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, 1999 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
- --------------------------------------------------------------------------------
(Name of small business issuer in its charter)
Delaware 35-1875502
- ----------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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:
None
----
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
---------------------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. YES X . NO ___.
<PAGE>
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:
$18,041,945.
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 15, 1999, was $15.5
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 15, 1999, there were issued and outstanding 1,438,449
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, 1999.
Part III of Form 10-KSB - Proxy Statement for 1999 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, 1999, the Company had $217.5 million of assets and
shareholders' equity of $19.4 million (or 8.92% 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, 1999, 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 sixty months. The Bank solicits
deposits in its primary market area. 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, 1999, the Bank had FHLB
advances totaling $66.3 million.
2
<PAGE>
FirstFed Financial of Wabash, Inc. During fiscal 1993, the Company
acquired FirstFed Financial of Wabash, Inc. ("FirstFed") from the Bank. FirstFed
offers insurance products, including life insurance, mutual funds, annuity and
brokerage services through a registered broker dealer. FirstFed, which is
located in Wabash, Indiana was incorporated in 1989. FirstFed had net income of
approximately $51,000 for the fiscal year ended June 30, 1999.
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 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
3
<PAGE>
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, 1999, the Bank's net loan
portfolio totaled $151.5 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 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.
4
<PAGE>
The following schedule presents the dollar amount of changes 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.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
------------------------------------- -------------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
---------------------- Increase -------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
-------- -------- ------------ -------- ------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1)........................... $1,720 $(321) $1,399 $1,738 $94 $1,832
Securities.................................... 450 (117) 333 393 98 491
Mortgage-backed securities.................... (159) (102) (261) (45) 26 (19)
Interest-bearings deposits in other financial
institutions............................. (151) 143 (8) 79 (18) 61
------ ------ ------ ------ ---- ------
Total interest-earning assets.................. $1,860 $(397) $1,463 $2,165 $200 $2,365
====== ------ ====== ====== ==== ------
Interest-bearing liabilities:
Money market accounts......................... (13) 14 1 $18 $--- $18
NOW accounts.................................. (6) 21 15 53 (5) 48
Passbook Savings accounts..................... 96 (70) 26 85 (40) 45
Certificates of deposit....................... 297 (158) 139 744 (6) 738
FHLB Advances................................. 724 (130) 594 483 13 496
------ ------ ---- ------ ----- ------
Total interest bearing liabilities............. $1,098 $(323) $775 $1,383 $(38) $1,345
====== ====== ---- ====== ===== ------
Net interest income............................ $688 $1,020
==== ======
</TABLE>
- -------------------
(1) Includes the impact of non-accruing loans and loan fees.
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,
----------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- -------------------------------- -------------------------------
Amount Percent Amount Percent Amount Percent
------------- --------------- ------------- ---------------- -------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family.................. $ 67,825 44.34% $ 70,243 49.64% $ 64,921 56.21%
Commercial and multi-family.......... 9,342 6.11 7,272 5.14 6,426 5.56
Construction......................... 899 .59 3,991 2.82 2,974 2.58
-------- ------ -------- ------- -------- ------
Total real estate loans........... 78,066 51.04 81,506 57.60 74,321 64.35
-------- ------ -------- ------ -------- ------
Other Loans:
Consumer Loans:
Deposit account..................... 504 .33 475 .34 451 .39
Automobile.......................... 36,334 23.75 33,814 23.90 22,625 19.59
Home equity and improvement......... 10,394 6.80 9,105 6.43 6,970 6.03
Manufactured home................... 249 .16 301 .21 350 .30
Other............................... 3,621 2.37 3,348 2.37 3,972 3.44
-------- ------ -------- ------- -------- ------
Total consumer loans.............. 51,102 33.41 47,043 33.25 34,368 29.75
-------- ------ -------- ------ -------- ------
Commercial business loans............ 23,781 15.55 12,945 9.15 6,813 5.90
-------- ------ -------- ------- -------- ------
Total other loans................... 74,883 48.96 59,988 42.40 41,181 35.65
-------- ------ -------- ------ -------- ------
Total loans....................... 152,949 100.00% 141,494 100.00% 115,502 100.00%
-------- ====== ====== ======
Less:
Loans in process..................... 444 1,716 1,134
Deferred fees, cost and discounts.... (609) (599) (363)
Allowance for loan losses............ 1,623 983 572
-------- -------- --------
Total loans, net.................. $151,491 $139,394 $114,159
======== ======== ========
</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,
----------------------------------------------------------------------------------
1999 1998 1997
-------------------------- --------------------------- --------------------------
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............................. $16,976 11.10% $17,492 12.36% $ 8,588 7.43%
Commercial and multi-family..................... 6,671 4.36 2,307 1.63 1,676 1.45
Construction.................................... 705 .46 2,110 1.49 1,222 1.06
------- ------ ------- ------ ------- -----
Total real estate loans..................... 24,352 15.92 21,909 15.48 11,486 9.94
------- ------ ------- ------ ------- -----
Consumer......................................... 45,140 29.51 42,370 29.94 31,222 27.03
Commercial business.............................. 6,853 4.48 5,540 3.92 2,921 2.53
------- ------ ------- ------ ------- -----
Total fixed-rate loans...................... 76,345 49.91 69,819 49.34 45,629 39.50
------- ------ ------- ------ ------- -----
Adjustable-Rate Loans:
Real estate:
One- to four-family............................ 50,849 33.24 52,751 37.28 56,333 48.77
Commercial and multi-family.................... 2,671 1.75 4,965 3.51 4,750 4.11
Construction................................... 194 .13 1,881 1.33 1,752 1.52
------- ------- ------ ------- -----
Total real estate loans..................... 53,714 35.12 59,597 42.12 62,835 54.40
------- ------ ------- ------ ------- -----
Consumer........................................ 5,962 3.90 4,673 3.30 3,146 2.73
------
Commercial business............................. 16,928 11.07 7,405 5.24 3,892 3.37
------- ------ ------- ------ ------- -----
Total adjustable-rate loans................. 76,604 50.09 71,675 50.66 69,873 60.50
------- ------ ------- ------ ------- -----
Total loans................................. 152,949 100.00% 141,494 100.00% 115,502 100.00%
====== ====== ======
Less:
- ----
Loans in process................................ 444 1,716 1,134
Deferred fees, cost and discounts............... (609) (599) (363)
Allowance for loan losses....................... 1,623 983 572
-------- ------- --------
Total loans, net............................ $151,491 $139,394 $114,159
======== ======== ========
</TABLE>
7
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Bank's loan portfolio (including non-accruing loans) at June 30, 1999. 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
------------------------ ----------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
----------- ----------- ---------- -------------- ----------- ------------
(Dollars in Thousands)
Due During
Years Ending
June 30,
<S> <C> <C> <C> <C> <C> <C>
2000.......................... $ 678 8.50% $ 93 8.75% $500 8.12%
2001 - 2004................... 2,035 8.50 280 9.25 399 8.75
2005 and following............ 65,112 8.22 8,969 9.05 --- ---
------ ---- ----- ---- ------ -----
$67,825 8.23% $9,342 9.05% $899 8.40%
====== ===== ===
</TABLE>
<TABLE>
<CAPTION>
Commercial
Consumer Business Total
---------------------- ------------------------- --------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate Amount Percent
--------- ------------ ----------- ------------- ---------- ---------
Due During
Years Ending
June 30,
<S> <C> <C> <C> <C> <C> <C>
2000.......................... $ 3,577 9.30% $ 9,988 8.84% $ 14,836 9.70%
2001 - 2004................... 39,144 8.55 6,183 8.40 48,041 31.41
2005 and following............ 8,381 8.35 7,610 9.01 90,072 58.89
------- ---- ------- ---- -------- -----
$51,102 8.57% $23,781 8.78% $152,949 100.00%
====== ====== =======
</TABLE>
The total amount of loans due after June 30, 2000 which have fixed
interest rates is $67.2 million, while the total amount of loans due after such
dates which have floating or adjustable interest rates is $70.9 million.
8
<PAGE>
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, 1999, the Bank's one- to four-family residential
mortgage loans totaled $67.8 million, or approximately 44.3% of the Bank's total
gross loan portfolio.
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's one- to
four-family residential mortgage originations are primarily in its market and
surrounding areas.
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, 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 Freddie Mac. 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.
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.
9
<PAGE>
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, 1999, the Bank's consumer loan portfolio
totaled $51.1 million, or 33.4% 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, 1999, $92,000 or approximately 0.18% 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, 1999, automobile loans totaled $36.3
million, or approximately 23.8% 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, 1999, home equity and home improvement loans, most of
which are secured by second mortgages, amounted to $10.4 million, or 6.8% 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.
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, 1999, the Bank had
$899,000 of gross construction loans, most of which were to borrowers who
intended to live in the properties upon completion of construction.
10
<PAGE>
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, 1999, the Bank had $194,000
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, 1999, 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, 1999, the Bank had $9.3 million of commercial and
multi-family real estate loans, which represented 6.1% of the Bank's total gross
loan portfolio. The largest commercial or multi-family real estate loan
outstanding at June 30, 1999 was $630,000, which was performing in accordance
with its repayment terms. At June 30, 1999, all of the Bank's commercial and
multi-family real estate loan portfolio was secured by properties located in
Indiana.
Loans secured by commercial and multi-family real estate properties are
generally larger and involve a greater degree of credit risk than one- to
four-family residential mortgage loans. Because payments on loans secured by
commercial real estate properties are often dependent on the successful
operation or management of the properties, repayment of such loans may be
subject to adverse conditions in the real estate market or the economy. If the
cash flow from the project is reduced (for example, if leases are not obtained
or renewed), the borrower's ability to repay the loan may be impaired.
The Bank's commercial and multi-family real estate loan portfolio is
secured primarily by apartment buildings and, to a lesser extent, office
buildings and nursing homes. Commercial and multi-family real estate loans
generally have terms that do not exceed 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.
11
<PAGE>
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 1999, approximately $23.8 million, or 15.6% 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, 1999, 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.
Non-Performing Assets and Classified Assets
When a borrower fails to make a required payment on real estate secured
loans and consumer loans within 30 days after the payment is due, the Bank
generally institutes collection procedures by mailing a delinquency notice. The
customer is contacted again, by notice and/or telephone, when the payment is 31
days past due and when 60 days past due. In most cases, delinquencies are cured
promptly; however, if a loan secured by real estate or other collateral has been
delinquent for more than 90 days, satisfactory payment arrangements must be
adhered to or the Bank will initiate foreclosure or repossession.
Generally, when a loan becomes delinquent 90 days or more or when the
collection of principal or interest becomes doubtful, the Bank will place the
loan on a non-accrual status and, as a result, previously accrued interest
income on the loan is taken out of current income. The loan will remain on a
non-accrual status as long as the loan is 90 days delinquent.
12
<PAGE>
The following table sets forth information concerning delinquent
mortgage and other loans at June 30, 1999. 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 Total Delinquent Loans
-------------------------- -------------------------- --------------------------- -----------------------
Percent Percent Percent Percent
of Loan of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category Number Amount Category
------- -------- --------- ------ -------- --------- -------- ------- ---------- ------ -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family...... 7 $ 190 0.28% 6 $282 0.42% --- $--- ---% 13 $ 472 0.70%
Commercial and
Multi-Family............ 2 84 0.90 --- --- --- --- --- 2 84 0.90
Construction............. --- --- --- --- --- --- --- --- --- --- --- ---
Consumer................... 111 877 1.72 23 188 0.36 --- --- --- 134 1,065 2.08
Commercial business........ 13 785 3.30 3 81 0.34 --- --- --- 16 866 3.64
----- ---- ---- ---- --- --- ----- ----
Total delinquent loans 133 $1,936 1.27% 32 $551 0.36% --- $--- ---% 165 $ 2,487 1.63%
===== ==== === ==== === === ===== ====
</TABLE>
The ratio of delinquent loans to total loans (net), was 1.63% at June
30, 1999.
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
----------------------------------------------
1999 1998 1997
-------------- -------------- ----------------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accruing loans:
One- to four-family............................ $ 1 $521 $ ---
Commercial and multi-family real estate........ 317 ---
Consumer....................................... 92 193 248
---- ---- ----
Total non-accruing loans................ 410 714 248
--- ---- ---
Foreclosed and repossessed assets:
One- to four-family............................ 274 --- ---
Commercial and multi-family real estate........ 101 101 ---
Consumer....................................... 57 58 33
---- ----- -----
Total foreclosed assets................. 432 159 33
--- ---- -----
Troubled debt restructurings..................... --- --- ---
Total non-performing assets...................... $842 $ 873 $281
=== ===== ====
Total as a percentage of total assets............ 0.39% 0.43% 0.16%
==== ==== ====
</TABLE>
13
<PAGE>
For the fiscal year ended June 30, 1999, gross interest income which
would have been recorded had the non-accruing loans been current amounted to
$16,000. The amount that was included in interest income on such loans was
$18,000 for the fiscal year ended June 30, 1999.
Non-Performing Assets. Included in non-accruing loans at June 30, 1999
were 15 consumer loans totaling $92,000 secured by property including
automobiles, manufactured homes and other collateral. Foreclosed and repossessed
assets included automobiles and commercial property totaling $158,000 at June
30, 1999.
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, 1999 there was also an aggregate of $1.9 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 132 consumer loans
aggregating $1.1 million, five one- to four-family loans aggregating $344,000
and three commercial loans aggregating $460,000 at June 30, 1999.
As of June 30, 1999, 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.
14
<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, 1999, the Bank had classified a total of approximately $543,000 of its
assets as substandard, $72,000 as doubtful, $46,000 as loss, and $1.3 million
special mention. At June 30, 1999, total classified and non-performing assets
comprised $2.8 million, or 17.3% of the Bank's capital, or 1.3% 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, 1999, the Bank had a total allowance for loan losses of
$1.6 million or 1.06% 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.
15
<PAGE>
The following table sets forth an analysis of the Bank's allowance for
loan losses.
<TABLE>
<CAPTION>
Year Ended June 30
---------------------------------------
1999 1998 1997
--------------- ------------ ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period................................................ $983 $572 $553
Charge-offs:
One- to four-family.......................................................... 26 --- 3
Consumer..................................................................... 439 285 181
Commercial Business.......................................................... --- 47 ---
----- ---- -----
465 332 184
Recoveries:
Consumer..................................................................... 95 38 83
Commercial and multi-family real estate...................................... --- --- ---
--- ----- -------
95 38 83
Net charge-offs............................................................... 370 294 101
Additions charged to operations............................................... 1,010 705 120
----- ===== -----
Balance at end of period...................................................... $1,623 $983 $572
===== ==== ====
Ratio of net charge-offs during the period to
average loans outstanding during the period................................. 0.25% 0.23% 0.09%
==== ==== ====
</TABLE>
The distribution of the Bank's allowance for loan losses at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------------------
1999 1998 1997
----------------------- ------------------------ ----------------------------
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......................... $113 44.34% $105 49.64% $ 95 56.21%
Commercial and multi-family
real estate.............................. 225 6.11 230 5.14 70 5.56
Construction................................ --- 0.59 28 2.82 25 2.58
Consumer.................................... 700 33.41 445 33.25 325 29.75
Commercial business......................... 405 15.55 165 9.15 50 5.90
Unallocated................................. 180 --- 10 --- 7 ---
------ ------ ---- ------ ---- ------
Total.................................. $1,623 100.00% $983 100.00% $572 100.00%
===== ====== ==== ====== ==== ======
</TABLE>
Investment Activities
First Federal must maintain minimum levels of investments that qualify
as liquid assets under OTS regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans. Historically, the Bank has
16
<PAGE>
generally maintained its liquid assets above the minimum requirements imposed by
the OTS regulations and at a level believed adequate to meet requirements of
normal daily activities, repayment of maturing debt and potential deposit
outflows. As of June 30, 1999, the Bank's liquidity ratio (liquid assets as a
percentage of net withdrawable savings deposits and current borrowings) was
12.05%. 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.
Statement of Financial Accounting Standards No. 115 "Accounting for
Certain Investments in Debt and Equity Securities" ("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, 1999, the Company had no securities
classified as held to maturity and $51.0 million classified as available for
sale including mortgage-backed securities. No securities were held for trading
purposes on such date.
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, 1999, the weighted average
term to maturity or repricing of the investment securities portfolio, excluding
the FHLB, Fannie Mae stock and other equity securities available for sale, was
8.2 years.
17
<PAGE>
OTS regulations restrict investments in corporate debt and equity
securities by the Bank. These restrictions include prohibitions against
investments in the debt securities of any one issuer in excess of 15% of the
Bank's unimpaired capital and unimpaired surplus as defined by federal
regulations, which totaled $16.8 million as of June 30, 1999, 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,
------------------------------------------------------------------
1999 1998 1997
--------------------- ----------------------- --------------------
Carrying % of Carrying %of Carrying % of
Value Total Total Total
---------- --------- ------------- ----------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
Federal agency obligations..................... 23,187 53.01 13,186 37.94 5,980 24.93
Commercial notes and commercial paper.......... 237 0.54 242 0.70 246 1.02
State and local government obligations......... 8,343 19.08 9,102 26.19 7,413 30.91
Other equity securities........................ 8,569 19.59 9,468 27.24 7,948 33.14
--------- ------ --------- -------- -------- -------
Total securities available for sale.......... 40,336 92.22 31,998 92.07 21,587 90.00
-------- ----- -------- ------- -------- -------
FHLB stock..................................... 3,401 7.78 2,757 7.93 2,398 10.00
--------- ------- --------- --------- -------- -------
Total securities............................. $43,737 100.00% $34,755 100.00% $23,985 100.00%
======= ====== ======= ====== ======= ======
Weighted average remaining life or term to
repricing, excluding FHLB stock and other
equity securities available for sale......... 8.2 yrs. 6.8 yrs. 3.9 yrs.
Other Interest-Earning Assets:
Interest-earning deposits with banks........... $ 188 $ 386 $15,500
========= ======== =======
</TABLE>
18
<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, 1999
---------------------------------------------------------------------------------------
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 Cost
--------------- ------------- -------------- ------------- --------------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal agency
obligations................. $ --- $4,998 $16,500 $2,344 $23,842 $23,187
Commercial notes and
commercial paper........... 235 --- --- --- 235 237
State and local
government obligations...... 1,386 3,444 512 3,036 8,378 8,343
------- ------- --------- ------- -------- -------
Total debt securities........ $1,621 $8,442 $17,012 $5,380 $32,455 $31,767
====== ====== ======= ====== ======= =======
Weighted average yield(1).... 6.24% 5.61% 6.51% 6.59% 6.28%
- -----------------------
</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, 1999 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.
The following table sets forth the amortized cost of the Company's
mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
June 30,
-----------------------------------------
1999 1998 1997
----------- --------------- -------------
(In thousands)
<S> <C> <C> <C>
Fannie Mae............................................. $ 283 $ 454 $ 546
Ginnie Mae............................................. 10,290 16,490 16,737
Freddie Mac............................................ 103 137 177
Other Mortgage-backed Securities(1).................... --- 471 758
------------ ---------- ----------
Total.............................................. $10,676 $17,552 $18,218
======= ======= =======
</TABLE>
- --------------------------------
(1) The June 30, 1997 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
19
<PAGE>
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.
The following table sets forth the contractual maturities of the
Company's mortgage-backed securities based on amortized cost at June 30, 1999.
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,
1999
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>
Fannie Mae............................................ $ --- $ --- $283 $ --- $ 283
Ginnie Mae............................................ 1 20 22 10,247 10,290
Freddie Mac........................................... --- 53 --- 50 103
----- ----- ----- ------- -------
Total............................................ $ 1 $ 73 $305 $10,297 $10,676
===== ==== ==== ======= =======
Weighted average yield................................ 8.00% 7.85% 6.46% 6.72% 6.72%
</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
currently 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.
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
20
<PAGE>
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.
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,
--------------------------------------------------
1999 1998 1997
--------------- ------------------ ---------------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance........................... $125,256 $116,118 $ 92,490
Purchased deposits........................ --- --- 17,133
Net deposits.............................. 246 4,535 2,470
Interest credited......................... 4,899 4,603 4,025
--------- ----------- -----------
Ending balance............................ $130,401 $125,256 $116,118
======== ======== ========
Net increase.............................. $ 5,145 $ 9,138 $ 23,628
========= ========== =========
Percent increase.......................... 4.11% 7.87% 25.55%
==== ==== =====
</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.
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ------------------------- ---------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
----------- --------------- ------------ ------------ -------------- ------------
(Dollars in Thousands)
Interest Rate Range:
<S> <C> <C> <C> <C> <C> <C>
Passbook Accounts.................... $45,653 35.01% $ 44,249 35.32% $ 42,063 36.22%
Demand accounts(1)................... 8,171 6.26 6,935 5.54 5,751 4.95
Money Market Accounts................ 568 0.44 1,217 .97 2,182 1.88
NOW Accounts......................... 6,640 5.09 6,020 4.81 6,285 5.41
--------- ------- ---------
Total Non-Certificates............... 61,032 46.80 58,421 46.64 56,281 48.46
------ ----- -------- ------- --------- -------
Certificates:
0.00 - 3.99%....................... --- --- --- --- 1 .01
4.00 - 5.99%....................... 53,305 40.88 37,894 30.25 34,029 29.31
6.00 - 7.99%....................... 16,064 12.32 28,722 22.94 25,589 22.03
8.00 - 9.99%....................... --- --- 219 .17 218 .19
--------- ------- --------- -------- --------- -------
Total Certificates................... 69,369 53.20 66,835 53.36 59,837 51.54
--------- ------- --------- ------- --------- -------
Total Deposits....................... $130,401 100.00% $125,256 100.00% $116,118 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
(1) Non-interest-bearing accounts.
21
<PAGE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of June 30, 1999.
<TABLE>
<CAPTION>
4.00- 6.00- Percent
5.99% 7.99% Total of Total
------------ ------------- ---------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Certificate accounts maturing in quarter ending:
September 30, 1999......................... $ 9,786 $4,476 $14,262 20.56%
December 31, 1999.......................... 10,812 2,625 13,437 19.37
March 31, 2000............................. 4,292 2,900 7,192 10.37
June 30, 2000.............................. 15,135 2,033 17,168 24.75
September 30, 2000......................... 4,398 499 4,897 7.06
December 31, 2000.......................... 1,260 412 1,672 2.41
March 31, 2001............................. 1,227 84 1,311 1.89
June 30, 2001.............................. 796 650 1,446 2.08
September 30, 2001......................... 842 307 1,149 1.65
December 31, 2001.......................... 388 443 831 1.20
March 31, 2002............................. 222 339 561 0.81
June 30, 2002.............................. 183 129 312 0.45
Thereafter................................. 3,964 1,167 5,131 7.40
-------- --------- ----- ----
Total................................. $53,305 $16,064 $69,369 100.00%
======= ======= ======= ======
Percent of total........................... 76.84% 23.16% 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, 1999.
<TABLE>
<CAPTION>
Maturity
------------------------------------------------------
Over Over
3 months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
----------- ------------ ------------ ---------------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000....... $11,396 $ 8,096 $17,015 $15,214 $51,721
Certificates of deposit of $100,000 or more...... 2,668 2,765 7,044 2,096 14,573
Public funds(1).................................. 198 2,576 301 --- 3,075
--------- -------- --------- ----------- ---------
Total certificates of deposit.................... $14,262 $13,437 $24,360 $17,310 $69,369
======= ======= ======= ======= =======
</TABLE>
- --------------------
(1)Deposits from governmental and other public entities.
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.
22
<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, 1999, the Bank had $65.9 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,
1999, 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,
------------------------------------------
1999 1998 1997
------------ ----------------- -----------
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances and line of credit................................. $66,300 $51,500 $44,800
Securities sold under agreements to repurchase................... --- --- ---
Average Balance:
FHLB advances and line of credit................................. 62,106 49,543 41,470
Securities sold under agreements to repurchase................... --- --- ---
Average Rate Paid On:
FHLB advances and line of credit................................. 5.73% 5.98% 5.95%
Securities sold under agreements to repurchase................... --- --- ---
</TABLE>
The following table sets forth the Bank's borrowings at the dates
indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------
1999 1998 1997
------------ -------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances and line of credit................................. $66,300 $51,500 $44,800
Due to brokers................................................... --- 5,000 ---
----------- -------- -----------
Total borrowings............................................. $66,300 $56,500 $44,800
======= ======= =======
</TABLE>
23
<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 $4.3 million
at June 30, 1999, 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, 1999.
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, 1999 was approximately
$55,000.
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.
24
<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, 1999, 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, 1999,
the Bank's lending limit under this restriction was approximately $2.5 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, 1999, the Bank met the requirements of a well- capitalized
institution.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC also may impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
25
<PAGE>
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 2015.
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, 1999, 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, 1999, the Bank had no
subsidiaries.
At June 30, 1999, the Bank had tangible capital of $15.3 million, or
7.1% of adjusted total assets, which is approximately $12.0 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, 1999 the Bank
had certain intangible assets related to the branch purchase which were subject
to these tests.
At June 30, 1999, the Bank had core capital equal to $15.3 million, or
7.1% of adjusted total assets, which is $8.8 million above the minimum leverage
ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration
26
<PAGE>
of credit risk and the risk of non-traditional activities. At June 30, 1999,
First Federal had no capital instruments that qualify as supplementary capital
and $1.6 million 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, 1999.
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 Fannie Mae or Freddie
Mac.
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, 1999, the Bank anticipates that it will be exempt from this rule.
On June 30, 1999, the Bank had total risk-based capital of $16.8
million (including $15.3 million in core capital and $1.5 million in qualifying
supplementary capital) and risk-weighted assets of $136.1 million (including,
converted off-balance sheet assets); or total capital of 12.4% of risk-weighted
assets. This amount was $5.9 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" (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.
27
<PAGE>
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.
28
<PAGE>
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, 1999, 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, 1999, 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.
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
29
<PAGE>
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, 1999, the Bank was in compliance with the
above restrictions.
Holding Company Regulation. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is registered and files reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Company and its non-savings association subsidiaries which also permits the OTS
to restrict or prohibit activities that are determined to be a serious risk to
the subsidiary savings association.
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings association)
would become subject to such restrictions unless such other associations each
qualify as a QTL and were acquired in a supervisory acquisition.
If the Bank fails the QTL test, the Company must obtain the approval of
the OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan holding company. See
"Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal Securities Law. The stock of the Company is registered with the
SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information
30
<PAGE>
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, 1999, the Bank was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS. See "- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Indianapolis, which is one of 12 regional FHLBs that administers the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the board of directors of the FHLB which
are subject to the oversight of the Federal Housing Finance Board. All advances
from the FHLB are required to be fully secured by sufficient collateral as
determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.
As a member, First Federal is required to purchase and maintain stock
in the FHLB of Indianapolis. At June 30, 1999, First Federal had $3.4 million in
FHLB stock, which was in compliance with this requirement. In past years, the
Bank has received substantial dividends on its FHLB stock. Over the past five
fiscal years such dividends have averaged 8.0% and were 8.0% for the fiscal year
ended June 30, 1999.
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, 1999, dividends paid by the FHLB of
Indianapolis to First Federal totaled $259,000 and was approximately $209,000 in
fiscal year 1998. The $259,000 dividend received for the fiscal year ended June
30, 1999 reflects an annualized rate of 8.0%.
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.
31
<PAGE>
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
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, 1999, 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
32
<PAGE>
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 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, 1999, the Company and its affiliates had a total of 62
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.
33
<PAGE>
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.
Roger K. Cromer, age 34, is Treasurer and Chief Financial Officer of
the Company and First Federal, positions he has held since October 1998. Mr.
Cromer is responsible for all accounting and investment functions. Prior ro
joining First Federal, Mr. Cromer was employed by 1st Source Corporation located
in South Bend, Indiana from 1988 to 1998 in a variety of positions, including
Accounting Manager from 1995 to 1998.
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, 1999 was $2.1
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, 1999.
<TABLE>
<CAPTION>
Date Total Approximate
Location Acquired Square Footage
- --------------------------------------------------------------------------------
<S> <C> <C>
Main Office: 1982 10,185(1)
1205 N. Cass Street
Wabash, Indiana
500 S. Huntington 1977 2,400(2)
Syracuse, Indiana(2)
1306 Street Road 114 West N. 1968 1,325
Manchester, Indiana
105 E. Columbia Street 1997 5,300(4)
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.
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
34
<PAGE>
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, 1999.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Page 35 of the attached 1999 Annual Report to Stockholders is herein
incorporated by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
Pages 5 through 13 of the attached 1999 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, 1999, 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.................................... 14
Consolidated Balance Sheets as of June 30, 1999 and 1998.......... 15
Consolidated Statements of Income
Years Ended June 30, 1999, 1998 and 1997.......................... 16
Consolidated Statement of Changes in Shareholders' Equity
Years Ended June 30, 1999, 1998 and 1997.......................... 17
Consolidated Statements of Cash Flows
Years Ended June 30, 1999, 1998 and 1997.......................... 18
Notes to Consolidated Financial Statements........................19 to 33
35
<PAGE>
With the exception of the aforementioned information, the Company's
Annual Report to Stockholders for the year ended June 30, 1999, 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.
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 1999, 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.
Section 16(a) Beneficial Ownership Reporting Compliance
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
the Company's Common Stock (or any other equity securities, of which there is
none), to file with the SEC initial reports of ownership and reports of changes
in ownership of the Company's Common Stock. Officers, directors and greater than
10% shareholders are required by SEC regulations 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 during the fiscal year ended June 30, 1999, all Section
16(a) filing requirements applicable to its officers, directors and greater than
10% beneficial owners were complied with except that Mr. George and Mr. Frank
inadvertently failed to timely file Form 4s to report one transaction each. Mr.
George and Mr. Frank reported their transactions on Form 4s dated July 28, 1999.
36
<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 1999, 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 1999, 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 1999, 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
No reports on Form 8-K were filed during the quarter ended June 30,
1999.
37
<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 12, 1999 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 and Director
(Principal Executive and Operating
Officer)
Date: October 12, 1999 Date: October 12, 1999
--------------------------- ---------------------------
/s/ Joseph W. McSpadden /s/ Stanley Myers
- ------------------------------------ ------------------------------------
JOSEPH W. MCSPADDEN, Director STANLEY MYERS, Director
Date: October 12, 1999 Date: October 12, 1999
--------------------------- --------------------------
/s/ Ronald D. Reynolds /s/ Thomas L. Frank
- ------------------------------------ ------------------------------------
RONALD D. REYNOLDS, Director THOMAS L. FRANK, Director
Date: October 12, 1999 Date: October 12, 1999
--------------------------- --------------------------
<PAGE>
/s/ Roger K. Cromer
- ------------------------------------
ROGER K. CROMER, Chief
Financial Officer (Principal
Financial and Accounting Officer)
Date: October 12, 1999
---------------------------
<PAGE>
<TABLE>
<CAPTION>
Index to Exhibits
Reference to
Prior Filing
Regulation S-B or Exhibit
Exhibit Number
Number Document Attached Hereto
--------------- ----------------------------------------------- ------------------
<S> <C> <C>
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) Employment Contract between Roger K. 10(b)
Cromer and the Bank
(c) 1992 Stock Option and Incentive Plan *
(d) Management Recognition and Retention Plan **
(e) 1998 Omnibus Incentive 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
</TABLE>
- -----------------------
* 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.
*** Filed as an Exhibit to the Company's Definitive Proxy Statement on
Schedule 14A on September 25, 1998 (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 2 of Notes to Consolidated Financial Statements included in
the Annual Report to Security Holders under Exhibit 13.
Exhibit 10(b)
Employment Contract
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
this 22nd day of June, 1999 by and between FIRST FEDERAL SAVINGS BANK OF WABASH,
WABASH, INDIANA, a federally chartered savings bank (hereinafter referred to as
the "Bank" whether in the mutual or stock form), whose address in 1205 North
Cass Street, Wabash, Indiana 46992 and Roger K. Cromer (the "Employee") whose
address is 1073 Mitten Dr., Wabash, Indiana.
WHEREAS, the Employee is currently serving as Treasurer and Chief
Financial Officer of the Bank; and
WHEREAS, the Board of Directors of the Bank recognizes that, as is the
case with publicly held corporations generally, the possibility of a change in
control of FFW Corporation (the "Holding Company") may exist and that such
possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of key management
personnel to the detriment of the Bank, the Holding Company and its
stockholders; and
WHEREAS, the Board of Directors of the Bank believes it is in the best
interests of the Bank to enter into this Agreement with the Employee in order to
assure continuity of management of the Bank and to reinforce and encourage the
continued attention and dedication of the Employee to his assigned duties
without distraction in the face of potentially disruptive circumstances arising
from the possibility of a change in control of the Holding Company, although no
such change is now contemplated; and
WHEREAS, the Board of Directors of the Bank has approved and authorized
the execution of this Agreement with the Employee to take effect as stated in
Section 4 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, it is AGREED as
follows:
1. Employment. The Employee will be employed as Treasurer and Chief
Financial Officer of the Bank. As Treasurer and Chief Financial Officer,
Employee shall render administrative and management services as are customarily
performed by persons situated in similar executive capacities, and shall have
other powers and duties as may from time to time be prescribed by the Board,
provided that such duties are consistent with the Employee's position as
Treasurer and Chief Financial Officer. The Employee shall continue to devote his
best efforts and substantially all his business time and attention to the
business and affairs of the Bank and affiliated companies.
2. Compensation.
(a) Salary. The Bank agrees to pay the Employee during the term of this
Agreement a salary established by the Board of Directors. The salary hereunder
as of the Commencement Date (as defined in Section 4 hereof) shall be at least
the Employee's current salary. The salary provided for herein shall be payable
not less frequently than monthly in accordance with the practices of the Bank,
provided, however, that no such salary is required to be paid by the terms of
this Agreement
1
<PAGE>
in respect of any month or portion thereof subsequent to the termination of this
Agreement and provided further, that the amount of such salary shall be reviewed
by the Bank not less often than annually and may be increased (but not
decreased) from time to time in such amounts as the Bank in its discretion may
decide, subject to the customary withholding tax and other employee taxes as
required with respect to compensation paid by a corporation to an employee.
(b) Discretionary Bonuses. The Employee shall be entitled to
participate in an equitable manner with all other executive officers of the Bank
in discretionary bonuses as authorized and declared by the Board of Directors of
the Bank to its executive employees. No other compensation provided for in this
Agreement shall be deemed a substitute for the Employee's right to participate
in such bonuses when and as declared by the Board of Directors.
(c) Expenses. During tho term of his employment hereunder, the Employee
shall be entitled to receive prompt reimbursement for all reasonable expenses
incurred by his (in accordance with policies and procedures at least as
favorable to the Employee as those presently applicable to the senior executive
officers of the Bank) in performing services hereunder, provided that the
Employee properly accounts therefor in accordance with Bank policy.
3. Benefits.
(a) Participation in Retirement and Employee Benefit Plans. The
Employee shall be entitled while employed hereunder to participate in, and
receive benefits under, all plans relating to stock options, stock purchases,
pension, thrift, profit-sharing, group life insurance, medical coverage,
education, cash or stock bonuses, and other retirement or employee benefits or
combinations thereof, that are now or hereafter maintained for the benefit of
the Bank's executive employees or for its employees generally.
(b) Fringe Benefits. The Employee shall be eligible while employed
hereunder to participate in, and receive benefits under, any other fringe
benefits which are or may become applicable to the Bank's executive employees or
to its employees generally.
4. Term. The term of employment under this Agreement shall be a period
of three (3) years commencing on the date of approval of this Agreement by the
Board of Directors ("Commencement Date") , subject to earlier termination as
provided herein. Beginning on the first anniversary of the Commencement Date,
and on each anniversary thereafter, the term of employment under this Agreement
shall be extended for a period of one year unless either the Bank or the
Employee gives contrary written notice to the other not less than 90 days in
advance of the date on which the term of employment under this Agreement would
otherwise be extended. Notwithstanding any other statement or provision in this
Agreement, this Agreement will not be automatically extended unless, prior
thereto, such extension is approved by the Board of Directors of the Bank
following the Board's review of a formal performance evaluation of the Employee
performed by the disinterested members of the Board of Directors of the Bank and
reflected in the minutes of the Board of Directors. Reference herein to the term
of employment under this Agreement shall refer to both such initial term and
such extended terms.
2
<PAGE>
5. Vacations. The Employee shall be entitled, without loss of pay, to
absent himself voluntarily from the performance of his employment under this
Agreement, all such voluntary absences to count as vacation time, provided that:
(a) The Employee shall be entitled to an annual vacation of not less
than two (2) weeks per year, subject to increase as provided in the Bank's
personnel manual as may be from time to time amended;
(b) The timing of vacations shall be scheduled in a reasonable manner
by the Employee;and
(c) management shall, solely at the Employee's request, be entitled to
grant to the Employee a leave or leaves of absence with or without pay at such
time or times and upon such terms and conditions as management, in its
discretion, may determine.
6. Termination of Employment; Death.
(a) The Board of Directors may terminate the Employee's employment at
any time, but any termination by the Bank's Board of Directors, other than
termination for cause, shall not prejudice the Employee's right to compensation
or other benefits under the Agreement. If the employment of the Employee is
involuntarily terminated, other than for "cause" as provided in this Section
6(a) or pursuant to any of Sections 6(d) through 6(g), or by reason of death or
disability as provided in Sections 6(c) or 7, the Employee shall be entitled to
receive, (i) his then applicable salary for the then-remaining term of the
Agreement as calculated in accordance with Section 4 hereof, payable in such
manner and at such times as such salary would have been payable to the Employee
under Section 2 had he remained in the employ of the Bank, and (ii) health
insurance benefits as maintained by the Bank for the benefit of its senior
executive employees or its employees generally over the then-remaining term of
the Agreement as calculated in accordance with Section 4 hereof.
The terms "termination" or "involuntarily terminated", in this
Agreement shall refer to the termination of the employment of Employee without
his express written consent. The Employee shall be considered to be
involuntarily terminated (1) if the employment of the Employee is involuntarily
terminated for any reason other than for "cause", as provided in this Section
6(a), pursuant to any of Sections 6(d) through 6(g) or by reason of death or
disability as provided in Sections 6(c) and 7; or (2) there occurs a material
diminution of or interference with the Employee's duties, responsibilities and
benefits as Treasurer and Chief Financial Officer of the Bank. By way of example
and not by way of limitation, any of the following actions, if unreasonable or
materially adverse to the Employee, shall constitute such diminution or
interference unless consented to in writing by the Employee: (i) a change in the
principal workplace of the Employee to a location outside of Wabash, Indiana;
(ii) a material demotion of the Employee, a reduction in the number or seniority
of other Bank personnel reporting to the Employee, or a reduction in the
frequency with which, or in the nature of the matters with respect to which,
such personnel are to report to the Employee, other than as part of a Bank or
Holding Company-wide reduction in staff; or (iii) a reduction or adverse change
in the salary, perquisites, benefits, contingent benefits or vacation time which
had theretofore been provided to the Employee, other than as part of an overall
program
3
<PAGE>
applied uniformly and with equitable effect to all members of the senior
management of the Bank or the Holding Company.
In case of termination of the Employee's employment for cause, the Bank
shall pay the Employee his salary through the date of termination, and the Bank
shall have no further obligation to the Employee under this Agreement. The
Employee shall have no right to receive compensation or other benefits for any
period after termination for cause. For purposes of this Agreement, termination
for "cause" shall include termination because of the Employee's personal
dishonesty, incompetence, willful misconduct, breach of a fiduciary duty
involving personal profit, intentional failure to perform stated duties, willful
violation of any law, rule, or regulation (other than traffic violations or
similar offenses) or final cease-and-desist order, or material breach of any
provision of this Agreement. Notwithstanding the foregoing, the Employee shall
not be deemed to have been terminated for cause unless and until there shall
have been delivered to the Employee a copy of a resolution, duly adopted by the
affirmative vote of not less than a majority of the disinterested members of the
Board of Directors of the Bank at a meeting of the Board called and held for
such purpose (after reasonable notice to the Employee and an opportunity for the
Employees, together with the Employee's counsel, to be heard before the Board),
stating that in the good faith opinion of the Board the Employee was guilty of
conduct constituting "cause" as set forth above and specifying the particulars
thereof in detail.
(b) The Employee's employment may be voluntarily terminated by the
Employee at any time upon ninety (90) days written notice to the Bank or upon
such shorter period as may be agreed upon between the Employee and the Board of
Directors of the Bank. In the event of such voluntary termination, the Bank
shall be obligated to continue to pay the Employee his salary only through the
date of termination, at the time such payments are due, and the Bank shall have
no further obligation to the Employee under this Agreement.
(c) In the event of the death of the Employee during the term of
employment under this Agreement and prior to any termination hereunder, the
Employee's estate, or such person as the Employee may have previously designated
in writing, shall be entitled to receive from the Bank the salary of the
Employee through the last day of the calendar month in which his death shall
have occurred, and the term of employment under this Agreement shall end on such
last day of the month.
(d) If the Employee is suspended from office and/or temporarily
prohibited from participating in the conduct of the Bank's affairs by a notice
served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act
("FDIA"), 12 U.S.C. ss.ss. 1818(e)(3) or (g)(1), the Bank's obligations under
this Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the Bank
may in its discretion (i) pay the Employee all or part of the compensation
withheld while its obligations under this Agreement were suspended and (ii)
reinstate in whole or in part any of the obligations which were suspended.
(e) If the Employee is removed from office and/or permanently
prohibited from participating in the conduct of the Bank's affairs by an order
issued under Section 8 (e) (4) or (g) (1) of the FDIA, 12 U.S.C. ss.ss.
1818(e)(4) or (g)(1), all obligations of the Bank under this Agreement
4
<PAGE>
shall terminate, as of the effective date of the order, but vested rights of the
parties shall not be affected.
(f) If the Bank is in default (as defined in Section 3 (x) (1) of the
FDIA, 12 U. S. C. ss. 1813 (x) (1) ), all obligations under this Agreement shall
terminate as of the date of default, but this provision shall not affect any
vested rights of the parties.
(g) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Bank: (i) by the Director of the Office of Thrift
Supervision ("OTS") or his or her designee at the time the Federal Deposit
Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Bank under the authority
contained in Section 13 (c) of the FDIA, 12 U.S.C. ss. 1823 (c) ; or (ii) by the
Director of the OTS or his or her designee at the time the Director of the OTS
or his or her designee approves a supervisory merger to resolve problems related
to operation of the Bank or when the Bank is determined by the Director of the
OTS to be in an unsafe or unsound condition.
Any rights of the parties that have already vested, however, shall not
be affected by any such action.
(h) In the event the Bank purports to terminate the Employee for cause,
but it is determined by a court of competent jurisdiction or by an arbitrator
pursuant to Section 18 that cause did not exist for such termination, or if in
any event it is determined by any such court or arbitrator that the Bank has
failed to make timely payment of any amounts owed to the Employee under this
Agreement, the Employee shall be entitled to reimbursement for all reasonable
costs, including attorneys' fees, incurred in challenging such termination or
collecting such amounts. Such reimbursement shall be in addition to all rights
to which the Employee is otherwise entitled under this Agreement.
7. Disability.
(a) During the term of this Agreement, in addition to the long-term
disability income plan maintained by the Bank for qualified employees of the
Bank, during the first ninety-one (91) days of disability, the Employee shall be
paid his regular compensation by the Bank. In such event, the rights of the
Employee to receive the salary stated in Section 2 hereof shall be suspended
after a period of ninety-one (91) days until the Employee is no longer disabled,
subject to the provisions of Section 7 (c) of this Agreement.
(b) The definition of "disability" shall be as stated in the disability
income plan in effect at the time the Employee becomes disabled. The
commencement of disability shall be the date which is accepted by the disability
insurance company.
(c) After the Employee has been continuously disabled for a period of
twelve (12) months, his employment automatically shall be terminated. This
Agreement may not otherwise be terminated by the Bank at any time except as
provided in this Agreement.
5
<PAGE>
8. Change in Control.
(a) Involuntary Termination. If the Employee's employment is
involuntarily terminated (other than for cause or pursuant to any of Sections
6(c) through 6(g) or Section 7 of this Agreement) in connection with or within
twelve (12) months after a change in control which occurs at any time during the
term of employment under this Agreement, the Bank shall pay to the Employee in a
lump sum in cash within twenty-five (25) business days after the Date of
Termination (as hereinafter defined) of employment an amount equal to 299
percent of the Employee's "base amount" of compensation, as defined in Section
280G(b) (3) of the Internal Revenue Code of 1986, as amended ("Code") .
(b) Definitions. For purposes of Sections 8, 9 and 12 of this
Agreement, "Date of Termination" means the earlier of (i) the date upon which
the Bank gives notice to the Employee of the termination of his employment with
the Bank or (ii) the date upon which the Employee ceases to serve as an Employee
of the Bank, and "change in control" is defined solely as any acquisition of
control (other than by a trustee or other fiduciary holding securities under an
employee benefit plan of the Holding Company or a subsidiary of the Holding
Company), as defined in 12 C.F.R. ss. 574.4, or any successor regulation, of the
Bank or Holding Company which would require the filing of an application for
acquisition of control or notice of change in control in a manner as set forth
in 12 C.F.R. ss. 574.3, or any successor regulation.
(c) Compliance with Capital Requirements. Notwithstanding anything in
this Agreement to the contrary, no payments may be made pursuant to Section 8
hereof without the prior approval of the Regional Deputy Director of the OTS if
following such payment the Bank would not be in compliance with its fully
phased-in capital requirements as defined in OTS regulations.
9. Certain Reduction of Payments by the Bank.
(a) Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined that any payment or distribution by the Bank to or
for the benefit of the Employee (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise) (a
"Payment") would be nondeductible (in whole or part) by the Bank for Federal
income tax purposes because of Section 280G of the Code, then the aggregate
present value of amounts payable or distributable to or for the benefit of the
Employee pursuant to this Agreement (such amounts payable or distributable
pursuant to this Agreement are hereinafter referred to as "Agreement Payments")
shall be reduced to the Reduced Amount. The "Reduced Amount" shall be an amount,
not less than zero (0), expressed in present value which maximizes the aggregate
present value of Agreement Payments without causing any Payment to be
nondeductible by the Bank because of Section 280G of the Code. For Purposes of
this Section 9, present value shall be determined in accordance with Section
280G(d)(4) of the Code.
(b) All determinations required to be made under this Section 9 shall
be made by the Bank's independent auditors, or at the election of such auditors
by such other firm or individuals of recognized expertise as such auditors may
select (such auditors or, if applicable, such other firm or individual, are
hereinafter referred to as the "Advisory Firm"). The Advisory Firm shall within
ten
6
<PAGE>
business days of the Date of Termination, or at such earlier time as is
requested by the Bank, provide to both the Bank and the Employee an opinion (and
detailed supporting calculations) that the Bank has substantial authority to
deduct for federal income tax purposes the full amount of the Agreement Payments
and that the Employee has substantial authority not to report on his federal
income tax return any excise tax imposed by Section 4999 of the Code with
respect to the Agreement Payments. Any such determination and opinion by the
Advisory Firm shall be binding upon the Bank and the Employee. The Employee
shall determine which and how much, if any, of the Agreement Payments shall be
eliminated or reduced consistent with the requirements of this Section 9,
provided that, if the Employee does not make such determination within ten (10)
business days of the receipt of the calculations made by the Advisory Firm, the
Bank shall elect which and how much, if any, of the Agreement Payments shall be
eliminated or reduced consistent with the requirements of this Section 9 and
shall notify the Employee promptly of such election. Within five (5) business
days of the earlier of (i) the Bank's receipt of the Employee's determination
pursuant to the immediately preceding sentence of this Agreement or (ii) the
Bank's election in lieu of such determination, the Bank shall pay to or
distribute to or for the benefit of the Employee such amounts as are then due
the Employee under this Agreement. The Bank and the Employee shall cooperate
fully with the Advisory Firm, including without limitation providing to the
Advisory Firm all information and materials reasonably requested by it, in
connection with the making of the determinations required under this Section 9.
(c) As a result of uncertainty in application of Section 280G of the
Code at the time of the initial determination by the Advisory Firm hereunder, it
is possible that Agreement Payments will have been made by the Bank which should
not have been made ("Overpayment") or that additional Agreement Payments will
not have been made by the Bank which should have been made ("Underpayment"), in
each case, consistent with the calculations required to be made hereunder. In
the event that the Advisory Firm, based upon the assertion by the Internal
Revenue Service against the Employee of a deficiency which the Advisory Firm
believes has a high probability of success determines that an Overpayment has
been made, any such Overpayment paid or distributed by the Bank to or for the
benefit of Employee shall be treated for all purposes as a loan ab initio which
the Employee shall repay to the Bank together with interest at the applicable
federal rate provided for in Section 7872(f) (2) of the Code; provided, however,
that no such loan shall be deemed to have been made and no amount shall be
payable by the Employee to the Bank if and to the extent such deemed loan and
payment would not either reduce the amount on which the Employee is subject to
tax under Section 1 and Section 4999 of the Code or generate a refund of such
taxes. In the event that the Advisory Firm, based upon controlling preceding or
other substantial authority, determines that an Underpayment has occurred, any
such Underpayment shall be promptly paid by the Bank to or for the benefit of
the Employee together with interest at the applicable federal rate provided for
in Section 7872(f)(2) of the Code.
(d) Notwithstanding anything in this Agreement to the contrary, in no
event shall the sum of a payment to the Employee under Section 8 of this
Agreement and payments of salary under Section 6 of this Agreement exceed an
amount that is three (3) times the Employee's average annual compensation (based
upon the last five (5) years taxable years) as of the date of termination of
employment.
7
<PAGE>
(e) Any payments made to the Employee pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12 U. S.C.
ss. 1828(k) and any regulations promulgated thereunder.
10. Confidential Information; Loyalty; Non-Competition.
(a) During the term of the Employee's employment hereunder and
thereafter, the Employee shall not, except as may be required to perform his
duties hereunder or as required by law, disclose to others or use, whether
directly or indirectly, any Confidential Information. "Confidential Information"
means information about the Bank and the Bank's clients and customers which is
not available to the general public and was or shall be learned by the Employee
in the course of his employment by the Bank, including without limitation any
data, formulae, information, proprietary knowledge, trade secrets, and credit
reports and analyses owned, developed and used in the course of the business of
the Bank, including client and customer lists and information related thereto;
and all papers, resumes, records and other documents (and all copies thereof)
containing such Confidential Information. The Employee acknowledges that such
Confidential Information is specialized, unique in nature and of great value to
the Bank. The Employee agrees that upon the expiration of the Employee's term of
employment hereunder or in the event the Employee's employment hereunder is
terminated prior thereto for any reason whatsoever, the Employee will promptly
deliver to the Bank all documents (and all copies thereof) containing any
Confidential Information.
(b) The Employee shall devote his full time to the performance of his
employment under this Agreement; provided, however, that the Employee may serve,
without compensation, with charitable, community and industry organizations and
continue to serve, with compensation, as a director of any business corporation
of which he is currently a director to the extent such directorships do not
inhibit the performance of his duties thereunder or conflict with the business
of the Bank. During the term of the Employee's employment hereunder, the
Employee shall not engage in any business or activity contrary to the business
affairs or interests of the Bank.
(c) Upon the expiration of the term of the Employee's employment
hereunder or in the event the Employee's employment hereunder terminates prior
thereto for any reason whatsoever, the Employee shall not, for a period of three
(3) years after the occurrence of such event, for himself or as the agent of, on
behalf of, or in conjunction with, any person or entity, solicit or attempt to
solicit, whether directly or indirectly: (i) any employee of the Bank to
terminate such employee's employment relationship with the Bank; or (ii) any
savings and loan, banking or similar business from any person or entity that is
or was a client, employee, or customer of the Bank and had dealt with the
Employee or any other employee of the Bank under the supervision of the
Employee.
(d) In the event the Employee voluntarily resigns pursuant to Section
6(b) of this Agreement, or in the event the Employee's employment hereunder is
terminated for cause, the Employee shall not, for a period of one year from the
date of termination, directly or indirectly, own, manage, operate or control, or
participate in the ownership, management, operation or control of, or be
employed by or connected in any manner with, any financial institution having an
office located within twenty (20) miles of any office of the Bank as of the date
of termination.
8
<PAGE>
(e) The provisions of subsections (b) and (d) hereof shall not prevent
the Employee from purchasing, solely for investment, not more than five (5%)
percent of any other financial institution's stock or other securities which are
traded on any national or regional securities exchange or are actively traded in
the over-the-counter market and registered under Section 12 (g) of the
Securities Exchange Act of 1934.
(f) The provisions of this Section shall survive the termination of the
Employee's employment hereunder whether by expiration of the term thereof or
otherwise.
11. No Mitigation. The Employee shall not be required to mitigate the
amount of any salary or other payment or benefit provided for in this Agreement
by seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in this Agreement be reduced by any compensation earned by
the Employee as the result of employment by another employer, by retirement
benefits after the date of termination or otherwise.
12. No Assignments.
(a) This Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or obligations hereunder
without first obtaining the written consent of the other party; provided,
however, that the Bank will require any successor or assign (whether direct or
indirect, by purchase, merger consolidation or otherwise) to all or
substantially all of the business and/or assets of the Bank, by an assumption
agreement in form and substance satisfactory to the Employee, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Bank would be required to perform it if no such succession or
assignment had taken place. Failure of the Bank to obtain such an assumption
agreement prior to the effectiveness of any such succession or assignment shall
be a breach of this Agreement and shall entitle the Employee to compensation
from the Bank in the same amount and on the same terms as the compensation
pursuant to Section 8 (a) hereof. For purposes of implementing the provisions of
this Section 12(a), the date on which any such succession becomes effective
shall be deemed the Date of Termination.
(b) This Agreement and all rights of the Employee hereunder shall inure
to the benefit of and be enforceable by the Employee's personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Employee should die while any amounts would still
be payable to the Employee hereunder if the Employee had continued to live, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Employee's devisee, legatee or other designee
or if there is no such designee, to the Employee's estate.
13. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, addressed to the respective
addresses set forth on the first page of this Agreement (provided that all
notices to the Bank shall be directed to the attention of the Board of Directors
of the Bank with a copy to the
9
<PAGE>
Secretary of the Bank), or to such other address as either party may have
furnished to the other in writing in accordance herewith.
14. Prior Agreements/Amendments. Upon the Commencement Date of this
Agreement, all prior agreements, still in effect, among the parties related to
the employment of the Employee as Treasurer and Chief Financial Officer of the
Bank shall be deemed null and void and have no effect. No amendments or
additions to this Agreement shall be binding unless in writing and signed by
both parties, except as herein otherwise provided.
15. Paragraph Headings. The paragraph headings used in this Agreement
are included solely for convenience and shall not affect, or be used in
connection with, the interpretation of this Agreement.
16. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
17. Governing Law. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
Indiana.
18. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
10
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
FIRST FEDERAL SAVINGS BANK OF WABASH
By: /s/ Nicholas M. George
---------------------------------
Nicholas M. George, President and
Chief Executive Officer
EMPLOYEE
/s/ Roger K. Cromer
---------------------------------
Roger K. Cromer
11
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 ................................... 5
REPORT OF INDEPENDENT AUDITORS ................................. 14
CONSOLIDATED BALANCE SHEETS
June 30, 1999 and 1998 ....................................... 15
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 1999, 1998 and 1997 ..................... 16
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended June 30, 1999, 1998 and 1997 ..................... 17
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1999, 1998 and 1997 ..................... 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ..................... 19
DIRECTORS AND EXECUTIVE OFFICERS ........................................ 34
SHAREHOLDER INFORMATION ................................................. 35
1
<PAGE>
[GRAPHIC-PHOTO OF BANK BUILDING]
<PAGE>
President's Message
Dear Shareholder:
Fiscal 1999 was a year of record earnings and preparation for the future. In
this, our sixth year as public company, net income was up 11.1% over the
previous year to $2,111,000 with diluted earnings per share up 10.6% to $1.46.
Our earnings were aided by a strong loan demand, a solid local economy, and
reflected the commitment our employees have made to provide service to the
customer.
During the year, your company emphasized expansion of its small business
relationships and consumer lending programs. Both have shown profitable growth
which will help us meet our long term goals. Our preparation for the future has
been primarily focused on two issues, systems and people. During this fiscal
year we have been diligently working to identify, test, and install software and
hardware systems that will serve our needs well into the next century.
Accordingly, at this time, we are Y2K compliant. Our second focus for the future
is people. The future success of our company relies on our ability to attract,
train, and retain qualified people. The continued effort to upgrade technology,
products, and personnel will be vital to our ability to compete in the new
millennium. During this next year, our training programs will be based on
proactive relationships with our customers. We will be more sales oriented, and
we will continue to stress "service for our customer."
In conclusion, I would like to thank and recognize our dedicated employees for
their loyalty and service to First Federal and the communities they serve. I
would also like to thank you, our customers and shareholders, for your continued
faith and support. We look forward to the challenge of the upcoming year and
every effort will be made to justify your continued confidence.
Sincerely,
/s/Nicholas M. George
- ---------------------
Nicholas M. George
President and Chief Executive Officer
3
<PAGE>
Selected Financial Information at or for the Year Ended June 30,:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data: $ 217,489 $ 203,311 $ 180,055 $ 150,467 $ 147,293
Total assets 151,491 139,394 114,159 100,529 92,475
Loans 51,029 50,293 40,450 40,566 34,983
Securities 130,401 125,256 116,118 92,490 85,930
Deposits 66,300 56,500 44,800 41,800 45,300
Borrowings 19,357 19,129 17,141 15,458 15,492
Equity
Selected Operations Data:
Total interest income $ 16,052 $ 14,589 $ 12,224 $ 11,164 $ 9,409
Net interest income 6,686 5,998 4,978 4,365 3,779
Provision for loan losses (1,010) (705) (120) (95) (34)
Non-interest income 1,990 1,265 674 628 145
Non-interest expense (4,591) (3,800) (3,583) (2,586) (2,356)
Income tax expense (964) (858) (605) (726) (435)
--------- --------- --------- --------- ---------
Net income $ 2,111 $ 1,900 $ 1,344 $ 1,586 $ 1,099
========= ========= ========= ========= =========
Per Share:
Basic earnings per share (1) $ 1.48 $ 1.36 $ 1.00 $ 1.11 $ 0.75
Diluted earnings per share (1) $ 1.46 $ 1.32 $ 0.97 $ 1.08 $ 0.74
Dividends declared (1) $ .42 $ 0.38 $ 0.32 $ 0.26 $ 0.23
Dividend payout ratio 28.38% 27.94% 32.00% 23.42% 30.67%
Other Data:
Net interest margin (2) 3.28% 3.31% 3.25% 3.06% 2.99%
Average interest-earning assets to
average interest-bearing liabilities . 1.11x 1.11x 1.12x 1.13x 1.14x
Non-performing assets (3) to total
assets at end of period .39% .43% .16% .06% .09%
Equity-to-total assets (end of period) . 8.90 9.41 9.52 10.27 10.52
Return on assets (ratio of net income
to average total assets) .99 1.00 .85 1.09 .85
Return on equity (ratio of net income
to average equity) 10.68 10.51 8.41 9.89 7.62
Equity-to-assets ratio (ratio of average
equity to average total assets) 9.25 9.49 10.11 11.02 11.15
Number of full-service offices 4 4 4 3 3
</TABLE>
(1) Restated for 100% stock dividend.
(2) Net interest income divided by average interest-earning assets.
(3) Includes non-accruing loans, accruing loans delinquent more than 90 days and
foreclosed assets.
4
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
GENERAL
FFW Corporation (the Company) owns First Federal Savings Bank of Wabash (the
Bank or First Federal), and the Company's earnings are primarily dependent on
the operations of First Federal. The following discussion relates primarily to
the Bank.
The principal business of First Federal is attracting deposits from the general
public and making loans secured by residential real estate. The Bank's earnings
are primarily dependent on net interest income, the difference between interest
income and interest expense. Interest income is a function of the balances of
loans, mortgage-backed securities and investments outstanding during the period
and the yield earned on such assets determines interest income. The balances of
deposits and borrowings and the rates paid on such deposits and borrowings
determines interest expense. Operating expenses consist of employee compensation
and benefits, occupancy and equipment, federal deposit insurance and other
general and administrative expenses.
Economic conditions as well as federal regulations concerning financial
institutions and monetary and fiscal policies affect the Company. Deposit
balances are influenced by a number of factors including interest rates paid on
competing personal investments and the level of personal income and savings in
our market. Deposit balances are influenced by the perceptions of customers
regarding the stability of the financial services industry. Lending activities
are influenced by the demand for housing and by competition from other lending
institutions. The primary sources of funds for lending activities include
deposits, loan repayments, borrowings, sales and maturities of securities
available for sale and funds provided from operations.
FINANCIAL CONDITION
Total assets increased $14.2 million during the year to $217.5 million at June
30, 1999. This increase was funded by an increase in deposits of $5.1 million
and an increase in advances outstanding from Federal Home Loan Bank of
Indianapolis (FHLB) of $9.8 million. These funds, along with cash on hand, were
used to originate loans, resulting in an increase in net loans of $12.1 million.
An additional $0.7 million was invested in government agencies, municipals and
other securities.
Total securities available for sale increased from $50.3 million at June 30,
1998 to $51.0 million at June 30, 1999. During fiscal 1999, state and municipal
securities decreased from $9.1 million at June 30, 1998 to $8.3 million at June
30, 1999 due to maturities during the course of the year totaling $1.0 million.
Government agency securities increased from $13.2 million at June 30, 1998 to
$23.2 million at June 30, 1999, which reflected the investment of $7.0 million
of called mortgage-backed securities during 1999. The Company has net unrealized
depreciation of $(455,000), net of tax at June 30, 1999 in its portfolio of
securities available for sale.
Mortgage-backed securities decreased from $18.3 million at June 30, 1998 to
$10.7 million at June 30, 1999. This decrease was primarily due to the $6.7
million of proceeds from the call of a privately issued mortgaged-backed
security. The call on this security resulted in a gain on sale of $724,000.
<PAGE>
Net loans increased $12.1 million, or 8.7%, from $139.4 million at June 30, 1998
to $151.5 million at June 30, 1999. The increases in the loan portfolio were
comprised primarily of automobile and commercial loans which increased $2.5
million and $10.8 million, respectively, during fiscal 1999. 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, 1999,
first mortgage loans secured by real estate comprise $78.1 million, or 47.8% of
the loan portfolio. The consumer and other loan portfolio included $36.3 million
of automobile loans, $10.4 million of home equity and improvement loans, $23.8
million in commercial loans and $4.4 million in other consumer loans at June 30,
1999.
Total deposits increased $5.1 million, or 4.1%, from $125.3 million at June 30,
1998 to $130.4 at June 30, 1999. During fiscal 1999, passbook and checking
accounts increased $2.6 million, or 4.5%, and certificates of deposit increased
$2.5 million, or 3.8%. The increase resulted from increased core deposit
accounts and targeted pricing of short term certificates of deposit. Assuming
interest rates remain at present levels during the next fiscal year, management
anticipates that deposits will continue to increase above current levels. As a
result, management will continue to control the overall increases in interest
rates in deposits by targeting certain terms and offering "specials" rather than
across the board increases for all deposit products. If deposit growth lags
behind loan demand, then an increase in FHLB advances may be necessary to fund
the Company's lending and investment activities during fiscal 2000.
5
<PAGE>
Total shareholders' equity increased $228,000 to $19.4 million at June 30, 1999.
The increase primarily resulted from net income of $2.11 million, $245,000 for
the release of ESOP shares and $27,000 of proceeds from the exercise of stock
options, which were offset by dividends paid of $609,000, $1.1 million change in
unrealized appreciation on securities available for sale, net of tax, and
$406,000 of treasury stock purchases.
RESULTS OF OPERATIONS
Comparison of Years Ended June 30, 1999 and June 30, 1998
General. Net income for the year ended June 30, 1999 was $2.1 million, an
increase of $211,000 compared to net income of $1.9 million for the year ended
June 30, 1998, an increase of 10.53%. The increase was primarily the result of
an increase of $688,000 in net interest income and $725,000 in noninterest
income, which was partially offset by an increase of $791,000 in noninterest
expense, a $305,000 increase in provisions for loan losses and an increase in
income taxes of $106,000. Further details of the changes in these items are
discussed below.
Net Interest Income. Net interest income increased $688,000, or 11.5%, from $6.0
million to $6.7 million for the year ended June 30, 1999. The increase in net
interest income was due to an increase of $1.5 million in interest income,
partially offset by an increase of $775,000 in interest expense. The increase in
net interest income was primarily a result of an increase in average
interest-earning assets exceeding the increase in average interest-bearing
liabilities.
[GRAPHIC-GRAPH DEPICTING (1) Year of one time assessment by Savings Association
Insurance Fund]
Net interest margin, the ratio of net interest income to average earning assets,
is affected by movements in interest rates and changes in the mix of earning
assets and the liabilities that fund those assets. Net interest margin was 3.28%
in 1999 compared to 3.31% in 1998. The net interest margin decreased because of
competitive pricing pressure. In addition, First Federal has relied more on FHLB
advances to meet loan demand.
The yield on earning assets in 1999 was 7.88% compared to 8.01% in 1998. Average
earning assets increased 10.9% in 1999, following a 19.5% increase in 1998. The
effective rate on interest bearing liabilities was 5.13% in 1999, compared to
5.26% in 1998.
Provision for Loan Losses. The provision for loan losses increased $305,000 from
$705,000 in fiscal 1998 to $1.0 million in fiscal 1999. The amounts provided
during the fiscal year were based on management's quarterly analysis of the
allowance for loan losses, and the changing composition of the total loan
portfolio from one-to-four family to commercial and consumer loans. The inherent
and identified risks of commercial and consumer loans require a higher level of
provisions for loan losses. The Company has monitored the historical results in
net charge-offs in the consumer loan portfolio for the last three years and had
increased the provision for loan losses accordingly. The
6
<PAGE>
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.
Non-interest Income. Supplementing the growth in net interest income was an
increase in noninterest income of 57.3% over 1998. The factors influencing the
growth were increased service fees, commission income, gains on sale of
securities and loans. Gains on sale of securities were $736,000 in 1999,
compared to $266,000 in 1998. The increase was due to a call on a
mortgage-backed security for $724,000. The gain on sale of loans increased
$44,000 as management continued to sell newly originated fixed-rate mortgage
loans with maturities greater than 15 years. Service charges and fees increased
44.2% from 1998 due to increase volume in our loan and deposit areas.
Non-interest Expense. During 1999, First Federal experienced an increase in
noninterest expense of 20.8%, from $4.6 million in 1999 to $3.8 million in 1998.
The increase was primarily attributed to professional consulting expenses, data
processing, furniture and equipment expense and salaries and benefits. Stringent
cost control and better utilization of resources continues to be a major focus
at First Federal.
Salaries and benefits increased 7.4% in 1999 compared to 26.0% in 1998. The
smaller increase in 1999 is due to branch expansion which took place in 1998.
Occupancy and equipment costs increased 11.0% from the prior year. The increase
is due to additional furniture purchased and the related depreciation costs.
Data processing increased 33.9% and other expense increased 84.0% from the prior
year. The majority of the increase in other expenses was in professional
consulting. The increase in professional consulting expense was attributed to
upgrading various computer systems for Year 2000 (Y2K) compliance, employee
acquisition and training, and professional consulting for collection and
repossession expenses.
Income Tax Expense. Income tax expense was $964,000 in fiscal 1999 compared to
$858,000 in fiscal 1998, an increase of $106,000, or 12.4%. Income taxes
increased primarily as a result of the tax effect of higher income before taxes.
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
non-interest 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 $1.4 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.
<PAGE>
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 8.01%
in fiscal 1998 from 7.98% in fiscal 1997.
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.
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.
7
<PAGE>
Non-interest Income. Non-interest 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.
Non-interest Expense. Non-interest 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
premium 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 were 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.
Asset and Liability Management and Market Risk
General. The principal market risk affecting the Company is interest-rate risk.
The Company does not maintain a trading account and is not affected by foreign
currency exchange rate risk or commodity price risk.
The Company is subject to interest rate risk to the extent its interest-earning
assets reprice differently than its interest-bearing liabilities. The Company
reduces exposure to changes in market interest rates by managing asset and
liability maturities and interest rates, primarily by reducing the effective
maturity of assets through the use of adjustable rate mortgage-backed securities
and adjustable rate loans and by extending funding maturities through the use of
other borrowings such as FHLB Advances.
Quantitative Aspects of Market Risk. As part of its efforts to monitor and
manage interest rate risk, the Company uses the "net portfolio value" (NPV)
methodology adopted by the OTS. This approach calculates the difference between
the present value of expected cash flows from assets and liabilities, as well as
cash flows from off balance sheet contracts, arising from an assumed 200 basis
point increase or decrease in interest rates. Under OTS regulations, an
institution's "normal" level of interest rate risk for this assumed change in
interest rates is a decrease in the institution's NPV not exceeding 2% of
assets.
<PAGE>
The Company's asset/liability management strategy sets limits on the change in
NPV given certain changes in interest rates. The table presented here, as of
March 31, 1999, is the Company's interest rate risk measured by changes in NPV
for instantaneous parallel shifts in the yield curve, in 100 basis point
increments, up and down 300 basis points.
<TABLE>
<CAPTION>
Change in NPV as % of Portfolio
Interest Rates Net Portfolio Value Value of Assets
In Basis --------------------------------------------------- ---------------------------
Points NPV
(Rate Shock) $ Amount $Change %Change Ratio Change (1)
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
300 $15,429 $(4,012) (21)% 7.60% (140)
200 17,071 (2,369) (12) 8.23 (77)
100 18,414 (1,026) (5) 8.69 (31)
Static 19,441 9.00
(100) 21,459 2,018 10 9.69 69
(200) 23,600 4,160 21 10.39 139
(300) 26,224 6,784 35 11.22 222
</TABLE>
8
<PAGE>
As illustrated in the table, the Company's NPV declines in a rising interest
rate environment. Specifically, the table indicates that, at March 31, 1999, the
Company's NPV was $19.4 million (or 9% of portfolio assets). Based upon the
assumptions used, an immediate increase in market interest rates of 200 basis
points would result in a $2.4 million or 12% decline in NPV and a 77 basis point
or 8.6% decline in the Company's NPV ratio to 8.23%. This is within the
Company's guidelines.
In evaluating the exposure to interest rate risk, certain simplifications in
analysis must be considered. For example, although assets and liabilities may
have similar maturities or period to repricing, they may react differently to
changes in market interest rates. In addition, the rates on some assets and
liabilities may fluctuate before changes in market interest rates, while
interest rates on other types may lag behind. Further, if rates change,
prepayments and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their debt may decrease in case of an interest rate increase.
Therefore, the actual effect of changing interest rates may differ from that
presented in the foregoing table.
The Board of Directors and management of the Company believe that certain
factors afford the Company the ability to operate successfully despite its
exposure to interest rate risk. The Company manages its interest rate risk by
originating adjustable rate loans and purchasing adjustable rate mortgage-backed
securities by maintaining capital well in excess of regulatory requirements and
by selling a portion of fixed rate one-to four-family real estate loans.
The Company focuses lending efforts toward offering competitively priced
adjustable rate loan products as an alternative to more traditional fixed rate
mortgage loans. In addition, while the Company generally originates mortgage
loans for its own portfolio, sales of fixed-rate first mortgage loans with
maturities of 15 years or greater are currently undertaken to manage interest
rate risk. These loans are currently classified as held for sale by the Company
at origination. There were no loans held for sale at June 30, 1999. The Company
retains the servicing on loans sold in the secondary market and, at June 30,
1999, $32.4 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.
9
<PAGE>
Average Balances, Interest Rates and Yields
This following table shows weighted average interest rates on loans,
investments, deposits, other interest-bearing liabilities, and the interest rate
spread and the net yield on weighted average interest-earning assets.
<TABLE>
<CAPTION>
Year Ended June 30
-----------------------------------------------------------------------------------------
Average 1999 Yield/ Average 1998 Yield/ Average 1997 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) $147,437 $12,428 8.43% $127,127 $11,029 8.68% $107,082 $ 9,197 8.59%
Securities (2) (3) 38,304 2,298 6.09 30,843 1,965 6.46 24,248 1,475 6.08
Mortgage-backed
securities (3) 15,703 1,166 7.25 18,732 1,427 7.84 18,781 1,445 7.69
Other interest-
bearing deposits 2,398 160 6.67 6,370 168 2.64 3,112 107 3.44
-------- ------- -------- ------- -------- -------
Total interest-earning
assets. 203,842 16,052 7.88% 183,072 14,589 8.01% 153,223 12,224 7.98%
Other assets 9,817 7,398 4,895
-------- -------- --------
Total assets $213,659 $190,470 $158,118
======== ======== ========
Interest-bearing liabilities:
Money market
accounts $ 625 $ 27 4.32% $ 1,022 $26 2.54% $298 $8 2.68%
NOW accounts 6,726 147 2.19 7,040 132 1.88 4,242 84 1.98
Passbook savings
accounts 45,317 1,843 4.07 42,983 1,817 4.23 40,982 1,772 4.32
Certificates
of deposit 67,916 3,791 5.58 62,666 3,652 5.83 49,907 2,914 5.84
FHLB advances 62,106 3,558 5.73 49,543 2,964 5.98 41,470 2,468 5.95
-------- ------- -------- ------- -------- -------
Total interest-
bearing liabilities 182,690 9,366 5.13% 163,254 8,591 5.26% 136,899 7,246 5.29%
Other liabilities 11,212 ------ ---- 9,133 ------- ---- 5,238 ------- ----
-------- -------- --------
Total liabilities 172,387 142,137
Equity 19,757 18,083 15,981
-------- -------- --------
Total liabilities and
Shareholders' equity $213,659 $190,470 $158,118
======== ======== ========
Net interest income/
interest rate spread $ 6,686 2.75% $5,998 2.75% $4,978 2.69%
======= ==== ====== ==== ====== ====
Net interest margin (4) 3.28% 3.31% 3.25%
==== ==== ====
</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 amortized cost for securities available
for sale.
(4) Net interest income divided by average interest earning assets.
Asset Quality
Total non-performing assets decreased to $842,000 at June 30, 1999 compared to
$873,000 at June 30, 1998. The ratio of non-performing assets to total assets at
June 30, 1999 was .39% compared to .43% at June 30, 1998. Included in
non-performing assets at June 30, 1999 were $410,000 in non-accruing loans,
$375,000 other real estate and $57,000 in repossessed assets.
In addition to the non-performing assets listed above, as of June 30, 1999 and
1998, there was $1.9 million and $1.7 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, 1999, $1.3 million of loans were classified
as special mention, $543,000 million as substandard, $72,000 as doubtful and
$46,000 as loss. As of June 30, 1998, $802,000 were classified as special
mention, $899,000 as substandard, $82,000 as doubtful and none as loss.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, borrowings, principal and
interest payments on loans and mortgage-backed securities and sales and
maturities of securities available for sale. While maturities of securities and
scheduled amortization of loans and mortgage-backed securities are a predictable
source of funds, deposit flows and mortgage prepayments are greatly influenced
by general interest rates, economic conditions and competition.
The standard measure of liquidity for thrift institutions is the ratio of cash
and eligible investments to a certain percentage of net withdrawable savings and
borrowings due within one year. The minimum required ratio is currently set by
OTS regulations at 4%, of which 1% must be comprised of short-term investments
(i.e. generally with a term of less than one year). At June 30, 1999, the Bank's
liquidity ratio was 12.05%, of which 6.83% was comprised of short-term
investments.
Year Ended June 30, 1999. During the year ended June 30, 1999 there was a net
increase of $429,000 in cash and cash equivalents. Major source of cash during
the year were an increase in deposits and borrowings of $5.1 million and $9.8
million, and the proceeds from the sales of loans held for sale and the sale,
call and maturity of securities provided $14.4 million and $22.8 million.
Management continued to sell fixed rate first mortgage loans with maturities of
15 to 30 years in the secondary market to manage interest rate risk.
Major uses of cash during the year which offset the sources of cash included
funding an increase of $14.3 million in the loan portfolio, net purchases of
$25.0 million in securities available for sale and originations of $14.3 million
of loans to be sold in the secondary market.
Year EndedJune 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.
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.
<PAGE>
Borrowings may be used as a source of funds to offset reductions in other
sources of funds such as deposits and to assist in asset/liability management.
Management believes that a diversified blend of borrowings from the FHLB offers
flexibility and is an important tool to be used in the balanced growth of the
Company. As such, borrowings outstanding at June 30, 1999 consist of advances
from the FHLB totaling $66.3 million. Also, the Company had commitments to fund
loan originations, unused lines of credit and standby lines of credit with
borrowers of $11.9 million at June 30, 1999. 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, 1999, the Bank exceeded all fully
phased in capital requirements. Tangible and core capital totaled $15.3 million,
or 7.10% of adjusted total assets (as defined by regulation) and risk-based
capital totaled $16.8 million, or 12.38% of risk-weighted assets (as defined by
regulation). See Note 11 of the Notes to Consolidated Financial Statements for
additional information regarding capital requirements applicable to the Bank.
IMPACT OF INFLATION
The financial statements and related data are in terms of historical dollars
without considering changes in purchasing power of money over time due to
inflation. The primary assets and liabilities of the Company are monetary in
nature. As a result, interest rates have a more significant impact on
performance than the general levels of inflation. Interest rates do not
necessarily move in the same direction or magnitude as the prices of goods and
services.
11
<PAGE>
YEAR 2000 CONSIDERATIONS
The Year 2000 issue is the result of potential problems with computer systems or
any equipment with computer chips that store the year portion of the date as
just two digits (e.g., 98 for 1998). Systems using this two-digit approach may
not be able to determine whether "00" represents the Year 2000 or 1900. The
problem, if not corrected, may make those systems fail altogether or, even
worse, allow them to generate incorrect calculations causing a disruption of
normal operations.
In 1997, a comprehensive project plan to address the Year 2000 issue as it
relates to the Company's operation was developed, approved by the Board of
Directors and implemented. The scope of the plan includes five phases,
Awareness, Assessment, Renovation, Validation (testing), and Implementation as
defined by federal banking regulatory agencies. A project team was assigned and
consists of key members of management. This team was to assess our systems and
equipment and our vendors to ascertain their readiness and to develop the
overall plan to bring our systems into compliance. Additionally, it was to
assess the readiness of our customers and determine what risk, if any, our key
customers pose to the Bank with regards to their Year 2000 readiness. The duties
of the Vice President of Operations were realigned to serve as the Year 2000
Project Manager.
An assessment of the impact of the year 2000 issue on the Company's computer
systems has been completed. The scope of the project also includes other
operational and environmental systems since they may be impacted if embedded
computer chips control the functionality of those systems. From the assessment,
the Company has identified and prioritized those systems deemed to be mission
critical or those that have a significant impact on normal operations.
The Company relies on third-party vendors and service providers for much of its
data processing capabilities and to maintain its computer systems. Formal
communications with these providers and other external counter parties were
initiated in 1997 to assess the Year 2000 readiness of their products and
services. Their progress in meeting their targeted schedules is being monitored
continually for any indication that they may not be able to address the problems
in time. Thus far, responses indicate that all of the significant providers
currently have compliant versions available or are well into the renovation and
testing phases with completion scheduled for sometime in 1999. However, the
Company can give no guarantee that the systems of these service providers and
vendors on which the Company's systems rely will be timely renovated.
Additionally, the Company has implemented a plan to manage the potential credit
risk posed by the impact of the Year 2000 issue on its major borrowing
customers. Formal communications have been initiated, and the assessment was
substantially completed on June 30, 1999. Loan losses attributed to the Year
2000 issue are not anticipated to be material to the Company.
The project team feels that the Company's Year 2000 readiness project is on
schedule. The following table provides a summary of the current status of the
five phases involved and a projected timetable for completion.
PROJECT PHASE % COMPLETION
Awareness 100%
Assessment 100%
Renovation 100%
Validation 100%
Implementation 100%
<PAGE>
The estimated total project cost is estimated to be between $100,000 and
$150,000. The total amount expended on the project through June 30, 1999, was
$115,000 of which approximately $36,000 was related to the cost of replacement
software, $30,000 was related to four training workshops with our data processor
and Arthur Anderson, a national consulting/CPA firm, and the creation of a test
bank using 5% of our data base. The remaining amount was associated with
hardware upgrades and replacements.
Funds have been provided from our normal operating budget and costs are expensed
as they are incurred.
The total cost to the Company of these Year 2000 readiness activities has not
been, and is not anticipated to be, material to its financial position or
results or operations in any given year.
No specific other projects have been deferred due to this project. Much of the
work done within this project is an acceleration of work that would have been
done in the normal course of business.
The costs and timetable in which the Company plans to complete the Year 2000
readiness activities are based on management's best estimates, which were
derived using numerous assumptions of future events including the continued
availability of certain resources, third-party readiness plans and other
factors. The Company can make no guarantee that these estimates will be achieved
and actual results could differ from such plans.
12
<PAGE>
Based upon current information related to the progress of its major vendors and
service providers, management has determined that the Year 2000 issue will not
pose significant operational problems for its computer systems. This
determination is based on the ability of those vendors and service providers to
renovate, in a timely manner, the products and services on which the Company's
systems rely. However, the Company can give no guarantee that the systems of
these suppliers will be renovated in a timely manner.
Realizing that some disruption may occur despite our best efforts, the Company
has developed contingency plans for each critical system in the event that one
or more of those systems fail. While this is an ongoing process, the Company has
the plan substantially documented as of June 30, 1999.
13
<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, 1999 and 1998 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, 1999. 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, 1999 and 1998 and the results of its operations and its cash flows
for each of the three years in the period ended June 30, 1999 in conformity with
generally accepted accounting principles.
/s/Crowe, Chizek and Company LLP
--------------------------------
Crowe, Chizek and Company LLP
South Bend, Indiana
August 6, 1999
14
<PAGE>
<TABLE>
<CAPTION>
FFW Corporation
Consolidated Balance Sheets
June 30, 1999 and 1998
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from financial institutions $ 4,650,866 $ 4,023,917
Interest-bearing deposits in other financial
institutions - short-term 188,369 386,435
------------- -------------
Total cash and cash equivalents 4,839,235 4,410,352
Securities available for sale 51,028,563 50,293,229
Loans receivable, net of allowance for loan losses of $1,623,293
in 1999 and $982,532 in 1998 151,491,090 139,393,692
Federal Home Loan Bank stock 3,400,900 2,757,200
Accrued interest receivable 1,616,479 1,428,927
Premises and equipment, net 2,124,656 2,205,458
Other assets 2,987,971 2,822,405
------------- -------------
Total assets $ 217,488,894 $ 203,311,263
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 8,171,372 $ 6,935,426
Interest-bearing 122,229,981 118,320,877
------------- -------------
Total deposits 130,401,353 125,256,303
Borrowings 66,300,388 56,500,000
Accrued expenses and other liabilities 1,430,313 2,426,233
------------- -------------
Total liabilities 198,132,054 184,182,536
Shareholders' equity
Preferred stock, $.01 par; 500,000 shares
authorized; none issued -- --
Common stock, $.01 par; 2,000,000 shares authorized;
issued: 1,785,288 - 1999 and 1,775,096 - 1998;
outstanding: 1,441,224 - 1999 and 1,458,032 - 1998 17,853 17,751
Additional paid-in capital 8,965,882 8,793,133
Retained earnings 13,970,694 12,468,144
Accumulated other comprehensive income (455,386) 685,432
Unearned Employee Stock Ownership Plan shares (52,331) (151,748)
Treasury stock at cost, 344,064 - 1999 and 317,064 -
1998, shares (3,089,872) (2,683,985)
------------- -------------
Total shareholders' equity 19,356,840 19,128,727
------------- -------------
Total liabilities and shareholders' equity $ 217,488,894 $ 203,311,263
============= =============
</TABLE>
See accompanying notes.
15
<PAGE>
<TABLE>
<CAPTION>
FFW Corporation
Consolidated Statements of Income
Years ended June 30, 1999, 1998 and 1997
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Interest and dividend income
Loans, including fees $12,428,098 $11,028,576 $ 9,197,093
Taxable securities 3,000,394 2,978,403 2,465,026
Nontaxable securities 464,433 413,504 455,056
Other 159,565 168,410 106,640
----------- ----------- -----------
Total interest and dividend income 16,052,490 14,588,893 12,223,815
Interest expense
Deposits 5,807,809 5,626,941 4,777,282
Borrowings 3,558,563 2,964,036 2,468,441
----------- ----------- -----------
Total interest expense 9,366,372 8,590,977 7,245,723
----------- ----------- -----------
Net interest income 6,686,118 5,997,916 4,978,092
Provision for loan losses 1,010,000 705,000 120,000
----------- ----------- -----------
Net interest income after provision for
loan losses 5,676,118 5,292,916 4,858,092
Noninterest income
Net gains on sales of securities 735,649 266,215 2,024
Net gains on sales of loans 148,096 104,148 43,341
Commission income 234,362 215,051 154,213
Service charges and fees 782,572 551,211 331,057
Other income 88,776 127,859 143,474
----------- ----------- -----------
Total noninterest income 1,989,455 1,264,484 674,109
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Noninterest expense
Salaries and benefits 2,032,452 1,892,039 1,501,292
Occupancy and equipment 369,647 332,894 269,638
Deposit insurance premium 121,423 113,521 726,684
Correspondent bank charges 205,883 211,420 147,581
Data processing 489,372 365,522 285,754
Printing, postage and supplies 245,031 192,935 163,820
Amortization of goodwill & core deposit premium 156,347 164,474 --
Other expense 970,372 527,184 488,005
---------- ---------- ----------
Total noninterest expense 4,590,527 3,799,989 3,582,774
---------- ---------- ----------
Income before income taxes 3,075,046 2,757,411 1,949,427
Income tax expense 963,991 857,743 605,767
---------- ---------- ----------
Net income $2,111,055 $1,899,668 $1,343,660
========== ========== ==========
Earnings per share
Basic $ 1.48 $ 1.36 $ 1.00
Diluted $ 1.46 $ 1.32 $ 0.97
</TABLE>
See accompanying notes.
16
<PAGE>
<TABLE>
<CAPTION>
FFW Corporation
Consolidated Statements of Changes in Stockholders' Equity
Years ended June 30, 1999, 1998 and 1997
Unearned
Employee Unearned
Accumulated Stock Management
Additional Other Ownership Retention
Common Paid-In Retained Comprehensive Plan Plan
Stock Capital Earnings Income Shares Shares
------- ---------- ----------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 $ 8,536 $8,132,484 $10,218,910 $(203,283) $(331,189) $(13,079)
Cash dividends - $0.32 per share -- -- (443,192) -- -- --
17,117 shares released under ESOP -- 145,503 -- -- 86,636 --
Amortization of MRP contribution -- -- -- -- -- 13,079
Purchase 32,000 shares -- -- -- -- -- --
Issue 32,348 shares on stock options 162 161,578 -- -- -- --
Net income -- -- 1,343,660 -- -- --
Other comprehensive income, net of tax:
Unrealized appreciation (depreciation) on
securities available for sale, net of tax
of $474,821 -- -- -- 705,466 -- --
------- ---------- ----------- --------- --------- --------
Total other comprehensive income -- -- -- 705,466 -- --
------- ---------- ----------- --------- --------- --------
Comprehensive income -- -- -- -- -- --
------- ---------- ----------- --------- --------- --------
Balance at June 30, 1997 8,698 8,439,565 11,119,378 502,183 (244,553) --
Cash dividends - $0.38 per share -- -- (542,101) -- -- --
17,117 shares released under ESOP -- 176,000 -- -- 92,805 --
100% stock dividend 8,801 -- (8,801) -- -- --
Issue 35,564 shares on stock options 252 177,568 -- -- -- --
Net income -- -- 1,899,668 -- -- --
Other comprehensive income, net of tax:
Unrealized appreciation (depreciation) on
securities available for sale, net of tax
of $84,263 -- -- -- 183,249 -- --
------- ---------- ----------- --------- --------- --------
Total other comprehensive income -- -- -- 183,249 -- --
------- ---------- ----------- --------- --------- --------
Comprehensive income -- -- -- -- -- --
------- ---------- ----------- --------- --------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998 $17,751 $8,793,133 $12,468,144 $ 685,432 $(151,748) $ --
Cash dividends - $0.42 per share -- -- (608,505) -- -- --
17,117 shares released under ESOP -- 145,495 -- -- 99,417 --
Purchased 27,000 shares -- -- -- -- -- --
Issue 10,192 shares, net, on stock options 102 27,254 -- -- -- --
Net income -- -- 2,111,055 -- -- --
Other comprehensive income, net of tax:
Unrealized appreciation (depreciation)
on securities available for sale, net of
tax of $(746,117) -- -- -- (1,140,818) -- --
------- ---------- ----------- --------- --------- --------
Total other comprehensive income -- -- -- (1,140,818) -- --
------- ---------- ----------- --------- --------- --------
Comprehensive income -- -- -- -- -- --
------- ---------- ----------- --------- --------- --------
Balance at June 30, 1999 $17,853 $8,965,882 $13,970,694 $ (455,386) $ (52,331) $ --
======= ========== =========== ========== ========== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Total
Treasury Shareholders'
Stock Equity
----------- -----------
<S> <C> <C>
Balance at June 30, 1996 $(2,354,236) $15,458,143
Cash dividends - $0.32 per share (443,192)
17,117 shares released under ESOP 232,139
Amortization of MRP contribution -- 13,079
Purchase 32,000 shares (329,749) (329,749)
Issue 32,348 shares on stock options -- 161,740
Net income -- 1,343,660
Other comprehensive income, net of tax:
Unrealized appreciation (depreciation) on
securities available for sale, net of tax
of $474,821 --
----------- -----------
Total other comprehensive income -- 705,466
----------- -----------
Comprehensive income -- 2,049,126
----------- -----------
Balance at June 30, 1997 (2,683,985) 17,141,286
Cash dividends - $0.38 per share -- (542,101)
17,117 shares released under ESOP -- 268,805
100% stock dividend -- --
Issue 35,564 shares on stock options -- 177,820
Net income -- 1,899,668
Other comprehensive income, net of tax:
Unrealized appreciation (depreciation) on
securities available for sale, net of tax
of $84,263 --
----------- -----------
Total other comprehensive income -- 183,249
----------- -----------
Comprehensive income -- 2,082,917
----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Balance at June 30, 1998 $(2,683,985) $19,128,727
Cash dividends - $0.42 per share -- (608,505)
17,117 shares released under ESOP -- 244,912
Purchased 27,000 shares (405,887) (405,887)
Issue 10,192 shares, net, on stock options -- 27,356
Net income -- 2,111,055
Other comprehensive income, net of tax:
Unrealized appreciation (depreciation)
on securities available for sale, net of
tax of $(746,117) --
----------- -----------
Total other comprehensive income -- (1,140,818)
----------- -----------
Comprehensive income -- 970,237
----------- -----------
Balance at June 30, 1999 $(3,089,872) $19,356,840
=========== ===========
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
FFW Corporation
Consolidated Statements of Cash Flows
Years ended June 30, 1999, 1998 and 1997
1999 1998 1997
------------ ------------ ------------
Cash flows from operating activities
<S> <C> <C> <C>
Net income $ 2,111,055 $ 1,899,668 $ 1,343,660
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization (60,899) (80,662) 89,006
Provision for loan losses 1,010,000 705,000 120,000
Net (gains) losses on sales of:
Securities (735,649) (266,215) (2,024)
Loans held for sale (148,096) (104,148) (43,341)
Foreclosed real estate (6,174) 13,901 (4,783)
Originations of loans held for sale (14,262,865) (9,045,410) (3,183,214)
Proceeds from sales of loans held for sale 14,410,961 9,149,558 3,650,555
ESOP expense 244,912 268,805 232,139
Amortization of MRP contribution -- -- 13,079
Net change in accrued interest receivable
and other assets 11,984 (387,593) (229,676)
Amortization of goodwill and core deposit intangibles 156,347 164,474 --
Net change in accrued interest payable and other
liabilities (249,803) 758,749 147,137
------------ ------------ ------------
Net cash from operating activities 2,481,773 3,076,127 2,132,538
Cash flows from investing activities Proceeds from:
Sales, calls and maturities of securities
available for sale 22,808,126 20,007,977 1,799,688
Sales of foreclosed real estate 903,878 465,351 315,344
Purchase of:
Securities available for sale (25,049,872) (29,770,835) (690,200)
Federal Home Loan Bank stock (643,700) (359,600) --
Principal collected on mortgage-backed securities 609,858 691,510 594,865
Net change in loans receivable (14,301,551) (26,445,499) (13,732,583)
Purchases of premises and equipment, net (113,031) (436,341) (234,855)
Investment in limited partnership (225,000) (412,500) (37,500)
Cash received for net liabilities assumed in
branch purchase -- -- 15,300,519
------------ ------------ ------------
Net cash from investing activities (16,011,292) (36,259,937) 3,315,278
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cash flows from financing activities
Net change in deposits $ 5,145,050 $ 9,137,829 $ 6,495,792
Proceeds from borrowings 42,500,000 52,975,956 37,500,000
Repayment of borrowings (32,699,612) (41,275,956) (34,500,000)
Proceeds from stock options 27,356 177,820 161,740
Purchase of treasury stock (405,887) -- (329,749)
Cash dividends paid (608,505) (542,101) (443,192)
------------ ------------ ------------
Net cash from financing activities 13,958,402 20,473,548 8,884,591
------------ ------------ ------------
Net change in cash and cash equivalents 428,883 (12,710,262) 14,332,407
Beginning cash and cash equivalents 4,410,352 17,120,614 2,788,207
------------ ------------ ------------
Ending cash and cash equivalents $ 4,839,235 $ 4,410,352 $ 17,120,614
============ ============ ============
</TABLE>
18
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include FFW
Corporation (the Company), and its wholly-owned subsidiaries, First Federal
Savings Bank of Wabash (the Bank) and FirstFed Financial of Wabash,
Incorporated. All significant inter-company transactions and balances have been
eliminated in consolidation.
Nature of Business and Concentrations of Credit Risk: The primary source of
income for the Company is the origination of commercial and residential real
estate loans (see Note 13).
Use of Estimates In Preparing Financial Statements: Preparing financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period, as well as the disclosures provided. Areas
involving the use of estimates and assumptions include the allowance for loan
losses, fair values of securities and other financial instruments, determination
and carrying value of impaired loans and intangible assets, the carrying value
of loans held for sale, the value of mortgage servicing rights, the accrued
liability for deferred compensation, the fair value of stock options, the
realization of deferred tax assets, and the determination of depreciation of
premises and equipment. Actual results could differ from those estimates.
Estimates associated with the allowance for loan losses, the classification and
carrying value of loans held for sale, the fair value of stock options and the
fair value of securities and other financial instruments are particularly
susceptible to material change in the near term.
Cash Flow Reporting: For reporting cash flows, cash and cash equivalents include
cash on hand, due from financial institutions and interest-bearing deposits in
other financial institutions - short-term. Net cash flows are reported for
customer loan and deposit transactions.
Securities: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported separately in shareholders'
equity, net of tax. Securities are classified as trading when held for short
term periods in anticipation of market gains, and are carried at fair value.
Securities are written down to fair value when a decline in fair value is not
temporary.
Gains and losses on sales are determined using the amortized cost of the
specific security sold. Interest income includes amortization of purchase
premiums and discounts.
<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.
19
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Loans are considered impaired if full principal or interest payments are not
anticipated in accordance with the contractual loan terms. Impaired loans are
carried at the present value of expected future cash flows discounted at the
loan's effective interest rate or at the fair value of the collateral if the
loan is collateral dependent. A portion of the allowance for loan losses is
allocated to impaired loans if the value of such loans is less than the unpaid
balance. If these allocations cause the allowance for loan losses to require an
increase, such increase is reported in the provision for loan losses.
Commercial loans and mortgage loans secured by other properties are evaluated
individually for impairment. Smaller-balance homogeneous loans such as
residential first mortgage loans, are evaluated for impairment in total. When
analysis of borrower operating results and financial condition indicates that
underlying cash flows of the borrower's business are not adequate to meet debt
service requirements, the loan is evaluated for impairment. Often this is
associated with a delay or shortfall in payments of 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,
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 were two
foreclosed properties at June 30, 1999, and one foreclosed property held at June
30, 1998.
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 South
Whitley Branch, on June 13, 1997, include goodwill and core deposit intangibles.
Goodwill represents the excess of the purchase price over the assets acquired.
Goodwill is amortized on a straight-line basis over 15 years. Core deposit
intangibles are amortized on an accelerated basis over 10 years. As of June 30,
1999, unamortized goodwill totaled $1,082,000 and unamortized core deposit
intangibles totaled $293,000.
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: Servicing rights represent both purchased rights and the
allocated value of servicing rights retained on loans sold. Servicing rights are
expensed in proportion to, and over the period of, estimated net servicing
revenues. Impairment is evaluated based on the fair value of the rights, using
groupings of the underlying loans as to interest rates and then, secondarily, as
to geographic and prepayment characteristics. Any impairment of a grouping is
reported as a valuation allowance.
Employee Stock Ownership Plan: The Company accounts for its employee stock
ownership plan (ESOP) under AICPA Statement of Position (SOP) 93-6. The cost of
shares issued to the ESOP, but not yet allocated to participants, 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.
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.
20
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Financial Instruments with Off-Balance-Sheet Risk: The Company, in the normal
course of business, makes commitments to make loans which are not reflected in
the financial statements. A summary of these commitments is disclosed in Note
12.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes the net change in net
unrealized appreciation (depreciation) on securities available for sale, net of
tax which is also recognized as a separate component of shareholders' equity.
The accounting standard that requires reporting comprehensive income first
applies for 1999, with prior information restated to be comparable.
Earnings and Dividends Per Common Share: Basic earnings per common share is
based on the net income divided by the weighted average number of common shares
outstanding during the period. ESOP shares are considered outstanding for
earnings per common share calculations as they are committed to be released;
unearned shares are not considered outstanding. Diluted earnings per common
share shows the dilutive effect of additional potential common shares issuable
under stock options. Earnings and dividends per common share are restated for
all stock splits and dividends.
Stock Split: Common share amounts and market values and price per share
disclosures related to stock repurchase programs, stock-based compensation plans
and earnings and dividends per share disclosures have been restated for the
two-for-one stock split effected in the form of a 100% stock dividend which was
declared November 25, 1997 and paid on December 31, 1997. Stock dividends in
excess of 20% are reported by transferring the par value of the stock issued
from retained earnings to common stock. Stock dividends for 20% or less are
reported by transferring the market value, as of the ex-dividend date, of the
stock issued from retained earnings to common stock and additional paid-in
capital.
Reclassifications: Certain amounts in the 1998 and 1997 financial statements
were reclassified to conform with the 1999 presentation.
<PAGE>
NOTE 2 - EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
A reconciliation of the numerators and denominators used in the computation of
basic earnings per common share and diluted earnings per common share is
presented below:
<TABLE>
<CAPTION>
Year ended June 30,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Basic Earnings Per Common Share
Numerator: Net income $ 2,111,055 $ 1,899,668 $ 1,343,660
=========== =========== ===========
Denominator: Weighted average common shares outstanding 1,464,857 1,449,938 1,411,099
Less: Average unallocated ESOP shares (34,236) (51,352) (68,468)
----------- ----------- -----------
Weighted average common shares outstanding 1,430,621 1,398,586 1,342,631
=========== =========== ===========
Basic earnings per common share $ 1.48 $ 1.36 $ 1.00
=========== =========== ===========
<CAPTION>
Year ended June 30,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Diluted Earnings Per Common Share
Numerator: Net income $2,111,055 $1,899,668 $1,343,660
========== ========== ==========
Denominator: Weighted average common shares
outstanding for basic earnings per common share 1,430,621 1,398,586 1,342,631
Add: Dilutive effects of assumed exercise of stock options 20,083 41,593 49,023
---------- ---------- ----------
Weighted average common shares and dilutive
potential common shares outstanding 1,450,704 1,440,179 1,391,654
========== ========== ==========
Diluted earnings per common share $ 1.46 $ 1.32 $ .97
========== ========== ==========
</TABLE>
21
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
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 1999
U.S. government and agency $ 23,842,475 $ -- $ (655,519) $ 23,186,956
State and municipal 8,377,975 131,593 (166,564) 8,343,004
Other 235,000 1,786 -- 236,786
Mortgage backed 10,675,605 27,585 (10,255) 10,692,935
Equity 8,609,362 145,781 (186,261) 8,568,882
------------ ------------ ------------ ------------
$ 51,740,417 $ 306,745 $ (1,018,599) $ 51,028,563
============ ============ ============ ============
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
============ ============ ============ ============
</TABLE>
Contractual maturities of debt securities at June 30, 1999 were as follows.
Expected maturities may differ from contractual maturities because borrowers may
call or prepay obligations. Securities not due at a single maturity date are
shown separately.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
----------- -----------
<S> <C> <C>
Due in one year or less $ 1,621,005 $ 1,611,514
Due from one to five years 8,441,976 8,440,015
Due from five to ten years 17,011,941 16,482,587
Due after ten years 5,380,528 5,232,630
Mortgage backed 10,675,605 10,692,935
Equities 8,609,362 8,568,882
----------- -----------
$51,740,417 $51,028,563
=========== ===========
</TABLE>
<PAGE>
Sales/calls of securities available for sale for the years ended June 30 were:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- --------
<S> <C> <C> <C>
Sales $ 966,504 $ 9,356,977 $377,024
Calls 14,196,622 10,051,000 --
Gross gains 747,733 266,215 2,024
Gross losses 12,084 -- --
</TABLE>
The June 30, 1999, gross gains included $724,000 from the call of a
mortgage-backed security. The gain recognized was the result of a pre-payment
penalty and the recognition of unaccreted discount.
22
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
The June 30, 1995 balance of mortgage-backed securities was reduced by $318,900
to reflect an other than temporary decline in the fair value of a security.
Collateral for this security was multi-family mortgage obligations primarily
located in Southern California. The decline in the fair value of the security
was due to increased delinquency in the underlying loans and a decline in the
cash reserve fund and losses incurred on foreclosed real estate. On April 29,
1998 this security was sold and a gain on sale of $264,028 was recognized from
the previously written down balance.
NOTE 4 - LOANS RECEIVABLE, NET
Loans receivable as of June 30 were as follows:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Mortgage loans (principally conventional)
Secured by one-to-four family residences $ 67,825,242 $ 70,243,040
Secured by other properties 9,341,791 7,272,108
Construction 898,600 3,990,770
------------- -------------
78,065,633 81,505,918
Undisbursed portion of construction loans (444,459) (1,715,762)
Net deferred loan origination fees (38,184) (47,280)
------------- -------------
Total mortgage loans 77,582,990 79,742,876
Consumer and other loans
Automobile 36,334,413 33,813,611
Manufactured home 248,789 301,445
Home equity and improvement 10,393,878 9,104,988
Commercial 23,781,154 12,945,444
Other 4,125,094 3,822,697
------------- -------------
74,883,328 59,988,185
Net deferred loan origination costs 648,065 645,163
------------- -------------
Total consumer and other loans 75,531,393 60,633,348
Less allowance for loan losses (1,623,293) (982,532)
------------- -------------
$ 151,491,090 $ 139,393,692
============= =============
</TABLE>
<PAGE>
Activity in the allowance for loan losses for the years ended June 30 is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Beginning balance $ 982,532 $ 571,751 $ 553,440
Provision for loan losses 1,010,000 705,000 120,000
Charge-offs (464,847) (331,702) (184,797)
Recoveries 95,608 37,483 83,108
----------- ----------- -----------
Ending balance $ 1,623,293 $ 982,532 $ 571,751
=========== =========== ===========
</TABLE>
At June 30, 1999 and 1998, no portion of the allowance for loan losses was
allocated to impaired loan balances as there were no loans considered impaired
as of or for the years ended June 30, 1999 or 1998.
NOTE 5 - LOAN SERVICING
Mortgage loans serviced for others are not reported as assets in the balance
sheets. These loans totaled $32,426,789 and $25,861,772 at June 30, 1999 and
1998. Related escrow deposit balances were $68,100 and $56,700 at June 30, 1999
and 1998.
23
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
NOTE 6 - PREMISES AND EQUIPMENT, NET
Premises and equipment at June 30 were as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Land $ 350,121 $ 350,121
Buildings 2,090,511 2,063,539
Furniture, fixtures and equipment 901,539 815,480
----------- -----------
Total cost 3,342,171 3,229,140
Less accumulated depreciation (1,217,515) (1,023,682)
----------- -----------
$ 2,124,656 $ 2,205,458
=========== ===========
</TABLE>
NOTE 7 - DEPOSITS
Deposit accounts individually exceeding $100,000 totaled $27,098,721 and
$27,940,314 at June 30, 1999 and 1998.
At June 30, 1999, stated maturities of certificates of deposit were:
2000 $52,058,153
2001 9,326,827
2002 2,853,616
2003 2,460,208
2004 2,670,754
Thereafter --
-----------
$69,369,558
===========
NOTE 8 - OTHER BORROWINGS
Federal Home Loan Bank (FHLB) advances total $65,877,262 at June 30, 1999. The
majority of the advances have fixed interest rates ranging from 4.59% to 7.94%
and the scheduled maturities during the years ended June 30 were as follows:
2000 $40,500,000
2001 19,000,000
2002 500,000
2003 --
2004 --
Thereafter 5,877,262
-----------
$65,877,262
===========
<PAGE>
The Bank also maintains a $1,000,000 overdraft line of credit agreement with the
FHLB which terminates on May 20, 2000. As of June 30, 1999 and 1998, $423,126
and $0 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, 1999, collateral of approximately $102
million is pledged to the FHLB to secure advances outstanding.
NOTE 9 - EMPLOYEE BENEFITS
Employee Pension Plan: The pension plan is part of a noncontributory
multi-employer defined-benefit pension plan covering substantially all
employees. There is no separate actuarial valuation of plan benefits nor
segregation of plan assets specifically for the Company. As of July 1, 1998, the
latest actuarial valuation, plan assets exceeded the actuarially determined
24
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
NOTE 9 - EMPLOYEE BENEFITS (continued)
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
1999, 1998 and 1997.
401(k) Plan: A retirement savings 401(k) plan covers full time employees 21 or
older and have completed one year of service. Participants may defer up to 15%
of compensation. The Company matches 50% of elective deferrals on the first 6%
of the participants' compensation. Expenses under this plan were $38,000,
$28,000, and $21,000 for 1999, 1998 and 1997.
Employee Stock Ownership Plan (ESOP): Employees with 1,000 hours of employment
with the Bank and who have attained age 21 are eligible to participate in the
ESOP. The ESOP borrowed $591,500 from the Company to purchase 118,300 shares of
the common stock issued in the conversion at $5 per share. The loan 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
to participants as the loan is repaid. ESOP expense was $245,000, $269,000 and
$232,000 for 1999, 1998 and 1997. Contributions to the ESOP were $99,000,
$93,000 and $87,000 for 1999, 1998 and 1997.
Contributions to the ESOP and shares released from suspense proportional to
repayment of the ESOP loan are allocated among ESOP participants on the basis of
compensation. Benefits are 100% vested after five years of service including
credit for years of service prior to July 1, 1992. Prior to five years of
credited service, a participant who terminates employment for reasons other than
death, normal retirement, or disability does not receive any ESOP benefit.
Forfeitures are reallocated among remaining participating employees, in the same
proportion as contributions. 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.
For 1999, 1998 and 1997, 17,117 shares with an average fair value of $15.74,
$17.31 and $13.57 per share, were committed to be released.
ESOP shares as of June 30 were:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Allocated (including shares committed to be released) 109,740 92,623 75,506
Unearned 8,560 25,677 42,794
Shares withdrawn from the plan by participants (7,110) (7,110) --
--------- --------- ---------
Total ESOP shares held in the plan 111,190 111,190 118,300
========= ========= =========
Fair value of unearned shares at June 30 $ 115,560 $ 443,442 $ 577,719
========= ========= =========
</TABLE>
<PAGE>
Stock Option Plan: The 1992 Stock Option and Incentive Plan authorizes options
of 169,000 shares of common stock. During 1998, the Company registered with the
Securities and Exchange Commission the 1998 Omnibus Incentive Plan. This plan
authorizes options, restricted stock and SARs of 142,000 shares of common stock.
For both plans when options are granted, option price is at least 100% of the
market value of common stock on the date of grant, and the option term cannot
exceed 10 years. Options awarded may be exercised at a rate of 25% per year. No
compensation expense was recognized for stock options for 1999, 1998 and 1997.
SFAS No. 123 requires proforma disclosures for companies that do not adopt its
fair value accounting method for stock-based employee compensation. Accordingly,
the following proforma information presents net loss per common share had the
fair value method been used to measure compensation cost for stock option plans.
25
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
NOTE 9 - EMPLOYEE BENEFITS (continued)
The fair value of options granted during 1999 was estimated using the following
weighted average information: risk-free interest rate of 5.25%, expected life of
10 years, expected volatility of stock price of .31 and expected dividends of
3.11% per year.
<TABLE>
<CAPTION>
1999
----------
<S> <C>
Net income as reported $ 2,111,055
Proforma net income $ 2,103,759
Basic income per common share as reported $ 1.48
Diluted income per common share as reported $ 1.46
Proforma basic income per common share $ 1.47
Proforma diluted income per common share $ 1.45
</TABLE>
In future years, the proforma effect of not applying this standard is expected
to increase as additional options are granted.
Stock option plans are used to reward employees and provide them with an
additional equity interest. Options are issued for 10-year periods with varying
vesting periods. Information about option grants follows:
<TABLE>
<CAPTION>
Weighted
Number of Weighted Average
Outstanding Exercise Average Fair Value
Options Price Exercise Price of Grants
------- ----- -------------- ---------
<S> <C> <C> <C> <C>
Outstanding, June 30, 1996 119,700 $5.00 $5.00
Granted 8,000 10.94 10.94
Granted 8,000 13.38 13.38
Exercised 32,348 5.00 5.00
-------
Outstanding, June 30, 1997 103,352 5.00 - 13.38 6.11
Exercised 35,564 5.00 5.00
-------
Outstanding, June 30, 1998 67,788 5.00 - 13.38 6.69
Granted 16,116 18.50 18.50 $1.34
Granted 3,000 14.25 14.25 2.53
Exercised 14,725 5.00 - 13.38 5.22
-------
Outstanding, June 30, 1999 72,179 5.00 - 18.50 10.06
=======
</TABLE>
<PAGE>
The weighted average remaining contractual life of options outstanding at June
30, 1999 was approximately five years. Stock options exercisable at June 30,
1999, 1998 and 1997 totaled 53,063, 59,788 and 87,352 at a weighted average
exercise price of $7.10, $5.79 and $5.00. As of June 30, 1999, 137,000 options
remain available for future grants.
Deferred Compensation: The Company has a deferred compensation plan for certain
directors of the Company and a salary continuation plan for a Bank executive.
The Company/Bank is obligated to pay each such individual or beneficiaries the
accumulated contributions plus interest credited for the deferred compensation
plan and a lump sum payment for the salary continuation plan, beginning with the
individual's termination of service. A deferred compensation liability of
$245,000 and $211,000 at June 30, 1999 and 1998 has been accrued for these
obligations. Life insurance on the participants was purchased. The cash
surrender value of such insurance was $234,000 and $248,000 at June 30, 1999 and
1998 and is included in other assets. Expense incurred for these plans was
$36,000, $36,000, and $36,000 for 1999, 1998 and 1997.
26
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
NOTE 10 - INCOME TAXES
Income tax expense for the years ended June 30 was:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Federal
Current $ 987,372 $ 626,763 $ 438,181
Deferred (291,260) 11,209 2,124
--------- --------- ---------
696,112 637,972 440,305
State
Current 334,696 216,357 129,438
Deferred (66,817) 3,414 36,024
--------- --------- ---------
267,879 219,771 165,462
--------- --------- ---------
Income tax expense $ 963,991 $ 857,743 $ 605,767
========= ========= =========
</TABLE>
Income tax expense differed from amounts computed using the U.S. federal income
tax rate of 34% as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Income taxes at 34% statutory rate $ 1,045,516 $ 937,519 $ 662,805
Tax effect of:
Tax-exempt income (146,615) (126,981) (147,117)
State tax, net of federal income tax effect 199,357 156,126 109,205
Dividends received deduction (80,121) (69,246) (61,794)
Fair market value of ESOP shares in excess of cost 49,468 59,840 49,471
Low income housing credits (64,739) (15,484) --
Other (38,875) (84,031) (6,803)
----------- ----------- -----------
Total income tax expense $ 963,991 $ 857,743 $ 605,767
=========== =========== ===========
</TABLE>
<PAGE>
Components of the net deferred tax liability as of June 30 are:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Bad debts $ 530,437 $ 254,122
Deferred compensation 96,921 83,523
Core deposit intangible 61,165 20,388
Depreciation on securities available for sale 280,669 --
Other 12,803 11,023
--------- ---------
981,995 369,056
Deferred tax liabilities:
Accretion (50,269) (50,164)
Net deferred loan costs (241,574) (236,821)
Appreciation on securities available for sale -- (465,448)
Other (271) (6,739)
--------- ---------
(292,114) (759,172)
Valuation allowance -- (24,199)
--------- ---------
Net deferred tax asset (liability) $ 689,881 $(414,315)
========= =========
</TABLE>
27
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
NOTE 10 - INCOME TAXES (continued)
Federal income tax laws provided savings banks with additional bad debt
deductions through 1987, totaling $1,156,000 for the Bank. Accounting standards
do not require a deferred tax liability to be recorded on this amount, which
liability otherwise would total $393,000 at June 30, 1999 and 1998. If the Bank
was liquidated or otherwise ceased to be a bank or if tax laws were to change,
the $393,000 would be recorded as expense.
NOTE 11 - REGULATORY MATTERS
The Bank is subject to regulatory capital requirements administered by federal
banking agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
regulators about components, risk weightings and other factors, and the
regulators can lower classifications in certain cases. Failure to meet various
capital requirements can initiate regulatory action that could have a direct
material effect on the financial statements.
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.
<PAGE>
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, 1999
Total Capital $16,841 12.38% $10,886 8.00% $13,607 10.00%
Tier I (Core) Capital
(to risk-weighted assets) 15,264 11.22% 5,443 4.00% 8,164 6.00%
Tier I (Core) Capital
(to adjusted total assets) 15,264 7.10% 6,449 3.00% N/A N/A
Tangible Capital 15,264 7.10% 3,224 1.50% N/A N/A
As of June 30, 1998
Total Capital $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 13,786 6.94% 2,979 1.50% N/A N/A
</TABLE>
Regulations of the Office of Thrift Supervision limit the dividends that may be
paid without prior approval of the Office of Thrift Supervision. At June 30,
1999, approximately $3.9 million of the Bank's retained earnings is available
for distribution to the Company.
28
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
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>
1999 1998
--------------------------- ---------------------------
Fixed Variable Fixed Variable
Rate Rate Rate Rate
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Commitments to make loans $ 211,000 $ 270,000 $ 1,278,000 $ 628,000
Unused lines of credit .. -- 9,718,000 -- 8,844,000
Standby letters of credit -- 1,671,000 -- 1,232,000
----------- ----------- ----------- -----------
$ 211,000 $11,659,000 $ 1,278,000 $10,704,000
=========== =========== =========== ===========
</TABLE>
Fixed rate loan commitments at June 30, 1999 were at current rates, ranging
primarily from 7.50% to 9.50%.
Variable rate loan commitments, unused lines of credit and standby letters of
credit at June 30, 1999 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 two of its officers, certain events leading to
separation from the Company could result in cash payments totaling $538,000.
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.
<PAGE>
The Bank has a 3% limited partner interest in a limited partnership formed to
construct, own and manage affordable housing projects. The Bank is one of 13
investors. As of June 30, 1999, the Bank had invested $675,000 and had recorded
equity in the operating loss of the limited partnership of $79,000, $45,000 and
$48 for the years ended June 30, 1999, 1998 and 1997. At June 30, 1999 and 1998,
the obligation due to the limited partnership was $75,000 and $300,000. The Bank
receives 3% of the eligible tax credits. For the years ended June 30, 1999, 1998
and 1997, the Bank received approximately $65,000, $15,000 and $18 in tax
credits.
NOTE 13 - SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
Real estate and consumer loans, including automobile, home equity and
improvement, manufactured home and other consumer loans are granted primarily in
Wabash, Kosciusko and Whitley counties. Loans secured by one to four family
residential real estate mortgages make up 48% of the loan portfolio. The Company
also sells loans and services loans for secondary market agencies.
The policy for collateral on mortgage loans allows borrowings up to 95% of the
appraised value of the property as established by appraisers approved by the
Company's Board of Directors, if private mortgage insurance is obtained to
reduce the Company's exposure to or below the 80% loan-to-value level.
Loan-to-value percentages and documentation guidelines are designed to protect
the Company's interest in the collateral as well as to comply with guidelines
for sale in the secondary market.
29
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
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, 1998 $1,268,945
New loans 191,150
Repayments (157,147)
Other changes (88,056)
----------
Balance - June 30, 1999 $1,214,892
==========
Other changes include adjustments for loans applicable to one reporting period
that are excludable from the other reporting period.
30
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
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, 1999 and 1998
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 66,439 $ 414,301
Investment in Bank subsidiary 16,293,893 16,014,935
Investment in non-bank subsidiary 274,920 224,206
Securities available for sale 1,769,006 2,284,236
Other assets 1,026,058 203,996
------------ ------------
Total assets $ 19,430,316 $ 19,141,674
============ ============
LIABILITIES
Accrued expenses and other liabilities $ 73,476 $ 12,947
SHAREHOLDERS' EQUITY
Common stock 17,853 17,751
Additional paid-in capital 8,965,882 8,793,133
Retained earnings - substantially restricted 13,970,694 12,468,144
Accumulated other comprehensive income (455,386) 685,432
Unearned Employee Stock Ownership Plan shares (52,331) (151,748)
Treasury stock (3,089,872) (2,683,985)
------------ ------------
Total shareholders' equity 19,356,840 19,128,727
------------ ------------
Total liabilities and shareholders' equity $ 19,430,316 $ 19,141,674
============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
For the years ended June 30, 1999, 1998 and 1997
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Interest income $ 107,012 $ 117,349 $ 152,696
Dividend income 1,050,000 -- --
Other income -- -- 1,924
----------- ----------- -----------
1,157,012 117,349 154,620
Operating expense 251,650 136,776 154,287
Equity in undistributed income of subsidiaries
Bank 1,222,359 1,817,183 1,271,803
Non-bank 50,714 56,035 32,541
----------- ----------- -----------
Income before income taxes 2,178,435 1,853,791 1,304,677
Income tax expense (benefit) (67,380) (45,877) (38,983)
----------- ----------- -----------
Net income $ 2,111,055 $ 1,899,668 $ 1,343,660
=========== =========== ===========
</TABLE>
31
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended June 30, 1999, 1998 and 1997
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 2,111,055 $ 1,899,668 $ 1,343,660
Adjustments to reconcile net income to net
cash from operating activities
Equity in undistributed income of subsidiaries (1,273,073) (1,873,218) (1,304,344)
Other (876,351) (30,964) 30,486
----------- ----------- -----------
Net cash from operating activities (38,369) (4,514) 69,802
Cash flows from investing activities
Net change in interest-bearing deposits - long-term -- -- 173,664
Proceeds from sales of securities (574,108) -- 175,000
Maturities of securities available for sale 982,234 455,000 635,000
Purchase of securities available for sale -- (267,289) (45,842)
Repayments on loan receivable from ESOP 170,000 92,805 86,636
----------- ----------- -----------
Net cash from investing activities 677,543 280,516 1,024,458
Cash flows from financing activities
Proceeds from stock options 27,356 177,820 161,740
Purchase of treasury stock (405,887) -- (329,749)
Cash dividends paid (608,505) (542,101) (443,192)
----------- ----------- -----------
Net cash from financing activities (987,036) (364,281) (611,201)
----------- ----------- -----------
Net change in cash and cash equivalents (347,862) (88,279) 483,059
Beginning cash and cash equivalents 414,301 502,580 19,521
----------- ----------- -----------
Ending cash and cash equivalents $ 66,439 $ 414,301 $ 502,580
=========== =========== ===========
</TABLE>
<PAGE>
The extent to which the Company may pay cash dividends to shareholders will
depend on the cash currently available at the Company, as well as the Bank's
ability to pay dividends to the Company (see Note 11).
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>
1999 1998
--------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 4,839 $ 4,839 $ 4,410 $ 4,410
Securities available for sale 51,029 51,029 50,293 50,293
Loans receivable, net 151,491 150,004 139,394 138,749
Federal Home Loan Bank stock 3,401 3,401 2,757 2,757
Accrued interest receivable 1,616 1,616 1,429 1,429
Non-interest-bearing deposits (8,171) (8,171) (6,935) (6,935)
Interest-bearing deposits (122,230) (121,910) (118,321) (118,525)
Borrowings (66,300) (64,927) (56,500) (56,240)
</TABLE>
32
<PAGE>
FFW Corporation
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS (continued)
For purposes of the above disclosures of estimated fair value, the following
assumptions were used as of June 30, 1999 and 1998. The estimated fair value for
cash and cash equivalents, Federal Home Loan Bank stock, accrued interest
receivable, and non-interest-bearing deposits is considered to approximate cost.
The estimated fair value for securities available for sale is based on quoted
market values for the individual securities or for equivalent securities. The
estimated fair value for loans receivable, net, is based on estimates of the
rate the Bank would charge for similar loans at June 30, 1999 and 1998 applied
for the time period until the loans are assumed to reprice or be paid. The
estimated fair value for interest-bearing deposits as well as borrowings is
based on estimates of the rate the Bank would pay on such liabilities at June
30, 1999 and 1998, applied for the time period until maturity.
While these estimates of fair value are based on management's judgment of the
most appropriate factors, there is no assurance that, were the Company to have
disposed of such items at June 30,1999 and 1998, 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, 1999
and 1998 should not necessarily be considered to apply to subsequent dates.
In addition, other assets and liabilities of the Company that are not defined as
financial instruments are not included in the above disclosures, such as
premises and equipment. Also, non-financial instruments typically not recognized
in financial statements nevertheless may have value but are not included in the
above disclosures. These include, among other items, the estimated earnings
power of core deposit accounts, the trained work force, customer goodwill and
similar items.
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
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, 2000. 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.
33
<PAGE>
Directors and Officers
FFW CORPORATION
Officers
Wayne W. Rees
Chairman of the Board and Secretary
Nicholas M. George
President and Chief Executive Officer
Roger K. Cromer
Treasurer and Chief Financial and
Accounting 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
Chairman of the Board
FirstFed Financial of Wabash, Inc.
J. Stanley Myers
Owner and Operator
Servisoft Water Conditioning, Inc.
Thomas L. Frank
Comptroller, B. Walter & Company
Joseph W. McSpadden
Vice President and Part Owner
Beauchamp & McSpadden
Ronald D. Reynolds
Owner, J. M. Reynolds Oil Co, Inc.
<PAGE>
FIRST FEDERAL SAVINGS BANK OF WABASH
Officers
Wayne W. Rees
Chairman of the Board
Nicholas M. George
President and Chief Executive Officer
R. Linden Unger
President of FirstFed Financial of Wabash, Inc.
Roger K. Cromer
Treasurer and Chief Financial 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
Sonia Niccom
Assistant Vice President and Lending Officer
Rebekah Steele
Assistant Secretary
Board of Directors
Wayne W. Rees
Nicholas M. George
J. Stanley Myers
Thomas L. Frank
Joseph W. McSpadden
Ronald D. Reynolds
34
<PAGE>
Shareholder Information
Stock Listing Information
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, 1999 there were approximately 349 shareholders of record, not
including those shares held in nominee or street name through various brokerage
firms or banks.
The following table sets forth the high and low bid prices and dividends paid
per share
The stock price information was provided by the NASD, Inc.
All information has been adjusted for a 2 for 1 stock split on December 31,
1997.
Quarter Dividend
Ended High Low Declared
- -----------------------------------------------------------
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 .105
Sept. 30, 1998 19.50 15.63 .105
Dec. 31, 1998 16.75 15.50 .105
March 31, 1999 16.75 15.38 .105
June 30, 1999 16.00 13.50 .105
Dividends
FFW declared and paid dividends of $0.42 per share for fiscal year 1999. The
Board of Directors intends to continue payment of quarterly cash dividends,
dependent on the results of operations and financial condition of FFW and other
factors.
Annual Meeting of Shareholders
The Annual Meeting of Shareholders of FFW Corporation will be held at 2:30 p.m.,
October 26, 1999 at the executive office of FFW Corporation located at:
1205 N. Cass Street
Wabash, Indiana 46992
Shareholders are welcome to attend.
<PAGE>
Annual Report on Form 10-KSB and
Investor Information
A copy of FFW Corporation's annual report on Form 10-KSB, filed with the
Securities and Exchange Commission, is available without charge by writing:
Roger K.Cromer
Chief Financial Officer
FFW Corporation
1205 N. Cass Street
P.O.Box 259
Wabash, Indiana 46992
Stock Transfer Agent
Inquiries regarding stock transfer, registration, lost certificates or changes
in name and address should be directed to the stock transfer agent and registrar
by writing:
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
Investor Information
Shareholders, investors, and analysts interested in additional information may
contact Nicholas M.George, President and Chief Executive Officer
Corporate Office
FFW Corporation
1205 N.Cass Street
P.O. Box 259
Wabash, Indiana 46992
(219) 563-3185
Special Counsel
Silver, Freedman &Taff, L.L.P.
1100 New York Ave., N.W.
Washington, D.C. 20006
Independent Auditor
Crowe, Chizek and Company LLP
330 E.Jefferson Blvd.
South Bend, Indiana 46624
35
Exhibit 21
Subsidiaries of the Registrant
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
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 in the Registration
Statements on Form S-8 (Registration Nos. 33-71194 and 333-70179) of FFW
Corporation (the "Company") of our report dated August 6, 1999, on the
consolidated financial statements of the Company, which report is included in
the Company's Annual Report to Shareholders and is incorporated by reference in
the Company's Form 10-KSB for the year ended June 30, 1999.
/s/ Crowe, Chizek and Company LLP
- ---------------------------------
Crowe, Chizek and Company LLP
South Bend, Indiana
October 12, 1999
<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, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,651
<INT-BEARING-DEPOSITS> 188
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 51,029
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 153,114
<ALLOWANCE> 1,623
<TOTAL-ASSETS> 217,489
<DEPOSITS> 130,401
<SHORT-TERM> 66,300
<LIABILITIES-OTHER> 1,430
<LONG-TERM> 0
0
0
<COMMON> 18
<OTHER-SE> 19,339
<TOTAL-LIABILITIES-AND-EQUITY> 217,489
<INTEREST-LOAN> 12,428
<INTEREST-INVEST> 3,464
<INTEREST-OTHER> 160
<INTEREST-TOTAL> 16,052
<INTEREST-DEPOSIT> 5,808
<INTEREST-EXPENSE> 9,366
<INTEREST-INCOME-NET> 6,686
<LOAN-LOSSES> 1,010
<SECURITIES-GAINS> 736
<EXPENSE-OTHER> 4,591
<INCOME-PRETAX> 3,075
<INCOME-PRE-EXTRAORDINARY> 3,075
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,111
<EPS-BASIC> 1.48
<EPS-DILUTED> 1.46
<YIELD-ACTUAL> 3.28
<LOANS-NON> 410
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 842
<ALLOWANCE-OPEN> 983
<CHARGE-OFFS> 465
<RECOVERIES> 96
<ALLOWANCE-CLOSE> 1,623
<ALLOWANCE-DOMESTIC> 1,243
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 380
</TABLE>
