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