0000914317-01-500370.txt : 20011009 0000914317-01-500370.hdr.sgml : 20011009 ACCESSION NUMBER: 0000914317-01-500370 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010928 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: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-21170 FILM NUMBER: 1748171 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 10KSB 1 form10ksb40453-928.txt 10KSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------------------- ------------- Commission File Number 0-21170 FFW CORPORATION (Name of small business issuer in its charter) Delaware 35-1875502 ------------------------------- ------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 1205 N. Cass Street, Wabash, Indiana 46992-1027 --------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (219) 563-3185 ----------------------------------------------------------------- Securities Registered Pursuant to Section 12(b) of the Act: None -------------------------------------------------------------------------------- Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share -------------------------------------------------------------------------------- (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES [ X ] NO [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained herein, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] State the issuer's revenues for its most recent fiscal year: $18.8 million. The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the closing price per share of such stock on the Nasdaq Stock Market on September 17, 2001, was approximately $15.6 million. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant.) As of September 17, 2001, there were issued and outstanding 1,390,345 shares of the Registrant's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Part II of Form 10-KSB - Portions of the Annual Report to Stockholders for the fiscal year ended June 30, 2001. Part III of Form 10-KSB - Proxy Statement for 2001 Annual Meeting of Stockholders. PART I Item 1. Description of Business ----------------------- General The Company. FFW Corporation (the "Company") a Delaware corporation, was formed in December 1992 to act as the holding company for First Federal Savings Bank of Wabash ("First Federal" or the "Bank") upon completion of the Bank's conversion from mutual to stock form (the "Conversion"). The Conversion was completed on April 1, 1993. The Company's business consists primarily of the business of First Federal. The Company also offers insurance products through its wholly-owned subsidiary, FirstFed Financial of Wabash, Inc. The executive offices of the Company are located at 1205 N. Cass Street, Wabash, Indiana 46992, and its telephone number at that address is (219) 563-3185. At June 30, 2001, the Company had $231.2 million of assets and shareholders' equity of $22.0 million (or 9.51% of total assets). First Federal. First Federal is a federally chartered stock savings bank headquartered in Wabash, Indiana and regulated by the Office of Thrift Supervision ("OTS"). Its deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation (the "FDIC"), which is backed by the full faith and credit of the United States Government. First Federal's primary market area covers Wabash, Kosciusko and Whitley Counties in northeast and central Indiana, which are serviced through its four offices in Wabash, North Manchester, Syracuse and South Whitley, Indiana. The principal business of the Bank consists of attracting retail deposits from the general public and investing those funds primarily in one- to four-family residential mortgage and consumer (primarily automobile) loans, and, to a lesser extent, commercial and multi-family real estate, construction and commercial business loans primarily in the Bank's market area. The Bank also purchases mortgage-backed securities and invests in U.S. Government and agency obligations and other permissible investments. At June 30, 2001, substantially all of the Bank's real estate mortgage loans (excluding mortgage-backed securities) were secured by properties located in Indiana. The Bank's revenues are derived primarily from interest on mortgage loans, mortgage- backed securities, consumer and other loans, investment securities, income from service charges and loan originations and loan servicing fee income. The Bank does not originate loans to fund leveraged buyouts, has no loans to foreign corporations or governments and is not engaged in land development or construction activities through joint ventures or subsidiaries. The Bank offers a variety of accounts having a wide range of interest rates and terms. The Bank's deposit accounts include passbook accounts, money market savings accounts, NOW, money market checking and regular checking accounts, and certificate accounts with terms of three to sixty months. The Bank solicits deposits in its primary market area. The Bank also has, from time to time, borrowed funds, both in the form of Federal Home Loan Bank ("FHLB") advances and by 2 entering into repurchase agreements. At June 30, 2001, the Bank had FHLB advances totaling $62.4 million. FirstFed Financial of Wabash, Inc. During fiscal 1993, the Company acquired FirstFed Financial of Wabash, Inc. ("FirstFed") from the Bank. FirstFed offers insurance products, including life insurance, mutual funds, annuity and brokerage services through a registered broker dealer. FirstFed, which is located in Wabash, Indiana was incorporated in 1989. In December 2000, FirstFed acquired Pulley Financial Services, Inc. Subsequent to the acquisition, FirstFed continued to operate as a wholly-owned subsidiary of the Company and also appointed a new president of FirstFed. For the fiscal year ended June 30, 2001, FirstFed had net income of approximately $15,000. Forward-Looking Statements When used in this Form 10-KSB and in future filings by the Company with the Securities and Exchange Commission (the "SEC"), 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 words 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. Such statements are subject to risks and uncertainties, including but not limited to 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, all or some of which could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made and are subject to the above- stated qualifications in any event. 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 opinions 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. Lending Activities of First Federal Market Area of the Bank. The main office of First Federal is located in Wabash, Indiana, which is located in Wabash County. The Bank operates three branches: the first in North Manchester, the second in Syracuse, and the third in South Whitley, Indiana. North Manchester is located in Wabash County, Syracuse is located in adjacent Kosciusko County, and South Whitley is located in adjacent Whitley County. The Bank considers Wabash, Kosciusko and Whitley Counties as its primary market area. The Bank also serves Grant, Miami, Huntington, Noble, Allen and Elkhart Counties in Indiana. 3 Wabash County is served by Conrail and the Norfolk Southern railroads, and also has a local municipal airport. Ft. Wayne, Indiana, 45 miles to the northeast, has a commercial airport served by two major airlines and several commuter affiliates. Wabash County has a mixed agriculture and industrial economy. Several major employers in Wabash County are suppliers to the automotive industry. Wabash County also has Manchester College, a four-year private undergraduate institution, and the Wabash County Hospital, a facility with 135 beds. Major manufacturing employers in Wabash County include: Jefferson Smurfitt; Eaton Corporation; Ford Meter Box Company, Inc.; GenCorp Automotive; Heckman Bindery; Blue Sky, Inc.; United Technologies, Inc.; Wabash Alloys; Cast Molding Industries, Inc.; and Wabash Magnetics. Kosciusko County's economy includes a mix of recreational, manufacturing, biomedical and manufactured home industries. Major private employers in Kosciusko County include: GTI Corporation; Dalton Foundries, Inc.; Maple Leaf Farms, Inc.; Biomet, Inc.; Danek Group; Zimmer Inc.; R. R. Donnelley; Depuy Inc.; Kemole Glass, Inc.; Othy, Inc.; and Creighton Brothers. Whitley County's economy includes a mix of agriculture and light manufacturing related to electronics, musical instruments and printing. Major private employers in Whitley County include: Fox Products; Stumps Printing Co.; Wheatherhead; Magnavox; and Essex Corporation. General. Historically, the Bank has originated fixed-rate, one- to four-family mortgage loans. In the early 1980s, the Bank began to focus on the origination of adjustable-rate mortgage ("ARM") loans and short-term loans for retention in its portfolio in order to increase the percentage of loans in its portfolio with more frequent repricing or shorter maturities, and in some cases higher yields, than fixed-rate mortgage loans. While the Bank has continued to originate fixed-rate mortgage loans in response to customer demand, currently, the Bank originates and sells most of its fixed-rate, first mortgage loans with maturities of greater than 15 years in the secondary market with servicing retained. The Bank also originates consumer (including automobile), commercial and multi-family real estate, commercial business, and residential construction loans in its primary market area. At June 30, 2001, the Bank's net loan portfolio totaled $152.2 million. The Executive Committee of the Bank, comprised of any three outside directors selected by and including the Chairman, has the responsibility for the supervision of the Bank's loan portfolio with an overview by the Board of Directors. The Bank's loan policy requires Executive Committee or full Board approval on mortgage, commercial and consumer loans over certain dollar thresholds, loan extensions, special loan situations, assumptions and loan participation. The Board of Directors has responsibility for the overall supervision of the Bank's loan portfolio and in addition, reviews all foreclosure actions or the taking of deeds-in-lieu of foreclosure. 4 The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between changes related to higher or lower outstanding balances and changes due to the levels and changes in interest rates. For each category of interest-earning assets and interest- bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
Year Ended June 30, ------------------------------------------------------------------------ 2001 vs. 2000 2000 vs. 1999 ----------------------------------- ---------------------------------- Increase Increase (Decrease) (Decrease) Due to Total Due to Total ------------------ Increase ------------------ Increase Volume Rate (Decrease) Volume Rate (Decrease) ------ ---- ---------- ------ ---- ---------- (Dollars in Thousands) Interest-earning assets: Loans receivable(1) ......................... $ 95 $ 484 $ 579 $ 476 $ (16) $ 460 Securities .................................. 171 26 197 463 95 558 Mortgage-backed securities .................. 101 (35) 66 (390) 30 (360) Interest-bearings deposits in other financial institutions ........................... 59 (44) 15 (43) 20 (23) ------- ------- ------- ------- ------- ------- Total interest-earning assets ................ $ 426 $ 431 $ 857 $ 506 $ 129 $ 635 ======= ======= ======= ======= ======= ======= Interest-bearing liabilities: Money market accounts ....................... $ 173 $ 10 $ 183 $ 31 $ 1 $ 32 NOW accounts ................................ 6 (2) 4 9 1 10 Passbook Savings accounts ................... (274) (39) (313) (133) (71) (204) Certificates of deposit ..................... 541 645 1,186 340 (52) 288 FHLB Advances ............................... (127) 211 84 152 (29) 123 ------- ------- ------- ------- ------- ------- Total interest bearing liabilities ........... $ 319 $ 825 $ 1,144 $ 399 $ (150) $ 249 ======= ======= ------- ======= ======= ======= Net interest income............................ $ (287) $ 386 ======= =======
-------------------- (1) Includes the impact of non-accruing loans and loan fees. 5 Loan Portfolio Composition. The following table contains information concerning the composition of the Bank's loan portfolio in dollar amounts and in percentages (before deductions for loans in process, deferred fees, cost and discounts and allowances for loan losses) as of the dates indicated.
June 30, -------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ----------------- ----------------- ---------------- ---------------- --------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- (Dollars in Thousands) Real Estate Loans: ----------------- One- to four-family........... $68,646 44.49 % $69,738 45.38% $ 67,825 44.34% $ 70,243 49.64% $ 64,921 56.21% Commercial and multi- family...................... 8,887 5.76 8,138 5.30 9,342 6.11 7,272 5.14 6,426 5.56 Construction.................. 4,163 2.70 2,344 1.53 899 .59 3,991 2.82 2,974 2.58 ------- ------ ------- ------ -------- ------ --------- ------ --------- ------ Total real estate loans.... 81,696 52.95 80,220 52.21 78,066 51.04 81,506 57.60 74,321 64.35 ------- ------ ------- ------ -------- ------ --------- ------ --------- ------ Other Loans: ----------- Consumer Loans: Deposit account.............. 314 .20 349 .23 504 .33 475 .34 451 .39 Automobile................... 27,163 17.60 31,368 20.41 36,334 23.75 33,814 23.90 22,625 19.59 Home equity and improvement................ 15,809 10.25 13,119 8.54 10,394 6.80 9,105 6.43 6,970 6.03 Manufactured home............ 212 .14 235 .15 249 .16 301 .21 350 .30 Other........................ 3,782 2.45 4,070 2.65 3,621 2.37 3,348 2.37 3,972 3.44 ------- ------ ------- ------ -------- ------ --------- ------ --------- ------ Total consumer loans....... 47,280 30.64 49,141 31.98 51,102 33.41 47,043 33.25 34,368 29.75 ------- ------ ------- ------ -------- ------ --------- ------ --------- ------ Commercial business loans..... 25,311 16.41 24,301 15.81 23,781 15.55 12,945 9.15 6,813 5.90 ------- ------ ------- ------ -------- ------ --------- ------ --------- ------ Total other loans............ 72,591 47.05 73,442 47.79 74,883 48.96 59,988 42.40 41,181 35.65 ------- ------ ------- ------ -------- ------ --------- ------ --------- ------ Total loans................ 154,287 100.00% 153,662 100.00% 152,949 100.00% 141,494 100.00% 115,502 100.00% ====== ====== ====== ====== ====== Less: ---- Loans in process.............. 565 1,335 444 1,716 1,134 Deferred fees, cost and discounts...................... (246) (444) (609) (599) (363) Allowance for loan losses..... 1,773 1,961 1,623 983 572 -------- -------- -------- -------- -------- Total loans, net........... $152,195 $150,810 $151,491 $139,394 $114,159 ======== ======== ======== ======== ========
6 The following table shows the composition of the Bank's loan portfolio by fixed and adjustable-rate at the dates indicated.
June 30, ------------------------------------------------------------------------------------------------ 2001 2000 1999 1998 1997 ----------------- ----------------- ---------------- ---------------- ------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- (Dollars in Thousands) Fixed-Rate Loans: ---------------- Real Estate: One- to four-family...............$ 17,690 11.47% $15,268 9.94% $ 16,976 11.10% $ 17,492 12.36% $ 8,588 7.43% Commercial and multi-family....... 4,566 2.96 2,253 1.46 6,671 4.36 2,307 1.63 1,676 1.45 Construction...................... 3,973 2.57 2,272 1.48 705 .46 2,110 1.49 1,222 1.06 -------- ------ ------- ------ --------- ------ ------- ------ -------- ------ Total real estate loans....... 26,229 17.00 19,793 12.88 24,352 15.92 21,909 15.48 11,486 9.94 -------- ------ ------- ------ --------- ------ ------- ------ -------- ------ Consumer........................... 38,915 25.22 49,024 31.90 45,140 29.51 42,370 29.94 31,222 27.03 Commercial business................ 12,376 8.02 8,666 5.64 6,853 4.48 5,540 3.92 2,921 2.53 -------- ------ -------- ------ --------- ----- ------- ------ -------- ------ Total fixed-rate loans........ 77,520 50.24 77,483 50.42 76,345 49.91 69,819 49.34 45,629 39.50 -------- ------ ------- ------ --------- ------ ------- ------ -------- ------ Adjustable-Rate Loans: --------------------- Real estate: One- to four-family.............. 50,956 33.03 54,470 35.44 50,849 33.24 52,751 37.28 56,333 48.77 Commercial and multi-family...... 4,321 2.80 5,885 3.83 2,671 1.75 4,965 3.51 4,750 4.11 Construction..................... 190 .12 72 .05 194 .13 1,881 1.33 1,752 1.52 -------- ------ ------- ------ --------- -------- ------ -------- ------ Total real estate loans....... 55,467 35.95 60,427 39.32 53,714 35.12 59,597 42.12 62,835 54.40 -------- ------ -------- ------ --------- ----- ------- ------ -------- ------ Consumer.......................... 8,365 5.43 117 .08 5,962 3.90 4,673 3.30 3,146 2.73 ------ Commercial business............... 12,935 8.38 15,635 10.18 16,928 11.07 7,405 5.24 3,892 3.37 -------- ------ ------- ------ --------- ------ ------- ------ -------- ------ Total adjustable-rate loans... 76,767 49.76 76,179 49.58 76,604 50.09 71,675 50.66 69,873 60.50 ------- ------ --------- ------ -------- ------ -------- ------- Total loans................... 154,287 100.00% 153,662 100.00% 152,949 100.00% 141,494 100.00% 115,502 100.00% ====== ====== ====== ====== ====== Less: ---- Loans in process.................. 565 1,335 444 1,716 1,134 Deferred fees, cost and discounts. (246) (444) (609) (599) (363) Allowance for loan losses......... 1,773 1,961 1,623 983 572 -------- -------- -------- -------- -------- Total loans, net..............$152,195 $150,810 $151,491 $139,394 $114,159 ======== ======== ======== ======== ========
7 The following schedule illustrates the interest rate sensitivity of the Bank's loan portfolio (including non-accruing loans) at June 30, 2001. Mortgages which have adjustable or renegotiable interest rates are shown as maturing in the period during which the contract is due. The schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses.
Real Estate ------------------------------------------------------- Commercial One- to four-family Commercial Construction Consumer Business Total ------------------ --------------- ---------------- ---------------- --------------- --------------- Weighted Weighted Weighted Weighted Weighted Average Average Average Average Average Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Percent ------ ---- ------ ---- ------ ---- ------ ---- ------ ---- ------ ------- (Dollars in Thousands) Due During Years Ending June 30, ------------- 2002 ............. $ 303 8.84% $ 877 8.50% $ 4,163 8.78 $ 3,391 12.39% $15,272 8.88 $ 24,006 15.56% 2003 - 2006 ...... 795 8.34 205 7.75 28,229 10.26 4,031 9.13 33,260 21.56 2007 and following 67,548 8.25 7,805 8.62 15,660 8.46 6,008 8.83 97,021 62.88 -------- -------- -------- ------- ------- -------- $ 68,646 8.25% $ 8,887 8.59% $ 4,163 8.78% $47,280 9.82% $25,311 8.91% $154,287 100.00% ======== ======== ======== ======= ======= ========
The total amount of loans due after June 30, 2002 which have fixed interest rates is $65.5 million, while the total amount of loans due after such dates which have floating or adjustable interest rates is $64.8 million. 8 One- to Four-Family Residential Mortgage Lending. Residential loan originations of this type are generated by the Bank's marketing efforts, its present and walk-in customers, and referrals from real estate agents and builders. The Bank focuses its lending efforts primarily on the origination of loans secured by first mortgages on owner-occupied, one- to four-family residences. At June 30, 2001, the Bank's one- to four-family residential mortgage loans totaled $68.6 million, or approximately 44.5% of the Bank's total gross loan portfolio. The Bank currently originates up to a maximum of 30-year adjustable-rate, one- to four- family residential mortgage loans in amounts up to 95% of the appraised value of the security property provided that private mortgage insurance is obtained in an amount sufficient to reduce the Bank's exposure to at or below the 80% loan-to-value level. The Bank's one- to four-family residential mortgage originations are primarily in its market and surrounding areas. The Bank currently offers one-, three-, five-, and seven-year ARM loans with a stated interest rate margin over applicable Treasury rates. These loans have a fixed-rate for the stated period and, thereafter, such loans adjust annually. Depending on whether a one-, three-, five-, or seven-year loan is selected, per-year and lifetime caps and floors will range from 100 to 200 basis points, and 300 to 600 basis points. As a consequence of using an initial fixed-rate, caps and floors, the interest rates on these loans may not be as rate sensitive as is the Bank's cost of funds. The Bank's ARM loans do not permit negative amortization of principal. The Bank qualifies borrowers at the fully indexed rate. Due to consumer demand, the Bank also offers fixed-rate 10- through 15-year and 15- through 30-year mortgage loans, most of which conform to the secondary market standards of Freddie Mac. Interest rates charged on these fixed-rate loans are competitively priced according to market conditions. Residential loans generally do not include prepayment penalties. Most of the fixed-rate loans with maturities of 15 to 30 years are sold in the secondary market. The Bank generally retains servicing rights on such loans. Generally, the Bank will retain fixed-rate loans with maturities of less than 15 years in its portfolio. The Bank reserves the right to discontinue, adjust or create new lending programs to respond to its needs and to competitive factors. In underwriting one- to four-family residential real estate loans, First Federal evaluates both the borrower's ability to make monthly payments and the value of the property securing the loan. Properties in Wabash county securing real estate loans made by First Federal are appraised by the Bank's salaried appraisers. Properties located outside of Wabash county securing real estate loans and all properties securing commercial loans are appraised by independent fee appraisers approved and qualified by the Board of Directors. First Federal generally requires borrowers to obtain an attorney's title opinion or title insurance, and fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan. Real estate loans originated by the Bank generally contain a "due on sale" clause allowing the Bank to declare the unpaid principal balance due and payable upon the sale of the security property. Consumer Lending. First Federal offers a variety of secured consumer loans, including automobile, home equity, home improvement and student loans, and loans secured by savings deposits. In addition, First Federal offers other secured and unsecured consumer loans. The Bank 9 currently originates substantially all of its consumer loans in its primary market area and surrounding areas. The Bank originates consumer loans on both a direct and indirect basis. Direct loans are made when the Bank extends credit directly to the borrower. Indirect loans are obtained when the Bank purchases loan contracts from retailers of goods or services which have extended credit to their customers. The only indirect lending by First Federal began in the early 1980s, and is with selected automobile and boat dealers located in the Bank's primary market and surrounding areas. The Bank underwrites each indirect loan in accordance with its normal consumer loan standards. At June 30, 2001, the Bank's consumer loan portfolio totaled $47.3 million, or 30.6% of its total gross loan portfolio. Consumer loans may entail greater credit risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles or mobile homes. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. At June 30, 2001, $163,000 or approximately 0.34% of the consumer loan portfolio was non- accruing. There can be no assurance that delinquencies will not increase in the future. The largest component of First Federal's consumer loan portfolio consists of automobile loans. At June 30, 2001, automobile loans totaled $27.2 million, or approximately 17.6% of the Bank's gross loan portfolio. Loans secured by second mortgages, together with loans secured by all prior liens, are currently limited to 100% or less of the appraised value of the property securing the loan. Generally, such loans have a maximum term of up to 20 years. As of June 30, 2001, home equity and home improvement loans, most of which are secured by second mortgages, amounted to $15.8 million, or 10.3% of the Bank's gross loan portfolio. Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower. Loans secured by deposit accounts at the Bank are currently originated for up to 90% of the account balance with a hold placed on the account restricting the withdrawal of the account balance. The interest rate on such loans is typically equal to 200 basis points above the deposit contract rate. The underwriting standards employed by the Bank for consumer loans include an application, a determination of the applicant's payment history on other debts and an assessment of ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of the value of the security, if any, in relation to the proposed loan amount. Construction Lending. The Bank engages in limited amounts of construction lending to individuals for the construction of their residences as well as to builders for the construction of 10 single family homes in the Bank's primary market area and surrounding areas. At June 30, 2001, the Bank had $4.2 million of gross construction loans, most of which were to borrowers who intended to live in the properties upon completion of construction. Construction loans to individuals for their residences are structured to be converted to permanent loans at the end of the construction phase, which typically runs for six months. During the construction phase, the borrower pays interest only. Residential construction loans are generally underwritten pursuant to the same guidelines used for originating permanent residential loans. Construction loans to builders of one- to four-family residences require the payment of interest only for up to 12 months. In most cases, these loans carry fixed interest rates. At June 30, 2001, the Bank had $1.9 million in construction loans outstanding to builders. Construction lending generally affords the Bank an opportunity to receive interest at rates higher than those obtainable from permanent residential loans and to receive higher origination and other loan fees. In addition, construction loans are generally made with fixed rates of interest or for relatively short terms. Nevertheless, construction lending is generally considered to involve a higher level of credit risk than one- to four-family residential lending due to the concentration of principal in a limited number of loans and borrowers and the effects of general economic conditions on development projects, real estate developers and managers. In addition, the nature of these loans is such that they are more difficult to evaluate and monitor. Finally, the risk of loss on construction loans is dependent largely upon the accuracy of the initial estimate of the individual property's value upon completion of the project and the estimated cost (including interest) of the project. If the cost estimate proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to permit completion of the project. At June 30, 2001, the Bank had no construction loans outstanding which were over thirty days delinquent. Commercial and Multi-Family Real Estate Lending. The Bank has also engaged in commercial and multi-family real estate lending in the Wabash market area and surrounding areas and has purchased participation interests in loans from other financial institutions throughout Indiana and neighboring jurisdictions. At June 30, 2001, the Bank had $8.9 million of commercial and multi-family real estate loans, which represented 5.8% of the Bank's total gross loan portfolio. The largest commercial or multi-family real estate loan outstanding at June 30, 2001 was $1.7 million, which was performing in accordance with its repayment terms. At June 30, 2001, substantially all of the Bank's commercial and multi-family real estate loan portfolio was secured by properties located in Indiana. Loans secured by commercial and multi-family real estate properties are generally larger and involve a greater degree of credit risk than one- to four-family residential mortgage loans. Because payments on loans secured by commercial real estate properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. If the cash flow from the project is reduced (for example, if leases are not obtained or renewed), the borrower's ability to repay the loan may be impaired. 11 The Bank's commercial and multi-family real estate loan portfolio is secured primarily by apartment buildings and, to a lesser extent, office buildings and nursing homes. Commercial and multi-family real estate loans generally have terms that do not exceed 20 years. The Bank has a variety of rate adjustment features and other terms in its commercial and multi-family real estate loan portfolio. Generally, the loans are made in amounts up to 75% of the appraised value of the security property. Commercial real estate loans provide for a margin over a designated index which is generally the prime rate and multi-family loans provide for a margin over the one-year Treasury bill rate. The Bank currently analyzes the financial condition of the borrower, the borrower's credit history, and the reliability and predictability of the cash flow generated by the property securing the loan. The Bank generally requires personal guaranties of the borrowers. Appraisals on properties securing commercial real estate loans originated by the Bank are performed by independent appraisers. Commercial Business Lending. The Bank began increasing its commercial loan portfolio in fiscal 1999. At June 30, 2001, approximately $25.3 million, or 16.4% of the Bank's total gross loan portfolio, was comprised of commercial loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower's ability to make repayment from his or her employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans typically are made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself (which, in turn, is likely to be dependent upon the general economic environment). The Bank's commercial business loans are usually, but not always, secured by business assets. However, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. The Bank recognizes the generally increased risks associated with commercial business lending. First Federal's commercial business lending policy includes credit file documentation and analysis of the borrower's character, capacity to repay the loan, the adequacy of the borrower's capital and collateral as well as an evaluation of conditions affecting the borrower. Analysis of the borrower's past, present and future cash flows is also an important aspect of First Federal's current credit analysis. Non-Performing Assets and Classified Assets When a borrower fails to make a required payment on real estate secured loans and consumer loans within 30 days after the payment is due, the Bank generally institutes collection procedures by mailing a delinquency notice. The customer is contacted again, by notice and/or telephone, when the payment is 31 days past due and when 60 days past due. In most cases, delinquencies are cured promptly; however, if a loan secured by real estate or other collateral has been delinquent for more than 90 days, satisfactory payment arrangements must be adhered to or the Bank will initiate foreclosure or repossession. 12 Generally, when a loan becomes delinquent 90 days or more or when the collection of principal or interest becomes doubtful, the Bank will place the loan on a non-accrual status and, as a result, previously accrued interest income on the loan is taken out of current income. The loan will remain on a non-accrual status as long as the loan is 90 days delinquent. The following table sets forth information concerning delinquent mortgage and other loans at June 30, 2001. The amounts presented represent the total remaining principal balances of the related loans, rather than the actual payment amounts which are overdue.
Loans Delinquent For: 30-59 Days 60-89 Days 90 Days and Over Total Delinquent Loans ------------------------- ------------------------ ------------------------ ----------------------- Percent Percent Percent Percent of Loan of Loan of Loan of Loan Number Amount Category Number Amount Category Number Amount Category Number Amount Category ------ ------ -------- ------------- --------------- ------ -------- ------------- -------- (Dollars in Thousands) Real Estate: One- to four-family...... 20 $734 1.07% --- $ --- ---% 3 $ 134 0.19% 23 $ 868 1.26% Commercial and Multi-Family............. -- -- -- -- ---- -- 1 346 0.39 1 346 0.39 Construction............. --- --- --- --- ---- --- ---- ---- ---- Consumer................... 138 895 1.89 37 265 .56 24 163 0.34 199 1,323 2.79 Commercial business........ 21 1,091 4.31 10 59 .023 27 676 2.67 58 1,825 7.21 --- ------ --- ----- -- ------ --- ------ Total delinquent loans 179 $2,720 1.76% 47 $324 0.21% 55 $1,319 0.85% 281 $4,363 2.82% === ====== ==== === ==== ==== == ====== ==== === ====== ====
The ratio of delinquent loans to total loans (net), was 2.87% at June 30, 2001. The table below sets forth the amounts and categories of non-performing assets in the Bank's loan portfolio at the dates indicated. Loans are placed on non-accrual status when the collection of principal and/or interest become doubtful or when the loan is in excess of 90 days delinquent. Foreclosed and repossessed assets include assets acquired in settlement of loans. See Notes 1 and 4 to Notes to Consolidated Financial Statements. 13
June 30 ------------------------------------------------------ 2001 2000 1999 1998 1997 ------ ------ ------ ------ ------ (Dollars in Thousands) Non-accruing loans: One- to four-family ................... $ 134 $ 137 $ 1 $ 521 $ -- Commercial and multi-family real estate 1,022 39 317 -- -- Consumer .............................. 163 75 92 193 248 ------ ------ ------ ------ ------ Total non-accruing loans ....... 1,319 251 410 714 248 ------ ------ ------ ------ ------ Foreclosed and repossessed assets: One- to four-family ................... 230 -- 274 -- -- Commercial and multi-family real estate -- -- 101 101 -- Consumer .............................. 69 39 57 58 33 ------ ------ ------ ------ ------ Total foreclosed assets ........ 299 39 432 159 33 ------ ------ ------ ------ ------ Troubled debt restructurings ............ -- -- -- -- -- Total non-performing assets ............. $1,618 $ 290 $ 842 $ 873 $ 281 ====== ====== ====== ====== ====== Total as a percentage of total assets ... 0.70% 0.13% 0.39% 0.43% 0.16% ====== ====== ====== ====== ======
Non-Performing Assets. Included in non-accruing loans at June 30, 2001 were 24 consumer loans totaling $103,000 secured by property including automobiles, manufactured homes and other collateral. Foreclosed and repossessed assets included automobiles and commercial property totaling $69,000 at June 30, 2001. Other Loans of Concern. Including the non-accruing loans set forth in the preceding table, as of June 30, 2001 there was also an aggregate of $4.7 million in net book value of loans classified by the Bank with respect to the majority of which known information about the possible credit problems of the borrowers or the cash flows of the security properties have caused management to have some doubts as to the ability of the borrowers to comply with present loan repayment terms and which may result in the future inclusion of such items in the non-performing asset categories. The principal components of loans of concern are 85 consumer loans aggregating $631,000, 13 one- to four-family loans aggregating $668,000 and 23 commercial loans aggregating $3.5 million at June 30, 2001. The principal components of loans of concern at June 30, 2000 consisted of 64 consumer loans aggregating $572,000, 18 one- to four-family loans aggregating $889,000 and 25 commercial loans aggregating $2.7 million. As of June 30, 2001, there were no other loans not included on the foregoing table or discussed above where known information about the possible credit problems of borrowers caused management to have doubts as to the ability of the borrower to comply with present loan repayment terms and which may result in disclosure of such loans in the future. 14 Classified Assets. Federal regulations provide for the classification of loans and other assets such as debt and equity securities considered by the OTS to be of lesser quality as "substandard," "doubtful" or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the savings association will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. When a savings bank classifies problem assets as either substandard or doubtful, it may establish general allowances for loan losses in an amount deemed prudent by management. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When a savings bank classifies problem assets as "loss," it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. First Federal's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the District Director at the regional OTS office, who may order the establishment of additional general or specific loss allowances. In accordance with its classification of assets policy, the Bank regularly reviews the loans in its portfolio to determine whether any loans require classification. On the basis of management's review of its assets, at June 30, 2001, the Bank had classified a total of approximately $2.5 million of its assets as substandard, $248,000 as doubtful, none as loss, and $2.0 million as special mention. At June 30, 2001, total classified and non-performing assets comprised $5.0 million, or 25.6% of the Bank's capital, or 2.2% of the Bank's total assets. Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risk inherent in its loan portfolio and changes in the nature and volume of its loan activity. Such evaluation, which includes a review of loans for which full collectibility may not be reasonably assured, considers among other matters, the estimated fair value of the underlying collateral, economic conditions, historical loan loss experience and other factors that warrant recognition in providing for an adequate loan loss allowance. Real estate properties acquired through foreclosure are recorded at fair value. If fair value at the date of foreclosure is lower than the balance of the related loan, the difference will be charged-off to the allowance at the time of transfer. Valuations are periodically updated by management and if the value declines, a specific provision for losses on such property is established by a charge to operations. 15 Although management believes that it uses the best information available to determine the allowances, unforeseen market conditions could result in adjustments and net earnings could be significantly affected if circumstances differ substantially from the assumptions used in making the final determination. Future additions to the Bank's allowances will be the result of periodic loan, property and collateral reviews and thus cannot be predicted in advance. At June 30, 2001, the Bank had a total allowance for loan losses of $1.8 million or 1.15% of total loans, net. See Note 4 of the Notes to Consolidated Financial Statements in the Annual Report to Stockholders (the "Annual Report"), attached hereto as Exhibit 13. The following table sets forth an analysis of the Bank's allowance for loan losses.
Year Ended June 30 ------------------------------------------------------ 2001 2000 1999 1998 1997 ------ ------ ------ ------ ------ (Dollars in Thousands) Balance at beginning of period .............. $1,961 $1,623 $ 983 $ 572 $ 553 Charge-offs: One- to four-family ........................ 113 -- 26 -- 3 Consumer ................................... 1,277 507 439 285 181 Commercial Business ........................ 802 276 -- 47 -- ------ ------ ------ ------ ------ 2,192 783 465 332 184 Recoveries: Consumer ................................... 139 82 95 38 83 Commercial and multi-family real estate .... 150 5 -- -- -- ------ ------ ------ ------ ------ 289 87 95 38 83 Net charge-offs ............................. 1,903 696 370 294 101 Additions charged to operations ............. 1,715 1,034 1,010 705 120 ------ ------ ------ ====== ------ Balance at end of period .................... $1,773 $1,961 $1,623 $ 983 $ 572 ====== ====== ====== ====== ====== Ratio of net charge-offs during the period to average loans outstanding during the period ...................................... 1.23% 0.45% 0.25% 0.23% .09 % ====== ====== ====== ====== ======
16 The distribution of the Bank's allowance for loan losses at the dates indicated is summarized as follows:
June 30, ---------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ------------------- ----------------- ------------------ ----------------- ------------------ Percent Percent Percent Percent Percent of Loans of Loans of Loans of Loans of Loans in Each in Each in Each in Each in Each Category Category Category Category Category to Total to Total to Total to Total to Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- (Dollars in Thousands) One- to four-family.......... $ 184 44.49% $ 274 45.38% $ 113 44.34% $105 49.64% $ 95 56.21% Commercial and multi-family real estate............... 215 5.76 120 5.30 225 6.11 230 5.14 70 5.56 Construction................. --- 2.70 -- 1.53 --- 0.59 28 2.82 25 2.58 Consumer..................... 454 30.64 825 31.98 700 33.41 445 33.25 325 29.75 Commercial business.......... 859 16.41 571 15.81 405 15.55 165 9.15 50 5.90 Unallocated.................. 61 --- 171 --- 180 --- 10 --- 7 --- ------- ------ ------ ------ ------ ------ ---- ------ ---- ------ Total................... $ 1,773 100.00% $1,961 100.00% $1,623 100.00% $983 100.00% $572 100.00 % ======= ====== ====== ====== ====== ====== ==== ====== ==== ======
17 Investment Activities Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. Historically, the Bank has generally maintained its liquid assets above the minimum requirements previously imposed by the OTS regulations and at a level believed adequate to meet requirements of normal daily activities, repayment of maturing debt and potential deposit outflows. As of June 30, 2001, the Bank's liquidity ratio (liquid assets as a percentage of net withdrawable savings deposits and current borrowings) was 7.94%, a level deemed by management to be consistent with safe and sound banking practices. Federally chartered savings institutions have the authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, certain bankers' acceptances, repurchase agreements and federal funds. Subject to various restrictions, federally chartered savings institutions may also invest their assets in commercial paper, investment grade corporate debt securities and mutual funds whose assets conform to the investments that a federally chartered savings institution is otherwise authorized to make directly. Generally, the investment policy of the Bank is to invest funds among various categories of investments and maturities based upon the Bank's need for liquidity, to achieve the proper balance between its desire to minimize risk and maximize yield, to provide collateral for borrowings, and to fulfill the Bank's asset/liability management policies. First Federal's investment and mortgage-backed securities portfolios are managed in accordance with a written investment policy adopted by the Board of Directors. Other than certificates of deposit and mortgage-backed securities, investments may be made by the President of First Federal only with the approval of the Investment Committee. Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No. 115"), requires that securities and mortgage-backed securities be classified as held to maturity, available for sale or trading purposes. Under SFAS No. 115, securities that the Company has the positive intent and ability to hold until maturity are classified as held to maturity and are reported at amortized cost. Securities classified as available for sale are those the Company may sell in response to liquidity needs, for asset/liability management purposes and other reasons and are reported at fair value. Unrealized gains and losses on securities available for sale are reported as a separate component of equity, net of tax. Trading securities are those which are purchased for sale in the near future and are reported at fair value. Unrealized gains and losses on trading securities are included in income. Transfers between categories are accounted for as sales and repurchases at fair value. For any sales or transfers of securities classified as held to maturity, the cost basis, the realized gain or loss, and the circumstances leading to the decision to sell are required to be disclosed. At the time of purchase of new securities, management of the Company makes a determination as to the appropriate classification of securities as available for sale or held to maturity. At June 30, 2001, the Company 18 had no securities classified as held to maturity and $61.0 million classified as available for sale including mortgage-backed securities. No securities were held for trading purposes on such date. Securities. It is the Company's general policy to purchase securities which are U.S. Government securities and federal agency obligations, state and local government obligations, commercial paper, short-term corporate debt securities and overnight federal funds. At June 30, 2001, the weighted average term to maturity or repricing of the investment securities portfolio, excluding the FHLB, Fannie Mae stock and other equity securities available for sale, was 3.6 years. OTS regulations restrict investments in corporate debt and equity securities by the Bank. These restrictions include prohibitions against investments in the debt securities of any one issuer in excess of 15% of the Bank's unimpaired capital and unimpaired surplus as defined by federal regulations, which totaled $19.4 million as of June 30, 2001, plus an additional 10% if the investments are fully secured by readily marketable collateral. See "Regulation - Federal Regulation of Savings Associations" for a discussion of additional restrictions on the Bank's investment activities. The following table sets forth the composition of the Company's securities portfolio excluding mortgage-backed securities, at the dates indicated.
June 30, ------------------------------------------------------------------ 2001 2000 1999 ---------------------- -------------------- ------------------ Carrying % of Carrying % of Carrying % of Value Total Value Total Value Total ----------- ---------------------------------------------- -------- (Dollars in Thousands) Securities available for sale: Federal agency obligations..................... $ 11,134 27.55% $21,952 49.41% $23,187 53.0% Commercial notes and commercial paper.......... 4,631 11.46 1,499 3.37 237 0.54 State and local government obligations......... 8,094 20.02 8,498 19.13 8,343 19.08 Other equity securities........................ 13,160 32.56 9,073 20.43 8,569 19.59 -------- ------- ------- ------- ------ Total securities available for sale.......... 37,019 91.59 41,022 92.34 40,336 92.22 -------- ------- ------- ------- ------ FHLB stock..................................... 3,401 8.41 3,401 7.66 3,401 7.78 -------- ------ ------- ------ ------- ------- Total securities............................. $40,420 100.00 $44,423 100.00% $43,737 100.00% ======= ====== ======= ====== ======= ====== Weighted average remaining life or term to repricing, excluding FHLB stock and other equity securities available for sale......... 3.6 yrs. 8.7 yrs. 8.2 yrs. Other Interest-Earning Assets: Interest-earning deposits with banks........... $ 2,158 $1,102 $ 188 ======= ====== =======
19 The composition and maturities of the securities portfolio, excluding mortgage-backed securities, FHLB of Indianapolis stock and other equity securities, are indicated in the following table.
June 30, 2001 --------------------------------------------------------------------------------- Less Than 1 to 5 5 to 10 Over 10 Total 1 Year Years Years Years Securities ------ ----- ----- ----- ---------------------- Amortized Amortized Amortized Amortized Amortized Market Cost Cost Cost Cost Cost Value ---- ---- ---- ---- ---- ----- (Dollars in Thousands) Federal agency obligations................. $ 0 $ 0 $ 9,000 $2,062 $11,062 $11,134 Commercial notes and commercial paper........... 2,194 0 0 2,259 4,453 4,631 State and local government obligations...... 582 1,181 1,044 5,213 8,020 8,094 -------- ------- -------- ------- ------ -------- Total debt securities........ $2,776 $1,181 $10,044 $9,534 $23,535 $23,859 ====== ====== ======= ====== ======= ======= Weighted average yield(1).... 5.68% 5.24% 6.24% 6.72% 6.32%
----------------------- (1) Yields reflected have not been computed on a tax equivalent basis. Except for obligations of state and local governments, the Company's securities portfolio at June 30, 2001 contained neither tax-exempt securities nor securities of any issuer with an aggregate book value in excess of 10% of the Company's shareholders' equity, excluding those issued by the United States Government, or its agencies. Mortgage-Backed Securities. The Company's investment in mortgage-backed securities can serve as collateral for borrowings and, through repayments, as a source of liquidity. In addition, management from time to time has purchased mortgage-backed securities in order to supplement loan originations. For information regarding the carrying and market values of the Company's mortgage-backed securities portfolio, see Note 3 of the Notes to Consolidated Financial Statements in the Annual Report attached hereto as Exhibit 13. The following table sets forth the amortized cost of the Company's mortgage-backed securities at the dates indicated.
June 30, ------------------------------------------- 2001 2000 1999 ------- ------- ------- (In thousands) Fannie Mae ............... $ 6,991 $ 1,219 $ 283 Ginnie Mae ............... 12,650 10,110 10,290 Freddie Mac .............. 3,856 73 103 ------- ------- ------- Total ................ $23,497 $11,402 $10,676 ======= ======= =======
20 The following table sets forth the contractual maturities of the Company's mortgage-backed securities based on amortized cost at June 30, 2001. Not considered in the preparation of the table below is the effect of prepayments, periodic principal repayments and the adjustable-rate nature of these instruments.
Due in June 30, --------------------------------------------- 2000 5 Years 5 to 10 10 to 20 Over 20 Balance or Less Years Years Years Outstanding ---------- ---------- ----------------------- ------------- (Dollars In Thousands) Fannie Mae....................... $ --- $ --- $ --- $ 6,991 $ 6,991 Ginnie Mae....................... --- --- --- 12,650 12,650 Freddie Mac...................... --- --- --- 3,856 3,856 -------- ------- ------- ------ --------- Total....................... $ --- $ --- $ --- $23,497 $23,497 ======= ====== ====== ======= ======= Weighted average yield........... ---% ---% ---% 6.48% 6.48%
Sources of Funds General. The Bank's primary sources of funds are deposits, borrowings, amortization and prepayment of loan principal (including interest earned on mortgage-backed securities), sales of whole loans and loan participations, interest earned on or sales and maturation of investment securities and short-term investments, and funds provided from operations. Borrowings, including FHLB advances and reverse repurchase agreements, may be used at times to compensate for seasonal reductions in deposits or deposit inflows at less than projected levels, and may be used on a longer term basis to support expanded lending activities. Deposits. First Federal offers a variety of deposit accounts having a wide range of interest rates and terms. The Bank's deposit accounts consist of passbook savings accounts, money market savings accounts, NOW, money market checking and regular checking accounts, and certificate accounts ranging in terms from 91 days to 60 months. The Bank only solicits deposits from its market area and currently does not use brokers to obtain deposits. The Bank relies primarily on competitive pricing policies, advertising and customer service to attract and retain these deposits. The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates, and competition. The variety of deposit accounts offered by the Bank has allowed it to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. Nonetheless, the Bank has become more susceptible to short-term fluctuations in deposit flows, as customers have become more interest rate conscious. The Bank endeavors to manage the pricing of its deposits in keeping with its asset/liability management and profitability objectives. Based on its experience, the Bank believes that its passbook savings, money market savings accounts, NOW, money market checking and regular checking accounts are relatively stable sources of deposits. However, the ability of the Bank to attract and maintain certificates of deposit and its passbook accounts and the rates paid on these deposits has been and will continue to be significantly affected by market conditions. 21 The following table sets forth the savings flows at the Bank during the periods indicated.
Year Ended June 30, ---------------------------------------------- 2001 2000 1999 --------- --------- --------- (In thousands) Opening balance ......... $ 133,105 $ 130,401 $ 125,256 Purchased deposits ...... -- -- -- Net deposits ............ 5,723 (2,213) 246 Interest credited ....... 5,802 4,917 4,899 --------- --------- --------- Ending balance .......... $ 144,630 $ 133,105 $ 130,401 ========= ========= ========= Net increase ............ $ 11,525 $ 2,704 $ 5,145 ========= ========= ========= Percent increase ........ 8.66% 2.07% 4.11% ========= ========= =========
The following table sets forth the dollar amount of deposits in the various types of deposit programs offered by the Bank at the dates indicated.
June 30, ------------------------------------------------------------------------------------- 2001 2000 1999 -------------------------- -------------------------- ---------------------- Percent Percent Percent Amount of Total Amount of Total Amount of Total ------ -------- ------ -------- ------ -------- (Dollars in Thousands) Interest Rate Range: ------------------- Passbook Accounts.................... $ 35,376 24.46% $ 37,775 28.38% $45,653 35.01% Demand accounts(1)................... 9,161 6.33 8,876 6.67 8,171 6.26 Money Market Accounts................ 5,621 3.88 2,884 2.17 568 0.44 NOW Accounts......................... 7,129 4.93 7,539 5.66 6,640 5.09 --------- ------ --------- ------ Total Non-Certificates............... 57,287 39.60 57,074 42.88 61,032 46.80 --------- ------ --------- ------ ------- ------ Certificates: ------------- 0.00 - 3.99%....................... 2,293 1.59 --- --- --- --- 4.00 - 5.99%....................... 26,651 18.43 37,129 27.89 53,305 40.88 6.00 - 7.99%....................... 58,319 40.32 38,902 29.23 16,064 12.32 8.00 - 9.99%....................... 80 .06 -- --- --- --- --------- ------ --------- ------ Total Certificates................... 87,343 60.40 76,031 57.12 69,369 53.20 --------- ------ --------- ------- --------- ------- Total Deposits....................... $ 144,630 100.00% $ 133,105 100.00% $130,401 100.00% ======== ====== ========= ====== ======== ======
---------------- (1) Non-interest-bearing accounts. 22 The following table shows rate and maturity information for the Bank's certificates of deposit as of June 30, 2001.
0.00- 4.00- 6.00- Percent 3.99% 5.99% 7.99% Total of Total ----- ----- ----- ----- -------- (Dollars in Thousands) Certificate accounts maturing in quarter ending: September 30, 2001....................... $ 509 $ 4,908 $ 9,736 $15,153 17.35% December 31, 2001........................ 345 2,896 4,315 7,556 8.65 March 31, 2002........................... 982 4,063 3,832 8,877 10.16 June 30, 2002............................ 365 2,746 20,610 23,721 27.16 September 30, 2002....................... 32 3,280 12,379 15,691 17.97 December 31, 2002........................ 60 2,943 1,498 4,501 5.15 March 31, 2003........................... --- 473 1,565 2,038 2.33 June 30, 2003............................ --- 1,669 1,635 3,304 3.78 September 30, 2003....................... --- 608 144 752 .86 December 31, 2003........................ --- 301 298 599 .69 March 31, 2004........................... --- 670 137 807 .92 June 30, 2004............................ --- 458 195 653 .75 Thereafter............................... --- 1,636 2,055 3,691 4.23 ----- ------- ------- ------- ------ Total............................... 2,293 $26,651 $58,399 $87,343 100.00% ===== ======= ======= ======= ====== Percent of total......................... 2.63% 30.51% 66.86% 100.00% ===== ===== ===== ======
The following table indicates the amount of the Bank's certificates of deposit and other deposits by time remaining until maturity as of June 30, 2000.
Maturity -------------------------------------------------- Over Over 3 Months 3 to 6 6 to 12 Over or Less Months Months 12 months Total ------- ------ ------ --------- ----- (In Thousands) Certificates of deposit less than $100,000....... $10,926 $ 5,597 $ 24,441 $ 26,851 $ 67,815 Certificates of deposit of $100,000 or more...... 4,052 1,892 6,762 5,165 17,871 Public funds(1).................................. 175 67 1,395 20 1,657 ------- ------- -------- -------- -------- Total certificates of deposit.................... $15,153 $ 7,556 $32,598 $ 32,036 $ 87,343 ======= ======= ======= ======== ========
-------------------- (1)Deposits from governmental and other public entities. Generally, the Bank does not pay interest rates on its jumbo certificates of deposit (certificates of deposit with balances of $100,000 or more) in excess of the interest rates paid on certificates of deposit with balances of less than $100,000. 23 Borrowings. Although deposits are the Bank's primary source of funds, the Bank's policy has been to utilize borrowings when they are a less costly source of funds, can be invested at a positive interest rate spread or when the Bank desires additional capacity to fund loan demand. First Federal's borrowings historically have consisted of advances from the FHLB of Indianapolis upon the security of a blanket collateral agreement of a percentage of unencumbered loans. Such advances can be made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. At June 30, 2001, the Bank had $62.4 million in FHLB advances, and a $500,000 overdraft line of credit was available from the FHLB. From time to time, First Federal has entered into repurchase agreements through a nationally recognized broker-dealer firm. These agreements are accounted for as borrowings by the Bank and are secured by certain of the Bank's securities. The broker-dealer takes possession of the securities during the period that the repurchase agreement is outstanding. The terms of the agreements have typically ranged from 30 days to a maximum of six months. The proceeds of these transactions are used to meet cash flow needs of the Bank. At June 30, 2001, the Bank had no repurchase agreements outstanding. The following table sets forth the maximum month-end balance and average balance of FHLB advances and line of credit from the FHLB and securities sold under agreements to repurchase at the dates indicated.
Year Ended June 30, ------------------------------------ 2001 2000 1999 ---- ---- ---- (In thousands) Maximum Balance: --------------- FHLB advances and line of credit...................... $ 64,168 $66,300 $66,300 Securities sold under agreements to repurchase........ --- --- -- Average Balance: --------------- FHLB advances and line of credit...................... 62,585 64,770 62,106 Securities sold under agreements to repurchase........ --- --- -- Average Rate Paid On: -------------------- FHLB advances and line of credit...................... 6.02% 5.68% 5.73% Securities sold under agreements to repurchase........ -- --- --
24 The following table sets forth the Bank's borrowings at the dates indicated.
Year Ended June 30, --------------------------------------- 2001 2000 1999 ---------- ------------ ----------- (In thousands) FHLB advances and line of credit....... $ 62,397 $64,168 $66,300 Due to brokers......................... -- --- --- ---------- ------------ ----------- Total borrowings................... $ 62,397 $64,168 $66,300 ======== ======= =======
Subsidiary Activities As a federally chartered savings association, First Federal is permitted by OTS regulations to invest up to 2% of its assets, or $4.6 million at June 30, 2001, in the stock of, or loans to, service corporation subsidiaries. First Federal may invest an additional 1% of its assets in service corporations where such additional funds are used for inner city or community development purposes. In addition to investments in service corporations, federal associations are permitted to invest an unlimited amount in operating subsidiaries engaged solely in activities which a federal association may engage in directly. First Federal had no subsidiaries at June 30, 2001. Regulation General. First Federal is a federally chartered savings bank, the deposits of which are federally insured and backed by the full faith and credit of the United States Government. Accordingly, First Federal is subject to broad federal regulation and oversight extending to all its operations. The Bank is a member of the FHLB of Indianapolis and is subject to certain limited regulation by the Board of Governors of the Federal Reserve System ("Federal Reserve Board"). As the savings and loan holding company of First Federal, the Company also is subject to federal regulation and oversight. The purpose of the regulation of the Holding Company and other savings and loan holding companies is to protect subsidiary savings associations. The Bank is a member of the Savings Association Insurance Fund ("SAIF"), which together with the Bank Insurance Fund (the "BIF") are the two deposit insurance funds administered by the FDIC, and the deposits of the Bank are insured by the FDIC. As a result, the FDIC has certain regulatory and examination authority over the Bank. Certain of these regulatory requirements and restrictions are discussed below or elsewhere in this document. Federal Regulation of Savings Associations. The OTS has extensive authority over the operations of savings associations. As part of this authority, First Federal is required to file periodic reports with the OTS and is subject to periodic examinations by the OTS and the FDIC. When these examinations are conducted by the OTS and the FDIC, the examiners may require the Bank to provide for higher general or specific loan loss reserves. 25 All savings associations are subject to a semi-annual assessment, based upon the association's total assets, to fund the operations of the OTS. The Bank's OTS assessment for the fiscal year ended June 30, 2001 was approximately $55,000. The OTS also has extensive enforcement authority over all savings institutions and their holding companies, including First Federal and the Company. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with the OTS. Except under certain circumstances, public disclosure of final enforcement actions by the OTS is required. In addition, the investment, lending and branching authority of the Bank is prescribed by federal laws, and it is prohibited from engaging in any activities not permitted by such laws. For instance, no savings institution may invest in non-investment grade corporate debt securities. In addition, the permissible level of investment by federal associations in loans secured by non-residential real property may not exceed 400% of total capital, except with approval of the OTS. Federal savings associations are also generally authorized to branch nationwide. At June 30, 2001, First Federal was in compliance with each of the noted restrictions. The Bank's general permissible lending limit for loans-to-one borrower is the greater of $500,000 or 15% of unimpaired capital and surplus (except for loans fully secured by certain readily marketable collateral, in which case this limit is increased to 25% of unimpaired capital and surplus). At June 30, 2001, the Bank's lending limit under this restriction was approximately $3.0 million. First Federal is in compliance with the loans-to-one borrower limitation. The OTS, as well as the other federal banking agencies, has adopted guidelines establishing safety and soundness standards on such matters as loan underwriting and documentation, asset quality, earnings standards, internal controls and audit systems, interest rate risk exposure and compensation and other employee benefits. Any institution which fails to comply with these standards must submit a compliance plan. Insurance of Accounts and Regulation by the FDIC. First Federal is a member of the SAIF, which is administered by the FDIC. Deposits are insured up to applicable limits by the FDIC and such insurance is backed by the full faith and credit of the United States Government. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the SAIF or the BIF. The FDIC also has the authority to initiate enforcement actions against savings associations, after giving the OTS an opportunity to take such action, and may terminate the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices, or is in an unsafe or unsound condition. 26 The FDIC's deposit insurance premiums are assessed through a risk-based system, under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their level of capital and supervisory evaluation. Under the system, institutions classified as well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1 or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at least 6% and a risk-based capital ratio of at least 10%) and considered healthy pay the lowest premium while institutions that are less than adequately capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a risk-based capital ratio of less than 8%) and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions will be made by the FDIC for each semi-annual assessment period. As of June 30, 2001, the Bank met the requirements of a well- capitalized institution. The premium schedule for BIF and SAIF insured institutions ranged from 0 to 27 basis points. However, SAIF insured institutions and BIF insured institutions are required to pay a Financing Corporation assessment in order to fund the interest on bonds issued to resolve thrift failures in the 1980s. This amount is currently equal to about 1.88 points for each $100 in domestic deposits for BIF and SAIF insured institutions. These assessments, which may be revised based upon the level of BIF and SAIF deposits, will continue until the bonds mature in 2017 through 2019. Regulatory Capital Requirements. Federally insured savings associations, such as the Bank, are required to maintain a minimum level of regulatory capital. The OTS has established capital standards, including a tangible capital requirement, a leverage ratio (or core capital) requirement and a risk-based capital requirement applicable to such savings associations. These capital requirements must be generally as stringent as the comparable capital requirements for national banks. The OTS is also authorized to impose capital requirements in excess of these standards on individual associations on a case-by-case basis. The capital regulations require tangible capital of at least 1.5% of adjusted total assets (as defined by regulation). Tangible capital generally includes common stockholders' equity and retained income, and certain noncumulative perpetual preferred stock and related income. In addition, all intangible assets, other than a limited amount of purchased mortgage servicing rights, must be deducted from tangible capital for calculating compliance with this requirement. At June 30, 2001, First Federal did not have any unamortized purchased mortgage servicing rights, but did have certain intangible assets related to the purchase of the branch in South Whitley, Indiana. The OTS regulations establish special capitalization requirements for savings associations that own subsidiaries. As of June 30, 2001, the Bank had no subsidiaries. At June 30, 2001, the Bank had tangible capital of $18.4 million, or 8.07% of adjusted total assets, which is approximately $9.3 million above the minimum requirement of 4.0% of adjusted total assets in effect on that date. The capital standards also effectively require core capital equal to at least 4% of adjusted total assets. Core capital generally consists of tangible capital plus certain intangible assets, 27 including a limited amount of purchased credit card relationships. At June 30, 2001 the Bank had certain intangible assets related to the branch purchase which were subject to these tests. At June 30, 2001, the Bank had core capital equal to $18.4 million, or 8.07% of adjusted total assets, which is $9.3 million above the minimum leverage ratio requirement of 4% as in effect on that date. The OTS risk-based requirement requires savings associations to have total capital of at least 8% of risk-weighted assets. Total capital consists of core capital, as defined above, and supplementary capital. Supplementary capital consists of certain permanent and maturing capital instruments that do not qualify as core capital and general valuation loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used to satisfy the risk-based requirement only to the extent of core capital. The OTS is also authorized to require a savings association to maintain an additional amount of total capital to account for concentration of credit risk and the risk of non-traditional activities. At June 30, 2001, First Federal had no capital instruments that qualify as supplementary capital and $1.8 million of general loss reserves, which was not more than 1.25% of risk-weighted assets. Certain exclusions from capital and assets are required to be made for the purpose of calculating total capital. Such exclusions consist of equity investments (as defined by regulation) and that portion of land loans and nonresidential construction loans in excess of an 80% loan-to-value ratio and reciprocal holdings of qualifying capital instruments. First Federal had no such exclusions from capital and assets at June 30, 2001. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet items, will be multiplied by a risk weight, ranging from 0% to 100% based on the risk inherent in the type of asset. For example, the OTS has assigned a risk weight of 50% for prudently underwritten permanent one- to four-family first lien mortgage loans not more than 90 days delinquent and having a loan to value ratio of not more than 80% at origination unless insured to such ratio by an insurer approved by the Fannie Mae or Freddie Mac. On June 30, 2001, the Bank had total risk-based capital of $20.1 million (including $18.4 million in core capital and $1.7 million in qualifying supplementary capital) and risk-weighted assets of $148.0 million (including, converted off-balance sheet assets); or total capital of 13.6% of risk-weighted assets. This amount was $8.3 million above the 8.0% requirement in effect on that date. The OTS and the FDIC are authorized and, under certain circumstances required, to take certain actions against savings associations that fail to meet their capital requirements. The OTS is generally required to take action to restrict the activities of an "undercapitalized association" (generally defined to be an association with less than either a 4% core capital ratio, a 4% Tier 1 risk-based capital ratio or an 8% risk-based capital ratio). Any such association must submit a capital restoration plan and until such plan is approved by the OTS may not increase its assets, acquire another institution, establish a branch or engage in any new activities, and generally may 28 not make capital distributions. The OTS is authorized to impose the additional restrictions, discussed below, that are applicable to significantly undercapitalized associations. As a condition to the approval of the capital restoration plan, any company controlling an undercapitalized association must agree that it will enter into a limited capital maintenance guarantee with respect to the institution's achievement of its capital requirements. Any savings association that fails to comply with its capital plan or is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios of less than 3% or a risk-based capital ratio of less than 6%) must be made subject to one or more additional actions and operating restrictions which may cover all aspects of its operations and include a forced merger or acquisition of the association; and any other action the OTS deems appropriate. An association that becomes "critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is subject to further mandatory restrictions on its activities in addition to those applicable to significantly undercapitalized associations. In addition, the OTS must appoint a receiver (or conservator with the concurrence of the FDIC) for a savings association, with certain limited exceptions, within 90 days after it becomes critically undercapitalized. Any undercapitalized association is also subject to the general enforcement authority of the OTS and the FDIC, including the appointment of a receiver or conservator. The OTS is also generally authorized to reclassify an association into a lower capital category and impose the restrictions applicable to such category if the institution is engaged in unsafe or unsound practices or is in an unsafe or unsound condition. The imposition by the OTS or the FDIC of any of these measures on the Bank may have a substantial adverse effect on the Bank's operations and profitability. Limitations on Dividends and Other Capital Distributions. OTS regulations impose various restrictions or requirements on savings associations with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account. OTS regulations permit a federal savings association to pay dividends in any calendar year equal to net income for that year plus retained earnings for the preceding two years (less any dividends paid). Qualified Thrift Lender Test. All savings associations, including the Bank, are required to meet a qualified thrift lender ("QTL") test to avoid certain restrictions on their operations. At June 30, 2001, the Bank met the test and has always met the test since its effectiveness. The test requires a savings association to have at least 65% of its portfolio assets (as defined by regulation) in qualified thrift investments on a monthly average in nine out of every 12 months on a rolling basis. As an alternative, the savings association may maintain 60% of its assets in those assets specified in Section 7701(a)(19) of the Internal Revenue Code. Under either test, such assets primarily consist of residential housing, related loans and investments. 29 Any savings association that fails to meet the QTL test must convert to a national bank charter, unless it requalifies as a QTL and thereafter remains a QTL. If an association does not requalify and converts to a national bank charter, it must remain SAIF-insured until the FDIC permits it to transfer to the BIF. If such an association has not yet requalified or converted to a national bank, its new investments and activities are limited to those permissible for both a savings association and a national bank, and it is limited to national bank branching rights in its home state. In addition, the association is immediately ineligible to receive any new FHLB borrowings and is subject to national bank limits for payment of dividends. If such association has not requalified or converted to a national bank within three years after the failure, it must divest of all investments and cease all activities not permissible for a national bank. In addition, it must repay promptly any outstanding FHLB borrowings, which may result in prepayment penalties. If any association that fails the QTL test is controlled by a holding company, then within one year after the failure, the holding company must register as a bank holding company and become subject to all restrictions on bank holding companies. See "- Holding Company Regulation." Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"), every FDIC insured institution has a continuing and affirmative obligation consistent with safe and sound banking practices to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with the examination of the Bank, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications, such as a merger or the establishment of a branch, by the Bank. An unsatisfactory rating may be used as the basis for the denial of an application by the OTS. The federal banking agencies, including the OTS, have recently revised the CRA regulations and the methodology for determining an institution's compliance with the CRA. Due to the heightened attention being given to the CRA in the past few years, the Bank may be required to devote additional funds for investment and lending in its local community. The Bank was examined for CRA compliance in June 1996 and received a rating of satisfactory. Transactions with Affiliates. Generally, transactions between a savings association or its subsidiaries and its affiliates are required to be on terms as favorable to the association as trans actions with non-affiliates. In addition, certain of these transactions, such as loans to an affiliate, are restricted to a percentage of the association's capital. Affiliates of First Federal include the Company and any company which is under common control with the Bank. In addition, a savings association may not lend to any affiliate engaged in activities not permissible for a bank holding company or acquire the securities of most affiliates. The OTS has the discretion to treat subsidiaries of savings associations as affiliates on a case by case basis. Certain transactions with directors, officers or controlling persons are also subject to conflict of interest regulations enforced by the OTS. These conflict of interest regulations and other statutes also impose restrictions on loans to such persons and their related interests. Among other things, 30 such loans must be made on substantially the same terms and conditions as loans to unaffiliated persons. At June 30, 2001, the Bank was in compliance with the above restrictions. Holding Company Regulation. The Company is a unitary savings and loan holding company subject to regulatory oversight by the OTS. As such, the Company is registered and files reports with the OTS and is subject to regulation and examination by the OTS. In addition, the OTS has enforcement authority over the Company and its non-savings association subsidiaries which also permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association. As a unitary savings and loan holding company that has been in existence prior to May 4, 1999, the Company generally is not subject to activity restrictions. If the Company acquires control of another savings association as a separate subsidiary, it would become a multiple savings and loan holding company, and the activities of the Company and any of its subsidiaries (other than the Bank or any other SAIF-insured savings association) would become subject to such restrictions unless such other associations each qualify as a QTL and were acquired in a supervisory acquisition. If the Bank fails the QTL test, the Company must obtain the approval of the OTS prior to continuing after such failure, directly or through its other subsidiaries, any business activity other than those approved for multiple savings and loan holding companies or their subsidiaries. In addition, within one year of such failure the Company must register as, and will become subject to, the restrictions applicable to bank holding companies. The activities authorized for a bank holding company are more limited than are the activities authorized for a unitary or multiple savings and loan holding company. See "Qualified Thrift Lender Test." Federal Securities Law. The stock of the Company is registered with the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the SEC under the Exchange Act. Company stock held by persons who are affiliates (generally officers, directors and principal stockholders) of the Company may not be resold without registration or unless sold in accordance with certain resale restrictions. If the Company meets specified current public information requirements, each affiliate of the Company is able to sell in the public market, without registration, a limited number of shares in any three-month period. Federal Reserve System. The Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily checking, NOW and Super NOW checking accounts). At June 30, 2001, the Bank was in compliance with these reserve requirements. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements that may be imposed by the OTS. Savings associations are authorized to borrow from the Federal Reserve Bank "discount window," but Federal Reserve Board regulations require associations to exhaust other reasonable 31 alternative sources of funds, including FHLB borrowings, before borrowing from the Federal Reserve Bank. Federal Home Loan Bank System. The Bank is a member of the FHLB of Indianapolis, which is one of 12 regional FHLBs that administers the home financing credit function of savings associations. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of directors of the FHLB which are subject to the oversight of the Federal Housing Finance Board. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term advances are required to provide funds for residential home financing. As a member, First Federal is required to purchase and maintain stock in the FHLB of Indianapolis. At June 30, 2001, First Federal had $3.4 million in FHLB stock, which was in compliance with this requirement. In past years, the Bank has received substantial dividends on its FHLB stock. Over the past five fiscal years such dividends have averaged 8.0% and were 8.0% for the fiscal year ended June 30, 2001. For the year ended June 30, 2001, dividends paid by the FHLB of Indianapolis to First Federal totaled $283,000 and was approximately $272,000 in fiscal year 2000. The $283,000 dividend received for the fiscal year ended June 30, 2001 reflects an annualized rate of 8.3%. Federal Taxation. In addition to the regular income tax, corporations, including savings associations such as the Bank, generally are subject to a minimum tax. An alternative minimum tax is imposed at a minimum tax rate of 20% on alternative minimum taxable income, which is the sum of a corporation's regular taxable income (with certain adjustments) and tax preference items, less any available exemption. The alternative minimum tax is imposed to the extent it exceeds the corporation's regular income tax and net operating losses can offset no more than 90% of alternative minimum taxable income. 32 A portion of the Bank's reserves for losses on loans may not, without adverse tax consequences, be utilized for the payment of cash dividends or other distributions to a shareholder (including distributions on redemption, dissolution or liquidation) or for any other purpose (except to absorb bad debt losses). As of June 30, 2001, the portion of the Bank's reserves subject to this treatment for tax purposes totaled approximately $1.2 million. The Company and its subsidiaries file consolidated federal income tax returns on a fiscal year basis using the accrual method of accounting. The Company and its subsidiaries have not been audited by the IRS within the last ten years. Indiana Taxation. The State of Indiana imposes an 8.5% franchise tax on the net income (as defined) for financial (including thrift) institutions, exempting them from the current gross income, supplemental net income and intangible taxes. Net income for franchise tax purposes will constitute federal taxable income before net operating loss deductions and special deductions, adjusted for certain items, including Indiana income taxes, tax exempt interest and bad debts. Other applicable Indiana taxes include sales, use and property taxes. Delaware Taxation. As a Delaware holding company, the Holding Company is exempted from Delaware corporate income tax but is required to file an annual report with and pay an annual fee to the State of Delaware. The Company is also subject to an annual franchise tax imposed by the State of Delaware which is generally based upon authorized shares. Competition First Federal faces strong competition, both in originating real estate and other loans and in attracting deposits. Competition in originating real estate loans comes primarily from other commercial banks, savings associations, credit unions and mortgage bankers making loans secured by real estate located in the Bank's market area. Commercial banks and finance companies provide vigorous competition in consumer lending. The Bank competes for real estate and other loans principally on the basis of the quality of services it provides to borrowers, interest rates and loan fees it charges, and the types of loans it originates. The Bank attracts all of its deposits through its retail banking offices, primarily from the communities in which those retail banking offices are located; therefore, competition for those deposits is principally from other commercial banks, savings associations and credit unions located in the same communities, as well as mutual funds. The Bank competes for these deposits by offering a variety of deposit accounts at competitive rates, convenient business hours, and convenient branch locations with interbranch deposit and withdrawal privileges at each. The Bank serves Wabash, Kosciukso, Grant, Miami, Huntington, Whitley, Allen, Noble and Elkhart Counties in Indiana. The Bank's primary market area, however, is the Counties of Wabash, Kosciukso and Whitley, Indiana. There are four commercial banks and one credit union which compete for deposits and loans in Wabash County. In Kosciukso County, there are six commercial banks, one credit union and one savings bank competing for market share. In Whitley County, there are five commercial banks, one credit union and one savings bank competing for market share. 33 Employees At June 30, 2001, the Company and its affiliates had a total of 66 employees, including 11 part-time employees. The Company's employees are not represented by any collective bargaining group. Management considers its employee relations to be good. Executive Officers of the Company and the Bank Who Are Not Directors The following information as to the business experience during the past five years is supplied with respect to executive officers of the Company and the Bank who do not serve on the Company's or the Bank's Board of Directors. There are no arrangements or understandings between the persons named and any other person pursuant to which such officers were selected. Christine Noonan, age 51, is Vice President and Chief Operations Officer and Secretary of First Federal, and also serves as Secretary of the Company. Mrs. Noonan joined First Federal in 1987 as secretary to the President and became the Data Processing Manager in 1989. Other duties over the years include new accounts, customer service, IRA administrator, loan clerk, mortgage lending, and compliance. Prior to joining First Federal, Mrs. Noonan worked for a company in Warsaw, Indiana for nine years that handled all aspects of qualified pension plans and financial planning. Timothy A. Sheppard, age 33, is Vice President and Controller of First Federal, and also serves as Treasurer and Chief Accounting Officer of the Company, positions he has held since October 2000. Prior to joining First Federal, Mr. Sheppard was employed by Home Bancorp and Home Loan Bank fsb located in Fort Wayne, Indiana from 1995 to 2000 in a variety of positions, including Assistant Treasurer from 1995 to 1999 and Treasurer from 1999 to 2000. Noah T. Smith, age 30, is Vice President of Commercial Loans of First Federal, a position he has held since August 2000. Prior to joining First Federal, Mr. Smith was employed by Indiana Lawrence Bank located in North Manchester, Indiana from 1993 to 2000 in a variety of lending positions, including Assistant Vice President from 1997 to 2000. 34 Item 2. Description of Property ----------------------- The Bank conducts its business at its main office and three other locations in its primary market area. The Bank owns all of its offices. The total net book value of the Bank's premises and equipment (including land, buildings and furniture, fixtures and equipment) at June 30, 2001 was $2.1 million. See Note 6 of Notes to Consolidated Financial Statements in the Annual Report attached as Exhibit 13. The following table sets forth information relating to each of the Bank's offices as of June 30, 2001. Date Total Approximate Location Acquired Square Footage -------- -------- -------------- Main Office: 1982 10,185(1) 1205 N. Cass Street Wabash, Indiana 500 S. Huntington 1977 2,400(2) Syracuse, Indiana(2) 1306 Street Road 114 West N. 1968 1,325 Manchester, Indiana 105 E. Columbia Street 1997 5,300(4) South Whitley, Indiana(3) ----------------------- (1) The Bank leases space in this office to its affiliate, FirstFed Financial. (2) A new branch at this site was completed in September 1995. (3) NBD Bank Branch acquired on June 13, 1997. (4) Includes basement. Item 3. Legal Proceedings ----------------- The Company and First Federal are involved from time to time as plaintiff or defendant in various legal actions arising in the normal course of its business. FirstFed, the Company's other wholly-owned subsidiary is not a party to any legal action. While the ultimate outcome of these proceedings cannot be predicted with certainty, it is the opinion of management, after consultation with counsel representing the Company and First Federal in the proceedings, that the resolution of these proceedings should not have a material effect on the Company's consolidated financial position or results of operations. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended June 30, 2001. 35 PART II Item 5. Market for Common Equity and Related Stockholder Matters -------------------------------------------------------- Page 32 of the attached 2001 Annual Report to Stockholders is herein incorporated by reference. Item 6. Management's Discussion and Analysis or Plan of Operation --------------------------------------------------------- Pages 4 through 11 of the attached 2001 Annual Report to Stockholders are herein incorporated by reference. Item 7. Financial Statements -------------------- The following information appearing in the Company's Annual Report to Stockholders for the year ended June 30, 2001, is incorporated by reference in this Annual Report on Form 10-KSB as Exhibit 13. Pages in Annual Annual Report Section Report --------------------- ------ Report of Independent Auditors....................................... 11 Consolidated Balance Sheets as of June 30, 2001 and 2000............. 12 Consolidated Statements of Income Years Ended June 30, 2001, 2000 and 1999............................. 13 Consolidated Statement of Changes in Shareholders' Equity Years Ended June 30, 2001, 2000 and 1999............................. 14 Consolidated Statements of Cash Flows Years Ended June 30, 2001, 2000 and 1999............................. 15 Notes to Consolidated Financial Statements........................... 16 to 30 With the exception of the information listed in Items 5-7 above, the Company's Annual Report to Stockholders for the year ended June 30, 2001, is not deemed filed as part of this Annual Report on Form 10-KSB. 36 Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure ------------------------------------------------------------ There has been no Current Report on Form 8-K filed within 24 months prior to the date of the most recent financial statements reporting a change of accountants and/or reporting disagreements on any matter of accounting principle or financial statement disclosure. PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act ------------------------------------------------------------- Directors --------- Information concerning Directors of the Company is incorporated herein by reference from the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on October 23, 2001. Executive Officers ------------------ Information regarding the business experience of the executive officers of the Company and the Bank contained in Part I of this Form 10-KSB is incorporated herein by reference. Section 16(a) Beneficial Ownership Reporting Compliance ------------------------------------------------------- Information concerning Section 16(a) Beneficial Ownership Reporting Compliance is incorporated herein by reference from the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on October 23, 2001. Item 10. Executive Compensation ---------------------- Information concerning executive compensation is incorporated herein by reference from the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on October 23, 2001. Item 11. Security Ownership of Certain Beneficial Owners and Management -------------------------------------------------------------- Information concerning security ownership of certain beneficial owners and management is incorporated herein by reference from the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on October 23, 2001. Item 12. Certain Relationships and Related Transactions ---------------------------------------------- 37 Information concerning certain relationships and related transactions is incorporated herein by reference from the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on October 23, 2001. PART IV Item 13. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits See Index to Exhibits. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended June 30, 2001. 38 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FFW CORPORATION Date: September 28, 2001 By: /s/ Roger K. Cromer ------------------ -------------------- ROGER K. CROMER (Duly Authorized Representative) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Roger K. Cromer /s/ Wayne W. Rees -------------------------------------------- ----------------- ROGER K. CROMER WAYNE W. REES --------------- ------------- President and Chief Executive Officer Chairman of the Board (Principal Executive and Operating Officer) Date: September 28, 2001 Date: September 28, 2001 ----- ------------------------------- ----- ------------------ /s/ Timothy A. Sheppard /s/ Joseph W. McSpadden -------------------------------------------- ----------------------- TIMOTHY A. SHEPPARD JOSEPH W. MCSPADDEN ------------------- ------------------- Treasurer (Principal Accounting Officer) Director Date: September 28, 2001 Date: September 28, 2001 ----- ------------------------------- ----- ------------------ /s/ J. Stanley Myers /s/ Ronald D. Reynolds -------------------------------------------- ---------------------- J. STANLEY MYERS RONALD D. REYNOLDS ---------------- ------------------ Director Director Date: September 28, 2001 Date: September 28, 2001 ----- ------------------------------- ------------------ /s/ Thomas L. Frank -------------------------------------------- THOMAS L. FRANK Director Date: September 28, 2001 39
Index to Exhibits Reference to Prior Filing Regulation S-B or Exhibit Exhibit Number Number Document Attached Hereto ------ -------- --------------- 3(i) Articles of Incorporation, including amendments * thereto 3(ii) By-Laws * 4 Instruments defining the rights of security * holders, including debentures 10 Executive Compensation Plans and Arrangements (a) Employment Contract between Roger K. ** Cromer and the Bank (b) 1992 Stock Option and Incentive Plan * (c) Management Recognition and Retention *** Plan (d) 1998 Omnibus Incentive Plan **** (e) Employment Agreement between Timothy 10(e) A. Sheppard and the Company (f) Employment Agreement between Noah T. 10(f) Smith and the Company (g) Employment Agreement between 10(g) Christine K. Noonan and the Company 11 Statement re: computation of per share earnings ***** 13 Annual Report to Security Holders 13 21 Subsidiaries of Registrant 21 23 Consents of Experts and Counsel 23
----------------------- * Filed as an Exhibit to the Company's Form S-1 Registration Statement filed on December 21, 1992 (File No. 33-56110) pursuant to Section 5 of the Securities Act of 1933. Such previously filed document is hereby incorporated herein by reference in accordance with Item 601 of Regulation S-B. ** Filed as Exhibit 10(b) to the Company's Annual Report on Form 10-KSB for the fiscal year ended June 30, 1999 (File No. 0-21170). This previously filed document is incorporated herein by reference in accordance with Item 601 of Regulation S-B. 40 *** Filed as Exhibit 10-1 to the Company's Annual Report on Form 10-KSB for the fiscal year ended June 30, 1994 (File No. 0-21170). This previously filed document is hereby incorporated herein by reference in accordance with Item 601 of Regulation S-B. **** Filed as an Exhibit to the Company's Definitive Proxy Statement on Schedule 14A on September 25, 1998 (File No. 0-21170). This previously filed document is hereby incorporated herein by reference in accordance with Item 601 of Regulation S-B. ***** See Note 2 of Notes to Consolidated Financial Statements included in the Annual Report to Security Holders under Exhibit 13. 41 EX-10 3 ex-10.txt EX-10 Exhibit 10(e) EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of this first day of January, 2001, by and between FFW Corporation (the "Company") and Timothy A. Sheppard (the "Executive"). WHEREAS, the Executive is currently serving as the Vice President - Treasurer and Controller of the Company; and WHEREAS, the Executive has made and will make a major contribution to the Company in the position of Vice President - Treasurer and Controller of the Company; and WHEREAS, the board of directors of the Company (the "Board of Directors") recognizes that the possibility of a change in control of the Company may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of key management personnel to the detriment of the Company; and WHEREAS, the Board of Directors believes it is in the best interests of the Company to enter into this Agreement with the Executive in order to assure continuity of management of the Company and to reinforce and encourage the continued attention and dedication of the Executive to his assigned duties without distraction in the face of potentially disruptive circumstances arising from the possibility of a change in control, although no such change is now contemplated; and WHEREAS, the Board of Directors has approved and authorized the execution of this Agreement with the Executive to take effect as stated in Section 2 hereof. NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein, it is AGREED as follows: 1. Definitions. ----------- (a) The term "Bank" means First Federal Savings Bank. (b) The term "Change in Control" means (1) an event of a nature that (i) results in a change in control of the Bank or the Company within the meaning of the Home Owners' Loan Act of 1933 and 12 C.F.R. Part 574 as in effect on the date hereof; or (ii) would be required to be reported in response to Item 1 of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); (2) any person (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities of the Bank or the Company representing 20% or more of the Bank's or the Company's outstanding securities; or (3) individuals who are members of the board of directors of the Bank or the Company on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Company's stockholders was approved by the nominating committee serving under an Incumbent Board, shall be considered a member of the Incumbent Board. The term "Change in Control" shall not include an acquisition of securities by an employee benefit plan of the Bank or the Company. In the application of 12 C.F.R. Part 574 to a determination of a Change in Control, determinations to be made by the OTS or its Director under such regulations shall be made by the Board of Directors. (c) The term "Date of Termination" means the earlier of (1) the date upon which the Company gives notice to the Executive of the termination of his employment with the Company, or (2) the date upon which the Executive ceases to serve as an employee of the Company. (d) The term "Involuntary Termination" means termination of the employment of the Executive without his express written consent, and shall include a material diminution of or interference with the Executive's duties, responsibilities and benefits as the Vice President - Treasurer and Controller of the Company, including (without limitation) any of the following actions unless consented to in writing by the Executive: (1) a change in the principal workplace of the Executive to a location outside of a 30 mile radius from the Company's headquarters office as of the date hereof; (2) a material demotion of the Executive; (3) a material reduction in the number or seniority of other Company personnel reporting to the Executive or a material reduction in the frequency with which, or in the nature of the matters with respect to which, such personnel are to report to the Executive, other than as part of an Bank- or Company-wide reduction in staff; (4) a material adverse change in the Executive's salary, perquisites, benefits, contingent benefits or vacation, other than as part of an overall program applied uniformly and with equitable effect to all members of the senior management of the Company; and (5) a material permanent increase in the required hours of work or the workload of the Executive. The term "Involuntary Termination" does not include Termination for Cause or termination of employment due to retirement, death, disability or suspension or temporary or permanent prohibition from participation in the conduct of the Company's affairs under Section 8 of the Federal Deposit Insurance Act ("FDIA"). (e) The terms "Termination for Cause" and "Terminated For Cause" mean termination of the employment of the Executive because of the Executive's personal dishonesty, incompetence, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and- desist order, supervisory agreement or similar agreement or order, or material breach of any provision of this Agreement. No act, or failure to act, on the Executive part shall be considered "willful" unless the Executive has acted (or failed to act) with an absence of good faith and without reasonable belief that the Executive's action or failure to act was in the best interest of the Company. 2. Term. The term of this Agreement shall be a period of one year commencing on the date first above written (the "Commencement Date"), subject to earlier termination as provided herein. Beginning on the first day of the month following the Commencement Date, and on the first day of each month thereafter (the "Renewal Month"), the term of this Agreement shall be extended until the day preceding the first anniversary of the Renewal Month, provided that neither the Executive nor the Company has given notice to the other in writing at least 90 days prior to such anniversary that the term of this Agreement shall not be extended further. Reference herein to the term of this Agreement shall refer to both such initial term and such extended terms. 3. Employment. The Executive is employed as the Vice president - Treasurer and Controller of the Company. As Vice President - Treasurer and Controller Executive shall render administrative and management services as are customarily performed by persons situated in similar executive capacities, and 2 shall have such other powers and duties of an officer of the Company as the Board of Directors may prescribe from time to time, provided that such duties are consistent with the Executive's position as Vice President - Treasurer and Controller. The Executive shall continue to devote his best efforts and substantially all his business time and attention to the business and affairs of the Company and its subsidiaries and affiliated companies. 4. Compensation. ------------ (a) Salary. The Company agrees to pay the Executive during the term of this Agreement the salary established by the Board of Directors, which shall be at least the Executive's salary in effect as of the Commencement Date. The Executive's salary shall be payable in accordance with the payroll practices of the Company as applicable to the executive officers of the Company. The amount of the Executive's salary shall be reviewed by the Board of Directors not less often than annually, beginning not later than the first anniversary of the Commencement Date. Adjustments in salary or other compensation shall not limit or reduce any other obligation of the Company under this Agreement. The Executive's salary in effect from time to time during the term of this Agreement shall not thereafter be reduced. (b) Discretionary Bonuses. The Executive shall be entitled to participate in an equitable manner with all other executive officers of the Company in discretionary bonuses as authorized and declared by the Board of Directors to its executives. No other compensation provided for in this Agreement shall be deemed a substitute for the Executive's right to participate in such bonuses when and as declared by the Board of Directors. (c) Expenses. The Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in performing services under this Agreement in accordance with the policies and procedures applicable to the executive officers of the Company, provided that the Executive properly accounts for such expenses in accordance with such policies and procedures. 5. Benefits. -------- (a) Participation in Retirement and Executive Benefit Plans. The Executive shall be entitled to participate in all plans relating to stock options, pension, thrift, profit-sharing, group life insurance, medical and dental coverage, education, cash bonuses, and other retirement or employee benefits or combinations thereof, that are now or hereafter maintained for the benefit of the Company's executive employees or its employees generally. Nothing herein shall preclude the Company from providing other benefits to the Executive independent of or separate from those provided to other executive officers or its executives generally. (b) Fringe Benefits. The Executive shall continue to receive during the term of his employment hereunder the fringe benefits and perquisites that are in effect on the Commencement Date. In addition, the Executive shall be eligible to participate in, and receive benefits under, any other fringe benefit plans which are or may become applicable to the Company's executive officers; provided, however, that such fringe benefits shall include the payment by the Company of the Executive's annual dues to a country club selected by the Executive and approved in writing by the Company, such approval not to be unreasonably withheld. 3 6. Vacations; Leave. The Executive shall be entitled to annual paid vacation in accordance with the policies established by the Company's Board of Directors for executive employees and to voluntary leave of absence, with or without pay, from time to time at such times and upon such conditions as the Board of Directors of the Company may determine in its discretion; provided, however that in no event shall the Executive's annual vacation be less than 3 weeks. The Executive shall also be entitled to all paid holidays given by the Company to its executive officers. 7. Termination of Employment. ------------------------- (a) Involuntary Termination. The Board of Directors may terminate the Executive's employment at any time, but, except in the case of Termination for Cause, termination of employment shall not prejudice the Executive's right to compensation or other benefits under this Agreement. In the event of Involuntary Termination other than in connection with or within 12 months after a Change in Control, (1) the Company shall pay to the Executive during the remaining term of this Agreement, his salary at the rate in effect immediately prior to the Date of Termination, payable in such manner and at such times as such salary would have been payable to the Executive under Section 2 if the Executive had continued to be employed by the Company, and (2) the Company shall provide to the Executive during the remaining term of this Agreement health benefits as maintained by the Company for the benefit of its executive officers from time to time during the remaining term of the Agreement or substantially the same health benefits as the Company maintained for its executive officers immediately prior to the Date of Termination. (b) Termination for Cause. In the event of Termination for Cause, the Company shall pay the Executive his salary through the Date of Termination, and the Company shall have no further obligation to the Executive under this Agreement. (c) Voluntary Termination. The Executive's employment may be voluntarily terminated by the Executive at any time upon 90 days written notice to the Company or upon such shorter period as may be agreed upon between the Executive and the Board of Directors of the Company. In the event of such voluntary termination, the Company shall be obligated to continue to pay the Executive his salary and benefits through the Date of Termination, at the time such payments are due, and the Company shall have no further obligation to the Executive under this Agreement. (d) In Connection with Change in Control. In the event of Involuntary Termination in connection with or within (but not later than) 12 months after a Change in Control which occurs while the Executive is employed under this Agreement, the Company shall, subject to Section 8 of this Agreement, (1) pay to the Executive during the 12-month period ending on the anniversary of his Termination Date, his salary at the rate in effect immediately prior to the Date of Termination, payable in such manner and at such times as such salary would have been payable to the Executive under Section 2 if the Executive had continued to be employed by the Company; and (2) provide to the Executive during the 12-month period ending on the anniversary of his Termination Date, such health benefits as are maintained for executive officers of the Company from time to time during the remaining term of this Agreement or substantially the same health benefits as the Company maintained for its executive officers immediately prior to the Change in Control. (e) Death; Disability. In the event of the death of the Executive while employed under this Agreement and prior to any termination of employment, the Executive's estate, or such person as the Executive may have previously designated in writing, shall be entitled to receive from the Company the salary of the 4 Executive through the last day of the calendar month in which the Executive died. If the Executive becomes disabled as defined in the Company's then current disability plan or if the Executive is otherwise unable to serve as Vice-President - Treasurer and Controller, the Executive shall be entitled to receive group and other disability income benefits of the type then provided by the Company for executive officers. (f) Temporary Suspension or Prohibition. If the Executive is suspended and/or temporarily prohibited from participating in the conduct of the Company's affairs by a notice served under Section 8(e)(3) or (g)(1) of the FDIA, 12 U.S.C. ss. 1818(e)(3) and (g)(1), the Company's obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Company may in its discretion (1) pay the Executive all or part of the compensation withheld while its obligations under this Agreement were suspended and (ii) reinstate in whole or in part any of its obligations which were suspended. (g) Permanent Suspension or Prohibition. If the Executive is removed and/or permanently prohibited from participating in the conduct of the Company's affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. ss. 1818(e)(4) and (g)(1), all obligations of the Company under this Agreement shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. (h) Default of the Company. If the Company is in default (as defined in Section 3(x)(1) of the FDIA), all obligations under this Agreement shall terminate as of the date of default, but this provision shall not affect any vested rights of the contracting parties. (i) Termination by Regulators. All obligations under this Agreement shall be terminated, except to the extent determined that continuation of this Agreement is necessary for the continued operation of the Company: (1) by the Director of the Office of Thrift Supervision (the "Director") or his or her designee, at the time the Federal Deposit Insurance Corporation enters into an agreement to provide assistance to or on behalf of the Company under the authority contained in Section 13(c) of the FDIA; or (2) by the Director or his or her designee, at the time the Director or his or her designee approves a supervisory merger to resolve problems related to operation of the Company or when the Company is determined by the Director to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by any such action. 8. Certain Reduction of Payments by the Company. --------------------------------------------- (a) Notwithstanding any other provision of this Agreement, if payments under this Agreement, together with any other payments received or to be received by the Executive in connection with a Change in Control would cause any amount to be nondeductible by the Company for federal income tax purposes pursuant to Section 280G of the Code, then benefits under this Agreement shall be reduced (not less than zero) to the extent necessary so as to maximize payments to the Executive without causing any amount to become nondeductible by the Bank or the Company. The Executive shall determine the allocation of such reduction among payments to the Executive. (b) Any payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. 1828(k) and any regulations promulgated thereunder. 5 9. No Mitigation. The Executive shall not be required to mitigate the amount of any salary or other payment or benefit provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits after the date of termination or otherwise. 10. Attorneys Fees. In the event the Company exercises its right of Termination for Cause, but it is determined by a court of competent jurisdiction or by an arbitrator pursuant to Section 17 that cause did not exist for such termination, or if in any event it is determined by any such court or arbitrator that the Company has failed to make timely payment of any amounts owed to the Executive under this Agreement, the Executive shall be entitled to reimbursement for all reasonable costs, including attorneys' fees, incurred in challenging such termination or collecting such amounts. Such reimbursement shall be in addition to all rights to which the Executive is otherwise entitled under this Agreement. 11. No Assignments. -------------- (a) This Agreement is personal to each of the parties hereto, and neither party may assign or delegate any of its rights or obligations hereunder without first obtaining the written consent of the other party; provided, however, that the Company shall require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by an assumption agreement in form and substance satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Failure of the Company to obtain such an assumption agreement prior to the effectiveness of any such succession or assignment shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the compensation pursuant to Section 7(d) hereof. For purposes of implementing the provisions of this Section 11(a), the date on which any such succession becomes effective shall be deemed the Date of Termination. (b) This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts would still be payable to the Executive hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee or other designee or if there is no such designee, to the Executive's estate. 12. Covenant Not to Compete. The Executive hereby covenants and agrees that, in the event of his termination of employment with the Company prior to the term of this Agreement, for a period of one year following the date of his termination of employment with the Company, he shall not, without the written consent of the Company, become an officer, employee, consultant, director or trustee of any savings bank, savings and loan association, savings and loan holding company, bank or bank holding company, or any direct or indirect subsidiary or affiliate of any such entity, where such entity or affiliate thereof has an office (defined broadly) within 25 miles of the main office of the Company or the main office of the Company's subsidiary, First Federal Savings. 6 13. Notice. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, to the Company at its home office, to the attention of the Board of Directors with a copy to the Secretary of the Company, or, if to the Executive, to such home or other address as the Executive has most recently provided in writing to the Company. 14. Amendments. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties, except as herein otherwise provided. 15. Headings. The headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. 16. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 17. Governing Law. This Agreement shall be governed by and is to be construed and enforced in accordance with the laws of the United States to the extent applicable and otherwise by the laws of the State of Indiana. 18. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES. Attest: FFW Corporation --------------------- --------------------------- Secretary By: Its: President, Roger K. Cromer Executive ---------------------------- Timothy A. Sheppard 7 Exhibit 10(f) EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of this first day of January, 2001, by and between FFW Corporation (the "Company") and Noah T. Smith (the "Executive"). WHEREAS, the Executive is currently serving as the Vice President - Commercial Lending of the Company; and WHEREAS, the Executive has made and will make a major contribution to the Company in the position of Vice President - Commercial Lending of the Company; and WHEREAS, the board of directors of the Company (the "Board of Directors") recognizes that the possibility of a change in control of the Company may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of key management personnel to the detriment of the Company; and WHEREAS, the Board of Directors believes it is in the best interests of the Company to enter into this Agreement with the Executive in order to assure continuity of management of the Company and to reinforce and encourage the continued attention and dedication of the Executive to his assigned duties without distraction in the face of potentially disruptive circumstances arising from the possibility of a change in control, although no such change is now contemplated; and WHEREAS, the Board of Directors has approved and authorized the execution of this Agreement with the Executive to take effect as stated in Section 2 hereof. NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein, it is AGREED as follows: 1. Definitions. ----------- (a) The term "Bank" means First Federal Savings Bank. (b) The term "Change in Control" means (1) an event of a nature that (i) results in a change in control of the Bank or the Company within the meaning of the Home Owners' Loan Act of 1933 and 12 C.F.R. Part 574 as in effect on the date hereof; or (ii) would be required to be reported in response to Item 1 of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); (2) any person (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities of the Bank or the Company representing 20% or more of the Bank's or the Company's outstanding securities; or (3) individuals who are members of the board of directors of the Bank or the Company on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Company's stockholders was approved by the nominating committee serving under an Incumbent Board, shall be considered a member of the Incumbent Board. The term "Change in Control" shall not include an acquisition of securities by an employee benefit plan of the Bank or the Company. In the application of 12 C.F.R. Part 574 to a determination of a Change in Control, determinations to be made by the OTS or its Director under such regulations shall be made by the Board of Directors. (c) The term "Date of Termination" means the earlier of (1) the date upon which the Company gives notice to the Executive of the termination of his employment with the Company, or (2) the date upon which the Executive ceases to serve as an employee of the Company. (d) The term "Involuntary Termination" means termination of the employment of the Executive without his express written consent, and shall include a material diminution of or interference with the Executive's duties, responsibilities and benefits as the Vice President - Commercial Lending of the Company, including (without limitation) any of the following actions unless consented to in writing by the Executive: (1) a change in the principal workplace of the Executive to a location outside of a 30 mile radius from the Company's headquarters office as of the date hereof; (2) a material demotion of the Executive; (3) a material reduction in the number or seniority of other Company personnel reporting to the Executive or a material reduction in the frequency with which, or in the nature of the matters with respect to which, such personnel are to report to the Executive, other than as part of an Bank- or Company-wide reduction in staff; (4) a material adverse change in the Executive's salary, perquisites, benefits, contingent benefits or vacation, other than as part of an overall program applied uniformly and with equitable effect to all members of the senior management of the Company; and (5) a material permanent increase in the required hours of work or the workload of the Executive. The term "Involuntary Termination" does not include Termination for Cause or termination of employment due to retirement, death, disability or suspension or temporary or permanent prohibition from participation in the conduct of the Company's affairs under Section 8 of the Federal Deposit Insurance Act ("FDIA"). (e) The terms "Termination for Cause" and "Terminated For Cause" mean termination of the employment of the Executive because of the Executive's personal dishonesty, incompetence, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and- desist order, supervisory agreement or similar agreement or order, or material breach of any provision of this Agreement. No act, or failure to act, on the Executive part shall be considered "willful" unless the Executive has acted (or failed to act) with an absence of good faith and without reasonable belief that the Executive's action or failure to act was in the best interest of the Company. 2. Term. The term of this Agreement shall be a period of one year commencing on the date first above written (the "Commencement Date"), subject to earlier termination as provided herein. Beginning on the first day of the month following the Commencement Date, and on the first day of each month thereafter (the "Renewal Month"), the term of this Agreement shall be extended until the day preceding the first anniversary of the Renewal Month, provided that neither the Executive nor the Company has given notice to the other in writing at least 90 days prior to such anniversary that the term of this Agreement shall not be extended further. Reference herein to the term of this Agreement shall refer to both such initial term and such extended terms. 3. Employment. The Executive is employed as the Vice president - Commercial Lending of the Company. As Vice President - Commercial Lending Executive shall render administrative and management services as are customarily performed by persons situated in similar executive capacities, and shall have such other powers and duties of an officer of the Company as the Board of Directors may prescribe from time to 2 time, provided that such duties are consistent with the Executive's position as Vice President - Commercial Lending. The Executive shall continue to devote his best efforts and substantially all his business time and attention to the business and affairs of the Company and its subsidiaries and affiliated companies. 4. Compensation. ------------ (a) Salary. The Company agrees to pay the Executive during the term of this Agreement the salary established by the Board of Directors, which shall be at least the Executive's salary in effect as of the Commencement Date. The Executive's salary shall be payable in accordance with the payroll practices of the Company as applicable to the executive officers of the Company. The amount of the Executive's salary shall be reviewed by the Board of Directors not less often than annually, beginning not later than the first anniversary of the Commencement Date. Adjustments in salary or other compensation shall not limit or reduce any other obligation of the Company under this Agreement. The Executive's salary in effect from time to time during the term of this Agreement shall not thereafter be reduced. (b) Discretionary Bonuses. The Executive shall be entitled to participate in an equitable manner with all other executive officers of the Company in discretionary bonuses as authorized and declared by the Board of Directors to its executives. No other compensation provided for in this Agreement shall be deemed a substitute for the Executive's right to participate in such bonuses when and as declared by the Board of Directors. (c) Expenses. The Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in performing services under this Agreement in accordance with the policies and procedures applicable to the executive officers of the Company, provided that the Executive properly accounts for such expenses in accordance with such policies and procedures. 5. Benefits. -------- (a) Participation in Retirement and Executive Benefit Plans. The Executive shall be entitled to participate in all plans relating to stock options, pension, thrift, profit-sharing, group life insurance, medical and dental coverage, education, cash bonuses, and other retirement or employee benefits or combinations thereof, that are now or hereafter maintained for the benefit of the Company's executive employees or its employees generally. Nothing herein shall preclude the Company from providing other benefits to the Executive independent of or separate from those provided to other executive officers or its executives generally. (b) Fringe Benefits. The Executive shall continue to receive during the term of his employment hereunder the fringe benefits and perquisites that are in effect on the Commencement Date. In addition, the Executive shall be eligible to participate in, and receive benefits under, any other fringe benefit plans which are or may become applicable to the Company's executive officers; provided, however, that such fringe benefits shall include the payment by the Company of the Executive's annual dues to a country club selected by the Executive and approved in writing by the Company, such approval not to be unreasonably withheld. 6. Vacations; Leave. The Executive shall be entitled to annual paid vacation in accordance with the policies established by the Company's Board of Directors for executive employees and to voluntary leave of 3 absence, with or without pay, from time to time at such times and upon such conditions as the Board of Directors of the Company may determine in its discretion; provided, however that in no event shall the Executive's annual vacation be less than 3 weeks. The Executive shall also be entitled to all paid holidays given by the Company to its executive officers. 7. Termination of Employment. ------------------------- (a) Involuntary Termination. The Board of Directors may terminate the Executive's employment at any time, but, except in the case of Termination for Cause, termination of employment shall not prejudice the Executive's right to compensation or other benefits under this Agreement. In the event of Involuntary Termination other than in connection with or within 12 months after a Change in Control, (1) the Company shall pay to the Executive during the remaining term of this Agreement, his salary at the rate in effect immediately prior to the Date of Termination, payable in such manner and at such times as such salary would have been payable to the Executive under Section 2 if the Executive had continued to be employed by the Company, and (2) the Company shall provide to the Executive during the remaining term of this Agreement health benefits as maintained by the Company for the benefit of its executive officers from time to time during the remaining term of the Agreement or substantially the same health benefits as the Company maintained for its executive officers immediately prior to the Date of Termination. (b) Termination for Cause. In the event of Termination for Cause, the Company shall pay the Executive his salary through the Date of Termination, and the Company shall have no further obligation to the Executive under this Agreement. (c) Voluntary Termination. The Executive's employment may be voluntarily terminated by the Executive at any time upon 90 days written notice to the Company or upon such shorter period as may be agreed upon between the Executive and the Board of Directors of the Company. In the event of such voluntary termination, the Company shall be obligated to continue to pay the Executive his salary and benefits through the Date of Termination, at the time such payments are due, and the Company shall have no further obligation to the Executive under this Agreement. (d) In Connection with Change in Control. In the event of Involuntary Termination in connection with or within (but not later than) 12 months after a Change in Control which occurs while the Executive is employed under this Agreement, the Company shall, subject to Section 8 of this Agreement, (1) pay to the Executive during the 12-month period ending on the anniversary of his Termination Date, his salary at the rate in effect immediately prior to the Date of Termination, payable in such manner and at such times as such salary would have been payable to the Executive under Section 2 if the Executive had continued to be employed by the Company; and (2) provide to the Executive during the 12-month period ending on the anniversary of his Termination Date, such health benefits as are maintained for executive officers of the Company from time to time during the remaining term of this Agreement or substantially the same health benefits as the Company maintained for its executive officers immediately prior to the Change in Control. (e) Death; Disability. In the event of the death of the Executive while employed under this Agreement and prior to any termination of employment, the Executive's estate, or such person as the Executive may have previously designated in writing, shall be entitled to receive from the Company the salary of the Executive through the last day of the calendar month in which the Executive died. If the Executive becomes disabled as defined in the Company's then current disability plan or if the Executive is otherwise unable to 4 serve as Vice-President - Commercial Lending, the Executive shall be entitled to receive group and other disability income benefits of the type then provided by the Company for executive officers. (f) Temporary Suspension or Prohibition. If the Executive is suspended and/or temporarily prohibited from participating in the conduct of the Company's affairs by a notice served under Section 8(e)(3) or (g)(1) of the FDIA, 12 U.S.C. ss. 1818(e)(3) and (g)(1), the Company's obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Company may in its discretion (1) pay the Executive all or part of the compensation withheld while its obligations under this Agreement were suspended and (ii) reinstate in whole or in part any of its obligations which were suspended. (g) Permanent Suspension or Prohibition. If the Executive is removed and/or permanently prohibited from participating in the conduct of the Company's affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. ss. 1818(e)(4) and (g)(1), all obligations of the Company under this Agreement shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. (h) Default of the Company. If the Company is in default (as defined in Section 3(x)(1) of the FDIA), all obligations under this Agreement shall terminate as of the date of default, but this provision shall not affect any vested rights of the contracting parties. (i) Termination by Regulators. All obligations under this Agreement shall be terminated, except to the extent determined that continuation of this Agreement is necessary for the continued operation of the Company: (1) by the Director of the Office of Thrift Supervision (the "Director") or his or her designee, at the time the Federal Deposit Insurance Corporation enters into an agreement to provide assistance to or on behalf of the Company under the authority contained in Section 13(c) of the FDIA; or (2) by the Director or his or her designee, at the time the Director or his or her designee approves a supervisory merger to resolve problems related to operation of the Company or when the Company is determined by the Director to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by any such action. 8. Certain Reduction of Payments by the Company. --------------------------------------------- (a) Notwithstanding any other provision of this Agreement, if payments under this Agreement, together with any other payments received or to be received by the Executive in connection with a Change in Control would cause any amount to be nondeductible by the Company for federal income tax purposes pursuant to Section 280G of the Code, then benefits under this Agreement shall be reduced (not less than zero) to the extent necessary so as to maximize payments to the Executive without causing any amount to become nondeductible by the Bank or the Company. The Executive shall determine the allocation of such reduction among payments to the Executive. (b) Any payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. 1828(k) and any regulations promulgated thereunder. 9. No Mitigation. The Executive shall not be required to mitigate the amount of any salary or other payment or benefit provided for in this Agreement by seeking other employment or otherwise, nor shall the 5 amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits after the date of termination or otherwise. 10. Attorneys Fees. In the event the Company exercises its right of Termination for Cause, but it is determined by a court of competent jurisdiction or by an arbitrator pursuant to Section 17 that cause did not exist for such termination, or if in any event it is determined by any such court or arbitrator that the Company has failed to make timely payment of any amounts owed to the Executive under this Agreement, the Executive shall be entitled to reimbursement for all reasonable costs, including attorneys' fees, incurred in challenging such termination or collecting such amounts. Such reimbursement shall be in addition to all rights to which the Executive is otherwise entitled under this Agreement. 11. No Assignments. -------------- (a) This Agreement is personal to each of the parties hereto, and neither party may assign or delegate any of its rights or obligations hereunder without first obtaining the written consent of the other party; provided, however, that the Company shall require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by an assumption agreement in form and substance satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Failure of the Company to obtain such an assumption agreement prior to the effectiveness of any such succession or assignment shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the compensation pursuant to Section 7(d) hereof. For purposes of implementing the provisions of this Section 11(a), the date on which any such succession becomes effective shall be deemed the Date of Termination. (b) This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts would still be payable to the Executive hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee or other designee or if there is no such designee, to the Executive's estate. 12. Covenant Not to Compete. The Executive hereby covenants and agrees that, in the event of his termination of employment with the Company prior to the term of this Agreement, for a period of one year following the date of his termination of employment with the Company, he shall not, without the written consent of the Company, become an officer, employee, consultant, director or trustee of any savings bank, savings and loan association, savings and loan holding company, bank or bank holding company, or any direct or indirect subsidiary or affiliate of any such entity, where such entity or affiliate thereof has an office (defined broadly) within 25 miles of the main office of the Company or the main office of the Company's subsidiary, First Federal Savings. 13. Notice. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, to the Company at its home office, to the 6 attention of the Board of Directors with a copy to the Secretary of the Company, or, if to the Executive, to such home or other address as the Executive has most recently provided in writing to the Company. 14. Amendments. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties, except as herein otherwise provided. 15. Headings. The headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. 16. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 17. Governing Law. This Agreement shall be governed by and is to be construed and enforced in accordance with the laws of the United States to the extent applicable and otherwise by the laws of the State of Indiana. 18. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES. Attest: FFW Corporation --------------------- --------------------------- Secretary By: Its: President, Roger K. Cromer Executive ---------------------------- Noah T. Smith 7 Exhibit 10(g) EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of this first day of January, 2001, by and between FFW Corporation (the "Company") and Christine K. Noonan (the "Executive"). WHEREAS, the Executive is currently serving as the Secretary and Vice President of Operations of the Company; and WHEREAS, the Executive has made and will make a major contribution to the Company in the positions of Secretary and Vice President of Operations of the Company; and WHEREAS, the board of directors of the Company (the "Board of Directors") recognizes that the possibility of a change in control of the Company may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of key management personnel to the detriment of the Company; and WHEREAS, the Board of Directors believes it is in the best interests of the Company to enter into this Agreement with the Executive in order to assure continuity of management of the Company and to reinforce and encourage the continued attention and dedication of the Executive to his assigned duties without distraction in the face of potentially disruptive circumstances arising from the possibility of a change in control, although no such change is now contemplated; and WHEREAS, the Board of Directors has approved and authorized the execution of this Agreement with the Executive to take effect as stated in Section 2 hereof. NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein, it is AGREED as follows: 1. Definitions. ----------- (a) The term "Bank" means First Federal Savings Bank. (b) The term "Change in Control" means (1) an event of a nature that (i) results in a change in control of the Bank or the Company within the meaning of the Home Owners' Loan Act of 1933 and 12 C.F.R. Part 574 as in effect on the date hereof; or (ii) would be required to be reported in response to Item 1 of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); (2) any person (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities of the Bank or the Company representing 20% or more of the Bank's or the Company's outstanding securities; or (3) individuals who are members of the board of directors of the Bank or the Company on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Company's stockholders was approved by the nominating committee serving under an Incumbent Board, shall be considered a member of the Incumbent Board. The term "Change in Control" shall not include an acquisition of securities by an employee benefit plan of the Bank or the Company. In the application of 12 C.F.R. Part 574 to a determination of a Change in Control, determinations to be made by the OTS or its Director under such regulations shall be made by the Board of Directors. (c) The term "Date of Termination" means the earlier of (1) the date upon which the Company gives notice to the Executive of the termination of his employment with the Company, or (2) the date upon which the Executive ceases to serve as an employee of the Company. (d) The term "Involuntary Termination" means termination of the employment of the Executive without his express written consent, and shall include a material diminution of or interference with the Executive's duties, responsibilities and benefits as the Secretary and Vice President of Operations, including (without limitation) any of the following actions unless consented to in writing by the Executive: (1) a change in the principal workplace of the Executive to a location outside of a 30 mile radius from the Company's headquarters office as of the date hereof; (2) a material demotion of the Executive; (3) a material reduction in the number or seniority of other Company personnel reporting to the Executive or a material reduction in the frequency with which, or in the nature of the matters with respect to which, such personnel are to report to the Executive, other than as part of an Bank- or Company-wide reduction in staff; (4) a material adverse change in the Executive's salary, perquisites, benefits, contingent benefits or vacation, other than as part of an overall program applied uniformly and with equitable effect to all members of the senior management of the Company; and (5) a material permanent increase in the required hours of work or the workload of the Executive. The term "Involuntary Termination" does not include Termination for Cause or termination of employment due to retirement, death, disability or suspension or temporary or permanent prohibition from participation in the conduct of the Company's affairs under Section 8 of the Federal Deposit Insurance Act ("FDIA"). (e) The terms "Termination for Cause" and "Terminated For Cause" mean termination of the employment of the Executive because of the Executive's personal dishonesty, incompetence, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and- desist order, supervisory agreement or similar agreement or order, or material breach of any provision of this Agreement. No act, or failure to act, on the Executive part shall be considered "willful" unless the Executive has acted (or failed to act) with an absence of good faith and without reasonable belief that the Executive's action or failure to act was in the best interest of the Company. 2. Term. The term of this Agreement shall be a period of one year commencing on the date first above written (the "Commencement Date"), subject to earlier termination as provided herein. Beginning on the first day of the month following the Commencement Date, and on the first day of each month thereafter (the "Renewal Month"), the term of this Agreement shall be extended until the day preceding the first anniversary of the Renewal Month, provided that neither the Executive nor the Company has given notice to the other in writing at least 90 days prior to such anniversary that the term of this Agreement shall not be extended further. Reference herein to the term of this Agreement shall refer to both such initial term and such extended terms. 3. Employment. The Executive is employed as the Secretary and Vice President of Operations of the Company. As Secretary and Vice President of Operations, the Executive shall render administrative and management services as are customarily performed by persons situated in similar executive capacities, and shall have such other powers and duties of an officer of the Company as the Board of Directors may prescribe 2 from time to time, provided that such duties are consistent with the Executive's position as Secretary and Vice President of Operations. The Executive shall continue to devote his best efforts and substantially all his business time and attention to the business and affairs of the Company and its subsidiaries and affiliated companies. 4. Compensation. ------------ (a) Salary. The Company agrees to pay the Executive during the term of this Agreement the salary established by the Board of Directors, which shall be at least the Executive's salary in effect as of the Commencement Date. The Executive's salary shall be payable in accordance with the payroll practices of the Company as applicable to the executive officers of the Company. The amount of the Executive's salary shall be reviewed by the Board of Directors not less often than annually, beginning not later than the first anniversary of the Commencement Date. Adjustments in salary or other compensation shall not limit or reduce any other obligation of the Company under this Agreement. The Executive's salary in effect from time to time during the term of this Agreement shall not thereafter be reduced. (b) Discretionary Bonuses. The Executive shall be entitled to participate in an equitable manner with all other executive officers of the Company in discretionary bonuses as authorized and declared by the Board of Directors to its executives. No other compensation provided for in this Agreement shall be deemed a substitute for the Executive's right to participate in such bonuses when and as declared by the Board of Directors. (c) Expenses. The Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in performing services under this Agreement in accordance with the policies and procedures applicable to the executive officers of the Company, provided that the Executive properly accounts for such expenses in accordance with such policies and procedures. 5. Benefits. -------- (a) Participation in Retirement and Executive Benefit Plans. The Executive shall be entitled to participate in all plans relating to stock options, pension, thrift, profit-sharing, group life insurance, medical and dental coverage, education, cash bonuses, and other retirement or employee benefits or combinations thereof, that are now or hereafter maintained for the benefit of the Company's executive employees or its employees generally. Nothing herein shall preclude the Company from providing other benefits to the Executive independent of or separate from those provided to other executive officers or its executives generally. (b) Fringe Benefits. The Executive shall continue to receive during the term of his employment hereunder the fringe benefits and perquisites that are in effect on the Commencement Date. In addition, the Executive shall be eligible to participate in, and receive benefits under, any other fringe benefit plans which are or may become applicable to the Company's executive officers; provided, however, that such fringe benefits shall include the payment by the Company of the Executive's annual dues to a country club selected by the Executive and approved in writing by the Company, such approval not to be unreasonably withheld. 3 6. Vacations; Leave. The Executive shall be entitled to annual paid vacation in accordance with the policies established by the Company's Board of Directors for executive employees and to voluntary leave of absence, with or without pay, from time to time at such times and upon such conditions as the Board of Directors of the Company may determine in its discretion; provided, however that in no event shall the Executive's annual vacation be less than 3 weeks. The Executive shall also be entitled to all paid holidays given by the Company to its executive officers. 7. Termination of Employment. ------------------------- (a) Involuntary Termination. The Board of Directors may terminate the Executive's employment at any time, but, except in the case of Termination for Cause, termination of employment shall not prejudice the Executive's right to compensation or other benefits under this Agreement. In the event of Involuntary Termination other than in connection with or within 12 months after a Change in Control, (1) the Company shall pay to the Executive during the remaining term of this Agreement, his salary at the rate in effect immediately prior to the Date of Termination, payable in such manner and at such times as such salary would have been payable to the Executive under Section 2 if the Executive had continued to be employed by the Company, and (2) the Company shall provide to the Executive during the remaining term of this Agreement health benefits as maintained by the Company for the benefit of its executive officers from time to time during the remaining term of the Agreement or substantially the same health benefits as the Company maintained for its executive officers immediately prior to the Date of Termination. (b) Termination for Cause. In the event of Termination for Cause, the Company shall pay the Executive his salary through the Date of Termination, and the Company shall have no further obligation to the Executive under this Agreement. (c) Voluntary Termination. The Executive's employment may be voluntarily terminated by the Executive at any time upon 90 days written notice to the Company or upon such shorter period as may be agreed upon between the Executive and the Board of Directors of the Company. In the event of such voluntary termination, the Company shall be obligated to continue to pay the Executive his salary and benefits through the Date of Termination, at the time such payments are due, and the Company shall have no further obligation to the Executive under this Agreement. (d) In Connection with Change in Control. In the event of Involuntary Termination in connection with or within (but not later than) 12 months after a Change in Control which occurs while the Executive is employed under this Agreement, the Company shall, subject to Section 8 of this Agreement, (1) pay to the Executive during the 12-month period ending on the anniversary of his Termination Date, his salary at the rate in effect immediately prior to the Date of Termination, payable in such manner and at such times as such salary would have been payable to the Executive under Section 2 if the Executive had continued to be employed by the Company; and (2) provide to the Executive during the 12-month period ending on the anniversary of his Termination Date, such health benefits as are maintained for executive officers of the Company from time to time during the remaining term of this Agreement or substantially the same health benefits as the Company maintained for its executive officers immediately prior to the Change in Control. (e) Death; Disability. In the event of the death of the Executive while employed under this Agreement and prior to any termination of employment, the Executive's estate, or such person as the Executive may have previously designated in writing, shall be entitled to receive from the Company the salary of the 4 Executive through the last day of the calendar month in which the Executive died. If the Executive becomes disabled as defined in the Company's then current disability plan or if the Executive is otherwise unable to serve as Secretary and Vice President of Operations, the Executive shall be entitled to receive group and other disability income benefits of the type then provided by the Company for executive officers. (f) Temporary Suspension or Prohibition. If the Executive is suspended and/or temporarily prohibited from participating in the conduct of the Company's affairs by a notice served under Section 8(e)(3) or (g)(1) of the FDIA, 12 U.S.C. ss. 1818(e)(3) and (g)(1), the Company's obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Company may in its discretion (1) pay the Executive all or part of the compensation withheld while its obligations under this Agreement were suspended and (ii) reinstate in whole or in part any of its obligations which were suspended. (g) Permanent Suspension or Prohibition. If the Executive is removed and/or permanently prohibited from participating in the conduct of the Company's affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. ss. 1818(e)(4) and (g)(1), all obligations of the Company under this Agreement shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. (h) Default of the Company. If the Company is in default (as defined in Section 3(x)(1) of the FDIA), all obligations under this Agreement shall terminate as of the date of default, but this provision shall not affect any vested rights of the contracting parties. (i) Termination by Regulators. All obligations under this Agreement shall be terminated, except to the extent determined that continuation of this Agreement is necessary for the continued operation of the Company: (1) by the Director of the Office of Thrift Supervision (the "Director") or his or her designee, at the time the Federal Deposit Insurance Corporation enters into an agreement to provide assistance to or on behalf of the Company under the authority contained in Section 13(c) of the FDIA; or (2) by the Director or his or her designee, at the time the Director or his or her designee approves a supervisory merger to resolve problems related to operation of the Company or when the Company is determined by the Director to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by any such action. 8. Certain Reduction of Payments by the Company. --------------------------------------------- (a) Notwithstanding any other provision of this Agreement, if payments under this Agreement, together with any other payments received or to be received by the Executive in connection with a Change in Control would cause any amount to be nondeductible by the Company for federal income tax purposes pursuant to Section 280G of the Code, then benefits under this Agreement shall be reduced (not less than zero) to the extent necessary so as to maximize payments to the Executive without causing any amount to become nondeductible by the Bank or the Company. The Executive shall determine the allocation of such reduction among payments to the Executive. (b) Any payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. 1828(k) and any regulations promulgated thereunder. 5 9. No Mitigation. The Executive shall not be required to mitigate the amount of any salary or other payment or benefit provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits after the date of termination or otherwise. 10. Attorneys Fees. In the event the Company exercises its right of Termination for Cause, but it is determined by a court of competent jurisdiction or by an arbitrator pursuant to Section 17 that cause did not exist for such termination, or if in any event it is determined by any such court or arbitrator that the Company has failed to make timely payment of any amounts owed to the Executive under this Agreement, the Executive shall be entitled to reimbursement for all reasonable costs, including attorneys' fees, incurred in challenging such termination or collecting such amounts. Such reimbursement shall be in addition to all rights to which the Executive is otherwise entitled under this Agreement. 11. No Assignments. -------------- (a) This Agreement is personal to each of the parties hereto, and neither party may assign or delegate any of its rights or obligations hereunder without first obtaining the written consent of the other party; provided, however, that the Company shall require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by an assumption agreement in form and substance satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Failure of the Company to obtain such an assumption agreement prior to the effectiveness of any such succession or assignment shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the compensation pursuant to Section 7(d) hereof. For purposes of implementing the provisions of this Section 11(a), the date on which any such succession becomes effective shall be deemed the Date of Termination. (b) This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts would still be payable to the Executive hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee or other designee or if there is no such designee, to the Executive's estate. 12. Covenant Not to Compete. The Executive hereby covenants and agrees that, in the event of his termination of employment with the Company prior to the term of this Agreement, for a period of one year following the date of his termination of employment with the Company, he shall not, without the written consent of the Company, become an officer, employee, consultant, director or trustee of any savings bank, savings and loan association, savings and loan holding company, bank or bank holding company, or any direct or indirect subsidiary or affiliate of any such entity, where such entity or affiliate thereof has an office (defined broadly) within 25 miles of the main office of the Company or the main office of the Company's subsidiary, First Federal Savings. 6 13. Notice. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, to the Company at its home office, to the attention of the Board of Directors with a copy to the Secretary of the Company, or, if to the Executive, to such home or other address as the Executive has most recently provided in writing to the Company. 14. Amendments. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties, except as herein otherwise provided. 15. Headings. The headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. 16. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 17. Governing Law. This Agreement shall be governed by and is to be construed and enforced in accordance with the laws of the United States to the extent applicable and otherwise by the laws of the State of Indiana. 18. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES. Attest: FFW Corporation --------------------- --------------------------- Treasurer By: Its: President, Roger K. Cromer Executive ---------------------------- Christine K. Noonan 7 EX-13 4 ex-13.txt EX-13 -------------------------------------------------------------------------------- FFW CORPORATION Wabash, Indiana Table of Contents 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 ........................................... 11 CONSOLIDATED BALANCE SHEETS - JUNE 30, 2001 and 2000...................... 12 CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED JUNE 30, 2001, 2000 and 1999 ............................ 13 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY YEARS ENDED JUNE 30, 2001, 2000 and 1999 ............................ 14 CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 2001, 2000 and 1999 ............................ 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................ 17 DIRECTORS AND EXECUTIVE OFFICERS ......................................... 35 SHAREHOLDER INFORMATION .................................................. 36 -------------------------------------------------------------------------------- 1. PRESIDENT'S MESSAGE FFW CORPORATION Dear Shareholder: Annual Report Fiscal Year 2001 was a year of transition and change for FFW Corporation and its subsidiaries First Federal Savings Bank of Wabash and FirstFed Financial, Inc. We completed our eighth year as a public company as well as celebrating our 80th anniversary. We are proud of our past and recognize that our commitment to the future will be the key to our success. Financial performance during the past twelve months proved to be challenging. Net earnings as of June 30, 2001 were $1,623,000, or diluted earnings per share at $1.13, compared to $2,271,000, or $1.57 for 2000. Earnings were negatively impacted by a $900,000 specific provision on loans to one borrower to provide adequate allowance for loan loss during 2001. Nonetheless, the Board of Directors was able to declare dividends totaling $0.52 per share during the year, an increase of 8.3% from prior year. In January 2001, the Company initiated a program to buy back up to 5% of its outstanding shares to enhance shareholder value. FFW Corporation experienced significant accomplishments during the past year that included investing in new products, facilities, and services. We developed new deposit products that led to an 8.7% increase in deposits for the year. Ground was recently broken for a new, full-service branch in North Manchester to provide banking services to meet the needs of the community. The Company also acquired Pulley Financial Services, Inc. and appointed a new president of FirstFed Financial, Inc. Our management team is committed to increasing our market share and enhancing our existing products and services. We intend to accomplish this through our commitment to superior customer service and stringent cost control. Our Board of Directors and staff are committed to improving our community's quality of life--and the quality of your banking experience. We encourage you to review our operating numbers on the following pages. We are proud of our institution and ask you for your continued support. To you, our shareholders, we pledge our best efforts to build shareholder value in the coming year. 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: 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (In Thousands) Financial Condition Data: Total assets $ 231,186 $ 219,037 $ 217,489 $ 203,311 $ 180,055 Loans 152,195 150,810 151,491 139,394 114,159 Securities 60,973 52,026 51,029 50,293 40,450 Deposits 144,630 133,105 130,401 125,256 116,118 Borrowings 62,397 64,168 66,300 56,500 44,800 Equity 21,993 19,615 19,357 19,129 17,141 (In Thousands) Selected Operations Data: Total interest income $ 17,544 $ 16,687 $ 16,052 $ 14,589 $ 12,224 Net interest income 6,786 7,072 6,686 5,998 4,978 Provision for loan losses (1,715) (1,034) (1,010) (705) (120) Non-interest income 1,265 1,689 1,990 1,265 674 Non-interest expense (4,237) (4,657) (4,591) (3,800) (3,583) Income tax expense (476) (799) (964) (858) (605) ------------- ------------ ------------ ------------ ------------ Net income $ 1,623 $ 2,271 $ 2,111 $ 1,900 $ 1,344 ============= ============ ============ ============ ============ Per Share: Basic earnings per share (1) $ 1.14 $ 1.60 $ 1.48 $ 1.36 $ 1.00 Diluted earnings per share (1) 1.13 1.57 1.46 1.32 0.97 Dividends declared (1) 0.52 0.48 0.42 0.38 0.32 Dividend payout ratio 45.61% 30.00% 28.38% 27.94% 32.00% Other Data: Net interest margin (2) 3.14% 3.38% 3.28% 3.31% 3.25% Average interest-earning assets to average interest-bearing liabilities 1.12x 1.10x 1.12x 1.12x 1.12x Non-performing assets (3) to total assets at end of period .70% .13% .39% .43% .16% Equity-to-total assets (end of period) 9.51 8.96 8.90 9.41 9.52 Return on assets (ratio of net income to average total assets) .72 1.04 .99 1.00 .85 Return on equity (ratio of net income to average equity) 7.87 11.83 10.68 10.51 8.41 Equity-to-assets ratio (ratio of average equity to average total assets) 9.13 8.76 9.25 9.49 10.11 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. -------------------------------------------------------------------------------- 3. 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 loans secured by residential real estate. 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 $12.1 million during the year to $231.2 million at June 30, 2001. This increase was funded by an increase in deposits of $11.5 million. These funds were used to pay down FHLB advances and invest in government agencies, municipals and other securities. Total securities available for sale increased from $52.0 million at June 30, 2000 to $61.0 million at June 30, 2001. During fiscal 2001, state and municipal securities decreased from $8.5 million at June 30, 2000 to $8.1 million at June 30, 2001 due to calls and maturities. Government agency securities decreased from $22.0 million at June 30, 2000 to $11.1 million at June 30, 2001. Mortgage-backed, equity and other securities increased from $21.6 million at June 30, 2000 to $41.7 million at June 30, 2001. The Company has net unrealized appreciation of $331,000, net of tax at June 30, 2001 for securities available for sale. Net loans increased $1.4 million, or 0.9%, from $150.8 million at June 30, 2000 to $152.2 million at June 30, 2001. The increases in the loan portfolio were comprised primarily of $2.7 million in home equity and improvement loans, -------------------------------------------------------------------------------- 4. $2.2 million in total mortgage loans and $1.0 million in commercial loans. These increases were partially offset by a decrease of $4.5 million in automobile and other consumer loans. Half of the loan portfolio is comprised of first mortgage loans secured by one-to-four family residential real estate located in the Company's market area. At June 30, 2001, total first mortgage loans secured by real estate comprised $81.1 million, or 53.3% of the net loan portfolio. The consumer and other loan portfolio included $15.8 million of home equity and improvement loans, $25.3 million in commercial loans and $31.5 million in automobile and other consumer loans at June 30, 2001. Total deposits increased $11.5 million, or 8.7%, from $133.1 million at June 30, 2000 to $144.6 at June 30, 2001. During fiscal 2001, checking accounts increased $2.4 million, or 12.4%, and certificates of deposit and passbook accounts increased $8.9 million, or 7.8%. The increase resulted from increased core deposit accounts and targeted pricing of short term and intermediate certificates of deposit. Assuming interest rates remain at present levels during the next fiscal year, management anticipates that deposits will continue to increase above current levels. As a result, management will continue to control the overall increases in interest rates in deposits by targeting certain terms and offering "specials" rather than across the board increases for all deposit products. If deposit growth lags behind loan demand, then an increase in FHLB advances may be necessary to fund the Company's lending and investment activities during fiscal 2002. Total shareholders' equity increased $2.4 million to $22.0 million at June 30, 2001. The increase primarily resulted from net income of $1.6 million, a $1.8 million change in unrealized appreciation on securities available for sale, net of tax and $126,000 of proceeds from the exercise of stock options, which were offset by dividends paid of $747,000 and $456,000 of treasury stock purchases. RESULTS OF OPERATIONS Comparison of Years Ended June 30, 2001 and June 30, 2000 General. Net income for the year ended June 30, 2001 was $1.6 million; a decrease of $648,000 compared to net income of $2.3 million for the year ended June 30, 2000, a decrease of 28.5%. The decrease was primarily the result of a decrease of $286,000 in net interest income and a $681,000 increase in provisions for loan losses which was partially offset by a decrease in income taxes of $323,000. Further details of the changes in these items are discussed below. [graphic-chart depicting year of one time assessment] (1) Year of one time assessment by Savings Association Insurance Fund Net Interest Income. Net interest income decreased $286,000, or 4.0%, from $7.1 million to $6.8 million for the year ended June 30, 2001. The decrease in net interest income was due to an increase of $857,000 in interest income, offset by an increase of $1.1 million in interest expense. The decrease in net interest income was primarily a result of a smaller increase in the yield on interest-earning assets compared to the increase 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 3.14% in 2001 compared to 3.38% in 2000. 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. -------------------------------------------------------------------------------- 5. The yield on earning assets in 2001 was 8.09% compared to 7.93% in 2000. Average earning assets increased 3.3% in 2001, following a 2.5% increase in 2000. The effective rate on interest bearing liabilities was 5.58% in 2001, compared to 5.08% in 2000. Provision for Loan Losses. The provision for loan losses increased $681,000 from $1.0 million in fiscal 2000 to $1.7 million in fiscal 2001. The majority of this increase was due to a $900,000 additional provision that was identified during the first quarter of this fiscal year 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 for the last three years 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 as economic and regulatory conditions dictate. Although the Company maintains its allowance for loan losses at a level which it considers to be adequate to provide for potential 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 the regulatory agencies, which can order the establishment of additional general or specific allowances. Noninterest Income. Noninterest income decreased 25.1% from $1.7 million in 2000 to $1.3 million in 2001. The primary factor influencing the decrease was other income. Other income decreased $674,000 compared to 2000 due to death benefit proceeds in 2000 from insurance resulting in additional non-taxable income of $559,000. These proceeds were offset by expenses related to a payment under a deferred compensation plan of $312,000 that is included in salaries and benefits expense. The other components of noninterest income, net gain or loss on sales of securities, sales of loans and service charges and fees, increased in 2001 while commission income was down 16.1% from $223,000. Loss on sale of securities was $14,000 in 2001 compared to a loss on sale of securities of $63,000 in 2000. The gain on sale of loans increased $75,000 as interest rates decreased during the year causing an increase in the number of newly originated fixed-rate mortgage loans with maturities greater than 15 years. Service charges and fees increased 19.2% from 2000 due to increased volume in our deposit and loan areas. Non-interest Expense. During 2001, noninterest expense decreased 9.0%, from $4.7 million in 2000 to $4.2 million in 2001. The decrease was primarily attributed to salaries and benefits and other expense. Stringent cost control and better utilization of resources continues to be a major focus at First Federal. Salaries and benefits decreased 15.3% in 2001 compared to a 17.5% increase in 2000. The decrease in 2001 is due to the recording of expense related to a payment under a deferred compensation plan of $312,000 in 2000 that was offset by $559,000 of proceeds from insurance included with other income in 2000. Occupancy and equipment costs increased 3.6% from the prior year. The increase is due to additional furniture and fixtures purchased and the related depreciation costs. Correspondent bank charges increased 15.2% from prior year due to volume and increased pass through costs. In accordance with the provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", management is currently assessing the extent to which the amortization of intangible assets recorded in connection with the purchase of the South Whitley branch location and Pulley Financial Services, Inc., may be discontinued. Income Tax Expense. Income tax expense was $476,000 in fiscal 2001 compared to $799,000 in fiscal 2000, a decrease of $323,000, or 40.4%. Income taxes decreased due to lower net income before taxes and benefits from a reapportionment of interest affecting state taxes. The change in income tax expense was also affected by the tax effects of the insurance proceeds received in the fourth quarter of fiscal 2000. Also, the impact of federal tax-free municipal interest and a dividend received deduction on FNMA and FHLMC preferred stock to reduce income tax expense was magnified in 2001 compared to 2000 due to the lower net income before taxes. Comparison of Years Ended June 30, 2000 and June 30, 1999 General. Net income for the year ended June 30, 2000 was $2.3 million; an increase of $160,000 compared to net income of $2.1 million for the year ended June 30, 1999, an increase of 7.6%. The increase was primarily the result of an increase of $386,000 in net interest income and a decrease in income taxes of $165,000, which was partially offset by an increase of $67,000 in noninterest expense, a $24,000 increase in provisions for loan losses and a decrease in noninterest income of $300,000. Further details of the changes in these items are discussed below. Net Interest Income. Net interest income increased $386,000, or 5.8%, from $6.7 million to $7.1 million for the year ended June 30, 2000. The increase in net interest income was due to an increase of $635,000 in interest income, -------------------------------------------------------------------------------- 6. partially offset by an increase of $249,000 in interest expense. The increase in net interest income was primarily a result of an increase in the yield on interest-earning assets and a 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 3.38% in 2000 compared to 3.28% in 1999. The net interest margin increased due primarily to the net impact of changes in yields and rates of interest-earning assets and interest-bearing liabilities. In addition, First Federal believes that the net interest margin will continue to level out or decrease due to competitive pricing pressures. The yield on earning assets in 2000 was 7.93% compared to 7.88% in 1999. Average earning assets increased 2.5% in 2000, following an 11.3% increase in 1999. The effective rate on interest bearing liabilities was 5.08% in 2000, compared to 5.13% in 1999. Provision for Loan Losses. The provision for loan losses was approximately $1.0 million in fiscal 1999 and in fiscal 2000. 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. Noninterest Income. Noninterest income decreased 15.1% from $2.0 million in 1999 to $1.7 million in 2000. The factors influencing the decrease were net gain or loss on sales of securities and sales of loans. Loss on sale of securities was $63,000 in 2000 compared to a gain on sale of securities of $736,000 in 1999. This difference is due to the gain from a call on a mortgage-backed security for $724,000 during 1999. The gain on sale of loans decreased $138,000 as interest rates increased during the year causing a reduction in the number of newly originated fixed-rate mortgage loans with maturities greater than 15 years. Service charges and fees increased 7.4% from 1999 due to increased volume in our deposit areas. Other income increased $591,000 compared to 1999 due to death benefit proceeds from insurance resulting in additional non-taxable income of $559,000 which was offset by expenses related to a payment under a deferred compensation plan of $312,000 that is included in salaries and benefits expense. Noninterest Expense. During 2000, First Federal experienced an increase in noninterest expense of 1.5%, from $4.6 million in 1999 to $4.7 million in 2000. The increase was primarily attributed to correspondent bank charges, furniture and equipment expense, and salaries and benefits. Salaries and benefits increased 17.4% in 2000 compared to 7.4% in 1999. The increase in 2000 is due to the recording expense related to a payment under a deferred compensation plan of $312,000 but was offset by $559,000 of proceeds from insurance included with other income. Occupancy and equipment costs increased 4.6% from the prior year. The increase is due to additional furniture purchased and the related depreciation costs. Correspondent bank charges increased 15.2% from prior year due to volume and the addition of imaging for our deposit customers. Income Tax Expense. Income tax expense was $799,000 in fiscal 2000 compared to $964,000 in fiscal 1999, a decrease of $165,000, or 17.1%. Income taxes decreased primarily because of the tax effects of the insurance proceeds. 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 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 200 basis point increase or decrease in interest rates. Under OTS regulations, an institution's "normal" level of interest rate risk for this assumed change in interest rates is a decrease in the institution's NPV not exceeding 2% of assets. -------------------------------------------------------------------------------- 7. The Company's asset/liability management strategy sets limits on the change in NPV given certain changes in interest rates. The table presented here, as of June 30, 2001, is 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.
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 $ 15,497 $ (7,671) (33)% 6.95% (288) 200 18,171 (4,997) (22) 8.00 (183) 100 20,780 (2,387) (10) 8.98 (85) Static 23,168 9.83 (100) 24,269 1,101 5 10.15 32 (200) 23,277 109 0 9.66 (17) (300) 22,309 (859) (4) 9.16 (67)
(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, 2001, the Company's NPV was $23.2 million (or 10% of portfolio assets). Based upon the assumptions used, an immediate increase in market interest rates of 200 basis points would result in a $5.0 million or 22% decline in NPV and a 183 basis point or 18.6% decline in the Company's NPV ratio to 8.00%. 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 a portion 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. There were no loans held for sale at June 30, 2001. The Company retains the servicing on loans sold in the secondary market and, at June 30, 2001, $35.2 million in 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. -------------------------------------------------------------------------------- 8. Average Balances, Interest Rates and Yields This 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----------------------------------------- 2001 2000 1999 ------------------------------- ----------------------------- ---------------------------- Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate (Dollars in Thousands) Interest-earning assets: Loans receivable (1) $154,211 $ 13,467 8.73% $153,090 $ 12,888 8.42% $147,437 $ 12,428 8.43% Securities (2) (3) 46,736 3,053 6.39 43,536 2,856 6.32 38,304 2,298 6.09 Mortgage-backed securities (3) 12,174 872 7.12 10,496 806 7.45 15,703 1,166 7.25 Other interest- bearing deposits 2,754 152 5.52 1,800 137 7.61 2,398 160 6.67 -------- -------- -------- -------- -------- -------- Total interest-earning assets 215,875 17,544 8.09 208,922 16,687 7.93 203,842 16,052 7.88 Other assets 9,028 10,199 9,817 -------- -------- -------- Total assets $224,903 $219,121 $213,659 ======== ======== ======== Interest-bearing liabilities: Money market accounts $ 4,690 $ 242 5.15% $ 1,316 $ 59 4.48% $ 625 $ 27 4.32% NOW accounts 7,398 161 2.18 7,134 157 2.20 6,726 147 2.19 Passbook savings accounts 34,798 1,326 3.81 41,970 1,639 3.91 45,317 1,843 4.07 Certificates of deposit 83,295 5,265 6.32 74,085 4,079 5.51 67,916 3,791 5.58 FHLB advances 62,585 3,765 6.02 64,770 3,681 5.68 62,106 3,558 5.73 -------- -------- -------- -------- -------- -------- Total interest- bearing liabilities 192,766 10,759 5.58 189,275 9,615 5.08 182,690 9,366 5.13 -------- ---- -------- ---- -------- ---- Other liabilities 11,502 10,645 11,212 -------- -------- -------- Total liabilities 204,268 199,920 193,902 Equity 20,635 19,201 19,757 -------- -------- -------- Total liabilities and shareholders' equity $224,903 $219,121 $213,659 ======== ======== ======== Net interest income/ interest rate spread $ 6,785 2.51% $ 7,072 2.85% $ 6,686 2.75% ======== ==== ======== ==== ======== ==== Net interest margin (4) 3.14% 3.38% 3.28% ==== ==== ====
(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. -------------------------------------------------------------------------------- 9. Asset Quality Total non-performing assets increased to $1.6 million at June 30, 2001 compared to $290,000 at June 30, 2000. The ratio of non-performing assets to total assets at June 30, 2001 was .70% compared to .13% at June 30, 2000. Included in non-performing assets at June 30, 2001 were $1.3 million in non-accruing loans and $299,000 in repossessed assets. Including the non-accruing loans listed above, as of June 30, 2001 and 2000, there were $4.7 million and $4.4 million, respectively, 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, 2001, $2.0 million of loans were classified as special mention, $2.5 million as substandard, $248,000 as doubtful and $0 as loss. As of June 30, 2000, $2.0 million were classified as special mention, $1.9 million as substandard, $434,000 as doubtful and $3,000 as loss. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of funds are deposits, borrowings, principal and interest payments on loans and mortgage-backed 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. The standard measure of liquidity for thrift institutions is the ratio of cash and eligible investments to a certain percentage of net withdrawable savings and borrowings due within one year. OTS regulations no longer require a minimum liquidity ratio. Previously, the required ratio was 4%. At June 30, 2001, the Bank's liquidity ratio was 7.94%. 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, the purchase of $25.7 million in securities available for sale and a reduction in FHLB borrowings of $1.8 million. Year Ended June 30, 2000. During the year ended June 30, 2000 there was a net increase of $415,000 in cash and cash equivalents. Major sources of cash during the year were an increase in deposits of $2.7 million, and the proceeds from the sales of loans held for sale and the sale, call and maturity of securities provided $1.2 million and $4.6 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 funding an increase of $1.3 million in the loan portfolio and the purchase of $7.5 million in securities available for sale. Year Ended June 30, 1999. During the year ended June 30, 1999 there was a net increase of $429,000 in cash and cash equivalents. Major sources of cash during the year were an increase in deposits and borrowings of $5.1 million and $9.8 million, and the proceeds from the sales of loans held for sale and the sale, call and maturity of securities provided $14.4 million and $22.8 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 included funding an increase of $14.3 million in the loan portfolio, purchases of $25.0 million in securities available for sale and originations of $14.3 million of loans to be sold in the secondary market. Borrowings may be used as a source of funds to offset reductions in other sources of funds such as deposits and to assist in asset/liability management. Management believes that a diversified blend of borrowings from the FHLB offers flexibility and is an important tool to be used in the balanced growth of the Company. As such, borrowings outstanding at June 30, 2001 consisted of advances from the FHLB totaling $62.4 million. The Company had commitments to fund loan originations, unused lines of credit and standby lines of credit with borrowers of $18.1 -------------------------------------------------------------------------------- 10. million at June 30, 2001. In the opinion of management, the Company has sufficient cash flow and borrowing capacity to meet current and anticipated funding commitments. Pursuant to federal law, thrift institutions must meet a 4.00% core capital requirement and an 8.00% total risk-based capital to risk weighted assets requirement. At June 30, 2001, the Bank exceeded all fully phased in capital requirements. Core capital totaled $18.4 million, or 8.07% of adjusted total assets (as defined by regulation) and risk-based capital totaled $20.1 million, or 13.60% of risk-weighted assets (as defined by regulation). See Note 11 of the Notes to Consolidated Financial Statements for additional information regarding capital requirements applicable to the Bank. 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, 2001 and 2000 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, 2001. 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, 2001 and 2000 and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2001 in conformity with accounting principles generally accepted in the United States of America. /s/Crowe, Chizek and Company LLP -------------------------------- Crowe, Chizek and Company LLP South Bend, Indiana August 24, 2001 -------------------------------------------------------------------------------- 11.
FFW CORPORATION CONSOLIDATED BALANCE SHEETS June 30, 2001 and 2000 ----------------------------------------------------------------------------------------------------- 2001 2000 ------------- ------------- ASSETS Cash and due from financial institutions $ 6,372,538 $ 4,152,652 Interest-bearing deposits in other financial institutions - short-term 2,157,621 1,101,766 ------------- ------------- Total cash and cash equivalents 8,530,159 5,254,418 Securities available for sale 60,973,088 52,026,138 Loans receivable, net of allowance for loan losses of $1,773,194 in 2001 and $1,961,318 in 2000 152,195,442 150,810,106 Federal Home Loan Bank stock 3,400,900 3,400,900 Accrued interest receivable 1,479,567 1,666,265 Premises and equipment, net 2,099,125 2,028,386 Other assets 2,508,181 3,850,819 ------------- ------------- Total assets $ 231,186,462 $ 219,037,032 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest-bearing $ 9,161,009 $ 8,875,968 Interest-bearing 135,469,043 124,228,632 ------------- ------------- Total deposits 144,630,052 133,104,600 Borrowings 62,396,906 64,167,542 Accrued expenses and other liabilities 2,166,444 2,149,970 ------------- ------------- Total liabilities 209,193,402 199,422,112 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 - 2001 and 1,807,013 - 2000; outstanding: 1,412,478 - 2001 and 1,423,627 - 2000 18,298 18,070 Additional paid-in capital 9,336,606 9,228,128 Retained earnings 16,423,160 15,547,131 Accumulated other comprehensive income 330,776 (1,479,969) Unearned management retention plan shares (52,242) (72,354) Treasury stock at cost, 417,350 shares - 2001 and 383,386 shares - 2000 (4,063,538) (3,626,086) ------------- ------------- Total shareholders' equity 21,993,060 19,614,920 ------------- ------------- Total liabilities and shareholders' equity $ 231,186,462 $ 219,037,032 ============= =============
See accompanying notes. -------------------------------------------------------------------------------- 12.
FFW CORPORATION CONSOLIDATED STATEMENTS OF INCOME Years ended June 30, 2001, 2000 and 1999 --------------------------------------------------------------------------------------------------------- 2001 2000 1999 ---- ---- ---- Interest and dividend income Loans, including fees $ 13,467,200 $ 12,888,537 $ 12,428,098 Taxable securities 3,522,670 3,266,784 3,000,394 Nontaxable securities 402,370 394,884 464,433 Other 152,053 137,211 159,565 ------------ ------------ ------------ Total interest and dividend income 17,544,293 16,687,416 16,052,490 Interest expense Deposits 6,993,703 5,934,009 5,807,809 Borrowings 3,765,075 3,681,171 3,558,563 ------------ ------------ ------------ Total interest expense 10,758,778 9,615,180 9,366,372 ------------ ------------ ------------ Net interest income 6,785,514 7,072,236 6,686,118 Provision for loan losses 1,715,000 1,033,677 1,010,000 ------------ ------------ ------------ Net interest income after provision for loan losses 5,070,515 6,038,559 5,676,118 Noninterest income Net gains/(loss) on sales of securities (14,159) (63,400) 735,649 Net gains on sales of loans 84,601 9,814 148,096 Commission income 186,877 222,562 234,362 Service charges and fees 1,001,570 840,296 782,572 Other income 6,596 679,913 88,776 ------------ ------------ ------------ Total noninterest income 1,265,485 1,689,185 1,989,455 Noninterest expense Salaries and benefits 2,021,239 2,386,933 2,032,452 Occupancy and equipment 400,707 386,744 369,647 Deposit insurance premium 81,814 101,662 121,423 Correspondent bank charges 272,908 237,118 205,883 Data processing 473,371 461,216 489,372 Printing, postage and supplies 124,085 131,015 245,031 Amortization of goodwill & core deposit premium 162,584 156,347 156,347 Other expense 700,221 796,376 970,372 ------------ ------------ ------------ Total noninterest expense 4,236,929 4,657,411 4,590,527 ------------ ------------ ------------ Income before income taxes 2,099,071 3,070,333 3,075,046 Income tax expense 475,726 799,472 963,991 ------------ ------------ ------------ Net income $ 1,623,345 $ 2,270,861 $ 2,111,055 ============ ============ ============ Earnings per share Basic $ 1.14 $ 1.60 $ 1.48 Diluted 1.13 1.57 1.46
-------------------------------------------------------------------------------- See accompanying notes. 13.
FFW CORPORATION ------------------------------------------------------------------------------------------------------------------------------------ CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years ended June 30, 2001, 2000 and 1999 ------------------------------------------------------------------------------------------------------------------------------------ Unearned Employee Accumulated Stock Additional Other Ownership Common Paid-In Retained Comprehensive Plan Stock Capital Earnings Income Shares ----- ------- -------- ------ ------ Balance at June 30, 1998 $ 17,751 $ 8,793,133 $ 12,468,144 $ 685,432 $ (151,748) Cash dividends - $0.42 per share - - (608,505) - - 17,117 shares released under ESOP - 145,495 - - 99,417 Purchased 27,000 shares - - - - - Issued 10,192 shares, net, on stock options 102 27,254 - - - Net income - - 2,111,055 - - Other comprehensive income, net of tax: Unrealized appreciation (depreciation) on securities available for sale, net of tax of $(746,117) - - - (1,140,818) - ------------- Total other comprehensive income - - - (1,140,818) - Comprehensive income - - - - - ------------- ------------- ------------- ------------- ------------- Balance at June 30, 1999 17,853 8,965,882 13,970,694 (455,386) (52,331) Cash dividends - $0.48 per share - - (694,424) - - 8,560 shares released under ESOP - 69,772 - - 52,331 7,000 shares purchased under MRP 70 95,305 - - - Purchased 39,322 shares, net - 42,497 - - - Issued 14,725 shares on stock options 147 54,672 - - - Amortization of MRP contribution - - - - - Net income - - 2,270,861 - - Other comprehensive income, net of tax: Unrealized appreciation (depreciation) on securities available for sale, net of tax of $(713,843) - - - (1,024,583) - ------------- Total other comprehensive income - - - (1,024,583) - Comprehensive income - - - - - ------------- ------------- ------------- ------------- ------------- Balance at June 30, 2000 18,070 9,228,128 15,547,131 (1,479,969) -
Unearned Management Retention Total Plan Treasury Shareholders' Shares Stock Equity ------ ----- ------ Balance at June 30, 1998 $ - $ (2,683,985) $ 19,128,727 Cash dividends - $0.42 per share - - (608,505) 17,117 shares released under ESOP - - 244,912 Purchased 27,000 shares - (405,887) (405,887) Issued 10,192 shares, net, on stock options - - 27,356 Net income - - 2,111,055 Other comprehensive income, net of tax: Unrealized appreciation (depreciation) on securities available for sale, net of tax of $(746,117) - - Total other comprehensive income - - (1,140,818) ------------- Comprehensive income - - 970,237 ------------- -------------- ------------- Balance at June 30, 1999 - (3,089,872) 19,356,840 Cash dividends - $0.48 per share - - (694,424) 8,560 shares released under ESOP - - 122,103 7,000 shares purchased under MRP (95,375) - - Purchased 39,322 shares, net - (536,214) (493,717) Issued 14,725 shares on stock options - - 54,819 Amortization of MRP contribution 23,021 - 23,021 Net income - - 2,270,861 Other comprehensive income, net of tax: Unrealized appreciation (depreciation) on securities available for sale, net of tax of $(713,843) - - Total other comprehensive income - - (1,024,583) ------------- Comprehensive income - - 1,246,278 ------------- -------------- ------------- Balance at June 30, 2000 (72,354) (3,626,086) 19,614,920
-------------------------------------------------------------------------------- (Continued) 14.
FFW CORPORATION ------------------------------------------------------------------------------------------------------------------------------------ CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years ended June 30, 2001, 2000 and 1999 ------------------------------------------------------------------------------------------------------------------------------------ Unearned Employee Accumulated Stock Additional Other Ownership Common Paid-In Retained Comprehensive Plan Stock Capital Earnings Income Shares ----- ------- -------- ------ ------ Balance at June 30, 2000 $ 18,070 $ 9,228,128 $ 15,547,131 $ (1,479,969) $ - Cash dividends - $0.52 per share - - (747,316) - - 1,000 shares purchased under MRP and 750 MRP shares forfeited - 1,906 - - - Purchased 36,400 shares, net - - - - - Issued 25,200 shares on stock options 228 106,572 - - - Amortization of MRP contribution - - - - - Net income - - 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 - Comprehensive income - - - - - ------------- ------------- ------------- ------------- ------------- Balance at June 30, 2001 $ 18,298 $ 9,336,606 $ 16,423,160 $ 330,776 $ - ============= ============= ============= ============= ============= Unearned Management Retention Total Plan Treasury Shareholders' Shares Stock Equity ------ ----- ------ Balance at June 30, 2000 $ (72,354) $ (3,626,086) $ 19,614,920 Cash dividends - $0.52 per share - - (747,316) 1,000 shares purchased under MRP and 750 MRP shares forfeited (1,344) (562) - Purchased 36,400 shares, net - (456,090) (456,090) Issued 25,200 shares on stock options - 19,200 126,000 Amortization of MRP contribution 21,456 - 21,456 Net income - - 1,623,345 Other comprehensive income, net of tax: Unrealized appreciation (depreciation) on securities available for sale, net of tax of $(1,187,178) - - Total other comprehensive income - - 1,810,745 ------------- Comprehensive income - - 3,434,090 ------------- -------------- ------------- Balance at June 30, 2001 $ (52,242) $ (4,063,538) $ 21,993,060 ============= ============== =============
-------------------------------------------------------------------------------- See accompanying notes. 15.
FFW CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended June 30, 2001, 2000 and 1999 -------------------------------------------------------------------------------------------------------------------- 2001 2000 1999 ---- ---- ---- Cash flows from operating activities Net income $ 1,623,345 $ 2,270,861 $ 2,111,055 Adjustments to reconcile net income to net cash from operating activities Depreciation and amortization (2,743) (31,822) (60,899) Provision for loan losses 1,715,000 1,033,677 1,010,000 Net (gains) losses on sales of: Securities 14,159 63,400 (735,649) Loans held for sale (84,601) (9,814) (148,096) Originations of loans held for sale (10,081,738) (1,164,250) (14,262,865) Proceeds from sales of loans held for sale 10,166,339 1,174,064 14,410,961 ESOP expense - 122,103 244,912 Amortization of MRP contribution 21,456 23,021 - Net change in accrued interest receivable and other assets 434,099 (1,132,071) 11,984 Amortization of goodwill and core deposit intangibles 162,584 219,437 156,347 Net change in accrued interest payable and other liabilities 91,474 1,433,499 (249,803) --------------- --------------- ---------------- Net cash from operating activities 4,059,374 4,002,105 2,487,947 Cash flows from investing activities Proceeds from: Sales, calls and maturities of securities available for sale 18,313,604 4,561,566 22,808,126 Sales of foreclosed real estate and repossessed assets 632,014 935,678 903,878 Purchase of: Securities available for sale (25,652,052) (7,463,987) (25,049,872) Federal Home Loan Bank stock - - (643,700) Principal collected on mortgage-backed securities 1,574,615 332,873 603,684 Net change in loans receivable (3,986,875) (1,288,371) (14,301,551) Purchases of premises and equipment, net (267,349) (101,760) (113,031) Investment in limited partnership (75,000) - (225,000) --------------- --------------- ---------------- Net cash from investing activities (9,461,043) (3,024,001) (16,017,466) Cash flows from financing activities Net change in deposits 11,525,452 2,703,247 5,145,050 Proceeds from borrowings 57,000,000 78,294,891 42,500,000 Repayment of borrowings (58,770,636) (80,427,737) (32,699,612) Proceeds from stock options 126,000 54,819 27,356 Purchase of treasury stock (456,090) (493,717) (405,887) Cash dividends paid (747,316) (694,424) (608,505) --------------- --------------- ---------------- Net cash from financing activities 8,677,410 (562,921) 13,958,402 --------------- --------------- ---------------- Net change in cash and cash equivalents 3,275,741 415,183 428,883 Beginning cash and cash equivalents 5,254,418 4,839,235 4,410,352 --------------- --------------- ---------------- Ending cash and cash equivalents $ 8,530,159 $ 5,254,418 $ 4,839,235 =============== =============== ================ Supplemental disclosure of cash flow information Cash paid during the period Interest $ 10,847,619 $ 9,525,756 $ 9,615,180 Income taxes 353,000 930,000 1,256,000
-------------------------------------------------------------------------------- See accompanying notes. 16. FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001, 2000 and 1999 -------------------------------------------------------------------------------- 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 of Wabash, Incorporated. All significant inter-company transactions and balances have been 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 13). Use of Estimates In Preparing Financial Statements: Preparing financial statements in conformity with generally accepted accounting principles 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, the fair value of stock options 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. As of July 1, 2000, the Company adopted a new accounting standard which required derivatives to be recorded at fair value. Unless designated as hedges, changes in these fair values are recorded in the income statement. Fair value changes involving hedges are generally recorded by offsetting gains or losses on the hedges and on the hedged item, even if the fair value of the hedged item is not otherwise recorded. Adoption of this standard on July 1, 2000 did not have a material effect on the Company's financial condition or results of operations. 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) 17. FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001, 2000 and 1999 -------------------------------------------------------------------------------- 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 residual mortgage, consumer, and credit card loans, and on an individual loan 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 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, 1997, include goodwill and core deposit intangibles. Goodwill represents the excess of the purchase price over the assets acquired. Goodwill is amortized on a straight-line basis over 15 years. Core deposit intangibles are amortized on an accelerated basis over 10 years. As of June 30, 2001, unamortized goodwill totaled $1,069,000 and unamortized core deposit intangibles totaled $154,000. In accordance with the provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", management is currently assessing the extent to which the amortization of intangible assets recorded in connection with the purchase of the South Whitley branch location and Pulley Financial Services, Inc., may be discontinued. 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. 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. -------------------------------------------------------------------------------- (Continued) 18. FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001, 2000 and 1999 -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Stock Compensation: Expense for employee compensation under stock option plans is based on Accounting Principles Board (APB) Opinion 25, with expense reported only if options are granted below market price at grant date. If applicable, disclosures of net income and earnings per common share are provided as if the fair value method of Statement of Financial Accounting Standards SFAS No. 123 were used for stock-based compensation. 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 12. 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. 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. ESOP shares are considered outstanding for earnings per share calculations as they are committed to be released; unearned shares are not considered outstanding. 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. Reclassifications: Certain amounts in the 2000 and 1999 financial statements were reclassified to conform to the 2001 presentation. -------------------------------------------------------------------------------- (Continued) 19. FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001, 2000 and 1999 -------------------------------------------------------------------------------- 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, 2001 2000 1999 ---- ---- ---- Basic Earnings Per Share Numerator: Net income $ 1,623,345 $ 2,270,861 $ 2,111,055 ============== ============== =============== Denominator: Weighted average shares outstanding 1,423,731 1,425,464 1,464,857 Less: Average unallocated ESOP shares - (2,140) (34,236) -------------- -------------- --------------- Weighted average shares outstanding 1,423,731 1,423,324 1,430,621 ============== ============== =============== Basic earnings per share $ 1.14 $ 1.60 $ 1.48 ============== ============== =============== Diluted Earnings Per Share Numerator: Net income $ 1,623,345 $ 2,270,861 $ 2,111,055 ============== ============== =============== Denominator: Weighted average shares outstanding for basic earnings per share 1,423,731 1,423,324 1,430,621 Add: Dilutive effects of assumed exercise of stock options and nonvested MRP shares 16,735 25,076 20,083 -------------- -------------- --------------- Weighted average shares and dilutive potential shares outstanding 1,440,466 1,448,400 1,450,704 ============== ============== =============== Diluted earnings per share $ 1.13 $ 1.57 $ 1.46 ============== ============== ===============
-------------------------------------------------------------------------------- (Continued) 20. FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001, 2000 and 1999 -------------------------------------------------------------------------------- NOTE 3 - SECURITIES At June 30, securities were as follows:
Fair Value Gains Losses ----- ----- ------ Available for sale 2001 U.S. government and agency $ 11,133,575 $ 77,891 $ (6,240) State and municipal 8,094,099 143,383 (69,111) Corporate bonds 4,631,112 178,274 - Mortgage backed 23,953,739 486,842 (29,989) Equity 13,160,563 79,838 (313,245) --------------- -------------- -------------- $ 60,973,088 $ 966,228 $ (418,585) =============== ============== ============== Available for sale 2000 U.S. government and agency $ 21,952,218 $ - $ (1,331,476) State and municipal 8,497,509 56,042 (321,654) Corporate bonds 1,499,479 16,223 (25,244) Mortgage backed 11,004,482 4,611 (402,304) Equity 9,072,450 - (446,478) --------------- -------------- -------------- $ 52,026,138 $ 76,876 $ (2,527,156) =============== ============== ==============
Contractual maturities of debt securities at June 30, 2001 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 $ 2,797,637 Due from one to five years 1,203,276 Due from five to ten years 10,144,026 Due after ten years 9,713,847 Mortgage backed 23,953,739 Equities 13,160,563 -------------- $ 60,973,088 ============== -------------------------------------------------------------------------------- (Continued) 21. FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001, 2000 and 1999 -------------------------------------------------------------------------------- NOTE 3 - SECURITIES (Continued) Sales/calls of securities available for sale for the years ended June 30 were:
2001 2000 1999 ---- ---- ---- Sales $ 3,442,356 $ 3,451,566 $ 966,504 Calls 13,806,248 - 14,196,622 Gross gains 13,624 5,794 747,733 Gross losses (27,783) (69,194) (12,084)
The June 30, 1999, gross gains included $724,000 from the call of a mortgage backed security. The gain recognized was the result of a pre-payment penalty and the recognition of unaccreted discount. NOTE 4 - LOANS RECEIVABLE, NET Loans receivable as of June 30 were as follows:
2001 2000 ---- ---- Mortgage loans (principally conventional) Secured by one-to-four family residences $ 68,646,306 $ 69,738,071 Secured by other properties 8,887,143 8,138,436 Construction 4,162,603 2,343,439 --------------- --------------- 81,696,052 80,219,946 Undisbursed portion of construction loans (565,253) (1,333,955) Net deferred loan origination fees (52,372) (35,522) --------------- --------------- Total mortgage loans 81,078,427 78,850,469 Consumer and other loans Automobile 27,162,815 31,367,885 Manufactured home 211,760 235,091 Home equity and improvement 15,809,379 13,119,225 Commercial 25,310,962 24,300,945 Other 4,096,920 4,418,593 --------------- --------------- 72,591,836 73,441,739 Net deferred loan origination costs 298,373 479,216 --------------- --------------- Total consumer and other loans 72,890,209 73,920,955 Less allowance for loan losses (1,773,194) (1,961,318) --------------- --------------- $ 152,195,442 $ 150,810,106 =============== ===============
-------------------------------------------------------------------------------- (Continued) 22. FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001, 2000 and 1999 -------------------------------------------------------------------------------- NOTE 4 - LOANS RECEIVABLE, NET (Continued) Activity in the allowance for loan losses for the years ended June 30 is as follows:
2001 2000 1999 ---- ---- ---- Beginning balance $ 1,961,318 $ 1,623,293 $ 982,532 Provision for loan losses 1,715,000 1,033,677 1,010,000 Charge-offs (2,191,984) (783,484) (464,847) Recoveries 288,860 87,832 95,608 ------------ ------------ ------------ Ending balance $ 1,773,194 $ 1,961,318 $ 1,623,293 ============ ============ ============
During the first quarter of the Company's fiscal year a $900,000 additional provision was identified for losses expected on loans to a single borrower. At June 30, 2001, the Company believes the additional provision was adequate for the losses incurred or remaining on these loans. Information regarding impaired loans is as follows for the years ending June 30:
2001 2000 ---- ---- Year end loans with no allowance for loan losses allocated $ - $ - Year end loans with allowance for loan losses allocated 2,141,236 754,116 Amount of allowance allocated 492,328 234,667 Average of impaired loans during the year 1,823,017 285,686 Interest income recognized during impairment 99,656 48,507 Cash-basis interest income recognized 92,330 32,814
There were no material impaired loans to report for the year ending June 30, 1999. NOTE 5 - LOAN SERVICING Mortgage loans serviced for others are not reported as assets in the balance sheets. These loans totaled $35,240,000 and $29,843,000 at June 30, 2001 and 2000. Related escrow deposit balances were $71,000 and $59,000 at June 30, 2001 and 2000. NOTE 6 - PREMISES AND EQUIPMENT, NET Premises and equipment at June 30 were as follows:
2001 2000 ---- ---- Land $ 480,121 $ 350,121 Buildings 2,191,166 2,090,511 Furniture, fixtures and equipment 1,012,311 985,217 ---------------- ---------------- Total cost 3,683,598 3,425,849 Less accumulated depreciation (1,584,473) (1,397,463) ---------------- ---------------- $ 2,099,125 $ 2,028,386 ================ ================
-------------------------------------------------------------------------------- (Continued) 23. FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001, 2000 and 1999 -------------------------------------------------------------------------------- NOTE 7 - DEPOSITS Deposit accounts individually exceeding $100,000 totaled $26,329,629 and $20,377,472 at June 30, 2001 and 2000. At June 30, 2001, stated maturities of certificates of deposit were: 2002 $ 55,307,242 2003 25,533,783 2004 2,811,097 2005 2,007,445 Thereafter 1,683,232 ---------------- $ 87,342,799 ================ NOTE 8 - OTHER BORROWINGS Federal Home Loan Bank (FHLB) advances totaled $62,396,906 and $64,167,542 at June 30, 2001 and 2000. The majority of the advances are fixed with interest rates ranging from 4.30% to 7.94% as of June 30, 2001 and the scheduled maturities during the years ended June 30 were as follows: 2002 $ 14,500,000 2003 7,500,000 2004 1,500,000 2005 1,698,453 2006 - Thereafter 37,198,453 ---------------- $ 62,396,906 ================ The Bank also maintains a $500,000 overdraft line of credit agreement with the FHLB which terminates on May 3, 2002. As of June 30, 2001 and 2000, 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, 2001, collateral of approximately $109.6 million is pledged to the FHLB to secure advances outstanding. NOTE 9 - 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, 2000, the latest actuarial valuation, plan assets exceeded the actuarially determined value of total vested benefits. The plan has reached its full funding limitation for Internal Revenue Code purposes and a full contribution is not required. As a result, other than administrative expenses, there was no pension expense for 2001, 2000 and 1999. 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 50% of elective deferrals on the first 6% of the participants' compensation. Expenses under this plan were $41,000, $39,000, and $38,000 for 2001, 2000 and 1999. -------------------------------------------------------------------------------- (Continued) 24. FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001, 2000 and 1999 -------------------------------------------------------------------------------- NOTE 9 - EMPLOYEE BENEFITS (Continued) Employee Stock Ownership Plan (ESOP): Employees with 1,000 hours of employment with the Bank and who have attained age 21 are eligible to participate in the ESOP. The ESOP borrowed $591,500 from the Company to purchase 118,300 shares of the common stock issued in the conversion at $5 per share. The loan was repaid principally from the Bank's discretionary contributions to the ESOP over seven years, and was paid off as of December 31, 2000. Shares purchased by the ESOP were held in suspense until allocated to participants as the loan was repaid. As of June 30, 2000, all ESOP shares had been allocated. ESOP expense related to shares allocated as the loan was repaid was $0, $122,000 and $245,000 for 2001, 2000 and 1999. Contributions to the ESOP for loan repayment were $0, $52,000 and $99,000 for 2001, 2000 and 1999. For 2000 and 1999, 8,560 and 17,117 shares with an average fair value of $12.34 and $15.74 per share, were committed to be released. Between January 1, 2000 and June 30, 2000 the Bank contributed an additional $125,000 to purchase 10,000 shares for the ESOP. As of June 30, 2000, these shares were allocated to eligible employees participating in the ESOP plan. During the year ended June 30, 2001, the Bank contributed an additional $101,500 to purchase 8,000 shares of the ESOP. As of June 30, 2001, these shares were allocated to eligible employees participating in the ESOP plan. Contributions to the ESOP and shares released from suspense proportional to repayment of the ESOP loan are allocated among ESOP participants on the basis of compensation. Benefits are 100% vested after five years of service including credit for years of service prior to July 1, 1992. Prior to five years of credited service, a participant who terminates employment for reasons other than death, normal retirement, or disability does not receive any ESOP benefit. Forfeitures are reallocated among remaining participating employees, in the same proportion as contributions. Benefits are payable in stock or cash upon termination of employment. The Company's contributions to the ESOP are not fixed, so benefits payable under the ESOP cannot be estimated. ESOP shares as of June 30 were:
2001 2000 1999 ---- ---- ---- Allocated (including shares committed to be released) 128,300 118,300 109,740 Unearned -- -- 8,560 Shares contributed and allocated 8,000 10,000 -- Shares withdrawn from the plan by participants (45,774) (23,295) (7,110) --------- --------- --------- Total ESOP shares held in the plan 90,526 105,005 111,190 ========= ========= ========= Fair value of unearned shares at June 30 $ -- $ -- $ 115,560 ========= ========= =========
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 SARs 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 2001, 2000 and 1999. -------------------------------------------------------------------------------- (Continued) 25. FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001, 2000 and 1999 -------------------------------------------------------------------------------- NOTE 9 - EMPLOYEE BENEFITS (Continued) SFAS No. 123 requires proforma disclosures for companies that do not adopt its fair value accounting method for stock-based employee compensation. Accordingly, the following proforma information presents earnings per share had the fair value method been used to measure compensation cost for stock option plans. The fair value of options granted during 2001 and 2000 were estimated using the following weighted average information: risk-free interest rates of 5.21% to 5.25%, expected lives of 10 years, expected volatility of stock prices of .26 to .31 and expected dividends of 3.11% to 4.33% per year.
2001 2000 1999 ---- ---- ---- Net income as reported $ 1,623,345 $ 2,270,861 $ 2,111,055 Proforma net income 1,588,312 2,254,165 2,103,759 Basic earnings per share as reported 1.14 1.60 1.48 Diluted earnings per share as reported 1.13 1.57 1.46 Proforma basic earnings per share 1.12 1.58 1.47 Proforma diluted earnings per share 1.10 1.56 1.45
In future years, the proforma effect of not applying this standard is expected to increase as additional options are granted. 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, June 30, 1998 68,288 $5.00 - 13.38 $ 6.74 Granted 16,116 18.50 18.50 $ 1.34 Granted 3,000 14.25 14.25 2.53 Exercised 14,725 5.00 - 13.38 5.22 ----------- Outstanding, June 30, 1999 72,679 5.00 - 18.50 10.08 Forfeited 4,000 10.94 10.94 Granted 16,000 13.38 13.38 2.35 Exercised 14,725 5.00 - 10.94 6.61 ----------- Outstanding, June 30, 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 Exercised 25,200 5.00 5.00 2.61 ----------- Outstanding, June 30, 2001 61,840 5.00 - 18.50 12.95 ===========
-------------------------------------------------------------------------------- (Continued) 26. FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001, 2000 and 1999 -------------------------------------------------------------------------------- NOTE 9 - EMPLOYEE BENEFITS (Continued) The weighted average remaining contractual life of options outstanding at June 30, 2001 was approximately seven years. Stock options exercisable at June 30, 2001, 2000 and 1999 totaled, 16,349, 41,146 and 50,063 at a weighted average exercise price of $13.73, $8.63 and $7.10. As of June 30, 2001, 100,000 options remain available for future grants. Deferred Compensation: The Company has a deferred compensation plan for certain directors of the Company and a salary continuation plan for a Bank executive. The Company/Bank is obligated to pay each such individual or beneficiaries the accumulated contributions plus interest credited for the deferred compensation plan and a lump sum payment for the salary continuation plan, beginning with the individual's termination of service. A deferred compensation liability of $23,000 and $18,000 at June 30, 2001 and 2000 has been accrued for these obligations. The expense for these plans was $6,000, $22,000 and $36,000 for 2001, 2000 and 1999. NOTE 10 - INCOME TAXES Income tax expense for the years ended June 30 was:
2001 2000 1999 ---- ---- ---- Federal Current $ 396,096 $ 738,171 $ 987,372 Deferred (53,288) (161,618) (291,260) ------------- ------------ ------------ 342,808 576,553 696,112 State Current 162,667 244,787 334,696 Deferred (29,749) (21,868) (66,817) ------------- ------------ ------------ 132,918 222,919 267,879 ------------ ------------ ------------ Income tax expense $ 475,726 $ 799,472 $ 963,991 ============ ============ ============
Income tax expense differed from amounts computed using the U.S. federal income tax rate of 34% as follows:
2001 2000 1999 ---- ---- ---- Income taxes at 34% statutory rate $ 713,684 $ 1,043,913 $ 1,045,516 Tax effect of: Tax-exempt income (138,466) (139,919) (146,615) State tax, net of federal income tax effect 87,725 147,127 199,357 Life insurance proceeds - (189,041) - Dividends received deduction (100,755) (84,879) (80,121) Fair market value of ESOP shares in excess of cost - 23,723 49,468 Low income housing credits (88,724) (87,987) (64,739) Other 2,262 86,535 (38,875) ------------ ------------ ------------ Total income tax expense $ 475,726 $ 799,472 $ 963,991 ============ ============ ============
-------------------------------------------------------------------------------- (Continued) 27. FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001, 2000 and 1999 -------------------------------------------------------------------------------- NOTE 10 - INCOME TAXES (Continued) Components of the net deferred tax liability as of June 30 are:
2001 2000 1999 ---- ---- ---- Deferred tax assets: Bad debts $ 634,833 $ 686,839 $ 530,437 Deferred compensation 8,921 7,234 96,921 Core deposit intangible 119,111 101,941 61,165 Depreciation on securities available for sale - 970,717 280,669 Other 66,641 20,618 12,803 ------------ ------------ ------------ 829,506 1,787,349 981,995 Deferred tax liabilities: Accretion (56,331) (48,188) (50,269) Net deferred loan costs (97,441) (175,747) (241,574) Appreciation on securities available for sale (216,867) - - Other - - (271) ------------ ------------ ------------ (370,639) (223,935) (292,114) Valuation allowance - - - ------------ ------------ ------------ Net deferred tax asset (liability) $ 458,867 $ 1,563,414 $ 689,880 ============ ============ ============
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, 2001 and 2000. 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. NOTE 11 - 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. -------------------------------------------------------------------------------- (Continued) 28. FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001, 2000 and 1999 -------------------------------------------------------------------------------- NOTE 11 - REGULATORY MATTERS (Continued) 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, 2001 Total Capital $ 20,138 13.60% $ 11,844 8.00% $ 14,805 10.00% Tier I (Core) Capital 18,365 12.40% 5,922 4.00% 8,883 6.00% (to risk weighted assets) Tier I (Core) Capital 18,365 8.07% 9,103 4.00% 11,378 5.00% (to adjusted total assets) Tier I (Core) Capital 18,365 8.02% 9,157 4.00% 11,446 5.00% (to average assets) As of June 30, 2000 Total Capital $ 18,897 13.58% $ 11,136 8.00% $ 13,920 10.00% Tier I (Core) Capital 17,153 12.32% 5,568 4.00% 8,352 6.00% (to risk weighted assets) Tier I (Core) Capital 17,153 7.92% 8,663 4.00% 10,829 5.00% (to adjusted total assets) Tier I (Core) Capital 17,153 7.83% 8,765 4.00% 10,953 5.00% (to average assets)
Regulations of the Office of Thrift Supervision limit the amount of dividends and other capital distributions that may be paid by a savings institution without prior approval of the Office of Thrift Supervision. 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 Office of Thrift Supervision prompt corrective action regulations, following the proposed distribution. Accordingly, at June 30, 2001, approximately $2,685,000 of the Bank's retained earnings was potentially available for distribution to the Company. -------------------------------------------------------------------------------- (Continued) 29. FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001, 2000 and 1999 -------------------------------------------------------------------------------- NOTE 12 - 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 1 2 0 0 0 ------- ------- Fixed Variable Fixed Variable Rate Rate Rate Rate ---- ---- ---- ---- Commitments to make loans $ 550,000 $ 161,300 $ 294,500 356,000 Unused lines of credit - 15,865,000 - 10,128,000 Standby letters of credit - 1,527,000 - 1,195,000 -------------- ------------- ------------- -------------- $ 550,000 $ 17,553,000 $ 294,500 $ 11,679,000 ============== ============= ============= ==============
Fixed rate loan commitments at June 30, 2001 were at current rates, ranging primarily from 7.00% to 9.00%. Variable rate loan commitments, unused lines of credit and standby letters of credit at June 30, 2001 were at current rates ranging from 7.00% to 7.25% for loan commitments, 7.25% 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 a certain three 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, 2001, the Bank had invested $750,000 and had recorded equity in the operating loss of the limited partnership of $81,000, $65,000 and $65,000 for the years ended June 30, 2001, 2000 and 1999. At June 30, 2001 and 2000, the obligation due to the limited partnership was $-0- and $75,000. The Bank receives 3% of the eligible tax credits. For the years ended June 30, 2001, 2000 and 1999, the Bank received approximately $89,000, $88,000 and $65,000 in tax credits. -------------------------------------------------------------------------------- (Continued) 30. FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001, 2000 and 1999 -------------------------------------------------------------------------------- NOTE 13 - 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 45% 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 14 - 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, 2000 $ 1,079,679 New loans 443,142 Repayments (127,393) Other changes (152,067) ------------ Balance - June 30, 2001 $ 1,243,361 ============ Other changes include adjustments for loans applicable to one reporting period that are excludable from the other reporting period. -------------------------------------------------------------------------------- (Continued) 31. FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001, 2000 and 1999 -------------------------------------------------------------------------------- NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS Presented below are condensed financial statements for the parent company, FFW Corporation.
CONDENSED BALANCE SHEETS June 30, 2001 and 2000 2001 2000 ---- ---- ASSETS Cash and cash equivalents $ 78,818 $ 190,720 Investment in Bank subsidiary 19,716,232 17,040,497 Investment in non-bank subsidiary 337,372 320,406 Securities available for sale 1,788,821 2,027,516 Other assets 269,768 263,988 --------------- ---------------- Total assets $ 22,191,011 $ 19,843,127 =============== ================ LIABILITIES Accrued expenses and other liabilities $ 197,951 $ 228,207 SHAREHOLDERS' EQUITY Common stock 18,298 18,070 Additional paid-in capital 9,336,606 9,228,128 Retained earnings - substantially restricted 16,423,160 15,547,131 Unearned employee MRP (52,242) (72,354) Accumulated other comprehensive income 330,776 (1,479,969) Treasury stock (4,063,538) (3,626,086) --------------- ---------------- Total shareholders' equity 21,993,060 19,614,920 --------------- ---------------- Total liabilities and shareholders' equity $ 22,191,011 $ 19,843,127 =============== ================ CONDENSED STATEMENTS OF INCOME For the years ended June 30, 2001, 2000 and 1999 2001 2000 1999 ---- ---- ---- Interest income $ 105,072 $ 121,025 $ 129,664 Dividend income 740,000 650,000 1,050,000 -------------- --------------- ---------------- 845,072 771,025 1,179,664 Operating expense 162,612 80,246 251,650 Equity in undistributed income of subsidiaries Bank 909,403 1,541,534 1,064,947 Non-bank 15,290 51,374 50,714 -------------- --------------- ---------------- Income before income taxes 1,607,153 2,283,687 2,043,675 Income tax expense (benefit) (16,192) 12,826 (67,380) -------------- --------------- ---------------- Net income $ 1,623,345 $ 2,270,861 $ 2,111,055 ============== =============== ================
-------------------------------------------------------------------------------- (Continued) 32. FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001, 2000 and 1999 -------------------------------------------------------------------------------- NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS For the years ended June 30, 2001, 2000 and 1999 2001 2000 1999 ---- ---- ---- Cash flows from operating activities Net income $ 1,623,345 $ 2,270,861 $ 2,111,055 Adjustments to reconcile net income to net cash from operating activities Equity in undistributed income of subsidiaries (924,693) (1,592,908) (1,115,661) Other (126,458) 918,066 (1,033,763) --------------- -------------- --------------- Net cash from operating activities 572,194 1,596,019 (38,369) Cash flows from investing activities Proceeds from sales of securities - 131,003 170,000 Maturities of securities available for sale 565,000 210,089 982,234 Purchase of securities available for sale (171,690) (731,839) (574,108) Repayments on loan receivable from ESOP - 52,331 99,417 --------------- -------------- --------------- Net cash from investing activities 393,310 (338,416) 677,543 Cash flows from financing activities Proceeds from stock options 126,000 54,819 27,356 Purchase of treasury stock (456,090) (493,717) (405,887) Cash dividends paid (747,316) (694,424) (608,505) --------------- -------------- --------------- Net cash from financing activities (1,077,406) (1,133,322) (987,036) --------------- -------------- --------------- Net change in cash and cash equivalents (111,902) 124,281 (347,862) Beginning cash and cash equivalents 190,720 66,439 414,301 --------------- -------------- --------------- Ending cash and cash equivalents $ 78,818 $ 190,720 $ 66,439 =============== ============== ===============
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 11). -------------------------------------------------------------------------------- (Continued) 33. FFW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001, 2000 and 1999 -------------------------------------------------------------------------------- NOTE 16 - 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 1 2 0 0 0 ------- ------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ------ ---------- ------ ---------- (In thousands) (In thousands) Cash and cash equivalents $ 8,530 $ 8,530 $ 5,254 $ 5,254 Securities available for sale 60,973 60,973 52,026 52,026 Loans receivable, net 152,195 152,798 150,810 148,403 Federal Home Loan Bank stock 3,401 3,401 3,401 3,401 Accrued interest receivable 1,480 1,480 1,666 1,666 Non-interest-bearing deposits (9,161) (9,161) (8,876) (8,876) Interest-bearing deposits (135,469) (137,067) (124,229) (123,555) Borrowings (62,397) (63,928) (64,168) (63,494)
For purposes of the above disclosures of estimated fair value, the following assumptions were used as of June 30, 2001 and 2000. The estimated fair value for cash and cash equivalents, Federal Home Loan Bank stock, accrued interest receivable and non-interest-bearing deposits is 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, 2001 and 2000 applied for the time period until the loans are assumed to reprice or be paid. 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, 2001 and 2000, 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, 2001 and 2000, 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, 2001 and 2000 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. -------------------------------------------------------------------------------- 34. DIRECTORS AND EXECUTIVE OFFICERS FFW CORPORATION Officers Wayne W. Rees Chairman of the Board Roger K. Cromer President and Chief Executive Officer Christine K. Noonan Secretary Timothy A. Sheppard Treasurer and Chief Accounting Officer Board of Directors Wayne W. Rees Owner and Publisher The Paper of Wabash County, Inc. J. Stanley Myers Owner and Operator Servisoft Water Conditioning, Inc. Thomas L. Frank Comptroller, B. Walter & Company Joseph W. McSpadden Vice President and Part Owner Beauchamp & McSpadden Ronald D. Reynolds Owner, J. M. Reynolds Oil Co, Inc. Roger K. Cromer President and Chief Executive Officer, FFW Corporation President and Chief Executive Officer, First Federal Savings Bank of Wabash Chairman of the Board, FirstFed Financial of Wabash FIRST FEDERAL SAVINGS BANK OF WABASH Officers Board of Directors Wayne W. Rees Wayne W. Rees Chairman of the Board J. Stanley Myers Roger K. Cromer President and Chief Executive Officer Thomas L. Frank Christine K. Noonan Joseph W. McSpadden Vice President, Chief Operations Officer and Secretary Ronald D. Reynolds Timothy A. Sheppard Roger K. Cromer Vice President and Controller Noah T. Smith Vice President, Commercial Loans Sonia Niccum Vice President, Mortgage Loans FIRSTFED FINANCIAL OF WABASH, INCORPORATED Officers Board of Directors Roger K. Cromer Wayne W. Rees Chairman of the Board J. Stanley Myers Tony Pulley President Thomas L. Frank Wayne W. Rees Joseph W. McSpadden Secretary Ronald D. Reynolds Timothy A. Sheppard Treasurer Roger K. Cromer -------------------------------------------------------------------------------- 35. 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 September 15, 2001 there were approximately 349 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, 1999 13.75 12.50 .12 Dec. 31, 1999 13.50 12.25 .12 March 31, 2000 12.75 10.63 .12 June 30, 2000 12.44 10.44 .12 Sept. 30, 2000 12.88 11.69 .13 Dec. 31, 2000 12.69 10.50 .13 March 31, 2001 12.69 11.13 .13 June 30, 2001 13.00 11.50 .13 Dividends FFW declared and paid dividends of $0.52 per share for fiscal year 2001. The Board of Directors intends to continue payment of quarterly cash dividends, dependent on the results of operations and financial condition of FFW and other factors. Annual Meeting of Shareholders The Annual Meeting of Shareholders of FFW Corporation will be held at 2:30 p.m., October 23, 2001 at the executive office 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 President and Chief Executive 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 transfer agent and registrar by writing: Registrar and Transfer Company 10 Commerce Drive Cranford, New Jersey 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 (219) 563-3185 Special Counsel Katten Muchin Zavis 1025 Thomas Jefferson Street, N.W. East Lobby, Suite 700 Washington, D.C. 20007-5201 Independent Auditor Crowe, Chizek and Company LLP 330 E. Jefferson Blvd. South Bend, Indiana 46624 -------------------------------------------------------------------------------- 36. EX-21 5 ex-21.txt EX-21
Exhibit 21 SUBSIDIARIES OF THE REGISTRANT Percent State of of Incorporation Parent Subsidiary Ownership or Organization ------ ---------- --------- --------------- FFW Corporation First Federal Savings Bank of 100% Federal Wabash FFW Corporation FirstFed Financial of Wabash, 100% Indiana Inc.
The financial statements of FFW Corporation are consolidated with those of its subsidiaries. EX-23 6 ex-23.txt EX-23 Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Registration Nos. 33-71194 and 333-70179) of FFW Corporation (the "Company") of our report dated August 24, 2001, on the consolidated financial statements of the Company, which report is included in the Company's Annual Report to Shareholders and is incorporated by reference in the Company's Form 10-KSB for the year ended June 30, 2001. /s/ Crowe, Chizek and Company LLP --------------------------------- Crowe, Chizek and Company LLP South Bend, Indiana September 27, 2001