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.