6.8 million to $6.6 million for the year ended June 30, 2002. The decrease in net interest income was due to a decrease of $1.5 million in interest income, offset by a decrease of $1.3 million in interest expense. The decrease in net interest income was primarily a result of a larger decrease in the yield on interest-earning assets compared to the decrease in the yield on interest-bearing liabilities. Net interest margin, the ratio of net interest income to average earning assets, is affected by movements in interest rates and changes in the mix of earning assets and the liabilities that fund those assets. Net interest margin was 2.96% in 2002 compared to 3.14% in 2001. The net interest margin decreased due primarily to the net impact of changes in yields and rates of interest-earning assets and interest-bearing liabilities. The yield on earning assets in 2002 was 7.23% compared to 8.09% in 2001. Average earning assets increased 2.9% in 2002, following a 3.3% increase in 2001. The effective rate on interest bearing liabilities was 4.79% in 2002, compared to 5.58% in 2001. Provision for Loan Losses. The provision for loan losses decreased $360,000 from $1.7 million in fiscal 2001 to $1.4 million in fiscal 2002. The decrease was primarily due to a $900,000 additional provision that was identified during the first quarter of fiscal 2001 for losses expected on loans to a single borrower. The amounts provided during the fiscal year were based on management's quarterly analysis of the allowance for loan losses. In addition, the inherent and identified risks of commercial and consumer loans continue to require a higher level of provisions for loan losses. The Company has monitored the historical increase in net charge-offs in the commercial and consumer loan portfolios and increased the provision for loan losses accordingly. Noninterest Income. Noninterest income increased 82.1% from $1.3 million in 2001 to $2.3 million in 2002. All components of noninterest income, net gain or loss on sales of securities, sales of loans, commission income, service charges and fees and other income, increased in 2002. The primary factors influencing the $1.0 million increase were gains on sales of securities, commission income and gains on sales of loans. Gain on sales of securities was $229,000 in 2002 compared to a loss on sales of securities of $14,000 in 2001. Commission income increased 55.0% or $103,000 in 2002. The gain on sales of loans increased $631,000 as interest rates decreased during the year causing an increase in the number of newly originated fixed-rate mortgage loans with maturities 15 years and greater. Included in this gain on sales of loans is $465,000 of income relative to the recording of mortgage servicing rights resulting from the substantial increase in the Company's serviced loan portfolio. Noninterest Expense. During 2002, noninterest expense increased 13.4%, from $4.2 million in 2001 to $4.8 million in 2002. The increase was primarily attributed to salaries and benefits and other expense. Salaries and benefits increased 7.8% in 2002 as the Company increased professional staff. Other expense increased 51.2% or $358,000 in 2002 with $292,000, or 81.6%, of the increase resulting from a one-time increase due to processing errors occurring over a period of time related to the processing of loan sales and payments on serviced loans. Management has taken steps to ensure such errors will not occur in the future. Income Tax Expense. Income tax expense was $668,000 in fiscal 2002 compared to $476,000 in fiscal 2001, an increase of $192,000 or 40.3%. Income taxes increased primarily due to higher net income before taxes in 2002. The effective tax rates were 24.6% and 22.7% for the years ended June 30, 2002 and 2001. Asset and Liability Management and Market Risk General. The principal market risk affecting the Company is interest rate risk. The Company does not maintain a trading account and is not affected by foreign currency exchange rate risk or commodity price risk. The Company is subject to interest rate risk to the extent its interest-earning assets reprice differently than its interest-bearing liabilities. The Company reduces exposure to changes in market interest rates by managing asset and liability maturities and interest rates, primarily by reducing the effective maturity of assets through the use of adjustable rate mortgage-backed securities and adjustable rate loans and by extending funding maturities through the use of other borrowings such as FHLB Advances. Quantitative Aspects of Market Risk. As part of its efforts to monitor and manage interest rate risk, the Company uses the "net portfolio value" (NPV) methodology adopted by the Office of Thrift Supervision (OTS). This approach calculates the difference between the present value of expected cash flows from assets and liabilities, as well as cash flows from off balance sheet contracts, arising from an assumed 300 basis point increase or decrease in interest rates. The Company's asset/liability management strategy sets limits on the change in NPV given certain changes in interest rates. The tables presented here, as of June 30, 2003 and 2002, are the Company's interest rate risk measured by changes in NPV for instantaneous parallel shifts in the yield curve, in 100 basis point increments, up and down 300 basis points. At June 30, 2003 and June 30, 2002, the OTS did not provide information as to interest rate risk for 200 and 300 point decreases due to the low level of interest rates. As of June 30, 2003 Change in Interest Rates NPV as % of Portfolio In Basis Net Portfolio Value Value of Assets Points NPV (Rate Shock) $ Amount $ Change % Change Ratio Change (1) ----------- -------- -------- -------- ----- ---------- (Dollars in thousands) 300 $15,868 $(5,662) (26)% 6.71% (191) 200 18,383 (3,147) (15) 7.62 (100) 100 20,300 (1,230) (6) 8.27 (35) Static 21,530 8.62 (100) 21,274 (256) (1) 8.42 (20) (1) Expressed in basis points As of June 30, 2002 Change in Interest Rates NPV as % of Portfolio In Basis Net Portfolio Value Value of Assets Points NPV (Rate Shock) $ Amount $ Change % Change Ratio Change (1) ----------- -------- -------- -------- ----- ---------- (Dollars in thousands) 300 $17,987 $(8,387) (32)% 7.73% (294) 200 21,535 (4,840) (18) 9.05 (162) 100 24,551 (1,824) (7) 10.10 (57) Static 26,375 10.67 (100) 26,323 (51) 0 10.53 (14) (1) Expressed in basis points As illustrated in the table, the Company's NPV declines in a rising interest rate environment. Specifically, the table indicates that, at June 30, 2003, the Company's NPV was $21.5 million (or 9% of portfolio assets). Based upon the assumptions used, an immediate increase in market interest rates of 200 basis points would result in a $3.1 million or 15% decline in NPV and a 100 basis point or 11.6% decline in the Company's NPV ratio to 7.62%. This is within the Company's guidelines. In evaluating the exposure to interest rate risk, certain simplifications in analysis must be considered. For example, although assets and liabilities may have similar maturities or period to repricing, they may react differently to changes in market interest rates. In addition, the rates on some assets and liabilities may fluctuate before changes in market interest rates, while interest rates on other types may lag behind. Further, if rates change, prepayments and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of many borrowers to service their debt may decrease in case of an interest rate increase. Therefore, the actual effect of changing interest rates may differ from that presented in the foregoing table. The Board of Directors and management of the Company believe that certain factors afford the Company the ability to operate successfully despite its exposure to interest rate risk. The Company manages its interest rate risk by originating adjustable rate loans and purchasing adjustable rate mortgage-backed securities, by maintaining capital well in excess of regulatory requirements and by selling the majority of fixed rate one-to four-family real estate loans. The Company focuses lending efforts toward offering competitively priced adjustable rate loan products as an alternative to more traditional fixed rate mortgage loans. In addition, while the Company generally originates mortgage loans for its own portfolio, sales of fixed-rate first mortgage loans with maturities of 15 years or greater are currently undertaken to manage interest rate risk. These loans are currently classified as held for sale by the Company at origination. The Company retains the servicing on loans sold in the secondary market. At June 30, 2003, $67.9 million of such loans were being serviced for others. The primary objective of the Company's investment strategy is to provide liquidity necessary to meet funding needs as well as address daily, cyclical and long-term changes in the asset/liability mix while contributing to profitability by providing a stable flow of dependable earnings. Generally, the Company invests funds among various categories of investments and maturities based on the Company's liquidity needs and to achieve the proper balance between the desire to minimize risk and maximize yield to fulfill the Company's asset/liability management policies. The Company's cost of funds responds to changes in interest rates due to the relatively short-term nature of its deposit portfolio. As a result, the levels of short-term interest rates influence the results of operations. The Company offers a range of maturities on its deposit products at competitive rates and monitors the maturities on an ongoing basis. Critical Accounting Policies Certain of the Company's accounting policies are important to the portrayal of the Company's financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances that could affect these judgments include, but without limitation, changes in interest rates, in the performance of the economy or in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses, ("ALL"), and the valuation of mortgage servicing rights. Allowance for Loan Losses: The ALL is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the ALL balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the ALL may be made for specific loans, but the entire ALL is available for any loan that, in management's judgment, should be charged-off. Loan losses are charged against the ALL when management believes the uncollectibility of a loan balance is confirmed. A loan is impaired when full payment under the loan terms is not expected. Impairment is evaluated in total for small-balance loans of similar nature such as residential mortgage and consumer loans, and on an individual loan basis for other loans. If a loan is impaired, a portion of the ALL is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Mortgage Servicing Rights: Servicing rights represent both purchased rights and the allocated value of servicing rights retained on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, as to geographic and prepayment characteristics. Any impairment of a grouping is reported as a valuation allowance. Changes in interest rates and the level of refinance activity can have volatile effects on the carrying value of servicing rights. At June 30, 2003, mortgage servicing rights had a carrying value of $615,000. Off-Balance Sheet Arrangements As of the date of this Annual Report, the Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, change in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term "off-balance sheet arrangement" generally means any transaction, agreement, or other contractual arrangement to which an entity unconsolidated with the Company is a party under which the Company has (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
Average Balances, Interest Rates and Yields The following table shows weighted average interest rates on loans, investments, deposits, other interest-bearing liabilities, and the interest rate spread and the net yield on weighted average interest-earning assets. --------------------------------------Year Ended June 30------------------------------------------------- ------------------ 2003 2002 2001 ------------------------------- ------------------------------------ -------------------------------- Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate ------- -------- ---- ------- -------- ---- ------- -------- ---- (Dollars in Thousands) Interest-earning assets: Loans receivable (1) $133,550 $ 10,165 7.61% $ 148,394 $ 12,015 8.10% $ 154,211 $ 13,467 8.73% Securities (2) (3) 73,277 3,213 4.38 57,399 3,099 5.40 46,736 3,053 6.39 Mortgage-backed securities (3) 10,222 518 5.07 13,085 834 6.64 12,174 872 7.12 Other interest- bearing deposits 4,668 67 1.44 3,342 74 2.21 2,754 152 5.52 -------- --------- ---------- ---------- ---------- --------- Total interest-earning assets 221,717 13,963 6.30 222,220 16,022 7.23 215,875 17,544 8.09 Other assets 14,748 9,422 9,028 -------- ---------- ---------- Total assets $236,465 $ 231,642 $ 224,903 ======== ========== ========== Interest-bearing liabilities: Money market accounts $ 2,401 $ 33 1.37% $ 4,335 105 2.42% $ 4,690 242 5.15 NOW accounts 8,086 102 1.26 7,771 129 1.66 7,398 161 2.18 Passbook savings accounts 58,510 1,248 2.13 42,624 1,281 3.01 34,798 1,326 3.81 Certificates of deposit 83,236 3,346 4.02 84,968 4,766 5.61 83,295 5,265 6.32 FHLB advances 47,747 2,626 5.50 57,607 3,171 5.50 62,585 3,765 6.02 -------- --------- ---------- ---------- ---------- --------- Total interest- bearing liabilities 199,980 7,355 3.68 197,305 9,452 4.79 192,766 10,759 5.58 -------- --------- ---- ------- ---------- ---- ---------- --------- ---- Other liabilities 13,083 12,178 11,502 -------- ---------- ---------- Total liabilities 213,063 209,483 204,268 Equity 23,402 22,159 20,635 -------- ---------- ---------- Total liabilities and shareholders' equity $ 236,465 $ 231,642 $ 224,903 ========= ========== ========== Net interest income/ interest rate spread $ 6,608 2.62% $ 6,570 2.44% $ 6,785 2.51% ========= ==== ========== ==== ========= ==== Net interest margin (4) 2.98% 2.96% 3.14% ==== ==== ==== (1) Average outstanding balances include non-accruing loans. Interest on loans receivable includes fees. The inclusion of nonaccrual loans and fees does not have a material effect on either the average outstanding balance or the average yield. (2) Yields reflected have not been computed on a tax equivalent basis. (3) Yields computed using the average amortized cost for securities available for sale. (4) Net interest income divided by average interest earning assets.
Asset Quality Total non-performing assets increased to $2.7 million at June 30, 2003 compared to $2.1 million at June 30, 2002. The ratio of non-performing assets to total assets at June 30, 2003 was 1.13% compared to .90% at June 30, 2002. Included in non-performing assets at June 30, 2003 were $2.6 million in non-accruing loans and $126,000 in repossessed assets. Including the non-accruing loans listed above, as of June 30, 2003 and 2002, there were $9.6 million and $8.7 million in net loans designated by the Bank as "watch loans" due to factors that may impact the ability of the borrowers to comply with loan repayment terms. Based on management's review as of June 30, 2003, $5.0 million of loans were classified as special mention, $4.0 million as substandard and $631,000 as doubtful. As of June 30, 2002, $5.5 million of loans were classified as special mention, $2.8 million as substandard and $446,000 as doubtful. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of funds are deposits, borrowings, principal and interest payments on loans and securities and sales and maturities of securities available for sale. While maturities of securities and scheduled amortization of loans and mortgage-backed securities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Historically, the standard measure of liquidity for thrift institutions was the ratio of cash and eligible investments to a certain percentage of net withdrawable savings and borrowings due within one year. OTS regulations require institutions to maintain sufficient liquidity to ensure their safe and sound operation. The Company maintains liquid investments based on management's assessment of the need for funds, expected deposit flows, yields on short-term liquid investments and its asset/liability management objectives. Year Ended June 30, 2003. During the year ended June 30, 2003, there was a net increase of $506,000 in cash and cash equivalents. Major sources of cash during the year were an increase in deposits of $4.8 million, a decrease in net loans receivable of $11.2 million and the sale, call and maturity of securities provided $10.3 million while repayments on these securities provided $23.6 million. Management continued to sell fixed rate first mortgage loans with maturities of 15 to 30 years in the secondary market to manage interest rate risk. Major uses of cash during the year which offset the sources of cash include the purchase of $46.2 million in securities available for sale and $4.5 million in life insurance contracts and a reduction in FHLB borrowings of $2.3 million. Year Ended June 30, 2002. During the year ended June 30, 2002, there was a net increase of $788,000 in cash and cash equivalents. Major sources of cash during the year were an increase in deposits of $14.0 million and the sale, call and maturity of securities provided $27.4 million. Management continued to sell fixed rate first mortgage loans with maturities of 15 to 30 years in the secondary market to manage interest rate risk. Major uses of cash during the year which offset the sources of cash include the purchase of $47.0 million in securities available for sale and a reduction in FHLB borrowings of $8.0 million. Year Ended June 30, 2001. During the year ended June 30, 2001, there was a net increase of $3.3 million in cash and cash equivalents. Major sources of cash during the year were an increase in deposits of $11.5 million and the sale, call and maturity of securities provided $18.3 million. Management continued to sell fixed rate first mortgage loans with maturities of 15 to 30 years in the secondary market to manage interest rate risk. Major uses of cash during the year which offset the sources of cash include funding an increase of $4.0 million in the loan portfolio and the purchase of $25.7 million in securities available for sale. IMPACT OF INFLATION The financial statements and related data are in terms of historical dollars without considering changes in purchasing power of money over time due to inflation. The primary assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on performance than the general levels of inflation. Interest rates do not necessarily move in the same direction or magnitude as the prices of goods and services. REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders FFW Corporation Wabash, Indiana We have audited the accompanying consolidated balance sheets of FFW Corporation as of June 30, 2003 and 2002 and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended June 30, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FFW Corporation as of June 30, 2003 and 2002 and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2003 in conformity with accounting principles generally accepted in the United States of America. /s/ Crowe Chizek and Company LLC Crowe Chizek and Company LLC South Bend, Indiana August 21, 2003
FFW CORPORATION CONSOLIDATED BALANCE SHEETS June 30, 2003 and 2002 2003 2002 ---- ---- ASSETS Cash and due from financial institutions $ 8,235,956 $ 6,321,697 Interest-bearing deposits in other financial institutions - short-term 1,588,877 2,996,816 ----------------- ----------------- Total cash and cash equivalents 9,824,833 9,318,513 Securities available for sale 89,636,775 76,344,629 Loans receivable, net of allowance for loan losses of $2,592,092 in 2003 and $2,361,241 in 2002 128,726,793 141,857,794 Federal Home Loan Bank stock 3,445,900 3,400,900 Accrued interest receivable 1,388,322 1,448,182 Premises and equipment, net 2,677,102 2,693,163 Mortgage servicing rights asset 614,638 465,327 Cash surrender value of life insurance 4,718,031 - Other assets 1,738,687 2,299,933 ----------------- ----------------- Total assets $ 242,771,081 $ 237,828,441 ================= ================= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest-bearing $ 11,238,092 $ 9,981,667 Interest-bearing 152,208,402 148,679,055 ----------------- ----------------- Total deposits 163,446,494 158,660,722 Borrowings 52,038,331 54,362,554 Accrued expenses and other liabilities 3,646,188 2,396,376 ----------------- ----------------- Total liabilities 219,131,013 215,419,652 Shareholders' equity Preferred stock, $.01 par; 500,000 shares authorized; none issued - - Common stock, $.01 par; 2,000,000 shares authorized; issued: 1,829,828 - 2003 and 2002; outstanding: 1,311,800 - 2003 and 1,367,375 - 2002 18,298 18,298 Additional paid-in capital 9,345,123 9,345,123 Retained earnings 19,266,267 17,711,055 Accumulated other comprehensive income 720,765 138,695 Unearned management retention plan shares (48,172) (80,961) Treasury stock at cost, 518,028 shares - 2003 and 462,453 shares - 2002 (5,662,213) (4,723,421) ----------------- ----------------- Total shareholders' equity 23,640,068 22,408,789 ----------------- ----------------- Total liabilities and shareholders' equity $ 242,771,081 $ 237,828,441 ================= ================= See accompanying notes.
FFW CORPORATION CONSOLIDATED STATEMENTS OF INCOME Years ended June 30, 2003, 2002 and 2001 2003 2002 2001 ---- ---- ---- Interest and dividend income Loans, including fees $ 10,165,367 $ 12,015,259 $ 13,467,200 Taxable securities 2,746,864 3,292,147 3,522,670 Nontaxable securities 984,146 640,238 402,370 Other 67,049 74,235 152,053 --------------- --------------- ---------------- Total interest and dividend income 13,963,426 16,021,879 17,544,293 Interest expense Deposits 4,729,382 6,281,203 6,993,703 Borrowings 2,626,504 3,170,538 3,765,075 --------------- --------------- ---------------- Total interest expense 7,355,886 9,451,741 10,758,778 --------------- --------------- ---------------- Net interest income 6,607,540 6,570,138 6,785,515 Provision for loan losses 1,440,000 1,355,000 1,715,000 --------------- --------------- ---------------- Net interest income after provision for loan losses 5,167,540 5,215,138 5,070,515 Noninterest income Net gains/(losses) on sales of securities 26,033 228,817 (14,159) Net gains on sales of loans 1,019,519 715,115 84,601 Commission income 198,979 289,726 186,877 Service charges and fees 866,555 1,030,275 1,001,570 Earnings on life insurance 235,621 - - Other income 141,121 40,509 6,596 --------------- --------------- ---------------- Total noninterest income 2,487,828 2,304,442 1,265,485 Noninterest expense Salaries and benefits 2,305,878 2,178,280 2,021,239 Occupancy and equipment 408,448 395,575 400,707 Deposit insurance premium 73,766 26,469 26,653 Regulatory assessment 98,278 79,390 55,161 Correspondent bank charges 242,427 269,608 272,908 Data processing 510,126 478,492 473,371 Printing, postage and supplies 172,514 150,301 124,085 Amortization of goodwill & core deposit premium 73,146 167,039 162,584 Other expense 899,399 1,058,705 700,221 --------------- --------------- ---------------- Total noninterest expense 4,783,982 4,803,859 4,236,929 --------------- --------------- ---------------- Income before income taxes 2,871,386 2,715,721 2,099,071 Income tax expense 513,126 667,986 475,726 --------------- --------------- ---------------- Net income $ 2,358,260 $ 2,047,735 $ 1,623,345 =============== =============== ================ Earnings per share Basic $ 1.76 $ 1.48 $ 1.14 Diluted 1.74 1.47 1.13 See accompanying notes.
FFW CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years ended June 30, 2003, 2002 and 2001 Unearned Accumulated Management Additional Other Retention Total Common Paid-In Retained Comprehensive Plan Treasury Shareholders' Stock Capital Earnings Income Shares Stock Equity ----- ------- -------- ------ ------ ----- ------ Balance at July 1, 2000 $18,070 $9,228,128 $15,547,131 $(1,479,969) $(72,354) $(3,626,086) $19,614,920 Cash dividends - $0.52 per share - - (747,316) - - - (747,316) 1,000 shares purchased under MRP and 750 MRP shares forfeited - 1,906 - - (1,344) (562) - Purchased 36,400 shares, net - - - - - (456,090) (456,090) Issued 25,200 shares on stock options 228 106,572 - - - 19,200 126,000 Amortization of MRP contribution - - - - 21,456 - 21,456 Net income - - 1,623,345 - - - 1,623,345 Other comprehensive income, net of tax: Unrealized appreciation (depreciation) on securities available for sale, net of tax of $1,187,178 - - - 1,810,745 - - - ----------- Total other comprehensive income - - - 1,810,745 - - 1,810,745 ------------ Comprehensive income - - - - - - 3,434,090 ------- ---------- ----------- ----------- -------- ----------- ------------ Balance at June 30, 2001 18,298 9,336,606 16,423,160 330,776 (52,242) (4,063,538) 21,993,060 (Continued)
FFW CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years ended June 30, 2003, 2002 and 2001 Unearned Accumulated Management Additional Other Retention Total Common Paid-In Retained Comprehensive Plan Treasury Shareholders' Stock Capital Earnings Income Shares Stock Equity ----- ------- -------- ------ ------ ----- ------ Balance at June 30, 2001 18,298 9,336,606 16,423,160 330,776 (52,242) (4,063,538) 21,993,060 Cash dividends - $0.56 per share - - (759,840) - - - (759,840) 4,000 shares purchased under MRP - 16,440 - - (56,800) 40,360 - Purchased 58,260 shares - - - - - (792,322) (792,322) Issued 9,157 shares on stock options - (7,923) - - - 92,079 84,156 Amortization of MRP contribution - - - - 28,081 - 28,081 Net income - - 2,047,735 - - - 2,047,735 Other comprehensive income, net of tax: Unrealized appreciation (depreciation) on securities available for sale, net of tax of $(24,033) - - - (192,081) - - --------- Total other comprehensive income - - - (192,081) - - (192,081) ---------- Comprehensive income - - - - - - 1,855,654 ------- ---------- ----------- --------- -------- ----------- ---------- Balance at June 30, 2002 18,298 9,345,123 17,711,055 138,695 (80,961) (4,723,421) 22,408,789 Cash dividends - $0.60 per share - - (803,048) - - - (803,048) Purchased 55,575 shares - - - - - (938,792) (938,792) Amortization of MRP contribution - - - - 32,789 - 32,789 Net income - - 2,358,260 - - - 2,358,260 Other comprehensive income, net of tax: Unrealized appreciation (depreciation) on securities available for sale, net of tax of $689,198 - - - 582,070 - - --------- Total other comprehensive income - - - 582,070 - - 582,070 ---------- Comprehensive income - - - - - - 2,940,330 ------- ---------- ----------- --------- -------- ----------- ---------- Balance at June 30, 2003 $18,298 $9,345,123 $19,266,267 $ 720,765 $(48,172) $(5,662,213) $23,640,068 ======= ========== =========== ========= ======== =========== =========== See accompanying notes.
FFW CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended June 30, 2003, 2002 and 2001 2003 2002 2001 ---- ---- ---- Cash flows from operating activities Net income $ 2,358,260 $ 2,047,735 $ 1,623,345 Adjustments to reconcile net income to net cash from operating activities Depreciation and amortization 524,281 172,605 (2,743) Provision for loan losses 1,440,000 1,355,000 1,715,000 Net (gains) losses on sales of: Securities (26,033) (228,817) 14,159 Loans held for sale (1,019,519) (715,115) (84,601) REOs and repossessed assets (47,861) 10,415 5,524 Originations of loans held for sale (52,282,546) (28,102,589) (10,081,738) Proceeds from sales of loans held for sale 52,831,522 28,352,376 10,166,339 Increase in cash surrender value of life insurance (218,031) - - Amortization of MRP contribution 32,789 28,081 21,456 Net change in accrued interest receivable and other assets 120,938 (24,085) 428,575 Amortization of goodwill and core deposit intangibles 73,146 167,039 162,584 Net change in accrued interest payable and other liabilities 1,249,812 229,932 91,474 --------------- --------------- ---------------- Net cash from operating activities 5,036,758 3,292,577 4,059,374 Cash flows from investing activities Proceeds from: Sales, calls and maturities of securities available for sale 10,291,285 27,427,247 18,313,604 Sales of REOs and repossessed assets 567,086 404,501 632,014 Purchase of: Securities available for sale (46,215,848) (47,046,695) (25,652,052) FHLB stock (45,000) - - Life insurance (4,500,000) - - Principal collected on mortgage-backed securities 23,590,002 4,279,463 1,574,615 Net change in loans receivable 11,234,726 8,688,445 (3,986,875) Purchases of premises and equipment, net (172,398) (785,496) (267,349) Investment in limited partnership - - (75,000) --------------- --------------- ---------------- Net cash from investing activities (5,250,147) (7,032,535) (9,461,043) Cash flows from financing activities Net change in deposits 4,785,772 14,030,670 11,525,452 Proceeds from borrowings 13,500,000 39,290,750 57,000,000 Repayment of borrowings (15,824,223) (47,325,102) (58,770,636) Proceeds from stock options - 84,156 126,000 Purchase of treasury stock (938,792) (792,322) (456,090) Cash dividends paid (803,048) (759,840) (747,316) ---------------- --------------- ---------------- Net cash from financing activities 719,709 4,528,312 8,677,410 --------------- --------------- ---------------- Net change in cash and cash equivalents 506,320 788,354 3,275,741 Beginning cash and cash equivalents 9,318,513 8,530,159 5,254,418 --------------- --------------- ---------------- Ending cash and cash equivalents $ 9,824,833 $ 9,318,513 $ 8,530,159 =============== =============== ================ Supplemental disclosure of cash flow information Cash paid during the period Interest $ 7,388,816 $ 9,495,010 $ 10,847,619 Income taxes 678,000 718,000 353,000 See accompanying notes.
FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2003, 2002 and 2001 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include FFW Corporation (the Company), and its wholly-owned subsidiaries, First Federal Savings Bank of Wabash (the Bank) and FirstFed Financial, Inc. Also included in the consolidated financial statements is Wabash Investments, Inc., a wholly-owned subsidiary of the Bank, which is a Nevada corporation that manages a portion of the Bank's investment portfolio. All intercompany transactions and balances are eliminated in consolidation. Nature of Business and Concentrations of Credit Risk: The primary source of income for the Company is the origination of commercial and residential real estate loans (see Note 14). Use of Estimates In Preparing Financial Statements: Preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period, as well as the disclosures provided. Areas involving the use of estimates and assumptions include the allowance for loan losses, fair values of securities and other financial instruments, determination and carrying value of impaired loans and intangible assets, the carrying value of loans held for sale, the value of mortgage servicing rights, the accrued liability for deferred compensation, the fair value of stock options, the realization of deferred tax assets and the determination of depreciation of premises and equipment. Actual results could differ from those estimates. Estimates associated with the allowance for loan losses, the classification and carrying value of loans held for sale, and the fair value of securities and other financial instruments are particularly susceptible to material change in the near term. Cash Flow Reporting: For reporting cash flows, cash and cash equivalents include cash on hand, due from financial institutions and interest-bearing deposits in other financial institutions - short-term. Net cash flows are reported for customer loan and deposit transactions. Securities: Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported separately in shareholders' equity, net of tax. Securities are classified as trading when held for short term periods in anticipation of market gains, and are carried at fair value. Securities are written down to fair value when a decline in fair value is not temporary. Gains and losses on sales are determined using the amortized cost of the specific security sold. Interest income includes amortization of purchase premiums and discounts. Loans Held for Sale: Mortgage loans intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized in a valuation allowance by charges to income. Loans Receivable: Loans receivable are reported at the principal balance outstanding, net of deferred loan fees and costs, the allowance for loan losses and charge-offs. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Interest income is not reported when full loan repayment is in doubt, typically when payments are past due over 90 days. Payments received on such loans are reported as principal reductions. (Continued) FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2003, 2002 and 2001 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. A loan is impaired when full payment under the loan terms is not expected. Impairment is evaluated in total for small-balance loans of similar nature such as residential mortgage, consumer, and credit card loans, and on an individual basis for other loans. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Foreclosed Real Estate: Real estate properties acquired through, or in lieu of, foreclosure are initially recorded at the lower of carrying amount or fair value at acquisition, establishing a new cost basis. Any reduction to fair value from the carrying value of the related loan at the time of acquisition is accounted for as a loan loss and charged against the allowance for loan losses. Valuations are periodically performed by management and valuation allowances are adjusted through a charge to income for changes in fair value or estimated selling costs. Premises and Equipment: Asset cost is reported net of accumulated depreciation. Depreciation expense is calculated on the straight-line method over the assets useful lives. These assets are reviewed for impairment when events indicate the carrying amount may not be recoverable. Intangible Assets: Intangible assets arising primarily from the acquisition of the South Whitley Branch, on June 13, 1998, include goodwill and core deposit intangibles. Goodwill represents the excess of the purchase price over the assets acquired. Effective July 1, 2002, the Company adopted new accounting standards for intangible assets, and as a result, reclassified $975,000 of unidentifiable intangible assets arising from previous acquisitions into goodwill. On July 1, 2002, the Company also discontinued the amortization of goodwill into expense and began reviewing goodwill for impairment. Goodwill is assessed at least annually for impairment and any such impairment will be recognized in the period identified. Management has determined that the Company's goodwill is not impaired as of June 30, 2003. Core deposit intangibles are amortized on an accelerated basis over 10 years. As of June 30, 2003, core deposit intangibles were fully amortized. (see Note 7) Mortgage Servicing Rights: Servicing rights represent both purchased rights and the allocated value of servicing rights retained on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, as to geographic and prepayment characteristics. Any impairment of a grouping is reported as a valuation allowance. Income Taxes: Income tax expense is the sum of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. (Continued) FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2003, 2002 and 2001 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Stock Compensation: Compensation expense under stock options is reported using the intrinsic value method. No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation.
2003 2002 2001 ---- ---- ---- Net income as reported $ 2,358,260 $ 2,047,735 $ 1,623,345 Less: Stock-based compensation expense determined under fair value based method 30,656 35,763 35,033 -------------- -------------- -------------- Pro forma net income $ 2,327,604 $ 2,011,972 $ 1,588,312 ============== ============== ============== Basic earnings per share as reported $ 1.76 $ 1.48 $ 1.14 Pro forma basic earnings per share 1.74 1.45 1.12 Diluted earnings per share as reported 1.74 1.47 1.13 Pro forma diluted earnings per share 1.72 1.44 1.10
There were no stock options granted during 2003. The pro forma effects of stock options granted during 2002 and 2001 were computed using option pricing models with the following weighted-average assumptions as of grant date. 2003 2002 2001 ---- ---- ---- Risk-free interest rate - 5.31% 5.21% Expected option life in years - 8 10 Expected stock price volatility - 24.00% 26.00% Dividend yield - 4.34% 3.11% In future years, as additional options are granted, the proforma effect on net income and earnings per share may increase. Stock options are used to reward directors and certain executive officers and provide them with an additional equity interest. Options are issued for ten year periods and have varying vesting schedules. Life Insurance Plans: The Company purchased bank owned life insurance during the year ended June 30, 2003. Life insurance plans are provided for certain executive officers on a split dollar basis. The Company is the owner of the split dollar policies. The officers are entitled to a sum equal to two times the employee's annual salary at death, if actively employed. The Company is entitled to the remainder of the death proceeds. The employees have the right to designate a beneficiary(s) to receive their share of the proceeds payable upon death. The cash surrender value of these life insurance policies, life insurance policies related to the Company's Salary Continuation Plan and other bank owned life insurance policies totaled approximately $4,718,000 as of June 30, 2003. Financial Instruments with Off-Balance-Sheet Risk: The Company, in the normal course of business, makes commitments to make loans which are not reflected in the financial statements. A summary of these commitments is disclosed in Note 13. Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes the net change in net unrealized appreciation (depreciation) on securities available for sale, net of tax which is also recognized as a separate component of shareholders' equity. (Continued) FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2003, 2002 and 2001 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Earnings and Dividends Per Share: Basic earnings per share is based on the net income divided by the weighted average number of shares outstanding during the period. MRP shares are considered outstanding for basic earnings per share as they become vested. Diluted earnings per share shows the dilutive effect of additional potential shares issuable under stock option plans and nonvested shares issued under the MRP. Earnings and dividends per share are restated for all stock splits and dividends. Stock Split: Common share amounts and market values and price per share disclosures related to stock repurchase programs, stock-based compensation plans and earnings and dividends per share disclosures have been restated for all stock splits and dividends. Stock dividends in excess of 20% are reported by transferring the par value of the stock issued from retained earnings to common stock. Stock dividends for 20% or less are reported by transferring the market value, as of the ex-dividend date, of the stock issued from retained earnings to common stock and additional paid-in capital. Newly Issued But Not Yet Effective Accounting Standards: The Financial Accounting Standards Board (FASB) recently issued two new accounting standards, Statement 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, and Statement 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equities. Management determined that, upon adopting the new standards, they will not materially affect the Company's operating results or financial condition. (Continued) FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2003, 2002 and 2001 NOTE 2 - EARNINGS PER SHARE A reconciliation of the numerators and denominators used in the computation of basic earnings per share and diluted earnings per share is presented below:
Year ended June 30, 2003 2002 2001 ---- ---- ---- Basic Earnings Per Share Numerator: Net income $ 2,358,260 $ 2,047,735 $ 1,623,345 ============== ============== =============== Denominator: Weighted average shares outstanding 1,343,441 1,384,704 1,423,731 Less: Average non-vested MRP shares (5,772) (4,930) (5,218) -------------- -------------- --------------- Weighted average shares outstanding 1,337,669 1,379,774 1,418,513 ============== ============== =============== Basic earnings per share $ 1.76 $ 1.48 $ 1.14 ============== ============== =============== Diluted Earnings Per Share Numerator: Net income $ 2,358,260 $ 2,047,735 $ 1,623,345 ============== ============== =============== Denominator: Weighted average shares outstanding for basic earnings per share 1,337,669 1,379,774 1,418,513 Add: Dilutive effects of assumed exercise of stock options and nonvested MRP shares 16,609 10,985 16,735 -------------- -------------- --------------- Weighted average shares and dilutive potential shares outstanding 1,354,278 1,390,759 1,435,248 ============== ============== =============== Diluted earnings per share $ 1.74 $ 1.47 $ 1.13 ============== ============== ===============
(Continued) FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2003, 2002 and 2001
NOTE 3 - SECURITIES At June 30, securities were as follows: Fair Value Gains Losses Available for sale - 2003 U.S. government and agency $ 16,696,863 $ 527,628 $ - State and municipal 20,263,498 1,329,986 - Corporate bonds 7,234,718 265,268 (5,000) Mortgage backed 28,356,127 334,907 (80,619) Equity 12,802,004 177,501 (971,179) Mutual funds 4,283,565 91,791 (67,486) --------------- -------------- --------------- $ 89,636,775 $ 2,727,081 $ (1,124,284) =============== ============== ============== Available for sale - 2002 U.S. government and agency $ 12,893,573 $ 84,838 $ (55,649) State and municipal 17,082,537 392,925 (55,788) Corporate bonds 2,531,079 58,427 (1,333) Mortgage backed 29,263,414 258,946 (132,739) Equity 10,314,099 185,250 (340,675) Mutual funds 4,259,927 16,599 (79,272) --------------- -------------- -------------- $ 76,344,629 $ 996,985 $ (665,456) =============== ============== ==============
Contractual maturities of debt securities at June 30, 2003 were as follows. Expected maturities may differ from contractual maturities because borrowers may call or prepay obligations. Securities not due at a single maturity date are shown separately. Fair Value Due in one year or less $ 2,608,250 Due from one to five years 12,236,649 Due from five to ten years 4,989,107 Due after ten years 24,361,073 Mortgage backed 28,356,127 Equity 12,802,004 Mutual funds 4,283,565 --------------- $ 89,636,775 =============== Sales/calls of securities available for sale for the years ended June 30 were: 2003 2002 2001 ---- ---- ---- Sales $ 2,537,790 $ 13,145,650 $ 3,442,356 Calls 7,603,495 11,631,600 13,806,248 Gross gains 26,674 296,417 13,624 Gross losses (641) (67,600) (27,783) (Continued) FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2003, 2002 and 2001
NOTE 4 - LOANS RECEIVABLE, NET Loans receivable as of June 30 were as follows: 2003 2002 ---- ---- Mortgage loans Secured by one-to-four family residences (conventional) $ 64,503,680 $ 65,657,658 Secured by other properties (commercial) 24,592,764 21,877,315 Construction 1,570,824 2,746,126 --------------- --------------- 90,667,268 90,281,099 Undisbursed portion of construction loans (921,401) (678,953) Net deferred loan origination fees (61,144) (48,641) --------------- --------------- Total mortgage loans 89,684,723 89,553,505 Consumer and other loans Automobile 14,976,771 21,965,552 Manufactured home 135,734 164,123 Home equity and improvement 15,138,725 17,232,172 Commercial 8,347,504 12,040,688 Other 3,014,839 3,122,198 --------------- --------------- 41,613,573 54,524,733 Net deferred loan origination costs 20,589 140,797 --------------- --------------- Total consumer and other loans 41,634,162 54,665,530 Allowance for loan losses (2,592,092) (2,361,241) --------------- --------------- $ 128,726,793 $ 141,857,794 =============== ===============
Activity in the allowance for loan losses for the years ended June 30 was as follows: 2003 2002 2001 ---- ---- ---- Beginning balance $ 2,361,241 $ 1,773,194 $ 1,961,318 Provision for loan losses 1,440,000 1,355,000 1,715,000 Charge-offs (1,529,259) (1,232,425) (2,191,984) Recoveries 320,110 465,472 288,860 ------------ ------------ ------------ Ending balance $ 2,592,092 $ 2,361,241 $ 1,773,194 ============ ============ ============ (Continued) FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2003, 2002 and 2001
NOTE 4 - LOANS RECEIVABLE, NET (Continued) Information regarding impaired loans was as follows for the years ended June 30: 2003 2002 2001 ---- ---- ---- Year end loans with no allowance for loan losses allocated $ - $ - $ - Year end loans with allowance for loan losses allocated 1,951,334 1,486,204 2,141,236 Amount of allowance allocated 517,209 405,320 492,328 Average of impaired loans during the year 1,845,155 1,807,605 1,823,017 Interest income recognized during impairment 103,305 34,955 99,656 Cash-basis interest income recognized 95,693 23,902 92,330 Nonperforming loans were as follows for the years ended June 30: 2003 2002 2001 ---- ---- ---- (In thousands) Loans past due over 90 days still on accrual $ - $ - $ - Nonaccrual loans 2,616 1,942 1,319
Nonperforming loans and impaired loans are defined differently. Nonperforming loans include both individually classified impaired loans and smaller balance homogeneous loans that are collectively evaluated for impairment. A loan is impaired when full payment under the loan terms is not expected. Some loans may be included in both categories, whereas other loans may only be included in one category. NOTE 5 - LOAN SERVICING Mortgage loans serviced for others are not reported as assets in the balance sheets. These loans totaled $67,906,000 and $51,044,000 at June 30, 2003 and 2002. Related escrow deposit balances were $259,000 and $108,000 at June 30, 2003 and 2002. NOTE 6 - PREMISES AND EQUIPMENT, NET Premises and equipment at June 30 were as follows: 2003 2002 ---- ---- Land $ 480,121 $ 480,121 Buildings 2,881,987 2,928,821 Furniture, fixtures and equipment 1,110,249 1,056,603 ---------------- ---------------- Total cost 4,472,357 4,465,545 Accumulated depreciation (1,795,255) (1,772,382) ---------------- ---------------- $ 2,677,102 $ 2,693,163 ================ ================ (Continued) FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2003, 2002 and 2001 NOTE 7 - GOODWILL The carrying amount of goodwill was $975,000 at June 30, 2003 and 2002. Goodwill is no longer amortized starting July 1, 2002. The effect of not amortizing goodwill is summarized as follows for the years ending June 30:
2003 2002 2001 ---- ---- ---- Net income as reported $ 2,358,260 $ 2,047,735 $ 1,623,345 Add back: goodwill amortization, net of tax - 56,712 54,021 -------------- --------------- -------------- Adjusted net income $ 2,358,260 $ 2,104,447 $ 1,677,366 ============== =============== ============== Basic earnings per share as reported $ 1.76 $ 1.48 $ 1.14 Diluted earnings per share as reported 1.74 1.47 1.13 Adjusted basic earnings per share 1.76 1.53 1.18 Adjusted diluted earnings per share 1.74 1.51 1.17
NOTE 8 - DEPOSITS Deposit accounts individually exceeding $100,000 totaled approximately $36,015,000 and $36,023,000 at June 30, 2003 and 2002. At June 30, 2003, stated maturities of certificates of deposit for the years ended June 30 were: 2004 $ 41,940,142 2005 18,824,745 2006 6,215,145 2007 3,790,120 Thereafter 10,987,968 ---------------- $ 81,758,120 ================ NOTE 9 - OTHER BORROWINGS Federal Home Loan Bank (FHLB) advances totaled $52,038,331 and $54,362,554 at June 30, 2003 and 2002. The majority of the advances carry fixed interest rates ranging from 4.12% to 7.94% as of June 30, 2003 and the scheduled maturities during the years ended June 30 were as follows: 2004 $ 12,500,000 2005 4,979,964 2006 - 2007 - 2008 2,979,964 Thereafter 31,578,403 ---------------- $ 52,038,331 ================ The Bank also maintains a $1,000,000 overdraft line of credit agreement with the FHLB which terminates on June 2, 2004. As of June 30, 2003 and 2002, no balance was outstanding under this agreement. FHLB advances and the overdraft line of credit agreement are secured by all stock in the FHLB, qualifying first mortgage loans, government, agency and mortgage-backed securities. At June 30, 2003, collateral of approximately $64.8 million is pledged to the FHLB to secure advances outstanding. (Continued) FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2003, 2002 and 2001 NOTE 10 - EMPLOYEE BENEFITS Employee Pension Plan: The pension plan is part of a noncontributory multi-employer defined-benefit pension plan covering substantially all employees. There is no separate actuarial valuation of plan benefits nor segregation of plan assets specifically for the Company. As of July 1, 2002, the latest actuarial valuation, plan assets exceeded the actuarially determined value of total vested benefits. For the years ending June 30, 2003 2002, and 2001, administrative pension expenses were $4,000, 9,000 and $3,000. As of June 30, 2002 and 2001, the plan had reached its full funding limitation for Internal Revenue Code purposes and a contribution was not required. The Company, however, does anticipate a contribution expense in 2004. Contributions may also be required in future years. 401(k) Plan: A retirement savings 401(k) plan covers full time employees 21 or older that have completed one year of service. Participants may defer up to 15% of compensation. The Company matches 100% of elective deferrals on the first 4% of the participants' compensation, and the Company matches 50% of elective deferrals on the next 2% of the participant's compensation. Additionally, the Company may contribute up to 4% of each participant's compensation regardless of the participant's personal contributions to their 401(k) account depending on earnings and other benefit expenses. Expenses under this plan were $67,000, $55,000 and $41,000 for 2003, 2002 and 2001. Stock Option Plan: The 1992 Stock Option and Incentive Plan authorizes options of 169,000 shares of common stock. During 1999, the Company registered with the Securities and Exchange Commission the 1999 Omnibus Incentive Plan. This plan authorizes options, restricted stock and stock appreciation rights of 142,000 shares of common stock. For both plans when options are granted, the option price is at least 100% of the market value of common stock on the date of grant, and the option term cannot exceed 10 years. Options awarded may be exercised at a rate of 25% per year. No compensation expense was recognized for stock options for 2003, 2002 and 2001. Stock option plans are used to reward employees and provide them with an additional equity interest. Options are issued for 10 year periods with varying vesting periods. Information about option grants follows:
Weighted Number of Weighted Average Outstanding Exercise Average Fair Value Options Price Exercise Price of Grants ------- ----- -------------- --------- Outstanding, July 1, 2000 69,954 $5.00 - 18.50 $ 11.20 Forfeited (11,030) 5.00 - 18.50 15.99 Granted 28,116 11.38 11.38 $ 2.61 Exercised (25,200) 5.00 5.00 ----------- Outstanding, June 30, 2001 61,840 5.00 - 18.50 12.95 Granted 4,000 14.20 14.20 2.92 Exercised (8,243) 5.00 - 11.38 9.65 ----------- Outstanding, June 30, 2002 57,597 11.38 - 18.50 13.51 Granted - - - - Exercised - - - ----------- Outstanding, June 30, 2003 57,597 $11.38 - 18.50 $13.51 ===========
The weighted average remaining contractual life of options outstanding at June 30, 2003 was approximately seven years. Stock options exercisable at June 30, 2003, 2002 and 2001 totaled 37,293, 23,016 and 16,349 at a weighted average exercise price of $14.27, $14.96 and $13.73. As of June 30, 2003, 91,668 options remain available for future grants. Deferred Compensation: The Company has a deferred compensation plan for certain directors of the Company. The Company/Bank is obligated to pay each such individual or beneficiaries the accumulated contributions plus interest credited for the deferred compensation plan. A deferred compensation liability of $31,000 and $26,000 at June 30, 2003 and 2002 has been accrued for these obligations. The expense for these plans was $6,000 for 2003, 2002 and 2001. (Continued) FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2003, 2002 and 2001 NOTE 10 - EMPLOYEE BENEFITS (continued) Employee Stock Ownership Plan (ESOP): On April 30, 2002, the Company terminated the ESOP, and all plan participants were given the option of receiving a distribution for their investment in the plan or the participants could transfer their ESOP investment to their 401(k) investment account or other retirement accounts. During the year ending June 30, 2001, the Bank contributed an additional $101,500 to purchase 8,000 shares for the ESOP. As of June 30, 2001, these shares were allocated to eligible employees participating in the ESOP plan and included in the ESOP when it was terminated. As of May 1, 2002, the ESOP plan no longer held shares of the Company's common stock.
ESOP shares as of June 30 were: 2003 2002 2001 ---- ---- ---- Allocated (including shares committed to be released) - 128,300 128,300 Shares contributed and allocated - - 8,000 Shares withdrawn from the plan by participants - (69,442) (45,774) Termination of plan - (58,858) - ------------- ------------- ------------- Total ESOP shares held in the plan - - 90,526 ============= ============= =============
Management Recognition and Retention Plans: The Management Recognition and Retention Plans (MRP) provide directors, officers and other key employees with a proprietary interest in the Company to encourage such persons to remain with the Company. Eligible directors, officers and other key employees of the Company become vested in shares of common stock awarded on a discretionary basis at a rate of 25% per year beginning on the date of grant. Expense of $33,000, $28,000 and $21,000 was recorded for these plans for the years ended June 30, 2003, 2002 and 2001. Salary Continuation Plan: On January 1, 2003, the Company implemented a Salary Continuation Plan (Plan) for certain executive officers. The Company is recording an expense equal to the projected present value of the payments due after retirement based on the participants' vesting schedules and projected remaining years of service. The accrued liability for this plan as of June 30, 2003 was approximately $29,000 which equals the expense recorded during the year ended June 30, 2003. NOTE 11 - INCOME TAXES Income tax expense for the years ended June 30 was: 2003 2002 2001 ---- ---- ---- Federal Current $ 514,237 $ 493,854 $ 396,096 Deferred (149,013) (12,137) (53,288) ------------ ------------ ------------ 365,224 481,717 342,808 State Current 162,019 190,315 162,667 Deferred (14,117) (4,046) (29,749) ------------ ------------ ------------ 147,902 186,269 132,918 ------------ ------------ ------------ Income tax expense $ 513,126 $ 667,986 $ 475,726 ============ ============ ============ (Continued) FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2003, 2002 and 2001
NOTE 11 - INCOME TAXES (continued) Income tax expense differed from amounts computed using the U.S. federal income tax rate of 34% as follows: 2003 2002 2001 ---- ---- ---- Income taxes at 34% statutory rate $ 976,271 $ 923,345 $ 713,684 Tax effect of: Tax-exempt income (305,067) (196,285) (138,466) State tax, net of federal income tax effect 97,615 122,938 87,725 Earnings on life insurance (74,131) - - Dividends received deduction (119,022) (124,096) (100,755) Low income housing credits (79,999) (91,496) (88,724) Other 17,459 33,580 2,262 ------------ ------------ ------------ Total income tax expense $ 513,126 $ 667,986 $ 475,726 ============ ============ ============ Components of the net deferred tax liability as of June 30 are: 2003 2002 2001 ---- ---- ---- Deferred tax assets: Bad debts $ 996,799 $ 864,224 $ 634,833 Deferred compensation 12,206 10,313 8,921 Core deposit intangible 105,466 86,585 119,111 Deferred loan fees 15,948 - - General business credit carry forward 60,310 - - Other 51,745 56,287 66,641 ------------ ------------ ------------ 1,242,474 1,017,409 829,506 Deferred tax liabilities: Accretion (111,202) (110,821) (56,331) Net deferred loan costs - (35,487) (97,441) Mortgage servicing rights (241,699) (179,184) - FHLB stock dividend (34,526) - - Appreciation on securities available for sale (882,032) (192,834) (216,867) ------------ ------------ ------------ (1,269,459) (518,326) (370,639) Valuation allowance - - - ------------ ------------ ------------ Net deferred tax asset (liability) $ (26,985) $ 499,083 $ 458,867 ============ ============ ============
Federal income tax laws provided savings banks with additional bad debt deductions through 1987, totaling $1,156,000 for the Bank. Accounting standards do not require a deferred tax liability to be recorded on this amount, which liability otherwise would total $393,000 at June 30, 2003 and 2002. If the Bank was liquidated or otherwise ceased to be a bank or if tax laws were to change, the $393,000 would be recorded as expense. (Continued) FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2003, 2002 and 2001 NOTE 12 - REGULATORY MATTERS The Bank is subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If only adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required.
The Bank's actual capital and required capital amounts and ratios are presented below: Minimum To Be Well Minimum Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) As of June 30, 2003 Total Capital $ 21,119 14.48% $ 11,671 8.00% $ 14,589 10.00% Tier I (Core) Capital 19,286 13.22% 5,835 4.00% 8,753 6.00% (to risk weighted assets) Tier I (Core) Capital 19,286 8.12% 9,505 4.00% 11,882 5.00% (to adjusted total assets) Tier I (Core) Capital 19,286 8.24% 9,361 4.00% 11,701 5.00% (to average assets) As of June 30, 2002 Total Capital $ 20,359 13.58% $ 11,985 8.00% $ 14,994 10.00% Tier I (Core) Capital 18,480 12.32% 5,998 4.00% 8,997 6.00% (to risk weighted assets) Tier I (Core) Capital 18,480 7.88% 9,375 4.00% 11,719 5.00% (to adjusted total assets) Tier I (Core) Capital 18,480 8.07% 9,157 4.00% 11,446 5.00% (to average assets)
Regulations of the Office of Thrift Supervision (OTS) limit the amount of dividends and other capital distributions that may be paid by a savings institution without prior approval of the OTS. Under the regulations, the Bank can make without application to the OTS (but only after filing a notification to the OTS), distributions during a calendar year up to 100% of its retained net income for the calendar year-to-date plus retained net income for the previous two calendar years (less any dividends previously paid) as long as the Bank would remain adequately capitalized, as defined in the OTS's prompt corrective action regulations, following the proposed distribution. Accordingly, at June 30, 2003, approximately $2,115,000 of the Bank's retained earnings was potentially available for distribution to the Company. (Continued) FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2003, 2002 and 2001 NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONTINGENCIES Various outstanding commitments and contingent liabilities are not reflected in the financial statements. Commitments to make loans at June 30 were as follows:
2 0 0 3 2 0 0 2 ------- ------- Fixed Variable Fixed Variable Rate Rate Rate Rate Commitments to make loans $ 2,407,200 $ 946,400 $1,313,700 $ 2,053,500 Unused lines of credit - 17,111,700 - 14,744,000 Standby letters of credit - 2,424,100 - 1,430,000 -------------- ------------- ------------- -------------- $ 2,407,200 $ 20,482,200 $ 1,313,700 $ 18,227,500 ============== ============= ============= ==============
Fixed rate loan commitments at June 30, 2003 were at current rates, ranging primarily from 4.50% to 8.00%. Variable rate loan commitments, unused lines of credit and standby letters of credit at June 30, 2003 were at current rates ranging from 4.25% to 9.50% for loan commitments, 4.25% to 12.00% for unused lines of credit, and primarily at the national prime rate of interest plus 100 to 300 basis points for standby letters of credit. Since commitments to make loans and to fund unused lines of credit, loans in process and standby letters of credit may expire without being used, the amounts do not necessarily represent future cash commitments. In addition, commitments are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The maximum exposure to credit loss in the event of nonperformance by the other party is the contractual amount of these instruments. The same credit policy is used to make such commitments as is used for loans receivable. Under employment agreements with one of its officers, certain events leading to separation from the Company could result in a lump sum cash payment. Under employment agreements with certain other officers, certain events leading to separation from the Company could result in cash payments totaling their current year salary, payable over the term the amount would have been originally paid. The Company and the Bank are subject to certain claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated financial position or results of operation of the Company. The Bank has a 3% limited partner interest in a limited partnership formed to construct, own and manage affordable housing projects. The Bank is one of 13 investors. As of June 30, 2003, the Bank had invested $750,000 and had recorded equity in the operating loss of the limited partnership of $46,000, $71,000 and $81,000 for the years ended June 30, 2003, 2002 and 2001. At both June 30, 2003 and 2002, the obligation due to the limited partnership was $0. The Bank receives 3% of the eligible tax credits. For the years ended June 30, 2003, 2002 and 2001, the Bank received approximately $80,000, $91,000 and $89,000 in tax credits. (Continued) FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2003, 2002 and 2001 NOTE 14 - SIGNIFICANT CONCENTRATIONS OF CREDIT RISK Real estate and consumer loans, including automobile, home equity and improvement, manufactured home and other consumer loans are granted primarily in Wabash, Kosciusko and Whitley counties. Loans secured by one to four family residential real estate mortgages make up 50% of the loan portfolio. The Company also sells loans and services loans for secondary market agencies. The policy for collateral on mortgage loans allows borrowings up to 95% of the appraised value of the property as established by appraisers approved by the Company's Board of Directors, if private mortgage insurance is obtained to reduce the Company's exposure to or below the 80% loan-to-value level. Loan-to-value percentages and documentation guidelines are designed to protect the Company's interest in the collateral as well as to comply with guidelines for sale in the secondary market. NOTE 15 - RELATED PARTY TRANSACTIONS Certain directors, executive officers and principal shareholders of the Company, including associates of such persons, are loan customers. A summary of the related party loan activity, for loans aggregating $60,000 or more to any one related party, is as follows: Balance - June 30, 2002 $ 1,607,498 New loans 557,071 Repayments (624,313) Other changes (6,467) ------------ Balance - June 30, 2003 $ 1,533,789 ============ Other changes include adjustments for loans applicable to one reporting period that are excludable from the other reporting period. (Continued) FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2003, 2002 and 2001
NOTE 16 - PARENT COMPANY FINANCIAL STATEMENTS Presented below are condensed financial statements for the parent company, FFW Corporation. CONDENSED BALANCE SHEETS June 30, 2003 and 2002 2003 2002 ---- ---- ASSETS Cash and cash equivalents $ 130,549 $ 556,731 Investment in Bank subsidiary 21,269,077 19,650,259 Investment in non-bank subsidiary 413,880 395,678 Securities available for sale 1,976,702 1,901,442 Other assets 26,390 59,819 --------------- ---------------- Total assets $ 23,816,598 $ 22,563,929 =============== ================ LIABILITIES Accrued expenses and other liabilities $ 176,530 $ 155,140 SHAREHOLDERS' EQUITY Common stock 18,298 18,298 Additional paid-in capital 9,345,123 9,345,123 Retained earnings 19,266,267 17,711,055 Accumulated other comprehensive income 720,765 138,695 Unearned employee MRP (48,172) (80,961) Treasury stock (5,662,213) (4,723,421) ---------------- ---------------- Total shareholders' equity 23,640,068 22,408,789 --------------- ---------------- Total liabilities and shareholders' equity $ 23,816,598 $ 22,563,929 =============== ================
CONDENSED STATEMENTS OF INCOME For the years ended June 30, 2003, 2002 and 2001 2003 2002 2001 ---- ---- ---- Interest income $ 105,396 $ 88,056 $ 105,072 Gain (loss) on the sale of securities available for sale 15,591 (67,600) - Dividend income 1,300,000 1,815,000 740,000 Other income 6,975 - - ----------- ---------- ---------- 1,427,962 1,835,456 845,072 Operating expense 186,874 196,859 162,612 Equity in undistributed income of subsidiaries Bank 1,068,138 257,423 909,403 Non-bank 10,569 57,597 15,290 ----------- ---------- ---------- Income before income taxes 2,319,795 1,953,617 1,607,153 Income tax expense (benefit) (38,465) (94,118) (16,192) ---------- ---------- ---------- Net income $2,358,260 $2,047,735 $1,623,345 ========== ========== ==========
(Continued) FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2003, 2002 and 2001
NOTE 16 - PARENT COMPANY FINANCIAL STATEMENTS (Continued) CONDENSED STATEMENTS OF CASH FLOWS For the years ended June 30, 2003, 2002 and 2001 2003 2002 2001 ---- ---- ---- Cash flows from operating activities Net income $ 2,358,260 $ 2,047,735 $ 1,623,345 Adjustments to reconcile net income to net cash from operating activities Equity in undistributed income of subsidiaries (1,078,707) (315,020) (924,693) Loss on the sale of securities (15,591) 67,600 - Other 36,759 157,109 (126,458) --------------- -------------- --------------- Net cash from operating activities 1,300,721 1,957,424 572,194 Cash flows from investing activities Proceeds from sales of securities 274,205 1,061,625 - Maturities of securities available for sale - 238,921 565,000 Purchase of securities available for sale (259,268) (1,312,050) (171,690) --------------- -------------- --------------- Net cash from investing activities 14,937 (11,504) 393,310 Cash flows from financing activities Proceeds from stock options - 84,156 126,000 Purchase of treasury stock (938,792) (792,322) (456,090) Cash dividends paid (803,048) (759,841) (747,316) --------------- -------------- --------------- Net cash from financing activities (1,741,840) (1,468,007) (1,077,406) --------------- -------------- --------------- Net change in cash and cash equivalents (426,182) 477,913 (111,902) Beginning cash and cash equivalents 556,731 78,818 190,720 --------------- -------------- --------------- Ending cash and cash equivalents $ 130,549 $ 556,731 $ 78,818 =============== ============== ===============
The extent to which the Company may pay cash dividends to shareholders will depend on the cash currently available at the Company, as well as the Bank's ability to pay dividends to the Company (see Note 12). (Continued) FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2003, 2002 and 2001
NOTE 17 - FAIR VALUES OF FINANCIAL INSTRUMENTS The following table shows estimated fair values and related carrying amounts of the Company's financial instruments at June 30. Items which are not financial instruments are not included. 2 0 0 3 2 0 0 2 ------- ------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value (In thousands) (In thousands) Cash and cash equivalents $ 9,825 $ 9,825 $ 9,319 $ 9,319 Securities available for sale 89,637 89,637 76,345 76,345 Loans receivable, net 128,727 133,237 141,858 146,468 Federal Home Loan Bank stock 3,446 3,446 3,401 3,401 Accrued interest receivable 1,388 1,388 1,448 1,448 Mortgage servicing rights asset 615 615 465 465 Cash surrender value of life insurance 4,718 4,718 - - Noninterest-bearing deposits (11,238) (11,238) (9,982) (9,982) Interest-bearing deposits (152,208) (155,362) (148,679) (150,103) Borrowings (52,038) (57,971) (54,363) (57,725) Accrued interest payable (121) (121) (154) (154)
For purposes of the above disclosures of estimated fair value, the following assumptions were used as of June 30, 2003 and 2002. The estimated fair values for cash and cash equivalents, Federal Home Loan Bank stock, accrued interest receivable, mortgage servicing rights asset, cash surrender value of life insurance, noninterest-bearing deposits and accrued interest payable are considered to approximate cost. The estimated fair value for securities available for sale is based on quoted market values for the individual securities or for equivalent securities. The estimated fair value for loans receivable, net, is based on estimates of the rate the Bank would charge for similar loans at June 30, 2003 and 2002 applied for the time period until the loans are assumed to reprice or be paid. The estimated fair value for mortgage servicing rights is based on groupings of the underlying loans as to interest rates as well as their geographic and prepayment characteristics. The estimated fair value for interest-bearing deposits as well as borrowings is based on estimates of the rate the Bank would pay on such liabilities at June 30, 2003 and 2002, applied for the time period until maturity. While these estimates of fair value are based on management's judgment of the most appropriate factors, there is no assurance that were the Company to have disposed of such items at June 30, 2003 and 2002, the estimated fair values would necessarily have been achieved at that date, since market values may differ depending on various circumstances. The estimated fair values at June 30, 2003 and 2002 should not necessarily be considered to apply to subsequent dates. In addition, other assets and liabilities of the Company that are not defined as financial instruments are not included in the above disclosures, such as premises and equipment. Also, non-financial instruments typically not recognized in financial statements nevertheless may have value but are not included in the above disclosures. These include, among other items, the estimated earnings power of core deposit accounts, the trained work force, customer goodwill and similar items. (Continued) FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2003, 2002 and 2001
NOTE 18 - OTHER COMPREHENSIVE INCOME (LOSS) Other comprehensive income (loss) components and related taxes were as follows: 2003 2002 2001 ---- ---- ---- Net change in net unrealized appreciation (depreciation) on securities available for sale Net unrealized appreciation (depreciation) arising during the year $ 1,297,301 $ 12,703 $ 2,983,764 Reclassification adjustments for (gains) losses included in net income (26,033) (228,817) 14,159 -------------- -------------- ---------------- Net change in net unrealized appreciation (depreciation) on securities available for sale 1,271,268 (216,114) 2,997,923 Tax expense (benefit) 689,198 (24,033) 1,187,178 -------------- -------------- ---------------- Total other comprehensive income (loss) $ 582,070 $ (192,081) $ 1,810,745 ============== ============== ================ (Continued)
DIRECTORS AND EXECUTIVE OFFICERS BOARD OF DIRECTORS Wayne W. Rees Joseph W. McSpadden Roger K. Cromer Owner and Publisher Vice President and Part Owner President and Chief Executive The Paper of Wabash County, Inc. Beauchamp & McSpadden Officer, FFW Corporation President and Chief Executive J. Stanley Myers Ronald D. Reynolds Officer, First Federal Savings Owner and Operator Owner, J.M. Reynolds Oil Co. Inc. Bank of Wabash Servisoft Water Conditioning, Inc. Chairman of the Board, John N. Philippsen FirstFed Financial of Wabash Thomas L. Frank Chief Financial Officer Comptroller, B. Walter & Company The Ford Meter Box Co. Comptroller and Part Owner, Walter Dimension Co. OFFICERS FFW CORPORATION FIRST FEDERAL SAVINGS FIRSTFED FINANCIAL, INC BANK OF WABASH Wayne W. Rees Wayne W. Rees Roger K. Cromer Chairman of the Board Chairman of the Board Chairman of the Board Roger K. Cromer Roger K. Cromer Tony Pulley President and Chief Executive President and Chief Executive President Officer Officer Wayne W. Rees Christine K. Noonan Christine K. Noonan Secretary Secretary Senior Vice President, Chief Operations Officer and Timothy A. Sheppard Timothy A. Sheppard Secretary Treasurer Treasurer and Chief Accounting Officer Timothy A. Sheppard Vice President, Controller Noah T. Smith Vice President, Commercial Loans Sonia Niccum Vice President, Mortgage Loans
Shareholder Information STOCK LISTING INFORMATION - -------------------------------------------------------------------------------- FFW Corporation's common stock is traded on the National Association of Securities Dealers Automated Quotation Small-Cap Market under the symbol "FFWC". STOCK PRICE INFORMATION - -------------------------------------------------------------------------------- As of June 30, 2003 there were approximately 290 shareholders of record, not including those shares held in nominee or street name through various brokerage firms or banks. The following table sets forth the high and low bid prices and dividends paid per share. The stock price information was provided by NASD, Inc. Quarter Ended High Low Declared ----------------------------------------------------- Sept. 30, 2001 14.00 12.40 .14 Dec. 31, 2001 13.50 12.95 .14 March 31, 2002 14.40 13.25 .14 June 30, 2002 16.48 14.51 .14 Sept. 30, 2002 16.20 14.40 .15 Dec. 31, 2002 16.95 15.35 .15 March 31, 2003 17.45 15.86 .15 June 30, 2003 20.20 17.22 .15 DIVIDENDS - -------------------------------------------------------------------------------- FFW Corporation declared and paid dividends of $0.60 per share for fiscal year 2003. The Board of Directors intends to continue payment of quarterly cash dividends, dependent on the results of operations and financial condition of FFW Corporation and other factors. ANNUAL MEETING OF SHAREHOLDERS - -------------------------------------------------------------------------------- The Annual Meeting of Shareholders of FFW Corporation will be held at 2:30 p.m, October 28, 2003 at the executive offices of FFW Corporation located at: 1205 N. Cass Street P.O. Box 259 Wabash, Indiana 46992 ANNUAL REPORT ON FORM 10-KSB AND INVESTOR INFORMATION - -------------------------------------------------------------------------------- A copy of FFW Corporation's annual report on Form 10-KSB, filed with the Securities and Exchange Commission, is available without charge by writing: Timothy A. Sheppard Treasurer and Chief Accounting Officer FFW Corporation 1205 N. Cass Street P.O. Box 259 Wabash, Indiana 46992 STOCK TRANSFER AGENT - -------------------------------------------------------------------------------- Inquiries regarding stock transfer, registration, lost certificates or changes in name and address should be directed to the stock agent transfer agent and registrar by writing: Registrar and Transfer Company 10 Commerce Drive Cranford, NJ 07016 INVESTOR INFORMATION - -------------------------------------------------------------------------------- Shareholders, investors, and analysts interested in additional information may contact Roger K. Cromer, President and Chief Executive Officer. CORPORATE OFFICE - -------------------------------------------------------------------------------- FFW Corporation 1205 N. Cass Street P.O. Box 259 Wabash, Indiana 46992 (260) 563-3185 BRANCH LOCATIONS - -------------------------------------------------------------------------------- North Manchester 1404 State Rd. 114 West P.O. Box 328 North Manchester, IN 46962 (260) 982-2188 Syracuse 500 S. Huntington St. P.O. Box 188 Syracuse, IN 46567 (574) 457-4411 South Whitley 105 E. Columbia St. P.O. Box 515 South Whitley, IN 46787 (260) 723-5127 SPECIAL COUNSEL - -------------------------------------------------------------------------------- Barnes and Thornburg 11 South Meridian Street Indianapolis, IN 46204 INDEPENDENT AUDITOR - -------------------------------------------------------------------------------- Crowe Chizek and Company LLC 330 E. Jefferson Blvd. South Bend, IN 46624 -----END PRIVACY-ENHANCED MESSAGE-----