Exhibit 13
Annual Report to Security Holders
<PAGE>
FFW Corporation
Wabash, Indiana
Index to Consolidated Financial Statements
PRESIDENT'S MESSAGE .................................................. 3
SELECTED CONSOLIDATED FINANCIAL INFORMATION .......................... 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ................................ 5
REPORT OF INDEPENDENT AUDITORS ............................... 12
CONSOLIDATED BALANCE SHEETS
June 30, 2000 and 1999 ..................................... 13
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 2000, 1999 and 1998 ................... 14
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended June 30, 2000, 1999 and 1998 ................... 15
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2000, 1999 and 1998 ................... 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ................... 17
DIRECTORS AND EXECUTIVE OFFICERS ..................................... 33
SHAREHOLDER INFORMATION .............................................. 34
1
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[PHOTO OF FFW CORPORTATION]
<PAGE>
President's Message
Dear Shareholder:
It is a pleasure to report to you that FFW Corporation and its subsidiary, First
Federal Savings Bank, have completed another successful year. In this our
seventh year as a public company, our net income was up 7.6% over the previous
year at $2,271,000 with diluted earnings per share up 7.5% at $1.57. Our growth
is a reflection of the commitment our employees have made to provide service to
our customers. I invite you to read Management's Discussion and Analysis
beginning on page five that explains our financial condition and our performance
in detail.
Fiscal 2000 was a year of change. We completed all Y2K issues and were
successful in making Y2K a nonevent for our customers. I would like to thank all
the personnel who worked so diligently on this project. Change can be
unexpected--as it was with the untimely death of Nicholas M. George on April 1,
2000. Mr. George served as President and CEO of First Federal Savings Bank for
23 years, but he will be remembered best as a leader, a colleague, and a friend.
Through his leadership, Mr. George built the foundation from which FFW
Corporation and its subsidiary, First Federal Savings Bank, will build upon and
one which will allow us to thrive in the new millennium. To that end, we have
continued our focus on updating our systems by constructing a new computer room
and installing a wide area network. This will enable us to communicate more
effectively with our branches and improve our financial services and products.
As a shareholder, I ask you to review this Annual Report. We are proud of our
history, our consistent growth, and our commitment to superior customer service.
We recognize that our growth is possible because of the continued confidence of
our shareholders. I would like to thank all of our employees and the Board of
Directors for their efforts this past year and their dedication to First Federal
Savings Bank and the communities it serves. We look forward to the opportunities
and challenges of this next year and thank you for your support.
Sincerely,
Roger K. Cromer
President and Chief Executive Officer
3
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Selected Financial Information at or for the Year Ended June 30,:
<TABLE>
<CAPTION>
2000 1999 1998 1997 1996
--------- -------- -------- -------- --------
(In Thousands)
Selected Financial Condition Data:
<S> <C> <C> <C> <C> <C>
Total assets $219,037 $217,489 $203,311 $180,055 $150,467
Loans 150,810 151,491 139,394 114,159 100,529
Securities 52,026 51,029 50,293 40,450 40,566
Deposits 133,105 130,401 125,256 116,118 92,490
Borrowings 64,168 66,300 56,500 44,800 41,800
Equity 19,615 19,357 19,129 17,141 15,458
(In Thousands)
Selected Operations Data:
Total interest income $ 16,687 $ 16,052 $ 14,589 $ 12,224 $ 11,164
Net interest income 7,072 6,686 5,998 4,978 4,365
Provision for loan losses (1,034) (1,010) (705) (120) (95)
Non-interest income 1,689 1,990 1,265 674 628
Non-interest expense (4,657) (4,591) (3,800) (3,583) (2,586)
Income tax expense (799) (964) (858) (605) (726)
--------- -------- -------- -------- --------
Net income $ 2,271 $ 2,111 $ 1,900 $ 1,344 $ 1,586
========= ======== ======== ======== ========
Per Share:
Basic earnings per share (1) $ 1.60 $ 1.48 $ 1.36 $ 1.00 $ 1.11
Diluted earnings per share (1) $ 1.57 $ 1.46 $ 1.32 $ 0.97 $ 1.08
Dividends declared (1) $ 0.48 $ 0.42 $ 0.38 $ 0.32 $ 0.26
Dividend payout ratio 30.00% 28.38% 27.94% 32.00% 23.42%
Other Data:
Net interest margin (2) 3.38% 3.28% 3.31% 3.25% 3.06%
Average interest-earning assets to
average interest-bearing liabilities 1.10x 1.12x 1.12x 1.12x 1.13x
Non-performing assets (3) to total
assets at end of period .13% .39% .43% .16% .06%
Equity-to-total assets (end of period) 8.96 8.90 9.41 9.52 10.27
Return on assets (ratio of net income
to average total assets) 1.04 .99 1.00 .85 1.09
Return on equity (ratio of net income
to average equity) 11.83 10.68 10.51 8.41 9.89
Equity-to-assets ratio (ratio of average
equity to average total assets) 8.76 9.25 9.49 10.11 11.02
Number of full-service offices 4 4 4 4 3
</TABLE>
(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.
4
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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 words or phrases "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. 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
opinions or statements expressed with respect to future periods in any current
statements.
The Company does not undertake -- and specifically declines any obligation -- to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
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 general
public and making loans secured by residential real estate. The Bank's earnings
are primarily dependent on net interest income, the difference between interest
income and interest expense. Interest income is a function of the balances of
loans, mortgage-backed securities and investments outstanding during the period
and the yield earned on such assets. The balances of deposits and borrowings and
the rates paid on such deposits and borrowings determines 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 $1.5 million during the year to $219.0 million at June
30, 2000. This increase was funded by an increase in deposits of $2.7 million.
These funds were used to pay down FHLB advances and invest in government
agencies, municipals and other securities.
Total securities available for sale increased from $51.0 million at June 30,
1999 to $52.0 million at June 30, 2000. During fiscal 2000, state and municipal
securities increased from $8.3 million at June 30, 1999 to $8.5 million at June
30, 2000 due to purchases made with excess cash at the holding company.
Government agency securities decreased from $23.2 million at June 30, 1999 to
$22.0 million at June 30, 2000. Mortgage-backed, equity and other securities
increased from $19.5 million at June 30, 1999 to $21.6 million at June 30, 2000.
The Company has net unrealized depreciation of $1.5 million, net of tax at June
30, 2000 for securities available for sale.
Net loans decreased $681,000, or 0.4%, from $151.5 million at June 30, 1999 to
$150.8 million at June 30, 2000. The decreases in the loan portfolio were
comprised primarily of automobile loans which decreased $4.5 million during
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fiscal 2000. Half of the loan portfolio is comprised of first mortgage loans
secured by one-to-four family residential real estate located in the Company's
market area. At June 30, 2000, first mortgage loans secured by real estate
comprised $70.7 million, or 46.9% of the loan portfolio. The consumer and other
loan portfolio included $31.4 million of automobile loans, $13.1 million of home
equity and improvement loans, $24.3 million in commercial loans and $4.6 million
in other consumer loans at June 30, 2000.
Total deposits increased $2.7 million, or 2.1%, from $130.4 million at June 30,
1999 to $133.1 at June 30, 2000. During fiscal 2000, checking accounts increased
$705,000 million, or 8.6%, and certificates of deposit and passbook accounts
increased $2.0 million, or 1.6%. The increase resulted from increased core
deposit accounts and targeted pricing of short term certificates of deposit.
Assuming interest rates remain at present levels during the next fiscal year,
management anticipates that deposits will continue to increase above current
levels. As a result, management will continue to control the overall increases
in interest rates in deposits by targeting certain terms and offering "specials"
rather than across the board increases for all deposit products. If deposit
growth lags behind loan demand, then an increase in FHLB advances may be
necessary to fund the Company's lending and investment activities during fiscal
2001.
Total shareholders' equity increased $258,000 to $19.6 million at June 30, 2000.
The increase primarily resulted from net income of $2.3 million, $122,000 for
the release of ESOP shares and $55,000 of proceeds from the exercise of stock
options, which were offset by dividends paid of $694,000, $1.0 million change in
unrealized depreciation on securities available for sale, net of tax, and
$494,000 of treasury stock purchases.
RESULTS OF OPERATIONS
Comparison of Years Ended June 30, 2000 and June 30, 1999
General. Net income for the year ended June 30, 2000 was $2.3 million, an
increase of $160,000 compared to net income of $2.1 million for the year ended
June 30, 1999, an increase of 7.6%. The increase was primarily the result of an
increase of $386,000 in net interest income and a decrease in income taxes of
$165,000, which was partially offset by an increase of $67,000 in noninterest
expense, a $24,000 increase in provisions for loan losses and a decrease in
noninterest income of $300,000. Further details of the changes in these items
are discussed below.
Net Income from 1996 to 2000
$1,586 $1,344 $1,900 $2,111 $2,271
------ ------- ------ ------ ------
1996 1997(1) 1998 1999 2000
(1) Year of one time assessment by Savings Association Insurance Fund
Net Interest Income. Net interest income increased $386,000, or 5.8%, from $6.7
million to $7.1 million for the year ended June 30, 2000. The increase in net
interest income was due to an increase of $635,000 in interest income,
6
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partially offset by an increase of $249,000 in interest expense. The increase in
net interest income was primarily a result of an increase in the yield on
interest-earning assets and a decrease in the yield on interest-bearing
liabilities.
Net interest margin, the ratio of net interest income to average earning assets,
is affected by movements in interest rates and changes in the mix of earning
assets and the liabilities that fund those assets. Net interest margin was 3.38%
in 2000 compared to 3.28% in 1999. The net interest margin increased due
primarily to the net impact of changes in yields and rates of interest-earning
assets and interest-bearing liabilities. In addition, First Federal believes
that the net interest margin will continue to level out or decrease due to
competitive pricing pressures.
The yield on earning assets in 2000 was 7.93% compared to 7.88% in 1999. Average
earning assets increased 2.5% in 2000, following a 11.3% increase in 1999. The
effective rate on interest bearing liabilities was 5.08% in 2000, compared to
5.13% in 1999.
Provision for Loan Losses. The provision for loan losses increased $24,000 from
$1.01 million in fiscal 1999 to $1.03 million in fiscal 2000. The amounts
provided during the fiscal year were based on management's quarterly analysis of
the allowance for loan losses. In addition, the inherent and identified risks of
commercial and consumer loans continue to require a higher level of provisions
for loan losses. The Company has monitored the historical increase in net
charge-offs in the commercial and consumer loan portfolios for the last three
years and increased the provision for loan losses accordingly. The Company will
continue to monitor its allowance for loan losses and make future additions to
the allowance through the provision for loan losses. Although the Company
maintains its allowance for loan losses at a level which it considers to be
adequate to provide for potential losses, there can be no assurance that future
losses will not exceed estimated amounts or that additional provisions for loan
losses will not be required in future periods. In addition, the Company's
determination as to the amount of the allowance for loan losses is subject to
review by the regulatory agencies, which can order the establishment of
additional general or specific allowances.
Noninterest Income. Noninterest income decreased 15.1% from $1.99 million in
1999 to $1.69 million in 2000. The factors influencing the decrease were net
gain or loss on sales of securities and sales of loans. Loss on sale of
securities was $63,000 in 2000 compared to a gain on sale of securities of
$736,000 in 1999. This difference is due to the gain from a call on a
mortgage-backed security for $724,000 during 1999. The gain on sale of loans
decreased $138,000 as interest rates increased during the year causing a
reduction in the number of newly originated fixed-rate mortgage loans with
maturities greater than 15 years. Service charges and fees increased 7.4% from
1999 due to increased volume in our deposit areas. Other income increased
$591,000 compared to 1999 due to death benefit proceeds from insurance resulting
in additional non-taxable income of $559,000 which was offset by expenses
related to a payment under a deferred compensation plan of $312,000 that is
included in salaries and benefits expense.
Non-interest Expense. During 2000, First Federal experienced an increase in
noninterest expense of 1.5%, from $4.6 million in 1999 to $4.7 million in 2000.
The increase was primarily attributed to correspondent bank charges, furniture
and equipment expense, and salaries and benefits. Stringent cost control and
better utilization of resources continues to be a major focus at First Federal.
Salaries and benefits increased 17.4% in 2000 compared to 7.4% in 1999. The
increase in 2000 is due to recording expense related to a payment under a
deferred compensation plan of $312,000 but offset by $559,000 of proceeds from
insurance included with other income. Occupancy and equipment costs increased
4.6% from the prior year. The increase is due to additional furniture purchased
and the related depreciation costs. Correspondent bank charges increased 15.2%
from prior year due to volume and the addition of imaging for our deposit
customers.
Income Tax Expense. Income tax expense was $799,000 in fiscal 2000 compared to
$964,000 in fiscal 1999, a decrease of $165,000, or 17.1%. Income taxes
decreased primarily as a result of the tax effects of the non-taxable insurance
proceeds.
Comparison of Years Ended June 30, 1999 and June 30, 1998
General. Net income for the year ended June 30, 1999 was $2.1 million, a
increase of $211,000 compared to net income of $1.9 million for the year ended
June 30, 1998, an increase of 11.1%. The increase was primarily the result of an
increase of $688,000 in net interest income and $725,000 in noninterest income,
which was partially offset by an increase of $791,000 in noninterest expense, a
$305,000 increase in provisions for loan losses and an increase in income taxes
of $106,000. Further details of the changes in these items are discussed below.
Net Interest Income. Net interest income increased $688,000, or 11.5%, from $6.0
million to $6.7 million for the year ended June 30, 1999. The increase in net
interest income was due to an increase of $1.5 million in interest income,
partially offset by an increase of $775,000 in interest expense. The increase in
net interest income was primarily a result of an increase in average
interest-earning assets exceeding the increase in average interest-bearing
liabilities.
7
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Net interest margin, the ratio of net interest income to average earning assets,
is affected by movements in interest rates and changes in the mix of earning
assets and the liabilities that fund those assets. Net interest margin was 3.28%
in 1999 compared to 3.31% in 1998. The net interest margin decreased because of
competitive pricing pressure. In addition, First Federal has relied more on FHLB
advances to meet loan demand.
The yield on earning assets in 1999 was 7.88% compared to 8.01% in 1999. Average
earning assets increased 11.3% in 1999, following a 19.5% increase in 1998. The
effective rate on interest bearing liabilities was 5.13% in 1999, compared to
5.26% in 1998.
Provision for Loan Losses. The provision for loan losses increased $305,000 from
$705,000 in fiscal 1998 to $1.0 million in fiscal 1999. The amounts provided
during the fiscal year were based on management's quarterly analysis of the
allowance for loan losses, and the changing composition of the total loan
portfolio from one-to-four family to commercial and consumer loans. The inherent
and identified risks of commercial and consumer loans require a higher level of
provisions for loan losses.
Non-interest Income. Supplementing the growth in net interest income was an
increase in noninterest income of 57.3% over 1998. The factors influencing the
growth were increased service fees, commission income, gains on sale of
securities and loans. Gains on sale of securities were $736,000 in 1999,
compared to $266,000 in 1998. The increase was due to a call on a mortgage
backed security for $724,000. The gain on sale of loans increased $44,000 as
management continued to sell newly originated fixed-rate mortgage loans with
maturities greater than 15 years. Service charges and fees increased 42.0% from
1998 due to increased volume in our loan and deposit areas.
Non-interest Expense. During 1999, First Federal experienced an increase in
noninterest expense of 20.8%, from $3.8 million in 1998 to $4.6 million in 1999.
The increase was primarily attributed to professional consulting expenses, data
processing, furniture and equipment expense and salaries and benefits. Stringent
cost control and better utilization of resources continues to be a major focus
at First Federal.
Salaries and benefits increased 7.4% in 1999 compared to 26.0% in 1998. The
larger increase in 1998 was due to branch expansion which took place. Occupancy
and equipment costs increased 11.0% from the prior year. The increase is due to
additional furniture purchased and the related depreciation costs. Data
processing increased 33.9% and other expense increased 84.1% from the prior
year. The majority of the increase in other expenses was in professional
consulting. The increase in professional consulting expense was attributed to
upgrading various computer systems for Year 2000 (Y2K) compliance, employee
acquisition and training, and professional consulting for collection and
repossession expenses.
Income Tax Expense. Income tax expense was $964,000 in fiscal 1999 compared to
$858,000 in fiscal 1998, an increase of $106,000, or 12.4%. Income taxes
increased primarily as a result of the tax effect of higher income before taxes.
Asset and Liability Management and Market Risk
General. The principal market risk affecting the Company is interest-rate risk.
The Company does not maintain a trading account and is not affected by foreign
currency exchange rate risk or commodity price risk.
The Company is subject to interest rate risk to the extent its interest-earning
assets reprice differently than its interest-bearing liabilities. The Company
reduces exposure to changes in market interest rates by managing asset and
liability maturities and interest rates, primarily by reducing the effective
maturity of assets through the use of adjustable rate mortgage-backed securities
and adjustable rate loans and by extending funding maturities through the use of
other borrowings such as FHLB Advances.
Quantitative Aspects of Market Risk. As part of its efforts to monitor and
manage interest rate risk, the Company uses the "net portfolio value" (NPV)
methodology adopted by the OTS. This approach calculates the difference between
the present value of expected cash flows from assets and liabilities, as well as
cash flows from off balance sheet contracts, arising from an assumed 200 basis
point increase or decrease in interest rates. Under OTS regulations, an
institution's "normal" level of interest rate risk for this assumed change in
interest rates is a decrease in the institution's NPV not exceeding 2% of
assets.
The Company's asset/liability management strategy sets limits on the change in
NPV given certain changes in interest rates. The table presented here, as of
June 30, 2000, is the Company's interest rate risk measured by changes in NPV
for instantaneous parallel shifts in the yield curve, in 100 basis point
increments, up and down 300 basis points.
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<TABLE>
<CAPTION>
Changes in NPV as % of Portfolio
Interest Rates Portfolio Value Value of Assets
In Basis Net ----------------------------- ---------------------
Points NPV
(Rate Shock) $Amount $Change %Change Ratio Change(1)
------------- ------- ------- ------- ----- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
300 $12,136 $(9,665) (44)% 5.89% (403)
200 15,380 (6,420) (29) 7.31 (261)
100 18,656 (3,144) (14) 8.67 (125)
Static 21,800 9.92
(100) 24,666 2,866 13 11.00 108
(200) 27,453 5,652 26 12.01 209
(300) 31,674 9,874 45 13.51 359
</TABLE>
(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, 2000, the
Company's NPV was $21.8 million (or 10% of portfolio assets). Based upon the
assumptions used, an immediate increase in market interest rates of 200 basis
points would result in a $6.4 million or 29% decline in NPV and a 261 basis
point or 26.3% decline in the Company's NPV ratio to 7.31%. This is within the
Company's guidelines.
In evaluating the exposure to interest rate risk, certain simplifications in
analysis must be considered. For example, although assets and liabilities may
have similar maturities or period to repricing, they may react differently to
changes in market interest rates. In addition, the rates on some assets and
liabilities may fluctuate before changes in market interest rates, while
interest rates on other types may lag behind. Further, if rates change,
prepayments and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their debt may decrease in case of an interest rate increase.
Therefore, the actual effect of changing interest rates may differ from that
presented in the foregoing table.
The Board of Directors and management of the Company believe that certain
factors afford the Company the ability to operate successfully despite its
exposure to interest rate risk. The Company manages its interest rate risk by
originating adjustable rate loans and purchasing adjustable rate mortgage-backed
securities, by maintaining capital well in excess of regulatory requirements and
by selling a portion of fixed rate one-to four-family real estate loans.
The Company focuses lending efforts toward offering competitively priced
adjustable rate loan products as an alternative to more traditional fixed rate
mortgage loans. In addition, while the Company generally originates mortgage
loans for its own portfolio, sales of fixed-rate first mortgage loans with
maturities of 15 years or greater are currently undertaken to manage interest
rate risk. These loans are currently classified as held for sale by the Company
at origination. There were no loans held for sale at June 30, 2000. The Company
retains the servicing on loans sold in the secondary market and, at June 30,
2000, $29.8 million in such loans were being serviced for others.
The primary objective of the Company's investment strategy is to provide
liquidity necessary to meet funding needs as well as address daily, cyclical and
long-term changes in the asset/liability mix while contributing to profitability
by providing a stable flow of dependable earnings. Generally, the Company
invests funds among various categories of investments and maturities based on
the Company's liquidity needs and to achieve the proper balance between the
desire to minimize risk and maximize yield to fulfill the Company's
asset/liability management policies.
The Company's cost of funds responds to changes in interest rates due to the
relatively short-term nature of its deposit portfolio. Consequently, 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.
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Average Balances, Interest Rates and Yields
This following table shows weighted average interest rates on loans,
investments, deposits, other interest-bearing liabilities, and the interest rate
spread and the net yield on weighted average interest-earning assets.
<TABLE>
<CAPTION>
Year Ended June 30
-----------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------ ------------------------------ --------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------- ---------- -------- --------- ---------- -------- ---------- ----------- --------
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable (1) $153,090 $12,888 8.42% $147,437 $12,428 8.43% $127,127 $11,029 8.68%
Securities (2) (3) 43,536 2,856 6.32 38,304 2,298 6.09 30,843 1,965 6.46
Mortgage-backed
securities (3) 10,496 806 7.45 15,703 1,166 7.25 18,732 1,427 7.84
Other interest-
bearing deposits 1,800 137 7.61 2,398 160 6.67 6,370 168 2.64
---------- ---------- --------- ---------- ---------- -----------
Total interest-earning
assets 208,922 16,687 7.93 203,842 16,052 7.88 183,072 14,589 8.01
Other assets 10,199 9,817 7,398
---------- --------- ----------
Total assets $219,121 $213,659 $190,470
========== ========= ==========
Interest-bearing liabilities:
Money market
accounts $1,316 59 4.48 $ 625 27 4.32 $1,022 26 2.54
NOW accounts 7,134 157 2.20 6,726 147 2.19 7,040 132 1.88
Passbook savings
accounts 41,970 1,639 3.91 45,317 1,843 4.07 42,983 1,817 4.23
Certificates
of deposit 74,085 4,079 5.51 67,916 3,791 5.58 62,666 3,652 5.83
FHLB advances 64,770 3,681 5.68 62,106 3,558 5.73 49,543 2,964 5.98
---------- ---------- --------- ---------- ---------- -----------
Total interest-
bearing liabilities 189,275 9,615 5.08 182,690 9,366 5.13 163,254 8,591 5.26
---------- -------- ---------- -------- ----------- --------
Other liabilities 10,645 11,212 9,133
---------- --------- ----------
Total liabilities 199,920 193,902 172,387
Equity 19,201 19,757 18,083
---------- --------- ----------
Total liabilities and
shareholders' equity $219,121 $213,659 $190,470
========== ========= ==========
Net interest income/
interest rate spread $ 7,072 2.85% $ 6,686 2.75% $ 5,998 2.75%
========== ======== ========== ======== =========== ========
Net interest margin (4) 3.38% 3.28% 3.31%
======== ======== ========
</TABLE>
(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 decreased to $290,000 at June 30, 2000 compared to
$842,000 at June 30, 1999. The ratio of non-performing assets to total assets at
June 30, 2000 was .13% compared to .39% at June 30, 1999. Included in
non-performing assets at June 30, 2000 were $251,000 in non-accruing loans and
$39,000 in repossessed assets.
In addition to the non-performing assets listed above, as of June 30, 2000 and
1999, there was $4.4 million and $1.9 million, respectively, in net loans
designated by the Bank as "watch loans" due to factors that may impact the
ability of the borrowers to comply with loan repayment terms. Based on
management's review as of June 30, 2000, $2.0 million of loans were classified
as special mention, $1.9 million as substandard, $434,000 as doubtful and $3,000
as loss. As of June 30, 1999, $1.3 million were classified as special mention,
$543,000 as substandard, $72,000 as doubtful and $46,000 as loss.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, borrowings, principal and
interest payments on loans and mortgage-backed securities and sales and
maturities of securities available for sale. While maturities of securities and
scheduled amortization of loans and mortgage-backed securities are a predictable
source of funds, deposit flows and mortgage prepayments are greatly influenced
by general interest rates, economic conditions and competition.
The standard measure of liquidity for thrift institutions is the ratio of cash
and eligible investments to a certain percentage of net withdrawable savings and
borrowings due within one year. The minimum required ratio is currently set by
OTS regulations at 4%, of which 1% must be comprised of short-term investments
(i.e. generally with a term of less than one year). At June 30, 2000, the Bank's
liquidity ratio was 7.03%, of which 3.25% was comprised of short-term
investments.
Year Ended June 30, 2000. During the year ended June 30, 2000 there was a net
increase of $415,000 in cash and cash equivalents. Major sources of cash during
the year were an increase in deposits of $2.7 million, and the proceeds from the
sales of loans held for sale and the sale, call and maturity of securities
provided $1.2 million and $4.6 million. Management continued to sell fixed rate
first mortgage loans with maturities of 15 to 30 years in the secondary market
to manage interest rate risk.
Major uses of cash during the year which offset the sources of cash include
funding an increase of $1.3 million in the loan portfolio and the purchase of
$7.5 million in securities available for sale. Year Ended June 30, 1999. During
the year ended June 30, 1999 there was a net increase of $429,000 in cash and
cash equivalents. Major sources of cash during the year were an increase in
deposits and borrowings of $5.1 million and 9.8 million, and the proceeds from
the sales of loans held for sale and the sale, call and maturity of securities
provided $14.4 million and $22.8 million. Management continued to sell fixed
rate first mortgage loans with maturities of 15 to 30 years in the secondary
market to manage interest rate risk. Major uses of cash during the year which
offset the sources of cash included funding an increase of $14.3 million in the
loan portfolio, purchases of $25.0 million in securities available for sale and
originations of $14.3 million of loans to be sold in the secondary market.
Year Ended June 30, 1998. During the year ended June 30, 1998 there was a net
decrease of $12.7 million in cash and cash equivalents. Major sources of cash
during the year were an increase in deposits of $9.1 million and proceeds from
sales of loans held for sale provided $9.1 million. Management continued to sell
fixed rate first mortgage loans with maturities of 15 to 30 years in the
secondary market to manage interest rate risk. Major uses of cash during the
year which offset the sources of cash included funding an increase of $26.0
million in the loan portfolio, purchases of $29.8 million in securities
available for sale and originations of $9.0 million of loans to be sold in the
secondary market.
Borrowings may be used as a source of funds to offset reductions in other
sources of funds such as deposits and to assist in asset/liability management.
Management believes that a diversified blend of borrowings from the FHLB offers
flexibility and is an important tool to be used in the balanced growth of the
Company. As such, borrowings outstanding at June 30, 2000 consisted of advances
from the FHLB totaling $64.2 million. Also, the Company had commitments to fund
loan originations, unused lines of credit and standby lines of credit with
borrowers of $12.0 million at June 30, 2000. In the opinion of management, the
Company has sufficient cash flow and borrowing capacity to meet current and
anticipated funding commitments.
Pursuant to federal law, thrift institutions must meet a 4.00% core capital
requirement and an 8.00% total risk-based capital to risk weighted assets
requirement. At June 30, 2000, the Bank exceeded all fully phased in capital
requirements. Core capital totaled $17.2 million, or 7.92% of adjusted total
assets (as defined by regulation) and risk-based capital totaled $18.9 million,
or 13.58% of risk-weighted assets (as defined by regulation). See Note 11 of the
Notes to Consolidated Financial Statements for additional information regarding
capital requirements applicable to the Bank.
IMPACT OF INFLATION
The financial statements and related data are in terms of historical dollars
without considering changes in purchasing power of money over time due to
inflation. The primary assets and liabilities of the Company are monetary in
nature. As a result, interest rates have a more significant impact on
performance than the general levels of inflation. Interest rates do not
necessarily move in the same direction or magnitude as the prices of goods and
services.
11
<PAGE>
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, 2000 and 1999 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, 2000. 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 generally accepted auditing standards. 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, 2000 and 1999 and the results of its operations and its cash flows
for each of the three years in the period ended June 30, 2000 in conformity with
generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
South Bend, Indiana
August 24, 2000
12
<PAGE>
FFW Corporation
Consolidated Balance Sheets
June 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
-------------- --------------
ASSETS
<S> <C> <C>
Cash and due from financial institutions $ 4,152,652 $ 4,650,866
Interest-bearing deposits in other financial
institutions - short-term 1,101,766 188,369
-------------- --------------
Total cash and cash equivalents 5,254,418 4,839,235
Securities available for sale 52,026,138 51,028,563
Loans receivable, net of allowance for loan
losses of $1,961,318 in 2000 and $1,623,293 in 1999 150,810,106 151,491,090
Federal Home Loan Bank stock 3,400,900 3,400,900
Accrued interest receivable 1,666,265 1,616,479
Premises and equipment, net 2,028,386 2,124,656
Other assets 3,850,819 2,987,971
-------------- --------------
Total assets $219,037,032 $217,488,894
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 8,875,968 $ 8,171,372
Interest-bearing 124,228,632 122,229,981
-------------- --------------
Total deposits 133,104,600 130,401,353
Borrowings 64,167,542 66,300,388
Accrued expenses and other liabilities 2,149,970 1,430,313
-------------- --------------
Total liabilities 199,422,112 198,132,054
============== ==============
Shareholders' equity
Preferred stock, $.01 par; 500,000 shares
authorized; none issued -- --
Common stock, $.01 par; 2,000,000 shares
authorized; issued: 1,807,013 - 2000 and
1,785,288 - 1999; outstanding: 1,423,627
- 2000 and 1,441,224 - 1999 18,070 17,853
Additional paid-in capital 9,228,128 8,965,882
Retained earnings 15,547,131 13,970,694
Accumulated other comprehensive income (loss) (1,479,969) (455,386)
Unearned Employee Stock Ownership Plan shares -- (52,331)
Unearned management retention plan shares (72,354) --
Treasury stock at cost, 383,386 shares - 2000 and
344,064 shares - 1999 (3,626,086) (3,089,872)
-------------- --------------
Total shareholders' equity 19,614,920 19,356,840
-------------- --------------
Total liabilities and shareholders' equity $219,037,032 $217,488,894
============== ==============
</TABLE>
See accompanying notes.
13
<PAGE>
FFW Corporation
Consolidated Statements of Income
Years ended June 30, 2000, 1999 and 1998
2000 1999 1998
----------- ----------- -----------
Interest and dividend income
Loans, including fees $12,888,537 $12,428,098 $11,028,576
Taxable securities 3,266,784 3,000,394 2,978,403
Nontaxable securities 394,884 464,433 413,504
Other 137,211 159,565 168,410
----------- ----------- -----------
Total interest and
dividend income 16,687,416 16,052,490 14,588,893
Interest expense
Deposits 5,934,009 5,807,809 5,626,941
Borrowings 3,681,171 3,558,563 2,964,036
----------- ----------- -----------
Total interest expense 9,615,180 9,366,372 8,590,977
----------- ----------- -----------
Net interest income 7,072,236 6,686,118 5,997,916
Provision for loan losses 1,033,677 1,010,000 705,000
----------- ----------- -----------
Net interest income after provision
for loan losses 6,038,559 5,676,118 5,292,916
Noninterest income
Net gains/(loss) on sales of
securities (63,400) 735,649 266,215
Net gains on sales of loans 9,814 148,096 104,148
Commission income 222,562 234,362 215,051
Service charges and fees 840,296 782,572 551,211
Other income 679,913 88,776 127,859
----------- ----------- -----------
Total noninterest income 1,689,185 1,989,455 1,264,484
Noninterest expense
Salaries and benefits 2,386,933 2,032,452 1,892,039
Occupancy and equipment 386,744 369,647 332,894
Deposit insurance premium 101,662 121,423 113,521
Correspondent bank charges 237,118 205,883 211,420
Data processing 461,216 489,372 365,522
Printing, postage and supplies 131,015 245,031 192,935
Amortization of goodwill & core
deposit premium 156,347 156,347 164,474
Other expense 796,376 970,372 527,184
----------- ----------- -----------
Total noninterest expense 4,657,411 4,590,527 3,799,989
----------- ----------- -----------
Income before income taxes 3,070,333 3,075,046 2,757,411
Income tax expense 799,472 963,991 857,743
----------- ----------- -----------
Net income $ 2,270,861 $ 2,111,055 $ 1,899,668
=========== =========== ===========
Earnings per share
Basic $ 1.60 $ 1.48 $ 1.36
Diluted $ 1.57 $ 1.46 $ 1.32
See accompanying notes.
14
<PAGE>
FFW Corporation
Consolidated Statements of Changes in Stockholders' Equity Years ended
June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-In Retained Comprehensive
Stock Capital Earnings Income (Loss)
-------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Balance at June 30, 1997 $ 8,698 $8,439,565 $11,119,378 $ 502,183
Cash dividends - $0.38 per share -- -- (542,101) --
17,117 shares released under ESOP -- 176,000 -- --
100% stock dividend 8,801 -- (8,801) --
Issued 35,564 shares on stock options 252 177,568 -- --
Net income -- -- 1,899,668 --
Other comprehensive income, net of tax:
Unrealized appreciation (depreciation)
on securities available for sale,
net of tax of $84,263 -- -- -- 183,249
--------------
Total other comprehensive income -- -- -- 183,249
Comprehensive income -- -- -- --
-------- ------------ ------------ -------------
Balance at June 30, 1998 17,751 8,793,133 12,468,144 685,432
Cash dividends - $0.42 per share -- -- (608,505) --
17,117 shares released under ESOP -- 145,495 -- --
Purchased 27,000 shares -- -- -- --
Issued 10,192 shares, net, on
stock options 102 27,254 -- --
Net income -- -- 2,111,055 --
Other comprehensive income, net of tax:
Unrealized appreciation (depreciation)
on securities available for sale, net of
tax of $(746,117) -- -- -- (1,140,818)
--------------
Total other comprehensive income (loss) -- -- -- (1,140,818)
Comprehensive income -- -- -- --
-------- ------------ ------------ --------------
Balance at June 30, 1999 17,853 8,965,882 13,970,694 (455,386)
Cash dividends - $0.48 per share -- -- (694,424) --
8,560 shares released under ESOP -- 69,772 -- --
7,000 shares purchased under MRP 70 95,305 -- --
Purchased 39,322 shares, net -- 42,497 -- --
Issued 14,725 shares on stock options 147 54,672 -- --
Amortization of MRP contribution -- -- -- --
Net income -- -- 2,270,861 --
Other comprehensive income, net of tax:
Unrealized appreciation (depreciation)
on securities available for sale, net of
tax of $(713,843) -- -- -- (1,024,583)
--------------
Total other comprehensive income (loss) -- -- -- (1,024,583)
Comprehensive income -- -- -- --
-------- ------------ ------------ --------------
Balance at June 30, 2000 $18,070 $9,228,128 $15,547,131 $(1,479,969)
======== ============ ============ ==============
<CAPTION>
Unearned
Employee Unearned
Stock Management
Ownership Retention Total
Plan Plan Treasury Shareholders'
Shares Shares Stock Equity
------------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at June 30, 1997 $(244,553) $ -- $(2,683,985) $17,141,286
Cash dividends - $0.38 per share -- -- -- (542,101)
17,117 shares released under ESOP 92,805 -- -- 268,805
100% stock dividend -- -- -- --
Issued 35,564 shares on stock options -- -- -- 177,820
Net income -- -- -- 1,899,668
Other comprehensive income, net of tax:
Unrealized appreciation (depreciation)
on securities available for sale,
net of tax of $84,263 -- -- --
Total other comprehensive income -- -- -- 183,249
-------------
Comprehensive income -- -- -- 2,082,917
------------- ---------- ------------ -------------
Balance at June 30, 1998 (151,748) -- (2,683,985) 19,128,727
Cash dividends - $0.42 per share -- -- -- (608,505)
17,117 shares released under ESOP 99,417 -- -- 244,912
Purchased 27,000 shares -- -- (405,887) (405,887)
Issued 10,192 shares, net, on
stock options -- -- -- 27,356
Net income -- -- -- 2,111,055
Other comprehensive income, net of tax:
Unrealized appreciation (depreciation)
on securities available for sale, net of
tax of $(746,117) -- -- --
Total other comprehensive income (loss) -- -- -- (1,140,818)
-------------
Comprehensive income -- -- -- 970,237
------------- ---------- ------------ -------------
Balance at June 30, 1999 (52,331) -- (3,089,872) 19,356,840
Cash dividends - $0.48 per share -- -- -- (694,424)
8,560 shares released under ESOP 52,331 -- -- 122,103
7,000 shares purchased under MRP -- (95,375) -- --
Purchased 39,322 shares, net -- -- (536,214) (493,717)
Issued 14,725 shares on stock options -- -- -- 54,819
Amortization of MRP contribution -- 23,021 -- 23,021
Net income -- -- -- 2,270,861
Other comprehensive income, net of tax:
Unrealized appreciation (depreciation)
on securities available for sale, net of
tax of $(713,843) -- -- --
Total other comprehensive income (loss) -- -- -- (1,024,583)
-------------
Comprehensive income -- -- -- 1,246,278
------------- ---------- ------------ -------------
Balance at June 30, 2000 $ -- $(72,354) $(3,626,086) $19,614,920
</TABLE>
See accompanying notes.
15
<PAGE>
FFW Corporation
Consolidated Statements of Cash Flows
Years ended June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -------------
Cash flows from operating activities
<S> <C> <C> <C>
Net income $ 2,270,861 $ 2,111,055 $ 1,899,668
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization (31,822) (60,899) (80,662)
Provision for loan losses 1,033,677 1,010,000 705,000
Net (gains) losses on sales of:
Securities 63,400 (735,649) (266,215)
Loans held for sale (9,814) (148,096) (104,148)
Originations of loans held for sale (1,164,250) (14,262,865) (9,045,410)
Proceeds from sales of loans held for sale 1,174,064 14,410,961 9,149,558
ESOP expense 122,103 244,912 268,805
Amortization of MRP contribution 23,021 -- --
Net change in accrued interest receivable
and other assets (1,132,071) 11,984 (387,593)
Amortization of goodwill and core deposit intangibles 219,437 156,347 164,474
Net change in accrued interest payable and other
liabilities 1,433,499 (249,803) 758,749
----------- ----------- -------------
Net cash from operating activities 4,002,105 2,487,947 3,062,226
Cash flows from investing activities
Proceeds from:
Sales, calls and maturities of securities
available for sale 4,561,566 22,808,126 20,007,977
Sales of foreclosed real estate and repossessed assets 935,678 903,878 465,351
Purchase of:
Securities available for sale (7,463,987) (25,049,872) (29,770,835)
Federal Home Loan Bank stock -- (643,700) (359,600)
Principal collected on mortgage-backed securities 332,873 603,684 705,411
Net change in loans receivable (1,288,371) (14,301,551) (26,445,499)
Purchases of premises and equipment, net (101,760) (113,031) (436,341)
Investment in limited partnership -- (225,000) (412,500)
----------- ----------- -------------
Net cash from investing activities (3,024,001) (16,017,466) (36,246,036)
Cash flows from financing activities
Net change in deposits 2,703,247 5,145,050 9,137,829
Proceeds from borrowings 78,294,891 42,500,000 52,975,956
Repayment of borrowings (80,427,737) (32,699,612) (41,275,956)
Proceeds from stock options 54,819 27,356 177,820
Purchase of treasury stock (493,717) (405,887) --
Cash dividends paid (694,424) (608,505) (542,101)
----------- ----------- -------------
Net cash from financing activities (562,921) 13,958,402 20,473,548
----------- ----------- -------------
Net change in cash and cash equivalents 415,183 428,883 (12,710,262)
Beginning cash and cash equivalents 4,839,235 4,410,352 17,120,614
----------- ----------- -------------
Ending cash and cash equivalents $ 5,254,418 $ 4,839,235 $ 4,410,352
=========== =========== =============
Supplemental disclosure of cash flow information
Cash paid during the period
Interest $ 9,525,756 $ 9,615,180 $ 8,544,462
Income taxes $ 930,000 $ 1,256,000 $ 895,000
</TABLE>
16
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 2000, 1999, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include FFW
Corporation (the Company), and its wholly-owned subsidiaries, First Federal
Savings Bank of Wabash (the Bank) and FirstFed Financial of Wabash,
Incorporated. All significant inter-company transactions and balances have been
eliminated in consolidation. Nature of Business and Concentrations of Credit
Risk: The primary source of income for the Company is the interest from
commercial and residential real estate loans (see Note 13).
Use of Estimates In Preparing Financial Statements: Preparing financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period, as well as the disclosures provided. Areas
involving the use of estimates and assumptions include the allowance for loan
losses, fair values of securities and other financial instruments, determination
and carrying value of impaired loans and intangible assets, the carrying value
of loans held for sale, the value of mortgage servicing rights, the accrued
liability for deferred compensation, the fair value of stock options, the
realization of deferred tax assets and the determination of depreciation of
premises and equipment. Actual results could differ from those estimates.
Estimates associated with the allowance for loan losses, the classification and
carrying value of loans held for sale, the fair value of stock options and the
fair value of securities and other financial instruments are particularly
susceptible to material change in the near term.
Cash Flow Reporting: For reporting cash flows, cash and cash equivalents include
cash on hand, due from financial institutions and interest-bearing deposits in
other financial institutions - short-term. Net cash flows are reported for
customer loan and deposit transactions.
Securities: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported separately in shareholders'
equity, net of tax. Securities are classified as trading when held for short
term periods in anticipation of market gains, and are carried at fair value.
Securities are written down to fair value when a decline in fair value is not
temporary.
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.
Allowance for Loan Losses: Because some loans may not be repaid in full, an
allowance for loan losses is recorded. The allowance for loan losses is
increased by a provision for loan losses charged to expense and decreased by
charge-offs (net of recoveries). Estimating the risk of loss and the amount of
loss on any loan is necessarily subjective. Accordingly, the allowance is
maintained by management at a level considered adequate to cover losses that are
currently anticipated. Management's periodic evaluation of the adequacy of the
allowance is based on past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay,
the estimated value of any underlying collateral and current economic
conditions. While management may periodically allocate portions of the allowance
for specific problem loan situations, the whole allowance is available for any
loan charge-offs that occur.
17
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 2000, 1999, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans are considered impaired if full principal or interest payments are not
anticipated in accordance with the contractual loan terms. Impaired loans are
carried at the present value of expected future cash flows discounted at the
loan's effective interest rate or at the fair value of the collateral if the
loan is collateral dependent. A portion of the allowance for loan losses is
allocated to impaired loans if the value of such loans is less than the unpaid
balance. If these allocations cause the allowance for loan losses to require an
increase, such increase is reported in the provision for loan losses.
Commercial loans and mortgage loans secured by other properties are evaluated
individually for impairment. Smaller-balance homogeneous loans such as
residential first mortgage loans, are evaluated for impairment in total. When
analysis of borrower operating results and financial condition indicates that
underlying cash flows of the borrower's business are not adequate to meet debt
service requirements, the loan is evaluated for impairment. Often this is
associated with a delay or shortfall in payments of 60 days or more. Nonaccrual
loans are often also considered impaired. Impaired loans, or portions thereof,
are charged off when deemed uncollectible.
Foreclosed Real Estate: Real estate properties acquired through, or in lieu of,
foreclosure are initially recorded at fair value at acquisition, establishing a
new cost basis. Any reduction to fair value from the carrying value of the
related loan at the time of acquisition is accounted for as a loan loss and
charged against the allowance for loan losses. Valuations are periodically
performed by management and valuation allowances are adjusted through a charge
to income for changes in fair value or estimated selling costs.
Premises and Equipment: Asset cost is reported net of accumulated depreciation.
Depreciation expense is calculated on the straight-line method over asset useful
lives. These assets are reviewed for impairment when events indicate the
carrying amount may not be recoverable.
Intangible Assets: Intangible assets arising from the acquisition of the South
Whitley Branch, on June 13, 1997, include goodwill and core deposit intangibles.
Goodwill represents the excess of the purchase price over the assets acquired.
Goodwill is amortized on a straight-line basis over 15 years. Core deposit
intangibles are amortized on an accelerated basis over 10 years. As of June 30,
2000, unamortized goodwill totaled $998,000 and unamortized core deposit
intangibles totaled $219,000.
Income Taxes: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
Servicing Rights: Servicing rights represent both purchased rights and the
allocated value of servicing rights retained on loans sold. Servicing rights are
expensed in proportion to, and over the period of, estimated net servicing
revenues. Impairment is evaluated based on the fair value of the rights, using
groupings of the underlying loans as to interest rates and then, secondarily, as
to geographic and prepayment characteristics. Any impairment of a grouping is
reported as a valuation allowance.
Employee Stock Ownership Plan: The Company accounts for its employee stock
ownership plan (ESOP) under AICPA Statement of Position (SOP) 93-6. The cost of
shares issued to the ESOP, but not yet allocated to participants, is presented
as a reduction of shareholders' equity. Compensation expense is based on the
market price of the shares committed to be released for allocation to
participant accounts. The difference between the market price and the cost of
shares committed to be released is adjusted to additional paid-in capital.
Dividends on allocated ESOP shares reduce retained earnings; dividends on
unearned ESOP shares reduce debt and accrued interest.
Stock Compensation: Expense for employee compensation under stock option plans
is based on Accounting Principles Board (APB) Opinion 25, with expense reported
only if options are granted below market price at grant date. If applicable,
disclosures of net income and earnings per common share are provided as if the
fair value method of SFAS No. 123 were used for stock-based compensation.
18
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 2000, 1999, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Financial Instruments with Off-Balance-Sheet Risk: The Company, in the normal
course of business, makes commitments to make loans which are not reflected in
the financial statements. A summary of these commitments is disclosed in Note
12.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes the net change in net
unrealized appreciation (depreciation) on securities available for sale, net of
tax, which is also recognized as a separate component of shareholders' equity.
Earnings and Dividends Per Common Share: Basic earnings per common share is
based on the net income divided by the weighted average number of common shares
outstanding during the period. ESOP shares are considered outstanding for
earnings per common share calculations as they are committed to be released;
unearned shares are not considered outstanding. Diluted earnings per common
share shows the dilutive effect of additional potential common shares issuable
under stock options. Earnings and dividends per common 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 the
two-for-one stock split effected in the form of a 100% stock dividend which was
declared November 25, 1997 and paid on December 31, 1997. Stock dividends in
excess of 20% are reported by transferring the par value of the stock issued
from retained earnings to common stock. Stock dividends for 20% or less are
reported by transferring the market value, as of the ex-dividend date, of the
stock issued from retained earnings to common stock and additional paid-in
capital.
Reclassifications: Certain amounts in the 1999 and 1998 financial statements
were reclassified to conform with the 2000 presentation.
NOTE 2 - EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
A reconciliation of the numerators and denominators used in the computation of
basic earnings per common share and diluted earnings per common share is
presented below:
<TABLE>
<CAPTION>
Year ended June 30,
2000 1999 1998
----------- ----------- ------------
Basic Earnings Per Common Share
<S> <C> <C> <C>
Numerator: Net income $ 2,270,861 $ 2,111,055 $ 1,899,668
=========== =========== ============
Denominator: Weighted average common shares outstanding 1,425,464 1,464,857 1,449,938
Less: Average unallocated ESOP shares (2,140) (34,236) (51,352)
----------- ----------- ------------
Weighted average common shares outstanding 1,423,324 1,430,621 1,398,586
=========== =========== ============
Basic earnings per common share $ 1.60 $ 1.48 $ 1.36
=========== =========== ============
Diluted Earnings Per Common Share
Numerator: Net income $ 2,270,861 $ 2,111,055 $ 1,899,668
=========== =========== ============
Denominator: Weighted average common shares
outstanding for basic earnings per common share 1,423,324 1,430,621 1,398,586
Add: Dilutive effects of assumed exercise of stock options 25,076 20,083 41,593
----------- ----------- ------------
Weighted average common shares and dilutive
potential common shares outstanding 1,448,400 1,450,704 1,440,179
=========== =========== ============
Diluted earnings per common share $ 1.57 $ 1.46 $ 1.32
=========== =========== ============
</TABLE>
19
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 2000, 1999, 1998
NOTE 3 - SECURITIES
At June 30, securities were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ -----------
Available for sale 2000
<S> <C> <C> <C> <C>
U.S. government and agency $23,283,694 $ -- $(1,331,476) $21,952,218
State and municipal 8,763,121 56,042 (321,654) 8,497,509
Other 1,508,500 16,223 (25,244) 1,499,479
Mortgage backed 11,402,175 4,611 (402,304) 11,004,482
Equity 9,518,928 -- (446,478) 9,072,450
----------- ------------ ------------ -----------
$54,476,418 $ 76,876 $(2,527,156) $52,026,138
=========== ============ ============ ===========
Available for sale 1999
U.S. government and agency $23,842,475 $ -- $ (655,519) $23,186,956
State and municipal 8,377,975 131,593 (166,564) 8,343,004
Other 235,000 1,786 -- 236,786
Mortgage backed 10,675,605 27,585 (10,255) 10,692,935
Equity 8,609,362 145,781 (186,261) 8,568,882
----------- ------------ ------------ -----------
$51,740,417 $ 306,745 $(1,018,599) $51,028,563
=========== ============ ============ ===========
</TABLE>
Contractual maturities of securities at June 30, 2000 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.
Amortized Fair
Cost Value
----------- ------------
Due in one year or less $ 2,269,194 $ 2,177,089
Due from one to five years 4,356,417 4,275,238
Due from five to ten years 18,913,249 17,818,705
Due after ten years 8,016,454 7,678,174
Mortgage backed 11,402,176 11,004,482
Equities 9,518,928 9,072,450
----------- ------------
$54,476,418 $52,026,138
=========== ============
Sales/calls of securities available for sale for the years ended June 30 were:
2000 1999 1998
----------- ----------- -----------
Sales $ 3,451,566 $ 966,504 $ 9,356,977
Calls -- 14,196,622 10,051,000
Gross gains 5,794 747,733 266,215
Gross losses (69,194) (12,084) --
20
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 2000, 1999, 1998
NOTE 3 - Secuirities (continued)
The June 30, 1999, gross gains included $724,000 from the call of a mortgage
backed security. The gain recognized was the result of a pre-payment penalty and
the recognition of unaccreted discount.
The June 30, 1995 balance of mortgage-backed securities was reduced by $318,900
to reflect an other than temporary decline in the fair value of a security.
Collateral for this security was multi-family mortgage obligations primarily
located in Southern California. The decline in the fair value of the security
was due to increased delinquency in the underlying loans and a decline in the
cash reserve fund and losses incurred on foreclosed real estate. On April 29,
1998 this security was sold and a gain on sale of $264,028 was recognized from
the previously written down balance.
NOTE 4 - LOANS RECEIVABLE, NET
Loans receivable as of June 30 were as follows:
<TABLE>
<CAPTION>
2000 1999
------------ ------------
Mortgage loans (principally conventional)
<S> <C> <C>
Secured by one-to-four family residences $ 69,738,071 $ 67,825,242
Secured by other properties 8,138,436 9,341,791
Construction 2,343,439 898,600
------------ ------------
80,219,946 78,065,633
Undisbursed portion of construction loans (1,333,955) (444,459)
Net deferred loan origination fees (35,522) (38,184)
------------ ------------
Total mortgage loans 78,850,469 77,582,990
Consumer and other loans
Automobile 31,367,885 36,334,413
Manufactured home 235,091 248,789
Home equity and improvement 13,119,225 10,393,878
Commercial 24,300,945 23,781,154
Other 4,418,593 4,125,094
------------ ------------
73,441,739 74,883,328
Net deferred loan origination costs 479,216 648,065
------------ ------------
Total consumer and other loans 73,920,955 75,531,393
Less allowance for loan losses (1,961,318) (1,623,293)
------------ ------------
$150,810,106 $151,491,090
============ ============
</TABLE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 2000, 1999, 1998
Activity in the allowance for loan losses for the years ended June 30 is as
follows:
2000 1999 1998
------------- ------------- --------------
Beginning balance $ 1,623,293 $ 982,532 $ 571,751
Provision for loan losses 1,033,677 1,010,000 705,000
Charge-offs (783,484) (464,847) (331,702)
Recoveries 87,832 95,608 37,483
------------- ------------- --------------
Ending balance $ 1,961,318 $ 1,623,293 $ 982,532
============= ============= ==============
21
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 2000, 1999, 1998
Information regarding impaired loans is as follows for the years ending June 30:
2000
---------
Year end loans with no allowance for loan losses allocated $ --
Year end loans with allowance for loan losses allocated 754,116
Amount of allowance allocated 234,667
Average of impaired loans during the year 285,686
Interest income recognized during impairment 48,507
Cash-basis interest income recognized 32,814
There were no material impaired loans to report for years ending June 30, 1999
and 1998.
NOTE 5 - LOAN SERVICING
Mortgage loans serviced for others are not reported as assets in the balance
sheets. These loans totaled $29,843,278 and $32,426,789 at June 30, 2000 and
1999. Related escrow deposit balances were $58,800 and $68,100 at June 30, 2000
and 1999.
NOTE 6 - PREMISES AND EQUIPMENT, NET
Premises and equipment at June 30 were as follows:
2000 1999
---------- -----------
Land $ 350,121 $ 350,121
Buildings 2,090,511 2,090,511
Furniture, fixtures and equipment 985,217 901,539
---------- -----------
Total cost 3,425,849 3,342,171
Less accumulated depreciation (1,397,463) (1,217,515)
---------- -----------
$2,028,386 $2,124,656
========== ===========
NOTE 7 - DEPOSITS
Deposit accounts individually exceeding $100,000 totaled $20,377,472 and
$27,098,721 at June 30, 2000 and 1999. At June 30, 2000, stated maturities of
certificates of deposit were:
2001 $39,215,233
2002 24,156,903
2003 8,316,408
2004 2,362,937
-----------
Thereafter 1,979,125
===========
$76,030,606
NOTE 8 - OTHER BORROWINGS
Federal Home Loan Bank (FHLB) advances totaled $64,167,542 and $65,877,262 at
June 30, 2000 and 1999. The majority of the advances have fixed interest rates
ranging from 4.59% to 7.94% as of June 30, 2000 and the scheduled maturities
during the years ended June 30 were as follows:
22
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 2000, 1999, 1998
NOTE 8 - OTHER BORROWINGS (continued)
2001 $24,500,000
2002 4,500,000
2003 4,000,000
2004 1,500,000
2005 1,833,771
Thereafter 27,833,771
-----------
$64,167,542
===========
The Bank also maintains a $1,000,000 overdraft line of credit agreement with the
FHLB which terminates on May 20, 2001. As of June 30, 2000 and 1999, $0 and
$423,126 were 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, 2000, collateral of approximately $104.4
million is pledged to the FHLB to secure advances outstanding.
NOTE 9 - EMPLOYEE BENEFITS
Employee Pension Plan: The pension plan is part of a noncontributory
multi-employer defined-benefit pension plan covering substantially all
employees. There is no separate actuarial valuation of plan benefits nor
segregation of plan assets specifically for the Company. As of July 1, 1999, the
latest actuarial valuation, plan assets exceeded the actuarially determined
value of total vested benefits. The plan has reached its full funding limitation
for Internal Revenue Code purposes and a full contribution is not required. As a
result, other than administrative expenses, there was no pension expense for
2000, 1999 and 1998.
401(k) Plan: A retirement savings 401(k) plan covers full time employees 21 or
older and have completed one year of service. Participants may defer up to 15%
of compensation. The Company matches 50% of elective deferrals on the first 6%
of the participants' compensation. Expenses under this plan were $39,000,
$38,000, and $28,000 for 2000, 1999 and 1998.
Employee Stock Ownership Plan (ESOP): Employees with 1,000 hours of employment
with the Bank and who have attained age 21 are eligible to participate in the
ESOP. The ESOP borrowed $591,500 from the Company to purchase 118,300 shares of
the common stock issued in the conversion at $5 per share. The loan was repaid
principally from the Bank's discretionary contributions to the ESOP over seven
years, and was paid off as of December 31, 1999. Shares purchased by the ESOP
were held in suspense until allocated to participants as the loan was repaid. As
of June 30, 2000, all ESOP shares had been allocated. ESOP expense related to
shares allocated as the loan was repaid was $122,000, $245,000 and $269,000 for
2000, 1999 and 1998. Contributions to the ESOP for loan repayment were $52,000,
$99,000 and $93,000 for 2000, 1999 and 1998. For 2000, 8,560 shares with an
average fair value of $12.34 per share, were committed to be released. For 1999
and 1998, 17,117 shares with an average fair value of $15.74 and $17.31 per
share, were committed to be released.
Between January 1, 2000 and June 30, 2000 the Bank contributed an additional
$125,000 to purchase 10,000 shares for the ESOP, resulting in additional ESOP
expense in 2000. As of June 30, 2000 these shares were allocated to eligible
employees participating in the ESOP plan.
Contributions to the ESOP and shares released from suspense proportional to
repayment of the ESOP loan are allocated among ESOP participants on the basis of
compensation. Benefits are 100% vested after five years of service including
credit for years of service prior to July 1, 1992. Prior to five years of
credited service, a participant who terminates employment for reasons other than
death, normal retirement, or disability does not receive any ESOP benefit.
Forfeitures are reallocated among remaining participating employees, in the same
proportion as contributions.
23
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 2000, 1999, 1998
NOTE 9 - EMPLOYEE BENEFITS (continued)
Benefits are payable in stock or cash upon termination of employment. The
Company's contributions to the ESOP are not fixed, so benefits payable under the
ESOP cannot be estimated. ESOP shares as of June 30 were:
<TABLE>
<CAPTION>
2000 1999 1998
---------- ---------- ---------
<S> <C> <C> <C>
Allocated (including shares committed to be released) 118,300 109,740 92,623
Unearned -- 8,560 25,677
Shares contributed and allocated in 2000 10,000 -- --
Shares withdrawn from the plan by participants (23,295) (7,110) (7,110)
---------- ---------- ---------
Total ESOP shares held in the plan 105,005 111,190 111,190
========== ========== =========
Fair value of unearned shares at June 30 $ -- $115,560 $443,442
========== ========== =========
</TABLE>
Stock Option Plan: The 1992 Stock Option and Incentive Plan authorizes options
of 169,000 shares of common stock. During 1999, the Company registered with the
Securities and Exchange Commission the 1999 Omnibus Incentive Plan. This plan
authorizes options, restricted stock and SARs of 142,000 shares of common stock.
For both plans when options are granted, the option price is at least 100% of
the market value of common stock on the date of grant, and the option term
cannot exceed 10 years. Options awarded may be exercised at a rate of 25% per
year. No compensation expense was recognized for stock options for 2000, 1999
and 1998.
SFAS No. 123 requires proforma disclosures for companies that do not adopt its
fair value accounting method for stock-based employee compensation. Accordingly,
the following proforma information presents earnings per common share had the
fair value method been used to measure compensation cost for stock option plans.
The fair value of options granted during 2000 and 1999 were estimated using the
following weighted average information: risk-free interest rate of 5.22% and
5.25%, expected life of 10 years and 10 years, expected volatility of stock
price of .29 and .31 and expected dividends of 3.59% and 3.11% per year.
2000 1999
---------- -----------
Net income as reported $2,270,861 $2,111,055
Proforma net income 2,254,165 2,103,759
Basic earnings per share as reported 1.60 1.48
Diluted earnings per share as reported 1.57 1.46
Proforma basic earnings per share 1.58 1.47
Proforma diluted earnings per share 1.56 1.45
In future years, the proforma effect of not applying this standard is expected
to increase as additional options are granted.
Stock option plans are used to reward employees and provide them with an
additional equity interest. Options are issued for 10-year periods with varying
vesting periods. Information about option grants follows:
24
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 2000, 1999, 1998
<TABLE>
<CAPTION>
Weighted
Number of Weighted Average
Outstanding Exercise Average Fair Value
Options Price Exercise Price of Grants
----------- ------------- -------------- ----------
<S> <C> <C> <C> <C>
Outstanding, June 30, 1997 103,352 $5.00 - 13.38 $6.11
Exercised 35,564 5.00 5.00
-----------
Outstanding, June 30, 1998 67,788 5.00 - 13.38 6.69
Granted 16,116 18.50 18.50 $1.34
Granted 3,000 14.25 14.25 2.53
Exercised 14,725 5.00 - 13.38 5.22
-----------
Outstanding, June 30, 1999 72,179 5.00 - 18.50 10.06
Forfeited 4,000 10.94 10.94
Granted 16,000 13.38 13.38 2.35
Exercised 14,725 5.00 - 10.94 6.61
-----------
Outstanding, June 30, 2000 69,454 5.00 - 18.50 11.18
===========
</TABLE>
The weighted average remaining contractual life of options outstanding at June
30, 2000 was approximately six years. Stock options exercisable at June 30,
2000, 1999 and 1998 totaled 41,146, 50,063 and 59,788 at a weighted average
exercise price of $8.63, $7.10 and $5.79. As of June 30, 2000, 121,000 options
remain available for future grants.
Deferred Compensation: The Company has a deferred compensation plan for certain
directors of the Company and a salary continuation plan for a Bank executive.
The Company/Bank is obligated to pay each such individual or beneficiaries the
accumulated contributions plus interest credited for the deferred compensation
plan and a lump sum payment for the salary continuation plan, beginning with the
individual's termination of service. A deferred compensation liability of
$18,000 and $245,000 at June 30, 2000 and 1999 has been accrued for these
obligations. Life insurance on the participants was purchased. The cash
surrender value of such insurance was $5,000 and $234,000 at June 30, 2000 and
1999 and is included in other assets. The expense for these plans was $22,000
for 2000, and $36,000 for 1999 and 1998.
NOTE 10 - INCOME TAXES
Income tax expense for the years ended June 30 was:
2000 1999 1998
--------- --------- ---------
Federal
Current $738,171 $987,372 $626,763
Deferred (161,618) (291,260) 11,209
--------- --------- ---------
576,553 696,112 637,972
State
Current 244,787 334,696 216,357
Deferred (21,868) (66,817) 3,414
--------- --------- ---------
222,919 267,879 219,771
--------- --------- ---------
Income tax expense $799,472 $963,991 $857,743
========= ========= =========
25
<PAGE>
FFW CORPORATION
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
NOTE 10 - INCOME TAXES (continued)
Income tax expense differed from amounts computed using the U.S. federal income
tax rate of 34% as follows:
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Income taxes at 34% statutory rate $ 1,043,913 $ 1,045,516 $ 937,519
Tax effect of:
Tax-exempt income (139,919) (146,615) (126,981)
State tax, net of federal income tax effect 147,127 199,357 156,126
Life insurance proceeds (189,041) -- --
Dividends received deduction (84,879) (80,121) (69,246)
Fair market value of ESOP shares in excess of cost 23,723 49,468 59,840
Low income housing credits (87,987) (64,739) (15,484)
Other 86,535 (38,875)
----------- ----------- -----------
Total income tax expense $ 799,472 $ 963,991 $ 857,743
=========== =========== ===========
</TABLE>
Components of the net deferred tax liability as of June 30 are:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Bad debts $ 686,839 $ 530,437
Deferred compensation 7,234 96,921
Core deposit intangible 101,941 61,165
Depreciation on securities available for sale 970,717 280,669
Other 20,618 12,803
----------- -----------
1,787,349 981,995
Deferred tax liabilities:
Accretion (48,188) (50,269)
Net deferred loan costs (175,747) (241,574)
Appreciation on securities available for sale -- --
Other -- (271)
----------- -----------
(223,935) (292,114)
Valuation allowance -- --
----------- -----------
Net deferred tax asset (liability) $ 1,563,414 $ 689,880
=========== ===========
</TABLE>
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, 2000 and 1999. If the Bank
was liquidated or otherwise ceased to be a bank or if tax laws were to change,
the $393,000 would be recorded as expense.
NOTE 11 - REGULATORY MATTERS
The Bank is subject to regulatory capital requirements administered by federal
banking agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
regulators about components, risk weightings and other factors, and the
regulators can lower classifications in certain cases. Failure to meet various
capital requirements can initiate regulatory action that could have a direct
material effect on the financial statements.
26
<PAGE>
FFW CORPORATION
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
NOTE 11 - REGULATORY MATTERS (continued)
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:
<TABLE>
<CAPTION>
Minimum
Requirement
Minimum To Be Well
Requirement Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- --------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 2000
Total Capital $18,897 13.58% $11,136 8.00% $13,920 10.00%
Tier I (Core) Capital
(to risk weighted assets) 17,153 12.32% 5,568 4.00% 8,352 6.00%
Tier I (Core) Capital
(to adjusted total assets) 17,153 7.92% 8,663 4.00% 10,829 5.00%
Tier I (Core) Capital
(to average assets) 17,153 7.83% 8,765 4.00% 10,953 5.00%
As of June 30, 1999
Total Capital $16,841 12.38% $10,886 8.00% $13,607 10.00%
Tier I (Core) Capital
(to risk weighted assets) 15,264 11.22% 5,443 4.00% 8,164 6.00%
Tier I (Core) Capital
(to adjusted total assets) 15,264 7.10% 8,599 4.00% 10,749 5.00%
Tier I (Core) Capital
(to average assets) 15,264 7.14% 8,546 4.00% 10,683 5.00%
</TABLE>
Regulations of the Office of Thrift Supervision limit the amount of dividends
and other capital distributions that may be paid by a savings institution
without prior approval of the Office of Thrift Supervision. Under the
regulations, the Bank can make without application to the OTS (but only after
filing a notification to the OTS), distributions during a calendar year up to
100% of its retained net income for the calendar year-to-date plus retained net
income for the previous two calendar years (less any dividends previously paid)
as long as the Bank would remain adequately, as defined in the office of Thrift
Supervision prompt corrective action regulations, following the proposed
distribution. Accordingly, at June 30, 2000, approximately $3,633,000 of the
Bank's retained earnings was potentially available for distribution to the
Company.
27
<PAGE>
FFW CORPORATION
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
NOTE 12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONTINGENCIES
Various outstanding commitments and contingent liabilities are not reflected in
the financial statements. Commitments to make loans at June 30 were as follows:
<TABLE>
<CAPTION>
2 0 0 0 1 9 9 9
------------------------- -----------------------------
Fixed Variable Fixed Variable
Rate Rate Rate Rate
-------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Commitments to make loans $294,500 $ 356,000 $ 211,000 $ 270,000
Unused lines of credit -- 10,128,000 -- 9,718,000
Standby letters of credit -- 1,195,000 -- 1,671,000
-------- ----------- ---------- -----------
$294,500 $11,679,000 $ 211,000 $11,659,000
</TABLE>
Fixed rate loan commitments at June 30, 2000 were at current rates, ranging
primarily from 9.25% to 11.00%.
Variable rate loan commitments, unused lines of credit and standby letters of
credit at June 30, 2000 were at current rates ranging from 8.25% to 9.75% for
loan commitments, 8.50% 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 cash payments totaling $270,000.
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, 2000, the Bank had invested $675,000 and had recorded
equity in the operating loss of the limited partnership of $65,000, $79,000 and
$45,000 for the years ended June 30, 2000, 1999 and 1998. At June 30, 2000 and
1999, the obligation due to the limited partnership was $75,000 and $75,000. The
Bank receives 3% of the eligible tax credits. For the years ended June 30, 2000,
1999 and 1998, the Bank received approximately $88,000, $65,000 and $15,000 in
tax credits.
NOTE 13 - SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
Real estate and consumer loans, including automobile, home equity and
improvement, manufactured home and other consumer loans are granted primarily in
Wabash, Kosciusko and Whitley counties. Loans secured by one to four family
residential real estate mortgages make up 49% 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.
28
<PAGE>
FFW CORPORATION
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
NOTE 14 - RELATED PARTY TRANSACTIONS
Certain directors, executive officers and principal shareholders of the Company,
including associates of such persons, are loan customers. A summary of the
related party loan activity, for loans aggregating $60,000 or more to any one
related party, is as follows:
Balance - June 30, 1999 $ 839,552
New loans 768,944
Repayments (257,268)
Other changes (271,549)
----------
Balance - June 30, 2000 $1,079,679
==========
Other changes include adjustments for loans applicable to one reporting period
that are excludable from the other reporting period.
29
<PAGE>
FFW CORPORATION
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS
Presented below are condensed financial statements for the parent company, FFW
Corporation.
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
June 30, 2000 and 1999
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 190,720 $ 66,439
Investment in Bank subsidiary 17,040,497 16,293,893
Investment in non-bank subsidiary 320,406 274,920
Securities available for sale 2,027,516 1,769,006
Other assets 263,988 1,026,058
------------ ------------
Total assets $ 19,843,127 $ 19,430,316
============ ============
LIABILITIES
Accrued expenses and other liabilities $ 228,207 $ 73,476
SHAREHOLDERS' EQUITY
Common stock 18,070 17,853
Additional paid-in capital 9,228,128 8,965,882
Retained earnings - substantially restricted 15,547,131 13,970,694
Unearned employee MRP (72,354) --
Accumulated other comprehensive income (loss) (1,479,969) (455,386)
Unearned Employee Stock Ownership Plan shares -- (52,331)
Treasury stock (3,626,086) (3,089,872)
------------ ------------
Total shareholders' equity 19,614,920 19,356,840
------------ ------------
Total liabilities and shareholders' equity $ 19,843,127 $ 19,430,316
============ ============
<CAPTION>
CONDENSED STATEMENTS OF INCOME
For the years ended June 30, 2000, 1999 and 1998
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Interest income $ 121,025 $ 129,664 $ 117,349
Dividend income 650,000 1,050,000 --
----------- ----------- -----------
771,025 1,179,664 117,349
Operating expense 80,246 251,650 136,776
Equity in undistributed income of subsidiaries
Bank 1,541,534 1,064,947 1,817,183
Non-bank 51,374 50,714 56,035
----------- ----------- -----------
Income before income taxes 2,283,687 2,043,675 1,853,791
Income tax expense (benefit) 12,826 (67,380) (45,877)
----------- ----------- -----------
Net income $ 2,270,861 $ 2,111,055 $ 1,899,668
=========== =========== ===========
</TABLE>
30
<PAGE>
FFW CORPORATION
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended June 30, 2000, 1999 and 1998
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 2,270,861 $ 2,111,055 $ 1,899,668
Adjustments to reconcile net income to net
cash from operating activities
Equity in undistributed income of subsidiaries (1,592,908) (1,115,661) (1,873,218)
Other 918,066 (1,033,763) (30,964)
----------- ----------- -----------
Net cash from operating activities 1,596,019 (38,369) (4,514)
Cash flows from investing activities
Proceeds from sales of securities 131,003 170,000 --
Maturities of securities available for sale 210,089 982,234 455,000
Purchase of securities available for sale (731,839) (574,108) (267,289)
Repayments on loan receivable from ESOP 52,331 99,417 92,805
----------- ----------- -----------
Net cash from investing activities (338,416) 677,543 280,516
Cash flows from financing activities
Proceeds from stock options 54,819 27,356 177,820
Purchase of treasury stock (493,717) (405,887) --
Cash dividends paid (694,424) (608,505) (542,101)
----------- ----------- -----------
Net cash from financing activities (1,133,322) (987,036) (364,281)
----------- ----------- -----------
Net change in cash and cash equivalents 124,281 (347,862) (88,279)
Beginning cash and cash equivalents 66,439 414,301 502,580
----------- ----------- -----------
Ending cash and cash equivalents $ 190,720 $ 66,439 $ 414,301
=========== =========== ===========
</TABLE>
The extent to which the Company may pay cash dividends to shareholders will
depend on the cash currently available at the Company, as well as the Bank's
ability to pay dividends to the Company (see Note 11).
31
<PAGE>
FFW CORPORATION
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table shows estimated fair values and related carrying amounts of
the Company's financial instruments at June 30. Items which are not financial
instruments are not included.
<TABLE>
<CAPTION>
2 0 0 0 1 9 9 9
---------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 5,254 $ 5,254 $ 4,839 4,839
Securities available for sale 52,026 52,026 51,029 51,029
Loans receivable, net 150,81 148,403 151,491 150,004
Federal Home Loan Bank stock 3,401 3,401 3,401 3,401
Accrued interest receivable 1,666 1,666 1,616 1,616
Non-interest-bearing deposits (8,876) (8,876) (8,171) (8,171)
Interest-bearing deposits (124,229) (123,555) (122,230) (121,910)
Borrowings (64,168) (63,494) (66,300) (64,927)
</TABLE>
For purposes of the above disclosures of estimated fair value, the following
assumptions were used as of June 30, 2000 and 1999. The estimated fair value for
cash and cash equivalents, Federal Home Loan Bank stock, accrued interest
receivable and non-interest-bearing deposits is considered to approximate cost.
The estimated fair value for securities available for sale is based on quoted
market values for the individual securities or for equivalent securities. The
estimated fair value for loans receivable, net, is based on estimates of the
rate the Bank would charge for similar loans at June 30, 2000 and 1999 applied
for the time period until the loans are assumed to reprice or be paid. The
estimated fair value for interest-bearing deposits as well as borrowings is
based on estimates of the rate the Bank would pay on such liabilities at June
30, 2000 and 1999, 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, 2000 and 1999, 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,
2000 and 1999 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.
32
<PAGE>
Directors and Officers
FFW CORPORATION
Officers
Wayne W. Rees
Chairman of the Board
Roger K. Cromer
President and Chief Executive Officer
Treasurer and Chief Financial and
Accounting Officer
Christine K. Noonan
Secretary
Board of Directors
Wayne W. Rees
Owner and Publisher
The Paper of Wabash County, Inc.
J. Stanley Myers
Owner and Operator
Servisoft Water Conditioning, Inc.
Thomas L. Frank
Comptroller, B. Walter & Company
Joseph W. McSpadden
Vice President and Part Owner
Beauchamp & McSpadden
Ronald D. Reynolds
Owner, J. M. Reynolds Oil Co, Inc.
FIRST FEDERAL SAVINGS BANK OF WABASH
Officers
Wayne W. Rees
Chairman of the Board
Roger K. Cromer
President and Chief Executive Officer
Treasurer and Chief Financial Officer
Christine K. Noonan
Vice President, Chief Operations Officer
and Secretary
Noah T. Smith
Vice President
Sonia Niccum
Vice President
Board of Directors
Wayne W. Rees
J. Stanley Myers
Thomas L. Frank
Joseph W. McSpadden
Ronald D. Reynolds
FIRST FEDERAL SAVINGS BANK OF WABASH, INCORPORATED
Officers
Roger K. Cromer
Chairman of the Board and Treasurer
R. Linden Unger
President
Wayne W. Rees
Secretary
Board of Directors
Wayne W. Rees
J. Stanley Myers
Thomas L. Frank
Joseph W. McSpadden
Ronald D. Reynolds
Roger K. Cromer
33
<PAGE>
Shareholder Information
Stock Listing Information
FFW Corporation's common stock is traded on the National Association of
Securities Dealers Automated Quotation Small-Cap Market under the symbol "FFWC".
Stock Price Information
As of September 15, 2000 there were approximately 349 shareholders of record,
not including those shares held in nominee or street name through various
brokerage firms or banks.
The following table sets forth the high and low bid prices and dividends paid
per share.
The stock price information was provided by the NASD, Inc.
Quarter Dividend
Ended High Low Declared
------------------------------------------------------
Sept. 30, 1998 $19.50 $14.50 $ .105
Dec. 31, 1998 16.75 14.00 .105
March 31, 1999 16.75 14.88 .105
June 30, 1999 16.00 13.38 .105
Sept. 30, 1999 13.75 12.50 .120
Dec. 31, 1999 13.50 12.25 .120
March 31, 2000 12.75 10.63 .120
June 30, 2000 12.44 10.44 .120
Dividends
FFW declared and paid dividends of $0.48 per share for fiscal year 2000. The
Board of Directors intends to continue payment of quarterly cash dividends,
dependent on the results of operations and financial condition of FFW and other
factors.
Annual Meeting of Shareholders
The Annual Meeting of Shareholders of FFW Corporation will be held at 2:30 p.m.,
October 24, 2000 at the executive office of FFW Corporation located at:
1205 N. Cass Street
P.O. Box 259
Wabash, Indiana 46992
Shareholders are welcome to attend.
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:
Roger K. Cromer
President and Chief Executive Officer
FFW Corporation
1205 N. Cass Street
P.O. Box 259
Wabash, Indiana 46992
Stock Transfer Agent
Inquiries regarding stock transfer, registration, lost certificates or changes
in name and address should be directed to the stock transfer agent and registrar
by writing:
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
Investor Information
Shareholders, investors, and analysts interested in additional information may
contact Roger K. Cromer, President and Chief Executive Officer
Corporate Office
FFW Corporation
1205 N. Cass Street
P.O. Box 259
Wabash, Indiana 46992
(219) 563-3185
Special Counsel
Silver, Freedman & Taff, L.L.P.
1100 New York Ave., N.W.
Washington, D.C. 20006
Independent Auditor
Crowe, Chizek and Company LLP
330 E. Jefferson Blvd.
South Bend, Indiana 46624
34
