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
For the fiscal year ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-21170
FFW CORPORATION
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(Name of small business issuer in its charter)
Delaware 35-1875502
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1205 N. Cass Street, Wabash, Indiana 46992-1027
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (219) 563-3185
---------------------------
Securities Registered Pursuant to Section 12(b) of the Act:
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None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
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(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. [ ]
State the issuer's revenues for its most recent fiscal year: $15,853,377.
<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 17, 1998, was $22.4 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 17, 1998, there were issued and outstanding 1,458,032
shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Portions of the Annual Report to Stockholders
for the fiscal year ended June 30, 1998.
Part III of Form 10-KSB - Proxy Statement for 1998 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. The Company's business consists
primarily of the Business of First Federal. The Company also offers insurance
products through its wholly-owned subsidiary, FirstFed Financial of Wabash, Inc.
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.
At June 30, 1998, the Company had $203.3 million of assets and
shareholders' equity of $19.1 million (or 9.39% of total assets).
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. In June 1997 First Federal closed on the
acquisition of a NBD Bank branch in South Whitley, Indiana. First Federal's
primary market area covers Wabash, Kosciusko and Whitley Counties in northeast
and central Indiana, which are serviced through its four offices in Wabash,
North Manchester, Syracuse and South Whitley, 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 (primarily automobile) 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, 1998, 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 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 Federal
Home Loan Bank ("FHLB") advances and by entering into repurchase agreements. At
June 30, 1998, the Bank had FHLB advances totaling $51.5 million.
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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 $56,000 for the fiscal year ended June 30, 1998.
Impact of the Year 2000
The Company has conducted a comprehensive review of its computer
systems to identify applications that could be affected by the "Year 2000"
issue, and has developed an implementation plan to address the issue. Much of
the Company's data processing is accomplished with third party vendors,
consequently the Company is very dependent on those vendors to conduct its
business. The Company has already contacted each vendor to request time tables
for year 2000 compliance and expected costs, if any, to be passed along to the
Company. To date, the Company has been informed that its primary service
providers anticipate that all reprogramming efforts will be completed by
December 31, 1998, allowing the Company adequate time for testing. Certain other
vendors have not yet responded, however, the Company will pursue other options
if it appears that these vendors will be unable to comply. Management does not
expect these costs to have a significant impact on its financial position or
results of operations however, there can be no assurance that the vendors
systems will be Year 2000 compliant, consequently the Company could incur
incremental costs to convert to another vendor. The Company has identified
certain of its hardware and software equipment that will not be Year 2000
compliant and intends to purchase new equipment and software prior to March 31,
1999. These capital expenditures are expected to total approximately $100,000.
Forward-Looking Statements
When used in this Form 10-KSB 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
3
<PAGE>
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 three
branches: the first in North Manchester, the second in Syracuse, and the third
in South Whitley, Indiana. North Manchester is located in Wabash County,
Syracuse is located in adjacent Kosciusko County, and South Whitley is located
in adjacent Whitley County. The Bank considers Wabash, Kosciusko and Whitley
Counties as its primary market area. The Bank also serves Grant, Miami,
Huntington, 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: Jefferson
Smurfitt; Eaton Corporation; Ford Meter Box Company, Inc.; GenCorp Automotive;
Heckman Bindery; Hiz Inc.; Blue Sky, Inc.; United Technologies, Inc.; Wabash
Alloys;, Cast Molding Industries, Inc.; and Wabash Magnetics.
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.
Whitley County's economy includes a mix of agriculture and light
manufacturing related to electronics, musical instruments and printing. Major
private employers in Whitley County include: Fox Products; Stumps Printing Co.;
Wheatherhead; Magnavox; and Essex Corporation.
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.
The Bank 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, 1998, the Bank's net loan
portfolio totaled $139.4 million.
The Executive Committee of the Bank, comprised of any 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
4
<PAGE>
or full Board approval on mortgage, commercial and consumer loans over certain
dollar thresholds, loan extensions, special loan situations, assumptions and
loan participation. 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, 1998, the maximum amount which the Bank could have lent to any one borrower
and the borrower's related entities was approximately $2.2 million. At June 30,
1998, 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 $1.6 million at June 30, 1998. At
June 30, 1998, the Bank had only 11 other loans in excess of $500,000
outstanding to any one borrower, or group of related borrowers. All such loans
were performing in accordance with their repayment terms at June 30, 1998.
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.
5
<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, cost and
discounts and allowances for loan losses) as of the dates indicated.
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------------------
1998 1997 1996
------------------------ ---------------------- ----------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family.................. $ 70,243 49.64% $ 64,921 56.21% $60,732 59.32%
Commercial and multi-family.......... 7,272 5.14 6,426 5.56 7,218 7.05
Construction......................... 3,991 2.82 2,974 2.58 2,676 2.61
--------- ----- --------- ----- ------- -----
Total real estate loans........... 81,506 57.60 74,321 64.35 70,626 68.98
--------- ----- --------- ----- ------- -----
Other Loans:
Consumer Loans:
Deposit account..................... 475 .34 451 .39 226 .22
Automobile.......................... 33,814 23.90 22,625 19.59 18,464 18.03
Home equity and improvement......... 9,105 6.43 6,970 6.03 4,624 4.52
Manufactured home................... 301 .21 350 .30 481 .47
Other............................... 3,348 2.37 3,972 3.44 3,583 3.50
--------- ----- --------- ----- ------- -----
Total consumer loans.............. 47,043 33.25 34,368 29.75 27,378 26.74
--------- ----- --------- ----- ------- -----
Commercial business loans............ 12,945 9.15 6,813 5.90 4,378 4.28
--------- ----- --------- ----- ------- -----
Total other loans................... 59,988 42.40 41,181 35.65 31,756 31.02
--------- ----- --------- ----- ------- -----
Total loans....................... 141,494 100.00% 115,502 100.00% 102,382 100.00%
====== ====== ======
Less:
- ----
Loans in process..................... 1,716 1,134 1,548
Deferred fees, cost and discounts.... (599) (363) (248)
Allowance for loan losses............ 983 572 553
--------- --------- --------
Total loans, net.................. $139,394 $114,159 $100,529
======== ======== ========
</TABLE>
6
<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,
------------------------------------------------------------------------------------
1998 1997 1996
------------------------ ---------------------- ----------------------
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.................. $ 17,492 12.36% $ 8,588 7.43% $ 8,302 8.11%
Commercial and multi-family.......... 2,307 1.63 1,676 1.45 2,248 2.19
Construction......................... 2,110 1.49 1,222 1.06 1,094 1.07
-------- ----- --------- ---- --------- ----
Total real estate loans.......... 21,909 15.48 11,486 9.94 11,644 11.37
-------- ----- --------- ---- --------- ----
Consumer.............................. 42,370 29.94 31,222 27.03 26,839 26.21
Commercial business................... 5,540 3.92 2,921 2.53 1,430 1.40
-------- ----- --------- ---- --------- ----
Total fixed-rate loans........... 69,819 49.34 45,629 39.50 39,913 38.98
-------- ----- --------- ---- --------- ----
Adjustable-Rate Loans:
Real estate:
One- to four-family................. 52,751 37.28 56,333 48.77 52,430 51.21
Commercial and multi-family......... 4,965 3.51 4,750 4.11 4,970 4.85
Construction........................ 1,881 1.33 1,752 1.52 1,582 1.55
-------- ----- --------- ---- --------- ----
Total real estate loans.......... 59,597 42.12 62,835 54.40 58,982 57.61
-------- ----- --------- ---- --------- ----
Consumer............................. 4,673 3.30 3,146 2.73 539 .53
Commercial business.................. 7,405 5.24 3,892 3.37 2,948 2.88
-------- ----- --------- ---- --------- ----
Total adjustable-rate loans...... 71,675 50.66 69,873 60.50 62,469 61.02
-------- ------ --------- ------ ------- -----
Total loans...................... 141,494 100.00% 115,502 100.00% 102,382 100.00%
====== ====== ======
Less:
Loans in process..................... 1,716 1,134 1,548
Deferred fees, cost and discounts.... (599) (363) (248)
Allowance for loan losses............ 983 572 553
-------- -------- --------
Total loans, net................. $139,394 $114,159 $100,529
======== ======== ========
</TABLE>
7
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Bank's loan portfolio (including non-accruing loans) at June 30, 1998. 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)
Due During
Years Ending
June 30,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999.......................... $ 116 8.51% $ 163 8.75% $2,323 8.49% $ 2,386 9.41%
2000 - 2003................... 1,492 8.50 186 9.84 774 8.20 36,931 9.35
2004 and following............ 68,635 8.10 6,923 9.13 894 8.75 7,726 9.90
-------- ------- ------ --------
$ 70,243 8.11% $ 7,272 9.14% $3,991 8.21% $ 47,043 9.44%
======== ======= ====== ========
<CAPTION>
Commercial
Business Total
-------------------- ------------------------
Weighted
Average
Amount Rate Amount Percent
------ ---- ------ -------
Due During
Years Ending
June 30,
<S> <C> <C> <C> <C>
1999.......................... $ 5,443 8.71% $ 10,431 7.37%
2000 - 2003................... 3,384 8.36 42,767 30.23
2004 and following............ 4,118 9.03 88,296 62.40
--------- --------- -------
$ 12,945 8.72% $ 141,494 100.00%
========= ========= ======
</TABLE>
The total amount of loans due after June 30, 1999 which have fixed
interest rates is $61.9 million, while the total amount of loans due after such
dates which have floating or adjustable interest rates is $69.2 million.
8
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One- to Four-Family Residential Mortgage Lending. Residential loan
originations of this type are generated by the Bank's marketing efforts, its
present and 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, 1998, the Bank's one- to four-family residential
mortgage loans totaled $70.2 million, or approximately 49.6% of the Bank's total
gross loan portfolio.
The Bank currently offers fixed-rate, ARM and balloon loans. During the
year ended June 30, 1998, the Bank originated $18.0 million of ARM loans and
$28.5 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 275 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 150
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 ARM loans 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 15 years or less 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.
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. 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.
9
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Consumer Lending. First Federal offers a variety of secured consumer
loans, including automobile, home equity, home improvement 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, 1998, the Bank's
consumer loan portfolio totaled $47.0 million, or 33.3% 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, 1998, $193,000 or approximately 0.4% 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, 1998, automobile loans totaled $33.8
million, or approximately 23.9% 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. Generally, such loans have a maximum term of up to
20 years. As of June 30, 1998, home equity and home improvement loans, most of
which are secured by second mortgages, amounted to $9.1 million, or 6.4% of the
Bank's gross loan portfolio.
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.
10
<PAGE>
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, 1998, the Bank had $4.0
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.
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, 1998, the Bank had $1.1
million 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
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, 1998, 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, 1998, the Bank had $7.3 million of commercial and
multi-family real estate loans, which represented 5.1% of the Bank's total gross
loan portfolio. The largest commercial or multi-family real estate loan
outstanding at June 30, 1998 was $1.6 million, which was performing in
accordance with its repayment terms. At June 30, 1998, 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.
11
<PAGE>
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 20 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 began increasing its commercial
loan portfolio last year due to the addition of a commercial loan officer. At
June 30 1998, approximately $12.9 million, or 9.2% of the Bank's total gross
loan portfolio was comprised of commercial 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
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, 1998, 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 and a commissioned loan originator. 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 15 years or less it
originated. Fixed
12
<PAGE>
rate loans originated in excess of 15 years are generally sold to the FHLMC. In
selling these fixed-rate mortgage loans, the Bank retains the servicing rights.
In fiscal 1998, the Bank originated $108 million of loans, compared to
$70.6 million and $48.6 million in fiscal 1997 and 1996, respectively. The
increase from fiscal 1997 to 1998 was due to favorable rates and expanding the
market with a commercial loan originator. The increase from fiscal 1996 to 1997
was due to favorable rates and expanding the Bank's markets with a loan
originator. Lower originations of loans in fiscal 1996 were somewhat offset by a
lower level of repayments during the same period. In fiscal 1998, $72.4 million
of loans were repaid, compared to $52.9 million and $33.8 million in fiscal 1997
and 1996, respectively.
No mortgage-backed securities were purchased in fiscal years 1998, 1997
or 1996. Sales of real estate loans totaled $9.0 million in fiscal 1998,
compared to $3.6 million and $6.7 million in fiscal 1997 and 1996, respectively.
In summary, net loans and mortgage-backed securities increased by $25.4 million
in fiscal 1998, compared to a $13.5 million and $7.3 million increase in fiscal
1997 and 1996, respectively. The increases in fiscal 1998, 1997 and 1996 were
attributable to the increased loan originations.
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 1998,
the Bank sold $9.0 million of loans.
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, 1998, the Bank serviced for
others approximately $25.9 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.
13
<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
----------------------------------
1998 1997 1996
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Originations by type:
Adjustable-rate:
Real estate - one- to four-family ..... $ 17,562 $ 25,456 $ 11,143
- commercial and multi-family .. 418 449 442
Non-real estate - consumer ............ 4,874 125 37
- commercial business .......... 11,634 5,681 2,745
-------- -------- --------
Total adjustable-rate .......... 34,488 31,711 14,367
-------- -------- --------
Fixed-rate:
Real estate - one- to four-family ..... 28,059 7,740 9,356
- commercial and multi-family .. 405 147 1,372
Non-real estate - consumer ............ 41,909 28,374 22,531
- commercial business .......... 3,044 2,676 986
-------- -------- --------
Total fixed-rate ............... 73,417 38,937 34,245
-------- -------- --------
Total loans originated ......... 107,905 70,648 48,612
-------- -------- --------
Purchases:
Mortgage-backed securities ............ -- -- --
Sales:
Real estate loans ..................... 9,045 3,607 6,693
Mortgage-backed securities ............ 355 -- --
Principal Repayments:
Loans ................................. 72,403 52,918 33,834
Mortgage-backed securities ............. 692 595 770
-------- -------- --------
Total repayments ............... 73,095 53,513 34,604
-------- -------- --------
Net increase ................... $ 25,410 $ 13,528 $ 7,315
======== ======== ========
</TABLE>
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.
<PAGE>
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.
14
<PAGE>
The following table sets forth information concerning delinquent
mortgage and other loans at June 30, 1998. The amounts presented represent the
total remaining principal balances of the related loans, rather than the actual
payment amounts which are overdue.
<TABLE>
<CAPTION>
Loans Delinquent For:
-----------------------------------------------------------------------------------------
30-59 Days 60-89 Days 90 Days and Over
------------------------------ --------------------------- --------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
Real Estate:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family ..... 6 $253 .36% 2 $ 83 .12% 5 $521 .74%
Commercial and
Multi-Family ........... 1 20 .28 -- -- -- -- -- --
Construction ............ -- -- -- -- -- -- -- -- --
Consumer .................. 64 522 1.11 28 211 .45 21 193 .41
Commercial business ....... 4 75 .58 2 139 1.07 -- -- --
--- ---- ---- ---- ---- ----- ---- ---- ---
Total delinquent loans 75 $870 .61% 32 $433 .31% 26 $714 .50%
==== ==== ==== ==== ==== ==== ==== ==== ===
<CAPTION>
Loans Delinquent For:
---------------------------------
Total Delinquent Loans
---------------------------------
Percent
of Loan
Number Amount Category
------ ------ --------
<S> <C> <C> <C>
Real Estate:
One- to four-family...... 13 $ 857 1.22%
Commercial and
Multi-Family............ 1 20 .28
Construction............. --- --- ----
Consumer................... 113 926 1.97
Commercial business........ 6 214 1.65
--- ---- ----
Total delinquent loans 133 $2,017 1.43%
=== ====== ====
</TABLE>
The ratio of delinquent loans to total loans (net), was 1.45% at June
30, 1998.
<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 4 to Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
June 30
----------------------------
1998 1997 1996
----- ---- -----
(Dollars in Thousands)
<S> <C> <C>
Non-accruing loans:
One- to four-family ......................... $521 $-- --
Commercial and multi-family real estate ..... -- -- --
Consumer .................................... 193 248 65
---- ---- ----
Total non-accruing loans ............. 714 248 65
---- ---- ----
Foreclosed and repossessed assets:
One- to four-family ......................... -- -- --
Commercial and multi-family real estate ..... 101 -- --
Consumer .................................... 58 33 27
---- ---- ----
Total foreclosed assets .............. 159 33 27
---- ---- ----
Troubled debt restructurings .................. -- -- --
Total non-performing assets ................... $873 $281 $ 92
==== ==== ====
Total as a percentage of total assets ......... .43% .16% .06%
==== ==== ====
</TABLE>
15
<PAGE>
For the fiscal year ended June 30, 1998, gross interest income which
would have been recorded had the non-accruing loans been current amounted to
$24,000. The amount that was included in interest income on such loans was
$31,000 for the fiscal year ended June 30, 1998.
Non-Performing Assets. Included in non-accruing loans at June 30, 1998
were 21 consumer loans totaling $193,000 secured by property including
automobiles, manufactured homes and other collateral. Foreclosed and repossessed
assets included automobiles and commercial property totaling $159,000 at June
30, 1998.
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, 1998 there was also an aggregate of $1.7 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 fifty-seven
consumer loans aggregating $491,000, seventeen one- to four-family loans
aggregating $981,000 and three commercial loans aggregating $187,000 at June 30,
1998.
As of June 30, 1998, 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.
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.
16
<PAGE>
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, 1998, the Bank had classified a total of approximately $1.6 million of
its assets as substandard, $30,000 as doubtful, $25,000 as loss, and $802,000 as
special mention. At June 30, 1998, total classified assets comprised $2.4
million, or 1.5% of the Bank's capital, or 1.2% 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 loss allowance.
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, 1998, the Bank had a total allowance for loan losses of
$983,000 or .7% of total loans, net. See Note 4 of the Notes to Consolidated
Financial Statements in the Annual Report to Stockholders (the "Annual Report"),
attached hereto as Exhibit 13.
17
<PAGE>
The following table sets forth an analysis of the Bank's allowance for
loan losses.
<TABLE>
<CAPTION>
Year Ended June 30
------------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period .................... $572 $553 $484
Charge-offs:
One- to four-family .............................. -- 3 16
Consumer ......................................... 285 181 64
Commercial Business .............................. 47 -- --
---- ---- ----
332 184 80
Recoveries:
Consumer ......................................... 38 83 10
Commercial and multi-family real estate .......... -- -- 44
---- ---- ----
38 83 54
Net charge-offs ................................... 294 101 26
Additions charged to operations ................... 705 120 95
==== ---- ----
Balance at end of period .......................... $983 $572 $553
==== ==== ====
Ratio of net charge-offs during the period to
average loans outstanding during the period ..... .23% .09 % .03%
==== ==== ====
</TABLE>
<PAGE>
The distribution of the Bank's allowance for loan losses at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- -----------------------
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 Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family ....... $105 49.64% $ 95 56.21% $100 59.32%
Commercial and multi-family
real estate ............ 230 5.14 70 5.56 75 7.05
Construction .............. 28 2.82 25 2.58 20 2.61
Consumer .................. 445 33.25 325 29.75 315 26.74
Commercial business ....... 165 9.15 50 5.90 35 4.28
Unallocated ............... 10 -- 7 -- 8
----- ---- ----- ---- ------
Total ................ $983 100.00% $572 100.00% $553 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
18
<PAGE>
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
regula tions 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, 1998, the Bank's liquidity ratio (liquid assets as a percentage of
net withdrawable savings deposits and current borrowings) was 12.1%. 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.
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.
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 leading 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, 1998, the Company had no securities classified as held to
maturity and $50.3 million classified as available for sale including
mortgage-backed securities. No securities were held for trading purposes on such
date.
19
<PAGE>
Securities. 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, 1998, 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 6.8
years.
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 $16.0 million as of June 30, 1998, 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,
--------------------------------------------------------------------
1998 1997 1996
-------------------- ------------------- -------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
------- ------ ------- ------ ------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
Federal agency obligations..................... 13,186 37.94 5,980 24.93 5,913 24.21
Commercial notes and commercial paper.......... 242 .70 246 1.02 565 2.32
State and local government obligations......... 9,102 26.19 7,413 30.91 8,332 34.11
Other equity securities........................ 9,468 27.24 7,948 33.14 7,216 29.54
------- ------ ------- ------ ------- ------
Total securities available for sale.......... 31,998 92.07 21,587 90.00 22,026 90.18
------- ------ ------- ------ ------- ------
FHLB stock..................................... 2,757 7.93 2,398 10.00 2,398 9.82
------- ------ ------- ------ ------- ------
Total securities............................. $34,755 100.00% $23,985 100.00% $24,424 100.00%
======= ====== ======= ====== ======= ======
Weighted average remaining life or term to
repricing, excluding FHLB stock and other
equity securities available for sale......... 6.8 yrs. 3.9 yrs. 4.3 yrs.
Other Interest-Earning Assets:
Interest-earning deposits with banks........... $ 386 $15,500 $ 2,289
======== ======= ========
</TABLE>
20
<PAGE>
The composition and maturities of the securities portfolio, excluding
mortgage-backed securities, FHLB of Indianapolis stock and other equity
securities, are indicated in the following table.
<TABLE>
<CAPTION>
June 30, 1998
---------------------------------------------------------------------------------
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................. $7,000 $2,166 $4,000 $--- $13,166 $13,186
Commercial notes and
commercial paper........... --- 238 --- --- 238 242
State and local
government obligations...... 1,071 3,852 3,862 120 8,905 9,102
----- ----- ----- ----- --------- ---------
Total debt securities........ $8,071 $6,256 $7,862 $120 $22,309 $22,530
====== ====== ====== ==== ======= =======
Weighted average yield(1).... 5.71% 6.62% 6.06% 6.00% 6.09%
</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, 1998 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 from time to time has 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 3 of the Notes to Consolidated
Financial Statements in the Annual Report attached hereto as Exhibit 13.
<PAGE>
The following table sets forth the amortized cost of the Company's
mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
June 30,
-------------------------------
1998 1997 1996
-------------------------------
(In thousands)
<S> <C> <C> <C>
Federal National Mortgage Association ...... $ 454 $ 546 $ 580
Government National Mortgage Association ... 16,490 16,737 16,988
Federal Home Loan Mortgage Corporation ..... 137 177 226
Other Mortgage-backed Securities(1) ........ 471 758 938
------- ------- -------
Total .................................. $17,552 $18,218 $18,732
======= ======= =======
</TABLE>
- --------------------
(1) The June 30, 1997 and 1996 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 of a security collateralized
by multi-family mortgage obligations with underlying collateral primarily
located in Southern California. During 1998 this security was sold and a
gain on sale of $264,028 was recognized. 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.
21
<PAGE>
The following table sets forth the contractual maturities of the
Company's mortgage-backed securities based on amortized cost at June 30, 1998.
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>
Due in
---------------------------------------------- June 30,
1998
5 Years 5 to 10 10 to 20 Over 20 Balance
or Less Years Years Years Outstanding
------- ----- ----- ----- -----------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Federal National Mortgage Association .. $ --- $ -- $ 168 $ 286 $ 454
Government National Mortgage Association 1 16,027 37 425 16,490
Federal Home Loan Mortgage Corporation . -- 72 -- 65 137
Other Mortgage-Backed Securities ....... -- -- -- 471 471
------- ------- ------- ------- -------
Total ............................. $ 1 $16,099 $ 205 $ 1,247 $17,552
======= ======= ======= ======= =======
Weighted average yield ................. 8.00% 7.90% 6.98% 7.10% 7.84%
</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.
22
<PAGE>
On June 13, 1997 deposits increased by $17.1 million with the purchase
of the NBD Bank N.A. branch in South Whitley, Indiana. This purchase opened up a
new market in a contiguous county to our existing operations.
The following table sets forth the savings flows at the Bank during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------
1998 1997 1996
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance ............. $116,118 $ 92,490 $ 85,930
Purchased deposits .......... -- 17,133 --
Net deposits ................ 4,535 2,470 3,191
Interest credited ........... 4,603 4,025 3,369
-------- -------- --------
Ending balance .............. $125,256 $116,118 $ 92,490
======== ======== ========
Net increase ................ $ 9,138 $ 23,628 $ 6,560
======== ======== ========
Percent increase ............ 7.87% 25.55% 7.63%
======== ======== ========
</TABLE>
The following table sets forth the dollar amount of deposits in the
various types of deposit programs offered by the Bank at the dates indicated.
<PAGE>
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------------------------------
1998 1997 1996
----------------------- -------------------------- -----------------------
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.................... $ 44,249 35.32% $ 42,063 36.22% $41,689 45.07%
Demand accounts(1)................... 6,935 5.54 5,751 4.95 3,264 3.53
Money Market Accounts................ 1,217 .97 2,182 1.88 258 .28
NOW Accounts......................... 6,020 4.81 6,285 5.41 3,922 4.24
--------- ------ ---------
Total Non-Certificates............... 58,421 46.64 56,281 48.46 49,133 53.12
--------- ------ ----------
Certificates:
0.00 - 3.99%....................... --- --- 1 .01 --- ---
4.00 - 5.99%....................... 37,894 30.25 34,029 29.31 26,624 28.79
6.00 - 7.99%....................... 28,722 22.94 25,589 22.03 16,506 17.85
8.00 - 9.99%....................... 219 .17 218 .19 227 .24
--------- ----- ---------
Total Certificates................... 66,835 53.36 59,837 51.54 43,357 46.88
--------- ------ ---------
Total Deposits....................... $ 125,256 100.00% $ 116,118 100.00% $92,490 100.00%
========= ====== =========
</TABLE>
(1) Non-interest-bearing accounts.
23
<PAGE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of June 30, 1998.
<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, 1998......................... $ --- $12,748 $ 2,821 $ --- $15,569 23.29%
December 31, 1998.......................... --- 3,899 4,483 --- 8,382 12.54
March 31, 1999............................. --- 9,856 2,468 219 12,543 18.77
June 30, 1999.............................. --- 3,744 3,162 --- 6,906 10.33
September 30, 1999......................... --- 1,496 4,441 --- 5,937 8.88
December 31, 1999.......................... --- 1,048 2,680 --- 3,728 5.58
March 31, 2000............................. --- 620 2,805 --- 3,425 5.12
June 30, 2000.............................. --- 420 1,983 --- 2,403 3.59
September 30, 2000......................... --- 573 401 --- 974 1.46
December 31, 2000.......................... --- 598 403 --- 1,001 1.50
March 31, 2001............................. --- 798 81 --- 879 1.32
June 30, 2001.............................. --- 466 635 --- 1,101 1.65
Thereafter................................. --- 1,628 2,359 --- 3,987 5.97
------- --------- --------- ------- ----- ----
Total................................. $ --- $37,894 $28,722 $219 $66,835 100.00%
====== ======= ======= ==== ======= ======
Percent of total........................... ---% 56.70% 42.97% .33% 100.00%
======= ====== ===== === ======
</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, 1998.
<TABLE>
<CAPTION>
Maturity
--------------------------------------------------
3 Months Over Over
or Less 3 to 6 6 to 12 Over
Months Months Months 12 months Total
------ ------ ------ --------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less
than $100,000................................ $ 9,480 $6,811 $14,454 $20,855 $51,600
Certificates of deposit of
$100,000 or more............................. 2,889 1,570 4,643 2,580 11,682
Public funds(1)............................... 3,200 --- 353 --- 3,553
------- ------ ------- ------- -------
Total certificates of
deposit...................................... $15,569 $8,381 $19,450 $23,435 $66,835
======= ====== ======= ======= =======
</TABLE>
- --------------------
(1)Deposits from governmental and other public entities.
<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.
24
<PAGE>
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, 1998, the Bank had $51.5 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,
1998, 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,
------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances and line of credit.................. $51,500 $44,800 $45,800
Securities sold under agreements to repurchase.... --- --- ---
Average Balance:
FHLB advances and line of credit.................. 49,543 41,470 39,296
Securities sold under agreements to repurchase.... --- --- ---
Average Rate Paid On:
FHLB advances and line of credit.................. 5.98% 5.95% 6.18%
Securities sold under agreements to repurchase.... --- --- ---
</TABLE>
<PAGE>
The following table sets forth the Bank's borrowings at the dates
indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------
1998 1997 1996
-------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances and line of credit...... $51,500 $44,800 $41,800
Due to brokers........................ 5,000 --- ---
-------- ----------- -----------
Total borrowings.................. $56,500 $44,800 $41,800
======= ======= =======
</TABLE>
25
<PAGE>
Subsidiary Activities
As a federally chartered savings association, First Federal is
permitted by OTS regulations to invest up to 2% of its assets, or $4.1 million
at June 30, 1998, 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, 1998.
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. The last
regular OTS examination of the Bank was as of July 1997. The last FDIC
examination was as of May 1990.
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, 1998 was approximately
$50,000.
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.
26
<PAGE>
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, 1998, 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, 1998,
the Bank's lending limit under this restriction was approximately $2.2 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.
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 or 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.
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. As
of June 30, 1998, 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
27
<PAGE>
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.
Effective January 1, 1997, the premium schedule for BIF and SAIF
insured institutions ranged from 0 to 27 basis points. However, SAIF-insured
institutions are required to pay a Financing Corporation (FICO) assessment, in
order to fund the interest on bonds issued to resolve thrift failures in the
1980s, equal to approximately 6.48 basis points for each $100 in domestic
deposits, while BIF-insured institutions pay an assessment equal to
approximately 1.52 basis points for each $100 in domestic deposits. The
assessment is expected to be reduced to 2.43 basis points no later than January
1, 2000, when BIF insured institutions fully participate in the assessment.
These assessments, which may be revised based upon the level of BIF and SAIF
deposits will continue until the bonds mature in the year 2017.
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, 1998, First Federal did not have any unamortized
purchased mortgage servicing rights, but did have certain intangible assets
related to the purchase of the branch in South Whitley, Indiana.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. As of June 30, 1998, the Bank had no
subsidiaries.
At June 30, 1998, the Bank had tangible capital of $13.8 million, or
6.9% of adjusted total assets, which is approximately $10.8 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, 1998 the Bank
had certain intangible assets related to the branch purchase which were subject
to these tests.
At June 30, 1998, the Bank had core capital equal to $13.8 million, or
6.9% of adjusted total assets, which is $7.8 million above the minimum leverage
ratio requirement of 3% as in effect on that date.
28
<PAGE>
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, 1998, First Federal had
no capital instruments that qualify as supplementary capital and $983,000 of
general loss reserves, which was less than 1.25% of risk-weighted assets.
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, 1998.
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.
OTS regulations also require that 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 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, 1998, the Bank anticipates that it will be exempt from this rule.
On June 30, 1998, the Bank had total risk-based capital of $14.7
million (including $13.8 million in core capital and $983,000 in qualifying
supplementary capital) and risk-weighted assets of $122.0 million (including,
converted off-balance sheet assets); or total capital of 12.1% of risk-weighted
assets. This amount was $4.9 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"
29
<PAGE>
(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.
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 is also generally authorized 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.
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 a
savings 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
30
<PAGE>
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 notice period based on safety and soundness
concerns.
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 average daily balance of its liquidity base during the
preceding calendar quarter or a percentage of the amount of its liquidity base
at the end of the preceding quarter. 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 4%.
Penalties may be imposed upon associations for violations of the liquid
asset ratio requirement. At June 30, 1998, the Bank was in compliance with the
requirement with an overall liquid asset ratio of 12.1%.
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, 1998, the Bank met the
test and has always met the test since its effectiveness.
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. As an
alternative, the savings association may maintain 60% of its assets in those
assets specified in Section 7701(a)(19) of the Internal Revenue Code. Under
either test, such assets primarily consist of residential housing, related loans
and investments.
31
<PAGE>
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 trans actions 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.
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, 1998, the Bank was in compliance with the
above restrictions.
32
<PAGE>
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.
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, 1998, 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."
33
<PAGE>
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, 1998, First Federal had $2.8 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 7.9% and were 8.1% for the fiscal year
ended June 30, 1998.
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, 1998, dividends paid by the FHLB of
Indianapolis to First Federal totaled $209,000 and was approximately $188,000 in
fiscal year 1997. The $209,000 dividend received for the fiscal year ended June
30, 1998 reflects an annualized rate of 8.1%.
Federal Taxation. Savings associations such as the Bank that meet
certain conditions prescribed by the Internal Revenue Code of 1986, as amended
(the "Code"), are permitted to establish reserves for bad debts and to make
annual additions thereto which may, within specified formula limits, be taken as
a deduction in computing taxable income for federal income tax purposes. 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 is
computed under the experience method. Under the experience method, the bad debt
reserve deduction is an amount determined under a formula based generally upon
the bad debts actually sustained by the savings association over a period of
years.
In August 1996, legislation was enacted that repealed 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 experience method for tax years
34
<PAGE>
beginning after December 31, 1987. 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.
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.
A portion of the Bank's reserves for losses on loans 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, 1998, the Bank's Excess for tax purposes totaled
approximately $1.2 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 (as defined) for 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.
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
35
<PAGE>
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, as well as mutual funds. 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 market area, however, is the
Counties of Wabash, Kosciukso and Whitley, 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. In Whitley County, there are
five commercial banks, one credit union and one savings bank competing for
market share.
Employees
At June 30, 1998, the Company and its affiliates had a total of 61
employees, including 12 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 Company's or 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 55, is Senior Vice President of Lending 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 30 years. Ms. Sanders joined First Federal in
1967 and has held a variety of positions including Secretary from 1978 to 1987.
Item 2. Description of Property
The Bank conducts its business at its main office and three 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, 1998 was $2.2
million. See Note 6 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, 1998.
36
<PAGE>
<TABLE>
<CAPTION>
Date Total Approximate Net Book Value
Location Acquired Square Footage at June 30, 1998
-------- -------- -------------- ----------------
<S> <C> <C> <C>
Main Office: 1982 10,185(1) $1,006
1205 N. Cass Street
Wabash, Indiana
500 S. Huntington 1977 2,400(2) 448
Syracuse, Indiana(2)
1306 Street Road 114 West N. 1968 1,325 61
Manchester, Indiana
105 E. Columbia Street 1997 5,300(4) 163
South Whitley, Indiana(3)
</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.
(3) NBD Bank Branch acquired on June 13, 1997.
(4) Includes basement.
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, 1998 was $192,000.
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 other 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, 1998.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Page 39 of the attached 1998 Annual Report to Stockholders is herein
incorporated by reference.
37
<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operation
Pages 6 through 14 of the attached 1998 Annual Report to Stockholders
are 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, 1998, is incorporated by reference in
this Annual Report on Form 10-KSB as Exhibit 13.
Pages in
Annual
Annual Report Section Report
- --------------------- ------
Report of Independent Auditors..................................... 15
Consolidated Balance Sheets as of June 30, 1998 and 1997........... 16
Consolidated Statements of Income
Years Ended June 30, 1998, 1997 and 1996........................... 17
Consolidated Statement of Changes in Shareholders' Equity
Years Ended June 30, 1998, 1997 and 1996........................... 18
Consolidated Statements of Cash Flows
Years Ended June 30, 1998, 1997 and 1996........................... 19 to 20
Notes to Consolidated Financial Statements......................... 21 to 37
With the exception of the aforementioned information, the Company's
Annual Report to Stockholders for the year ended June 30, 1998, is not deemed
filed as part of this Annual Report on Form 10-KSB.
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure
There has been no Current Report on Form 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.
38
<PAGE>
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 1998, 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.
Compliance with Section 16(a)
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10% of
a registered class of the Company's equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Officers, directors and greater than
10% stockholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file.
To the Company's knowledge based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, all Section 16(a) filing requirements applicable to its
officers, directors and greater than 10 percent beneficial owners were complied
with except for the following:
1. Mr. George who inadvertently failed to file one required Form
4 to report one transaction. Mr. George reported the
transaction on a Form 5.
2. Mr. Frank who inadvertently failed to timely file two required
Form 4s to report one transaction each. Mr. Frank filed a Form
4 to report one transaction and a Form 5 to report the other.
3. Mr. Rees who inadvertently failed to timely file one required
Form 4 to report one transaction. Mr. Rees filed a Form 4 to
report the transaction.
4. Mr. Reynolds who inadvertently failed to timely file one
required Form 4 to report one transaction. Mr. Reynolds filed
a Form 4 to report the transaction; and
5. Ms. Sanders who inadvertently failed to timely file two
required Form4s to report one transaction each. Ms. Sanders
filed Form 4s to report the transactions.
39
<PAGE>
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 1998, 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 1998, 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 1998, a copy of which will
be filed not later than 120 days after the close of the fiscal year.
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
See Index to Exhibits.
(b) Reports on Form 8-K
The Registrant filed four current reports on form 8-K during the
three-month period ended June 30, 1998. Three reports were filed on May 4, 1998,
to report: (i) operating results for the quarter ended December 31, 1997; (ii)
dividends for the quarter ended March 31, 1998; and (iii) operating results for
the quarter ended March 31, 1998. The fourth report was filed on June 4, 1998 to
report an increase in dividends.
40
<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: October 8, 1998 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, Chairman of the NICHOLAS M. GEORGE, President,
Board and Secretary Chief Executive Officer, Chief Financial
Officer and Director (Principal
Executive, Operating, Financial and
Accounting Officer)
Date: October 8, 1998 Date: October 8, 1998
--------------- ---------------
/s/ Joseph W. McSpadden /s/ Stanley Myers
- ----------------------- -----------------
JOSEPH W. MCSPADDEN, Director STANLEY MYERS, Director
Date: October 8, 1998 Date: October 8, 1998
--------------- ---------------
/s/ Ronald D. Reynolds /s/ Thomas L. Frank
- ---------------------- -------------------
RONALD D. REYNOLDS, Director THOMAS L. FRANK, Director
Date: October 8, 1998 Date: October 8, 1998
--------------- ---------------
41
<PAGE>
Index to Exhibits
Reference to
Prior Filing
Regulation SB or Exhibit
Exhibit Number
Number Document Attached Hereto
------ -------- ---------------
3(i) Articles of Incorporation, including amendments *
thereto
3(ii) By-Laws *
4 Instruments defining the rights of security *
holders, including debentures
10 Executive Compensation Plans and Arrangements *
(a) Employment Contract between Nicholas *
George and the Bank
(b) 1992 Stock Option and Incentive Plan *
(c) Management Recognition and Retention Plan **
11 Statement re: computation of per share earnings ***
13 Annual Report to Security Holders 13
21 Subsidiaries of Registrant 21
23 Consents of Experts and Counsel 23
27 Financial Data Schedule 27
- -----------------------
* Filed as an Exhibit 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.
42
Exhibit 13
Annual Report to Security Holders
<PAGE>
FFW Corporation
Wabash, Indiana
Table of Contents
PRESIDENT'S MESSAGE 3
SELECTED CONSOLIDATED FINANCIAL INFORMATION 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 6
REPORT OF INDEPENDENT AUDITORS 15
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and 1997 16
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 1998, 1997 and 1996 17
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended June 30, 1998, 1997 and 1996 18
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1998, 1997 and 1996 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21
DIRECTORS AND EXECUTIVE OFFICERS 38
SHAREHOLDER INFORMATION 39
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
President's Message
Dear Shareholder:
It is a pleasure to report to you that FFW Corporation and its subsidiary, First
Federal Savings Bank, have completed another successful year. We have now
completed five years as a public company. This year was a record year in two
ways. First, the earnings for fiscal year 1998 set a new record of $1.9 million
or $1.36 per share. This represents an increase of 41.4% and 36.0% respectively
over fiscal 1997. Second, the assets of the corporation at June 30, 1998
exceeded $203.0 million. This increase in assets represents $23.3 million or
12.9%.
During fiscal 1998, the company continued to grow aggressively aided by a strong
loan demand and a stable economy. Because of the increased loan demand, the Loan
Department at the Wabash office required additional staff and office space on
the main floor. As a result, the second floor of the Wabash facility was
expanded and remodeled to accommodate the back office departments. Additionally,
First Federal installed Access Plus, a bank-by-phone system that offers the
convenience of 24-hour banking from your car, your home, or anywhere a
touch-tone phone is available. This new service provides increased access to our
entire hometown banking services.
Your Board of Directors and Officers understand the importance of enhancing
shareholder value and providing an acceptable return on your investment. To that
end, the Board authorized the payment of a two-for-one stock split on December
31, 1997, and have consistently increased the dividends you earn on your FFW
stock.
In conclusion, I would like to thank and recognize our dedicated employees for
their service and dedication to First Federal and the communities they serve. I
want to pay a special tribute to Chief Financial Officer Charles (Chuck) E.
Redman, who, along with his wife Terri, were tragically killed in an automobile
accident at the time this report was being prepared. Chuck was extremely
dedicated and loyal to his family, the First Federal family, and to the Company.
His experience, energy and friendship will be missed by everyone that knew him.
I would also like to recognize and thank long time director Maynard E. Vollmer,
who is retiring from the board. Maynard has been a faithful and dedicated board
member for 30 years; his experience, expertise and advice has contributed
greatly to the success of your company. To our valued customers who are vital to
our growth, profitability, and success, we thank you for your continued support.
I invite you to review this Annual Report. We are proud of our history, our
consistent growth, and our shareholder equity and income. We look forward to the
upcoming year and every effort will be made to justify your continued confidence
and support.
Sincerely,
/s/Nicholas M. George
- ---------------------
Nicholas M. George
President and Chief Executive Officer
3
<PAGE>
<TABLE>
<CAPTION>
Selected Consolidated Financial Information
June 30,
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets $203,311 $180,055 $150,467 $147,293 $122,480
Loans receivable, net 139,394 114,159 100,529 92,475 77,688
Loans held for sale, net -- -- 423 214 1,315
Securities available for sale 50,293 40,450 40,566 34,983 38,153
Deposits 125,256 116,118 92,490 85,930 82,041
Total borrowings 56,500 44,800 41,800 45,300 25,490
Stockholders' equity 19,129 17,141 15,458 15,492 14,435
<CAPTION>
Year Ended June 30,
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
(In Thousands, except for per share data)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Total interest income $14,589 $12,224 $11,164 $9,409 $7,236
Total interest expense 8,591 7,246 6,799 5,630 3,770
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 5,998 4,978 4,365 3,779 3,466
Provision for loan losses 705 120 95 34 24
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 5,293 4,858 4,270 3,745 3,442
Net realized gains on sales/calls
of interest-earning assets 371 45 146 9 230
Net unrealized gains (losses) on
loans held for sale -- 1 (1) 18 (61)
Unrealized loss on mortgage-
backed security -- -- -- (319) -
Other noninterest income 894 628 483 437 452
Noninterest expense (3,800) (3,583) (2,586) (2,356) (2,247)
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,758 1,949 2,312 1,534 1,816
Income tax expense (858) (605) (726) (435) (468)
- ---------------------------------------------------------------------------------------------------------------------------
Net income $1,900 $1,344 $1,586 $1,099 $1,348
===========================================================================================================================
Earnings per Common and Common
Equivalent Shares:
Basic (1) $1.36 $1.00 $1.11 $0.75 $0.89
Diluted (1) $1.32 $0.97 $1.08 $0.74 $0.87
Dividends declared and paid
per common share (1) $0.38 $0.32 $0.26 $0.23 $0.21
Dividend payout ratio 27.94% 32.00% 23.42% 30.67% 23.60%
</TABLE>
(1) Restated for 100% stock dividend.
4
<PAGE>
<TABLE>
<CAPTION>
Selected Consolidated Financial Information (continued)
Year Ended June 30,
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Other Data:
Interest rate spread information:
Average during period 2.78% 2.69% 2.45% 2.36% 2.74%
End of period 2.96 2.82 2.67 2.30 2.60
Net interest margin(1) 3.31 3.25 3.06 2.99 3.45
Average interest-earning assets to
average interest-bearing liabilities 1.11x 1.12x 1.13x 1.14x 1.19x
Non-performing assets (2) to total
assets at end of period .43% .16% .06% .09% .08%
Equity-to-total assets (end of period) 9.41 9.52 10.27 10.52 11.79
Return on assets (ratio of net income
to average total assets) 1.00 .85 1.09 .85 1.31
Return on equity (ratio of net income
to average equity) 10.51 8.41 9.89 7.62 9.26
Equity-to-assets ratio (ratio of average
equity to average total assets) 9.49 10.11 11.02 11.15 14.15
Number of full-service offices 4 4 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.
[GRAPHIC-GRAPH DEPICTING DIVIDENDS PAID PER SHARE]
[GRAPHIC-GRAPH DEPICTING EARNINGS PER SHARE]
5
<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, sales and maturities of securities
available for sale and funds provided from operations.
FINANCIAL CONDITION
The Company's total assets increased from $180.1 million at June 30, 1997 to
$203.3 million at June 30, 1998, an increase of $23.2 million, or 12.9%. This
increase was funded by an increase in deposits of $9.2 million, an increase in
advances outstanding from Federal Home Loan Bank of Indianapolis (FHLB) of $6.7
million and an increase in due to brokers of $5.0 million. These funds, along
with cash on hand, were used to originate loans, resulting in an increase in net
loans of $25.2 million. An additional $1.0 million was invested in FHLMC
preferred stock and an increase in government agencies and municipals of $8.9
million.
Total securities available for sale increased from $40.4 million at June 30,
1997 to $50.3 million at June 30, 1998. During fiscal 1998, state and municipal
securities increased from $7.4 million at June 30, 1997 to $9.1 million at June
30, 1998 due to two purchases during the course of the year totaling $2.4
million. During fiscal 1998, management continued to diversify the investment
portfolio by investing $1.0 million in a 5-year non-callable FHLMC preferred
stock, of which the dividends are 70% excluded for tax purposes. Government
<PAGE>
agency securities increased from $6.0 million at June 30, 1997 to $13.2 million
at June 30, 1998, which reflected the investment of the interest-bearing
deposits at the end of June 30, 1997. The Company has net unrealized
appreciation of $685,000, net of tax at June 30, 1998 for securities available
for sale.
Mortgage-backed securities decreased from $18.9 million at June 30, 1997 to
$18.3 million at June 30, 1998. This decrease was primarily due to the $355,000
proceeds from the sale of a privately issued mortgaged-backed security, which
had previously been written down $319,000 in 1995. The sale of this security
resulted in a gain on sale of $264,000.
Net loans increased $25.2 million, or 22.1%, from $114.2 million at June 30,
1997 to $139.4 million at June 30, 1998. The increases in the loan portfolio
were comprised primarily of automobile, commercial, and mortgage loans which
increased $11.2 million, $6.1 million, and $6.6 million, respectively, during
fiscal 1998. 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. At June 30, 1998, first mortgage loans secured by one-to-four
family real estate comprise $70.2 million, or 50.4% of the loan portfolio. The
Company also had $7.3 million of commercial and multi-family real estate loans
and $4.0 million of construction loans. The consumer loan portfolio included
$33.8 million of automobile loans, $9.1 million of home equity and improvement
loans, $12.9 million in commercial business loans and $4.1 million in other
consumer loans at June 30, 1998.
6
<PAGE>
Total deposits increased $9.2 million, or 7.9%, from $116.1 million at June 30,
1997 to $125.3 million at June 30, 1998. During fiscal 1998, passbook and
checking accounts increased $2.1 million, or 3.8%, and certificates of deposit
increased $7.0 million, or 11.7%. The increase resulted from increased
commercial accounts and targeted pricing of short term certificates of deposit.
Assuming interest rates remain at present levels during the next fiscal year,
management anticipates that deposits will continue to increase above current
levels. As a result, management will continue to control the overall increases
in interest rates in deposits by targeting certain terms and offering "specials"
rather than across the board increases for all deposit products. If deposit
growth lags behind loan demand, then an increase in FHLB advances may be
necessary to fund the Company's lending and investment activities during fiscal
1999.
[GRAPHIC-PIE CHART DEPICTING LOAN MIX]
Total shareholders' equity increased $2.0 million to $19.1 million at June 30,
1998. The increase primarily resulted from net income of $1.9 million, $183,000
change in unrealized appreciation on securities available for sale, net of tax,
$269,000 for the release of ESOP shares and $177,820 of proceeds from the
exercise of stock options, which were offset by dividends paid of $542,000.
RESULTS OF OPERATIONS
Comparison of Years Ended June 30, 1998 and June 30, 1997
General. Net income for the year ended June 30, 1998 was $1.9 million, a
increase of $556,000 compared to net income for the year ended June 30, 1997.
The increase was primarily the result of an increase of $1.0 million in net
interest income, which was partially offset by an increase of $217,000 in
noninterest expense and an increase in income taxes of $252,000. Further details
of the changes in these items are discussed below.
Net Interest Income. Net interest income increased $1.0 million, or 20.0%, from
$5.0 million to $6.0 million for the year ended June 30, 1998. The increase in
net interest income was due to an increase of $2.4 million in interest income,
partially offset by an increase of $1.3 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 and an improvement in net interest margin as discussed below.
[GRAPHIC-GRAPH DEPICTING NET INCOME]
Interest income increased $2.4 million, or 19.7 %, for fiscal 1998 compared to
fiscal 1997 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 lesser extent the increase in interest
income resulted from an increase in the average rate on earning assets to 8.04%
in fiscal 1998 from 7.98% in fiscal 1997.
<PAGE>
Interest expense increased $1.4 million, or 19.4%, for fiscal 1998 compared to
fiscal 1997 primarily due to an increase in the average balance of certificates
of deposit and FHLB advances outstanding, partially offset by a decrease in the
average rate on interest-bearing liabilities to 5.26% in fiscal 1998 from 5.29%
in fiscal 1997. Management plans to continue using FHLB advances to fund loan
growth if there is not sufficient deposit growth.
7
<PAGE>
Provision for Loan Losses. The provision for loan losses increased $585,000 from
$120,000 in fiscal 1997 to $705,000 in fiscal 1998. The amounts provided during
the fiscal year were based on management's quarterly analysis of the allowance
for loan losses, and the changing composition of the total loan portfolio from
one-to-four family to commercial and consumer loans. The inherent risk of
commercial and consumer loans requires a higher level of provisions for loan
losses. This year the Company has seen an increase in its non-performing loans
and has been increasing and will continue to increase its loan loss allowance to
deal with potential 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.
Noninterest Income. Noninterest income increased from $674,000 in fiscal 1997 to
$1.3 million in fiscal 1998. This increase of $626,000 was primarily the result
of increases of $264,000, $61,000, $61,000 and $220,000 in gains on sale of
securities, gains on sale of loans, commission income, and service charges,
respectively. The increase in service charges resulted from our increased
transaction account activity from our South Whitley office, which was acquired
in June of 1997. 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
that purchases these products for the secondary market.
Noninterest Expense. Noninterest expense increased from $3.6 million in fiscal
1997 to $3.8 million in fiscal 1998. This increase of $200,000, or 5.6%, was
primarily the result of increases in salaries and employee benefits of $391,000,
amortization of goodwill and core deposit premium of $164,000, data processing
expense of $80,000, correspondent bank charges of $64,000 and office occupancy
of $63,000. These increases were partially offset by a decrease in SAIF deposit
insurance premium of $613,000. The decrease in the SAIF deposit insurance
premiums was related to the one time assessment of $556,000 paid in November
1996. The increase in salaries and employee benefits, office occupancy,
amortization of goodwill and core deposit premium, data processing and
correspondent bank charges was primarily the result of additional costs related
to our branch in South Whitley, which was acquired in June of 1997.
Income Tax Expense. Income tax expense was $858,000 in fiscal 1998 compared to
$606,000 in fiscal 1997, an increase of $252,000, or 41.6%. Income taxes
increased primarily as a result of the tax effect of higher income before income
taxes resulting primarily from the one time SAIF assessment in 1997.
Comparison of Years Ended June 30, 1997 and June 30, 1996
General. Net income for the year ended June 30, 1997 was $1.3 million, a
decrease of $243,000 compared to net income for the year ended June 30, 1996.
The decrease was primarily the result of an increase of $1.0 million in
noninterest expense, which was partially offset by an increase of $613,000 in
net interest income and a decrease in income taxes of $120,000. Further details
of the changes in these items are discussed below.
<PAGE>
Net Interest Income. Net interest income increased $613,000, or 14.0%, from $4.4
million to $5.0 million for the year ended June 30, 1997. The increase in net
interest income was due to an increase of $1.1 million in interest income,
partially offset by an increase of $447,000 in interest expense. The increase in
net interest income was primarily a result of an increase in average
interest-earning assets exceeding the increase in average interest-bearing
liabilities and an improvement in net interest margin as discussed below.
Interest income increased $1.1 million, or 9.5%, for fiscal 1997 compared to
fiscal 1996 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 lesser extent the increase in interest
income resulted from an increase in the average rate on earning assets to 7.98%
in fiscal 1997 from 7.83% in fiscal 1996.
Interest expense increased $447,000, or 6.6%, for fiscal 1997 compared to fiscal
1996 due to an increase in the average balance of certificates of deposit and
FHLB advances outstanding, partially offset by a decrease in the average rate on
interest-bearing liabilities to 5.29% in fiscal 1997 from 5.38% in fiscal 1996.
Management plans to continue using FHLB advances to fund loan growth if there is
not sufficient deposit growth.
8
<PAGE>
Provision for Loan Losses. The provision for loan losses increased $25,000 from
$95,000 in fiscal 1996 to $120,000 in fiscal 1997. 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.
Noninterest Income. Noninterest income increased from $628,000 in fiscal 1996 to
$674,000 in fiscal 1997. This increase of $46,000 was primarily the result of
increases of $48,000, $63,000 and $34,000 in commission income, service charges
and other income, respectively. These increases were offset by decreases of
$43,000 and $58,000 in gains on sale of loans and gains on sale of securities,
respectively. 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 $2.6 million in fiscal
1996 to $3.6 million in fiscal 1997. This increase of $1.0 million, or 38.5%,
was primarily the result of increases in SAIF deposit insurance premiums of
$489,000, other expense of $133,000, and salaries and employee benefits of
$277,000. The increase in SAIF deposit insurance premiums was related to the one
time assessment of $556,000 paid in November 1996. The increase in salaries and
employee benefits was primarily the result of increases in staff for a
commercial loan department, and additional employees related to our new branch
in South Whitley and normal salary increases. The increase in other expense was
primarily due to costs related to the branch acquisition, and start up costs for
our commercial loan department.
Income Tax Expense. Income tax expense was $606,000 in fiscal 1997 compared to
$726,000 in fiscal 1996, a decrease of $120,000, or 16.6%. Income taxes
decreased primarily as a result of the tax effect of lower income before income
taxes resulting primarily from the one time SAIF assessment.
Asset and Liability Management and Market Risk
General - The principal market risk affecting the Company is interest-rate risk.
The Company does not maintain a trading account for any class of financial
instrument, and the Company is not affected by foreign currency exchange rate
risk or commodity price risk.
The Company, like other financial institutions, is subject to interest rate risk
to the extent that its interest-earning assets reprice differently than its
interest-bearing liabilities. One of the Company's principal financial
objectives is to achieve long-term profitability while reducing and managing its
exposure to fluctuations in interest rates. The Company has sought to reduce
exposure to its earnings to changes in market interest rates by managing asset
and liability maturities and interest rates primarily by reducing the effective
maturity of assets through the use of adjustable rate mortgage-backed securities
and adjustable rate loans and by extending funding maturities through the use of
other borrowings such as FHLB Advances.
<PAGE>
Quantitative Aspects of Market Risk - As part of its efforts to monitor and
manage interest rate risk, the Company uses the "net portfolio value" (NPV)
methodology adopted by the OTS as part of its capital regulations. In essence,
this approach calculates the difference between the present value of expected
cash flows from assets and the present value of expected cash flows from
liabilities, as well as cash flows from off balance sheet contracts, arising
from an assumed 200 basis point increase or decrease in interest rates
(whichever results in the greater pro forma decrease in NPV). Under OTS
regulations, an institution's "normal" level of interest rate risk in the event
of this assumed change in interest rates is a decrease in the institution's NPV
in an amount not exceeding 2% of the present value of its assets.
The Company's asset/liability management strategy dictates acceptable limits on
the amounts of change in NPV given certain changes in interest rates. The table
presented here, as of March 31, 1998, is an analysis of the Company's interest
rate risk as measured by changes in NPV for instantaneous and sustained parallel
shifts in the yield curve, in 100 basis point increments, up and down 400 basis
points and compared to the Company policy limits.
9
<PAGE>
<TABLE>
<CAPTION>
Change in NPV as % of Portfolio
Interest Rates Net Portfolio Value Value of Assets
In Basis ----------------------------------------------- ---------------------------
Points NPV
(Rate Shock) (1) $ Amount $Change %Change Ratio Change (1)
- ---------------- -------- ------- ------- ----- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
400 $11,607 $(8,620) (43)% 6.29% (386)
300 13,994 (6,233) (31) 7.43 (272)
200 16,311 (3,916) (19) 8.49 (166)
100 18,450 (1,777) (9) 9.42 (73)
Static 20,227 10.15
(100) 22,446 2,219 11 11.05 90
(200) 25,246 5,019 25 12.16 201
(300) 28,676 8,449 42 13.47 332
(400) 32,894 12,667 63 15.02 487
</TABLE>
(1) Expressed in basis points.
As illustrated in the table, the Company's NPV declines in a rising interest
rate environment. Specifically, the table indicates that, at March 31, 1998, the
Company's NPV was $17.5 million (or 8.91% of the market value of portfolio
assets). Based upon the assumptions utilized, an immediate increase in market
interest rates of 200 basis points would result in a $3.8 million or 22.00%
decline in the Company's NPV and would result in a 168 basis point or 18.9%
decline in the Company's NPV ratio to 7.23%. The percentage decline in the
Company's NPV at March 31, 1998 was within the limit in the Company's
Board-approved guidelines.
In evaluating the Company's exposure to interest rate risk, certain shortcomings
inherent in the method of analysis presented in the foregoing table must be
considered. For example, although certain assets and liabilities may have
similar maturities or period to repricing, they may react in different degrees
to changes in market interest rates. In addition, 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. Furthermore, in the event of a change in interest rates,
prepayments and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their debt may decrease in case of an interest rate increase.
Therefore, the actual effect of changing interest rates may differ from that
presented in the foregoing table.
The Board of Directors and management of the Company believe that certain
factors afford the Company the ability to operate successfully despite its
exposure to interest rate risk. The Company manages its interest rate risk by
originating adjustable rate loans and purchasing adjustable rate mortgage-backed
securities and by maintaining capital well in excess of regulatory requirements
and by selling a portion of fixed rate one-to four-family real estate loans.
<PAGE>
The Company focuses lending efforts toward offering competitively priced
adjustable rate loan products as an alternative to more traditional fixed rate
mortgage loans. In addition, while the Company generally originates mortgage
loans for its own portfolio, sales of fixed-rate first mortgage loans with
maturities of 15 years or greater are currently undertaken to manage interest
rate risk. These loans are currently classified as held for sale by the Company
at origination. There were no loans held for sale at June 30, 1998. The Company
retains the servicing on loans sold in the secondary market and, at June 30,
1998, $25.9 million in such loans were being serviced for others.
The primary objective of the Company's investment strategy is to provide
liquidity necessary to meet funding needs as well as address daily, cyclical and
long-term changes in the asset/liability mix while contributing to profitability
by providing a stable flow of dependable earnings. Generally, the Company
invests funds among various categories of investments and maturities based on
the Company's liquidity needs and to achieve the proper balance between the
desire to minimize risk and maximize yield to fulfill the Company's
asset/liability management policies.
The Company's cost of funds responds to changes in interest rates due to the
relatively short-term nature of its deposit portfolio. Consequently, the levels
of short-term interest rates influence the results of operations. The Company
offers a range of maturities on its deposit products at competitive rates and
monitors the maturities on an ongoing basis.
10
<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
- ---------------------------------------------------------------------------------------------------------------------------
Average 1998 Yield/ Average 1997 Yield/ Average 1996 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) $127,127 $11,029 8.68% $107,082 $ 9,197 8.59% $ 97,473 $ 8,287 8.50%
Securities (2) (3) 30,843 1,965 6.46 24,248 1,475 6.08 20,730 1,238 5.97
Mortgage-backed
securities (3) 18,732 1,427 7.84 18,781 1,445 7.69 19,432 1,425 7.33
Interest-bearing
deposits in other
financial institutions 6,370 168 2.64 3,112 107 3.44 4,911 214 4.36
-------- ------- -------- ------- -------- -------
Total interest-earning
assets 183,072 14,589 8.01% 153,223 12,224 7.98% 142,546 11,164 7.83%
Other assets 7,398 4,895 2,959
Total assets $190,470 $158,118 $145,505
Interest-bearing liabilities:
Money market
accounts $ 1,022 $ 26 2.54% $ 298 $ 8 2.68% $ 295 $ 7 2.37%
NOW accounts 7,040 132 1.88 4,242 84 1.98 3,926 78 1.99
Passbook savings
accounts 42,983 1,817 4.23 40,982 1,772 4.32 41,682 1,841 4.42
Certificates
of deposit 62,666 3,652 5.83 49,907 2,914 5.84 41,155 2,446 5.94
FHLB advances 49,543 2,964 5.98 41,470 2,468 5.95 39,296 2,427 6.18
-------- ------- -------- ------- ---- -------- ------- ----
Total interest-
bearing liabilities 163,254 8,591 5.26% 136,899 7,246 5.29% 126,354 6,799 5.38%
------- ---- ------- ---- ------- ----
Other liabilities 9,133 5,238 3,115
-------- -------- --------
Total liabilities 172,387 142,137 129,469
Shareholders' equity 18,083 15,981 16,036
-------- -------- --------
Total liabilities and
Shareholders' equity $190,470 $158,118 $145,505
======== ======== ========
Net interest income/
interest rate spread $5,998 2.75% $4,978 2.69% $4,365 2.45%
====== ==== ====== ==== ====== ====
Net interest margin (4) 3.31% 3.25% 3.06%
==== ==== ====
</TABLE>
<PAGE>
(1) Average outstanding balances include non-accruing loans. Interest on loans
receivable includes fees. The inclusion of nonaccrual loans and fees does
not have a material effect on either the average outstanding balance or the
average yield.
(2) Yields reflected have not been computed on a tax equivalent basis.
(3) Yields computed using the average fair value for securities available for
sale.
(4) Net interest income divided by average interest earning assets.
11
<PAGE>
<TABLE>
<CAPTION>
At June 30
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average rate on:
Loans receivable (1) 8.67% 8.72% 8.57%
Securities (2) 6.09 6.10 5.96
Mortgage-backed securities 7.84 7.79 7.14
Interest-bearing deposits in other
financial institutions 5.06 6.27 4.83
Combined weighted average yield
on interest-earning assets 8.18 8.05 7.89
Weighted average rate paid on:
Money market accounts 4.04 2.60 2.42
NOW accounts 1.85 1.96 1.99
Passbook savings accounts 4.21 4.23 4.29
Certificates of deposit 5.77 5.78 5.74
FHLB advances 5.82 5.94 5.92
Combined weighted average rate paid
on interest-bearing liabilities 5.22 5.23 5.22
Spread 2.96 2.82 2.67
</TABLE>
(1) Includes impact of non-accruing loans and loan fees.
(2) Yields reflected have not been computed on a tax equivalent basis.
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-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.
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
---------------------------------- -----------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
----------------- Increase ------------------ Increase
Volume Rate (Decrease) Volume Rate (Decrease)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $1,738 $ 94 $1,832 $825 $ 85 $ 910
Securities 393 98 491 214 23 237
Mortgage-backed securities (45) 26 (19) (49) 69 20
Interest-bearings deposits
in other financial institutions 79 (18) 61 (68) (39) (107)
- -------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $2,165 $200 $2,365 $922 $ 138 $1,060
===================================================================================================================
Interest-bearing liabilities:
Money market accounts $18 $-- $18 $-- $ 1 $ 1
NOW accounts 53 (5) 48 6 -- 6
Passbook savings accounts 85 (40) 45 (31) (38) (69)
Certificates of deposit 744 (6) 738 512 (44) 468
FHLB advances 483 13 496 131 (90) 41
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $1,383 $(38) $1,345 $618 $(171) $ 447
===================================================================================================================
Net interest income $1,020 $ 613
===================================================================================================================
</TABLE>
(1) Includes the impact of non-accruing loans and loan fees.
12
<PAGE>
Asset Quality
Total non-performing assets increased to $873,000 at June 30, 1998 compared to
$281,000 at June 30, 1997. The ratio of non-performing assets to total assets at
June 30, 1998 was .43% compared to .16% at June 30, 1997. Included in
non-performing assets at June 30, 1998 were five one-to-four family mortgage
loans totaling $521,000 and 21 consumer loans totaling $193,000. Repossessed
assets totaled $160,000 at June 30, 1998.
In addition to the non-performing assets listed above, as of June 30, 1998 and
1997, there was $1.7 million and $1.5 million, respectively, 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, 1998, $802,000 of loans were classified as
special mention, $1.6 million as substandard, $30,000 as doubtful and $25,000 as
loss. As of June 30, 1997, $802,000 were classified as special mention, $899,000
as substandard, $82,000 as doubtful and none as loss.
The increases for non-performing and substandard loans were primarily due to
four borrowers with first and second mortgages, which totaled $563,000, and were
classified as substandard and non-performing. Foreclosure proceedings have begun
against these borrowers. We believe the loan loss allowance will cover any
potential loss on these loans and we do not anticipate any material losses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, borrowings, principal and
interest payments on loans and mortgage-backed securities and sales and
maturities of securities available for sale. While maturities of securities and
scheduled amortization of loans and mortgage-backed securities are a predictable
source of funds, deposit flows and mortgage prepayments are greatly influenced
by general interest rates, economic conditions and competition.
The standard measure of liquidity for thrift institutions is the ratio of cash
and eligible investments to a certain percentage of net withdrawable savings and
borrowings due within one year. The minimum required ratio is currently set by
OTS regulations at 4%, of which 1% must be comprised of short-term investments
(i.e. generally with a term of less than one year). At June 30, 1998, the Bank's
liquidity ratio was 12.05%, of which 6.83% was comprised of short-term
investments.
Year Ended June 30, 1998. During the year ended June 30, 1998 there was a net
decrease of $12.7 million in cash and cash equivalents. Major sources of cash
during the year were an increase in deposits of $9.1 million and proceeds from
sales of loans held for sale provided $9.2 million. Management continued to sell
fixed rate first mortgage loans with maturities of 15 to 30 years in the
secondary market to manage interest rate risk.
Major uses of cash during the year which offset the sources of cash included
funding an increase of $26.0 million in the loan portfolio, net purchases of
$10.0 million in securities available for sale and originations of $9.0 million
of loans to be sold in the secondary market.
<PAGE>
Year Ended June 30, 1997. During the year ended June 30, 1997 there was a net
increase of $14.3 million in cash and cash equivalents. Another major source of
cash during the year was an increase in deposits of $23.6 million of which $17.1
million was the result of the acquisition of the NBD Bank branch in South
Whitley, Indiana on June 13, 1997. In addition, proceeds from sales of loans
held for sale provided $3.7 million. Management continued to sell fixed rate
first mortgage loans with maturities of 15 to 30 years in the secondary market
to manage interest rate risk.
Major uses of cash during the year which offset the sources of cash included
funding an increase of $13.6 million in the loan portfolio, purchase of $500,000
in FHLMC preferred stock and originations of $3.2 million of loans to be sold in
the secondary market.
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 included
funding an increase of $8.1 million in the loan portfolio, purchasing $5.0
million in a callable FHLB bond and $4.0 million in FHLMC preferred stock and
originations of $6.9 million of loans to be sold in the secondary market.
Borrowings may be used as a source of funds to offset reductions in other
sources of funds such as deposits and to assist in asset/liability management.
Management believes that a diversified blend of borrowings from the FHLB offers
flexibility and is an important tool to be used in the balanced growth of the
Company. As such, borrowings out-
13
<PAGE>
standing at June 30, 1998 consist of advances from the FHLB totaling $51.5
million and due to brokers of $5.0 million. Also, the Company had commitments to
fund loan originations, unused lines of credit and standby lines of credit with
borrowers of $12.0 million at June 30, 1998. 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 4% core capital requirement and an 8% total risk-based capital to
risk weighted assets requirement. At June 30, 1998, the Bank exceeded all fully
phased in capital requirements. Tangible and core capital totaled $13.8 million,
or 6.9% of adjusted total assets (as defined by regulation) and risk-based
capital totaled $14.7 million, or 12.1% of risk-weighted assets (as defined by
regulation). See Note 11 of the Notes to Consolidated Financial Statements for
additional information regarding capital requirements applicable to the Bank.
IMPACT OF INFLATION
The financial statements and related data 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.
YEAR 2000 CONSIDERATIONS
The Board of Directors and management view the year 2000-date (Y2K) issue as a
potentially serious interruption to the conduct of our day to day operations. To
alleviate this potential interruption, the bank has formed a year 2000 committee
that consists of the Senior Vice-President/Treasurer, Vice-President of
Operations and our computer technician. This committee reports to the Board at
least quarterly about the status and progress of our Y2K plan.
Our Y2K action plan covers five areas; awareness of the problem, inventory &
assessment of hardware and software for Y2K problems, renovation of necessary
systems, validation of testing plans and implementation of system changes. At
the time of this report we have completed the first two steps of the plan and
are working on the next two steps. We anticipate that we will be through the
testing phase by the end of 1998 and will have implementation completed by the
middle of 1999. Our major Y2K system critical function lies with our third party
data processing center, BISYS. BISYS is working closely with their clients and
we believe that they will be Y2K compliant before the middle of the 1999
deadline. They have conducted most of their testing, and we will be testing
their results on our system by the end of 1998.
The training, hardware and software costs for Y2K have been preliminarily
budgeted at $100,000. All of the costs for training and software are being
expensed as incurred. Hardware cost will be capitalized and expensed under our
fixed asset guidelines. While we believe this amount will be sufficient to
complete the requirements of becoming Y2K compliant, it is an estimate. As such,
we will review our budget monthly to help ensure that we have allocated
sufficient resources to this project. Any deviations to the preliminary budget
will be reported to the Board of Directors.
<PAGE>
The impact on the Company for Y2K risk are many and include, but are not limited
to, the risk of insufficient liquidity, communication loss, power loss and the
inability to process customer data. The potential impact to the profitability of
the Company related to these risks and those not yet identified cannot be
measured or known at this time.
At the time of this report the Company had not finalized a contingency plan.
However, the contingency plan when completed will address those risks that have
been identified and how to minimize those risks. The contingency plan is
scheduled to be completed before we hold our annual meeting.
14
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
FFW Corporation
Wabash, Indiana
We have audited the accompanying consolidated balance sheets of FFW Corporation
as of June 30, 1998 and 1997 and the related consolidated statements of income,
changes in shareholders' equity and cash flows for each of the three years in
the period ended June 30, 1998. 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, 1998 and 1997 and the results of its operations and its cash flows
for each of the three years in the period ended June 30, 1998 in conformity with
generally accepted accounting principles.
/s/Crowe, Chizek and Company LLP
--------------------------------
Crowe, Chizek and Company LLP
South Bend, Indiana
August 14, 1998
15
<PAGE>
<TABLE>
<CAPTION>
FFW Corporation
Consolidated Balance Sheets
June 30, 1998 and 1997
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from financial institutions $ 4,023,917 $ 1,620,716
Interest-bearing deposits in other financial
institutions - short-term 386,435 15,499,898
Total cash and cash equivalents 4,410,352 17,120,614
Securities available for sale 50,293,229 40,449,698
Loans receivable, net of allowance for loan losses
of $982,532 in 1998 and $571,751 in 1997 139,393,692 114,158,745
Federal Home Loan Bank stock, at cost 2,757,200 2,397,600
Accrued interest receivable 1,428,927 1,123,623
Premises and equipment, net 2,205,458 1,926,910
Investment in limited partnership 704,990 749,952
Other assets 2,117,415 2,128,339
------------ ------------
Total assets $203,311,263 $180,055,481
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing demand $ 6,935,426 $ 5,751,478
Savings, NOW and MMDA 51,485,630 50,529,826
Other time 66,835,247 59,837,170
------------ ------------
Total deposits 125,256,303 116,118,474
Other borrowings 56,500,000 44,800,000
Obligation relative to limited partnership 300,000 712,500
Accrued interest payable 204,036 157,521
Accrued expenses and other liabilities 1,922,197 1,125,700
------------ ------------
Total liabilities 184,182,536 162,914,195
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Shareholders' equity
Preferred stock, $.01 par value; 500,000 shares
authorized; none issued and outstanding -- --
Common stock, $.01 par value; 2,000,000 shares authorized;
shares issued: 1,775,096 - 1998 and 869,766 - 1997;
shares outstanding: 1,458,032 - 1998 and 711,234 - 1997 17,751 8,698
Additional paid-in capital 8,793,133 8,439,565
Retained earnings substantially restricted 12,468,144 11,119,378
Net unrealized appreciation (depreciation) on securities available
for sale, net of tax of $489,649 in 1998 and $405,385 in 1997 685,432 502,183
Unearned Employee Stock Ownership Plan shares (151,748) (244,553)
Treasury stock at cost, 317,064 - 1998 and 158,532 - 1997,
common shares (2,683,985) (2,683,985)
------------ ------------
Total shareholders' equity 19,128,727 17,141,286
------------ ------------
Total liabilities and shareholders' equity $203,311,263 $180,055,481
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE>
<TABLE>
<CAPTION>
FFW Corporation
Consolidated Statements of Income
Years ended June 30, 1998, 1997 and 1996
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Interest and dividend income
Loans receivable, including fees $11,028,576 $ 9,197,093 $ 8,287,276
Taxable securities 2,978,403 2,465,026 2,118,899
Nontaxable securities 413,504 455,056 544,165
Other 168,410 106,640 213,832
----------- ----------- -----------
Total interest and dividend income 14,588,893 12,223,815 11,164,172
Interest expense
Deposits 5,626,941 4,777,282 4,371,748
Federal Home Loan Bank advances 2,964,036 2,468,441 2,427,205
----------- ----------- -----------
Total interest expense 8,590,977 7,245,723 6,798,953
----------- ----------- -----------
Net interest income 5,997,916 4,978,092 4,365,219
Provision for loan losses 705,000 120,000 95,153
----------- ----------- -----------
Net interest income after provision for
loan losses 5,292,916 4,858,092 4,270,066
Noninterest income
Net realized gains on sales/calls
of securities available for sale 266,215 2,024 59,779
Net realized gains on sales of loans held for sale 104,148 43,341 86,039
Net unrealized gains (losses) on loans
held for sale -- 639 (639)
Commission income 215,051 154,213 106,710
Service charges and fees 551,211 331,057 267,664
Other income 127,859 142,835 108,598
----------- ----------- -----------
Total noninterest income 1,264,484 674,109 628,151
Noninterest expense
Salaries and employee benefits 1,892,039 1,501,292 1,224,121
Occupancy and equipment expense 332,894 269,638 255,855
SAIF deposit insurance premium 113,521 726,684 238,033
Correspondent bank charges 211,420 147,581 140,533
Data processing expense 365,522 285,754 231,322
Printing, postage and supplies 192,935 163,820 140,971
Amortization of goodwill & core deposit premium 164,474 -- --
Other expense 527,184 488,005 355,210
----------- ----------- -----------
Total noninterest expense 3,799,989 3,582,774 2,586,045
----------- ----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Income before income taxes 2,757,411 1,949,427 2,312,172
Income tax expense 857,743 605,767 725,991
----------- ----------- -----------
Net income $ 1,899,668 $ 1,343,660 $ 1,586,181
=========== =========== ===========
Earnings per common and common
equivalent share
Basic earnings per common share $ 1.36 $ 1.00 $ 1.11
Diluted earnings per common share $ 1.32 $ 0.97 $ 1.08
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE>
<TABLE>
<CAPTION>
FFW Corporation
Consolidated Statements of Changes in Stockholders' Equity
Years ended June 30, 1998, 1997 and 1996
Net
Unrealized
Appreciation Unearned
(Depreciation) Employee
on Securities Stock
Additional Available Ownership
Common Paid-In Retained for Sale, Plan
Stock Capital Earnings Net of Tax Shares
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1995 ................... $ 8,484 $ 8,007,476 $ 9,014,804 $ (61,618) $ (412,064)
Cash dividends declared on common
stock - $0.26 per share ................... -- -- (382,075) -- --
17,117 shares committed to be released
under the ESOP ............................ -- 73,100 -- -- 80,875
Amortization of MRP contribution ........... -- -- -- -- --
Purchase of 139,764 shares of treasury stock -- -- -- -- --
Issuance of 10,392 shares of common stock
due to exercise of stock options .......... 52 51,908 -- -- --
Net change in unrealized appreciation
(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)
Cash dividends declared on common
stock - $0.32 per share ................... -- -- (443,192) -- --
17,117 shares committed to be released
under the ESOP ............................ -- 145,503 -- -- 86,636
Amortization of MRP contribution ........... -- -- -- -- --
Purchase of 32,000 shares of treasury stock -- -- -- -- --
Issuance of 32,348 shares of common stock
due to exercise of stock options .......... 162 161,578 -- -- --
Net change in unrealized appreciation
(depreciation) on securities available for
sale, net of tax of $474,821 .............. -- -- -- 705,466 --
Net income for year ended June 30, 1997 .... -- -- 1,343,660 -- --
------------ ------------ ------------ ------------ ------------
Balance at June 30, 1997 ................... 8,698 8,439,565 11,119,378 502,183 (244,553)
Cash dividends declared on common
stock - $0.38 per share ................... -- -- (542,101) -- --
17,117 shares committed to be released
under the ESOP ............................ -- 176,000 -- -- 92,805
100% stock dividend ........................ 8,801 -- (8,801) -- --
Issuance of 35,564 shares of common stock
due to exercise of stock options .......... 252 177,568 -- -- --
Net change in unrealized appreciation
(depreciation) on securities available for
sale, net of tax of $84,263 ............... -- -- -- 183,249 --
Net income for year ended June 30, 1998 .... -- -- 1,899,668 -- --
------------ ------------ ------------ ------------ ------------
Balance at June 30, 1998 ................... $ 17,751 $ 8,793,133 $ 12,468,144 $ 685,432 $ (151,748)
============ ============ ============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Unearned
Management
Retention Total
Plan Treasury Shareholders'
Shares Stock Equity
------------ ------------ ------------
<S> <C> <C> <C>
Balance at June 30, 1995 ................... $ (56,678) $ (1,008,836) $ 15,491,568
Cash dividends declared on common
stock - $0.26 per share ................... -- -- (382,075)
17,117 shares committed to be released
under the ESOP ............................ -- -- 153,975
Amortization of MRP contribution ........... 43,599 -- 43,599
Purchase of 139,764 shares of treasury stock -- (1,345,400) (1,345,400)
Issuance of 10,392 shares of common stock
due to exercise of stock options .......... -- -- 51,960
Net change in unrealized appreciation
(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
Cash dividends declared on common
stock - $0.32 per share ................... -- -- (443,192)
17,117 shares committed to be released
under the ESOP ............................ -- -- 232,139
Amortization of MRP contribution ........... 13,079 -- 13,079
Purchase of 32,000 shares of treasury stock -- (329,749) (329,749)
Issuance of 32,348 shares of common stock
due to exercise of stock options .......... -- -- 161,740
Net change in unrealized appreciation
(depreciation) on securities available for
sale, net of tax of $474,821 .............. -- -- 705,466
Net income for year ended June 30, 1997 .... -- -- 1,343,660
------------ ------------ ------------
Balance at June 30, 1997 ................... -- (2,683,985) 17,141,286
Cash dividends declared on common
stock - $0.38 per share ................... -- -- (542,101)
17,117 shares committed to be released
under the ESOP ............................ -- -- 268,805
100% stock dividend ........................ -- -- --
Issuance of 35,564 shares of common stock
due to exercise of stock options .......... -- -- 177,820
Net change in unrealized appreciation
(depreciation) on securities available for
sale, net of tax of $84,263 ............... -- -- 183,249
Net income for year ended June 30, 1998 .... -- -- 1,899,668
------------ ------------ ------------
Balance at June 30, 1998 ................... $ -- $ (2,683,985) $ 19,128,727
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE>
<TABLE>
<CAPTION>
FFW Corporation
Consolidated Statements of Cash Flows
Years ended June 30, 1998, 1997 and 1996
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,899,668 $ 1,343,660 $ 1,586,181
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization, net of accretion (80,662) 89,006 114,705
Provision for loan losses 705,000 120,000 95,153
Equity in loss of investment in limited partnership 44,962 48 --
Net (gains) losses on sales of:
Securities available for sale (266,215) (2,024) (59,779)
Loans held for sale (104,148) (43,341) (86,039)
Foreclosed real estate owned and repossessed assets 13,901 (4,783) 48,514
Net unrealized (gains) losses on loans held for sale -- (639) 639
Originations of loans held for sale (9,045,410) (3,183,214) (6,913,224)
Proceeds from sales of loans held for sale 9,149,558 3,650,555 6,789,253
ESOP expense 268,805 232,139 153,975
Amortization of MRP contribution -- 13,079 43,599
Net change in accrued interest receivable (305,304) (21,012) (129,935)
Net change in other assets (127,251) (208,073) (7,367)
Amortization of goodwill and core deposit intangibles 164,474 -- --
Net change in accrued interest payable, accrued
expenses and other liabilities 758,749 147,137 147,485
----------- ----------- -----------
Net cash from operating activities 3,076,127 2,132,538 1,783,160
Cash flows from investing activities
Net change in interest-bearing deposits
in other financial institutions - long-term -- 362,664 16,336
Proceeds from:
Sales/calls of securities available for sale 19,407,977 377,024 1,595,398
Calls of securities held to maturity -- -- 500,000
Maturities of securities available for sale 600,000 1,060,000 3,252,000
Maturities of securities held to maturity -- -- 300,000
Purchase of:
Securities available for sale (29,770,835) (690,200) (7,161,658)
Securities held to maturity -- -- (5,000,000)
Federal Home Loan Bank stock (359,600) -- (57,200)
Principal collected on mortgage-backed securities 691,510 594,865 770,030
Net change in loans receivable (26,445,499) (13,732,583) (8,150,023)
Purchases of premises and equipment, net (436,341) (234,855) (453,024)
Investment in limited partnership (412,500) (37,500) --
Cash received for net liabilities assumed in
acquisition of branch -- 15,300,519 --
Proceeds from sales of foreclosed real estate
and repossessed assets 465,351 315,344 113,735
----------- ----------- -----------
Net cash from investing activities (36,259,937) 3,315,278 (14,274,406)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
<TABLE>
<CAPTION>
FFW Corporation
Consolidated Statements of Cash Flows (continued)
Years ended June 30, 1998, 1997 and 1996
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities
Net change in deposits $ 9,137,829 $ 6,495,792 $ 6,560,253
Proceeds from other borrowings 52,975,956 37,500,000 27,300,000
Repayment of other borrowings (41,275,956) (34,500,000) (30,800,000)
Proceeds from exercise of stock options 177,820 161,740 51,960
Purchase of treasury stock -- (329,749) (1,345,400)
Cash dividends paid (542,101) (443,192) (382,075)
----------- ----------- -----------
Net cash from financing activities 20,473,548 8,884,591 1,384,738
----------- ----------- -----------
Net change in cash and cash equivalents (12,710,262) 14,332,407 (11,106,508)
Cash and cash equivalents at beginning of period 17,120,614 2,788,207 13,894,715
----------- ----------- -----------
Cash and cash equivalents at end of period $ 4,410,352 $17,120,614 $ 2,788,207
=========== =========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 8,544,462 $ 7,238,694 $ 6,795,414
Income taxes $ 895,000 $ 526,000 $ 620,238
Supplemental schedule of non-cash investing activities
Transfer from:
Securities held to maturity to securities
available for sale $ -- $ -- $15,194,732
Increases related to branch acquisition and
purchase accounting adjustments:
Loans, net $ -- $ 16,750 $ --
Premises and equipment, net -- 132,320 --
Core deposit intangibles -- 447,000 --
Goodwill -- 1,248,030 --
Other liabilities -- 12,048 --
Deposits -- 17,132,571 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
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 inter-company transactions and balances have been
eliminated in consolidation.
Nature of Business and Concentrations of Credit Risk: The primary source of
income for the Company is the origination of commercial and residential real
estate loans in Wabash County and the surrounding areas. Loans secured by real
estate mortgages comprise approximately 57% of the loan portfolio at June 30,
1998.
Use of Estimates In Preparing Financial Statements: Preparing financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period, as well as the disclosures provided. Areas
involving the use of estimates and assumptions include the allowance for loan
losses, fair values of securities and other financial instruments, determination
and carrying value of impaired loans and intangible assets, the carrying value
of loans held for sale, the value of mortgage servicing rights, the accrued
liability for deferred compensation, the fair value of stock options, the
realization of deferred tax assets, and the determination of depreciation of
premises and equipment. Actual results could differ from those estimates.
Estimates associated with the allowance for loan losses, the classification and
carrying value of loans held for sale, the fair value of stock options and the
fair value of securities and other financial instruments are particularly
susceptible to material change in the near term.
Cash Flow Reporting: For reporting cash flows, cash and cash equivalents include
cash on hand, due from financial institutions and interest-bearing deposits in
other financial institutions - short-term. Net cash flows are reported for
customer loan and deposit transactions and interest-bearing deposits in other
financial institutions - long-term.
Securities: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported separately in shareholders'
equity, net of tax. Securities are classified as trading when held for short
term periods in anticipation of market gains, and are carried at fair value.
Securities are written down to fair value when a decline in fair value is not
temporary.
Gains and losses on sales are determined using the amortized cost of the
specific security sold. Interest income includes amortization of purchase
premiums and discounts.
<PAGE>
Loans Held for Sale: Mortgage loans intended for sale in the secondary market
are carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized in a valuation allowance by charges to income.
Loans Receivable: Loans receivable are reported at the principal balance
outstanding, net of deferred loan fees and costs, the allowance for loan losses,
and charge-offs. Interest income is reported on the interest method and includes
amortization of net deferred loan fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt, typically
when payments are past due over 90 days. Payments received on such loans are
reported as principal reductions.
Allowance for Loan Losses: Because some loans may not be repaid in full, an
allowance for loan losses is recorded. The allowance for loan losses is
increased by a provision for loan losses charged to expense and decreased by
charge-offs (net of recoveries). Estimating the risk of loss and the amount of
loss on any loan is necessarily subjective. Accordingly, the allowance is
maintained by management at a level considered adequate to cover losses that are
currently anticipated. Management's periodic evaluation of the adequacy of the
allowance is based on past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay,
the estimated value of any underlying collateral, and current economic
conditions. While management may periodically allocate portions of the allowance
for specific problem loan situations, the whole allowance is available for any
loan charge-offs that occur.
21
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Loans are considered impaired if full principal or interest payments are not
anticipated in accordance with the contractual loan terms. Impaired loans are
carried at the present value of expected future cash flows discounted at the
loan's effective interest rate or at the fair value of the collateral if the
loan is collateral dependent. A portion of the allowance for loan losses is
allocated to impaired loans if the value of such loans is less than the unpaid
balance. If these allocations cause the allowance for loan losses to require
increase, such increase is reported in the provision for loan losses.
Commercial loans and mortgage loans secured by other properties are evaluated
individually for impairment. Smaller-balance homogeneous loans such as
residential first mortgage loans, are evaluated for impairment in total. When
analysis of borrower operating results and financial condition indicates that
underlying cash flows of the borrower's business are not adequate to meet debt
service requirements, the loan is evaluated for impairment. Often this is
associated with a delay or shortfall in payments of 30 days or more. Nonaccrual
loans are often also considered impaired. Impaired loans, or portions thereof,
are charged off when deemed uncollectible.
Foreclosed Real Estate: Real estate properties acquired through, or in lieu of,
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.
There was one foreclosed property at June 30, 1998, and no foreclosed real
estate held at June 30, 1997.
Premises and Equipment: Asset cost is reported net of accumulated depreciation.
Depreciation expense is calculated on the straight-line method over asset useful
lives. These assets are reviewed for impairment under SFAS No. 121 when events
indicate the carrying amount may not be recoverable.
Intangible Assets: Intangible assets arising from the acquisition of the NBD
Bank, N.A., South Whitley Branch (the Branch), on June 13, 1997, include
goodwill and core deposit intangibles. Goodwill represents the excess of the
purchase price over the net value of tangible assets acquired and related core
deposit intangibles identified. Goodwill is being amortized on a straight-line
basis for a period of 15 years. The core deposit intangibles are being amortized
on an accelerated basis for a period of 10 years, which represents the estimated
life of the deposits acquired. As of June 30, 1998, unamortized goodwill totaled
$1,165,000 and unamortized core deposit intangibles totaled $366,000.
Income Taxes: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
<PAGE>
Servicing Rights: Prior to adopting Statement of Financial Accounting Standards
(SFAS) No. 122 on July 1, 1996, servicing right assets were recorded only for
purchased rights to service mortgage loans. Subsequent to adopting this
standard, servicing rights represent both purchased rights and the allocated
value of servicing rights retained on loans sold. Servicing rights are expensed
in proportion to, and over the period of, estimated net servicing revenues.
Impairment is evaluated based on the fair value of the rights, using groupings
of the underlying loans as to interest rates and then, secondarily, as to
geographic and prepayment characteristics. Any impairment of a grouping is
reported as a valuation allowance. The effect of adopting this standard was not
material.
Employee Stock Ownership Plan: The Company accounts for its employee stock
ownership plan (ESOP) under AICPA Statement of Position (SOP) 93-6. The cost of
shares issued to the ESOP, but not yet allocated to participants, 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.
22
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock Compensation: Expense for employee compensation under stock option plans
is based on Accounting Principles Board (APB) Opinion 25, with expense reported
only if options are granted below market price at grant date. If applicable,
disclosures of net income and earnings per share are provided as if the fair
value method of SFAS No. 123 were used for stock-based compensation.
Financial Instruments with Off-Balance-Sheet Risk: The Company, in the normal
course of business, makes commitments to make loans which are not reflected in
the financial statements. A summary of these commitments is disclosed in Note
12.
Earnings and Dividends Per Common Share: Basic and diluted earnings per common
share are computed under a new accounting standard effective beginning with the
quarter ended December 31, 1997. All prior earnings per common share amounts
have been restated to be comparable. Basic earnings per common share is based on
the net income divided by the weighted average number of common shares
outstanding during the period. ESOP shares are considered outstanding for
earnings per common share calculations as they are committed to be released;
unearned shares are not considered outstanding. Recognition and retention plan
("RRP") shares are considered outstanding for earnings per common share
calculations as they become vested. Diluted earnings per common share shows the
dilutive effect of additional potential common shares issuable under stock
options and nonvested shares issued under the RRP. Earnings and dividends per
common share are restated for all stock splits and dividends.
Stock Split: Common share amounts and market values and price per share
disclosures related to stock repurchase programs, stock-based compensation plans
and earnings and dividends per share disclosures have been restated for the
two-for-one stock split effected in the form of a 100% stock dividend which was
declared on November 25, 1997 and paid on December 31, 1998. Stock dividends in
excess of 20% are reported by transferring the par value of the stock issued
from retained earnings to common stock. Stock dividends for 20% or less are
reported by transferring the market value, as of the ex-dividend date, of the
stock issued from retained earnings to common stock and additional paid-in
capital. Fractional share amounts are paid in cash with a reduction in retained
earnings.
Reclassifications: Certain amounts in the 1997 and 1996 financial statements
were reclassified to conform with the 1998 presentation.
NOTE 2 - EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
A reconciliation of the numerators and denominators used in the computation of
the basic earnings per common share and diluted earnings per common share is
presented below:
<PAGE>
<TABLE>
<CAPTION>
Year ended June 30,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Basic Earnings Per Common Share
Numerator
Net income $ 1,899,668 $ 1,343,660 $ 1,586,181
=========== =========== ===========
Denominator
Weighted average common shares
outstanding 1,449,938 1,411,099 1,532,856
Less: Average unallocated ESOP shares (51,352) (68,468) (85,584)
Less: Average nonvested RRP shares -- -- (12,125)
----------- ----------- -----------
Weighted average common shares
outstanding for basic earnings per
common share 1,398,586 1,342,631 1,435,147
=========== =========== ===========
Basic earnings per common share $ 1.36 $ 1.00 $ 1.11
=========== =========== ===========
</TABLE>
23
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
NOTE 2 - EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE (continued)
<TABLE>
<CAPTION>
Year ended June 30,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Diluted Earnings Per Common Share
Numerator
Net income $ 1,899,668 $ 1,343,660 $ 1,586,181
=========== =========== ===========
Denominator
Weighted average common shares
outstanding for basic earnings per
common share 1,398,586 1,342,631 1,435,147
Add: Dilutive effects of average nonvested
RRP shares -- -- 6,826
Add: Dilutive effects of assumed exercises
of stock options 41,593 49,023 27,478
----------- ----------- -----------
Weighted average common shares
and dilutive potential common shares
outstanding 1,440,179 1,391,654 1,469,451
=========== =========== ===========
Diluted earnings per common share $ 1.32 $ .97 $ 1.08
=========== =========== ===========
</TABLE>
Stock options for 8,000 shares of common stock, granted during the year ended
June 30, 1997, were not considered in computing diluted earnings per common
share for the year ended June 30, 1997 because they were antidilutive.
<PAGE>
NOTE 3 - SECURITIES
At June 30, securities were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Available for sale 1998
U.S. government and agency $13,166,099 $ 19,527 $ -- $13,185,626
State and municipal 8,905,135 205,283 (8,462) 9,101,956
Other 237,716 4,663 -- 242,379
Mortgage backed 17,551,985 759,441 (16,133) 18,295,293
Equity 9,257,214 296,855 (86,094) 9,467,975
----------- ----------- -------- -----------
$49,118,149 $ 1,285,769 $ (110,689) $50,293,229
=========== =========== ========== ===========
Available for sale 1997
U.S. government and agency $ 6,000,000 $ -- $ (19,663) $ 5,980,337
State and municipal 7,244,059 198,770 (29,695) 7,413,134
----------- ----------- -------- -----------
Other 239,749 6,364 -- 246,113
Mortgage backed 18,217,843 668,318 (23,995) 18,862,166
Equity 7,840,479 153,750 (46,281) 7,947,948
----------- ----------- -------- -----------
$39,542,130 $ 1,027,202 $ (119,634) $40,449,698
=========== =========== ========== ===========
</TABLE>
Contractual maturities of debt securities at June 30, 1998 were as follows.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations. Securities not due at a single
maturity date are shown separately.
24
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
NOTE 3 - SECURITIES (continued)
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
----------- -----------
<S> <C> <C>
Due in one year or less $ 8,071,201 $ 8,072,854
Due from one to five years 6,256,049 6,422,004
Due from five to ten years 7,861,700 7,906,665
Due after ten years 120,000 128,438
Mortgage backed 17,551,985 18,295,293
Equities 9,257,214 9,467,975
----------- -----------
$49,118,149 $50,293,229
=========== ===========
</TABLE>
Sales/calls of securities available for sale for the years ended June 30 were:
1998 1997 1996
----------- ---------- -----------
Sales $ 9,356,977 $ 377,024 $ 1,595,398
Calls 10,051,000 -- --
Gross gains 266,215 2,024 59,369
Calls of securities held to maturity for the years ended June 30 were:
Proceeds $-- $ -- $ 500,000
Gross gains -- -- 410
The June 30, 1995 balance of mortgage-backed securities was reduced by $318,900
to reflect an other than temporary decline in the fair value of a security.
Collateral for this security was multi-family mortgage obligations primarily
located in Southern California. The decline in the fair value of the security
was due to increased delinquency in the underlying loans and a decline in the
cash reserve fund and losses incurred on foreclosed real estate. On April 29,
1998 this security was sold and a gain on sale of $264,028 was recognized from
the previously written down balance.
<PAGE>
NOTE 4 - LOANS RECEIVABLE, NET
Loans receivable as of June 30 were as follows:
1998 1997
----------- -----------
Mortgage loans (principally conventional)
Principal
Secured by one-to-four family residences $70,243,040 $64,921,190
Secured by other properties 7,272,108 6,425,510
Construction 3,990,770 2,974,100
----------- -----------
81,505,918 74,320,800
Undisbursed portion of construction loans (1,715,762) (1,134,371)
Net deferred loan origination fees (47,280) (63,059)
----------- -----------
Total mortgage loans 79,742,876 73,123,370
25
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
NOTE 4 - LOANS RECEIVABLE, NET (continued)
1998 1997
------------ ------------
Consumer and other loans
Principal
Automobile $ 33,813,611 $ 22,625,031
Manufactured home 301,445 350,293
Home equity and improvement 9,104,988 6,969,879
Commercial 12,945,444 6,812,814
Other 3,822,697 4,422,631
------------ ------------
59,988,185 41,180,648
Net deferred loan origination costs 645,163 426,478
------------ ------------
Total consumer and other loans 60,633,348 41,607,126
Less allowance for loan losses (982,532) (571,751)
------------ ------------
$139,393,692 $114,158,745
============ ============
Activity in the allowance for loan losses for the years ended June 30 is as
follows:
1998 1997 1996
-------- -------- --------
Beginning balance $571,751 $553,440 $483,780
Provision for loan losses 705,000 120,000 95,153
Charge-offs (331,702) (184,797) (79,520)
Recoveries 37,483 83,108 54,027
-------- -------- --------
Ending balance $982,532 $571,751 $553,440
======== ======== ========
At June 30, 1998 and 1997, no portion of the allowance for loan losses was
allocated to impaired loan balances as there were no loans considered to be
impaired as of or for the years ended June 30, 1998 or 1997.
NOTE 5 - LOAN SERVICING
Mortgage loans serviced for others are not reported as assets in the balance
sheets. These loans totaled $25,861,772 and $21,397,561 at June 30, 1998 and
1997. Related escrow deposit balances were $56,700 and $34,000 at June 30, 1998
and 1997.
<PAGE>
NOTE 6 - PREMISES AND EQUIPMENT, NET
Premises and equipment at June 30 were as follows:
1998 1997
----------- -----------
Land $ 350,121 $ 267,999
Buildings 2,063,539 1,914,153
Furniture, fixtures and equipment 815,480 639,072
----------- -----------
Total cost 3,229,140 2,821,224
Less accumulated depreciation (1,023,682) (894,314)
----------- -----------
$ 2,205,458 $ 1,926,910
=========== ===========
26
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
NOTE 7 - DEPOSITS
Deposit accounts individually exceeding $100,000 totaled $27,940,314 and
$20,253,000 at June 30, 1998 and 1997.
At June 30, 1998, stated maturities of certificates of deposit were:
1999 $43,399,983
2000 15,492,801
2001 3,954,973
2002 1,710,414
2003 and thereafter 2,277,076
-----------
$66,835,247
===========
NOTE 8 - OTHER BORROWINGS
Federal Home Loan Bank (FHLB) advances total $51,500,000 at June 30, 1998. The
majority of the advances have fixed interest rates ranging from 5.32% to 7.94%
and the scheduled maturities during the years ended June 30 were as follows:
1999 $28,000,000
2000 5,000,000
2001 4,000,000
2002 500,000
Thereafter 14,000,000
-----------
$51,500,000
===========
The Bank also maintains a $1,000,000 overdraft line of credit agreement with the
FHLB which terminates on May 20, 1999. As of June 30, 1998 and 1997 no amounts
were outstanding under this agreement.
FHLB advances and the overdraft line of credit agreement are secured by all
stock in the FHLB, qualifying first mortgage loans, government, agency and
mortgage-backed securities. At June 30, 1998, collateral of approximately $92.0
million is pledged to the FHLB to secure advances outstanding.
At June 30, 1998, the Bank had a due to broker for $5.0 million for a security
purchase which settled on July 1, 1998.
NOTE 9 - EMPLOYEE BENEFITS
Employee Pension Plan: The pension plan is part of a noncontributory
multi-employer defined-benefit pension plan covering substantially all
employees. 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
<PAGE>
Company. As of July 1, 1997, the latest actuarial valuation, total plan assets
exceeded the actuarially determined value of total vested benefits. The plan has
reached its full funding limitation for Internal Revenue Code purposes and a
full contribution is not required. As a result, other than administrative
expenses, there was no pension expense for the years ended June 30, 1998, 1997
and 1996.
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 under this plan were
$28,000, $21,000 and $20,000 for the years ended June 30, 1998, 1997 and 1996.
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 64,670 shares of common stock at an average price of
$6.47 per share. The plan fully vested in April of 1997. Expense of $0, $13,000,
and $44,000 was recorded for these Plans for the years ended June 30, 1998, 1997
and 1996.
27
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
NOTE 9 - EMPLOYEE BENEFITS (continued)
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 118,300 shares of the common
stock issued in the conversion at $5 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 $269,000, $232,000 and $154,000 was recorded for the years ended June
30, 1998, 1997 and 1996. Contributions to the ESOP were $93,000, $87,000 and
$54,000 during the years ended June 30, 1998, 1997 and 1996.
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, 1998, 1997 and 1996, 17,117 shares with an average
fair value of $17.31, $13.57 and $9.00 per share, were committed to be released.
The ESOP shares as of June 30 were:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Allocated (including shares committed to be released) 92,623 75,506 58,390
Unearned 25,677 42,794 59,910
Shares withdrawn from the plan by participants (7,110) -- --
-------- -------- --------
Total ESOP shares held in the plan 111,190 118,300 118,300
======== ======== ========
Fair value of unearned shares at June 30 $443,442 $577,719 $576,634
======== ======== ========
</TABLE>
<PAGE>
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 169,000 shares of common stock from the initial public
offering. 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. No compensation expense was recognized for
stock options for the years ended June 30, 1998, 1997 and 1996.
SFAS No. 123, which became effective for the year ended June 30, 1997, requires
pro forma disclosures for companies that do not adopt its fair value accounting
method for stock-based employee compensation. The effects on the Company's net
income and earnings per share under the provisions of SFAS No. 123 were not
material for the years ended June 30, 1998, 1997 and 1996. In future years, the
pro forma effect of not applying this standard is expected to increase as
additional options are granted.
Information about option grants follows.
28
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
NOTE 9 - EMPLOYEE BENEFITS (continued)
<TABLE>
<CAPTION>
Available Options
For Grant Outstanding Exercise Price
--------- ----------- --------------
<S> <C> <C> <C>
Outstanding, June 30, 1995 32,116 130,092 $5.00
Exercised -- (10,392) 5.00
------ -------
Outstanding, June 30, 1996 32,116 119,700 5.00
Granted (8,000) 8,000 10.94
Granted (8,000) 8,000 13.38
Exercised -- (32,348) 5.00
------ -------
Outstanding, June 30, 1997 16,116 103,352 5.00-13.38
Exercised -- (35,564) 5.00
------ -------
Outstanding, June 30, 1998 16,116 67,788 5.00-13.38
====== =======
</TABLE>
Options exercisable at June 30, 1998 were as follows.
Number of
Options Exercise Price
------- --------------
59,788 $5.00-13.38
Deferred Compensation: The Company has a deferred compensation plan for certain
directors of the Company and a salary continuation plan for a certain executive
of the Bank. Under these plans, the Company/Bank is obligated to pay each such
individual or beneficiaries the amount of accumulated contributions plus
interest credited thereon over a period of three to fifteen years for the
deferred compensation plan and a lump sum payment for the salary continuation
plan beginning with the individual's termination of service. A deferred
compensation liability of $211,000 and $176,000 at June 30, 1998 and 1997 has
been accrued for the obligations under these plans. To fund the benefits that
will be payable under these plans, life insurance on the participants was
purchased. The cash surrender value of such insurance was $248,000 and $246,000
at June 30, 1998 and 1997 and is included in other assets in the consolidated
balance sheets. The expense incurred for these plans was $36,000, $36,000, and
$31,000 for the years ending June 30, 1998, 1997 and 1996.
NOTE 10 - INCOME TAXES
The Company and the Bank file consolidated income tax returns on a fiscal year
basis. Prior to fiscal year 1997, if certain conditions were met in determining
taxable income as reported on the consolidated federal income tax return, the
Bank was allowed a special bad debt deduction based on a percentage of taxable
income (8% for fiscal 1996) or on specified experience formulas. The Bank used
the percentage-of-taxable-income method for the tax years ended June 30, 1996.
Tax legislation passed in August 1996 now requires the Bank to deduct a
provision for bad debts for tax purposes based on actual loss experience and
recapture the excess bad debt reserve accumulated in tax years beginning after
June 30, 1987. The related amount of deferred tax liability which must be
recaptured is approximately $135,000 and is payable over a six year period
beginning no later than the tax year ending June 30, 1999.
<PAGE>
Income tax expense for the years ended June 30 was:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Federal
Current $626,763 $438,181 $466,577
Deferred 11,209 2,124 65,482
-------- -------- --------
637,972 440,305 532,059
State
Current 216,357 129,438 189,930
Deferred 3,414 36,024 4,002
-------- -------- --------
219,771 165,462 193,932
-------- -------- --------
Income tax expense $857,743 $605,767 $725,991
-------- -------- --------
</TABLE>
29
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
NOTE 10 - INCOME TAXES (continued)
Income tax expense differed from amounts computed using the U.S. federal income
tax rate of 34% on income before income taxes for the years ended June 30 as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Income taxes at 34% statutory rate $937,519 $662,805 $786,138
Tax effect of:
Tax-exempt income (126,981) (147,117) (170,230)
State tax, net of federal income tax effect 156,126 109,205 127,995
Dividends received deduction (69,246) (61,794) (17,297)
Fair market value of ESOPshares in excess of cost 59,840 49,471 23,834
Other (99,515) (6,803) (24,449)
-------- -------- --------
Total income tax expense $857,743 $605,767 $725,991
======== ======== ========
</TABLE>
Components of the net deferred tax liability as of June 30 are:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Bad debts $ 254,122 $ 91,412
Deferred compensation 83,523 69,781
Core deposit intangible 20,388 --
Securities writedown -- 126,316
Other 11,023 1,976
--------- ---------
369,056 289,485
Deferred tax liabilities:
Accretion (50,164) (48,190)
Net deferred loan costs (236,821) (143,950)
Net unrealized appreciation on
securities available for sale (465,448) (385,716)
Other (6,739) (7,390)
--------- ---------
(759,172) (585,246)
Valuation allowance (24,199) (19,669)
--------- ---------
Net deferred tax asset (liability) $(414,315) $(315,430)
========= =========
</TABLE>
<PAGE>
A valuation allowance is established for the tax effect of unrealized
depreciation on marketable equity securities available for sale. It increased
$4,530 in 1998 and decreased $26,801 in 1997.
Federal income tax laws provide savings banks with additional bad debt
deductions through 1987, totaling $1,156,000 for the Bank. Accounting standards
do not require a deferred tax liability to be recorded on this amount, which
liability otherwise would total $393,000 at June 30, 1998 and 1997. If the Bank
was liquidated or otherwise ceased to be a bank or if tax laws were to change,
the $393,000 would be recorded as expense.
NOTE 11 - REGULATORY MATTERS
The Bank is subject to regulatory capital requirements administered by federal
banking agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets, liabilities, and certain
offbalance-sheet items calculated under regulatory accounting practices. Capital
amounts and classifications are also subject to qualitative judgments by
regulators about components, risk weightings and other factors, and the
regulators can lower classifications in certain cases. Failure to meet various
capital requirements can initiate regulatory action that could have a direct
material effect on the financial statements.
30
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
NOTE 11 - REGULATORY MATTERS (continued)
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If only adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
The Bank's actual capital and required capital amounts and ratios are presented
below:
<TABLE>
<CAPTION>
Minimum
Requirement
Minimum To Be Well
Requirement Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
- ---------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1998
Total Capital (to risk
weighted assets) $14,743 12.08% $9,764 8.00% $12,205 10.00%
Tier I (Core) Capital
(to risk weighted
assets) 13,786 11.30% 4,882 4.00% 7,323 6.00%
Tier I (Core) Capital
(to adjusted total
assets) 13,786 6.94% 5,958 3.00% N/A N/A
Tangible Capital
(to adjusted total
assets) 13,786 6.94% 2,979 1.50% N/A N/A
Tier I (Core) Capital
(to average assets) 13,786 7.28% 7,573 4.00% 9,466 5.00%
As of June 30, 1997
Total Capital (to risk
weighted assets) $12,124 12.71% $7,628 8.00% $ 9,535 10.00%
Tier I (Core) Capital
(to risk weighted
assets) 11,552 12.11% 3,814 4.00% 5,721 6.00%
Tier I (Core) Capital
(to adjusted total
assets) 11,552 6.62% 5,236 3.00% N/A N/A
Tangible Capital
(to adjusted total
assets) 11,552 6.62% 2,618 1.50% N/A N/A
Tier I (Core) Capital
(to average assets) 11,552 7.31% 6,323 4.00% 7,904 5.00%
</TABLE>
<PAGE>
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 calendar year. Accordingly, at June 30, 1998 approximately $3.2
million of the Bank's retained earnings is available for distribution to the
Company.
31
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
NOTE 12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONTINGENCIES
Various outstanding commitments and contingent liabilities are not reflected in
the financial statements. Commitments to make loans at June 30 were as follows:
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 7
------------------------------ ---------------------------
Fixed Variable Fixed Variable
Rate Rate Rate Rate
---------- ----------- -------- ----------
<S> <C> <C> <C> <C>
Commitments to make loans $1,278,000 $ 628,000 $905,000 $1,598,000
Unused lines of credit -- 8,844,000 -- 5,370,000
Standby letters of credit -- 1,232,000 -- 1,229,000
---------- ----------- -------- ----------
$1,278,000 $10,704,000 $905,000 $8,197,000
========== =========== ======== ==========
</TABLE>
Fixed rate loan commitments at June 30, 1998 were at current rates, ranging
primarily from 7.50% to 12.50%.
Variable rate loan commitments, unused lines of credit and standby letters of
credit at June 30, 1998 were at current rates ranging from 7.00% to 11.50% for
loan commitments, 8.50% to 11.50% for unused lines of credit and primarily at
the national prime rate of interest plus 100 to 300 basis points for standby
letters of credit.
Since commitments to make loans and to fund unused lines of credit, loans in
process and standby letters of credit may expire without being used, the amounts
do not necessarily represent future cash commitments. In addition, commitments
are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. The maximum exposure to credit loss in
the event of nonperformance by the other party is the contractual amount of
these instruments. The same credit policy is used to make such commitments as is
used for loans receivable.
Under employment agreements with three of its officers, certain events leading
to separation from the Company could result in cash payments totaling $687,000.
The Company and the Bank are subject to certain claims and legal actions arising
in the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters is
not expected to have a material adverse effect on the consolidated financial
position or results of operation of the Company.
The Bank has a 3% limited partner interest in House Investments-Midwest
Corporate Tax Credit Fund II, L.P. which was formed for the construction,
ownership and management of affordable housing projects located throughout the
midwest. The Bank is one of 13 investors and has subscribed for two of the 65.27
shares. Each subscription represents a commitment to invest $375,000. As part of
<PAGE>
the partnership agreement, the Bank signed a demand note for $750,000 for a term
not longer than ten years. As of June 30, 1998, the Bank had invested $450,000
as a payment on the demand note and had recorded equity in the operating loss of
the limited partnership of $45,000 and $48 for the years ended June 30, 1998 and
1997. At June 30, 1998 and 1997, the obligation due to the limited partnership
was $300,000 and $712,500 which represents the amount of principal payment
remaining on the demand note. Terms of the partnership agreement allocate 3% of
the eligible tax credits to the Bank as a limited partner. For the years ended
June 30, 1998 and 1997, the Bank received approximately $15,000 and $18 in tax
credits from the limited partnership.
NOTE 13 - SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
Real estate and consumer loans, including automobile, home equity and
improvement, manufactured home and other consumer loans are granted primarily in
Wabash and Kosciusko counties. Loans secured by one to four family residential
real estate mortgages make up 50% 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.
32
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
NOTE 14 - RELATED PARTY TRANSACTIONS
Certain directors, executive officers and principal shareholders of the Company,
including associates of such persons, are loan customers. A summary of the
related party loan activity, for loans aggregating $60,000 or more to any one
related party, is as follows:
Balance June 30, 1997 $ 726,674
New loans 479,347
Repayments (127,554)
Other changes 190,478
----------
Balance - June 30, 1998 $1,268,945
==========
Other changes include adjustments for loans applicable to one reporting period
that are excludable from the other reporting period.
NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS
Presented below are condensed financial statements for the parent company, FFW
Corporation.
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
June 30, 1998 and 1997
1998 1997
----------- -----------
<S> <C> <C>
Cash and cash equivalents $ 414,301 $ 502,580
Investment in Bank subsidiary 16,014,935 13,794,878
Investment in non-bank subsidiary 224,206 168,171
Securities available for sale 2,284,236 2,402,056
Loan receivable from ESOP 151,748 244,553
Other assets 52,248 33,141
----------- -----------
Total assets $19,141,674 $17,145,379
=========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
LIABILITIES
Accrued expenses and other liabilities $ 12,947 $ 4,093
SHAREHOLDERS' EQUITY
Common stock 17,751 8,698
Additional paid-in capital 8,793,133 8,439,565
Retained earnings - substantially restricted 12,468,144 11,119,378
Net unrealized appreciation (depreciation) on securities
available for sale, net of tax of $489,649 in
1998 and $405,385 in 1997 685,432 502,183
Unearned Employees Stock Ownership Plan shares (151,748) (244,553)
Treasury stock, at cost (2,683,985) (2,683,985)
----------- -----------
Total shareholders' equity 19,128,727 17,141,286
----------- -----------
Total liabilities and shareholders' equity $19,141,674 $17,145,379
=========== ===========
</TABLE>
33
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
For the years ended June 30, 1998, 1997 and 1996
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Interest income $ 117,349 $ 152,696 $ 223,511
Net realized gains on sales of securities
available for sale -- 1,924 59,279
Other income -- -- 1,175
----------- ----------- -----------
117,349 154,620 283,965
Operating expense 136,776 154,287 121,779
----------- ----------- -----------
Income before income taxes and equity
in undistributed income of subsidiaries (19,427) 333 162,186
Equity in undistributed income of subsidiaries
Bank 1,817,183 1,271,803 1,406,430
Non-bank 56,035 32,541 9,732
----------- ----------- -----------
Income before income taxes 1,853,791 1,304,677 1,578,348
Income tax expense (benefit) (45,877) (38,983) (7,833)
----------- ----------- -----------
Net income $ 1,899,668 $ 1,343,660 $ 1,586,181
=========== =========== ===========
</TABLE>
34
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended June 30, 1998, 1997 and 1996
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,899,668 $ 1,343,660 $ 1,586,181
Adjustments to reconcile net income to net
cash from operating activities
Equity in undistributed income of subsidiaries
Bank (1,817,183) (1,271,803) (1,406,430)
Non-bank (56,035) (32,541) (9,732)
Other (30,964) 30,486 (37,098)
----------- ----------- -----------
Net cash from operating activities (4,514) 69,802 132,921
Cash flows from investing activities
Net change in interest-bearing deposits
in other financial institutions - long-term -- 173,664 (173,664)
Proceeds from sales of securities
available for sale -- 175,000 1,595,398
Maturities of securities available for sale 455,000 635,000 --
Maturities of securities held to maturity -- -- 70,000
Purchase of securities available for sale (267,289) (45,842) (78,511)
Repayments on loan receivable from ESOP 92,805 86,636 80,875
----------- ----------- -----------
Net cash from investing activities 280,516 1,024,458 1,494,098
Cash flows from financing activities
Proceeds from exercise of stock options 177,820 161,740 51,960
Purchase of treasury stock -- (329,749) (1,345,400)
Cash dividends paid (542,101) (443,192) (382,075)
----------- ----------- -----------
Net cash from financing activities (364,281) (611,201) (1,675,515)
----------- ----------- -----------
Net change in cash and cash equivalents (88,279) 483,059 (48,496)
Cash and cash equivalents at beginning of period 502,580 19,521 68,017
----------- ----------- -----------
Cash and cash equivalents at end of period $ 414,301 $ 502,580 $ 19,521
=========== =========== ===========
</TABLE>
The extent to which the Company may pay cash dividends to shareholders will
depend on the cash currently available at the Company, as well as the Bank's
ability to pay dividends to the Company (see Note 11).
35
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table shows estimated fair values and related carrying amounts of
the Company's financial instruments at June 30. Items which are not financial
instruments are not included.
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 7
------------------------- --------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 4,410 $ 4,410 $ 17,121 $ 17,121
Securities available for sale 50,293 50,293 40,450 40,450
Loans receivable, net 139,394 138,749 114,159 114,432
Federal Home Loan Bank stock 2,757 2,757 2,398 2,398
Accrued interest receivable 1,429 1,429 1,124 1,124
Investment in limited partnership 705 705 750 750
Noninterest-bearing demand deposits (6,935) (6,935) (5,751) (5,751)
Savings, NOW and MMDA deposits (51,486) (51,486) (50,530) (50,530)
Other time deposits (66,835) (67,039) (59,837) (60,140)
Other borrowings (56,500) (56,240) (44,800) (44,841)
Obligation relative to limited partnership (300) (300) (713) (713)
Accrued interest payable (204) (204) (158) (158)
</TABLE>
For purposes of the above disclosures of estimated fair value, the following
assumptions were used as of June 30, 1998 and 1997. The estimated fair value for
cash and cash equivalents, Federal Home Loan Bank stock, accrued interest
receivable, investment in limited partnership, noninterest-bearing demand
deposits, savings, NOW and MMDA deposits, obligation relative to limited
partnership 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 receivable, net, is based on estimates of the rate the Bank
would charge for similar loans at June 30, 1998 and 1997 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, 1998 and 1997, 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 was the Company to have
disposed of such items at June 30,1998 and 1997, 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, 1998
and 1997 should not necessarily be considered to apply to subsequent dates.
<PAGE>
In addition, other assets and liabilities of the Company that are not defined as
financial instruments are not included in the above disclosures, such as
premises and equipment. Also, non-financial instruments typically not recognized
in financial statements nevertheless may have value but are not included in the
above disclosures. These include, among other items, the estimated earnings
power of core deposit accounts, the trained work force, customer goodwill and
similar items.
36
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
NOTE 17 - SAIF DEPOSIT INSURANCE PREMIUM
The deposits of savings associations such as the Bank are insured by the Savings
Association Insurance Fund ("SAIF"). A recapitalization plan signed into law on
September 30, 1996 provided for a one-time assessment of 65.7 basis points
applied to all SAIF deposits as of March 31, 1995. Based on the Bank's deposits
as of this date, a one-time assessment of approximately $556,000 was paid and
recorded as federal deposit insurance premium expense for the year ended June
30, 1997.
NOTE 18 - IMPACT OF NEW ACCOUNTING STANDARDS
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, was issued in 1996. It revised the accounting
for transfers of financial assets, such as loans and securities, and for
distinguishing between sales and secured borrowings. It became effective for
some transactions in 1997 and others beginning in 1998. The effect on the
consolidated financial statements was not material.
A new accounting standard, SFAS No. 130, Reporting Comprehensive Income, will
require future reporting of comprehensive income beginning with the quarter
ended September 30, 1998. Comprehensive income is net income plus changes in the
net unrealized gain (loss) on securities available for sale, net of tax.
A new accounting standard, SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, will require future reporting of additional
information related to material business segments beginning with the year ended
June 30, 1999.
A new accounting standard, SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, will require all derivatives to be recognized at fair
value as either assets or liabilities in the Consolidated Balance Sheets
beginning with the quarter ended September 30, 1999. Changes in the fair value
of derivatives not designated as hedging instruments are to be recognized
currently in earnings. Gains or losses on derivatives designated as hedging
instruments are either to be recognized currently in earnings or are to be
recognized as a component of other comprehensive income, depending on the
intended use of the derivatives and the resulting designations. The Corporation
does not believe adoption of this new standard will have a material impact on
its consolidated financial position or results of operations.
37
<PAGE>
Directors and Officers
FFW CORPORATION
Officers
Wayne W. Rees
Chairman of the Board and Secretary
Nicholas M. George
President and Chief Executive Officer
Board of Directors
Wayne W. Rees
Owner and Publisher
The Paper of Wabash County, Inc.
Nicholas M. George
President and Chief Executive Officer
FFW Corporation
President and Chief Executive Officer
First Federal Savings Bank of Wabash
President
FirstFed Financial of Wabash, Inc.
Maynard E. Vollmer
Retired
J. Stanley Myers
Owner and Operator
Servisoft Water Conditioning, Inc.
Thomas L. Frank
Comptroller, B. Walter & Company
Joseph W. McSpadden
Vice President and Part Owner
Beauchamp & McSpadden
Ronald D. Reynolds
Owner, J. M. Reynolds Oil Co, Inc.
<PAGE>
FIRST FEDERAL SAVINGS BANK OF WABASH
Officers
Wayne W. Rees
Chairman of the Board
Nicholas M. George
President and Chief Executive Officer
Joyce K. Sanders
Vice President and Senior Lending Officer
Timothy T. Taylor
Vice President
Richard B. Conroy
Vice President
Marvin A. Goble
Vice President
Gregory A. Metz
Vice President
Christine K. Noonan
Vice President Data Processing and Secretary
Rebekah Steele
Assistant Secretary
Board of Directors
Wayne W. Rees
Nicholas M. George
Maynard E. Vollmer
J. Stanley Myers
Thomas L. Frank
Joseph W. McSpadden
Ronald D. Reynolds
38
<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, 1998 there were approximately 349 shareholders of record, not
including those shares held in nominee or street name through various brokerage
firms or banks.
The following table sets forth the high and low bid prices and dividends paid
per share of common stock over the last two year period. The stock price
information was provided by the NASD, Inc. All information has been adjusted for
a 2 for 1 stock split on December 31, 1997.
Quarter Dividend
Ended High Low Declared
- -------------------------------------------------------
Sept. 30, 1996 $10.00 $ 9.63 $.08
Dec. 31, 1996 11.00 10.00 .08
March 31, 1997 13.38 10.75 .08
June 30, 1997 13.50 12.75 .09
Sept. 30, 1997 15.88 13.00 .09
Dec. 31, 1997 20.88 15.13 .09
March 31, 1998 22.00 17.50 .09
June 30, 1998 20.00 17.00 .11
[GRAPHIC-GRAPH DEPICTING ENDING STOCK PRICE JUNE 30,]
Dividends
FFW declared and paid dividends of $0.38 per share for fiscal year 1997. 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.
39
<PAGE>
Investor Information
Shareholders, investors, and analysts interested in additional information may
contact Nicholas M. George, President and Chief Executive 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
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
Annual Meeting of Shareholders
The Annual Meeting of Shareholders of FFW Corporation will be held at 2:30 p.m.,
October 27, 1998 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-KSB and
Investor Information
A copy of FFW Corporation's annual report on Form 10-KSB, filed with the
Securities and Exchange Commission, is available without charge by writing:
Nicholas M. George
President and Chief Executive Officer
FFW Corporation
1205 N. Cass Street
Wabash, Indiana 46992
40
Exhibit 21
Subsidiaries of the Registrant
<PAGE>
Exhibit 21
<TABLE>
<CAPTION>
SUBSIDIARIES OF THE REGISTRANT
Percent State of
of Incorporation
Parent Subsidiary Ownership or Organization
------ ---------- --------- ---------------
<S> <C> <C> <C>
FFW Corporation First Federal Savings Bank of 100% Federal
Wabash
FFW Corporation FirstFed Financial of Wabash, 100% Indiana
Inc.
</TABLE>
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 August 14, 1998 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, 1998, 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
October 8, 1998
<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, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,024
<INT-BEARING-DEPOSITS> 386
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 50,293
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 139,394
<ALLOWANCE> 983
<TOTAL-ASSETS> 203,311
<DEPOSITS> 125,256
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,426
<LONG-TERM> 56,500
<COMMON> 18
0
0
<OTHER-SE> 19,111
<TOTAL-LIABILITIES-AND-EQUITY> 203,311
<INTEREST-LOAN> 11,029
<INTEREST-INVEST> 3,392
<INTEREST-OTHER> 168
<INTEREST-TOTAL> 14,589
<INTEREST-DEPOSIT> 5,627
<INTEREST-EXPENSE> 8,591
<INTEREST-INCOME-NET> 5,998
<LOAN-LOSSES> 705
<SECURITIES-GAINS> 266
<EXPENSE-OTHER> 3,800
<INCOME-PRETAX> 2,757
<INCOME-PRE-EXTRAORDINARY> 1,900
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,900
<EPS-PRIMARY> 1.36
<EPS-DILUTED> 1.32
<YIELD-ACTUAL> 3.31
<LOANS-NON> 714
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,700
<ALLOWANCE-OPEN> 572
<CHARGE-OFFS> 332
<RECOVERIES> 38
<ALLOWANCE-CLOSE> 983
<ALLOWANCE-DOMESTIC> 973
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 10
</TABLE>
