SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 0-21170
FFW CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 35-1875502
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) or Number)
1205 North Cass Street, Wabash, IN 46992
(Address of principal executive offices)
(260) 563-3185
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes _X_ No ___
State the number of Shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
As of February 11, 2005, there were 1,282,243 shares of the Registrant's common
stock issued and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes ___ No _X_
FFW CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Consolidated Balance Sheets for December 31, 2004 3
and June 30, 2004
Consolidated Statements of Income and 4
Comprehensive Income for the three and six
months ended December 31, 2004 and 2003.
Consolidated Statements of Cash Flows for the six months 5
ended December 31, 2004 and 2003.
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis or Plan of Operation 9
Item 3. Controls and Procedures 16
PART II. OTHER INFORMATION
Items 1-6 17
Signature Page 18
Exhibit Index 19
2
PART I: FINANCIAL INFORMATION
FFW CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS : December 31 June 30
2004 2004
----- ----
Cash and due from financial institutions $ 5,623,262 $ 5,239,955
Interest-earning deposits in other financial institutions - short term 1,545,455 1,299,774
------- --------- ----------------
Cash and cash equivalents 7,168,717 6,539,729
Securities available for sale 78,571,658 79,070,586
Loans receivable, net of allowance for loan losses of $2,486,912
at December 31, 2004 and $2,569,960 at June 30, 2004 153,850,912 136,086,451
Loans held for sale 164,800 96,600
Federal Home Loan Bank stock, at cost 3,695,800 3,616,600
Accrued interest receivable 1,360,206 1,356,853
Premises and equipment, net 4,166,016 3,965,553
Mortgage servicing rights 530,676 618,793
Cash surrender value of life insurance 5,038,484 4,935,876
Goodwill 975,468 975,468
Other assets 2,154,686 2,647,008
--------- ---------
Total Assets $257,677,423 $239,909,517
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Noninterest-bearing deposits $ 13,770,404 $ 10,912,541
Interest-bearing deposits 156,175,787 148,339,452
----------- -----------
Total Deposits 169,946,191 159,251,993
Federal Home Loan Bank advances 62,593,150 55,733,017
Accrued expenses and other liabilities 1,729,023 2,300,427
--------- ---------
Total Liabilities 234,268,364 217,285,437
Shareholders' Equity:
Preferred stock, $.01 par; 500,000 shares authorized, none issued --- ---
Common stock, $.01 par; 2,000,000 shares authorized;
issued: 1,836,328, outstanding: 1,291,792 - December 31, 2004;
issued: 1,829,828, outstanding: 1,285,248 - June 30, 2004 18,363 18,298
Additional paid-in capital 9,496,561 9,403,738
Retained earnings 19,830,235 20,872,005
Accumulated other comprehensive income (loss) 565,275 (1,209,167)
Unearned management retention plan shares (83,296) (107,816)
Treasury stock at cost, shares: 544,536 - December 31, 2004 and
544,580 - June 30, 2004 (6,418,079) (6,352,978)
---------- ----------
Total Shareholders' Equity 23,409,059 22,624,080
---------- ----------
Total Liabilities and Shareholders' Equity $ 257,677,423 $ 239,909,517
============= =============
See accompanying notes.
3
PART I: FINANCIAL INFORMATION
FFW CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Six Months Ended
December 31 December 31
2004 2003 2004 2003
---- ---- ---- ----
Interest and dividend income :
Loans, including fees $ 2,344,916 $ 2,179,033 $ 4,601,058 $4,450,127
Taxable securities 650,962 669,569 1,295,817 1,298,778
Nontaxable securities 214,554 243,749 421,552 496,465
Other interest-earning assets 17,930 12,090 26,320 18,321
------ ------ ------ ------
Total interest income 3,228,362 3,104,441 6,344,747 6,263,691
Interest expense :
Deposits 865,977 905,925 1,684,126 1,841,674
Other 649,526 639,895 1,274,260 1,275,494
------- ------- --------- ---------
Total interest expenses 1,515,503 1,545,820 2,958,386 3,117,168
--------- --------- --------- ---------
Net interest income 1,712,859 1,558,621 3,386,361 3,146,523
Provision for loan losses 120,000 210,000 240,000 420,000
------- ------- ------- -------
Net interest income after provision for loan losses 1,592,859 1,348,621 3,146,361 2,726,523
Non-interest income (loss) :
Net gain on sale of securities --- --- --- 3,712
Net gain on sale of loans 42,750 85,204 75,372 355,867
Commission income 51,250 56,026 100,444 91,787
Service charges and fees 317,987 331,395 545,501 488,886
Earnings on life insurance 58,527 73,101 116,816 146,202
Other than temporary impairment on securities (1,804,750) --- (1,804,750) ---
Other 31,060 67,909 200,879 84,281
------ ------ ------- ------
Total non-interest income (loss) (1,303,176) 613,635 (765,738) 1,170,735
Non-interest expense :
Compensation and benefits 661,776 582,545 1,316,851 1,161,898
Occupancy and equipment 165,188 105,833 332,903 209,784
Deposit insurance premium 5,793 18,405 11,706 37,331
Regulatory assessment 15,882 16,131 32,681 31,562
Correspondent bank charges 65,307 66,160 130,742 127,127
Data processing expense 114,960 129,303 228,227 257,814
Printing, postage and supplies 41,813 38,018 81,081 76,897
Other 323,665 323,398 650,618 616,726
------- ------- ------- -------
Total non-interest expense 1,394,384 1,279,793 2,784,809 2,519,139
--------- --------- --------- ---------
Income (Loss) before income taxes (1,104,701) 682,463 (404,186) 1,378,119
Income tax expense 111,104 48,378 202,586 142,437
------- ------ ------- -------
Net income (loss) $(1,215,805) $ 634,085 $(606,772) $ 1,235,682
============ ========= ========== ===========
Change in unrealized appreciation (depreciation) on
securities available for sale, net of tax 978,210 16,761 1,774,442 (898,682)
------- ------ --------- ---------
Comprehensive income (loss) $ (237,595) $650,846 $ 1,167,670 $337,000
=========== ======== =========== ========
Earnings (loss) per common share :
Basic $ (.95) $ .49 $ (.47) $ .95
Diluted $ (.95) $ .48 $ (.47) $ .94
See accompanying notes.
4
PART I: FINANCIAL INFORMATION
FFW CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
December 31
2004 2003
---- ----
Cash flows from operating activities :
Net income (loss) $ (606,772) $ 1,235,682
Adjustments to reconcile net income (loss) to net cash
from operating activities :
Depreciation and amortization 434,352 483,545
Provision for loan losses 240,000 420,000
Net (gains) losses on sale of :
Securities --- (3,712)
Loans held for sale (75,372) (355,867)
REOs and repossessed assets (51,509) (51,978)
Fixed assets (105,124) ---
Other than temporary impairment on securities 1,804,750 ---
Originations of loans held for sale (3,855,230) (17,863,884)
Proceeds from sale of loans held for sale 3,833,118 18,062,549
Increase in cash surrender value of life insurance (102,608) (133,980)
Dividends paid as FHLB stock (79,200) (86,600)
Amortization of MRP contribution 24,520 15,880
Net change in accrued interest receivable and other
assets 141,667 177,612
Net change in accrued interest payable
and other liabilities (571,404) (2,082,989)
--------- -----------
Net cash from operating activities 1,031,188 (183,742)
Cash flows from investing activities :
Proceeds from :
Sales and calls of securities available for sale 3,700,000 6,540,191
Maturities of securities available for sale 1,000,000 955,000
Sales of REOs and repossessed assets 454,257 321,128
Sale of branch building 115,733 ---
Purchase of securities available for sale (6,360,022) (10,189,760)
Principal collected on mortgage- backed securities 2,202,126 5,462,020
Net change in loans receivable (18,258,368) (5,072,236)
Purchases of premises and equipment, net (403,046) (342,662)
--------- ---------
Net cash from investing activities (17,549,320) (2,326,319)
Cash flows from financing activities :
Net change in deposits 10,694,198 (5,195,837)
Proceeds from borrowings 27,500,000 22,500,000
Repayment on borrowings (20,639,867) (14,630,412)
Purchase of treasury stock (135,900) (393,377)
Proceeds from stock options 163,687 60,875
Cash dividends paid (434,998) (414,793)
--------- ---------
Net cash from financing activities 17,147,120 1,926,456
---------- ---------
Net change in cash and cash equivalents 628,988 (583,605)
Beginning cash and cash equivalents 6,539,729 9,824,833
--------- ---------
Ending cash and cash equivalents $7,168,717 $9,241,228
========== ==========
Supplemental disclosure of cash flow information
Transfer of loans to REO and repossessed assets $ 253,907 $ 906,500
See accompanying notes.
5
PART I: FINANCIAL INFORMATION
FFW CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of Presentation
The accompanying unaudited Consolidated Financial Statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to Form
10-QSB and Regulation S-B. Accordingly, they do not include all the information
and footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements.
In the opinion of management, the Consolidated Financial Statements contain all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial condition of FFW Corporation as of December 31,
2004 and June 30, 2004 and the results of its operations, for the three and six
months ended December 31, 2004 and 2003. Financial Statement reclassifications
have been made for the prior period to conform to classifications used as of and
for the period ended December 31, 2004.
Operating results for the three and six months ended December 31, 2004 are not
necessarily indicative of the results that may be expected for the fiscal year
ending June 30, 2005.
(2) Earnings Per Share:
Basic earnings per share are calculated solely on weighted-average common shares
outstanding. Diluted earnings per share reflect the potential dilution of stock
options and other common stock equivalents. For the three and six month periods
ending December 31, 2004, the weighted average shares outstanding in calculating
basic earnings per share were 1,280,602 and 1,279,970 while the weighted average
number of shares for diluted earnings per share were also 1,280,602 and
1,279,970. For the three and six month periods ending December 31, 2003, the
weighted average shares outstanding in calculating basic earnings per share were
1,290,059 and 1,295,088 while the weighted average number of shares for diluted
earnings per share were 1,316,803 and 1,319,572.
6
(3) Stock Based 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.
Three Months Ending Six Months Ending
December 31, December 31,
2004 2003 2004 2003
---- ---- ---- ----
Net income as reported $ (1,215,805) $ 634,086 $ (606,772) $ 1,235,682
Less: Stock-based compensation
expense determined under fair value
based method 730 5,314 1,460 10,628
-------------- -------------- -------------- ---------------
Pro forma net income $ (1,216,535) $ 628,772 $ (608,232) $ 1,225,054
=============== =============================================
Basic earnings (loss) per share as reported $ (.95) $ .49 $ (.47) $ .95
Pro forma basic earnings (loss) per share (.95) .49 (.48) .95
Diluted earnings (loss) per share as reported (.95) .48 (.47) .94
Pro forma diluted earnings (loss) per share (.95) .48 (.48) .93
There were no stock options granted during the six months ended December 31,
2004 or 2003.
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.
A newly issued accounting standard, FAS 123R, will require all companies to
record compensation cost for stock options provided to employees in return for
employee service. The cost is measured at the fair value of the options when
granted, and this cost is expensed over the employee service period, which is
normally the vesting period of the options. This will apply to awards granted or
modified by the Company after the first quarter beginning after December 15,
2005. Compensation cost will also be recorded for prior option grants that vest
after the date of adoption. The effect on results of operations will depend on
the level of future option grants and the calculation of the fair value of the
options granted at such future date, as well as the vesting periods provided,
and so cannot currently be predicted. Existing options that will vest after
adoption date are expected to result in additional compensation expense, but the
amounts will not be significant, and there will be no significant effect on
financial position as total equity will not change.
(4) Other Than Temporary Impairment
As of December 31, 2004, unrealized losses on equity securities totaled
approximately $1.9 million. During the quarter ending December 31, 2004, public
disclosures regarding accounting practices at Fannie Mae ("FNMA") and a
multi-billion dollar FNMA preferred stock issuance with a substantially
different structure and higher yield than previous offerings had a detrimental
effect on the fair value of the Company's FNMA and FHLMC preferred stock
holdings. As a result of these factors and the duration and level of market
values below cost on certain preferred stock issues, management could not
forecast full recovery of the fair values in a reasonable time period and
concluded that five of the eight preferred stock issues that it owns are other
than temporarily impaired and recorded an impairment charge in the amount of
$1.8 million. This impairment charge is a
7
capital loss for income tax purposes, and may be deducted only to the extent
capital gains are generated within an available carry-forward period. Management
evaluated the likelihood that the Company could generate capital gains to allow
realization of the tax benefits associated with this capital loss, including
consideration of various possible tax planning strategies. Management concluded
that it is unlikely the Company would be able to generate significant capital
gains in the foreseeable future, and, therefore, a tax benefit has not been
recorded in connection with the impairment charge.
8
PART I: ITEM 2
FFW CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The accompanying Consolidated Financial Statements include the accounts of FFW
Corporation (the "Company") and its wholly owned subsidiaries, First Federal
Savings Bank of Wabash (the "Bank") and FirstFed Financial, Inc ("FirstFed
Financial"). All significant inter-company transactions and balances are
eliminated in consolidation. The Company's results of operations are primarily
dependent on the Bank's net interest margin, which is the difference between
interest income on interest-earning assets and interest expense on
interest-bearing liabilities. The Bank's net income is also affected by the
level of its non-interest income and non-interest expenses, such as employee
compensation and benefits, occupancy expenses, and other expenses.
FORWARD-LOOKING STATEMENTS
Except for historical information contained herein, the matters discussed in
this document, and other information contained in the Company's SEC filings, may
express "forward-looking statements." Those "forward-looking statements" may
involve risk and uncertainties, including statements concerning future events,
performance and assumptions and other statements that are other than statements
of historical facts. The Company wishes to caution readers not to place undue
reliance on any forward-looking statements, which speak only as of the date
made. Readers are advised that various factors--including, but not limited to,
changes in laws, regulations or accounting principles generally accepted in the
United States of America; the Company's competitive position within the markets
served; increasing consolidation within the banking industry; unforeseen changes
in interest rates; any unforeseen downturns in the local, regional or national
economies--could cause the Company's actual results or circumstances for future
periods to differ materially from those anticipated or projected.
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.
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"), the carrying value of securities available for sale 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
9
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.
Carrying Value of Securities Available For Sale ("AFS"): Securities AFS are
carried at fair value, with unrealized holding gains and losses reported
separately in accumulated other comprehensive income/(loss), net of tax. The
Company obtains market values from a third party on a monthly basis in order to
adjust the securities to fair value. As a result of changes in the fair market
value of the Company's AFS securities portfolio, accumulated other comprehensive
income/(loss) net of tax totaled $565,275 at December 31, 2004 and $(1,209,167)
at June 30, 2004. Additionally, securities AFS are required to be written down
to fair value when a decline in fair value is not temporary; therefore, future
changes in the fair value of securities could have a significant impact on the
Company's operating results. In determining whether a market value decline is
other than temporary, management considers the reason for the decline, the
extent of the decline and the duration of the decline. As of December 31, 2004,
unrealized losses on equity securities totaled approximately $1.9 million.
During the quarter ending December 31, 2004, public disclosures regarding
accounting practices at Fannie Mae ("FNMA") and a multi-billion dollar FNMA
preferred stock issuance with a substantially different structure and higher
yield than previous offerings had a detrimental effect on the fair value of the
Company's FNMA and FHLMC preferred stock holdings. As a result of these factors
and the duration and level of market values below cost on certain preferred
stock issues, management concluded that five of the eight preferred stock issues
that it owns are other than temporarily impaired and recorded an impairment
charge in the amount of $1.8 million. This impairment charge is a capital loss
for income tax purposes, and may be deducted only to the extent capital gains
are generated within an available carry-forward period. Management evaluated the
likelihood that the Company could generate capital gains to allow realization of
the tax benefits associated with this capital loss, including consideration of
various possible tax planning strategies. Management concluded that it is
unlikely the Company would be able to generate significant capital gains in the
foreseeable future, and, therefore, a tax benefit has not been recorded in
connection with the impairment charge.
Mortgage Servicing Rights: Servicing rights represent 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 term. Any impairment 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. The Company periodically obtains an outside appraisal in order to
evaluate the Company's mortgage servicing rights asset for impairment. During
the quarter ending December 31, 2004, a $3,000 impairment charge was taken
following the receipt of an outside appraisal. The $3,000 impairment charge is
presented as a reduction in non-interest income in the financial statements and
has been established as a valuation allowance.
FINANCIAL CONDITION
Total assets were $257.7 million at December 31, 2004, up $17.8 million, or
7.4%, from $239.9 million at June 30, 2004. Growth in net loans receivable of
$17.8 million, or 11.6%, was accompanied by a $10.7 million increase in
deposits.
Net loans receivable increased from $136.1 million at June 30, 2004 to $153.9
million at December 31, 2004. The increases in the loan portfolio were comprised
primarily of $14.2 million in nonresidential and commercial loans, $3.7 million
in residential mortgages and $1.8 million in home equity and improvement loans.
Other consumer and automobile loans decreased $1.9 million. Nonresidential and
commercial loans have increased
10
in all of our branch markets. The increase in residential mortgages reflects
renewed interest in adjustable rate loans, primarily five year hybrids, which
the Company retains on its balance sheet. The Company primarily sells its fixed
rate mortgages in the secondary market with terms of 15 years or longer. Loans
held for sale increased from $97,000 at June 30, 2004 to $165,000 at December
31, 2004.
Total deposits increased to $169.9 million at December 31, 2004. Management will
continue to attempt to control the overall increases in interest rates on
deposits by targeting certain terms and offering "specials" rather than making
across the board increases in interest rates on all deposit products. FHLB
advances increased by $6.9 million, or 4.3%, to $62.6 million at December 31,
2004.
Total shareholders' equity increased $785,000 to $23.4 million at December 31,
2004. The increase primarily resulted from a $1.8 million decrease in unrealized
depreciation on securities available for sale, net of tax, offsetting a $1.0
million reduction in retained earnings.
COMPARISON OF THE THREE AND SIX-MONTH PERIODS ENDED DECEMBER 31, 2004 AND 2003
Net loss for the three and six-month periods ended December 31, 2004 was
$1,216,000 and $607,000 compared to net income of $634,000 and $1,236,000 for
the equivalent periods in 2003. The three and six-month periods ended December
31, 2004 were primarily affected by a $1.8 million other than temporary
impairment charge on FNMA and FHLMC preferred stocks. Management decided to
record this charge due to recent public disclosures at FNMA and FHLMC, the
duration and level of market values below book cost on these preferred stocks
and the December 2004 multi-billion dollar FNMA preferred stock issuance with a
substantially different structure and higher yields than previous offerings.
These preferred stocks are investment grade securities that have never defaulted
on payment to FFW Corporation. The impairment charge had no impact on FFWC's
capital since the unrealized losses were already recorded as a mark to market
adjustment in other comprehensive income (loss). Since capital is unaffected,
the non-cash impairment charge had no effect on the Company's book value per
share. As discussed under "Critical Accounting Policies," no tax benefit was
recorded on the impairment charge, as the Company does not believe it is likely
to realize a tax benefit from the charge.
Without this charge, net income for the three and six-month periods ended
December 31, 2004 would have been $589,000 and $1,198,000. Without the other
than temporary impairment charge, the three and six-month periods ended December
31, 2004 were characterized by higher net interest income, lower provision,
lower noninterest income and higher noninterest expense. Without the charge,
income before taxes was higher in fiscal 2005 for the three and six-month
periods but net income was lower due to a higher effective tax rate in fiscal
2005.
Diluted net loss per common share for the second fiscal quarter of 2005 amounted
to ($0.95) with the charge. Without the charge, diluted net income for the
three-month period ended December 31, 2004 would have been $0.45 compared to
$0.48 for the equivalent period in 2004. For the six months ended December 31,
2004, with the charge, diluted net loss per share was ($0.47). Without the
charge, diluted earnings per common share would have been $0.92 and $0.94 for
the six months ended December 31, 2004 and 2003.
Return on average shareholders' equity (ROE) was (20.77)% for the three months
and (5.15)% for the six months ended December 31, 2004, compared to 10.96% and
10.61% in 2003. The return on total average assets (ROA) was (1.97)% and (0.49)%
for the three and six-month periods ended December 31, 2004, compared to 1.04%
and 1.02% in 2003. Without the charge, ROE would have been 9.87% and 10.17% and
ROA would have been 0.93% and 0.96% for the three and six-months ended December
31, 2004.
11
NET INTEREST INCOME
The net interest income for the three-month period ended December 31, 2004, was
$1,714,000 compared to $1,558,000, an increase of 10.0% over the same period in
2003. Accordingly, the Company's net interest margin was 2.91% compared to 2.73%
in 2003. The net interest income for the six-month period ended December 31,
2004, was $3,387,000 compared to $3,146,000, an increase of 7.7% over the same
period in 2003. Accordingly, the Company's net interest margin was 2.91%
compared to 2.78% in 2003.
Total average earning assets increased $6.3 and $4.2 million, respectively, for
the three and six-month periods ended December 31, 2004, over the comparative
periods in 2003. Total average investment securities decreased $7.9 and $8.6
million for the three and six-month periods over one-year ago. Total average
loans increased $14.2 and $12.8 million for the three and six-month periods over
one-year ago. The yields on total average earning assets were 5.48% and 5.44%
for the three-month periods ended December 31, 2004, and 2003 and 5.46% and
5.53% for the six-month periods. The decline in yield for the six month period
was due to lower average rates on loans more than offsetting higher average
rates on securities and other interest earning assets. The cost of funds on
total average interest-bearing liabilities were 2.85% and 2.98% for the
three-month periods ended December 31, 2004, and 2003 and 2.81% and 3.03% for
the six-month periods.
The following tables set forth consolidated information regarding average
balances and rates.
FFW Corp
Three Months Ending
(Dollars in thousands)
12/31/2004 12/31/2003
Average Average Average Average
Interest-earning assets: Balance Interest Rate Balance Interest Rate
- ------------------------ ------- -------- ----- ------- -------- ----
Loans $147,627 $2,345 6.30% $133,436 $2,179 6.50%
Securities 82,637 866 4.14% 90,884 913 4.01%
Other interest-earning assets 3,333 18 2.14% 3,002 12 1.59%
-------- ------ -------- ------
Total interest-earning assets 233,597 3,229 5.48% 227,322 3,104 5.44%
Non interest-earning assets:
Cash and due from 6,110 6,217
Allowance for loan losses (2,511) (2,429)
Other non interest-earning assets 14,013 11,820
--------- --------
Total assets $251,209 $242,930
========= ========
Interest-bearing liabilities:
Interest-bearing deposits $152,782 866 2.25% $148,221 906 2.43%
HLB advances 57,919 649 4.45% 57,997 640 4.39%
--------- ------ -------- -----
Total interest-bearing liabilities 210,701 1,515 2.85% 206,218 1,546 2.98%
--------- ------ -------- -----
Non interest-bearing deposit accounts 14,174 11,039
Other non interest-bearing liabilities 2,660 2,681
---------- -------
Total liabilities 227,535 219,938
Shareholders' equity 23,674 22,992
---------- -------
Total liabilities and shareholders' equity $251,209 $242,930
========== ========
Net interest income $ 1,714 $ 1,558
======= =======
Net interest margin 2.91% 2.73%
==== ====
12
FFW Corp
Six Months Ending
(Dollars in thousands)
12/31/2004 12/31/2003
Average Average Average Average
Interest-earning assets: Balance Interest Rate Balance Interest Rate
- ------------------------ ------- -------- ----- ------- -------- ----
Loans $144,663 $4,601 6.31% $131,835 $4,450 6.71%
Securities 82,696 1,718 4.10% 91,341 1,795 3.93%
Other interest-earning assets 2,728 26 1.89% 2,706 18 1.32%
-------- ------ -------- ------
Total interest-earning assets 230,087 6,345 5.46% 225,882 6,263 5.53%
Non interest-earning assets:
Cash and due from 6,024 6,242
Allowance for loan losses (2,562) (2,490)
Other non interest-earning assets 14,062 11,694
-------- --------
Total assets $247,611 $241,328
======== ========
Interest-bearing liabilities:
Interest-bearing deposits $150,898 1,684 2.21% $149,492 1,842 2.45%
FHLB advances 57,652 1,274 4.38% 54,902 1,275 4.62%
-------- ------ -------- ------
Total interest-bearing liabilities 208,550 2,958 2.81% 204,394 3,117 3.03%
-------- ------ -------- ------
Non interest-bearing deposit accounts 13,272 11,025
Other non interest-bearing liabilities 2,417 2,748
-------- --------
Total liabilities 224,239 218,167
Shareholders' equity 23,372 23,161
-------- --------
Total liabilities and shareholders' equity $247,611 $241,328
======== ========
Net interest income $ 3,387 $ 3,146
======= =======
Net interest margin 2.91% 2.78%
==== ====
PROVISION FOR LOAN LOSSES
The provision for loan losses was $120,000 and $240,000 for the three and
six-month periods ended December 31, 2004 and $210,000 and $420,000 for the same
periods in 2003. Changes in the provision for loan losses are attributable to
management's analysis of the adequacy of the allowance for loan losses (ALL) to
address probable and incurred losses. Net charge-offs of $321,000 and $323,000
have been recorded for the three and six- month periods ended December 31, 2004,
compared to $9,000 and $365,000 of net charge-offs for the same period in 2003.
The ALL was $2,487,000 or 1.59% of portfolio loans at December 31, 2004 compared
$2,688,000 or 1.89% at September 30, 2004 and $2,570,000 or 1.89% at June 30,
2004. Non-performing loans, which include non-accruing loans and accruing loans
delinquent more than 90 days, were $950,000 at December 31, 2004 compared to
$1.1 million at September 30, 2004, $1.0 million at June 30, 2004 and $2.5
million at December 31, 2003.
The Company establishes an ALL based on an evaluation of risk factors in the
loan portfolio and changes in the nature and volume of its loan activity. This
evaluation includes, among other factors, the level of the Company's classified
and non-performing assets and their estimated value, the economic outlook and
the resulting impact on real estate and other values in the Company's primary
market area, regulatory issues and historical loan loss experience. Although
management believes it uses the best information available to
13
determine the ALL, unforeseen market conditions or other unforeseen events could
result in adjustments and net earnings could be significantly affected if
circumstances differ substantially from the assumptions used in making the
determination. In addition, a determination by the Company's main operating
subsidiary, the Bank, as to the classification of its assets and the amount of
its valuation allowances is subject to review by the OTS which may order the
establishment of additional general or specific reserve allowances. It is
management's opinion that the ALL is adequate to absorb existing losses in the
loan portfolio as of December 31, 2004.
NON-INTEREST INCOME
Non-interest income (loss) for the three-month period ended December 31, 2004
was ($1.2) million with the $1.8 million other than temporary impairment charge
on certain FNMA and FHLMC preferred stocks mentioned above. Without the charge,
non-interest income for the three and six-month periods ended December 31, 2004
would have been $502,000 and $1,039,000 compared to $614,000 and $1,171,000 for
the same periods in 2003. Without the charge, the three-month decrease of
$132,000 from the prior period was a result of decreases of $42,000 in gain on
sale of loans, $15,000 in earnings on life insurance, $37,000 in other
non-interest income, $13,000 in service charges and fees and $5,000 in
commission income. Without the charge, the six-month results for fiscal 2005
were $132,000 less due to decreases of $4,000 in gain on sale of securities,
$280,000 in gain on sale of loans, $29,000 in earnings on the cash surrender
value of bank owned life insurance that were partially offset by increases of
$9,000 in commission income, $57,000 in service charges and fees and $117,000 in
other non-interest income. The increase in other non-interest income includes
$105,000 from the sale of the Bank's previous North Manchester, IN branch.
NON-INTEREST EXPENSE
Non-interest expense for the three-month period ended December 31, 2004, was
$1,394,000, an increase of $115,000, or 9.0%, compared to the same period in
2003. For the six-month period ended December 31, 2004, non-interest expense was
$2,785,000, an increase of $266,000, or 10.5%. Comparing the six-month periods,
all areas of non-interest expense were higher except for deposit insurance
premiums and data processing expense. The largest increases, $155,000 or 13.3%
in compensation and benefits and $123,000 or 58.7% in occupancy and equipment,
stem from the addition of our fifth full service branch, located in Columbia
City, IN, in late June 2004 and increased depreciation of computer hardware and
software purchased over the last year.
FFW Corporation is investigating the possibility of de-listing its stock and
de-registering with the Securities and Exchange Commission ("SEC"). This
strategy would reduce future expenses associated with SEC reporting
requirements, as well as NASDAQ filing fees, but would also result in the
Company's common stock no longer being quoted on the NASDAQ Small Cap Market. In
order to de-register, the Company must first have fewer than 300 shareholders of
record. The Company currently has approximately 314 shareholders of record. The
Company's shares trade infrequently and residents of Indiana hold many shares.
Therefore, it is management's belief that any negative impact on the liquidity
of the shares as a result of a de-registering and de-listing would be minimal.
INCOME TAXES
The provisions for income taxes for the three and six-month periods ended
December 31, 2004 are not affected by the $1.8 million other than temporary
impairment charge since no deferred tax asset was setup in regard to this
charge. The provisions for income taxes for the three and six-month periods
ended December 31, 2004,
14
were $111,000 and $203,000 compared to $48,000 and $142,000 for the same periods
in 2003. The increase in provision is partially due to slightly higher income
before taxes without the $1.8 million charge. The provision increase is also due
to a higher effective tax rate stemming from decreased nontaxable securities
income and decreased nontaxable income from the cash surrender value of bank
owned life insurance. Without the charge, the Company's effective tax rate was
14.46% for the six months ended December 31, 2004 compared to 11.53% at December
31, 2003.
REGULATORY CAPITAL REQUIREMENTS
The Bank is required to maintain specific amounts of regulatory capital pursuant
to regulations of the OTS. At December 31, 2004, the Bank exceeded all
regulatory capital standards as is shown in the following table.
Minimum
To Be Well
Minimum Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ ------
As of December 31, 2004
Total Risk-Based Capital $ 21,229 12.88%$ 13,187 8.00% $ 16,484 10.00%
Tier I (Core) Capital 19,163 11.63% 6,593 4.00% 9,890 6.00%
(to risk weighted assets)
Tier I (Core) Capital 19,163 7.54% 10,169 4.00% 12,711 5.00%
(to adjusted total assets)
15
PART I: ITEM 3
FFW CORPORATION
CONTROLS AND PROCEDURES
As of the end of the fiscal quarter covered by this report, an evaluation was
carried out under the supervision and with the participation of FFW
Corporation's management, including our Chief Executive Officer and Chief
Financial Accounting Officer, of the effectiveness of our disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934). Based on their evaluation, our Chief
Executive Officer and Chief Financial Accounting Officer have concluded that the
Company's disclosure controls and procedures are, to the best of their
knowledge, effective to ensure that information required to be disclosed by FFW
Corporation in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
Subsequent to the date of their evaluation, our Chief Executive Officer and
Chief Financial Accounting Officer have concluded that there were no significant
changes in FFW Corporation's internal controls or in other factors that could
significantly affect its internal controls, including any corrective actions
with regard to significant deficiencies and material weaknesses.
16
Part II - Other Information
As of December 31, 2004, management is not aware of any current recommendations
by regulatory authorities which, if they were to be implemented, would have or
are reasonably likely to have a material adverse effect on the Company's
liquidity, capital resources or operations.
Item 1 - Legal Proceedings
Not Applicable.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
On March 25, 2003, the Board of Directors approved the repurchase of
5% of the Company's outstanding shares of common stock, or 66,090 such
shares, on the open market. The program had no expiration date. As of
December 31, 2004, the Company had repurchased 53,552 shares pursuant
to this repurchase program, leaving 12,538 shares subject to the plan.
Item 3 - Defaults Upon Senior Securities
Not Applicable.
Item 4 - Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 5 - Other Information
Not Applicable
Item 6 - Exhibits
(a) Exhibits
31(1) Certification required by 17 C.F.R. ss. 240.13a-14(a)
31(2) Certification required by 17 C.F.R. ss. 240.13a-14(a)
32 Certification pursuant to 18 U.S.C. ss. 1350
(b) Reports on Form 8-K
Form 8-K for 1st Fiscal Quarter Earnings Release filed on October
28, 2004.
17
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FFW CORPORATION
Registrant
Date: February 11, 2005 By: /s/ Roger K. Cromer
------------------------------ -------------------------------
Roger K. Cromer
President and Chief
Executive Officer
Date: February 11, 2005 By: /s/ Timothy A. Sheppard
------------------------------ -------------------------------
Timothy A. Sheppard
Treasurer and Chief
Accounting Officer
18
EXHIBIT INDEX
Exhibit No. Description of Exhibit Page
31(1) Certification required by 17 C.F.R. ss. 240.13a-14(a) 17
31(2) Certification required by 17 C.F.R. ss. 240.13a-14(a) 18
32 Certification pursuant to 18 U.S.C. ss. 1350 19
19