UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to -----------------------
Commission File Number 0-21170
FFW CORPORATION
(Name of small business issuer in its charter)
- --------------------------------------------------------------------------------
Delaware 35-1875502
(State or other jurisdiction (IRS Employer )
of incorporation or oganization) Identification No.)
- --------------------------------------------------------------------------------
1205 N. Cass Street, Wabash, Indiana 46992-1027
(Address of principal executive offices) (Zip Code)
- --------------------------------------------------------------------------------
Registrant's telep(219) 563-3185 including area code:
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. YES [X[ NO [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State the issuer's revenues for its most recent fiscal year: $11,792,323.
<PAGE>
The aggregate market value of the voting stock held by non-affiliates of
the registrant, computed by reference to the average of the bid and asked prices
of such stock on the NASDAQ System as of September 12, 1996, was $9.2 million.
(The exclusion from such amount of the market value of the shares owned by any
person shall not be deemed an admission by the registrant that such person is an
affiliate of the registrant.)
As of September 12, 1996, there were issued and outstanding 702,066
shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of Form 10-KSB - Portions of the Annual Report to
Stockholders for the fiscal year ended June 30, 1996.
Part III of Form 10-KSB - Proxy Statement for 1996 Annual Meeting of
Stockholders.
<PAGE>
PART I
Item 1. DESCRIPTION OF BUSINESS
General
THE COMPANY. FFW Corporation (the "Company") a Delaware corporation,
was formed in December 1992 to act as the holding company for First Federal
Savings Bank of Wabash ("First Federal" or the "Bank") upon the completion of
the Bank's conversion from the mutual to the stock form (the "Conversion"). The
Conversion was completed on April 1, 1993.
At June 30, 1996, the Company had $150.5 million of assets and
shareholders' equity of $15.5 million (or 10.3% of total assets).
The executive offices of the Company are located at 1205 N. Cass
Street, Wabash, Indiana 46992, and its telephone number at that address is (219)
563-3185.
FIRST FEDERAL. First Federal is a federally chartered stock savings
bank headquartered in Wabash, Indiana and regulated by the Office of Thrift
Supervision ("OTS"). Its deposits are insured up to applicable limits, by the
Federal Deposit Insurance Corporation (the "FDIC"), which is backed by the full
faith and credit of the United States. First Federal's primary market area
covers Wabash and Kosciusko Counties in northeast and central Indiana, which are
serviced through its three offices in Wabash, North Manchester and Syracuse,
Indiana.
The principal business of the Bank consists of attracting retail
deposits from the general public and investing those funds primarily in one- to
four-family residential mortgage and consumer loans, and, to a lesser extent,
commercial and multi-family real estate, construction and commercial business
loans primarily in the Bank's market area. The Bank also purchases
mortgage-backed securities and invests in U.S. Government and agency obligations
and other permissible investments. At June 30, 1996, substantially all of the
Bank's real estate mortgage loans (excluding mortgage-backed securities) were
secured by properties located in Indiana.
The Bank's revenues are derived primarily from interest on mortgage
loans, mortgage-backed securities, consumer (primarily automobile) and other
loans, investment securities, income from service charges and loan originations
and loan servicing fee income. The Bank does not originate loans to fund
leveraged buyouts, has no loans to foreign corporations or governments and is
not engaged in land development or construction activities through joint
ventures or subsidiaries.
The Bank offers a variety of accounts having a wide range of interest
rates and terms. The Bank's deposits include passbook accounts, money market
savings accounts, NOW, money market checking and regular checking accounts, and
certificate accounts with terms of three to 60 months. The Bank only solicits
deposits in its primary market area and does not accept brokered deposits. The
Bank also has, from time to time, borrowed funds, both in the form of advances
and by entering into repurchase agreements. At June 30, 1996, the Bank had
advances totalling $41.8 million.
<PAGE>
FIRSTFED FINANCIAL OF WABASH, INC. During fiscal 1993, the Company
acquired FirstFed Financial of Wabash, Inc. ("FirstFed") from the Bank. FirstFed
offers insurance products, including life insurance, mutual funds, annuity and
brokerage services through a registered broker dealer. FirstFed which is located
in Wabash, Indiana was incorporated in 1989. FirstFed had net income of
approximately $10,000 for the fiscal year ended June 30, 1996.
FORWARD-LOOKING STATEMENTS
When used in this Form 10-K and in future filings by the Company with
the Securities and Exchange Commission (the "SEC"), in the Company's press
releases or other public or shareholder communications, and in oral statements
made with the approval of an authorized executive officer, the words or phrases
"will likely result", "are expected to", "will continue", "is anticipated",
"estimate", "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to risks and
uncertainties, including but not limited to changes in economic conditions in
the Company's market area, changes in policies by regulatory agencies,
fluctuations in interest rates, demand for loans in the Company's market area
and competition, all or some of which could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made and
are subject to the above-stated qualifications in any event. The Company wishes
to advise readers that the factors listed above could affect the Company's
financial performance and could cause the Company's actual results for future
periods to differ materially from any opinions or statements expressed with
respect to future periods in any current statements.
The Company does not undertake--and specifically declines any
obligation--to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.
LENDING ACTIVITIES OF THE BANK
MARKET AREA OF THE BANK. The main office of the Bank is located in
Wabash, Indiana, which is located in Wabash County. The Bank operates two
branches, one in North Manchester and another in Syracuse, Indiana. North
Manchester is located in Wabash County and Syracuse is located in adjacent
Kosciusko County. The Bank considers Wabash and Kosciusko Counties as its
primary market area. The Bank also serves Grant, Miami, Huntington, Whitley and
Elkhart Counties in Indiana.
Wabash County is served by Conrail and the Norfolk Southern railroads,
and also has a local municipal airport. Ft. Wayne, Indiana, 45 miles to the
northeast, has a commercial airport served by two major airlines and several
commuter affiliates. Wabash County has a mixed agriculture and industrial
economy. Several major employers in Wabash County are suppliers to the
automotive industry. Wabash County also has Manchester College, a four-year
private undergraduate institution, and the Wabash County Hospital, a facility
with 135 beds. Major manufacturing employers in Wabash County include Container
Corporation of America, Eaton Corporation, Ford Meter Box Company, Inc., GenCorp
Automotive, Heckman Bindery, Blue Sky, Inc., United Technologies, Inc., Wabash
Alloys, Cast Molding Industries, Inc. and Wabash Magnetics.
<PAGE>
Kosciusko County's economy includes a mix of recreational,
manufacturing, biomedical and manufactured home industries. Major private
employers in Kosciusko County include GTI Corporation, Dalton Foundries, Inc.,
Maple Leaf Farms, Inc., Biomet, Inc., Danek Group, Zimmer Inc., R. R. Donnelley,
Depuy Inc., Kemole Glass, Inc., Othy, Inc. and Creighton Brothers.
GENERAL. Historically, the Bank has originated fixed-rate, one- to
four-family mortgage loans. In the early 1980s, the Bank began to focus on the
origination of adjustable-rate mortgage ("ARM") loans and short-term loans for
retention in its portfolio, in order to increase the percentage of loans in its
portfolio with more frequent repricing or shorter maturities, and in some cases
higher yields, than fixed-rate mortgage loans. While the Bank has continued to
originate fixed-rate mortgage loans in response to customer demand, currently,
the Bank originates and sells most of its fixed-rate, first mortgage loans with
maturities of greater than 15 years in the secondary market with servicing
retained.
While the Bank primarily focuses its lending activities on the
origination of loans secured by first mortgages on owner-occupied one- to
four-family residences, it also originates consumer (including automobile),
commercial and multi-family real estate, commercial business, and residential
construction loans in its primary market area. At June 30, 1996, the Bank's net
loan portfolio totaled $100.5 million.
The Executive Committee of the Bank, comprised of three outside
directors selected by and including the Chairman, has the responsibility for the
supervision of the Bank's loan portfolio with an overview by the Board of
Directors. The Bank's loan policy requires Executive Committee or full Board
approval on mortgage and consumer loans over certain dollar thresholds, loan
extensions, special loan situations, assumptions and loan participations. The
Board of Directors has responsibility for the overall supervision of the Bank's
loan portfolio and in addition, reviews all foreclosure actions or the taking of
deeds-in-lieu of foreclosure.
The aggregate amount of loans that the Bank is permitted to make under
applicable federal regulations to any one borrower, including related entities,
or the aggregate amount that the Bank could have invested in any one real estate
project is generally the greater of 15% of unimpaired capital and surplus or
$500,000. See "Regulation - Federal Regulation of Savings Associations." At June
30, 1996, the maximum amount which the Bank could have lent to any one borrower
and the borrower's related entities was approximately $1.7 million. At June 30,
1996, the Bank had no loans with outstanding balances in excess of this amount.
The principal balance of the largest amount outstanding to any one borrower, or
group of related borrowers, was approximately $1.0 million at June 30, 1996.
Currently, it is the Bank's general policy to limit its loans to one borrower to
$500,000, although this limit may be exceeded under certain circumstances.
<PAGE>
LOAN PORTFOLIO COMPOSITION. The following table contains information
concerning the composition of the Bank's loan portfolio in dollar amounts and in
percentages (before deductions for loans in process, deferred fees and discounts
and allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------
1996 1995
---------------------------- --------------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family................................... $60,732 59.32% $60,353 64.76%
Commercial and multi-family........................... 7,218 7.05 6,547 7.03
Construction.......................................... 2,676 2.61 1,406 1.51
-------- ------ ------- ------
Total real estate loans............................ 70,626 68.98 68,306 73.30
------- ------ ------- ------
Other Loans:
Consumer Loans:
Deposit account...................................... 226 .22 326 .35
Automobile........................................... 18,464 18.03 12,405 13.31
Home equity and improvement.......................... 4,624 4.52 4,487 4.82
Manufactured home.................................... 481 .47 616 .66
Other................................................ 3,583 3.50 2,517 2.70
-------- ------ ------- ------
Total consumer loans............................... 27,378 26.74 20,351 21.84
-------- ------ ------- ------
Commercial business loans............................. 4,378 4.28 4,531 4.86
-------- ------ ------- ------
Total other loans.................................... 31,756 31.02 24,882 26.70
-------- ------ ------- ------
Total loans........................................ 102,382 100.00% 93,188 100.00%
====== ======
Less:
- ----
Loans in process...................................... 1,548 371
Deferred fees and discounts........................... (248) (142)
Allowance for losses.................................. 553 484
--------- -------
Total loans, net................................... $100,529 $92,475
======== =======
<PAGE>
<CAPTION>
June 30,
---------------------------
1994
---------------------------
Amount Percent
------ -------
<S> <C> <C>
Real Estate Loans:
One- to four-family................................... $52,869 66.54%
Commercial and multi-family........................... 5,027 6.33
Construction.......................................... 2,912 3.66
------- ------
Total real estate loans............................ 60,808 76.53
------- ------
Other Loans:
Consumer Loans:
Deposit account...................................... 279 .35
Automobile........................................... 9,426 11.87
Home equity and improvement.......................... 3,075 3.87
Manufactured home.................................... 797 1.00
Other................................................ 1,588 2.00
------- ------
Total consumer loans............................... 15,165 19.09
------- ------
Commercial business loans............................. 3,479 4.38
------- ------
Total other loans.................................... 18,644 23.47
------ ------
Total loans........................................ 79,452 100.00%
======
Less:
- ----
Loans in process...................................... 1,378
Deferred fees and discounts........................... (99)
Allowance for losses.................................. 485
-------
Total loans, net................................... $77,688
=======
</TABLE>
<PAGE>
The following table shows the composition of the Bank's loan portfolio
by fixed and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------------------------
1996 1995 1994
------------------------ ---------------------- ------------------------
Amount Percent Amount Percent Amount Percent
--------- ----- --------- ----- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real Estate:
One- to four-family ....................... $ 8,302 8.11% $ 7,772 8.34% $ 8,054 10.13%
Commercial and multi-family ............... 2,248 2.19 1,018 1.09 2,421 3.05
Construction .............................. 1,094 1.07 843 .91 260 .33
--------- ----- --------- ----- -------- -----
Total real estate loans ............... 11,644 11.37 9,633 10.34 10,735 13.51
--------- ----- --------- ----- -------- -----
Consumer ................................... 26,839 26.21 18,814 20.19 13,375 16.83
Commercial business ........................ 1,430 1.40 1,168 1.25 1,151 1.45
--------- ----- --------- ----- -------- -----
Total fixed-rate loans ................ 39,913 38.98 29,615 31.78 25,261 31.79
--------- ----- --------- ----- -------- -----
Adjustable-Rate Loans:
Real estate:
One- to four-family ...................... 52,430 51.21 52,581 56.43 44,815 56.41
Commercial and multi-family .............. 4,970 4.85 5,529 5.93 2,606 3.28
Construction ............................. 1,582 1.55 563 .60 2,652 3.34
--------- ----- --------- ----- -------- -----
Total real estate loans ............... 58,982 57.61 58,673 62.96 50,073 63.03
--------- ----- --------- ----- -------- -----
Consumer .................................. 539 .53 1,537 1.65 1,790 2.25
Commercial business ....................... 2,948 2.88 3,363 3.61 2,328 2.93
--------- ----- --------- ----- -------- -----
Total adjustable-rate loans ........... 62,469 61.02 63,573 68.22 54,191 68.21
--------- ----- --------- ----- -------- -----
Total loans ........................... 102,382 100.00% 93,188 100.00% 79,452 100.00%
====== ====== ======
Less:
Loans in process .......................... 1,548 371 1,378
Deferred fees and discounts ............... (248) (142) (99)
Allowance for loan losses ................. 553 484 485
--------- --------- --------
Total loans, net ...................... $ 100,529 $ 92,475 $ 77,688
========= ========= ==========
</TABLE>
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Bank's loan portfolio (including non-accruing loans) at June 30, 1996. Mortgages
which have adjustable or renegotiable interest rates are shown as maturing in
the period during which the contract is due. The schedule does not reflect the
effects of possible prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
------------------------------------------------------------------------
One- to four-family Commercial Construction Consumer
------------------- --------------------- ----------------- ------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Due During
Years Ending
June 30,
- --------------
1997.......................... $ 8 8.50% $ 335 9.12% $ 433 8.51% $ 2,088 9.40%
1998.......................... 44 7.69 222 9.50 --- --- 2,016 9.44
1999.......................... 158 8.27 6 10.07 --- --- 3,850 9.34
2000 to 2001.................. 690 8.58 126 9.83 --- --- 15,199 9.29
2002 to 2006.................. 5,349 8.22 1,255 9.31 --- --- 1,904 10.62
2007 to 2021.................. 29,641 8.07 3,776 8.63 335 8.04 2,321 9.57
2022 and following............ 24,842 7.95 1,498 8.41 1,908 7.98 --- ---
-------- -------- -------- --------
$ 60,732 8.04% $ 7,218 8.77% $ 2,676 8.07% $ 27,378 9.43%
======== ======== ======== ========
<CAPTION>
Commercial
Business Total
------------------ --------------------
Weighted
Average
Amount Rate Amount Percent
------ ---- ------ -------
<S> <C> <C> <C> <C>
Due During
Years Ending
June 30,
- -------------
1997.......................... $ 2,795 9.39% $ 5,659 5.53%
1998.......................... 309 8.66 2,591 2.53
1999.......................... 278 8.37 4,292 4.19
2000 to 2001.................. 638 8.82 16,653 16.27
2002 to 2006.................. 358 9.49 8,866 8.66
2007 to 2021.................. --- --- 36,073 35.23
2022 and following............ --- --- 28,248 27.59
-------- --------
$ 4,378 9.20% $102,382 100.00%
======== ========
</TABLE>
<PAGE>
The total amount of loans due after June 30, 1997 which have fixed
interest rates is $35.4 million, while the total amount of loans due after such
dates which have floating or adjustable interest rates is $61.3 million.
ONE- TO FOUR-FAMILY RESIDENTIAL MORTGAGE LENDING. Residential loan
originations of this type are generated by the Bank's marketing efforts, its
present customers, walk-in customers and referrals from real estate agents and
builders. The Bank focuses its lending efforts primarily on the origination of
loans secured by first mortgages on owner-occupied, one- to four-family
residences. At June 30, 1996, the Bank's one- to four-family residential
mortgage loans totaled $60.7 million, or approximately 59.3% of the Bank's total
gross loan portfolio.
The Bank currently offers fixed-rate monthly, ARM payment and balloon
loans. During the year ended June 30, 1996, the Bank originated $11.6 million of
adjustable-rate real estate loans, most of which were secured by one- to
four-family residential real estate. During fiscal 1996, the Bank originated
$10.7 million of fixed-rate real estate loans, most of which were secured by
one- to four-family residential real estate. The Bank's one- to four-family
residential mortgage originations are primarily in its market and surrounding
areas.
The Bank currently originates up to a maximum of 30-year
adjustable-rate, one- to four-family residential mortgage loans in amounts up to
95% of the appraised value of the security property provided that private
mortgage insurance is obtained in an amount sufficient to reduce the Bank's
exposure to at or below the 80% loan-to-value level.
The Bank currently offers one-, three-, five-, and seven-year ARM loans
with an interest rate margin generally 300 basis points over the one year
Treasury rates. These loans have a fixed-rate for the stated period and,
thereafter, such loans adjust annually. These loans provide for up to a 200
basis points annual cap and a lifetime cap of 600 basis points over the initial
rate. Under the current ARM program, such loans will never adjust more than 175
basis points below the initial rate. Depending on whether a one-, three-, five-,
or seven-year loan is selected, per-year and lifetime caps will range from 100
to 200 basis points, and 300 to 600 basis points. As a consequence of using an
initial fixed-rate and caps and floor, the interest rates on these loans may not
be as rate sensitive as is the Bank's cost of funds. The Bank's ARMs do not
permit negative amortization of principal. The Bank qualifies borrowers at the
fully indexed rate.
Due to consumer demand, the Bank also offers fixed-rate 10-through
15-year and 15- through 30- year mortgage loans, most of which conform to the
secondary market standards of the Federal Home Loan Mortgage Corporation
("FHLMC").
Interest rates charged on these fixed-rate loans are competitively
priced according to market conditions. Residential loans generally do not
include prepayment penalties. Most of the fixed-rate loans with maturities of 15
to 30 years are sold in the secondary market. The Bank generally retains
servicing rights on such loans. Generally, the Bank will retain fixed-rate loans
with maturities of less than 15 years in its portfolio. The Bank reserves the
right to discontinue, adjust or create new lending programs to respond to its
needs and to competitive factors.
<PAGE>
In underwriting one- to four-family residential real estate loans,
First Federal evaluates both the borrower's ability to make monthly payments and
the value of the property securing the loan. Currently, virtually all properties
securing real estate loans made by First Federal are appraised by independent
fee appraisers approved and qualified by the Board of Directors. First Federal
generally requires borrowers to obtain an attorney's title opinion or title
insurance, and fire and property insurance (including flood insurance, if
necessary) in an amount not less than the amount of the loan. Real estate loans
originated by the Bank generally contain a "due on sale" clause allowing the
Bank to declare the unpaid principal balance due and payable upon the sale of
the security property.
CONSUMER LENDING. First Federal offers a variety of secured consumer
loans, including automobile, home equity, home improvement, manufactured home
and student loans, and loans secured by savings deposits. In addition, First
Federal offers other secured and unsecured consumer loans. The Bank currently
originates substantially all of its consumer loans in its primary market area
and surrounding areas. The Bank originates consumer loans on both a direct and
indirect basis. Direct loans are made when the Bank extends credit directly to
the borrower. Indirect loans are obtained when the Bank purchases loan contracts
from retailers of goods or services which have extended credit to their
customers. The only indirect lending by First Federal began in the early 1980s,
and is with selected automobile and boat dealers located in the Bank's primary
market and surrounding areas. The Bank underwrites each indirect loan in
accordance with its normal consumer loan standards. At June 30, 1996, the Bank's
consumer loan portfolio totaled $27.4 million, or 26.7% of its total gross loan
portfolio.
Consumer loans may entail greater credit risk than do residential
mortgage loans, particularly in the case of consumer loans which are unsecured
or are secured by rapidly depreciable assets, such as automobiles or mobile
homes. In such cases, any repossessed collateral for a defaulted consumer loan
may not provide an adequate source of repayment of the outstanding loan balance
as a result of the greater likelihood of damage, loss or depreciation. In
addition, consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be affected by adverse personal
circumstances. Furthermore, the application of various federal and state laws,
including bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans. At June 30, 1996, $65,000 or approximately 0.2% of the
consumer loan portfolio was non-performing. There can be no assurance that
delinquencies will not increase in the future.
The largest component of First Federal's consumer loan portfolio
consists of automobile loans. At June 30, 1996, automobile loans totaled $18.5
million, or approximately 18.0% of the Bank's gross loan portfolio.
Loans secured by second mortgages, together with loans secured by all
prior liens, are currently limited to 100% or less of the appraised value of the
property securing the loan, unless the first mortgage is held by First Federal
in which case the percentage is 100%. Generally, such loans have a maximum term
of up to 20 years. As of June 30, 1996, home equity and home improvement loans,
most of which are secured by second mortgages, amounted to $4.6 million, or 4.5%
of the Bank's gross loan portfolio.
<PAGE>
In the early 1970s, First Federal began originating loans secured by
new and used manufactured homes purchased by qualified individuals in its
primary market and surrounding areas. At June 30, 1996, manufactured home loans
totaled $481,000, or approximately .5%, of the Bank's gross loan portfolio.
Manufactured home loans are typically made at a higher yield and for a shorter
maturity than one- to four-family residential mortgage loans. Most of the Bank's
manufactured home loans have been originated with fixed rates of interest and
are generally made in amounts of up to a maximum of the lesser of 110% of the
net invoice or 80% of the buyer's cost. The buyer's cost can include such items
as freight, itemized set-up charges, physical damage insurance, sales tax and
filing and recording fees. First Federal is permitted by regulation to make
manufactured home loans for terms of up to 20 years, although most of the Bank's
manufactured home loans are for terms of 15 years or less. The Bank intends to
deemphasize this type of lending in the future.
Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. Loans secured by
deposit accounts at the Bank are currently originated for up to 90% of the
account balance with a hold placed on the account restricting the withdrawal of
the account balance. The interest rate on such loans is typically equal to 200
basis points above the deposit contract rate.
The underwriting standards employed by the Bank for consumer loans
include an application, a determination of the applicant's payment history on
other debts and an assessment of ability to meet existing obligations and
payments on the proposed loan. Although creditworthiness of the applicant is a
primary consideration, the underwriting process also includes a comparison of
the value of the security, if any, in relation to the proposed loan amount.
CONSTRUCTION LENDING. The Bank engages in limited amounts of
construction lending to individuals for the construction of their residences as
well as to builders for the construction of single family homes in the Bank's
primary market area and surrounding areas. At June 30, 1996, the Bank had $2.7
million of gross construction loans, most of which were to borrowers who
intended to live in the properties upon completion of construction.
Construction loans to individuals for their residences are structured
to be converted to permanent loans at the end of the construction phase, which
typically runs for six months. During the construction phase, the borrower pays
interest only. Residential construction loans are generally underwritten
pursuant to the same guidelines used for originating permanent residential
loans. Generally, fixed-rate loans during the construction phase are not
permitted.
Construction loans to builders of one- to four-family residences
require the payment of interest only for up to 12 months. In most cases, these
loans carry adjustable interest rates. At June 30, 1996, the Bank had $585,600
in construction loans outstanding to builders.
Construction lending generally affords the Bank an opportunity to
receive interest at rates higher than those obtainable from permanent
residential loans and to receive higher origination and other loan fees. In
addition, construction loans are generally made with adjustable rates of
interest or for relatively short terms. Nevertheless, construction lending is
generally considered to involve a higher level of credit risk than one- to
four-family residential lending due to the concentration of principal in a
limited number of loans and borrowers and the effects of general economic
<PAGE>
conditions on development projects, real estate developers and managers. In
addition, the nature of these loans is such that they are more difficult to
evaluate and monitor. Finally, the risk of loss on construction loans is
dependent largely upon the accuracy of the initial estimate of the individual
property's value upon completion of the project and the estimated cost
(including interest) of the project. If the cost estimate proves to be
inaccurate, the Bank may be required to advance funds beyond the amount
originally committed to permit completion of the project. At June 30, 1996, the
Bank had no construction loans outstanding which were over thirty days
delinquent.
COMMERCIAL AND MULTI-FAMILY REAL ESTATE LENDING. The Bank has also
engaged in limited commercial and multi-family real estate lending in the Wabash
market area and surrounding areas and has purchased participation interests in
loans from other financial institutions throughout Indiana and neighboring
jurisdictions. At June 30, 1996, the Bank had $7.2 million of commercial and
multi-family real estate loans, which represented 7.1% of the Bank's total gross
loan portfolio. At June 30, 1996, all of the Bank's commercial and multi-family
real estate loan portfolio was secured by properties located in Indiana.
Loans secured by commercial and multi-family real estate properties are
generally larger and involve a greater degree of credit risk than one- to
four-family residential mortgage loans. Because payments on loans secured by
commercial real estate properties are often dependent on the successful
operation or management of the properties, repayment of such loans may be
subject to adverse conditions in the real estate market or the economy. If the
cash flow from the project is reduced (for example, if leases are not obtained
or renewed), the borrower's ability to repay the loan may be impaired.
The Bank's commercial and multi-family real estate loan portfolio is
secured primarily by apartment buildings and, to a lesser extent, office
buildings and nursing homes. Commercial and multi-family real estate loans
generally have terms that do not exceed 15 years. The Bank has a variety of rate
adjustment features and other terms in its commercial and multi-family real
estate loan portfolio. Generally, the loans are made in amounts up to 75% of the
appraised value of the security property. Commercial real estate loans provide
for a margin over a designated index which is generally the prime rate and
multi-family loans provide for a margin over the one-year Treasury bill rate.
The Bank currently analyzes the financial condition of the borrower, the
borrower's credit history, and the reliability and predictability of the cash
flow generated by the property securing the loan. The Bank generally requires
personal guaranties of the borrowers. Appraisals on properties securing
commercial real estate loans originated by the Bank are performed by independent
appraisers.
COMMERCIAL BUSINESS LENDING. The Bank also originates a limited number
of commercial business loans. At June 30, 1996, approximately $4.4 million, or
4.3% of the Bank's total gross loan portfolio was comprised of commercial
business loans.
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her employment and
other income and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans typically are made on the basis
of the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
<PAGE>
itself (which, in turn, is likely to be dependent upon the general economic
environment). The Bank's commercial business loans are usually, but not always,
secured by business assets. However, the collateral securing the loans may
depreciate over time, may be difficult to appraise and may fluctuate in value
based on the success of the business. At June 30, 1996, First Federal's
commercial business loan portfolio was performing substantially in accordance
with its repayment terms.
The Bank recognizes the generally increased risks associated with
commercial business lending. First Federal's commercial business lending policy
includes credit file documentation and analysis of the borrower's character,
capacity to repay the loan, the adequacy of the borrower's capital and
collateral as well as an evaluation of conditions affecting the borrower.
Analysis of the borrower's past, present and future cash flows is also an
important aspect of First Federal's current credit analysis.
ORIGINATIONS, PURCHASES, SALES AND SERVICING OF LOANS AND MORTGAGE-BACKED
SECURITIES
Real estate loans are generally originated by First Federal's staff of
salaried loan officers. Loan applications are taken and processed in the
branches and main office of the Bank.
While the Bank originates both adjustable-rate and fixed-rate loans,
its ability to originate loans is dependent upon the relative customer demand
for loans in its market. Demand is affected by the interest rate environment.
The Bank currently holds in its portfolio most adjustable-rate loans and first
mortgage, fixed-rate real estate loans with maturities of less than 15 years it
originated and the remainder of such loans is sold primarily to the FHLMC. In
selling these fixed-rate mortgage loans, the Bank retains the servicing rights.
In fiscal 1996, the Bank originated $48.6 million of loans, compared to
$36.1 million and $44.6 million in fiscal 1995 and 1994, respectively. The
increase from fiscal 1995 to 1996 was due to favorable rates. Management
attributes the decrease in originations from fiscal 1994 to 1995 to higher
interest rates during the first half of fiscal 1995. Lower originations of loans
in fiscal 1995 were somewhat offset by a lower level of repayments during the
same period. In fiscal 1996, $32.5 million of loans were repaid, compared to
$21.1 million and $25.4 million in fiscal 1995 and 1994, respectively.
No mortgage-backed securities were purchased in fiscal 1996 or fiscal
1995 compared to a purchase of $16.5 million in fiscal 1994. Sales of real
estate loans totaled $6.7 million in fiscal 1996, compared to $2.4 million and
$8.3 million in fiscal 1995 and 1994, respectively. In summary, net loans and
mortgage-backed securities increased by $7.3 million in fiscal 1996, compared to
a $12.8 million and $26.2 million increase in fiscal 1995 and 1994,
respectively. The increase in fiscal 1996 was attributable to increased loan
originations, while the increases in fiscal 1995 and 1994 were attributable to
the increased loan originations in fiscal 1995 and purchase of $16.5 million in
mortgage-backed securities in fiscal 1994.
Currently, the Bank sells whole loans and, in the past, has sold loan
participations primarily without recourse. Sales of whole loans and loan
participations generally have been beneficial to the Bank since these sales
usually generate income at the time of sale, produce future servicing income and
provide funds for additional lending and other investments. During fiscal 1996,
the Bank sold $6.7 million of loans.
<PAGE>
When loans are sold, the Bank typically retains the responsibility for
collecting and remitting loan payments, making certain that real estate tax
payments are made on behalf of borrowers, and otherwise servicing the loans. The
Bank receives a servicing fee for performing these services. The amount of
servicing fees received by the Bank varies but is generally calculated on the
basis of 1/4th of 1% per annum for fixed-rate mortgage loans on the outstanding
principal amount of the loans serviced. The servicing fee is recognized as
income over the life of the loans. At June 30, 1996, the Bank serviced for
others approximately $20.2 million of mortgage loans that it originated and
sold.
In periods of economic uncertainty, the Bank's ability to originate
large dollar volumes of real estate loans may be substantially reduced or
restricted, with a resultant decrease in related loan origination fees, other
fee income and operating earnings. In addition, the Bank's ability to sell loans
may substantially decrease as potential buyers (principally government agencies)
reduce their purchasing activities. In the past, the Bank has purchased
mortgage-backed securities in amounts which consistently exceed its sales of
such items, although the specific levels of purchases have varied in recent
periods in response to available spreads and other market factors.
<PAGE>
The following table shows the loan and mortgage-backed securities
origination, purchase, sale and repayment activities of the Bank for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended June 30
-------------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Originations by type:
Adjustable-rate:
Real estate - one- to four-family ......... $ 11,143 $ 11,831 $ 15,661
- commercial and multi-family ...... 442 1,068 911
Non-real estate - consumer ................ 37 779 1,048
- commercial business .............. 2,745 2,903 1,715
-------- -------- --------
Total adjustable-rate .............. 14,367 16,581 19,335
-------- -------- --------
Fixed-rate:
Real estate - one- to four-family ......... 9,356 3,765 12,091
- commercial and multi-family ...... 1,372 409 3,067
Non-real estate - consumer ................ 22,531 15,387 9,190
- commercial business .............. 986 -- 877
-------- -------- --------
Total fixed-rate ................... 34,245 19,561 25,225
-------- -------- --------
Total loans originated ............. 48,612 36,142 44,560
-------- -------- --------
Purchases:
Mortgage-backed securities ................ -- -- 16,503
Sales:
Real estate loans ......................... 6,693 2,447 8,303
Principal Repayments:
Loans ..................................... 32,515 21,060 25,434
Mortgage-backed securities ................ 770 630 883
-------- -------- --------
Total repayments ................... 33,285 21,690 26,317
-------- -------- --------
Increase (decrease) in other items .......... (1,319) 746 (235)
-------- -------- --------
Net increase ....................... $ 7,315 $ 12,751 $ 26,208
======== ======== ========
</TABLE>
<PAGE>
NON-PERFORMING ASSETS AND CLASSIFIED ASSETS
When a borrower fails to make a required payment on real estate secured
loans and consumer loans within 30 days after the payment is due, the Bank
generally institutes collection procedures by mailing a delinquency notice. The
customer is contacted again, by notice and/or telephone, when the payment is 31
days past due and when 60 days past due. In most cases, delinquencies are cured
promptly; however, if a loan secured by real estate or other collateral has been
delinquent for more than 90 days, satisfactory payment arrangements must be
adhered to or the Bank will initiate foreclosure or repossession.
Generally, when a loan becomes delinquent 90 days or more or when the
collection of principal or interest becomes doubtful, the Bank will place the
loan on a non-accrual status and, as a result, previously accrued interest
income on the loan is taken out of current income. The loan will remain on a
non-accrual status as long as the loan is 90 days delinquent.
The following table sets forth information concerning delinquent
mortgage and other loans at June 30, 1996. The amounts presented represent the
total remaining principal balances of the related loans, rather than the actual
payment amounts which are overdue.
<TABLE>
<CAPTION>
Real Estate
-----------------------------------------------------------------
Commercial and Consumer
One- to four-family Multi-Family -------------------------
Number Amount Percent Number Amount Percent Number Amount Percent
------ ------ ------- ------ ------ ------- ------ ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30-59 days ........................... 14 $357 81.14% 1 $ 22 100.00% 71 $410 70.09%
60-89 days ........................... 3 83 18.86 -- -- -- 15 110 18.80
90 days and over ..................... -- -- -- -- -- -- 11 65 11.11
--- ---- ------ -- ---- ------ -- ---- -----
Total delinquent loans ............. 17 $440 100.00% 1 $ 22 100.00% 97 $585 100.00%
=== ==== ====== == ==== ====== == ==== ======
<CAPTION>
Construction
------------
Number Amount Percent
------ ------ -------
<S> <C> <C> <C>
Loans delinquent for:
30-59 days............................ --- $ --- ---%
60-89 days............................ --- --- ---
90 days and over...................... --- --- ---
--- --- ------
Total delinquentloans............... --- $ --- ---%
=== ====== ======
</TABLE>
There were no delinquent commercial business loans at June 30, 1996.
The ratio of delinquent loans to total loans (net), was 1.04% at June 30, 1996.
<PAGE>
The table below sets forth the amounts and categories of non-performing
assets in the Bank's loan portfolio at the dates indicated. Loans are placed on
non-accrual status when the collection of principal and/or interest become
doubtful or when the loan is in excess of 90 days delinquent. Foreclosed and
repossessed assets include assets acquired in settlement of loans. See Notes 1
and 3 to Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
June 30
--------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accruing loans:
One- to four-family ............................ -- $ 23 $ 8
Commercial and multi-family real estate ........ -- 23 --
Consumer ....................................... 65 58 10
---- ---- ----
Total non-accruing loans ................ 65 104 18
---- ---- ----
Foreclosed and repossessed assets:
One- to four-family ............................ -- -- --
Commercial and multi-family real estate ........ -- -- 80
Consumer ....................................... 27 24 4
---- ---- ----
Total foreclosed assets ................. 27 24 84
---- ---- ----
Troubled debt restructurings ..................... -- -- 80
Total non-performing assets ...................... $ 92 $128 $102
==== ==== ====
Total as a percentage of total assets ............ .06% .09% .08%
==== ==== ====
</TABLE>
For the fiscal year ended June 30, 1996, gross interest income which
would have been recorded had the non-accruing loans been current amounted to
$7,500. The amount that was included in interest income on such loans was $5,000
for the fiscal year ended June 30, 1996.
NON-PERFORMING ASSETS. Included in non-accruing loans at June 30, 1996
were 11 consumer loans totaling $65,000 secured by property including
automobiles, manufactured homes and other collateral. Foreclosed and repossessed
assets included automobiles totaling $27,000 at June 30, 1996.
OTHER LOANS OF CONCERN. In addition to the non-performing loans and
foreclosed and repossessed assets set forth in the preceding table, as of June
30, 1996 there was also an aggregate of $1.4 million in net book value of loans
classified by the Bank with respect to the majority of which known information
about the possible credit problems of the borrowers or the cash flows of the
security properties have caused management to have some doubts as to the ability
of the borrowers to comply with present loan repayment terms and which may
result in the future inclusion of such items in the non-performing asset
categories. The principal components of loans of concern are 56 consumer loans
aggregating $406,000, 28 one- to four-family loans aggregating $958,000 and 1
commercial real estate loan totalling $22,000.
<PAGE>
As of June 30, 1996, there were no other loans not included on the
foregoing table or discussed above where known information about the possible
credit problems of borrowers caused management to have doubts as to the ability
of the borrower to comply with present loan repayment terms and which may result
in disclosure of such loans in the future.
CLASSIFIED ASSETS. Federal regulations provide for the classification
of loans and other assets such as debt and equity securities considered by the
OTS to be of lesser quality as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the savings association will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets which do not
currently expose the savings association to sufficient risk to warrant
classification in one of the aforementioned categories, but possess weaknesses,
are designated "Special Mention" by management.
When a savings association classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When a savings association classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge-off such amount. An association's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the association's District Director at the regional OTS
office, who may order the establishment of additional general or specific loss
allowances.
In accordance with its classification of assets policy, the Bank
regularly reviews the loans in its portfolio to determine whether any loans
require classification. On the basis of management's review of its assets, at
June 30, 1996, the Bank had classified a total of approximately $691,400 of its
assets as substandard, $46,700 as doubtful, none as loss and $712,900 as special
mention. At June 30, 1996, total classified assets, including special mention
assets, comprised $1.5 million, or 12.5% of the Bank's capital, or .99% of the
Bank's total assets.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity. Such evaluation, which includes a review of loans for which full
collectibility may not be reasonably assured, considers among other matters, the
estimated fair value of the underlying collateral, economic conditions,
historical loan loss experience and other factors that warrant recognition in
providing for an adequate loan allowance.
<PAGE>
Real estate properties acquired through foreclosure are recorded at
fair value. If fair value at the date of foreclosure is lower than the balance
of the related loan, the difference will be charged-off to the allowance at the
time of transfer. Valuations are periodically updated by management and if the
value declines, a specific provision for losses on such property is established
by a charge to operations.
Although management believes that it uses the best information
available to determine the allowances, unforeseen market conditions could result
in adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Bank's allowances will be the result of
periodic loan, property and collateral reviews and thus cannot be predicted in
advance. At June 30, 1996, the Bank had a total allowance for loan losses of
$553,400 or .55% of total loans, net. See Notes 1 and 3 of the Notes to
Consolidated Financial Statements in the Annual Report to Stockholders (the
"Annual Report"), attached hereto as Exhibit 13.
The following table sets forth an analysis of the Bank's allowance for
loan losses.
<TABLE>
<CAPTION>
Year Ended June 30
-----------------------
1996 1995 1994
-----------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period ...................... $484 $485 $477
Charge-offs:
One- to four-family ................................ 16 2 29
Consumer ........................................... 64 45 46
---- ---- ----
80 47 75
---- ---- ----
Recoveries:
Consumer ........................................... 10 12 59
Commercial and multi-family real estate ............ 44 -- --
---- ---- ----
54 12 59
Net charge-offs ..................................... 26 35 16
Additions charged to operations ..................... 95 34 24
---- ---- ----
Balance at end of period ............................ $553 $484 $485
==== ==== ====
Ratio of net charge-offs during the period to
average loans outstanding during the period ....... .03% .04% .02%
==== ==== ====
</TABLE>
<PAGE>
The distribution of the Bank's allowance for loan losses at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------------------------
1996 1995 1994
------------------------ ------------------- --------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans(1) Amount Loans(1) Amount Loans(1)
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family ......................... $100 59.32% $ 95 64.76% $ 89 66.54%
Commercial and multi-family
real estate .............................. 75 7.05 70 7.03 67 6.33
Construction ................................ 20 2.61 15 1.51 25 3.66
Consumer .................................... 315 26.74 254 21.84 250 19.09
Commercial business ......................... 35 4.28 35 4.86 33 4.38
Unallocated ................................. 8 -- 15 -- 21 --
---- ------ ---- ------ ---- ------
Total .................................. 553 100.00% $484 100.00% $485 100.00%
==== ====== ==== ====== ==== ======
(1) Excluding Loans Held for Sale.
- ---------------------------------
</TABLE>
INVESTMENT ACTIVITIES
First Federal must maintain minimum levels of investments that qualify
as liquid assets under OTS regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans. Historically, the Bank has generally
maintained its liquid assets above the minimum requirements imposed by the OTS
regulations and at a level believed adequate to meet requirements of normal
daily activities, repayment of maturing debt and potential deposit outflows. As
of June 30, 1996, the Bank's liquidity ratio (liquid assets as a percentage of
net withdrawable savings deposits and current borrowings) was 6.9%. See
"Regulation - Liquidity."
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly.
<PAGE>
Generally, the investment policy of the Bank is to invest funds among
various categories of investments and maturities based upon the Bank's need for
liquidity, to achieve the proper balance between its desire to minimize risk and
maximize yield, to provide collateral for borrowings, and to fulfill the Bank's
asset/ liability management policies.
First Federal's investment and mortgage-backed securities portfolios
are managed in accordance with a written investment policy adopted by the Board
of Directors. Other than certificates of deposit and mortgage-backed securities,
investments may be made by the President of First Federal only with the approval
of the Investment Committee. At the present time, neither the Company nor the
Bank has any investments that are held for trading purposes.
Effective July 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS No. 115"). SFAS No. 115 requires that securities and
mortgage-backed securities be classified as held to maturity, available for sale
or trading purposes. Under SFAS No. 115, securities that the Company has the
positive intent and ability to hold until maturity are classified as held to
maturity and are reported at amortized cost. Securities classified as available
for sale are those the Company may sell in response to liquidity needs, for
asset/liability management purposes and other reasons and are reported at fair
value. Unrealized gains and losses on securities available for sale are reported
as a separate component of equity, net of tax. Trading securities are those
which are purchased for sale in the near future and are reported at fair value.
Unrealized gains and losses on trading securities are included in income.
Transfers between categories are accounted for as sales and repurchases at fair
value. For any sales or transfers of securities classified as held to maturity,
the cost basis, the realized gain or loss, and the circumstances lending to the
decision to sell are required to be disclosed. At the time of purchase of new
securities, management of the Company makes a determination as to the
appropriate classification of securities as available for sale or held to
maturity. At June 30, 1996, the Company had no securities classified as held to
maturity and $22.0 million classified as available for sale excluding
mortgage-backed securities. No securities were held for trading purposes on such
date.
Securities. At June 30, 1996, the Company's cash and cash equivalents
and interest-earning deposits in other financial institutions totaled $3.2
million, or 2.1% of its total assets, and investment securities (including a
$2.4 million investment in the common stock of the FHLB of Indianapolis in order
to satisfy the requirement for membership in such institution, a $4.0 million
investment in Preferred FNMA Stock, and a $2.3 million investment in various
mutual funds) totaled $24.4 million, or 16.2% of its total assets. It is the
Company's general policy to purchase securities which are U.S. Government
securities and federal agency obligations, state and local government
obligations, commercial paper, short-term corporate debt securities and
overnight federal funds. At June 30, 1996, the weighted average term to maturity
or repricing of the investment securities portfolio, excluding the FHLB, FNMA
stock and other equity securities available for sale, was 4.3 years.
<PAGE>
OTS regulations restrict investments in corporate debt and equity
securities by the Bank. These restrictions include prohibitions against
investments in the debt securities of any one issuer in excess of 15% of the
Bank's unimpaired capital and unimpaired surplus as defined by federal
regulations, which totaled $11.6 million as of June 30, 1996, plus an additional
10% if the investments are fully secured by readily marketable collateral. See
"Regulation - Federal Regulation of Savings Associations" for a discussion of
additional restrictions on the Bank's investment activities.
The following table sets forth the composition of the Company's
securities portfolio excluding mortgage-backed securities, at the dates
indicated.
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- --------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities held to maturity:
Federal agency obligations................. $ --- ---% $ 1,500 8.41% $ 2,000 11.28%
Commercial notes and commercial
paper.................................... --- --- 654 3.67 959 5.41
State and local government
obligations.............................. --- --- 8,859 49.67 9,495 53.55
-------- ---- ------- ------ ------ -----
Total securities held to maturity........... --- --- 11,013 61.75 12,454 70.24
-------- ------- ------- ------ ------ -----
Securities available for sale:
Federal agency obligations................. 5,913 24.21 --- --- --- ---
Commercial notes and commercial
paper.................................... 565 2.32 --- --- --- ---
State and local government
obligations.............................. 8,332 34.11 --- --- --- ---
Other equity securities..................... 7,216 29.54 4,481 25.13 3,976 22.43
------- ----- ------ ------ ------- -----
Total securities available
for sale............................ 22,026 90.18 4,481 25.13 3,976 22.43
------ ----- ------ ------ ------- -----
FHLB stock.................................. 2,398 9.82 2,340 13.12 1,300 7.33
------- ------ ------- ------ ------- -----
Total securities....................... $24,424 100.00% $17,834 100.00% $17,730 100.00%
======= ====== ======= ====== ======= ======
Weighted average remaining life
or term to repricing, excluding
FHLB stock and other equity
securities available for sale............. 4.3 yrs. 4.5 yrs. 5.1 yrs.
Other Interest-Earning Assets:
Interest-earning deposits with
banks................................... $ 2,289 $13,421 $ 1,644
======== ======= =======
</TABLE>
<PAGE>
The composition and maturities of the securities portfolio, excluding
FHLB of Indianapolis stock and other equity securities, are indicated in the
following table.
<TABLE>
<CAPTION>
June 30, 1996
----------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over Total
1 Year Years Years 10 Years Securities
------ ----- ----- -------- -----------------------
Amortized Amortized Amortized Amortized Amortized Market
Cost Cost Cost Cost Cost Value
---- ---- ---- ---- ---- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal agency
obligations................. $ --- $ 6,000 $ --- $ --- $ 6,000 $ 5,913
Commercial notes and
commercial paper........... 317 242 --- --- 559 565
State and local
government obligations...... 1,290 3,780 2,803 350 8,223 8,332
------- ------- ----- ------- ------- -------
Total debt securities........ $1,607 $10,022 $2,803 $ 350 $14,782 $14,810
====== ======= ====== ====== ======= =======
Weighted average yield(1).... 4.29% 6.15% 4.92% 7.12% 5.74%
===== ===== ===== ===== =====
- -----------------------
</TABLE>
(1) Yields reflected have not been computed on a tax equivalent basis.
Except for obligations of state and local governments, the Company's
securities portfolio at June 30, 1996 contained neither tax-exempt securities
nor securities of any issuer with an aggregate book value in excess of 10% of
the Company's shareholders' equity, excluding those issued by the United States
Government, or its agencies.
MORTGAGE-BACKED SECURITIES. The Company's investment in mortgage-backed
securities can serve as collateral for borrowings and, through repayments, as a
source of liquidity. In addition, management has in the past purchased
mortgage-backed securities in order to supplement loan originations. For
information regarding the carrying and market values of the Company's
mortgage-backed securities portfolio, see Note 2 of the Notes to Consolidated
Financial Statements in the Annual Report attached hereto as Exhibit 13. Under
the Bank's risk-based capital requirement, mortgage-backed securities have a
risk weight of 20% (or 0% in the case of GNMA securities) in contrast to the 50%
risk weight carried by residential loans. See "Regulation."
<PAGE>
Generally accepted accounting principles require an adjustment to the
principal balance of securities to the lower of cost or fair value to reflect
other than temporary declines in fair value. As a result, during fiscal 1995,
the Company incurred a $319,000 unrealized loss related to a decline in fair
value of a mortgage-backed security collateralized by loans secured by
multi-family real estate located in Southern California. The carrying value of
this security at June 30, 1995 after recording of the unrealized loss was
$319,000. This unrealized loss on mortgage-backed securities held to maturity
had the effect of reducing earnings, net of tax, by approximately $193,000. No
prediction can be made as to whether additional losses will be incurred as a
result of this investment. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Annual Report.
The following table sets forth the amortized cost of the Company's
mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
June 30,
-----------------------------
1996 1995 1994
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Federal National Mortgage Association ......... $ 580 $ 657 $ 712
Government National Mortgage Association ...... 16,988 17,330 17,594
Federal Home Loan Mortgage Corporation ........ 226 276 336
Other Mortgage-backed Securities(1) ........... 938 1,226 1,781
------- ------- -------
Total ..................................... $18,732 $19,489 $20,423
======= ======= =======
- -------------------------
</TABLE>
(1) The June 30, 1995 principal balance and amortized cost of other
mortgage-backed securities included an adjustment of $318,900 to reflect an
other than temporary decline in the fair value a security collateralized by
multi-family mortgage obligations with underlying collateral primarily
located in Southern California. The decline in the fair value of the
security was due to increased loan delinquencies, a decline in the cash
reserve fund and losses incurred on foreclosed real estate which resulted
in downgrades in the security's rating by various independent rating
agencies. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the Annual Report.
<PAGE>
The following table sets forth the contractual maturities of the
Company's mortgage-backed securities based on amortized cost at June 30, 1996.
Not considered in the preparation of the table below is the effect of
prepayments, periodic principal repayments and the adjustable-rate nature of
these instruments.
<TABLE>
<CAPTION>
June 30,
Due in 1996
5 Years 5 to 10 10 to 20 Over 20 Balance
or Less Years Years Years Outstanding
------- ----- ----- ----- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Federal National Mortgage Association .. $ -- $ -- $ -- $ 580 $ 580
Government National Mortgage Association 1 69 69 16,849 16,988
Federal Home Loan Mortgage Corporation . -- 46 71 109 226
Other Mortgage-Backed Securities ....... -- -- -- 938 938
------- ------- ------- ------- -------
Total ............................. $ 1 $ 115 $ 140 $18,476 $18,732
======= ======= ======= ======= =======
Weighted average yield ................. 9.53% 9.28% 9.35% 7.11% 7.14%
======= ======= ======= ======= =======
</TABLE>
SOURCES OF FUNDS
GENERAL. The Bank's primary sources of funds are deposits, borrowings,
amortization and prepayment of loan principal (including interest earned on
mortgage-backed securities), sales of whole loans and loan participations,
interest earned on or sales and maturation of investment securities and
short-term investments, and funds provided from operations.
Borrowings, including FHLB advances and reverse repurchase agreements,
may be used at times to compensate for seasonal reductions in deposits or
deposit inflows at less than projected levels, and may be used on a longer term
basis to support expanded lending activities.
DEPOSITS. First Federal offers a variety of deposit accounts having a
wide range of interest rates and terms. The Bank's deposits consist of passbook
savings accounts, money market savings accounts, NOW, money market checking and
regular checking accounts, and certificate accounts ranging in terms from 91
days to 60 months. The Bank only solicits deposits from its market area and does
not use brokers to obtain deposits. The Bank relies primarily on competitive
pricing policies, advertising and customer service to attract and retain these
deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates, and
competition.
<PAGE>
The variety of deposit accounts offered by the Bank has allowed it to
be competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. The Bank has become more susceptible to short-term fluctuations
in deposit flows, as customers have become more interest rate conscious. The
Bank endeavors to manage the pricing of its deposits in keeping with its
asset/liability management and profitability objectives. Based on its
experience, the Bank believes that its passbook savings, money market savings
accounts, NOW, money market checking and regular checking accounts are
relatively stable sources of deposits. However, the ability of the Bank to
attract and maintain certificates of deposit and its passbook accounts and the
rates paid on these deposits has been and will continue to be significantly
affected by market conditions.
The following table sets forth the savings flows at the Bank during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------
1996 1995 1993
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance ................ $85,930 $82,041 $75,211
Net deposits ................... 3,191 486 4,081
Interest credited .............. 3,369 3,403 2,749
------- ------- -------
Ending balance ................. $92,490 $85,930 $82,041
======= ======= =======
Net increase ................... $ 6,560 $ 3,889 $ 6,830
======= ======= =======
Percent increase ............... 7.63% 4.74% 9.08%
======= ======= =======
</TABLE>
<PAGE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Bank at the dates
indicated.
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------------
1996 1995 1994
------------------ ---------------------- --------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Rate Range:
Passbook Accounts.................... $41,689 45.07% $41,345 48.11% $52,878 64.45%
Demand accounts(1)................... 3,264 3.53 2,279 2.65 1,763 2.15
Money Market Accounts................ 258 .28 304 .36 561 .68
NOW Accounts......................... 3,922 4.24 3,677 4.28 3,632 4.43
------- ----- ------- ------ ------- ------
Total Non-Certificates............... 49,133 53.12 47,605 55.40 58,834 71.71
------- ------ ------- ------ ------- ------
Certificates:
0.00 - 3.99%....................... --- --- 197 .23 3,743 4.56
4.00 - 5.99%....................... 26,624 28.79 19,378 22.55 11,937 14.55
6.00 - 7.99%....................... 16,506 17.85 17,127 19.93 3,798 4.63
8.00 - 9.99%....................... 227 .24 1,623 1.89 3,729 4.55
--------- ---- ------- ------ ------- ------
Total Certificates................... 43,357 46.88 38,325 44.60 23,207 28.29
-------- ------ ------- ------ ------- ------
Total Deposits....................... $92,490 100.00% $85,930 100.00% $82,041 100.00%
======= ====== ======= ====== ======= ======
(1) Non-interest-bearing accounts.
</TABLE>
<PAGE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of June 30, 1996.
<TABLE>
<CAPTION>
0.00- 4.00- 6.00- 8.00- Percent
3.99% 5.99% 7.99% 9.99% Total of Total
----- ------ ----- ----- ----- --------
(Dollars in Thousands)
Certificate accounts maturing in quarter
ending:
<S> <C> <C> <C> <C> <C> <C>
September 30, 1996......................... $ --- $ 6,227 $1,635 $ --- $ 7,862 18.13%
December 31, 1996.......................... --- 4,181 1,177 --- 5,358 12.36
March 31, 1997............................. --- 3,797 1,942 --- 5,739 13.24
June 30, 1997.............................. --- 1,607 804 10 2,421 5.58
September 30, 1997......................... --- 2,578 754 --- 3,332 7.69
December 31, 1997.......................... --- 2,064 449 --- 2,513 5.80
March 31, 1998............................. --- 624 768 --- 1,392 3.21
June 30, 1998.............................. --- 1,048 523 --- 1,571 3.62
September 30, 1998......................... --- 981 325 --- 1,306 3.01
December 31, 1998.......................... --- 571 731 --- 1,302 3.00
March 31, 1999............................. --- 1,143 171 217 1,531 3.53
June 30, 1999.............................. --- 189 1,251 --- 1,440 3.32
September 30, 1999......................... --- --- 1,112 --- 1,112 2.57
Thereafter................................. --- 1,614 4,864 --- 6,478 14.94
------- ------- ------- ------ ------- ------
Total................................. $ --- $26,624 $16,506 $ 227 $43,357 100.00%
======= ======= ======= ====== ======= ======
Percent of total........................... ---% 61.41% 38.07% .52%
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of June 30, 1996.
<TABLE>
<CAPTION>
Maturity
---------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
------- ------ ------ --------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less
than $100,000................................ $ 6,300 $ 4,447 $ 7,145 $19,213 $37,105
Certificates of deposit of
$100,000 or more............................. 1,362 911 1,015 2,664 5,952
Public funds(1)............................... 200 --- --- 100 300
-------- -------- ------- -------- -------
Total certificates of deposit................. $ 7,862 $ 5,358 $ 8,160 $21,977 $43,357
======= ======= ======= ======= =======
- --------------------
(1)Deposits from governmental and other public entities.
</TABLE>
<PAGE>
Generally, the Bank does not pay interest rates on its jumbo
certificates of deposit (certificates of deposit with balances of $100,000 or
more) in excess of the interest rates paid on certificates of deposit with
balances of less than $100,000.
BORROWINGS. Although deposits are the Bank's primary source of funds,
the Bank's policy has been to utilize borrowings when they are a less costly
source of funds, can be invested at a positive interest rate spread or when the
Bank desires additional capacity to fund loan demand.
First Federal's borrowings historically have consisted of advances from
the FHLB of Indianapolis upon the security of a blanket collateral agreement of
a percentage of unencumbered loans. Such advances can be made pursuant to
several different credit programs, each of which has its own interest rate and
range of maturities. At June 30, 1996, the Bank had $41.8 million in FHLB
advances, and a $1.0 million overdraft line of credit was available from the
FHLB.
From time to time, First Federal has entered into repurchase agreements
through a nationally recognized broker-dealer firm. These agreements are
accounted for as borrowings by the Bank and are secured by certain of the Bank's
securities. The broker-dealer takes possession of the securities during the
period that the repurchase agreement is outstanding. The terms of the agreements
have typically ranged from 30 days to a maximum of six months. The proceeds of
these transactions are used to meet cash flow needs of the Bank. At June 30,
1996, the Bank had no repurchase agreements outstanding.
The following table sets forth the maximum month-end balance and
average balance of FHLB advances and line of credit from the FHLB and securities
sold under agreements to repurchase at the dates indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum Balance:
- ----------------
FHLB advances and line of credit .............. $45,800 $45,300 $25,490
Securities sold under agreements to repurchase -- -- 250
Average Balance:
- ----------------
FHLB advances and line of credit .............. 39,296 29,944 $ 6,640
Securities sold under agreements to repurchase -- -- 31
Average Rate Paid On:
- ---------------------
FHLB advances and line of credit .............. 6.18% 6.17% 4.46%
Securities sold under agreements to repurchase -- -- 6.45
</TABLE>
<PAGE>
The following table sets forth the Bank's borrowings at the dates
indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances and line of credit $41,800 $45,300 $25,490
</TABLE>
SUBSIDIARY ACTIVITIES
As a federally chartered savings association, First Federal is
permitted by OTS regulations to invest up to 2% of its assets, or $3.0 million
at June 30, 1996, in the stock of, or loans to, service corporation
subsidiaries. First Federal may invest an additional 1% of its assets in service
corporations where such additional funds are used for inner city or community
development purposes. In addition to investments in service corporations,
federal associations are permitted to invest an unlimited amount in operating
subsidiaries engaged solely in activities which a federal association may engage
in directly.
First Federal had no subsidiaries at June 30, 1996.
REGULATION
GENERAL. First Federal is a federally chartered savings bank, the
deposits of which are federally insured and backed by the full faith and credit
of the United States Government. Accordingly, First Federal is subject to broad
federal regulation and oversight extending to all its operations. The Bank is a
member of the FHLB of Indianapolis and is subject to certain limited regulation
by the Board of Governors of the Federal Reserve System ("Federal Reserve
Board"). As the savings and loan holding company of First Federal, the Company
also is subject to federal regulation and oversight. The purpose of the
regulation of the Holding Company and other holding companies is to protect
subsidiary savings associations. The Bank is a member of the Savings Association
Insurance Fund ("SAIF"), which together with the Bank Insurance Fund (the "BIF")
are the two deposit insurance funds administered by the FDIC, and the deposits
of the Bank are insured by the FDIC. As a result, the FDIC has certain
regulatory and examination authority over the Bank.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, First Federal is required to file periodic reports with the OTS and
is subject to periodic examinations by the OTS and the FDIC. When these
examinations are conducted by the OTS and the FDIC, the examiners may require
the Bank to provide for higher general or specific loan loss reserves. Financial
institutions in various regions of the United States have been called upon by
examiners to write down assets and to establish increased levels of reserves,
primarily as a result of perceived weaknesses in real estate values and a more
restrictive regulatory climate. The last regular OTS examination of the Bank was
as of July 1996. The last FDIC examination was as of May 1990.
<PAGE>
All savings associations are subject to a semi-annual assessment, based
upon the association's total assets, to fund the operations of the OTS. The
Bank's OTS assessment for the fiscal year ended June 30, 1996 was approximately
$40,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including First Federal and the
Company. This enforcement authority includes, among other things, the ability to
assess civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the
Bank is prescribed by federal laws, and it is prohibited from engaging in any
activities not permitted by such laws. For instance, no savings institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also generally authorized
to branch nationwide. At June 30, 1996, First Federal was in compliance with
each of the noted restrictions.
The Bank's general permissible lending limit for loans-to-one borrower
is the greater of $500,000 or 15% of unimpaired capital and surplus (except for
loans fully secured by certain readily marketable collateral, in which case this
limit is increased to 25% of unimpaired capital and surplus). At June 30, 1996,
the Bank's lending limit under this restriction was approximately $1.7 million.
First Federal is in compliance with the loans-to-one borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan. A failure to submit a plan or to comply
with an approved plan will subject the institution to further enforcement
action.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC. First Federal is a
member of the SAIF, which is administered by the FDIC. Deposits are insured up
to applicable limits by the FDIC and such insurance is backed by the full faith
and credit of the United States Government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the SAIF of the BIF. The FDIC also has the
authority to initiate enforcement actions against savings associations, after
giving the OTS an opportunity to take such action, and may terminate the deposit
insurance if it determines that the institution has engaged in unsafe or unsound
practices, or is in an unsafe or unsound condition.
<PAGE>
The FDIC's deposit insurance premiums are assessed through a risk-based
system, under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period.
For the first six months of 1995, the assessment schedule for BIF and SAIF
members ranged from .23% to .31% of deposits. As of June 30, 1996, the Bank met
the requirements of a well-capitalized institution.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC also may impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
As is the case with the SAIF, the FDIC is authorized to adjust the
insurance premium rates for banks that are insured by the BIF of the FDIC in
order to maintain the reserve ratio of the BIF at 1.25% of BIF insured deposits.
As a result of the BIF reaching its statutory reserve ratio, effective in
January 1996, the FDIC revised the premium schedule for BIF insured institutions
to provide a range of 0% to .27% of deposits with a minimum annual assessment of
$2,000. As a result, BIF members generally pay lower premiums.
The SAIF is not expected to attain the designated reserve ratio until
the year 2002 due to the shrinking deposit base for SAIF assessments and the
requirement that SAIF premiums be used to make the interest payments on bonds
issued by the Financing Corporation ("FICO") in order to finance the costs of
resolving thrift failures in the 1980s. As a result, SAIF members generally will
be subject to higher deposit insurance premiums than BIF members until, all
things being equal, the SAIF attains the required reserve ratio.
The effect of this disparity on the Bank and other SAIF members is
uncertain at this time. It may have the effect of permitting BIF members to
offer loan and deposit products on more attractive terms than SAIF members due
to the cost savings achieved through lower deposit premiums, thereby placing
SAIF members at a competitive disadvantage. In order to eliminate this disparity
a number of proposals to recapitalize the SAIF have been recently considered by
the United States Congress. The plan under current consideration provides for a
one-time assessment, anticipated to be approximately .70%, to be imposed on all
deposits assessed at the SAIF rates as of March 31, 1995, including those held
by commercial banks. The BIF and SAIF would be merged into one fund as soon as
practicable, but no later than January 1, 1998. There can be no assurance that
any particular proposal will be implemented or that premiums for either BIF or
SAIF members will not be adjusted in the future by the FDIC or by legislative
action. Accordingly, this special assessment would significantly increase
non-interest expense and adversely effect the Company's results of operations.
Conversely, depending upon the Bank's capital level and supervisory rating, and
assuming the insurance premium levels for BIF and SAIF members are again
<PAGE>
equalized, future deposit insurance premiums are expected to decrease
significantly, to as low as 0.4% from the .23% of deposits currently paid by the
Bank, which would reduce non-interest expense for future periods. If the
proposed assessment of .70% was effected based on deposits as of March 31, 1995
(as proposed), the Bank's special assessment would amount to approximately
$593,000 before taxes.
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings
associations, such as the Bank, are required to maintain a minimum level of
regulatory capital. The OTS has established capital standards, including a
tangible capital requirement, a leverage ratio (or core capital) requirement and
a risk-based capital requirement applicable to such savings associations. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
this requirement. At June 30, 1996, First Federal did not have any unamortized
purchased mortgage servicing rights or other intangible assets.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. As of June 30, 1996, the Bank had no
subsidiaries.
At June 30, 1996, the Bank had tangible capital of $11.8 million, or
8.0% of adjusted total assets, which is approximately $9.6 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At June 30, 1996, the Bank
had no intangible assets which were subject to these tests.
At June 30, 1996, the Bank had core capital equal to $11.8 million, or
8.0% of adjusted total assets, which is $7.4 million above the minimum leverage
ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At June 30, 1996, First Federal had
no capital instruments that qualify as supplementary capital and $553,000 of
general loss reserves, which was less than 1.25% of risk-weighted assets.
<PAGE>
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. First Federal had no such
exclusions from capital and assets at June 30, 1996.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100% based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or the FHLMC.
The OTS has adopted a final rule that requires every savings
association with more than normal interest rate risk exposure to deduct from its
total capital, for purposes of determining compliance with such requirement, an
amount equal to 50% of its interest-rate risk exposure multiplied by the present
value of its assets. This exposure is a measure of the potential decline in the
net portfolio value of a savings association, greater than 2% of the present
value of its assets, based upon a hypothetical 200 basis point increase or
decrease in interest rates (whichever results in a greater decline). Net
portfolio value is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. The rule provides for a two-quarter
lag between calculating interest rate risk and recognizing any deduction from
capital. The rule will not become effective until the OTS evaluates the process
by which savings associations may appeal an interest rate risk deduction
determination. It is uncertain as to when this evaluation will be completed. Any
savings association with less than $300 million in assets and a total capital
ratio in excess of 12% is exempt from this requirement unless the OTS determines
otherwise. Based on its asset size and total capital ratio at June 30, 1996, the
Bank anticipates that it will be exempt from this rule.
On June 30, 1996, the Bank had total capital of $12.3 million
(including $11.8 million in core capital and $553,000 in qualifying
supplementary capital) and risk-weighted assets of $81.1 million (including,
converted off-balance sheet assets); or total capital of 15.2% of risk-weighted
assets. This amount was $5.8 million above the 8.0% requirement in effect on
that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be an association with less than either a 4% core capital ratio, a 4% Tier 1
risk-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions, discussed below, that are applicable to significantly
undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
<PAGE>
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more additional actions and operating restrictions which
may cover all aspects of its operations and include a forced merger or
acquisition of the association; and any other action the OTS deems appropriate.
An association that becomes "critically undercapitalized" (i.e., a
tangible capital ratio of 2% or less) is subject to further mandatory
restrictions on its activities in addition to those applicable to significantly
undercapitalized associations. In addition, the OTS must appoint a receiver (or
conservator with the concurrence of the FDIC) for a savings association, with
certain limited exceptions, within 90 days after it becomes critically
undercapitalized.
Any undercapitalized association is also subject to the general
enforcement authority of the OTS and the FDIC, including the appointment of a
receiver or conservator. The OTS also is authorized generally to reclassify an
association into a lower capital category and impose the restrictions applicable
to such category if the institution is engaged in unsafe or unsound practices or
is in an unsafe or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Bank may have a substantial adverse effect on the Bank's operations and
profitability. Company shareholders do not have preemptive rights, and
therefore, if the Company is directed by the OTS or the FDIC to issue additional
shares of common stock, such issuance may result in the dilution in the
percentage of ownership of the Company shareholders.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. OTS
regulations impose various restrictions or requirements on savings associations
with respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account.. OTS regulations also prohibit an
association from declaring or paying any dividends or from repurchasing any of
its stock if, as a result, the regulatory capital of the institution would be
reduced below the amount required to be maintained for the liquidation account
established in connection with its mutual to stock conversion.
Generally, savings associations, such as the Bank, that before and
after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of its net income for the most recent four quarter period.
However, an association deemed to be in need of more than normal supervision by
the OTS may have its dividend authority restricted by the OTS. The Bank may pay
dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30- day period notice based on safety and soundness
concerns.
<PAGE>
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association that is a
subsidiary of a holding company may make a capital distribution with notice to
the OTS provided that it has a CAMEL 1 or 2 rating, is not of supervisory
concern and would remain adequately capitalized (as defined in the OTS prompt
corrective action regulations) following the proposed distribution. Savings
associations that would remain adequately capitalized following the proposed
distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
LIQUIDITY. All savings associations, including First Federal, are
required to maintain an average daily balance of liquid assets equal to a
certain percentage of the sum of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less. For a discussion of
what the Bank includes in liquid assets, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" in the Annual Report attached as Exhibit 13. This liquid
asset ratio requirement may vary from time to time (between 4% and 10%)
depending upon economic conditions and savings flows of all savings
associations. At the present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio requirement. At June 30, 1996, the Bank was in compliance with both
requirements, with an overall liquid asset ratio of 6.9% and a short-term liquid
assets ratio of 1.6%.
ACCOUNTING. An OTS policy statement applicable to all savings
associations clarifies and re-emphasizes that the investment activities of a
savings association must be in compliance with approved and documented
investment policies and strategies, and must be accounted for in accordance with
GAAP. Under the policy statement, management must support its classification of
and accounting for loans and securities (i.e., whether held for investment, sale
or trading) with appropriate documentation. The Bank is in compliance with these
amended rules.
OTS accounting regulations, which may be made more stringent than GAAP
by the OTS, require that transactions be reported in a manner that best reflects
their underlying economic substance and inherent risk and that financial reports
must incorporate any other accounting regulations or orders prescribed by the
OTS.
QUALIFIED THRIFT LENDER TEST. All savings associations, including the
Bank, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. At June 30, 1996, the Bank met the
test and has always met the test since its effectiveness.
<PAGE>
The test requires a savings association to have at least 65% of its
portfolio assets (as defined by regulation) in qualified thrift investments on a
monthly average in nine out of every 12 months on a rolling basis. Such assets
primarily consist of residential housing, related loans and investments.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act
("CRA"), every FDIC insured institution has a continuing and affirmative
obligation consistent with safe and sound banking practices to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with the examination of the Bank, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications, such as a
merger or the establishment of a branch, by the Bank. An unsatisfactory rating
may be used as the basis for the denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in June 1996 and received a rating of satisfactory.
TRANSACTIONS WITH AFFILIATES. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of First
Federal include the Company and any company which is under common control with
the Bank. In addition, a savings association may not lend to any affiliate
engaged in activities not permissible for a bank holding company or acquire the
securities of most affiliates. The OTS has the discretion to treat subsidiaries
of savings associations as affiliates on a case by case basis.
<PAGE>
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on substantially the same terms and conditions as loans to
unaffiliated persons. At June 30, 1996, the Bank was in compliance with the
above restrictions.
HOLDING COMPANY REGULATION. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is registered and files reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Company and its non-savings association subsidiaries which also permits the OTS
to restrict or prohibit activities that are determined to be a serious risk to
the subsidiary savings association.
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings association)
would become subject to such restrictions unless such other associations each
qualify as a QTL and were acquired in a supervisory acquisition.
If the Bank fails the QTL test, the Company must obtain the approval of
the OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan holding company. See
"Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
FEDERAL SECURITIES LAW. The stock of the Company is registered with the
SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
<PAGE>
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At June 30, 1996, the Bank was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS. See "- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of
Indianapolis, which is one of 12 regional FHLBs, that administers the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the board of directors of the FHLB which
are subject to the oversight of the Federal Housing Finance Board. All advances
from the FHLB are required to be fully secured by sufficient collateral as
determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.
As a member, First Federal is required to purchase and maintain stock
in the FHLB of Indianapolis. At June 30, 1996, First Federal had $2.4 million in
FHLB stock, which was in compliance with this requirement. In past years, the
Bank has received substantial dividends on its FHLB stock. Over the past five
fiscal years such dividends have averaged 8.7% and were 7.9% for the fiscal year
ended June 30, 1996.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in First Federal's capital.
For the year ended June 30, 1996, dividends paid by the FHLB of
Indianapolis to First Federal totaled $188,000 which constitutes a $76,000
increase over the amount of dividends received in fiscal year 1995. The $188,000
dividend received for the fiscal year ended June 30, 1996 reflects an annualized
rate of 7.9%.
FEDERAL AND STATE TAXATION. Savings associations such as the Bank that
met certain definitional tests relating to the composition of assets and other
conditions prescribed by the Internal Revenue Code of 1986, as amended (the
"Code"), were permitted to establish reserves for bad debts and to make annual
additions thereto which could, within specified formula limits, be taken as a
deduction in computing taxable income for federal income tax purposes for
<PAGE>
taxable years beginning prior to January 1, 1996. The amount of the bad debt
reserve deduction for "non-qualifying loans" was computed under the experience
method. The amount of the bad debt reserve deduction for "qualifying real
property loans" (generally loans secured by improved real estate) could be
computed under either the experience method or the percentage of taxable income
method (based on an annual election).
Under the experience method, the bad debt reserve deduction was an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
The percentage of specially computed taxable income that was used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") was 8%. The
percentage bad debt deduction thus computed was reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permitted qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction).
If an association's specified assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, the
association could not deduct any addition to a bad debt reserve and was
generally required to include existing reserves in income over a four-year
period.
Under the percentage of taxable income method, the percentage bad debt
deduction could not exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for "non-qualifying loans" equalled the amount
by which 12% of the amount comprising savings accounts at year end exceeded the
sum of surplus, undivided profits and reserves at the beginning of the year. At
June 30, 1996, the 6% and 12% limitations did not restrict the percentage bad
debt deduction available to the Bank.
In August 1996, legislation was enacted that repeals the reserve method
of accounting (including the percentage of taxable income method) used by many
thrifts, including the Bank, to calculate their bad debt reserve for federal
income tax purposes. As a result, thrifts such as the Bank must recapture that
portion of the reserve that exceeds the amount that could have been taken under
the specific charge-off method for post-1987 tax years. The legislation also
requires thrifts to account for bad debts for federal income tax purposes on the
same basis as commercial banks for tax years beginning after December 31, 1995.
The recapture will occur over a six-year period, the commencement of which will
be delayed until the first taxable year beginning after December 31, 1997,
provided the institution meets certain residential lending requirements. The
management of the Company does not believe that the legislation will have a
material impact on the Company or the Bank.
<PAGE>
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2.0 million.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the savings association's supplemental
reserves for losses on loans ("Excess"), such Excess may not, without adverse
tax consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of June 30, 1996, the Bank's Excess for tax purposes totaled
approximately $1.9 million.
The Company and its subsidiaries file consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting. Savings
associations, such as the Bank, that file federal income tax returns as part of
a consolidated group are required by applicable Treasury regulations to reduce
their taxable income for purposes of computing the percentage bad debt deduction
for losses attributable to activities of the non-savings association members of
the consolidated group that are functionally related to the activities of the
savings association member.
The Company and its subsidiaries have not been audited by the IRS
within the last ten years.
INDIANA TAXATION. The State of Indiana imposes an 8.5% franchise tax on
the net income of financial (including thrift) institutions, exempting them from
the current gross income, supplemental net income and intangible taxes. Net
income for franchise tax purposes will constitute federal taxable income before
net operating loss deductions and special deductions, adjusted for certain
items, including Indiana income taxes, tax exempt interest and bad debts. Other
applicable Indiana taxes include sales, use and property taxes.
DELAWARE TAXATION. As a Delaware holding company, the Holding Company
is exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Company is also
subject to an annual franchise tax imposed by the State of Delaware which is
generally based upon authorized shares.
<PAGE>
Competition
First Federal faces strong competition, both in originating real estate
and other loans and in attracting deposits. Competition in originating real
estate loans comes primarily from other commercial banks, savings associations,
credit unions and mortgage bankers making loans secured by real estate located
in the Bank's market area. Commercial banks and finance companies provide
vigorous competition in consumer lending. The Bank competes for real estate and
other loans principally on the basis of the quality of services it provides to
borrowers, interest rates and loan fees it charges, and the types of loans it
originates.
The Bank attracts all of its deposits through its retail banking
offices, primarily from the communities in which those retail banking offices
are located; therefore, competition for those deposits is principally from other
commercial banks, savings associations and credit unions located in the same
communities. The Bank competes for these deposits by offering a variety of
deposit accounts at competitive rates, convenient business hours, and convenient
branch locations with interbranch deposit and withdrawal privileges at each.
The Bank serves Wabash, Kosciukso, Grant, Miami, Huntington, Whitley
and Elkhart Counties in Indiana. The Bank's primary concentration is the
Counties of Wabash and Kosciukso, Indiana. There are four commercial banks and
one credit union which compete for deposits and loans in Wabash County. In
Kosciukso County, there are six commercial banks, one credit union and one
savings bank competing for market share.
EMPLOYEES
At June 30, 1996, the Company and its affiliates had a total of 39
employees, including 9 part-time employees. The Company's employees are not
represented by any collective bargaining group.
Management considers its employee relations to be good.
EXECUTIVE OFFICERS OF THE COMPANY AND THE BANK WHO ARE NOT DIRECTORS
The following information as to the business experience during the past
five years is supplied with respect to executive officers of the Company and the
Bank who do not serve on the Bank's Board of Directors. There are no
arrangements or understandings between the persons named and any other person
pursuant to which such officers were selected.
JOYCE K. SANDERS, AGE 53, is Vice President and Office Manager of the
Wabash office, a position she has held since 1984. Ms. Sanders is responsible
for oversight of day to day operations at the Wabash office and is involved in
operations and loan policy decisions. Ms. Sanders has been employed by First
Federal for 29 years. Ms. Sanders joined First Federal in 1967 and has held a
variety of positions including Secretary from 1978 to 1987. In addition to her
duties as a Vice President and Office Manager, Ms. Sanders has responsibility
for First Federal's personnel records, employee benefit programs and computer
system.
<PAGE>
CHARLES E. REDMAN, AGE 36, is Treasurer and Chief Financial Officer of
First Federal and the Company, positions he has held since 1990 and 1992,
respectively. Mr. Redman joined First Federal as Controller in 1989 and was
promoted to Treasurer and Chief Financial Officer in 1990. Mr. Redman is
responsible for the supervision of the Bank's accounting department. Mr. Redman
also serves as the Bank's Compliance Officer, a position he has held since 1990.
Prior to joining First Federal, Mr. Redman was employed by Pioneer Savings and
Loan Association located in Plymouth, Indiana from 1986 to 1989 in a variety of
positions including Controller from 1987 to 1988 and Treasurer and Chief
Financial Officer from 1988 to 1989. Mr. Redman is a Certified Public
Accountant.
ITEM 2. DESCRIPTION OF PROPERTY
-----------------------
The Bank conducts its business at its main office and two other
locations in its primary market area. The Bank owns all of its offices. The
total net book value of the Bank's premises and equipment (including land,
buildings and furniture, fixtures and equipment) at June 30, 1996 was $1.7
million. See Note 5 of Notes to Consolidated Financial Statements in the Annual
Report attached as Exhibit 13. The following table sets forth information
relating to each of the Bank's offices as of June 30, 1996.
<TABLE>
<CAPTION>
Total
Approximate
Date Square Net Book Value
Location Acquired Footage at June 30, 1996
-------- -------- ------- ----------------
(In Thousands)
<S> <C> <C> <C>
Main Office:
1205 N. Cass Street 1982 10,185(1) $1,110,000
Wabash, Indiana
500 S. Huntington 1977 2,400(2) 508,000
Syracuse, Indiana(2)
1306 Street Road 114 West N. 1968 1,325 73,000
Manchester, Indiana
- -----------------------
</TABLE>
(1) The Bank leases space in this office to its affiliate, FirstFed Financial.
(2) A new branch at this site was completed in September 1995.
The Bank maintains an on-line data base of depositor and borrower
customer information. The net book value of the data processing and computer
equipment utilized by the Bank at June 30, 1996 was $75,000.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company and First Federal are involved from time to time as
plaintiff or defendant in various legal actions arising in the normal course of
its business. FirstFed, the Company's wholly owned subsidiary is not a party to
any legal action. While the ultimate outcome of these proceedings cannot be
predicted with certainty, it is the opinion of management, after consultation
with counsel representing the Company and First Federal in the proceedings, that
the resolution of these proceedings should not have a material effect on the
Company's consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended June 30, 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------
Appears in the attached 1996 Annual Report to Stockholders herein
incorporated by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATION
-------------------------------------------------
Appears in the attached 1996 Annual Report to Stockholders herein
incorporated by reference.
ITEM 7. FINANCIAL STATEMENTS
--------------------
The following information appearing in the Company's Annual Report to
Stockholders for the year ended June 30, 1996, is incorporated by reference in
this Annual Report on Form 10-KSB as Exhibit 13.
ANNUAL REPORT SECTION
- ---------------------
Report of Independent Auditors
Consolidated Balance Sheets as of June 30, 1996 and 1995
Consolidated Statements of Income
Years Ended June 30, 1996, 1995 and 1994
Consolidated Statement of Changes in Shareholders' Equity
Years Ended June 30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows
Years Ended June 30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
With the exception of the aforementioned information, the Company's
Annual Report to Stockholders for the year ended June 30, 1996, is not deemed
filed as part of this Annual Report on Form 10-KSB.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
--------------------
There has been no Current Report on orm 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
-------------------------------------------------
DIRECTORS
- ---------
Information concerning Directors of the Company is incorporated herein
by reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in October 1996, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
EXECUTIVE OFFICERS
- ------------------
Information regarding the business experience of the executive officers
of the Company and the Bank contained in Part I of this Form 10-KSB is
incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
----------------------
Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in October 1996, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in October 1996, a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Information concerning certain relationships and related transactions
is incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in October 1996, a copy of which will
be filed not later than 120 days after the close of the fiscal year.
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Sequential
Page Number
Reference to Where Attached
Prior Filing Exhibits Are
or Exhibit Located in
Number This
Regulation S-B Attached Form 10-KSB
Exhibit Number Document Hereto Report
-------------- -------- ------ ------
<S> <C> <C> <C>
3(i) Articles of Incorporation, including amendments * Not applicable
thereto
3(ii) By-Laws * Not applicable
4 Instruments defining the rights of security holders, * Not applicable
including debentures
9 Voting Trust Agreement None Not applicable
10 Executive Compensation Plans and Arrangements * Not applicable
(a) Employment Contract between Nicholas * Not applicable
George and the Bank
(b) 1992 Stock Option and Incentive Plan * Not applicable
(c) Management Recognition and Retention Plan ** Not applicable
11 Statement re: computation of per share earnings *** Not applicable
13 Annual Report to Security Holders 13
16 Letter re: change in certifying accountants None Not applicable
18 Letter re: change in accounting principles None Not applicable
21 Subsidiaries of Registrant 21
22 Published report regarding matters submitted to None Not applicable
vote of security holders
23 Consents of Experts and Counsel 23
24 Power of Attorney Not required Not applicable
27 Financial Data Schedule 27
28 Information from reports furnished to state None Not applicable
insurance regulatory authorities
99 Additional Exhibits None Not applicable
- -----------------------
</TABLE>
* Filed as Exhibits to the Company's Form S-1 Registration Statement filed
on December 21, 1992 (File No. 33-56110) pursuant to Section 5 of the
Securities Act of 1933. All of such previously filed documents are hereby
incorporated herein by reference in accordance with Item 601 of Regulation
S-B.
** Filed as Exhibit 10-1 to the Company's Annual Report on Form 10-KSB for
the fiscal year ended June 30, 1994 (File No. 0-21170). This previously
filed document is hereby incorporated herein by reference in accordance
with Item 601 of Regulation S-B.
*** See Note 1 of Notes to Consolidated Financial Statements included in the
Annual Report to Security Holders under Exhibit 13.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three-month period ended
June 30, 1996, except for the Current reports on Form 8-K filed on May 1, 1996,
to report quarterly earnings and on June 3, 1996 to report dividends.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FFW CORPORATION
Date: September 27, 1996 By: /s/ Nicholas M. George
----------------------
NICHOLAS M. GEORGE
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/Wayne W. Rees /s/Nicholas M. George
- ---------------- ---------------------
WAYNE W. REES NICHOLAS M. GEORGE
Chairman of President,
Board and Secretary Chief Executive Officer and
Director (Principal Executive
and Operating Officer)
Date: September 27, 1996 Date: September 27, 1996
/s/Maynard E. Vollmer /s/Joseph W. McSpadden
- --------------------- ----------------------
MAYNARD E. VOLLMER JOSEPH W. MCSPADDEN
Director Director
Date: September 27, 1996 Date: September 27, 1996
/s/Stanley Myers /s/Ronald D. Reynolds
- ---------------- ---------------------
STANLEY MYERS RONALD D. REYNOLDS
Director Director
Date: September 27, 1996 Date: September 27, 1996
/s/Charles E. Redman s/sThomas L. Frank
- -------------------- ------------------
CHARLES E. REDMAN THOMAS L. FRANK
Chief Financial Officer Director
(Principal Financial and
Accounting Officer)
Date: September 27, 1996 Date: September 27, 1996
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Exhibit
Number
------
<S> <C>
13 Annual Report to Security Holders
21 Subsidiaries of the Registrant
23 Consents of Experts and Counsel
27 Financial Data Schedule
</TABLE>
Exhibit 13
ANNUAL REPORT TO SECURITY HOLDERS
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
June 30,
-------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
SELECTED FINANCIAL CONDITION DATA: (In Thousands)
<S> <C> <C> <C> <C> <C>
Total assets $150,467 $147,293 $122,480 $92,197 $78,757
Loans receivable, net 100,529 92,475 77,688 68,192 58,411
Loans held for sale 423 214 1,315 223 --
Mortgage-backed securities 18,540 19,489 20,423 4,803 4,800
Securities 22,026 15,494 17,730 13,076 8,529
Deposits 92,490 85,930 82,041 75,211 71,958
Total borrowings 41,800 45,300 25,490 2,000 --
Stockholders' equity 15,458 15,492 14,435 14,273 6,318
Year Ended June 30,
-------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In Thousands, except for per share data)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATIONS DATA:
Total interest income $11,164 $9,409 $7,236 $6,741 $6,392
Total interest expense 6,799 5,630 3,770 3,693 4,059
-------- -------- -------- ------- -------
Net interest income 4,365 3,779 3,466 3,048 2,333
Provision for loan losses 95 34 24 149 235
-------- -------- -------- ------- -------
Net interest income after provision
for loan losses 4,270 3,745 3,442 2,899 2,098
Net realized gains from sales/calls
of interest-earning assets 146 9 230 147 23
Net unrealized gains (losses) on
loans held for sale (1) 18 (61) -- --
Unrealized loss on mortgage-backed security -- (319) -- -- --
Other noninterest income 483 437 452 401 345
Noninterest expense (2,586) (2,356) (2,247) (1,885) (1,629)
-------- -------- -------- ------- -------
Income before income taxes 2,312 1,534 1,816 1,562 837
Income tax expense (726) (435) (468) (547) (333)
-------- -------- -------- ------- -------
Net income $ 1,586 $1,099 $1,348 $1,015 $ 504
======== ======== ======== ======= =======
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARES
Primary $ 2.13 $ 1.46 $ 1.62 $ .36(1) N/A
Fully diluted $ 2.13 $ 1.45 $ 1.61 $ .36(1) N/A
Dividends declared and paid per common share $ .51 $ .45 $ .41 $ .10(1) N/A
Dividend payout ratio 24.09% 31.67% 24.65% 24.03% N/A
</TABLE>
- ---------------
(1)Subsequent to conversion of First Federal Savings Bank to stock form,
effective April 1, 1993.
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL INFORMATION (continued)
Year Ended June 30,
-------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Interest rate spread information:
Average during period 2.45% 2.36% 2.74% 3.09% 2.89%
End of period 2.67 2.30 2.60 3.14 2.93
Net interest margin(1) 3.06 2.99 3.45 3.63 3.41
Average interest-earning assets to average
interest-bearing liabilities 1.13x 1.14x 1.19x 1.12x 1.09x
Non-performing assets to total assets
at end of period(2) .06 .09 .08 .24 .41
Equity-to-total assets (end of period) 10.27 10.52 11.79 15.48 8.02
Return on assets (ratio of net income
to average total assets) 1.09 .85 1.31 1.19 .70
Return on equity (ratio of net income
to average equity) 9.89 7.62 9.26 9.86 8.31
Equity-to-assets ratio (ratio of average
equity to average total assets) 11.02 11.15 14.15 12.04 8.42
Number of full-service offices 3 3 3 3 3
- -----------------------
</TABLE>
(1) Net interest income divided by average interest earning assets.
(2) Includes non-accruing loans, accruing loans delinquent more than 90 days and
foreclosed assets.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
FFW Corporation (the Company) owns all outstanding stock of 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. As a result, the
following discussion relates primarily to the operations of the Bank.
The principal business of savings banks, including First Federal, has
historically consisted of 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. Interest expense is a function of the balances of
deposits and borrowings outstanding during the same period and the rates paid on
such deposits and borrowings. The Bank's earnings are also affected by
provisions for loan losses, service charges and income taxes. Operating expenses
consist primarily of employee compensation and benefits, occupancy and equipment
expenses, federal deposit insurance premiums and other general and
administrative expenses.
The Company is significantly affected by prevailing economic conditions as
well as federal regulations concerning financial institutions and monetary and
fiscal policies. 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 within the institution's market. In addition, growth
of deposit balances is influenced by the perceptions of customers regarding the
stability of the financial services industry. Lending activities are influenced
by the demand for housing as well as competition from other lending
institutions. The primary sources of funds for lending activities include
deposits, loan repayments, borrowings and funds provided from operations.
FINANCIAL CONDITION
The Company's total assets increased from $147.3 million at June 30, 1995
to $150.5 million at June 30, 1996, an increase of $3.2 million, or 2.2%. This
increase was funded by an increase in deposits of $6.6 million net of a decrease
in advances outstanding from Federal Home Loan Bank of Indianapolis (FHLB) of
$3.5 million. A portion of these funds, along with cash on hand, were used to
originate loans, resulting in an increase in net loans of $8.1 million. An
additional $9.0 million was invested in FNMA preferred stock and in a FHLB
callable bond.
Total securities increased from $35.0 million at June 30, 1995 to $40.6
million at June 30, 1996, an increase of $5.6 million or 16.0%. During fiscal
1996, municipal securities decreased from $8.9 million at June 30, 1995 to $8.3
million at June 30, 1996 due to maturities and calls during the course of the
year. During fiscal 1996, management continued to diversify the investment
portfolio by investing $4.0 million in a 5 year non-callable FNMA preferred
stock, of which the dividends are 70% excluded for tax purposes. Management also
invested $5.0 million in a FHLB callable bond which is eligible for liquidity
calculations. Both of these investments were funded with a combination of
advances and cash on hand. These purchases were offset by the sale of mutual
funds totaling $1.5 million and the early call of $584,000 in government agency
and corporate bonds.
<PAGE>
Mortgage-backed securities decreased $1.0 million from $19.5 million at
June 30, 1995 to $18.5 million at June 30, 1996. This decrease was comprised of
repayments. The privately issued mortgage-backed security which was downgraded
twice in fiscal 1995 by various nationally recognized rating agencies was
downgraded again on May 28, 1996. Management believes, based on the indicated
market value of this security, that the valuation allowance of $319,000 is
sufficient and no additional loss allocation is required. The establishment of
this allowance in fiscal year 1995 was the result of an other than temporary
decline in the market value of the security which is secured by multi-family
loans primarily located in Southern California. The decline in market value was
the result of the weakened economy in Southern California, rising delinquencies
and larger than anticipated loan losses in the loan pool. The actual loss to the
Company over the life of this investment is not known at this time, and no
predictions can be made as to whether any additional losses will be incurred as
a result of this investment.
On December 19, 1995, the Company reclassified it's entire investment
portfolio of debt and mortgage-backed securities to available-for-sale from
held-to-maturity. This reclassification resulted in a valuation allowance of
$203,000, net of tax at June 30, 1996 for securities available for sale.
Net loans increased $8.1 million, or 8.7%, from $92.4 million at June 30,
1995 to $100.5 million at June 30, 1996. The increase in the loan portfolio was
comprised primarily of automobile loans and mortgage loans which increased $6.1
million and $1.2 million, respectively, during fiscal 1996. The loan portfolio
is comprised primarily of first mortgage loans secured by one- to four-family
residential real estate located in the Company's market area. First mortgage
loans secured by one-to four-family real estate comprise $60.7 million, or 60.4%
of the loan portfolio. The Company also had $7.2 million of commercial and
multi-family real estate loans and $2.7 million of construction loans. The
consumer loan portfolio included $18.5 million of automobile loans, $4.6 million
of home equity and home improvement loans, $4.4 million in commercial business
loans and $4.3 million in other consumer loans at June 30, 1996.
Total deposits increased $6.6 million, or 7.6%, from $85.9 million at June
30, 1995 to $92.5 million at June 30, 1996. During fiscal 1996, passbook and
checking accounts increased $1.5 million, or 3.2%, and certificates of deposit
increased $5.0 million, or 13.1%. The increase in deposits was related to the
grand opening specials run for our new Syracuse branch facility and the 75th
year anniversary specials run at our Wabash and North Manchester offices. This
increase in deposits has allowed us to pay down our outstanding FHLB advances by
$3.5 million. 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 try 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
1997.
Total borrowed funds decreased from $45.3 million at June 30, 1995 to $41.8
million at June 30, 1996. The decrease was a result of increased deposits.
Management took advantage of lower rates on three-month LIBOR indexed advances.
These advances allowed us to obtain advances at lower rates than comparable one
year fixed rates. If rates should decrease, then we are positioned to take
advantage of a rate downturn. Until that happens, we have increased our net
spread by taking on some short term interest rate risk.
<PAGE>
Total shareholders' equity decreased $33,400 to $15.5 million at June 30,
1996. The decrease resulted from the repurchase of stock totaling $1.3 million
and dividends paid of $382,000 which were offset by net income of $1.6 million.
RESULTS OF OPERATIONS
Comparison of Years Ended June 30, 1996 and June 30, 1995
GENERAL. Net income for the year ended June 30, 1996 was $1.6 million, an
increase of $487,000 compared to net income for the year ended June 30, 1995.
The increase was primarily the result of a $587,000 increase in net interest
income and an increase of $483,000 in non-interest income. These increases were
offset by increases in income taxes of $291,000 and an increase in non-interest
expense of $230,000. Further details of the changes in these items are discussed
below.
NET INTEREST INCOME. Net interest income increased $587,000, or 15.5%, from
$3.8 million to $4.4 million for the year ended June 30, 1996. The increase in
net interest income was due to an increase of $1.8 million in interest income,
partially offset by an increase of $1.2 million 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.
Interest income increased $1.8 million or 18.7% for fiscal 1996 compared to
fiscal 1995 primarily due to an increase in the average balance of loans and
investments. These increases exceeded the increases in the interest-bearing
liabilities for the same period. To a lessor extent the increase in interest
income resulted from an increase in the average rate on earning assets to 7.83%
in fiscal 1996 from 7.43% in fiscal 1995.
Interest expense increased $1.2 million or 20.8% for fiscal 1996 compared
to fiscal 1995 due to an increase in the average balance of deposits and FHLB
advances outstanding, and an increase in the average rate on interest-bearing
liabilities to 5.38% in fiscal 1996 from 5.07% in fiscal 1995. Management plans
to continue using FHLB advances to fund loan growth if there is not sufficient
deposit growth.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased $61,400
from $33,700 in fiscal 1995 to $95,100 in fiscal 1996. The amounts provided
during the fiscal year were based on management's quarterly analysis of the
allowance for loan losses. The Company will continue to monitor its allowance
for loan losses and make future additions to the allowance through the provision
for loan losses as economic and regulatory conditions dictate. Although the
Company maintains its allowance for loan losses at a level which it considers to
be adequate to provide for potential losses, there can be no assurance that
future losses will not exceed estimated amounts or that additional provisions
for loan losses will not be required in future periods. In addition, the
Company's determination as to the amount of the allowance for loan losses is
subject to review by the regulatory agencies which can order the establishment
of additional general or specific allowances.
<PAGE>
NONINTEREST INCOME. Noninterest income increased from $145,000 in fiscal
1995 to $628,000 in fiscal 1996. This increase of $483,000 was primarily the
result of the impact on fiscal 1995 of an unrealized loss on a mortgage-backed
security of $319,000. In addition, there was an increase of $118,000 in net
realized and unrealized gains on loans and securities sold or held for sale.
Management intends to continue to sell newly originated fixed-rate mortgage
loans with maturities greater than 15 years. The loans to be sold are classified
as held for sale at the date of origination. Management continues to price these
loans based on rates offered by a government agency which purchases these
products in the secondary market.
NONINTEREST EXPENSE. Noninterest expense increased from $2.4 million in
fiscal 1995 to $2.6 million in fiscal 1996. This increase of $230,000, or 9.8%,
was primarily the result of increases in occupancy and equipment expenses of
$70,000, other expenses of $62,000, and salaries and employee benefits of
$82,000. The increase in salaries and employee benefits was primarily the result
of increases in staff and normal salary increases. The increase in occupancy and
equipment expense was related to our new office in Syracuse, which replaced an
existing office at the same location. The increase in other expense was
primarily the result of an increase of $37,000 in data processing expense due to
increased transaction volume and services rendered to the Bank by the data
center.
INCOME TAX EXPENSE. Income tax expense was $726,000 in fiscal 1996 compared
to $435,000 in fiscal 1995, an increase of $291,000, or 67.0%. Income taxes
increased primarily as a result of increased income before income taxes.
Comparison of Years Ended June 30, 1995 and June 30, 1994
GENERAL. Net income for the year ended June 30, 1995 was $1.1 million, a
decrease of $248,000 compared to net income for the year ended June 30, 1994.
The decrease was primarily the result of an unrealized loss on a mortgage-backed
security of $319,000, a decrease in realized and unrealized gains on sales of
interest-earning assets and loans held for sale of $142,000, an increase in the
provision for loan losses of $10,000, and an increase in noninterest expenses of
$108,000. These items were partially offset by an increase in net interest
income of $312,000 and a decrease in income tax expense of $34,000. Further
details of the changes in these items are discussed below.
NET INTEREST INCOME. Net interest income increased $312,000, or 9.0%, from
$3.5 million to $3.8 million for the year ended June 30, 1995. This increase was
primarily the result of an increase in average interest-earning assets exceeding
the increase in average interest-bearing liabilities.
Interest income increased $2.2 million to $9.4 million for fiscal 1995
compared to $7.2 million for fiscal 1994 primarily due to an increase in the
average balance of loans, investments, and mortgage-backed securities. Interest
income on mortgage loans increased $613,000, interest income on investment
securities increased $151,000, interest income on mortgage-backed securities
increased $986,000, and interest income on consumer and commercial loans
increased $376,000 during fiscal 1995 as compared to fiscal 1994. These
increases resulted primarily from the increased balances of the respective
portfolios, and to a lessor extent the increase in interest rates earned on
these assets.
<PAGE>
Interest expense increased $1.9 million from $3.8 million in fiscal 1994 to
$5.6 million in fiscal 1995. Interest expense on FHLB advances increased $1.6
million during fiscal 1995 as compared to fiscal 1994. This increase was the
result of an increase in average FHLB advances outstanding of $23.4 million for
fiscal 1995. The increase in FHLB advances was used to fund loan growth and lock
in lower interest rates. Interest expense on deposits increased $308,000 during
fiscal 1995 as compared to fiscal 1994. This increase was the result of a shift
in the deposit base, due to increased interest rates in the market place, from
passbook accounts to certificates of deposit, which pay a higher interest rate.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased $9,700
from $24,000 in fiscal 1994 to $33,700 in fiscal 1995. The amounts provided
during the fiscal year were based on management's quarterly analysis of the
allowance for loan losses.
NONINTEREST INCOME. Noninterest income decreased from $621,000 in fiscal
1994 to $145,000 in fiscal 1995. This decrease of $476,000 was primarily the
result of the $319,000 unrealized loss on a mortgage-backed security, and the
decrease in net realized and unrealized gains on loans and securities sold or
held for sale of $142,000 as compared to the prior year. The majority of loan
sales for fiscal 1995 occurred in the last half of the year when rates were
lower.
NONINTEREST EXPENSE. Noninterest expense increased from $2.2 million in
fiscal 1994 to $2.4 million in fiscal 1995. This increase of $108,000, or 4.8%,
was primarily the result of an increase in other expense of $51,000, and an
increase in salaries and employee benefits of $51,000. The increase in salaries
and employee benefits was primarily the result of increased expense resulting
from the adoption of Statement of Position 93-6 "Employers' Accounting for
Employee Stock Ownership Plans" ("SOP 93-6"). SOP 93-6 was adopted during fiscal
1995 and requires the company to record compensation expense equal to the fair
value of shares committed to be released for allocation to participant accounts.
Adoption of SOP 93-6 resulted in additional compensation expense of $48,000 in
fiscal 1995 as compared to the method of accounting applicable in fiscal 1994.
Other compensation expenses related to the hiring of a mortgage loan originator
were more than offset by decreases in other stock related compensation expenses.
The increase in other expense was primarily the result of an increase of $27,000
in data processing expense due to increased transaction volume and services
rendered to the Bank by the data center.
INCOME TAX EXPENSE. Income tax expense was $435,000 in fiscal 1995 compared
to $468,000 in fiscal 1994, a decrease of $34,000, or 7.2%. Income taxes
decreased primarily as a result of reduced income before income taxes.
ASSET/LIABILITY MANAGEMENT
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
anticipated, based upon certain assumptions, to mature or reprice within a
specific time period, and the amount of interest-bearing liabilities
anticipated, based upon certain assumptions, to mature or reprice within that
same time period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
<PAGE>
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of rising interest rates, a negative gap would tend to adversely affect
net interest income while a positive gap would tend to benefit net interest
income.
A primary objective of asset/liability management is to manage interest
rate risk. The Company monitors its asset/liability mix on an ongoing basis,
and, from time-to-time, may institute certain changes in its product mix and
asset and liability maturities.
At June 30, 1996, total interest-earning assets maturing or repricing
within one year exceeded total interest-bearing liabilities maturing or
repricing in the same period by $18.8 million representing a positive cumulative
one-year gap ratio of 12.5% of total assets. This assumes non-interest bearing
demand deposit accounts do not reprice. If interest rates increase, the Company
may be forced to reprice interest-bearing deposits such as money market, NOW,
and passbook accounts in advance of the Federal Home Loan Bank of Indianapolis
assumptions, and as a result, a negative gap may occur.
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 $423,000 in loans held for sale at June 30, 1996. The
Company retains the servicing on loans sold in the secondary market.
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
results of operations are influenced by the levels of short-term interest rates.
The Company offers a range of maturities on its deposit products at competitive
rates and monitors the maturities on an ongoing basis.
The following table illustrates the assumed maturities and repricing
mechanisms of the major asset and liability categories of the Company as of June
30, 1996. Maturity and repricing dates have been projected by applying the
assumptions set forth below to contractual maturity and repricing dates. The
information is based on certain repricing and other assumptions which are set
forth below the table and which are different than historical experience.
Classifications of such items are different from those presented in other
schedules and financial statements included herein.
<PAGE>
<TABLE>
<CAPTION>
Maturing or Repricing
-------------------------------------------------------------------------------
Within One Year
--------------------------------
181 Days
90 Days 91-180 to One Over Over Over
or Less Days Year 1-3 Yrs 3-5 Yrs 5 yrs TOTAL
------- ------ ------- -------- ------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed-rate 1-4 family (including
mortgage-backed securities),
commercial real estate and
construction loans $ 1,255(1) $ 815 $ 1,594 $ 5,854 $ 5,617 $22,952 $38,087(1)
Adjustable-rate 1-4 family (includ-
ing mortgage-backed securities),
commercial real estate and
construction loans 3,180 528 32,228 2,023 16,513 6 54,478
Non-mortgage loans 4,845 1,522 3,167 14,234 3,713 -- 27,481
Investment securities and other 12,233 51 685 2,124 7,718 3,902 26,713
------- ------ ------- -------- ------- ------- --------
Total interest-earning assets 21,513 2,916 37,674 24,235 33,561 26,860 146,759
------- ------ ------- -------- ------- ------- --------
Deposits/escrows/borrowings 23,211 10,829 9,293 52,418 15,461 23,184 134,396
------- ------ ------- -------- ------- ------- --------
Total interest-bearing liabilities 23,211 10,829 9,293 52,418 15,461 23,184 134,396
------- ------ ------- -------- ------- ------- --------
Interest-rate sensitivity Gap
(interest-earning assets less
interest-bearing liabilities) $(1,698) $(7,913) $28,381 $(28,183) $18,100 $ 3,676 $12,363
======= ======= ======= ======== ======= ======= =======
Difference as a percent of total
interest-earning assets (1.16)% (5.39)% 19.34% (19.20)% 12.33% 2.50% 8.42%
Cumulative interest-rate
sensitivity gap $(1,698) $(9,611) $18,770 $ (9,413) $ 8,687 $12,363 $12,363
Cumulative interest-rate
sensitivity gap as a percentage
of total assets (1.13)% (6.39)% 12.47% (6.26)% 5.77% 8.22% 8.22%
Cumulative interest-rate sensitivity
gap as a percentage of total
interest-earning assets (1.16)% (6.55)% 12.79% (6.41)% 5.92% 8.42% 8.42%
</TABLE>
- ---------------------
(1) Includes $423,000 of loans held for sale on June 30, 1996
In preparing the table above, it has been assumed, consistent with the
assumptions used by the FHLB at June 30, 1996 in assessing the interest rate
sensitivity of thrift institutions, that: (i) adjustable rate first mortgage
loans on one-to four-family residences will prepay at the rate of 22% per year;
(ii) first mortgage loans on residential properties of five or more units and
non-residential properties will prepay at the rate of 15% per year; (iii) fixed
rate first mortgage loans on one-to four-family residences with terms to
maturity of 5 years or less will prepay at a rate of 8.4% per maturity
<PAGE>
classification; (iv) second mortgage loans on one-to four-family residences will
prepay at a rate of 26% per maturity classification (v) non-mortgage loans and
investments will not prepay; and (vi) fixed rate first mortgage loans on one-to
four-family residences with terms to maturity of more than 5 years will prepay
annually as follows:
<TABLE>
<CAPTION>
Annual
Loan Rate Prepayment Rate
- --------- ---------------
<S> <C>
Less than 8.0% ........................................... 8.4%
8.0% to 8.99% ............................................ 9.2%
9.0% to 9.99% ............................................ 13.6%
10.0% to 10.99% .......................................... 21.6%
11.0% or more ............................................ 32.6%
</TABLE>
In addition, it is assumed that interest rates do not change, that fixed
maturity deposits are not withdrawn prior to maturity, and that other deposits
are withdrawn or reprice as follows:
<TABLE>
<CAPTION>
Annual Percentage Rate
-------------------------------------------------------------------
1 Year More Than More Than More Than More Than
or Less 1-3 Years 3-5 Years 5-10 Years 10 Years
------- --------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Accounts:
Interest-bearing transaction ........................ 37.0% 33.9% 9.0% 12.2% 7.9%
Money market ........................................ 79.0 11.0 5.2 4.0 0.8
Passbook savings .................................... 17.0 25.8 16.8 36.2 4.2
Non-interest bearing transaction .................... 10.0 17.1 13.8 24.2 34.9
</TABLE>
In evaluating the Company's exposure to interest rate risk, certain
shortcomings inherent in the method of analysis presented in the foregoing
tables must be considered. For example, although certain assets and liabilities
may have similar maturities, they may react in different degrees to changes in
market interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable rate mortgages, have features
which restrict changes in interest rates on a short-term basis and over the life
of the asset. Further, in the event of a change in interest rates, prepayment
and early withdrawal levels would likely deviate significantly from those
assumed in calculating the table. For example, projected passbook, money market
and transaction account maturities or withdrawals may also materially change if
interest rates change. Finally, the ability of many borrowers to service their
debt may decrease in the event of an interest rate increase. The Company
considers all of these factors in monitoring its exposure to interest rate risk.
<PAGE>
AVERAGE BALANCES, INTEREST RATES AND YIELDS
The following tables set forth the weighted average effective interest rate
earned by the Company on its loan and investment portfolios, the weighted
average effective cost of the Company's deposits and other interest-bearing
liabilities, the interest rate spread of the Company, and the net yield on
weighted average interest-earning assets for the periods and as of the dates
shown.
<TABLE>
<CAPTION>
Year Ended June 30
----------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- -------------------------- ----------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1) $ 97,473 $ 8,287 8.50% $ 85,870 $6,863 7.99% $74,412 $5,873 7.89%
Investment securities(2) 20,730 1,238 5.97 17,399 952 5.47 15,424 800 5.19
Mortgage-backed securities 19,432 1,425 7.33 20,098 1,453 7.23 7,313 467 6.39
Interest-bearing deposits in
other financial institutions 4,911 214 4.36 3,188 141 4.42 3,329 96 2.88
-------- ------- -------- ------ -------- ------
Total interest-earning assets $142,546 $11,164 7.83% $126,555 $9,409 7.43% $100,478 $7,236 7.20%
======== ======== ========
Interest-bearing liabilities:
Money market accounts $ 295 $ 7 2.37% $ 477 $ 12 2.52% $ 831 $ 21 2.53%
NOW accounts 3,926 78 1.99 3,908 78 2.00 3,505 70 2.00
Passbook savings accounts 41,682 1,841 4.42 43,793 1,802 4.11 48,365 1,902 3.93
Certificates of deposit 41,155 2,446 5.94 32,914 1,889 5.74 25,133 1,479 5.88
FHLB advances 39,296 2,427 6.18 29,994 1,850 6.17 6,640 296 4.46
Securities sold under
agreements to repurchase -- -- -- -- -- -- 31 2 6.45
Total interest-bearing
liabilities $126,354 $ 6,799 5.38% $111,086 $5,631 5.07% $ 84,505 $3,770 4.46%
======== ------- ---- ======== ------ ---- ======== ------ ----
Net interest income/interest
rate spread $ 4,365 2.45% $3,778 2.36% $3,466 2.74%
======= ==== ====== ==== ====== ====
Net interest margin(3) 3.06% 2.99% 3.45%
==== ==== ====
- --------------------------
</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 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)Net interest income divided by average interest earning assets.
<PAGE>
<TABLE>
<CAPTION>
At June 30,
--------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
WEIGHTED AVERAGE YIELD ON:
Loans receivable(1) ......................... 8.57% 8.38% 7.78%
Investment securities(2) .................... 5.96 5.38 4.96
Mortgage-backed securities .................. 7.14 7.13 7.01
Interest-bearing deposits in other
financial institutions .................... 4.83 6.31 4.94
Combined weighted average yield
on interest-earning assets ................ 7.89 7.76 7.19
WEIGHTED AVERAGE RATE PAID ON:
Money market accounts ....................... 2.42 2.43 2.47
NOW accounts ................................ 1.99 2.00 2.00
Passbook savings accounts ................... 4.29 4.41 3.93
Certificates of deposit ..................... 5.74 5.92 5.43
FHLB advances ............................... 5.92 6.33 5.61
Combined weighted average rate paid
on interest-bearing liabilities ........... 5.22 5.46 4.59
Spread ...................................... 2.67 2.30 2.60
</TABLE>
(1)Includes impact of non-accruing loans and loan fees.
(2)Yields reflected have not been computed on a tax equivalent basis.
<PAGE>
Rate/Volume Analysis
The following schedule presents the dollar amount of change in interest
income and interest expense for major components of interest-earning assets and
interest-earning assets and interest-bearing liabilities. It distinguishes
between changes related to higher or lower outstanding balances and changes due
to the levels and changes in interest rates. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume (i.e., changes in
volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate
multiplied by old volume). For purposes of this table, changes attributable to
both rate and volume, which cannot be segregated have been allocated
proportionately to the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
----------------------------------- ------------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
------------------ Increase ------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1) $ 968 $456 $1,424 $ 915 $ 75 $ 990
Investment securities 194 92 286 106 46 152
Mortgage-backed securities (49) 21 (28) 917 69 986
Interest-bearing deposits in other
financial institutions 75 (2) 73 (4) 49 45
------ ---- ------ ------ ---- ------
Total interest-earning assets $1,118 $567 $1,755 $1,934 $239 $2,173
====== ==== ====== ====== ==== ======
Interest-bearing liabilities:
Money market accounts $ (4) $ (1) $ (5) $ (9) $-- $ (9)
NOW accounts -- -- -- 8 -- 8
Passbook savings accounts (89) 128 39 (185) (85) (11)
Certificates of deposit 488 69 557 447 (37) 410
FHLB advances 575 2 577 1,401 153 1,554
Securities sold under agreements
to repurchase -- -- -- (1) (1) (2)
------ ---- ------ ------ ---- ------
Total interest-bearing liabilities $ 970 $198 $1,168 $1,661 $200 $1,861
====== ==== ====== ====== ==== ======
Net interest income $ 587 $ 312
====== ======
</TABLE>
- ----------------
(1) Includes the impact of non-accruing loans and loan fees.
<PAGE>
Asset Quality
Total non-performing assets decreased to $92,000 at June 30, 1996 compared
to $128,000 at June 30, 1995. The ratio of non-performing assets to total assets
at June 30, 1996 was .06% compared to .09% at June 30, 1995. Included in
non-performing assets at June 30, 1996 were eleven consumer loans totaling
$65,000. Repossessed assets totaled $27,000 at June 30, 1996.
In addition to the non-performing assets listed above, as of June 30, 1996
and 1995, there was $1.4 million in net loans designated by the Bank as "of
concern" due to management's doubts as to the ability of the borrowers to comply
with loan repayment terms. Based on management's review as of June 30, 1996,
$691,000 of loans were classified as substandard, $47,000 as doubtful, $0 as
loss, and $713,000 as special mention. As of June 30, 1995, $759,000 were
classified as substandard, $10,000 as doubtful, $2,000 as loss, and $685,000 as
special mention.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, borrowings, and
principal and interest payments on loans and mortgage-backed securities and
maturities of investment securities. While maturities of investment securities
and scheduled amortizations 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 5%, of which 1% must be comprised of
short-term investments (i.e. generally with a term of less than one year). At
June 30, 1996 the Bank's liquidity ratio was 6.9%, of which 1.6% was comprised
of short-term investments.
YEAR ENDED JUNE 30, 1996. During the year ended June 30, 1996 there was a
net decrease of $11.1 million in cash and cash equivalents. A major source of
cash during the year was an increase in deposits of $6.6 million. In addition,
proceeds from the sale of mortgage loans provided $6.8 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 include
funding an increase of $8.1 million in the loan portfolio, purchasing $5.0
million in a callable FHLB bond, $4.0 million in FHLMC preferred stock and
originations of $6.9 million of loans to be sold in the secondary market.
YEAR ENDED JUNE 30, 1995. During the year ended June 30, 1995 there was a
net increase of $11.8 million in cash and cash equivalents. A major source of
cash during the year included the $19.8 million increase in advances from the
FHLB. In addition, proceeds from the sale of mortgage loans provided $2.4
million. Management continued to sell fixed rate first mortgage loans with
maturities of 15 to 30 years in the secondary market to manage interest rate
risk. Additional sources of funds included a $3.9 million increase in deposits.
Major uses of cash during the year which offset the sources of cash
included funding an increase of $14.8 million in the loan portfolio, purchasing
$1.0 million in FHLB stock and origination of $1.3 million of loans to be sold
in the secondary market.
<PAGE>
YEAR ENDED JUNE 30, 1994. During the year ended June 30, 1994, there was a
net decrease of $487,000 in cash and cash equivalents. A major source of cash
during the year included the $23.5 million increase in proceeds from the
advances from the FHLB. Proceeds from the sale of mortgage loans and proceeds
from sales and calls of investment securities provided $8.3 million and $2.5
million in funds, respectively, during fiscal 1994. Management continued to sell
fixed rate first mortgage loans with maturities of 15 to 30 years originated for
sale in the secondary market to manage interest rate risk. However, in the
second half of the fiscal year management, to better manage interest rate risk,
decided to retain for portfolio fixed rate loans with maturities of 15 years or
less, but continued to sell loans with maturities in excess of 15 years.
Additional sources of funds included a $6.8 million increase in deposits.
Major uses of cash during the year which offset the sources of cash
included funding an increase of $9.6 million in the loan portfolio, purchasing
$6.7 million in investment securities and origination of $9.2 million of loans
to be sold in the secondary market. In addition, management purchased $16.5
million in GNMA fixed rate project loans, which management feels offer an
attractive return.
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 offer
flexibility and are an important tool to be used in the balanced growth of the
Company. As such, borrowings outstanding at June 30, 1996 consist of advances
from the FHLB totaling $41.8 million. Also, the Company had commitments to fund
loan originations and unused lines of credit with borrowers of $6.0 million at
June 30, 1996. 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 1.5% tangible
capital requirement, a 3.0% core capital requirement and an 8.0% total
risk-based capital to risk weighted assets requirement. At June 30, 1996, the
Bank exceeded all fully phased in capital requirements. Tangible and core
capital totaled $11.8 million, or 8.0% of adjusted total assets (as defined by
regulation) and risk-based capital totaled $12.3 million, or 15.2% of
risk-weighted assets (as defined by regulation). See Note 10 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 presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative 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 the Company's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or magnitude as the prices of goods and services.
<PAGE>
RECENT REGULATORY DEVELOPMENTS
The deposits of savings associations such as the Bank are presently insured
by the Saving Association Insurance Fund ("SAIF"), which together with the Bank
Insurance Fund ("BIF"), are the two insurance funds administered by the FDIC.
The premium disparity that we have been expecting for the last two years is now
here. The FDIC revised the premium schedule for BIF-insured banks to provide
that a well capitalized bank pays only a token $2,000 annual fee and zero
deposit insurance. This compares to a well capitalized SAIF institution paying
.23% of deposits, as an annual premium. As a result, BIF members will pay lower
premiums than the SAIF members. It is anticipated that the SAIF will not be
adequately recapitalized until 2002, absent a substantial increase in premium
rates or the imposition of special assessments or other significant
developments, such as a merger of the SAIF and BIF. As a result of this
disparity, SAIF members are placed at a significant competitive disadvantage to
BIF members due to higher costs for deposit insurance. A recapitalization plan
under consideration by the Congress reportedly provides for a one-time
assessment of .85% to .90% to be imposed on all deposits assessed at the SAIF
rates in order to recapitalize the SAIF and eliminate the disparity between SAIF
and BIF premium rates. No assurance can be given, when or if ever, the
recapitalization plan will be implemented or as to the nature or extent of any
competitive disadvantage which may be experienced by SAIF-member institutions.
IMPACT OF NEW ACCOUNTING STANDARDS
Several new accounting standards have been issued by the FASB that will
apply for the Company's consolidated financial statements for the year ending
June 30, 1997. SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets To Be Disposed Of, requires a review of long-term
assets for impairment of recorded value and resulting write-downs if the value
is impaired. SFAS No. 122, Accounting for Mortgage Servicing Rights, requires
recognition of an asset when servicing rights are retained on in-house
originated loans that are sold. SFAS No. 123, Accounting for Stock-Based
Compensation, encourages, but does not require, entities to use a "fair value
based method" to account for stock-based compensation plans. If the fair value
accounting encouraged is not adopted, entities must disclose the pro forma
effect on net income and on earnings per share had the accounting been adopted.
SFAS No. 125, Accounting for Transfer and Servicing of Financial Assets and
Extinguishment of Liabilities, provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
and requires a consistent application of a financial-components approach that
focuses on control. Under that approach, after a transfer of financial assets,
an entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred and derecognizes liabilities when extinguished. SFAS
No. 125 also supersedes SFAS No. 122, and requires that servicing assets and
liabilities be subsequently measured by amortization in proportion to and over
the period of estimated net servicing income or loss and requires assessment for
asset impairment or increased obligation based on their fair values. SFAS No.
125 applies to transfers and extinguishments occurring after December 31, 1996,
and early or retroactive application is not permitted.
These statements are not expected to have a material effect on the
Company's consolidated financial position or results of operation.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
FFW Corporation
Wabash, Indiana
We have audited the accompanying consolidated balance sheets of FFW
Corporation as of June 30, 1996 and 1995 and the related consolidated statements
of income, changes in shareholders' equity and cash flows for the years ended
June 30, 1996, 1995 and 1994. 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, 1996 and 1995 and the results of its operations and
its cash flows for the years ended June 30, 1996, 1995 and 1994 in conformity
with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for securities and its method of
accounting for its Employee Stock Ownership Plan effective July 1, 1994 to
conform to new accounting guidance.
Crowe, Chizek and Company LLP
South Bend, Indiana
July 25, 1996
<PAGE>
<TABLE>
<CAPTION>
FFW CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND 1995
==========================================================================================================================
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from financial institutions $ 861,553 $ 852,892
Interest-bearing deposits in other financial institutions - short-term 1,926,654 13,041,823
------------ ------------
Total cash and cash equivalents 2,788,207 13,894,715
Interest-bearing deposits in other financial institutions
(cost approximates market) 362,664 379,000
Securities available for sale 40,566,384 4,480,521
Securities held to maturity (fair value: June 30, 1995 - $31,250,000) -- 30,502,509
Loans held for sale, net of unrealized losses of $639 in 1996 and $-0- in 1995 423,361 213,900
Loans receivable, net of allowance for loan losses of $553,440 in 1996 and
$483,780 in 1995 100,529,412 92,474,542
Federal Home Loan Bank stock, at cost 2,397,600 2,340,400
Accrued interest receivable 1,102,611 972,676
Premises and equipment, net 1,691,433 1,389,672
Other assets 605,233 644,657
------------ ------------
Total assets $150,466,905 $147,292,592
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Noninterest-bearing demand deposits $ 3,263,982 $ 2,278,934
Savings, NOW and MMDA deposits 45,868,695 45,325,514
Other time deposits 43,357,434 38,325,410
------------ ------------
Total deposits 92,490,111 85,929,858
Federal Home Loan Bank advances 41,800,000 45,300,000
Accrued interest payable 150,492 146,953
Accrued expenses and other liabilities 568,159 424,213
------------ ------------
Total liabilities 135,008,762 131,801,024
<PAGE>
<CAPTION>
FFW CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND 1995
==========================================================================================================================
1996 1995
------------ ------------
<S> <C> <C>
Shareholders' equity
Preferred stock, $.01 par value; 500,000 shares authorized; none issued
Common stock, $.01 par value; 2,000,000 shares authorized;
853,592 shares issued and 711,060 shares outstanding at June 30, 1996;
848,396 shares issued and 775,746 shares outstanding at June 30, 1995 8,536 8,484
Additional paid-in capital 8,132,484 8,007,476
Retained earnings - substantially restricted 10,218,910 9,014,804
Net unrealized depreciation on securities available for sale,
net of tax benefit of $69,436 in 1996 and $0 in 1995 (203,283) (61,618)
Unearned Employee Stock Ownership Plan shares (331,189) (412,064)
Unearned Management Retention Plan shares (13,079) (56,678)
Treasury stock, 142,532 and 72,650 common shares, at cost,
at June 30, 1996 and 1995, respectively (2,354,236) (1,008,836)
------------ ------------
Total shareholders' equity 15,458,143 15,491,568
------------ ------------
Total liabilities and shareholders' equity $150,466,905 $147,292,592
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
FFW CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
===========================================================================================================================
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Interest and dividend income
Loans receivable, including fees
Mortgage loans $ 5,663,159 $5,051,277 $4,438,435
Consumer and other loans 2,624,117 1,811,513 1,435,213
Securities
Taxable 2,118,899 1,844,604 721,841
Nontaxable 544,165 560,674 545,722
Other interest-earning assets 213,832 140,645 95,447
----------- ---------- ----------
11,164,172 9,408,713 7,236,658
Interest expense
Deposits 4,371,748 3,780,381 3,472,344
Federal Home Loan Bank advances 2,427,205 1,849,920 297,881
----------- ---------- ----------
6,798,953 5,630,301 3,770,225
----------- ---------- ----------
Net interest income 4,365,219 3,778,412 3,466,433
Provision for loan losses 95,153 33,718 24,000
----------- ---------- ----------
Net interest income after provision for loan losses 4,270,066 3,744,694 3,442,433
Noninterest income
Net realized gains from sales/calls of interest-earning assets 145,818 8,939 230,193
Net unrealized gains (losses) on loans held for sale (639) 18,106 (61,475)
Unrealized loss on mortgage-backed security -- (318,900) --
Other income 482,972 437,064 452,275
----------- ---------- ----------
628,151 145,209 620,993
Noninterest expenses
Salaries and employee benefits 1,224,121 1,142,065 1,090,732
Occupancy and equipment expense 255,855 185,478 189,076
SAIF deposit insurance premium 238,033 222,414 212,686
Other expense 868,036 805,877 754,973
----------- ---------- ----------
2,586,045 2,355,834 2,247,467
----------- ---------- ----------
Income before income taxes 2,312,172 1,534,069 1,815,959
Income tax expense 725,991 434,620 468,210
----------- ---------- ----------
Net income $ 1,586,181 $1,099,449 $1,347,749
=========== ========== ==========
Earnings per common and common equivalent shares
Primary $2.13 $1.46 $1.62
Fully diluted 2.13 1.45 1.61
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
FFW CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY YEARS ENDED JUNE 30,
1996, 1995 AND 1994
===================================================================================================================================
Net Unrealized
Appreciation Unearned
(Depreciation) Unrealized Employee
Additional on Securities Loss on Stock
Common Paid-in Retained Available for Equity Ownership
Stock Capital Earnings Sale, Net of Tax Investments Plan Shares
----- ------- -------- ---------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1993 .......... $ 8,450 $ 7,925,550 $ 7,248,114 $ -- $ -- $ (591,500)
Cash dividends declared on
common stock - $.41 per share ... -- -- (332,259) -- -- --
12,079 shares committed to be
released under the Employee
Stock Ownership Plan (ESOP) ..... -- -- -- -- -- 103,939
Amortization of MRP
contribution .................... -- -- -- -- -- --
Purchase 72,650 shares of
treasury stock .................. -- -- -- -- -- --
Unrealized loss on equity
investments ..................... -- -- -- -- (122,608) --
Net income for the year ended
June 30, 1994 ................... -- -- 1,347,749 -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 1994 .......... 8,450 7,925,550 8,263,604 -- (122,608) (487,561)
Net unrealized depreciation on
securities available for sale,
net of tax of $0, upon
adoption of SFAS No. 115 on
July 1, 1994 .................... -- -- -- (122,608) 122,608 --
Cash dividends declared on
common stock-- $.45 per share ... -- -- (348,249) -- -- --
8,558 shares committed to be
released under the ESOP ......... -- 48,000 -- -- -- 75,497
Amortization of MRP
contribution .................... -- -- -- -- -- --
Issuance of 3,396 shares of
common stock due to exercise
of stock options ................ 34 33,926 -- -- -- --
Net change in unrealized
depreciation on securities
available for sale, net of
tax of $0 ....................... -- -- -- 60,990 -- --
Net income for the year ended
June 30, 1995 ................... -- -- 1,099,449 -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 1995 .......... 8,484 8,007,476 9,014,804 (61,618) -- (412,064)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FFW CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY YEARS ENDED JUNE 30,
1996, 1995 AND 1994 (Continued)
===================================================================================================================================
Unearned
Management Total
Retention Treasury Shareholders'
Plan Shares Stock Equity
----------- -------- -------------
<S> <C> <C> <C>
Balance at June 30, 1993 ....... $ (317,810) $ -- $ 14,272,804
Cash dividends declared on
common stock - $.41 per share -- -- (332,259)
12,079 shares committed to be
released under the Employee
Stock Ownership Plan (ESOP) .. -- -- 103,939
Amortization of MRP
contribution ................. 173,931 -- 173,931
Purchase 72,650 shares of
treasury stock ............... -- (1,008,836) (1,008,836)
Unrealized loss on equity
investments .................. -- -- (122,608)
Net income for the year ended
June 30, 1994 ................ -- -- 1,347,749
------------ ------------ ------------
Balance at June 30, 1994 ....... (143,879) (1,008,836) 14,434,720
Net unrealized depreciation on
securities available for sale,
net of tax of $0, upon
adoption of SFAS No. 115 on
July 1, 1994 ................. -- -- --
Cash dividends declared on
common stock-- $.45 per share -- -- (348,249)
8,558 shares committed to be
released under the ESOP ...... -- -- 123,497
Amortization of MRP
contribution ................. 87,201 -- 87,201
Issuance of 3,396 shares of
common stock due to exercise
of stock options ............. -- -- 33,960
Net change in unrealized
depreciation on securities
available for sale, net of
tax of $0 .................... -- -- 60,990
Net income for the year ended
June 30, 1995 ................ -- -- 1,099,449
------------ ------------ ------------
Balance at June 30, 1995 ....... (56,678) (1,008,836) 15,491,568
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FFW CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY YEARS ENDED JUNE 30,
1996, 1995 AND 1994 (Continued)
===================================================================================================================================
Net Unrealized
Appreciation Unearned
(Depreciation) Unrealized Employee
Additional on Securities Loss on Stock
Common Paid-in Retained Available for Equity Ownership
Stock Capital Earnings Sale, Net of Tax Investments Plan Shares
----- ------- -------- ---------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash dividends declared on
common stock --
$.51 per share -- -- (382,075) -- -- --
8,558 shares committed to be
released under the ESOP -- 73,100 -- -- -- 80,875
Amortization of MRP
contribution -- -- -- -- -- --
Purchase 69,882 shares of
treasury stock -- -- -- -- -- --
Issuance of 5,196 shares of
common stock due to exercise
of stock options 52 51,908 -- -- -- --
Net change in unrealized
depreciation on securities
available for sale, net of
tax of ($69,436) -- -- -- (141,665) -- --
Net income for year ended
June 30, 1996 -- -- 1,586,181 -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 1996 $8,536 $8,132,484 $10,218,910 $(203,283) $-- $(331,189)
====== ========== =========== ========= = =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FFW CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY YEARS ENDED JUNE 30,
1996, 1995 AND 1994 (Continued)
===================================================================================================================================
Unearned
Management Total
Retention Treasury Shareholders'
Plan Shares Stock Equity
----------- ----- ------
<S> <C> <C> <C>
Cash dividends declared on
common stock --
$.51 per share -- -- (382,075)
8,558 shares committed to be
released under the ESOP -- -- 153,975
Amortization of MRP
contribution 43,599 -- 43,599
Purchase 69,882 shares of
treasury stock -- (1,345,400) (1,345,400)
Issuance of 5,196 shares of
common stock due to exercise
of stock options -- -- 51,960
Net change in unrealized
depreciation on securities
available for sale, net of
tax of ($69,436) -- -- (141,665)
Net income for year ended
June 30, 1996 -- -- 1,586,181
-------- ----------- -----------
Balance at June 30, 1996 $(13,079) $(2,354,236) $15,458,143
======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
FFW CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
============================================================================================================================
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,586,181 $ 1,099,449 $ 1,347,749
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization, net of accretion 114,705 167,316 175,796
Provision for loan losses 95,153 33,718 24,000
Net realized gains from sales/calls of interest-earning assets (145,818) (8,939) (230,193)
Net unrealized (gains) losses on loans held for sale 639 (18,106) 61,475
Unrealized loss on mortgage-backed security -- 318,900 --
Net (gains) losses on sales of real estate owned,
repossessed assets and fixed assets 48,514 (13,711) (14,110)
Originations of loans held for sale (6,913,224) (1,282,630) (9,185,516)
Proceeds from sales of loans held for sale 6,789,253 2,410,566 8,303,234
ESOP expense 153,975 123,497 103,939
Amortization of MRP contribution 43,599 87,201 173,931
Net change in accrued interest receivable (129,935) (87,890) (143,121)
Net change in other assets (7,367) (215,679) (286,222)
Net change in accrued interest payable, accrued
expenses and other liabilities 147,485 57,374 (199,352)
------------ ----------- -----------
Total adjustments 196,979 1,571,617 (1,216,139)
------------ ----------- -----------
Net cash provided by operating activities 1,783,160 2,671,066 131,610
Cash flows from investing activities
Net change in interest-bearing deposits
in other financial institutions 16,336 -- 396,000
Proceeds from:
Sales/calls of securities available for sale 1,595,398 95,000 --
Calls of securities held to maturity 500,000 500,693 --
Sales/calls of investment securities -- -- 2,532,503
Maturities of securities available for sale 3,252,000 -- --
Maturities of securities held to maturity 300,000 880,000 --
Maturities of investment securities -- -- 130,000
Purchase of:
Securities available for sale (7,161,658) (538,600) --
Securities held to maturity (5,000,000) -- --
Investment securities -- -- (6,721,830)
Mortgage-backed securities -- -- (16,502,846)
Federal Home Loan Bank stock (57,200) (1,040,500) (756,200)
Principal collected on mortgage-backed securities 770,030 629,778 882,918
Net change in loans receivable (8,150,023) (14,820,746) (9,580,989)
Net purchases of premises and equipment (453,024) (95,178) (150,328)
Proceeds from sales of other real estate and repossessed assets 113,735 145,763 172,636
------------ ----------- ----------
Net cash used in investing activities (14,274,406) (14,243,790) (29,598,136)
<PAGE>
<CAPTION>
FFW CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
============================================================================================================================
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities
Net change in deposits 6,560,253 3,888,457 6,830,507
Proceeds from short-term borrowings 27,300,000 41,800,000 23,490,000
Payment on short-term borrowings (30,800,000) (21,990,000) --
Proceeds from exercise of stock options 51,960 33,960 --
Purchase of treasury stock (1,345,400) -- (1,008,836)
Cash dividends paid (382,075) (348,249) (332,259)
------------ ----------- ----------
Net cash provided by financing activities 1,384,738 23,384,168 28,978,412
------------ ----------- ----------
Net change in cash and cash equivalents (11,106,508) 11,811,444 (487,114)
Cash and cash equivalents at beginning of period 13,894,715 2,083,271 2,570,385
------------ ----------- ----------
Cash and cash equivalents at end of period $ 2,788,207 $ 13,894,715 $ 2,083,271
============ ============ ============
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 6,795,414 $ 5,550,238 $ 3,765,358
Income taxes 620,238 519,000 787,000
Supplemental schedule of noncash investing activities Transfer from:
Investment securities to securities available for sale $ -- $ 3,975,931 $ --
Investment securities to securities held to maturity -- 12,453,807 --
Securities held to maturity to securities available for sale 15,194,732 -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
FFW CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996, 1995 AND 1994
===============================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The accompanying 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 intercompany transactions and balances are
eliminated in consolidation.
Nature of Business and Concentrations of Credit Risk: The primary source of
income for the Company is the origination of commercial and residential real
estate loans in Wabash County and the surrounding areas. Loans secured by real
estate mortgages comprise approximately 68% of the loan portfolio at June 30,
1996.
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, the carrying value of loans held for sale,
the accrued liability for deferred compensation, 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 and the fair values of securities and other financial
instruments are particularly susceptible to material change in the near term.
Cash and Cash Equivalents: For reporting cash flows, cash and cash equivalents
include cash on hand and due from financial institutions. Net cash flows are
reported for customer loan and deposit transactions.
Securities: On July 1, 1994, Statement of Financial Accounting Standards (SFAS)
No. 115, Accounting for Certain Investments in Debt and Equity Securities was
adopted. Securities are classified as securities held to maturity, securities
available for sale and trading securities. Securities held to maturity are those
which the Company has the positive intent and ability to hold to maturity, and
are reported at amortized cost. Securities available for sale are those the
Company may decide to sell if needed for liquidity, asset-liability management
or other reasons. Securities available for sale are reported at fair value, with
unrealized gains and losses included as a separate component of shareholders'
equity, net of tax. Trading securities are bought principally for sale in the
near term, and are reported at fair value with unrealized gains and losses
included in earnings. Adoption of SFAS No. 115 on July 1, 1994 had no effect on
shareholders' equity.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Financial Accounting Standards Board ("FASB") issued a guide to
Implementation of SFAS No. 115. As permitted by the Guide, on December 31, 1995,
the Company made a one-time reassessment and transferred securities from
securities held to maturity to securities available for sale. At the transfer
date, these securities had an amortized cost of $15,194,732. The transfer
increased the unrealized appreciation on securities available for sale by
$244,331 and shareholders' equity by $140,490, net of tax of $103,841.
Security sale gains and losses are determined using the specific identification
of amortized cost. Interest and dividend income, adjusted by amortization of
purchase premium or discount over the estimated life of the security using the
level yield method, is included in earnings.
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: Loans receivable that management has the intent and ability to hold for
the foreseeable future or until maturity or pay-off are reported at principal
balances adjusted for charge-offs, the allowance for loan losses, deferred fees
or costs on originated loans, and unamortized premiums or discounts on purchased
loans.
Premiums or discounts on mortgage loans are amortized to income on the level
yield method over the remaining period to contractual maturity, adjusted for
anticipated prepayments.
Loan fees and certain direct loan origination costs are deferred, and the net
fee or cost is recognized as an adjustment to interest income using the interest
method.
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.
SFAS No. 114, Accounting by Creditors for Impairment of a Loan, as amended, was
adopted effective July 1, 1995 and requires recognition of loan impairment.
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
increase, such increase is reported in the provision for loan losses. The effect
of adopting these standards was not material.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 30 days or more. Nonaccrual
loans are often also considered impaired. Impaired loans, or portions thereof,
are charged off when deemed uncollectible. The nature of disclosures for
impaired loans is considered generally comparable to prior nonaccrual and
renegotiated loans and non-performing and past due asset disclosures.
FORECLOSED REAL ESTATE: Real estate properties acquired through, or in lieu of,
loan 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.
INCOME TAXES: Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through income tax expense.
PREMISES AND EQUIPMENT: Land is carried at cost. Buildings, furniture, fixtures
and equipment are carried at cost less accumulated depreciation and amortization
computed principally by using the straight-line method over the estimated useful
lives of the assets ranging from 3 to 40 years.
EMPLOYEE STOCK OWNERSHIP PLAN: Effective July 1, 1994, the Company accounted 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, are 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.
ESOP shares are outstanding for earnings per share calculations as they are
committed to be released; unearned shares are not considered outstanding.
Prior to the adoption of SOP 93-6, the ESOP expense was limited to the principal
repayment on the loan and the earnings per share calculation included as
outstanding all 59,150 ESOP shares.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK: The Company, in the normal
course of business, makes commitments to make loans which are not reflected in
the financial statements. A summary of these commitments is disclosed in Note
13.
EARNINGS PER SHARE: Earnings per common share is computed by dividing net income
by the weighted average number of common shares outstanding and common share
equivalents which would arise from considering dilutive stock options. The
weighted average number of shares for calculating earnings per common share is:
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Primary ........................ 744,422 753,141 834,290
Fully diluted .................. 746,072 758,541 835,174
</TABLE>
RECLASSIFICATIONS: Certain amounts in the 1995 and 1994 financial statements
were reclassified to conform with the 1996 presentation.
NOTE 2 - SECURITIES
Information for securities available for sale is as follows:
<TABLE>
<CAPTION>
June 30, 1996
-----------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
Debt securities
U.S. Government and agencies $ 6,000,000 $ -- $ (87,300) $ 5,912,700
Mortgage backed 18,732,095 389,423 (581,392) 18,540,126
States and political subdivisions 8,222,856 174,894 (65,640) 8,332,110
Other 558,873 6,671 (32) 565,512
----------- -------- --------- -----------
33,513,824 570,988 (734,364) 33,350,448
Marketable equity securities 7,325,279 6,250 (115,593) 7,215,936
----------- -------- --------- -----------
$40,839,103 $577,238 $(849,957) $40,566,384
=========== ======== ========= ===========
June 30, 1995
-----------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
Debt securities
Marketable equity securities $ 4,542,139 $ 28,192 $ (89,810) $ 4,480,521
=========== ======== ========= ===========
</TABLE>
<PAGE>
NOTE 2 - SECURITIES (Continued)
Information for securities held to maturity is:
<TABLE>
<CAPTION>
June 30, 1995
-----------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
Debt securities
U.S. Government and agencies $ 1,500,000 $ 1,500 $ (10,500) $ 1,491,000
Mortgage backed 19,489,202 695,438 (34,640) 20,150,000
States and political subdivisions 8,859,629 196,541 (109,170) 8,947,000
Other 653,678 10,012 (1,690) 662,000
----------- -------- --------- -----------
$30,502,509 $903,491 $(156,000) $31,250,000
=========== ======== ========= ===========
</TABLE>
Amortized cost and fair value of debt securities by contractual maturity is
shown below. Expected maturities may differ from contractual maturities because
borrowers may call or prepay obligations.
<TABLE>
<CAPTION>
June 30, 1996
---------------------------
Amortized Fair
Cost Value
----------- -----------
<S> <C> <C>
Due in one year or less ........................ $ 1,607,149 $ 1,601,337
Due after one year through five years .......... 10,021,600 9,957,039
Due after five years through ten years ......... 2,802,763 2,869,024
Due after ten years ............................ 350,217 382,922
----------- -----------
14,781,729 14,810,322
Mortgage-backed securities ..................... 18,732,095 18,540,126
----------- -----------
$33,513,824 $33,350,448
=========== ===========
</TABLE>
For the year ended June 30, 1996, proceeds from calls of securities held to
maturity were $500,000 and gains were $410. Proceeds from sales of securities
available for sale were $1,595,398 during the year ended June 30, 1996 and gross
gains were $59,279.
For the year ended June 30, 1995, proceeds from calls of securities held to
maturity were $500,693 and net gains were $692. Proceeds from sales of
securities available for sale were $95,000 during the year ended June 30, 1995
and there were no gains or losses.
<PAGE>
NOTE 2 - SECURITIES (Continued)
For the year ended June 30, 1994, proceeds from calls of investment securities
were $2,532,503 and net gains were $20,023. There were no sales of investment
securities during the year ended June 30, 1994.
The June 30, 1995 balance of mortgage-backed securities held to maturity was
reduced $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 of the underlying loans, a decline in
the cash reserve fund and losses incurred on foreclosed real estate. The
writedown is reflected as a loss in the June 30, 1995 statement of income. The
security was transferred to available for sale on December 31, 1995 as discussed
in Note 1. No adjustment to the unrealized loss occurred during 1996.
NOTE 3 - LOANS RECEIVABLE, NET
Loans receivable as of June 30 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Mortgage loans (principally conventional)
Principal
Secured by one-to-four family residences $ 60,732,222 $ 60,352,633
Secured by other properties ............. 7,217,530 6,547,002
Construction loans ...................... 2,676,300 1,406,300
------------- -------------
70,626,052 68,305,935
Less
Undisbursed portion of construction loans (1,547,942) (370,873)
Net deferred loan origination fees ...... (92,459) (102,067)
------------- -------------
Total mortgage loans .................. 68,985,651 67,832,995
Consumer and other loans
Principal
Automobile .............................. 18,463,701 12,405,411
Manufactured home ....................... 481,283 615,689
Home equity and improvement ............. 4,624,052 4,487,384
Commercial .............................. 4,377,767 4,530,557
Other ................................... 3,809,415 2,842,890
------------- -------------
31,756,218 24,881,931
Net deferred loan origination costs ....... 340,983 243,396
------------- -------------
Total consumer and other loans .......... 32,097,201 25,125,327
Less allowance for loan losses ............... (553,440) (483,780)
------------- -------------
$ 100,529,412 $ 92,474,542
============= =============
</TABLE>
<PAGE>
NOTE 3 - LOANS RECEIVABLE, NET(Continued)
Activity in the allowance for loan losses for the years ended June 30 is
summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Beginning balance .............. $ 483,780 $ 485,225 $ 476,546
Provision for loan losses ...... 95,153 33,718 24,000
Charge-offs .................... (79,520) (46,777) (74,913)
Recoveries ..................... 54,027 11,614 59,592
--------- --------- ---------
Ending balance ................. $ 553,440 $ 483,780 $ 485,225
========= ========= =========
</TABLE>
At June 30, 1996, no portion of the allowance for loan losses was allocated to
impaired loan balances as there were no loans considered impaired loans as of,
or for the year ended, June 30, 1996.
Nonaccrual loans with interest recognition reduced were $65,000, $104,000 and
$18,000 at June 30, 1996, 1995 and 1994, respectively.
NOTE 4 - LOAN SERVICING
Mortgage loans serviced for others are not included in the balance sheets.
Unpaid principal balances at June 30 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Mortgage loans serviced for FHLMC .......... $20,154,358 $15,561,404
=========== ===========
</TABLE>
Custodial escrow balances maintained for this loan servicing were approximately
$32,000 and $24,000 at June 30, 1996 and 1995.
NOTE 5 - PREMISES AND EQUIPMENT, NET
Premises and equipment at June 30 are as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Land ....................................... $ 210,657 $ 210,657
Buildings .................................. 1,753,154 1,432,037
Furniture, fixtures and equipment .......... 436,391 411,632
----------- -----------
2,400,202 2,054,326
Less accumulated depreciation .............. (708,769) (664,654)
----------- -----------
$ 1,691,433 $ 1,389,672
=========== ===========
</TABLE>
<PAGE>
NOTE 6 - DEPOSITS
Short-term jumbo certificates of deposit of $100,000 or more totalled $5,952,000
and $3,665,000 at June 30, 1996 and 1995.
At June 30, 1996, scheduled maturities of certificates of deposit were as
follows, for the years ended June 30:
<TABLE>
<CAPTION>
<S> <C>
1997 $21,380,420
1998 8,808,874
1999 5,579,619
2000 5,153,200
2001 and thereafter 2,437,321
-----------
$43,357,434
===========
</TABLE>
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES
At June 30, 1996, advances from the Federal Home Loan Bank of Indianapolis
(FHLB) (with fixed and variable rates ranging from 5.26% to 7.94%) mature in the
year ending June 30 as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $21,500,000
1998 3,800,000
1999 13,000,000
2000 1,000,000
2001 500,000
Thereafter 2,000,000
-----------
$41,800,000
===========
</TABLE>
FHLB advances are secured by all stock in the FHLB, qualifying first mortgage
loans, government, agency, and mortgage-backed securities. At June 30, 1996,
collateral of approximately $86,000,000 is pledged to the FHLB to secure
advances outstanding.
NOTE 8 - EMPLOYEE BENEFITS
EMPLOYEE PENSION PLAN: The pension plan is part of a noncontributory
multi-employer defined-benefit pension plan covering substantially all
employees. The plan is administered by the Financial Institutions Retirement
Fund. Because the plan is a multi-employer plan, there is no separate actuarial
valuation of plan benefits nor segregation of plan assets specifically for the
Company. As of July 1, 1995, the latest actuarial valuation, total plan assets
exceeded the actuarially determined value of total vested benefits. The plan
reached its full funding limitation for Internal Revenue Code purposes and a
full contribution was not required. As a result, other than administrative
expenses, there was no pension expense for the years ended June 30, 1996, 1995
and 1994.
<PAGE>
NOTE 8 - EMPLOYEE BENEFITS(Continued)
401(K) PLAN: A retirement savings 401(k) plan covers all full time employees who
are 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 were $20,000, $19,000 and
$18,000 in 1996, 1995 and 1994.
MANAGEMENT RECOGNITION AND RETENTION PLANS: The Management Recognition and
Retention Plans (MRP) provide directors, officers and other key employees of the
Company with a proprietary interest in the Company to encourage such persons to
remain with the Company. Eligible directors, officers and other key employees of
the Company become vested in shares of common stock awarded at a rate of 25% per
year commencing April 1, 1993. In 1993 the Bank contributed funds to the MRP to
enable the Plans to acquire 32,335 shares of common stock at an average price of
$12.94 per share. Expense of $44,000, $87,000 and $174,000 was recorded for
these Plans for the years ended June 30, 1996, 1995 and 1994.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP): In conjunction with the stock conversion,
the Company established an ESOP. Employees with 1,000 hours of employment with
the Bank and who have attained age 21 are eligible to participate. The ESOP
borrowed $591,500 from the Company to purchase 59,150 shares of the common stock
issued in the conversion at $10 per share. Collateral for the 7% loan is the
unearned shares of common stock purchased by the ESOP with the loan proceeds.
The loan will be repaid principally from the Bank's discretionary contributions
to the ESOP over seven years. Shares purchased by the ESOP are held in suspense
until allocated among participants as the loan is repaid. ESOP expense of
$154,000, $123,000 and $104,000 was recorded for the years ended June 30, 1996,
1995 and 1994. Contributions to the ESOP were $54,000, $108,000 and $152,000
during the years ended June 30, 1996, 1995 and 1994. Dividends on unearned
shares are used to reduce the accrued interest and principal amount of the
ESOP's loan payable to the Company.
Contributions to the ESOP and shares released from suspense proportional to the
repayment of the ESOP loan are allocated among ESOP participants on the basis of
compensation in the year of allocation. Benefits are 100% vested after five
years of credited service including credit for years of service prior to July 1,
1992. Prior to the five years of credited service, a participant who terminates
employment for reasons other than death, normal retirement, or disability does
not receive any ESOP benefit. Forfeitures are reallocated among remaining
participating employees, in the same proportion as contributions. Benefits are
payable in stock or cash upon termination of employment. The Company's
contributions to the ESOP are not fixed, so benefits payable under the ESOP
cannot be estimated.
ESOP participants receive distributions from their ESOP accounts only upon
termination of service.
For the years ended June 30, 1996 and 1995, 8,558 shares with a average fair
value of $17.99 and $14.43 per share, were committed to be released.
<PAGE>
NOTE 8 - EMPLOYEE BENEFITS (Continued)
The ESOP shares as of June 30 are:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Allocated ..................................... 29,195 20,637 12,079
Unearned ...................................... 29,955 38,513 47,071
-------- -------- --------
Total shares .................................. 59,150 59,150 59,150
======== ======== ========
Fair value of unearned shares at June 30 ...... $576,634 $673,976 $647,226
======== ======== ========
</TABLE>
STOCK OPTION PLAN: The 1992 Stock Option and Incentive Plan (the "Plan") was
adopted in conjunction with the stock conversion. The options authorized under
the Plan are 10% or 84,500 shares of common stock. Officers, directors and
employees of the Company and its subsidiaries are eligible to participate. The
option exercise price is at least 100% of the market value (as defined in the
Plan) of the common stock on the date of the grant, and the option term cannot
exceed 10 years. Options awarded may be exercised at a rate of 25% per year.
A summary of transactions for the plans follows:
<TABLE>
<CAPTION>
Effective Price
Per Share
at Dates
Available Options Exercised or
For Grant Outstanding Granted
--------- ----------- -------
<S> <C> <C> <C>
Balance June 30, 1993 ............. 16,058 68,442
Balance June 30, 1994 ............. 16,058 68,442
Exercised ......................... -- (3,396) $ 10.00
------ ------
Balance June 30, 1995 ............. 16,058 65,046
Exercised ......................... -- (5,196) $ 10.00
------ ------
Balance June 30, 1996 ............. 16,058 59,850
====== ======
</TABLE>
<PAGE>
NOTE 9 - INCOME TAXES
The Company and the Bank file a consolidated federal income tax return. The Bank
is allowed a bad debt deduction of 8% of taxable income or on a specified
experience formula. The percentage-of-taxable-income method was used for tax
returns filed for June 30, 1995 and 1994 and is anticipated for June 30, 1996.
Income tax expense for the years ended June 30 is:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Federal
Current .................... $ 466,577 $ 368,125 $ 348,152
Deferred ................... 65,482 (67,817) (14,142)
--------- --------- ---------
532,059 300,308 334,010
State
Current .................... 189,930 161,163 146,000
Deferred ................... 4,002 (26,851) (11,800)
--------- --------- ---------
193,932 134,312 134,200
--------- --------- ---------
Income tax expense ........... $ 725,991 $ 434,620 $ 468,210
========= ========= =========
</TABLE>
Income tax expense differed from amounts computed using the U.S. federal income
tax rate of 34% on income before income taxes as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Income taxes at 34% statutory rate ........... $ 786,138 $ 521,583 $ 617,426
Tax effect of:
Tax-exempt income ......................... (170,230) (204,338) (198,784)
State tax, net of federal income tax effect 127,995 88,645 88,572
Other ..................................... (17,912) 28,730 (39,004)
--------- --------- ---------
Total income tax expense ................ $ 725,991 $ 434,620 $ 468,210
========= ========= =========
</TABLE>
<PAGE>
NOTE 9 - INCOME TAXES (Continued)
Components of the net deferred tax asset as of June 30, 1996 are:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax assets:
Bad debts .................................................. $ 104,737 $ 108,847
Deferred compensation ...................................... 60,312 47,606
Management retention plan expense .......................... 16,863 42,805
Securities writedown ....................................... 135,533 135,533
Net unrealized depreciation on securities available for sale 115,906 24,647
Other ...................................................... 1,068 1,141
--------- ---------
434,419 360,579
Deferred tax liabilities
Accretion .................................................. (60,534) (57,610)
Net deferred loan costs .................................... (105,623) (60,065)
Other ...................................................... (24,253) (20,670)
--------- ---------
(190,410) (138,345)
Valuation allowance .......................................... (46,470) (24,647)
--------- ---------
Net deferred tax asset ....................................... $ 197,539 $ 197,587
========= =========
</TABLE>
A valuation allowance is established for the tax effect of net unrealized
depreciation on marketable equity securities available for sale. It increased
$24,647 in 1995 and $21,823 in 1996.
Retained earnings at June 30, 1996 and 1995 includes approximately $1,156,000
for which no deferred federal income tax liability has been recorded which
represents bad debt deductions for tax purposes only. Reduction of amounts so
allocated for other than tax bad debt losses or adjustments from carryback of
net operating losses would create tax return income which would be taxed at
current income tax rates. The unrecorded deferred income tax liability on the
above amount was $393,000 at June 30, 1996 and 1995.
NOTE 10 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
The Bank is subject to various regulatory capital requirements. Failure to meet
minimum capital requirements can initiate certain mandatory or discretionary
actions by regulators that could have a direct material effect on the Bank's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific quantitative
capital guidelines using the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's requirements are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Regulations require the Bank to maintain minimum amounts and ratios (set forth
below)of total and Tier I capital to risk-weighted assets, and of Tier I capital
to average assets. Management believes, as of June 30, 1996, that the Bank meets
the capital adequacy requirements.
<PAGE>
NOTE 10 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS (Continued)
The following reconciles the Bank's capital under generally accepted accounting
principles (GAAP) to regulatory capital.
<TABLE>
<CAPTION>
Tangible Leverage Risk-Based
Capital Capital Capital
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
GAAP capital at June 30, 1996 .................... $11,607 $11,607 $11,607
Additional capital items
Net unrealized depreciation on securities
available for sale .......................... 168 168 168
Allowance for loan losses ..................... -- -- 553
------- ------- -------
Regulatory capital at June 30, 1996 .............. $11,775 $11,775 $12,328
======= ======= =======
GAAP capital at June 30, 1995 .................... $10,104 $10,104 $10,104
Additional capital items
Net unrealized depreciation on securities
available for sale .......................... 67 67 67
Allowance for loan losses ..................... -- -- 484
------- ------- -------
Regulatory capital at June 30, 1995 .............. $10,171 $10,171 $10,655
======= ======= =======
</TABLE>
The Bank's actual capital and required capital amounts and ratios are presented
below:
<TABLE>
<CAPTION>
Requirement
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, 1996
Tangible Capital ...................... $11,775 8.00% $ 2,208 1.50% $ 4,416 3.00%
Leverage Capital ...................... $11,775 8.00% $ 4,416 3.00% $ 8,832 6.00%
Risk-Based Capital .................... $12,328 15.20% $ 6,488 8.00% $ 8,110 10.00%
As of June 30, 1995
Tangible Capital ...................... $10,171 7.14% $ 2,137 1.50% $ 4,282 3.00%
Leverage Capital ...................... $10,171 7.14% $ 4,282 3.00% $ 8,564 6.00%
Risk-Based Capital .................... $10,655 14.95% $ 5,700 8.00% $ 7,125 10.00%
</TABLE>
Regulations of the Office of Thrift Supervision limit the dividends that may be
paid without prior approval of the Office of Thrift Supervision. The Bank is
currently a "well-capitalized" Tier 1 institution and can make distributions
during a year of 100% of its net income to date during the year plus one-half
its "surplus capital ratio" (the excess over its capital requirements) at the
beginning of the year. Accordingly, at June 30, 1996 approximately $2,900,000 of
the Bank's retained earnings is available for distribution to the Company.
<PAGE>
NOTE 11 - SALES/CALLS OF INTEREST-EARNING ASSETS
Net realized gains or losses from sales/calls of interest-earning assets for the
years ended June 30 are:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net gains - sales of first mortgage loans ..... $ 86,129 $ 8,247 $210,170
Net gains - sales and calls of securities ..... 59,689 692 20,023
-------- -------- --------
$145,818 $ 8,939 $230,193
======== ======== ========
</TABLE>
NOTE 12 - OTHER NONINTEREST INCOME AND EXPENSES
Other noninterest income and expenses for the years ended June 30 are:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Other noninterest income
Commission income .......................... $106,710 $103,827 $144,045
Service charges and fees ................... 267,664 221,352 188,340
Late charges ............................... 53,622 42,668 42,499
Other ...................................... 54,976 69,217 77,391
-------- -------- --------
$482,972 $437,064 $452,275
======== ======== ========
Other noninterest expenses
Advertising and promotion .................. $ 71,189 $ 61,032 $ 58,374
Correspondent bank charges ................. 140,533 124,278 113,938
Data processing expense .................... 231,322 208,980 182,296
Insurance expense .......................... 48,784 45,179 34,915
Professional fees .......................... 52,254 57,769 71,015
Printing, postage, stationery and supplies . 140,971 131,185 121,808
Other ...................................... 182,983 177,454 172,627
-------- -------- --------
$868,036 $805,877 $754,973
======== ======== ========
</TABLE>
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONTINGENCIES
Various outstanding commitments and contingent liabilities are not reflected in
the financial statements. Commitments to make loans at June 30, 1996 are:
<TABLE>
<CAPTION>
Fixed Variable
Rate Rate Total
---- ---- -----
<S> <C> <C> <C>
Mortgage loans .............. $ 405,750 $ 729,688 $1,135,438
========== ========== ==========
</TABLE>
Commitments for unused lines and letters of credit total $4,868,841 at June 30,
1996.
<PAGE>
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONTINGENCIES
(Continued)
Fixed rate loan commitments and lines of credit at June 30, 1996 are at current
rates, ranging primarily from 8.125% to 9.25% for loans and 21.00% for lines of
credit, and are primarily for terms ranging from one to twenty years.
Variable rate loan commitments, lines of credit and letters of credit at June
30, 1996 are at current rates ranging from 7.75% to 9.25% for loans, 9.25% to
21.00% for lines of credit, and primarily at the national prime rate of interest
plus 100 to 200 basis points for letters of credit.
Since commitments to make loans and to fund lines of credit and loans in process
may expire without being used, the amount does 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 by 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 those loans.
Under an employment agreement with one of its officers, certain events leading
to separation from the Company could result in a cash payment of $312,000.
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 deposits of savings associations such as the Bank are insured by the Savings
Association Insurance Fund ("SAIF"). A recapitalization plan under consideration
by the Congress would provide a one-time assessment of .65% to .90% of all SAIF
deposits. It is unclear whether the recapitalization plan will be implemented.
Based on the Bank's deposits at June 30, 1996 a one-time assessment at 87.5
basis points would be approximately $809,000.
NOTE 14 - SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
Real estate and consumer loans, including automobile, home equity and
improvement, mobile home and other consumer loans are granted primarily in
Wabash and Kosciusko counties. Loans secured by one to four family residential
real estate mortgages are 60% of the loan portfolio. The Company is also
involved in selling loans and servicing these loans for secondary market
agencies.
The policy for collateral on mortgage loans allows borrowings up to 95% of the
appraised value of the property as established by appraisers approved by the
Company's Board of Directors, if private mortgage insurance is obtained to
reduce the Company's exposure to or below the 80% loan-to-value level.
Loan-to-value percentages and documentation guidelines are designed to protect
the Company's interest in the collateral as well as to comply with guidelines
for sale in the secondary market.
NOTE 15 - RELATED PARTY TRANSACTIONS
Certain directors, executive officers and principal shareholders of the Company,
including associates of such persons, are loan customers. A summary of the
related party loan activity, for loans aggregating $60,000 or more to any one
related party, is as follows:
<PAGE>
NOTE 15 - RELATED PARTY TRANSACTIONSF(Continued)
<TABLE>
<CAPTION>
<S> <C>
Balance-- June 30, 1995 ................................ $ 552,098
New loans ............................................ 8,000
Repayments ........................................... (67,625)
Other changes ........................................ 67,331
---------
Balance-- June 30, 1996 ................................ $ 559,804
=========
</TABLE>
Other changes include adjustments for loans applicable to one reporting period
that are excludable from the other reporting period.
NOTE 16 - PARENT COMPANY FINANCIAL STATEMENT
Presented below are condensed financial statements for the parent company, FFW
Corporation.
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
June 30, 1996 and 1995
1996 1995
<S> <C> <C>
ASSETS
Cash and cash equivalents ................................... $ 19,521 $ 68,017
Interest-bearing deposits in other financial institutions ... 173,664 --
Investment in Bank subsidiaries ............................. 11,606,817 10,104,334
Investment in non-bank subsidiary ........................... 135,630 125,898
Securities available for sale ............................... 3,137,101 2,262,380
Securities held to maturity ................................. -- 2,472,556
Loans receivable from ESOP .................................. 331,189 412,064
Other assets ................................................ 65,943 55,103
------------ ------------
Total assets ........................................... $ 15,469,865 $ 15,500,352
============ ============
LIABILITIES
Accrued expenses and other liabilities ...................... $ 11,722 $ 8,784
SHAREHOLDERS' EQUITY
Common stock ................................................ 8,536 8,484
Additional paid-in capital .................................. 8,132,484 8,007,476
Retained earnings - substantially restricted ................ 10,218,910 9,014,804
Net unrealized depreciation on securities available for sale,
net of tax benefit of $69,436 in 1996 and $-0- in 1995 ...... (203,283) (61,618)
Unearned Employees Stock Ownership Plan shares .............. (331,189) (412,064)
Unearned Management Retention Plan shares ................... (13,079) (56,678)
Treasury stock, at cost ..................................... (2,354,236) (1,008,836)
------------ ------------
Total shareholders' equity ............................. 15,458,143 15,491,568
------------ ------------
Total liabilities and shareholders' equity ............. $ 15,469,865 $ 15,500,352
============ ============
</TABLE>
<PAGE>
NOTE 16 - PARENT COMPANY FINANCIAL STATEMENT (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
For the years ended June 30, 1996, 1995 and 1994
1996 1995 1994
<S> <C> <C> <C>
Interest income ............................................ $ 223,511 $ 245,291 $ 215,496
Dividends from subsidiary banks ............................ -- -- 2,800,000
Net realized gains on sales of securities available for sale 59,279 -- --
Other income ............................................... 1,175 -- --
----------- ----------- -----------
283,965 245,291 3,015,496
Operating expense .......................................... 121,779 132,754 120,168
----------- ----------- -----------
Income before income taxes and equity in
undistributed income of subsidiaries ..................... 162,186 112,537 2,895,328
(Distributions in excess of) equity in undistributed
income of subsidiaries
Bank .................................................. 1,406,430 963,525 (1,572,844)
Non-bank .............................................. 9,732 8,507 26,916
----------- ----------- -----------
Income before income tax ................................... 1,578,348 1,084,569 1,349,400
Income tax expense (benefit) ............................... (7,833) (14,880) 1,651
----------- ----------- -----------
Net income ................................................. $ 1,586,181 $ 1,099,449 $ 1,347,749
=========== =========== ===========
</TABLE>
<PAGE>
NOTE 16 - PARENT COMPANY FINANCIAL STATEMENT (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended June 30, 1996, 1995 and 1994
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income ......................................... $ 1,586,181 $ 1,099,449 $ 1,347,749
Adjustments to reconcile net income to net
cash provided by operating activities
Distributions in excess of (equity in
undistributed) income of subsidiaries
Bank subsidiary ............................ (1,406,430) (963,525) 1,572,844
Non-bank subsidiary ........................ (9,732) (8,507) (26,916)
Other .............................................. (37,098) 113,948 (47,917)
----------- ----------- -----------
Net cash from operating activities ............. 132,921 241,365 2,845,760
Cash flows from investing activities
Net change in interest-bearing deposits
in other financial institutions .................. (173,664) -- --
Proceeds from sales of securities available for sale 1,595,398 80,000 --
Calls of investment securities ..................... -- -- 1,314,000
Maturities of securities held to maturity .......... 70,000 335,000 --
Purchase of securities available for sale .......... (78,511) (419,811) --
Investment securities .............................. -- -- (3,030,612)
Repayments on loan receivable from ESOP ............ 80,875 75,497 103,939
----------- ----------- -----------
Net cash from investing activities ............... 1,494,098 70,686 (1,612,673)
Cash flows from financing activities
Proceeds from exercise of stock options ............ 51,960 33,960 --
Purchase of treasury stock ......................... (1,345,400) -- (1,008,836)
Cash dividends paid ................................ (382,075) (348,249) (332,259)
----------- ----------- -----------
Net cash from financing activities ............... (1,675,515) (314,289) (1,341,095)
----------- ----------- -----------
Net change in cash and cash equivalents .............. (48,496) (2,238) (108,008)
Cash and cash equivalents at beginning of period ..... 68,017 70,255 178,263
----------- ----------- -----------
Cash and cash equivalents at end of period ........... $ 19,521 $ 68,017 $ 70,255
=========== =========== ===========
</TABLE>
<PAGE>
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 10).
NOTE 17 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table shows estimated fair values and related carrying amounts of
the Company's financial instruments at June 30, 1996. Items which are not
financial instruments are not included.
<TABLE>
<CAPTION>
1996
--------------------
Carrying Estimated
Amount Fair Value
-------- ----------
(In thousands)
<S> <C> <C>
Cash and cash equivalents ............................... 2,788 2,788
Interest-bearing deposits in other financial institutions 363 363
Securities available for sale ........................... 40,566 40,566
Loans held for sale ..................................... 423 423
Loans receivable, net ................................... 100,529 100,982
FHLB Stock .............................................. 2,398 2,398
Accrued interest receivable ............................. 1,103 1,103
Noninterest-bearing demand deposit ...................... (3,264) (3,264)
Savings, NOW and MMDA deposits .......................... (45,869) (45,869)
Other time deposits ..................................... (43,357) (43,826)
Federal Home Loan Bank advances ......................... (41,800) (41,625)
Accrued interest payable ................................ (150) (150)
</TABLE>
For purposes of the above disclosures of estimated fair value, the following
assumptions were used as of June 30, 1996. The estimated fair value for cash and
cash equivalents, interest-bearing deposits in other financial institutions,
FHLB stock, accrued interest receivable, noninterest-bearing demand deposits,
savings, NOW and MMDA deposits and accrued interest payable 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 held for sale is based on the
price offered in the secondary market on June 30, 1996 for loans having similar
rates and maturities. 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, 1996 applied for the time period until the loans are assumed to reprice or
be paid. The estimated fair value for other time deposits as well as Federal
Home Loan Bank advances is based on estimates of the rate the Bank would pay on
such liabilities at June 30, 1996, 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, 1996, 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, 1996
should not necessarily be considered to apply to subsequent dates.
<PAGE>
NOTE 17 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
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 earnings potential of loan servicing rights,
the trained work force, customer goodwill and similar items.
NOTE 18 - IMPACT OF NEW ACCOUNTING STANDARDS
Several new accounting standards have been issued by the FASB that will apply
for the year ending June 30, 1997. SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of, requires a
review of long-term assets for impairment of recorded value and resulting
write-downs if the value is impaired. SFAS No. 122, Accounting for Mortgage
Servicing Rights, requires recognition of an asset when servicing rights are
retained on in-house originated loans that are sold. SFAS No. 123, Accounting
for Stock-Based Compensation, encourages, but does not require, entities to use
a "fair value based method" to account for stock-based compensation plans and
requires disclosure of the pro forma effect on net income and on earnings per
share had the accounting been adopted. SFAS No. 125, Accounting for Transfer and
Servicing of Financial Assets and Extinguishment of Liabilities, provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities and requires a consistent application
of a financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred and
derecognizes liabilities when extinguished. SFAS No. 125 also supersedes SFAS
No. 122, and requires that servicing assets and liabilities be subsequently
measured by amortization in proportion to and over the period of estimated net
servicing income or loss and requires assessment for asset impairment or
increased obligation based on their fair values. SFAS No. 125 applies to
transfers and extinguishments occurring after December 31, 1996, and early or
retroactive application is not permitted. These statements are not expected to
have a material effect on the Company's consolidated financial position or
results of operations.
<PAGE>
Shareholder Information
===============================================================================
Stock Listing Information
First Federal Savings Bank of Wabash converted from a mutual to a stock savings
bank effective April 1, 1993, and formed FFW Corporation to act as its holding
company. FFW Corporation's common stock is traded on the National Association of
Securities Dealers Automated Quotation (NASDAQ) Small-Cap Market under the
symbol "FFWC".
Stock Price Information
As of September 7, 1996 there were approximately 416 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 of common stock over the last two year period. The stock price
information was provided by the NASD, Inc.
Quarter Dividend
Ended High Low Declared
----- ---- --- --------
September 30, 1994 $15.25 $13.75 $.11
December 31, 1994 15.25 13.25 .11
March 31, 1995 17.00 14.00 .11
June 30, 1995 18.50 16.50 .12
September 30, 1995 18.75 17.50 .12
December 31, 1995 19.75 17.25 .12
March 31, 1996 19.75 18.00 .12
June 30, 1996 20.25 16.50 .15
Dividends
FFW declared and paid dividends of $.51 per share for fiscal year 1996. The
Board of Directors intends to continue the payment of quarterly cash dividends,
dependent on the results of operations and financial condition of FFW, tax
considerations, industry standards, economic conditions, general business
practices and other factors. FFW's ability to pay dividends is dependent on the
dividend payments it receives from its subsidiary, First Federal Savings Bank of
Wabash (the "Bank"), which are subject to regulations and the Bank's continued
compliance with all regulatory capital requirements. See Note 10 of the Notes to
Consolidated Financial Statements for a discussion of regulations governing the
Bank's ability to pay dividends.
Annual Meeting of Shareholders
The Annual Meeting of Shareholders of FFW Corporation will be held at 2:30 P.M.,
October 22, 1996 at the executive office of FFW Corporation located at:
1205 N. Cass Street
Wabash, Indiana 46992
Shareholders are welcome to attend.
Annual Report on Form 10-K and
Investor Information
<PAGE>
A copy of FFW Corporation's annual report on Form 10-K, filed with the
Securities and Exchange Commission, is available without charge by writing:
Charles E. Redman, C.P.A.
Chief Financial and
Accounting Officer
FFW Corporation
1205 N. Cass Street
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 Charles E. Redman, C.P.A., Chief Financial and Accounting Officer, FFW
Corporation.
Corporate Office
FFW Corporation
1205 N. Cass Street
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
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
------------------------------
<PAGE>
Percent State of
of Incorporation
Parent Subsidiary Ownership or Organization
------ ---------- --------- ---------------
FFW Corporation First Federal Savings Bank of Wabash 100% Federal
FFW Corporation FirstFed Financial of Wabash, Inc. 100% Indiana
The financial statements of FFW Corporation are consolidated with those
of its subsidiaries.
Exhibit 23
CONSENTS OF EXPERTS AND COUNSEL
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference and use of our report, dated
July 25, 1996 on the consolidated financial statements of FFW Corporation which
appears in FFW Corporation's Annual Report to Shareholders and is incorporated
by reference in FFW Corporation's Form 10-KSB for the fiscal year ended June 30,
1996, in FFW Corporation's previously filed Registration Statements on Form S-8.
/s/Crowe, Chizek and Company LLP
--------------------------------
Crowe, Chizek and Company LLP
South Bend, Indiana
September 26, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED JUNE 30, 1996 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 862
<INT-BEARING-DEPOSITS> 2,289
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 40,566
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 101,507
<ALLOWANCE> 554
<TOTAL-ASSETS> 150,467
<DEPOSITS> 92,490
<SHORT-TERM> 0
<LIABILITIES-OTHER> 719
<LONG-TERM> 41,800
0
0
<COMMON> 9
<OTHER-SE> 15,449
<TOTAL-LIABILITIES-AND-EQUITY> 150,467
<INTEREST-LOAN> 8,287
<INTEREST-INVEST> 2,663
<INTEREST-OTHER> 214
<INTEREST-TOTAL> 11,164
<INTEREST-DEPOSIT> 4,372
<INTEREST-EXPENSE> 6,799
<INTEREST-INCOME-NET> 4,365
<LOAN-LOSSES> 95
<SECURITIES-GAINS> 145
<EXPENSE-OTHER> 2,586
<INCOME-PRETAX> 2,312
<INCOME-PRE-EXTRAORDINARY> 1,586
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,586
<EPS-PRIMARY> 2.13
<EPS-DILUTED> 2.13
<YIELD-ACTUAL> 2.67
<LOANS-NON> 65
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,364
<ALLOWANCE-OPEN> 484
<CHARGE-OFFS> 80
<RECOVERIES> 54
<ALLOWANCE-CLOSE> 553
<ALLOWANCE-DOMESTIC> 545
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 8
</TABLE>
