-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BfMu96Wztzoh02ADsp6BJGVgAQUnRqKQT7o06OcnVlKMTCn2k3BTHRvq+UXXHXps 8bIAMBE3JiDSd9SFJOZImg== 0000914317-98-000615.txt : 19981012 0000914317-98-000615.hdr.sgml : 19981012 ACCESSION NUMBER: 0000914317-98-000615 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19981009 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FFW CORP CENTRAL INDEX KEY: 0000895401 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 351875502 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-21170 FILM NUMBER: 98723386 BUSINESS ADDRESS: STREET 1: 1205 N CASS STREET STREET 2: PO BOX 419 CITY: WABASH STATE: IN ZIP: 46992-1027 BUSINESS PHONE: 2195633185 MAIL ADDRESS: STREET 1: 1205 N CASS ST STREET 2: PO BOX 419 CITY: WABASH STATE: IN ZIP: 46992 10KSB 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 0-21170 FFW CORPORATION - -------------------------------------------------------------------------------- (Name of small business issuer in its charter) Delaware 35-1875502 - -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 1205 N. Cass Street, Wabash, Indiana 46992-1027 - -------------------------------------------------------------------------------- (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 [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained herein, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] State the issuer's revenues for its most recent fiscal year: $15,853,377. The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the average of the bid and asked prices of such stock on the Nasdaq System as of September 17, 1998, was $22.4 million. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant.) As of September 17, 1998, there were issued and outstanding 1,458,032 shares of the Registrant's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Part II of Form 10-KSB - Portions of the Annual Report to Stockholders for the fiscal year ended June 30, 1998. Part III of Form 10-KSB - Proxy Statement for 1998 Annual Meeting of Stockholders. PART I Item 1. Description of Business General The Company. FFW Corporation (the "Company") a Delaware corporation, was formed in December 1992 to act as the holding company for First Federal Savings Bank of Wabash ("First Federal" or the "Bank") upon the completion of the Bank's conversion from the mutual to the stock form (the "Conversion"). The Conversion was completed on April 1, 1993. The Company's business consists primarily of the Business of First Federal. The Company also offers insurance products through its wholly-owned subsidiary, FirstFed Financial of Wabash, Inc. The executive offices of the Company are located at 1205 N. Cass Street, Wabash, Indiana 46992, and its telephone number at that address is (219) 563-3185. At June 30, 1998, the Company had $203.3 million of assets and shareholders' equity of $19.1 million (or 9.39% of total assets). First Federal. First Federal is a federally chartered stock savings bank headquartered in Wabash, Indiana and regulated by the Office of Thrift Supervision ("OTS"). Its deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation (the "FDIC"), which is backed by the full faith and credit of the United States. In June 1997 First Federal closed on the acquisition of a NBD Bank branch in South Whitley, Indiana. First Federal's primary market area covers Wabash, Kosciusko and Whitley Counties in northeast and central Indiana, which are serviced through its four offices in Wabash, North Manchester, Syracuse and South Whitley, Indiana. The principal business of the Bank consists of attracting retail deposits from the general public and investing those funds primarily in one- to four-family residential mortgage and consumer (primarily automobile) loans, and, to a lesser extent, commercial and multi-family real estate, construction and commercial business loans primarily in the Bank's market area. The Bank also purchases mortgage-backed securities and invests in U.S. Government and agency obligations and other permissible investments. At June 30, 1998, all of the Bank's real estate mortgage loans (excluding mortgage-backed securities) were secured by properties located in Indiana. The Bank's revenues are derived primarily from interest on mortgage loans, mortgage-backed securities, consumer and other loans, investment securities, income from service charges and loan originations and loan servicing fee income. The Bank does not originate loans to fund leveraged buyouts, has no loans to foreign corporations or governments and is not engaged in land development or construction activities through joint ventures or subsidiaries. The Bank offers a variety of accounts having a wide range of interest rates and terms. The Bank's deposits include passbook accounts, money market savings accounts, NOW, money market checking and regular checking accounts, and certificate accounts with terms of three to 60 months. The Bank only solicits deposits in its primary market area and does not accept brokered deposits. The Bank also has, from time to time, borrowed funds, both in the form of Federal Home Loan Bank ("FHLB") advances and by entering into repurchase agreements. At June 30, 1998, the Bank had FHLB advances totaling $51.5 million. 2 FirstFed Financial of Wabash, Inc. During fiscal 1993, the Company acquired FirstFed Financial of Wabash, Inc. ("FirstFed") from the Bank. FirstFed offers insurance products, including life insurance, mutual funds, annuity and brokerage services through a registered broker dealer. FirstFed, which is located in Wabash, Indiana was incorporated in 1989. FirstFed had net income of approximately $56,000 for the fiscal year ended June 30, 1998. Impact of the Year 2000 The Company has conducted a comprehensive review of its computer systems to identify applications that could be affected by the "Year 2000" issue, and has developed an implementation plan to address the issue. Much of the Company's data processing is accomplished with third party vendors, consequently the Company is very dependent on those vendors to conduct its business. The Company has already contacted each vendor to request time tables for year 2000 compliance and expected costs, if any, to be passed along to the Company. To date, the Company has been informed that its primary service providers anticipate that all reprogramming efforts will be completed by December 31, 1998, allowing the Company adequate time for testing. Certain other vendors have not yet responded, however, the Company will pursue other options if it appears that these vendors will be unable to comply. Management does not expect these costs to have a significant impact on its financial position or results of operations however, there can be no assurance that the vendors systems will be Year 2000 compliant, consequently the Company could incur incremental costs to convert to another vendor. The Company has identified certain of its hardware and software equipment that will not be Year 2000 compliant and intends to purchase new equipment and software prior to March 31, 1999. These capital expenditures are expected to total approximately $100,000. Forward-Looking Statements When used in this Form 10-KSB and in future filings by the Company with the Securities and Exchange Commission (the "SEC"), in the Company's press releases or other public or shareholder communications, and in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties, including but not limited to changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company's market area and competition, all or some of which could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made and are subject to the above-stated qualifications in any event. The Company wishes to advise readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake--and specifically declines any obligation--to publicly release the result of any revisions which may be made to any forward-looking statements to reflect 3 events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Lending Activities of the Bank Market Area of the Bank. The main office of the Bank is located in Wabash, Indiana, which is located in Wabash County. The Bank operates three branches: the first in North Manchester, the second in Syracuse, and the third in South Whitley, Indiana. North Manchester is located in Wabash County, Syracuse is located in adjacent Kosciusko County, and South Whitley is located in adjacent Whitley County. The Bank considers Wabash, Kosciusko and Whitley Counties as its primary market area. The Bank also serves Grant, Miami, Huntington, and Elkhart Counties in Indiana. Wabash County is served by Conrail and the Norfolk Southern railroads, and also has a local municipal airport. Ft. Wayne, Indiana, 45 miles to the northeast, has a commercial airport served by two major airlines and several commuter affiliates. Wabash County has a mixed agriculture and industrial economy. Several major employers in Wabash County are suppliers to the automotive industry. Wabash County also has Manchester College, a four-year private undergraduate institution, and the Wabash County Hospital, a facility with 135 beds. Major manufacturing employers in Wabash County include: Jefferson Smurfitt; Eaton Corporation; Ford Meter Box Company, Inc.; GenCorp Automotive; Heckman Bindery; Hiz Inc.; Blue Sky, Inc.; United Technologies, Inc.; Wabash Alloys;, Cast Molding Industries, Inc.; and Wabash Magnetics. Kosciusko County's economy includes a mix of recreational, manufacturing, biomedical and manufactured home industries. Major private employers in Kosciusko County include: GTI Corporation; Dalton Foundries, Inc.; Maple Leaf Farms, Inc.; Biomet, Inc.; Danek Group; Zimmer Inc.; R. R. Donnelley; Depuy Inc.; Kemole Glass, Inc.; Othy, Inc.; and Creighton Brothers. Whitley County's economy includes a mix of agriculture and light manufacturing related to electronics, musical instruments and printing. Major private employers in Whitley County include: Fox Products; Stumps Printing Co.; Wheatherhead; Magnavox; and Essex Corporation. General. Historically, the Bank has originated fixed-rate, one- to four-family mortgage loans. In the early 1980s, the Bank began to focus on the origination of adjustable-rate mortgage ("ARM") loans and short-term loans for retention in its portfolio in order to increase the percentage of loans in its portfolio with more frequent repricing or shorter maturities, and in some cases higher yields, than fixed-rate mortgage loans. While the Bank has continued to originate fixed-rate mortgage loans in response to customer demand, currently, the Bank originates and sells most of its fixed-rate, first mortgage loans with maturities of greater than 15 years in the secondary market with servicing retained. The Bank also originates consumer (including automobile), commercial and multi-family real estate, commercial business, and residential construction loans in its primary market area. At June 30, 1998, the Bank's net loan portfolio totaled $139.4 million. The Executive Committee of the Bank, comprised of any three outside directors selected by and including the Chairman, has the responsibility for the supervision of the Bank's loan portfolio with an overview by the Board of Directors. The Bank's loan policy requires Executive Committee 4 or full Board approval on mortgage, commercial and consumer loans over certain dollar thresholds, loan extensions, special loan situations, assumptions and loan participation. The Board of Directors has responsibility for the overall supervision of the Bank's loan portfolio and in addition, reviews all foreclosure actions or the taking of deeds-in-lieu of foreclosure. The aggregate amount of loans that the Bank is permitted to make under applicable federal regulations to any one borrower, including related entities, or the aggregate amount that the Bank could have invested in any one real estate project is generally the greater of 15% of unimpaired capital and surplus or $500,000. See "Regulation - Federal Regulation of Savings Associations." At June 30, 1998, the maximum amount which the Bank could have lent to any one borrower and the borrower's related entities was approximately $2.2 million. At June 30, 1998, the Bank had no loans with outstanding balances in excess of this amount. The principal balance of the largest amount outstanding to any one borrower, or group of related borrowers, was approximately $1.6 million at June 30, 1998. At June 30, 1998, the Bank had only 11 other loans in excess of $500,000 outstanding to any one borrower, or group of related borrowers. All such loans were performing in accordance with their repayment terms at June 30, 1998. Currently, it is the Bank's general policy to limit its loans to one borrower to $500,000, although this limit may be exceeded under certain circumstances. 5 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.
June 30, ------------------------------------------------------------------------------------ 1998 1997 1996 ------------------------ ---------------------- ---------------------- Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- (Dollars in Thousands) Real Estate Loans: One- to four-family.................. $ 70,243 49.64% $ 64,921 56.21% $60,732 59.32% Commercial and multi-family.......... 7,272 5.14 6,426 5.56 7,218 7.05 Construction......................... 3,991 2.82 2,974 2.58 2,676 2.61 --------- ----- --------- ----- ------- ----- Total real estate loans........... 81,506 57.60 74,321 64.35 70,626 68.98 --------- ----- --------- ----- ------- ----- Other Loans: Consumer Loans: Deposit account..................... 475 .34 451 .39 226 .22 Automobile.......................... 33,814 23.90 22,625 19.59 18,464 18.03 Home equity and improvement......... 9,105 6.43 6,970 6.03 4,624 4.52 Manufactured home................... 301 .21 350 .30 481 .47 Other............................... 3,348 2.37 3,972 3.44 3,583 3.50 --------- ----- --------- ----- ------- ----- Total consumer loans.............. 47,043 33.25 34,368 29.75 27,378 26.74 --------- ----- --------- ----- ------- ----- Commercial business loans............ 12,945 9.15 6,813 5.90 4,378 4.28 --------- ----- --------- ----- ------- ----- Total other loans................... 59,988 42.40 41,181 35.65 31,756 31.02 --------- ----- --------- ----- ------- ----- Total loans....................... 141,494 100.00% 115,502 100.00% 102,382 100.00% ====== ====== ====== Less: - ---- Loans in process..................... 1,716 1,134 1,548 Deferred fees, cost and discounts.... (599) (363) (248) Allowance for loan losses............ 983 572 553 --------- --------- -------- Total loans, net.................. $139,394 $114,159 $100,529 ======== ======== ========
6 The following table shows the composition of the Bank's loan portfolio by fixed and adjustable-rate at the dates indicated.
June 30, ------------------------------------------------------------------------------------ 1998 1997 1996 ------------------------ ---------------------- ---------------------- Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- (Dollars in Thousands) Fixed-Rate Loans: Real Estate: One- to four-family.................. $ 17,492 12.36% $ 8,588 7.43% $ 8,302 8.11% Commercial and multi-family.......... 2,307 1.63 1,676 1.45 2,248 2.19 Construction......................... 2,110 1.49 1,222 1.06 1,094 1.07 -------- ----- --------- ---- --------- ---- Total real estate loans.......... 21,909 15.48 11,486 9.94 11,644 11.37 -------- ----- --------- ---- --------- ---- Consumer.............................. 42,370 29.94 31,222 27.03 26,839 26.21 Commercial business................... 5,540 3.92 2,921 2.53 1,430 1.40 -------- ----- --------- ---- --------- ---- Total fixed-rate loans........... 69,819 49.34 45,629 39.50 39,913 38.98 -------- ----- --------- ---- --------- ---- Adjustable-Rate Loans: Real estate: One- to four-family................. 52,751 37.28 56,333 48.77 52,430 51.21 Commercial and multi-family......... 4,965 3.51 4,750 4.11 4,970 4.85 Construction........................ 1,881 1.33 1,752 1.52 1,582 1.55 -------- ----- --------- ---- --------- ---- Total real estate loans.......... 59,597 42.12 62,835 54.40 58,982 57.61 -------- ----- --------- ---- --------- ---- Consumer............................. 4,673 3.30 3,146 2.73 539 .53 Commercial business.................. 7,405 5.24 3,892 3.37 2,948 2.88 -------- ----- --------- ---- --------- ---- Total adjustable-rate loans...... 71,675 50.66 69,873 60.50 62,469 61.02 -------- ------ --------- ------ ------- ----- Total loans...................... 141,494 100.00% 115,502 100.00% 102,382 100.00% ====== ====== ====== Less: Loans in process..................... 1,716 1,134 1,548 Deferred fees, cost and discounts.... (599) (363) (248) Allowance for loan losses............ 983 572 553 -------- -------- -------- Total loans, net................. $139,394 $114,159 $100,529 ======== ======== ========
7 The following schedule illustrates the interest rate sensitivity of the Bank's loan portfolio (including non-accruing loans) at June 30, 1998. Mortgages which have adjustable or renegotiable interest rates are shown as maturing in the period during which the contract is due. The schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses.
Real Estate -------------------------------------------------------------------- One- to four-family Commercial Construction Consumer ---------------------- ------------------- ------------------- -------------------------- Weighted Weighted Weighted Weighted Average Average Average Average Amount Rate Amount Rate Amount Rate Amount Rate ------ ---- ------ ---- ------ ---- ------ ---- (Dollars in Thousands) Due During Years Ending June 30, 1999.......................... $ 116 8.51% $ 163 8.75% $2,323 8.49% $ 2,386 9.41% 2000 - 2003................... 1,492 8.50 186 9.84 774 8.20 36,931 9.35 2004 and following............ 68,635 8.10 6,923 9.13 894 8.75 7,726 9.90 -------- ------- ------ -------- $ 70,243 8.11% $ 7,272 9.14% $3,991 8.21% $ 47,043 9.44% ======== ======= ====== ======== Commercial Business Total -------------------- ------------------------ Weighted Average Amount Rate Amount Percent ------ ---- ------ ------- Due During Years Ending June 30, 1999.......................... $ 5,443 8.71% $ 10,431 7.37% 2000 - 2003................... 3,384 8.36 42,767 30.23 2004 and following............ 4,118 9.03 88,296 62.40 --------- --------- ------- $ 12,945 8.72% $ 141,494 100.00% ========= ========= ======
The total amount of loans due after June 30, 1999 which have fixed interest rates is $61.9 million, while the total amount of loans due after such dates which have floating or adjustable interest rates is $69.2 million. 8 One- to Four-Family Residential Mortgage Lending. Residential loan originations of this type are generated by the Bank's marketing efforts, its present and walk-in customers, and referrals from real estate agents and builders. The Bank focuses its lending efforts primarily on the origination of loans secured by first mortgages on owner-occupied, one- to four-family residences. At June 30, 1998, the Bank's one- to four-family residential mortgage loans totaled $70.2 million, or approximately 49.6% of the Bank's total gross loan portfolio. The Bank currently offers fixed-rate, ARM and balloon loans. During the year ended June 30, 1998, the Bank originated $18.0 million of ARM loans and $28.5 million of fixed-rate real estate loans, most of which were secured by one- to four-family residential real estate. The Bank's one- to four-family residential mortgage originations are primarily in its market and surrounding areas. The Bank currently originates up to a maximum of 30-year adjustable-rate, one- to four-family residential mortgage loans in amounts up to 95% of the appraised value of the security property provided that private mortgage insurance is obtained in an amount sufficient to reduce the Bank's exposure to at or below the 80% loan-to-value level. The Bank currently offers one-, three-, five-, and seven-year ARM loans with an interest rate margin generally 275 basis points over the one year Treasury rates. These loans have a fixed-rate for the stated period and, thereafter, such loans adjust annually. These loans provide for up to a 200 basis points annual cap and a lifetime cap of 600 basis points over the initial rate. Under the current ARM program, such loans will never adjust more than 150 basis points below the initial rate. Depending on whether a one-, three-, five-, or seven-year loan is selected, per-year and lifetime caps will range from 100 to 200 basis points, and 300 to 600 basis points. As a consequence of using an initial fixed-rate and caps and floor, the interest rates on these loans may not be as rate sensitive as is the Bank's cost of funds. The Bank's ARM loans do not permit negative amortization of principal. The Bank qualifies borrowers at the fully indexed rate. Due to consumer demand, the Bank also offers fixed-rate 10- through 15-year and 15- through 30-year mortgage loans, most of which conform to the secondary market standards of the Federal Home Loan Mortgage Corporation ("FHLMC"). Interest rates charged on these fixed-rate loans are competitively priced according to market conditions. Residential loans generally do not include prepayment penalties. Most of the fixed-rate loans with maturities of 15 to 30 years are sold in the secondary market. The Bank generally retains servicing rights on such loans. Generally, the Bank will retain fixed-rate loans with maturities of 15 years or less in its portfolio. The Bank reserves the right to discontinue, adjust or create new lending programs to respond to its needs and to competitive factors. In underwriting one- to four-family residential real estate loans, First Federal evaluates both the borrower's ability to make monthly payments and the value of the property securing the loan. Virtually all properties securing real estate loans made by First Federal are appraised by independent fee appraisers approved and qualified by the Board of Directors. First Federal generally requires borrowers to obtain an attorney's title opinion or title insurance, and fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan. Real estate loans originated by the Bank generally contain a "due on sale" clause allowing the Bank to declare the unpaid principal balance due and payable upon the sale of the security property. 9 Consumer Lending. First Federal offers a variety of secured consumer loans, including automobile, home equity, home improvement and student loans, and loans secured by savings deposits. In addition, First Federal offers other secured and unsecured consumer loans. The Bank currently originates substantially all of its consumer loans in its primary market area and surrounding areas. The Bank originates consumer loans on both a direct and indirect basis. Direct loans are made when the Bank extends credit directly to the borrower. Indirect loans are obtained when the Bank purchases loan contracts from retailers of goods or services which have extended credit to their customers. The only indirect lending by First Federal began in the early 1980s, and is with selected automobile and boat dealers located in the Bank's primary market and surrounding areas. The Bank underwrites each indirect loan in accordance with its normal consumer loan standards. At June 30, 1998, the Bank's consumer loan portfolio totaled $47.0 million, or 33.3% of its total gross loan portfolio. Consumer loans may entail greater credit risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles or mobile homes. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. At June 30, 1998, $193,000 or approximately 0.4% of the consumer loan portfolio was non-performing. There can be no assurance that delinquencies will not increase in the future. The largest component of First Federal's consumer loan portfolio consists of automobile loans. At June 30, 1998, automobile loans totaled $33.8 million, or approximately 23.9% of the Bank's gross loan portfolio. Loans secured by second mortgages, together with loans secured by all prior liens, are currently limited to 100% or less of the appraised value of the property securing the loan. Generally, such loans have a maximum term of up to 20 years. As of June 30, 1998, home equity and home improvement loans, most of which are secured by second mortgages, amounted to $9.1 million, or 6.4% of the Bank's gross loan portfolio. Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower. Loans secured by deposit accounts at the Bank are currently originated for up to 90% of the account balance with a hold placed on the account restricting the withdrawal of the account balance. The interest rate on such loans is typically equal to 200 basis points above the deposit contract rate. The underwriting standards employed by the Bank for consumer loans include an application, a determination of the applicant's payment history on other debts and an assessment of ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of the value of the security, if any, in relation to the proposed loan amount. 10 Construction Lending. The Bank engages in limited amounts of construction lending to individuals for the construction of their residences as well as to builders for the construction of single family homes in the Bank's primary market area and surrounding areas. At June 30, 1998, the Bank had $4.0 million of gross construction loans, most of which were to borrowers who intended to live in the properties upon completion of construction. Construction loans to individuals for their residences are structured to be converted to permanent loans at the end of the construction phase, which typically runs for six months. During the construction phase, the borrower pays interest only. Residential construction loans are generally underwritten pursuant to the same guidelines used for originating permanent residential loans. Construction loans to builders of one- to four-family residences require the payment of interest only for up to 12 months. In most cases, these loans carry adjustable interest rates. At June 30, 1998, the Bank had $1.1 million in construction loans outstanding to builders. Construction lending generally affords the Bank an opportunity to receive interest at rates higher than those obtainable from permanent residential loans and to receive higher origination and other loan fees. In addition, construction loans are generally made with adjustable rates of interest or for relatively short terms. Nevertheless, construction lending is generally considered to involve a higher level of credit risk than one- to four-family residential lending due to the concentration of principal in a limited number of loans and borrowers and the effects of general economic conditions on development projects, real estate developers and managers. In addition, the nature of these loans is such that they are more difficult to evaluate and monitor. Finally, the risk of loss on construction loans is dependent largely upon the accuracy of the initial estimate of the individual property's value upon completion of the project and the estimated cost (including interest) of the project. If the cost estimate proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to permit completion of the project. At June 30, 1998, the Bank had no construction loans outstanding which were over thirty days delinquent. Commercial and Multi-Family Real Estate Lending. The Bank has also engaged in limited commercial and multi-family real estate lending in the Wabash market area and surrounding areas and has purchased participation interests in loans from other financial institutions throughout Indiana and neighboring jurisdictions. At June 30, 1998, the Bank had $7.3 million of commercial and multi-family real estate loans, which represented 5.1% of the Bank's total gross loan portfolio. The largest commercial or multi-family real estate loan outstanding at June 30, 1998 was $1.6 million, which was performing in accordance with its repayment terms. At June 30, 1998, all of the Bank's commercial and multi-family real estate loan portfolio was secured by properties located in Indiana. Loans secured by commercial and multi-family real estate properties are generally larger and involve a greater degree of credit risk than one- to four-family residential mortgage loans. Because payments on loans secured by commercial real estate properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. If the cash flow from the project is reduced (for example, if leases are not obtained or renewed), the borrower's ability to repay the loan may be impaired. 11 The Bank's commercial and multi-family real estate loan portfolio is secured primarily by apartment buildings and, to a lesser extent, office buildings and nursing homes. Commercial and multi-family real estate loans generally have terms that do not exceed 20 years. The Bank has a variety of rate adjustment features and other terms in its commercial and multi-family real estate loan portfolio. Generally, the loans are made in amounts up to 75% of the appraised value of the security property. Commercial real estate loans provide for a margin over a designated index which is generally the prime rate and multi-family loans provide for a margin over the one-year Treasury bill rate. The Bank currently analyzes the financial condition of the borrower, the borrower's credit history, and the reliability and predictability of the cash flow generated by the property securing the loan. The Bank generally requires personal guaranties of the borrowers. Appraisals on properties securing commercial real estate loans originated by the Bank are performed by independent appraisers. Commercial Business Lending. The Bank began increasing its commercial loan portfolio last year due to the addition of a commercial loan officer. At June 30 1998, approximately $12.9 million, or 9.2% of the Bank's total gross loan portfolio was comprised of commercial loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower's ability to make repayment from his or her employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans typically are made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself (which, in turn, is likely to be dependent upon the general economic environment). The Bank's commercial business loans are usually, but not always, secured by business assets. However, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. At June 30, 1998, First Federal's commercial business loan portfolio was performing substantially in accordance with its repayment terms. The Bank recognizes the generally increased risks associated with commercial business lending. First Federal's commercial business lending policy includes credit file documentation and analysis of the borrower's character, capacity to repay the loan, the adequacy of the borrower's capital and collateral as well as an evaluation of conditions affecting the borrower. Analysis of the borrower's past, present and future cash flows is also an important aspect of First Federal's current credit analysis. Originations, Purchases, Sales and Servicing of Loans and Mortgage-Backed Securities Real estate loans are generally originated by First Federal's staff of salaried loan officers and a commissioned loan originator. Loan applications are taken and processed in the branches and main office of the Bank. While the Bank originates both adjustable-rate and fixed-rate loans, its ability to originate loans is dependent upon the relative customer demand for loans in its market. Demand is affected by the interest rate environment. The Bank currently holds in its portfolio most adjustable-rate loans and first mortgage, fixed-rate real estate loans with maturities of 15 years or less it originated. Fixed 12 rate loans originated in excess of 15 years are generally sold to the FHLMC. In selling these fixed-rate mortgage loans, the Bank retains the servicing rights. In fiscal 1998, the Bank originated $108 million of loans, compared to $70.6 million and $48.6 million in fiscal 1997 and 1996, respectively. The increase from fiscal 1997 to 1998 was due to favorable rates and expanding the market with a commercial loan originator. The increase from fiscal 1996 to 1997 was due to favorable rates and expanding the Bank's markets with a loan originator. Lower originations of loans in fiscal 1996 were somewhat offset by a lower level of repayments during the same period. In fiscal 1998, $72.4 million of loans were repaid, compared to $52.9 million and $33.8 million in fiscal 1997 and 1996, respectively. No mortgage-backed securities were purchased in fiscal years 1998, 1997 or 1996. Sales of real estate loans totaled $9.0 million in fiscal 1998, compared to $3.6 million and $6.7 million in fiscal 1997 and 1996, respectively. In summary, net loans and mortgage-backed securities increased by $25.4 million in fiscal 1998, compared to a $13.5 million and $7.3 million increase in fiscal 1997 and 1996, respectively. The increases in fiscal 1998, 1997 and 1996 were attributable to the increased loan originations. Currently, the Bank sells whole loans and, in the past, has sold loan participations primarily without recourse. Sales of whole loans and loan participations generally have been beneficial to the Bank since these sales usually generate income at the time of sale, produce future servicing income and provide funds for additional lending and other investments. During fiscal 1998, the Bank sold $9.0 million of loans. When loans are sold, the Bank typically retains the responsibility for collecting and remitting loan payments, making certain that real estate tax payments are made on behalf of borrowers, and otherwise servicing the loans. The Bank receives a servicing fee for performing these services. The amount of servicing fees received by the Bank varies but is generally calculated on the basis of 1/4th of 1% per annum for fixed-rate mortgage loans on the outstanding principal amount of the loans serviced. The servicing fee is recognized as income over the life of the loans. At June 30, 1998, the Bank serviced for others approximately $25.9 million of mortgage loans that it originated and sold. In periods of economic uncertainty, the Bank's ability to originate large dollar volumes of real estate loans may be substantially reduced or restricted, with a resultant decrease in related loan origination fees, other fee income and operating earnings. In addition, the Bank's ability to sell loans may substantially decrease as potential buyers (principally government agencies) reduce their purchasing activities. In the past, the Bank has purchased mortgage-backed securities in amounts which consistently exceed its sales of such items, although the specific levels of purchases have varied in recent periods in response to available spreads and other market factors. 13 The following table shows the loan and mortgage-backed securities origination, purchase, sale and repayment activities of the Bank for the periods indicated.
Year Ended June 30 ---------------------------------- 1998 1997 1996 -------- -------- -------- (In Thousands) Originations by type: Adjustable-rate: Real estate - one- to four-family ..... $ 17,562 $ 25,456 $ 11,143 - commercial and multi-family .. 418 449 442 Non-real estate - consumer ............ 4,874 125 37 - commercial business .......... 11,634 5,681 2,745 -------- -------- -------- Total adjustable-rate .......... 34,488 31,711 14,367 -------- -------- -------- Fixed-rate: Real estate - one- to four-family ..... 28,059 7,740 9,356 - commercial and multi-family .. 405 147 1,372 Non-real estate - consumer ............ 41,909 28,374 22,531 - commercial business .......... 3,044 2,676 986 -------- -------- -------- Total fixed-rate ............... 73,417 38,937 34,245 -------- -------- -------- Total loans originated ......... 107,905 70,648 48,612 -------- -------- -------- Purchases: Mortgage-backed securities ............ -- -- -- Sales: Real estate loans ..................... 9,045 3,607 6,693 Mortgage-backed securities ............ 355 -- -- Principal Repayments: Loans ................................. 72,403 52,918 33,834 Mortgage-backed securities ............. 692 595 770 -------- -------- -------- Total repayments ............... 73,095 53,513 34,604 -------- -------- -------- Net increase ................... $ 25,410 $ 13,528 $ 7,315 ======== ======== ========
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. 14 The following table sets forth information concerning delinquent mortgage and other loans at June 30, 1998. The amounts presented represent the total remaining principal balances of the related loans, rather than the actual payment amounts which are overdue.
Loans Delinquent For: ----------------------------------------------------------------------------------------- 30-59 Days 60-89 Days 90 Days and Over ------------------------------ --------------------------- -------------------------- Percent Percent Percent of Loan of Loan of Loan Number Amount Category Number Amount Category Number Amount Category ------ ------ -------- ------ ------ -------- ------ ------ -------- (Dollars in Thousands) Real Estate: One- to four-family ..... 6 $253 .36% 2 $ 83 .12% 5 $521 .74% Commercial and Multi-Family ........... 1 20 .28 -- -- -- -- -- -- Construction ............ -- -- -- -- -- -- -- -- -- Consumer .................. 64 522 1.11 28 211 .45 21 193 .41 Commercial business ....... 4 75 .58 2 139 1.07 -- -- -- --- ---- ---- ---- ---- ----- ---- ---- --- Total delinquent loans 75 $870 .61% 32 $433 .31% 26 $714 .50% ==== ==== ==== ==== ==== ==== ==== ==== === Loans Delinquent For: --------------------------------- Total Delinquent Loans --------------------------------- Percent of Loan Number Amount Category ------ ------ -------- Real Estate: One- to four-family...... 13 $ 857 1.22% Commercial and Multi-Family............ 1 20 .28 Construction............. --- --- ---- Consumer................... 113 926 1.97 Commercial business........ 6 214 1.65 --- ---- ---- Total delinquent loans 133 $2,017 1.43% === ====== ====
The ratio of delinquent loans to total loans (net), was 1.45% at June 30, 1998. 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.
June 30 ---------------------------- 1998 1997 1996 ----- ---- ----- (Dollars in Thousands) Non-accruing loans: One- to four-family ......................... $521 $-- -- Commercial and multi-family real estate ..... -- -- -- Consumer .................................... 193 248 65 ---- ---- ---- Total non-accruing loans ............. 714 248 65 ---- ---- ---- Foreclosed and repossessed assets: One- to four-family ......................... -- -- -- Commercial and multi-family real estate ..... 101 -- -- Consumer .................................... 58 33 27 ---- ---- ---- Total foreclosed assets .............. 159 33 27 ---- ---- ---- Troubled debt restructurings .................. -- -- -- Total non-performing assets ................... $873 $281 $ 92 ==== ==== ==== Total as a percentage of total assets ......... .43% .16% .06% ==== ==== ====
15 For the fiscal year ended June 30, 1998, gross interest income which would have been recorded had the non-accruing loans been current amounted to $24,000. The amount that was included in interest income on such loans was $31,000 for the fiscal year ended June 30, 1998. Non-Performing Assets. Included in non-accruing loans at June 30, 1998 were 21 consumer loans totaling $193,000 secured by property including automobiles, manufactured homes and other collateral. Foreclosed and repossessed assets included automobiles and commercial property totaling $159,000 at June 30, 1998. Other Loans of Concern. In addition to the non-performing loans and foreclosed and repossessed assets set forth in the preceding table, as of June 30, 1998 there was also an aggregate of $1.7 million in net book value of loans classified by the Bank with respect to the majority of which known information about the possible credit problems of the borrowers or the cash flows of the security properties have caused management to have some doubts as to the ability of the borrowers to comply with present loan repayment terms and which may result in the future inclusion of such items in the non-performing asset categories. The principal components of loans of concern are fifty-seven consumer loans aggregating $491,000, seventeen one- to four-family loans aggregating $981,000 and three commercial loans aggregating $187,000 at June 30, 1998. As of June 30, 1998, there were no other loans not included on the foregoing table or discussed above where known information about the possible credit problems of borrowers caused management to have doubts as to the ability of the borrower to comply with present loan repayment terms and which may result in disclosure of such loans in the future. Classified Assets. Federal regulations provide for the classification of loans and other assets such as debt and equity securities considered by the OTS to be of lesser quality as "substandard," "doubtful" or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the savings association will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. When a savings association classifies problem assets as either substandard or doubtful, it may establish general allowances for loan losses in an amount deemed prudent by management. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When a savings association classifies problem assets as "loss," it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An association's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the association's District Director at the regional OTS office, who may order the establishment of additional general or specific loss allowances. 16 In accordance with its classification of assets policy, the Bank regularly reviews the loans in its portfolio to determine whether any loans require classification. On the basis of management's review of its assets, at June 30, 1998, the Bank had classified a total of approximately $1.6 million of its assets as substandard, $30,000 as doubtful, $25,000 as loss, and $802,000 as special mention. At June 30, 1998, total classified assets comprised $2.4 million, or 1.5% of the Bank's capital, or 1.2% of the Bank's total assets. Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risk inherent in its loan portfolio and changes in the nature and volume of its loan activity. Such evaluation, which includes a review of loans for which full collectibility may not be reasonably assured, considers among other matters, the estimated fair value of the underlying collateral, economic conditions, historical loan loss experience and other factors that warrant recognition in providing for an adequate loan loss allowance. Real estate properties acquired through foreclosure are recorded at fair value. If fair value at the date of foreclosure is lower than the balance of the related loan, the difference will be charged-off to the allowance at the time of transfer. Valuations are periodically updated by management and if the value declines, a specific provision for losses on such property is established by a charge to operations. Although management believes that it uses the best information available to determine the allowances, unforeseen market conditions could result in adjustments and net earnings could be significantly affected if circumstances differ substantially from the assumptions used in making the final determination. Future additions to the Bank's allowances will be the result of periodic loan, property and collateral reviews and thus cannot be predicted in advance. At June 30, 1998, the Bank had a total allowance for loan losses of $983,000 or .7% of total loans, net. See Note 4 of the Notes to Consolidated Financial Statements in the Annual Report to Stockholders (the "Annual Report"), attached hereto as Exhibit 13. 17 The following table sets forth an analysis of the Bank's allowance for loan losses.
Year Ended June 30 ------------------------ 1998 1997 1996 ---- ---- ---- (Dollars in Thousands) Balance at beginning of period .................... $572 $553 $484 Charge-offs: One- to four-family .............................. -- 3 16 Consumer ......................................... 285 181 64 Commercial Business .............................. 47 -- -- ---- ---- ---- 332 184 80 Recoveries: Consumer ......................................... 38 83 10 Commercial and multi-family real estate .......... -- -- 44 ---- ---- ---- 38 83 54 Net charge-offs ................................... 294 101 26 Additions charged to operations ................... 705 120 95 ==== ---- ---- Balance at end of period .......................... $983 $572 $553 ==== ==== ==== Ratio of net charge-offs during the period to average loans outstanding during the period ..... .23% .09 % .03% ==== ==== ====
The distribution of the Bank's allowance for loan losses at the dates indicated is summarized as follows:
June 30, -------------------------------------------------------------------------- 1998 1997 1996 -------------------- -------------------- ----------------------- Percent Percent Percent of-Loans of-Loans of-Loans in Each in Each in Each Category Category Category to Total to Total to Total Amount Loans Amount Loans Amount Loans ------ ----- ------ ----- ------ ----- (Dollars in Thousands) One- to four-family ....... $105 49.64% $ 95 56.21% $100 59.32% Commercial and multi-family real estate ............ 230 5.14 70 5.56 75 7.05 Construction .............. 28 2.82 25 2.58 20 2.61 Consumer .................. 445 33.25 325 29.75 315 26.74 Commercial business ....... 165 9.15 50 5.90 35 4.28 Unallocated ............... 10 -- 7 -- 8 ----- ---- ----- ---- ------ Total ................ $983 100.00% $572 100.00% $553 100.00% ==== ====== ==== ====== ==== ======
18 Investment Activities First Federal must maintain minimum levels of investments that qualify as liquid assets under OTS regulations. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. Historically, the Bank has generally maintained its liquid assets above the minimum requirements imposed by the OTS regula tions and at a level believed adequate to meet requirements of normal daily activities, repayment of maturing debt and potential deposit outflows. As of June 30, 1998, the Bank's liquidity ratio (liquid assets as a percentage of net withdrawable savings deposits and current borrowings) was 12.1%. See "Regulation - Liquidity." Federally chartered savings institutions have the authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, certain bankers' acceptances, repurchase agreements and federal funds. Subject to various restrictions, federally chartered savings institutions may also invest their assets in commercial paper, investment grade corporate debt securities and mutual funds whose assets conform to the investments that a federally chartered savings institution is otherwise authorized to make directly. Generally, the investment policy of the Bank is to invest funds among various categories of investments and maturities based upon the Bank's need for liquidity, to achieve the proper balance between its desire to minimize risk and maximize yield, to provide collateral for borrowings, and to fulfill the Bank's asset/liability management policies. First Federal's investment and mortgage-backed securities portfolios are managed in accordance with a written investment policy adopted by the Board of Directors. Other than certificates of deposit and mortgage-backed securities, investments may be made by the President of First Federal only with the approval of the Investment Committee. Effective July 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No. 115"). SFAS No. 115 requires that securities and mortgage-backed securities be classified as held to maturity, available for sale or trading purposes. Under SFAS No. 115, securities that the Company has the positive intent and ability to hold until maturity are classified as held to maturity and are reported at amortized cost. Securities classified as available for sale are those the Company may sell in response to liquidity needs, for asset/liability management purposes and other reasons and are reported at fair value. Unrealized gains and losses on securities available for sale are reported as a separate component of equity, net of tax. Trading securities are those which are purchased for sale in the near future and are reported at fair value. Unrealized gains and losses on trading securities are included in income. Transfers between categories are accounted for as sales and repurchases at fair value. For any sales or transfers of securities classified as held to maturity, the cost basis, the realized gain or loss, and the circumstances leading to the decision to sell are required to be disclosed. At the time of purchase of new securities, management of the Company makes a determination as to the appropriate classification of securities as available for sale or held to maturity. At June 30, 1998, the Company had no securities classified as held to maturity and $50.3 million classified as available for sale including mortgage-backed securities. No securities were held for trading purposes on such date. 19 Securities. It is the Company's general policy to purchase securities which are U.S. Government securities and federal agency obligations, state and local government obligations, commercial paper, short-term corporate debt securities and overnight federal funds. At June 30, 1998, the weighted average term to maturity or repricing of the investment securities portfolio, excluding the FHLB, FNMA stock and other equity securities available for sale, was 6.8 years. OTS regulations restrict investments in corporate debt and equity securities by the Bank. These restrictions include prohibitions against investments in the debt securities of any one issuer in excess of 15% of the Bank's unimpaired capital and unimpaired surplus as defined by federal regulations, which totaled $16.0 million as of June 30, 1998, plus an additional 10% if the investments are fully secured by readily marketable collateral. See "Regulation - Federal Regulation of Savings Associations" for a discussion of additional restrictions on the Bank's investment activities. The following table sets forth the composition of the Company's securities portfolio excluding mortgage-backed securities, at the dates indicated.
June 30, -------------------------------------------------------------------- 1998 1997 1996 -------------------- ------------------- ------------------- Carrying % of Carrying % of Carrying % of Value Total Value Total Value Total ------- ------ ------- ------ ------- ----- (Dollars in Thousands) Securities available for sale: Federal agency obligations..................... 13,186 37.94 5,980 24.93 5,913 24.21 Commercial notes and commercial paper.......... 242 .70 246 1.02 565 2.32 State and local government obligations......... 9,102 26.19 7,413 30.91 8,332 34.11 Other equity securities........................ 9,468 27.24 7,948 33.14 7,216 29.54 ------- ------ ------- ------ ------- ------ Total securities available for sale.......... 31,998 92.07 21,587 90.00 22,026 90.18 ------- ------ ------- ------ ------- ------ FHLB stock..................................... 2,757 7.93 2,398 10.00 2,398 9.82 ------- ------ ------- ------ ------- ------ Total securities............................. $34,755 100.00% $23,985 100.00% $24,424 100.00% ======= ====== ======= ====== ======= ====== Weighted average remaining life or term to repricing, excluding FHLB stock and other equity securities available for sale......... 6.8 yrs. 3.9 yrs. 4.3 yrs. Other Interest-Earning Assets: Interest-earning deposits with banks........... $ 386 $15,500 $ 2,289 ======== ======= ========
20 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.
June 30, 1998 --------------------------------------------------------------------------------- Less Than 1 to 5 5 to 10 Over Total 1 Year Years Years 10 Years Securities ---------- --------- --------- --------- ---------------------- Amortized Amortized Amortized Amortized Amortized Market Cost Cost Cost Cost Cost Value (Dollars in Thousands) Federal agency obligations................. $7,000 $2,166 $4,000 $--- $13,166 $13,186 Commercial notes and commercial paper........... --- 238 --- --- 238 242 State and local government obligations...... 1,071 3,852 3,862 120 8,905 9,102 ----- ----- ----- ----- --------- --------- Total debt securities........ $8,071 $6,256 $7,862 $120 $22,309 $22,530 ====== ====== ====== ==== ======= ======= Weighted average yield(1).... 5.71% 6.62% 6.06% 6.00% 6.09%
- ----------------------- (1) Yields reflected have not been computed on a tax equivalent basis. Except for obligations of state and local governments, the Company's securities portfolio at June 30, 1998 contained neither tax-exempt securities nor securities of any issuer with an aggregate book value in excess of 10% of the Company's shareholders' equity, excluding those issued by the United States Government, or its agencies. Mortgage-Backed Securities. The Company's investment in mortgage-backed securities can serve as collateral for borrowings and, through repayments, as a source of liquidity. In addition, management from time to time has purchased mortgage-backed securities in order to supplement loan originations. For information regarding the carrying and market values of the Company's mortgage-backed securities portfolio, see Note 3 of the Notes to Consolidated Financial Statements in the Annual Report attached hereto as Exhibit 13. The following table sets forth the amortized cost of the Company's mortgage-backed securities at the dates indicated.
June 30, ------------------------------- 1998 1997 1996 ------------------------------- (In thousands) Federal National Mortgage Association ...... $ 454 $ 546 $ 580 Government National Mortgage Association ... 16,490 16,737 16,988 Federal Home Loan Mortgage Corporation ..... 137 177 226 Other Mortgage-backed Securities(1) ........ 471 758 938 ------- ------- ------- Total .................................. $17,552 $18,218 $18,732 ======= ======= =======
- -------------------- (1) The June 30, 1997 and 1996 principal balance and amortized cost of other mortgage-backed securities included an adjustment of $318,900 to reflect an other than temporary decline in the fair value of a security collateralized by multi-family mortgage obligations with underlying collateral primarily located in Southern California. During 1998 this security was sold and a gain on sale of $264,028 was recognized. The decline in the fair value of the security was due to increased loan delinquencies, a decline in the cash reserve fund and losses incurred on foreclosed real estate which resulted in downgrades in the security's rating by various independent rating agencies. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report. 21 The following table sets forth the contractual maturities of the Company's mortgage-backed securities based on amortized cost at June 30, 1998. Not considered in the preparation of the table below is the effect of prepayments, periodic principal repayments and the adjustable-rate nature of these instruments.
Due in ---------------------------------------------- June 30, 1998 5 Years 5 to 10 10 to 20 Over 20 Balance or Less Years Years Years Outstanding ------- ----- ----- ----- ----------- (Dollars In Thousands) Federal National Mortgage Association .. $ --- $ -- $ 168 $ 286 $ 454 Government National Mortgage Association 1 16,027 37 425 16,490 Federal Home Loan Mortgage Corporation . -- 72 -- 65 137 Other Mortgage-Backed Securities ....... -- -- -- 471 471 ------- ------- ------- ------- ------- Total ............................. $ 1 $16,099 $ 205 $ 1,247 $17,552 ======= ======= ======= ======= ======= Weighted average yield ................. 8.00% 7.90% 6.98% 7.10% 7.84%
Sources of Funds General. The Bank's primary sources of funds are deposits, borrowings, amortization and prepayment of loan principal (including interest earned on mortgage-backed securities), sales of whole loans and loan participations, interest earned on or sales and maturation of investment securities and short-term investments, and funds provided from operations. Borrowings, including FHLB advances and reverse repurchase agreements, may be used at times to compensate for seasonal reductions in deposits or deposit inflows at less than projected levels, and may be used on a longer term basis to support expanded lending activities. Deposits. First Federal offers a variety of deposit accounts having a wide range of interest rates and terms. The Bank's deposits consist of passbook savings accounts, money market savings accounts, NOW, money market checking and regular checking accounts, and certificate accounts ranging in terms from 91 days to 60 months. The Bank only solicits deposits from its market area and does not use brokers to obtain deposits. The Bank relies primarily on competitive pricing policies, advertising and customer service to attract and retain these deposits. The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates, and competition. The variety of deposit accounts offered by the Bank has allowed it to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. The Bank has become more susceptible to short-term fluctuations in deposit flows, as customers have become more interest rate conscious. The Bank endeavors to manage the pricing of its deposits in keeping with its asset/liability management and profitability objectives. Based on its experience, the Bank believes that its passbook savings, money market savings accounts, NOW, money market checking and regular checking accounts are relatively stable sources of deposits. However, the ability of the Bank to attract and maintain certificates of deposit and its passbook accounts and the rates paid on these deposits has been and will continue to be significantly affected by market conditions. 22 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.
Year Ended June 30, ------------------------------------------- 1998 1997 1996 -------- -------- -------- (Dollars in Thousands) Opening balance ............. $116,118 $ 92,490 $ 85,930 Purchased deposits .......... -- 17,133 -- Net deposits ................ 4,535 2,470 3,191 Interest credited ........... 4,603 4,025 3,369 -------- -------- -------- Ending balance .............. $125,256 $116,118 $ 92,490 ======== ======== ======== Net increase ................ $ 9,138 $ 23,628 $ 6,560 ======== ======== ======== Percent increase ............ 7.87% 25.55% 7.63% ======== ======== ========
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.
June 30, -------------------------------------------------------------------------------------- 1998 1997 1996 ----------------------- -------------------------- ----------------------- Percent Percent Percent Amount of Total Amount of Total Amount of Total ------ -------- ------ -------- ------ -------- (Dollars in Thousands) Interest Rate Range: Passbook Accounts.................... $ 44,249 35.32% $ 42,063 36.22% $41,689 45.07% Demand accounts(1)................... 6,935 5.54 5,751 4.95 3,264 3.53 Money Market Accounts................ 1,217 .97 2,182 1.88 258 .28 NOW Accounts......................... 6,020 4.81 6,285 5.41 3,922 4.24 --------- ------ --------- Total Non-Certificates............... 58,421 46.64 56,281 48.46 49,133 53.12 --------- ------ ---------- Certificates: 0.00 - 3.99%....................... --- --- 1 .01 --- --- 4.00 - 5.99%....................... 37,894 30.25 34,029 29.31 26,624 28.79 6.00 - 7.99%....................... 28,722 22.94 25,589 22.03 16,506 17.85 8.00 - 9.99%....................... 219 .17 218 .19 227 .24 --------- ----- --------- Total Certificates................... 66,835 53.36 59,837 51.54 43,357 46.88 --------- ------ --------- Total Deposits....................... $ 125,256 100.00% $ 116,118 100.00% $92,490 100.00% ========= ====== =========
(1) Non-interest-bearing accounts. 23 The following table shows rate and maturity information for the Bank's certificates of deposit as of June 30, 1998.
0.00- 4.00- 6.00- 8.00- Percent 3.99% 5.99% 7.99% 9.99% Total of Total ----- ----- ----- ----- ----- -------- (Dollars in Thousands) Certificate accounts maturing in quarter ending: September 30, 1998......................... $ --- $12,748 $ 2,821 $ --- $15,569 23.29% December 31, 1998.......................... --- 3,899 4,483 --- 8,382 12.54 March 31, 1999............................. --- 9,856 2,468 219 12,543 18.77 June 30, 1999.............................. --- 3,744 3,162 --- 6,906 10.33 September 30, 1999......................... --- 1,496 4,441 --- 5,937 8.88 December 31, 1999.......................... --- 1,048 2,680 --- 3,728 5.58 March 31, 2000............................. --- 620 2,805 --- 3,425 5.12 June 30, 2000.............................. --- 420 1,983 --- 2,403 3.59 September 30, 2000......................... --- 573 401 --- 974 1.46 December 31, 2000.......................... --- 598 403 --- 1,001 1.50 March 31, 2001............................. --- 798 81 --- 879 1.32 June 30, 2001.............................. --- 466 635 --- 1,101 1.65 Thereafter................................. --- 1,628 2,359 --- 3,987 5.97 ------- --------- --------- ------- ----- ---- Total................................. $ --- $37,894 $28,722 $219 $66,835 100.00% ====== ======= ======= ==== ======= ====== Percent of total........................... ---% 56.70% 42.97% .33% 100.00% ======= ====== ===== === ======
The following table indicates the amount of the Bank's certificates of deposit and other deposits by time remaining until maturity as of June 30, 1998.
Maturity -------------------------------------------------- 3 Months Over Over or Less 3 to 6 6 to 12 Over Months Months Months 12 months Total ------ ------ ------ --------- ----- (In Thousands) Certificates of deposit less than $100,000................................ $ 9,480 $6,811 $14,454 $20,855 $51,600 Certificates of deposit of $100,000 or more............................. 2,889 1,570 4,643 2,580 11,682 Public funds(1)............................... 3,200 --- 353 --- 3,553 ------- ------ ------- ------- ------- Total certificates of deposit...................................... $15,569 $8,381 $19,450 $23,435 $66,835 ======= ====== ======= ======= =======
- -------------------- (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. 24 Borrowings. Although deposits are the Bank's primary source of funds, the Bank's policy has been to utilize borrowings when they are a less costly source of funds, can be invested at a positive interest rate spread or when the Bank desires additional capacity to fund loan demand. First Federal's borrowings historically have consisted of advances from the FHLB of Indianapolis upon the security of a blanket collateral agreement of a percentage of unencumbered loans. Such advances can be made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. At June 30, 1998, the Bank had $51.5 million in FHLB advances, and a $1.0 million overdraft line of credit was available from the FHLB. From time to time, First Federal has entered into repurchase agreements through a nationally recognized broker-dealer firm. These agreements are accounted for as borrowings by the Bank and are secured by certain of the Bank's securities. The broker-dealer takes possession of the securities during the period that the repurchase agreement is outstanding. The terms of the agreements have typically ranged from 30 days to a maximum of six months. The proceeds of these transactions are used to meet cash flow needs of the Bank. At June 30, 1998, the Bank had no repurchase agreements outstanding. The following table sets forth the maximum month-end balance and average balance of FHLB advances and line of credit from the FHLB and securities sold under agreements to repurchase at the dates indicated.
Year Ended June 30, ------------------------------------ 1998 1997 1996 ---- ---- ---- (Dollars in Thousands) Maximum Balance: FHLB advances and line of credit.................. $51,500 $44,800 $45,800 Securities sold under agreements to repurchase.... --- --- --- Average Balance: FHLB advances and line of credit.................. 49,543 41,470 39,296 Securities sold under agreements to repurchase.... --- --- --- Average Rate Paid On: FHLB advances and line of credit.................. 5.98% 5.95% 6.18% Securities sold under agreements to repurchase.... --- --- ---
The following table sets forth the Bank's borrowings at the dates indicated.
Year Ended June 30, ------------------------------------ 1998 1997 1996 -------- ----------- ----------- (Dollars in Thousands) FHLB advances and line of credit...... $51,500 $44,800 $41,800 Due to brokers........................ 5,000 --- --- -------- ----------- ----------- Total borrowings.................. $56,500 $44,800 $41,800 ======= ======= =======
25 Subsidiary Activities As a federally chartered savings association, First Federal is permitted by OTS regulations to invest up to 2% of its assets, or $4.1 million at June 30, 1998, in the stock of, or loans to, service corporation subsidiaries. First Federal may invest an additional 1% of its assets in service corporations where such additional funds are used for inner city or community development purposes. In addition to investments in service corporations, federal associations are permitted to invest an unlimited amount in operating subsidiaries engaged solely in activities which a federal association may engage in directly. First Federal had no subsidiaries at June 30, 1998. Regulation General. First Federal is a federally chartered savings bank, the deposits of which are federally insured and backed by the full faith and credit of the United States Government. Accordingly, First Federal is subject to broad federal regulation and oversight extending to all its operations. The Bank is a member of the FHLB of Indianapolis and is subject to certain limited regulation by the Board of Governors of the Federal Reserve System ("Federal Reserve Board"). As the savings and loan holding company of First Federal, the Company also is subject to federal regulation and oversight. The purpose of the regulation of the Holding Company and other holding companies is to protect subsidiary savings associations. The Bank is a member of the Savings Association Insurance Fund ("SAIF"), which together with the Bank Insurance Fund (the "BIF") are the two deposit insurance funds administered by the FDIC, and the deposits of the Bank are insured by the FDIC. As a result, the FDIC has certain regulatory and examination authority over the Bank. Certain of these regulatory requirements and restrictions are discussed below or elsewhere in this document. Federal Regulation of Savings Associations. The OTS has extensive authority over the operations of savings associations. As part of this authority, First Federal is required to file periodic reports with the OTS and is subject to periodic examinations by the OTS and the FDIC. When these examinations are conducted by the OTS and the FDIC, the examiners may require the Bank to provide for higher general or specific loan loss reserves. The last regular OTS examination of the Bank was as of July 1997. The last FDIC examination was as of May 1990. All savings associations are subject to a semi-annual assessment, based upon the association's total assets, to fund the operations of the OTS. The Bank's OTS assessment for the fiscal year ended June 30, 1998 was approximately $50,000. The OTS also has extensive enforcement authority over all savings institutions and their holding companies, including First Federal and the Company. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with the OTS. Except under certain circumstances, public disclosure of final enforcement actions by the OTS is required. 26 In addition, the investment, lending and branching authority of the Bank is prescribed by federal laws, and it is prohibited from engaging in any activities not permitted by such laws. For instance, no savings institution may invest in non-investment grade corporate debt securities. In addition, the permissible level of investment by federal associations in loans secured by non-residential real property may not exceed 400% of total capital, except with approval of the OTS. Federal savings associations are also generally authorized to branch nationwide. At June 30, 1998, First Federal was in compliance with each of the noted restrictions. The Bank's general permissible lending limit for loans-to-one borrower is the greater of $500,000 or 15% of unimpaired capital and surplus (except for loans fully secured by certain readily marketable collateral, in which case this limit is increased to 25% of unimpaired capital and surplus). At June 30, 1998, the Bank's lending limit under this restriction was approximately $2.2 million. First Federal is in compliance with the loans-to-one borrower limitation. The OTS, as well as the other federal banking agencies, has adopted guidelines establishing safety and soundness standards on such matters as loan underwriting and documentation, asset quality, earnings standards, internal controls and audit systems, interest rate risk exposure and compensation and other employee benefits. Any institution which fails to comply with these standards must submit a compliance plan. Insurance of Accounts and Regulation by the FDIC. First Federal is a member of the SAIF, which is administered by the FDIC. Deposits are insured up to applicable limits by the FDIC and such insurance is backed by the full faith and credit of the United States Government. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the SAIF or the BIF. The FDIC also has the authority to initiate enforcement actions against savings associations, after giving the OTS an opportunity to take such action, and may terminate the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices, or is in an unsafe or unsound condition. The FDIC's deposit insurance premiums are assessed through a risk-based system, under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their level of capital and supervisory evaluation. Under the system, institutions classified as well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1 or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at least 6% and a risk-based capital ratio of at least 10%) and considered healthy pay the lowest premium while institutions that are less than adequately capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a risk-based capital ratio of less than 8%) and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions will be made by the FDIC for each semi-annual assessment period. As of June 30, 1998, the Bank met the requirements of a well-capitalized institution. The FDIC is authorized to increase assessment rates, on a semiannual basis, if it determines that the reserve ratio of the SAIF will be less than the designated reserve ratio of 1.25% of SAIF insured deposits. In setting these increased assessments, the FDIC must seek to restore the reserve ratio to that designated reserve level, or such higher reserve ratio as established by the FDIC. The 27 FDIC also may impose special assessments on SAIF members to repay amounts borrowed from the United States Treasury or for any other reason deemed necessary by the FDIC. Effective January 1, 1997, the premium schedule for BIF and SAIF insured institutions ranged from 0 to 27 basis points. However, SAIF-insured institutions are required to pay a Financing Corporation (FICO) assessment, in order to fund the interest on bonds issued to resolve thrift failures in the 1980s, equal to approximately 6.48 basis points for each $100 in domestic deposits, while BIF-insured institutions pay an assessment equal to approximately 1.52 basis points for each $100 in domestic deposits. The assessment is expected to be reduced to 2.43 basis points no later than January 1, 2000, when BIF insured institutions fully participate in the assessment. These assessments, which may be revised based upon the level of BIF and SAIF deposits will continue until the bonds mature in the year 2017. Regulatory Capital Requirements. Federally insured savings associations, such as the Bank, are required to maintain a minimum level of regulatory capital. The OTS has established capital standards, including a tangible capital requirement, a leverage ratio (or core capital) requirement and a risk-based capital requirement applicable to such savings associations. These capital requirements must be generally as stringent as the comparable capital requirements for national banks. The OTS is also authorized to impose capital requirements in excess of these standards on individual associations on a case-by-case basis. The capital regulations require tangible capital of at least 1.5% of adjusted total assets (as defined by regulation). Tangible capital generally includes common stockholders' equity and retained income, and certain noncumulative perpetual preferred stock and related income. In addition, all intangible assets, other than a limited amount of purchased mortgage servicing rights, must be deducted from tangible capital for calculating compliance with this requirement. At June 30, 1998, First Federal did not have any unamortized purchased mortgage servicing rights, but did have certain intangible assets related to the purchase of the branch in South Whitley, Indiana. The OTS regulations establish special capitalization requirements for savings associations that own subsidiaries. As of June 30, 1998, the Bank had no subsidiaries. At June 30, 1998, the Bank had tangible capital of $13.8 million, or 6.9% of adjusted total assets, which is approximately $10.8 million above the minimum requirement of 1.5% of adjusted total assets in effect on that date. The capital standards also require core capital equal to at least 3% of adjusted total assets. Core capital generally consists of tangible capital plus certain intangible assets, including a limited amount of purchased credit card relationships. As a result of the prompt corrective action provisions discussed below, however, a savings association must maintain a core capital ratio of at least 4% to be considered adequately capitalized unless its supervisory condition is such to allow it to maintain a 3% ratio. At June 30, 1998 the Bank had certain intangible assets related to the branch purchase which were subject to these tests. At June 30, 1998, the Bank had core capital equal to $13.8 million, or 6.9% of adjusted total assets, which is $7.8 million above the minimum leverage ratio requirement of 3% as in effect on that date. 28 The OTS risk-based requirement requires savings associations to have total capital of at least 8% of risk-weighted assets. Total capital consists of core capital, as defined above, and supplementary capital. Supplementary capital consists of certain permanent and maturing capital instruments that do not qualify as core capital and general valuation loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used to satisfy the risk-based requirement only to the extent of core capital. The OTS is also authorized to require a savings association to maintain an additional amount of total capital to account for concentration of credit risk and the risk of non-traditional activities. At June 30, 1998, First Federal had no capital instruments that qualify as supplementary capital and $983,000 of general loss reserves, which was less than 1.25% of risk-weighted assets. Certain exclusions from capital and assets are required to be made for the purpose of calculating total capital. Such exclusions consist of equity investments (as defined by regulation) and that portion of land loans and nonresidential construction loans in excess of an 80% loan-to-value ratio and reciprocal holdings of qualifying capital instruments. First Federal had no such exclusions from capital and assets at June 30, 1998. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet items, will be multiplied by a risk weight, ranging from 0% to 100% based on the risk inherent in the type of asset. For example, the OTS has assigned a risk weight of 50% for prudently underwritten permanent one- to four-family first lien mortgage loans not more than 90 days delinquent and having a loan to value ratio of not more than 80% at origination unless insured to such ratio by an insurer approved by the FNMA or the FHLMC. OTS regulations also require that every savings association with more than normal interest rate risk exposure to deduct from its total capital, for purposes of determining compliance with such requirement, an amount equal to 50% of its interest-rate risk exposure multiplied by the present value of its assets. This exposure is a measure of the potential decline in the net portfolio value of a savings association, greater than 2% of the present value of its assets, based upon a hypothetical 200 basis point increase or decrease in interest rates (whichever results in a greater decline). Net portfolio value is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. The rule will not become effective until the OTS evaluates the process by which savings associations may appeal an interest rate risk deduction determination. It is uncertain as to when this evaluation will be completed. Any savings association with less than $300 million in assets and a total capital ratio in excess of 12% is exempt from this requirement unless the OTS determines otherwise. Based on its asset size and total capital ratio at June 30, 1998, the Bank anticipates that it will be exempt from this rule. On June 30, 1998, the Bank had total risk-based capital of $14.7 million (including $13.8 million in core capital and $983,000 in qualifying supplementary capital) and risk-weighted assets of $122.0 million (including, converted off-balance sheet assets); or total capital of 12.1% of risk-weighted assets. This amount was $4.9 million above the 8.0% requirement in effect on that date. The OTS and the FDIC are authorized and, under certain circumstances required, to take certain actions against savings associations that fail to meet their capital requirements. The OTS is generally required to take action to restrict the activities of an "undercapitalized association" 29 (generally defined to be an association with less than either a 4% core capital ratio, a 4% Tier 1 risk-based capital ratio or an 8% risk-based capital ratio). Any such association must submit a capital restoration plan and until such plan is approved by the OTS may not increase its assets, acquire another institution, establish a branch or engage in any new activities, and generally may not make capital distributions. The OTS is authorized to impose the additional restrictions, discussed below, that are applicable to significantly undercapitalized associations. As a condition to the approval of the capital restoration plan, any company controlling an undercapitalized association must agree that it will enter into a limited capital maintenance guarantee with respect to the institution's achievement of its capital requirements. Any savings association that fails to comply with its capital plan or is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios of less than 3% or a risk-based capital ratio of less than 6%) must be made subject to one or more additional actions and operating restrictions which may cover all aspects of its operations and include a forced merger or acquisition of the association; and any other action the OTS deems appropriate. An association that becomes "critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is subject to further mandatory restrictions on its activities in addition to those applicable to significantly undercapitalized associations. In addition, the OTS must appoint a receiver (or conservator with the concurrence of the FDIC) for a savings association, with certain limited exceptions, within 90 days after it becomes critically undercapitalized. Any undercapitalized association is also subject to the general enforcement authority of the OTS and the FDIC, including the appointment of a receiver or conservator. The OTS is also generally authorized to reclassify an association into a lower capital category and impose the restrictions applicable to such category if the institution is engaged in unsafe or unsound practices or is in an unsafe or unsound condition. The imposition by the OTS or the FDIC of any of these measures on the Bank may have a substantial adverse effect on the Bank's operations and profitability. Limitations on Dividends and Other Capital Distributions. OTS regulations impose various restrictions or requirements on savings associations with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account. OTS regulations also prohibit a savings association from declaring or paying any dividends or from repurchasing any of its stock if, as a result, the regulatory capital of the institution would be reduced below the amount required to be maintained for the liquidation account established in connection with its mutual to stock conversion. Generally, savings associations, such as the Bank, that before and after the proposed distribution meet their capital requirements, may make capital distributions during any calendar year equal to the greater of 100% of net income for the year-to-date plus 50% of the amount by which the lesser of the association's tangible, core or risk-based capital exceeds its capital requirement for such capital component, as measured at the beginning of the calendar year, or 75% of its net income for the most recent four quarter period. However, an association deemed to be in need of more than 30 normal supervision by the OTS may have its dividend authority restricted by the OTS. The Bank may pay dividends in accordance with this general authority. Savings associations proposing to make any capital distribution need only submit written notice to the OTS 30 days prior to such distribution. Savings associations that do not, or would not meet their current minimum capital requirements following a proposed capital distribution, however, must obtain OTS approval prior to making such distribution. The OTS may object to the distribution during that 30-day notice period based on safety and soundness concerns. The OTS has proposed regulations that would revise the current capital distribution restrictions. Under the proposal a savings association that is a subsidiary of a holding company may make a capital distribution with notice to the OTS provided that it has a CAMEL 1 or 2 rating, is not of supervisory concern and would remain adequately capitalized (as defined in the OTS prompt corrective action regulations) following the proposed distribution. Savings associations that would remain adequately capitalized following the proposed distribution but do not meet the other noted requirements must notify the OTS 30 days prior to declaring a capital distribution. The OTS stated it will generally regard as permissible that amount of capital distributions that do not exceed 50% of the institution's excess regulatory capital plus net income to date during the calendar year. A savings association may not make a capital distribution without prior approval of the OTS and the FDIC if it is undercapitalized before, or as a result of, such a distribution. As under the current rule, the OTS may object to a capital distribution if it would constitute an unsafe or unsound practice. No assurance may be given as to whether or in what form the regulations may be adopted. Liquidity. All savings associations, including First Federal, are required to maintain an average daily balance of liquid assets equal to a certain percentage of the average daily balance of its liquidity base during the preceding calendar quarter or a percentage of the amount of its liquidity base at the end of the preceding quarter. For a discussion of what the Bank includes in liquid assets, see "Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources" in the Annual Report attached as Exhibit 13. This liquid asset ratio requirement may vary from time to time (between 4% and 10%) depending upon economic conditions and savings flows of all savings associations. At the present time, the minimum liquid asset ratio is 4%. Penalties may be imposed upon associations for violations of the liquid asset ratio requirement. At June 30, 1998, the Bank was in compliance with the requirement with an overall liquid asset ratio of 12.1%. Qualified Thrift Lender Test. All savings associations, including the Bank, are required to meet a qualified thrift lender ("QTL") test to avoid certain restrictions on their operations. At June 30, 1998, the Bank met the test and has always met the test since its effectiveness. The test requires a savings association to have at least 65% of its portfolio assets (as defined by regulation) in qualified thrift investments on a monthly average in nine out of every 12 months on a rolling basis. As an alternative, the savings association may maintain 60% of its assets in those assets specified in Section 7701(a)(19) of the Internal Revenue Code. Under either test, such assets primarily consist of residential housing, related loans and investments. 31 Any savings association that fails to meet the QTL test must convert to a national bank charter, unless it requalifies as a QTL and thereafter remains a QTL. If an association does not requalify and converts to a national bank charter, it must remain SAIF-insured until the FDIC permits it to transfer to the BIF. If such an association has not yet requalified or converted to a national bank, its new investments and activities are limited to those permissible for both a savings association and a national bank, and it is limited to national bank branching rights in its home state. In addition, the association is immediately ineligible to receive any new FHLB borrowings and is subject to national bank limits for payment of dividends. If such association has not requalified or converted to a national bank within three years after the failure, it must divest of all investments and cease all activities not permissible for a national bank. In addition, it must repay promptly any outstanding FHLB borrowings, which may result in prepayment penalties. If any association that fails the QTL test is controlled by a holding company, then within one year after the failure, the holding company must register as a bank holding company and become subject to all restrictions on bank holding companies. See "- Holding Company Regulation." Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"), every FDIC insured institution has a continuing and affirmative obligation consistent with safe and sound banking practices to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with the examination of the Bank, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications, such as a merger or the establishment of a branch, by the Bank. An unsatisfactory rating may be used as the basis for the denial of an application by the OTS. The federal banking agencies, including the OTS, have recently revised the CRA regulations and the methodology for determining an institution's compliance with the CRA. Due to the heightened attention being given to the CRA in the past few years, the Bank may be required to devote additional funds for investment and lending in its local community. The Bank was examined for CRA compliance in June 1996 and received a rating of satisfactory. Transactions with Affiliates. Generally, transactions between a savings association or its subsidiaries and its affiliates are required to be on terms as favorable to the association as trans actions with non-affiliates. In addition, certain of these transactions, such as loans to an affiliate, are restricted to a percentage of the association's capital. Affiliates of First Federal include the Company and any company which is under common control with the Bank. In addition, a savings association may not lend to any affiliate engaged in activities not permissible for a bank holding company or acquire the securities of most affiliates. The OTS has the discretion to treat subsidiaries of savings associations as affiliates on a case by case basis. Certain transactions with directors, officers or controlling persons are also subject to conflict of interest regulations enforced by the OTS. These conflict of interest regulations and other statutes also impose restrictions on loans to such persons and their related interests. Among other things, such loans must be made on substantially the same terms and conditions as loans to unaffiliated persons. At June 30, 1998, the Bank was in compliance with the above restrictions. 32 Holding Company Regulation. The Company is a unitary savings and loan holding company subject to regulatory oversight by the OTS. As such, the Company is registered and files reports with the OTS and is subject to regulation and examination by the OTS. In addition, the OTS has enforcement authority over the Company and its non-savings association subsidiaries which also permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association. As a unitary savings and loan holding company, the Company generally is not subject to activity restrictions. If the Company acquires control of another savings association as a separate subsidiary, it would become a multiple savings and loan holding company, and the activities of the Company and any of its subsidiaries (other than the Bank or any other SAIF-insured savings association) would become subject to such restrictions unless such other associations each qualify as a QTL and were acquired in a supervisory acquisition. If the Bank fails the QTL test, the Company must obtain the approval of the OTS prior to continuing after such failure, directly or through its other subsidiaries, any business activity other than those approved for multiple savings and loan holding companies or their subsidiaries. In addition, within one year of such failure the Company must register as, and will become subject to, the restrictions applicable to bank holding companies. The activities authorized for a bank holding company are more limited than are the activities authorized for a unitary or multiple savings and loan holding company. See "Qualified Thrift Lender Test." The Company must obtain approval from the OTS before acquiring control of any other SAIF-insured association. Such acquisitions are generally prohibited if they result in a multiple savings and loan holding company controlling savings associations in more than one state. However, such interstate acquisitions are permitted based on specific state authorization or in a supervisory acquisition of a failing savings association. Federal Securities Law. The stock of the Company is registered with the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the SEC under the Exchange Act. Company stock held by persons who are affiliates (generally officers, directors and principal stockholders) of the Company may not be resold without registration or unless sold in accordance with certain resale restrictions. If the Company meets specified current public information requirements, each affiliate of the Company is able to sell in the public market, without registration, a limited number of shares in any three-month period. Federal Reserve System. The Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily checking, NOW and Super NOW checking accounts). At June 30, 1998, the Bank was in compliance with these reserve requirements. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements that may be imposed by the OTS. See "- Liquidity." 33 Savings associations are authorized to borrow from the Federal Reserve Bank "discount window," but Federal Reserve Board regulations require associations to exhaust other reasonable alternative sources of funds, including FHLB borrowings, before borrowing from the Federal Reserve Bank. Federal Home Loan Bank System. The Bank is a member of the FHLB of Indianapolis, which is one of 12 regional FHLBs that administers the home financing credit function of savings associations. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of directors of the FHLB which are subject to the oversight of the Federal Housing Finance Board. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term advances are required to provide funds for residential home financing. As a member, First Federal is required to purchase and maintain stock in the FHLB of Indianapolis. At June 30, 1998, First Federal had $2.8 million in FHLB stock, which was in compliance with this requirement. In past years, the Bank has received substantial dividends on its FHLB stock. Over the past five fiscal years such dividends have averaged 7.9% and were 8.1% for the fiscal year ended June 30, 1998. Under federal law, the FHLBs are required to provide funds for the resolution of troubled savings associations and to contribute to low- and moderately priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have affected adversely the level of FHLB dividends paid and could continue to do so in the future. These contributions could also have an adverse effect on the value of FHLB stock in the future. A reduction in value of the Bank's FHLB stock may result in a corresponding reduction in First Federal's capital. For the year ended June 30, 1998, dividends paid by the FHLB of Indianapolis to First Federal totaled $209,000 and was approximately $188,000 in fiscal year 1997. The $209,000 dividend received for the fiscal year ended June 30, 1998 reflects an annualized rate of 8.1%. Federal Taxation. Savings associations such as the Bank that meet certain conditions prescribed by the Internal Revenue Code of 1986, as amended (the "Code"), are permitted to establish reserves for bad debts and to make annual additions thereto which may, within specified formula limits, be taken as a deduction in computing taxable income for federal income tax purposes. The amount of the bad debt reserve deduction for "non-qualifying loans" was computed under the experience method. The amount of the bad debt reserve deduction is computed under the experience method. Under the experience method, the bad debt reserve deduction is an amount determined under a formula based generally upon the bad debts actually sustained by the savings association over a period of years. In August 1996, legislation was enacted that repealed the percentage of taxable income method used by many thrifts, including the Bank, to calculate their bad debt reserve for federal income tax purposes. As a result, thrifts such as the Bank must recapture that portion of the reserve that exceeds the amount that could have been taken under the experience method for tax years 34 beginning after December 31, 1987. The recapture will occur over a six-year period, the commencement of which will be delayed until the first taxable year beginning after December 31, 1997, provided the institution meets certain residential lending requirements. The management of the Company does not believe that the legislation will have a material impact on the Company or the Bank. In addition to the regular income tax, corporations, including savings associations such as the Bank, generally are subject to a minimum tax. An alternative minimum tax is imposed at a minimum tax rate of 20% on alternative minimum taxable income, which is the sum of a corporation's regular taxable income (with certain adjustments) and tax preference items, less any available exemption. The alternative minimum tax is imposed to the extent it exceeds the corporation's regular income tax and net operating losses can offset no more than 90% of alternative minimum taxable income. A portion of the Bank's reserves for losses on loans may not, without adverse tax consequences, be utilized for the payment of cash dividends or other distributions to a shareholder (including distributions on redemption, dissolution or liquidation) or for any other purpose (except to absorb bad debt losses). As of June 30, 1998, the Bank's Excess for tax purposes totaled approximately $1.2 million. The Company and its subsidiaries file consolidated federal income tax returns on a fiscal year basis using the accrual method of accounting. Savings associations, such as the Bank, that file federal income tax returns as part of a consolidated group are required by applicable Treasury regulations to reduce their taxable income for purposes of computing the percentage bad debt deduction for losses attributable to activities of the non-savings association members of the consolidated group that are functionally related to the activities of the savings association member. The Company and its subsidiaries have not been audited by the IRS within the last ten years. Indiana Taxation. The State of Indiana imposes an 8.5% franchise tax on the net income (as defined) for financial (including thrift) institutions, exempting them from the current gross income, supplemental net income and intangible taxes. Net income for franchise tax purposes will constitute federal taxable income before net operating loss deductions and special deductions, adjusted for certain items, including Indiana income taxes, tax exempt interest and bad debts. Other applicable Indiana taxes include sales, use and property taxes. Delaware Taxation. As a Delaware holding company, the Holding Company is exempted from Delaware corporate income tax but is required to file an annual report with and pay an annual fee to the State of Delaware. The Company is also subject to an annual franchise tax imposed by the State of Delaware which is generally based upon authorized shares. Competition First Federal faces strong competition, both in originating real estate and other loans and in attracting deposits. Competition in originating real estate loans comes primarily from other commercial banks, savings associations, credit unions and mortgage bankers making loans secured by real estate located in the Bank's market area. Commercial banks and finance companies provide vigorous competition in consumer lending. The Bank competes for real estate and other loans 35 principally on the basis of the quality of services it provides to borrowers, interest rates and loan fees it charges, and the types of loans it originates. The Bank attracts all of its deposits through its retail banking offices, primarily from the communities in which those retail banking offices are located; therefore, competition for those deposits is principally from other commercial banks, savings associations and credit unions located in the same communities, as well as mutual funds. The Bank competes for these deposits by offering a variety of deposit accounts at competitive rates, convenient business hours, and convenient branch locations with interbranch deposit and withdrawal privileges at each. The Bank serves Wabash, Kosciukso, Grant, Miami, Huntington, Whitley and Elkhart Counties in Indiana. The Bank's primary market area, however, is the Counties of Wabash, Kosciukso and Whitley, Indiana. There are four commercial banks and one credit union which compete for deposits and loans in Wabash County. In Kosciukso County, there are six commercial banks, one credit union and one savings bank competing for market share. In Whitley County, there are five commercial banks, one credit union and one savings bank competing for market share. Employees At June 30, 1998, the Company and its affiliates had a total of 61 employees, including 12 part-time employees. The Company's employees are not represented by any collective bargaining group. Management considers its employee relations to be good. Executive Officers of the Company and the Bank Who Are Not Directors The following information as to the business experience during the past five years is supplied with respect to executive officers of the Company and the Bank who do not serve on the Company's or the Bank's Board of Directors. There are no arrangements or understandings between the persons named and any other person pursuant to which such officers were selected. Joyce K. Sanders, age 55, is Senior Vice President of Lending and Office Manager of the Wabash office, a position she has held since 1984. Ms. Sanders is responsible for oversight of day to day operations at the Wabash office and is involved in operations and loan policy decisions. Ms. Sanders has been employed by First Federal for 30 years. Ms. Sanders joined First Federal in 1967 and has held a variety of positions including Secretary from 1978 to 1987. Item 2. Description of Property The Bank conducts its business at its main office and three other locations in its primary market area. The Bank owns all of its offices. The total net book value of the Bank's premises and equipment (including land, buildings and furniture, fixtures and equipment) at June 30, 1998 was $2.2 million. See Note 6 of Notes to Consolidated Financial Statements in the Annual Report attached as Exhibit 13. The following table sets forth information relating to each of the Bank's offices as of June 30, 1998. 36
Date Total Approximate Net Book Value Location Acquired Square Footage at June 30, 1998 -------- -------- -------------- ---------------- Main Office: 1982 10,185(1) $1,006 1205 N. Cass Street Wabash, Indiana 500 S. Huntington 1977 2,400(2) 448 Syracuse, Indiana(2) 1306 Street Road 114 West N. 1968 1,325 61 Manchester, Indiana 105 E. Columbia Street 1997 5,300(4) 163 South Whitley, Indiana(3)
(1) The Bank leases space in this office to its affiliate, FirstFed Financial. (2) A new branch at this site was completed in September 1995. (3) NBD Bank Branch acquired on June 13, 1997. (4) Includes basement. The Bank maintains an on-line data base of depositor and borrower customer information. The net book value of the data processing and computer equipment utilized by the Bank at June 30, 1998 was $192,000. Item 3. Legal Proceedings The Company and First Federal are involved from time to time as plaintiff or defendant in various legal actions arising in the normal course of its business. FirstFed, the Company's other wholly owned subsidiary is not a party to any legal action. While the ultimate outcome of these proceedings cannot be predicted with certainty, it is the opinion of management, after consultation with counsel representing the Company and First Federal in the proceedings, that the resolution of these proceedings should not have a material effect on the Company's consolidated financial position or results of operations. Item 4. Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended June 30, 1998. PART II Item 5. Market for Common Equity and Related Stockholder Matters Page 39 of the attached 1998 Annual Report to Stockholders is herein incorporated by reference. 37 Item 6. Management's Discussion and Analysis or Plan of Operation Pages 6 through 14 of the attached 1998 Annual Report to Stockholders are herein incorporated by reference. Item 7. Financial Statements The following information appearing in the Company's Annual Report to Stockholders for the year ended June 30, 1998, is incorporated by reference in this Annual Report on Form 10-KSB as Exhibit 13. Pages in Annual Annual Report Section Report - --------------------- ------ Report of Independent Auditors..................................... 15 Consolidated Balance Sheets as of June 30, 1998 and 1997........... 16 Consolidated Statements of Income Years Ended June 30, 1998, 1997 and 1996........................... 17 Consolidated Statement of Changes in Shareholders' Equity Years Ended June 30, 1998, 1997 and 1996........................... 18 Consolidated Statements of Cash Flows Years Ended June 30, 1998, 1997 and 1996........................... 19 to 20 Notes to Consolidated Financial Statements......................... 21 to 37 With the exception of the aforementioned information, the Company's Annual Report to Stockholders for the year ended June 30, 1998, is not deemed filed as part of this Annual Report on Form 10-KSB. Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure There has been no Current Report on Form 8-K filed within 24 months prior to the date of the most recent financial statements reporting a change of accountants and/or reporting disagreements on any matter of accounting principle or financial statement disclosure. 38 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act Directors Information concerning Directors of the Company is incorporated herein by reference from the definitive Proxy Statement for the Annual Meeting of Stockholders to be held in October 1998, a copy of which will be filed not later than 120 days after the close of the fiscal year. Executive Officers Information regarding the business experience of the executive officers of the Company and the Bank contained in Part I of this Form 10-KSB is incorporated herein by reference. Compliance with Section 16(a) Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than 10% of a registered class of the Company's equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than 10% stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10 percent beneficial owners were complied with except for the following: 1. Mr. George who inadvertently failed to file one required Form 4 to report one transaction. Mr. George reported the transaction on a Form 5. 2. Mr. Frank who inadvertently failed to timely file two required Form 4s to report one transaction each. Mr. Frank filed a Form 4 to report one transaction and a Form 5 to report the other. 3. Mr. Rees who inadvertently failed to timely file one required Form 4 to report one transaction. Mr. Rees filed a Form 4 to report the transaction. 4. Mr. Reynolds who inadvertently failed to timely file one required Form 4 to report one transaction. Mr. Reynolds filed a Form 4 to report the transaction; and 5. Ms. Sanders who inadvertently failed to timely file two required Form4s to report one transaction each. Ms. Sanders filed Form 4s to report the transactions. 39 Item 10. Executive Compensation Information concerning executive compensation is incorporated herein by reference from the definitive Proxy Statement for the Annual Meeting of Stockholders to be held in October 1998, a copy of which will be filed not later than 120 days after the close of the fiscal year. Item 11. Security Ownership of Certain Beneficial Owners and Management Information concerning security ownership of certain beneficial owners and management is incorporated herein by reference from the definitive Proxy Statement for the Annual Meeting of Stockholders to be held in October 1998, a copy of which will be filed not later than 120 days after the close of the fiscal year. Item 12. Certain Relationships and Related Transactions Information concerning certain relationships and related transactions is incorporated herein by reference from the definitive Proxy Statement for the Annual Meeting of Stockholders to be held in October 1998, a copy of which will be filed not later than 120 days after the close of the fiscal year. PART IV Item 13. Exhibits and Reports on Form 8-K (a) Exhibits See Index to Exhibits. (b) Reports on Form 8-K The Registrant filed four current reports on form 8-K during the three-month period ended June 30, 1998. Three reports were filed on May 4, 1998, to report: (i) operating results for the quarter ended December 31, 1997; (ii) dividends for the quarter ended March 31, 1998; and (iii) operating results for the quarter ended March 31, 1998. The fourth report was filed on June 4, 1998 to report an increase in dividends. 40 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FFW CORPORATION Date: October 8, 1998 By: /s/ Nicholas M. George --------------- ----------------------- NICHOLAS M. GEORGE (Duly Authorized Representative) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Wayne W. Rees /s/ Nicholas M. George - ----------------- ---------------------- WAYNE W. REES, Chairman of the NICHOLAS M. GEORGE, President, Board and Secretary Chief Executive Officer, Chief Financial Officer and Director (Principal Executive, Operating, Financial and Accounting Officer) Date: October 8, 1998 Date: October 8, 1998 --------------- --------------- /s/ Joseph W. McSpadden /s/ Stanley Myers - ----------------------- ----------------- JOSEPH W. MCSPADDEN, Director STANLEY MYERS, Director Date: October 8, 1998 Date: October 8, 1998 --------------- --------------- /s/ Ronald D. Reynolds /s/ Thomas L. Frank - ---------------------- ------------------- RONALD D. REYNOLDS, Director THOMAS L. FRANK, Director Date: October 8, 1998 Date: October 8, 1998 --------------- --------------- 41 Index to Exhibits Reference to Prior Filing Regulation SB or Exhibit Exhibit Number Number Document Attached Hereto ------ -------- --------------- 3(i) Articles of Incorporation, including amendments * thereto 3(ii) By-Laws * 4 Instruments defining the rights of security * holders, including debentures 10 Executive Compensation Plans and Arrangements * (a) Employment Contract between Nicholas * George and the Bank (b) 1992 Stock Option and Incentive Plan * (c) Management Recognition and Retention Plan ** 11 Statement re: computation of per share earnings *** 13 Annual Report to Security Holders 13 21 Subsidiaries of Registrant 21 23 Consents of Experts and Counsel 23 27 Financial Data Schedule 27 - ----------------------- * Filed as an Exhibit to the Company's Form S-1 Registration Statement filed on December 21, 1992 (File No. 33-56110) pursuant to Section 5 of the Securities Act of 1933. All of such previously filed documents are hereby incorporated herein by reference in accordance with Item 601 of Regulation S-B. ** Filed as Exhibit 10-1 to the Company's Annual Report on Form 10-KSB for the fiscal year ended June 30, 1994 (File No. 0-21170). This previously filed document is hereby incorporated herein by reference in accordance with Item 601 of Regulation S-B. *** See Note 1 of Notes to Consolidated Financial Statements included in the Annual Report to Security Holders under Exhibit 13. 42 EX-13 2 Exhibit 13 Annual Report to Security Holders FFW Corporation Wabash, Indiana Table of Contents PRESIDENT'S MESSAGE 3 SELECTED CONSOLIDATED FINANCIAL INFORMATION 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 6 REPORT OF INDEPENDENT AUDITORS 15 CONSOLIDATED BALANCE SHEETS June 30, 1998 and 1997 16 CONSOLIDATED STATEMENTS OF INCOME Years Ended June 30, 1998, 1997 and 1996 17 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years Ended June 30, 1998, 1997 and 1996 18 CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended June 30, 1998, 1997 and 1996 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21 DIRECTORS AND EXECUTIVE OFFICERS 38 SHAREHOLDER INFORMATION 39 [THIS PAGE INTENTIONALLY LEFT BLANK] President's Message Dear Shareholder: It is a pleasure to report to you that FFW Corporation and its subsidiary, First Federal Savings Bank, have completed another successful year. We have now completed five years as a public company. This year was a record year in two ways. First, the earnings for fiscal year 1998 set a new record of $1.9 million or $1.36 per share. This represents an increase of 41.4% and 36.0% respectively over fiscal 1997. Second, the assets of the corporation at June 30, 1998 exceeded $203.0 million. This increase in assets represents $23.3 million or 12.9%. During fiscal 1998, the company continued to grow aggressively aided by a strong loan demand and a stable economy. Because of the increased loan demand, the Loan Department at the Wabash office required additional staff and office space on the main floor. As a result, the second floor of the Wabash facility was expanded and remodeled to accommodate the back office departments. Additionally, First Federal installed Access Plus, a bank-by-phone system that offers the convenience of 24-hour banking from your car, your home, or anywhere a touch-tone phone is available. This new service provides increased access to our entire hometown banking services. Your Board of Directors and Officers understand the importance of enhancing shareholder value and providing an acceptable return on your investment. To that end, the Board authorized the payment of a two-for-one stock split on December 31, 1997, and have consistently increased the dividends you earn on your FFW stock. In conclusion, I would like to thank and recognize our dedicated employees for their service and dedication to First Federal and the communities they serve. I want to pay a special tribute to Chief Financial Officer Charles (Chuck) E. Redman, who, along with his wife Terri, were tragically killed in an automobile accident at the time this report was being prepared. Chuck was extremely dedicated and loyal to his family, the First Federal family, and to the Company. His experience, energy and friendship will be missed by everyone that knew him. I would also like to recognize and thank long time director Maynard E. Vollmer, who is retiring from the board. Maynard has been a faithful and dedicated board member for 30 years; his experience, expertise and advice has contributed greatly to the success of your company. To our valued customers who are vital to our growth, profitability, and success, we thank you for your continued support. I invite you to review this Annual Report. We are proud of our history, our consistent growth, and our shareholder equity and income. We look forward to the upcoming year and every effort will be made to justify your continued confidence and support. Sincerely, /s/Nicholas M. George - --------------------- Nicholas M. George President and Chief Executive Officer 3
Selected Consolidated Financial Information June 30, - --------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- (In Thousands) Selected Financial Condition Data: Total assets $203,311 $180,055 $150,467 $147,293 $122,480 Loans receivable, net 139,394 114,159 100,529 92,475 77,688 Loans held for sale, net -- -- 423 214 1,315 Securities available for sale 50,293 40,450 40,566 34,983 38,153 Deposits 125,256 116,118 92,490 85,930 82,041 Total borrowings 56,500 44,800 41,800 45,300 25,490 Stockholders' equity 19,129 17,141 15,458 15,492 14,435 Year Ended June 30, - --------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- (In Thousands, except for per share data) Selected Operations Data: Total interest income $14,589 $12,224 $11,164 $9,409 $7,236 Total interest expense 8,591 7,246 6,799 5,630 3,770 - --------------------------------------------------------------------------------------------------------------------------- Net interest income 5,998 4,978 4,365 3,779 3,466 Provision for loan losses 705 120 95 34 24 - --------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 5,293 4,858 4,270 3,745 3,442 Net realized gains on sales/calls of interest-earning assets 371 45 146 9 230 Net unrealized gains (losses) on loans held for sale -- 1 (1) 18 (61) Unrealized loss on mortgage- backed security -- -- -- (319) - Other noninterest income 894 628 483 437 452 Noninterest expense (3,800) (3,583) (2,586) (2,356) (2,247) - --------------------------------------------------------------------------------------------------------------------------- Income before income taxes 2,758 1,949 2,312 1,534 1,816 Income tax expense (858) (605) (726) (435) (468) - --------------------------------------------------------------------------------------------------------------------------- Net income $1,900 $1,344 $1,586 $1,099 $1,348 =========================================================================================================================== Earnings per Common and Common Equivalent Shares: Basic (1) $1.36 $1.00 $1.11 $0.75 $0.89 Diluted (1) $1.32 $0.97 $1.08 $0.74 $0.87 Dividends declared and paid per common share (1) $0.38 $0.32 $0.26 $0.23 $0.21 Dividend payout ratio 27.94% 32.00% 23.42% 30.67% 23.60%
(1) Restated for 100% stock dividend. 4
Selected Consolidated Financial Information (continued) Year Ended June 30, - --------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- Other Data: Interest rate spread information: Average during period 2.78% 2.69% 2.45% 2.36% 2.74% End of period 2.96 2.82 2.67 2.30 2.60 Net interest margin(1) 3.31 3.25 3.06 2.99 3.45 Average interest-earning assets to average interest-bearing liabilities 1.11x 1.12x 1.13x 1.14x 1.19x Non-performing assets (2) to total assets at end of period .43% .16% .06% .09% .08% Equity-to-total assets (end of period) 9.41 9.52 10.27 10.52 11.79 Return on assets (ratio of net income to average total assets) 1.00 .85 1.09 .85 1.31 Return on equity (ratio of net income to average equity) 10.51 8.41 9.89 7.62 9.26 Equity-to-assets ratio (ratio of average equity to average total assets) 9.49 10.11 11.02 11.15 14.15 Number of full-service offices 4 4 3 3 3
(1) Net interest income divided by average interest-earning assets. (2) Includes non-accruing loans, accruing loans delinquent more than 90 days and foreclosed assets. [GRAPHIC-GRAPH DEPICTING DIVIDENDS PAID PER SHARE] [GRAPHIC-GRAPH DEPICTING EARNINGS PER SHARE] 5 Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL FFW Corporation (the Company) owns all outstanding stock of First Federal Savings Bank of Wabash (the Bank or First Federal), and the Company's earnings are primarily dependent on the operations of First Federal. As a result, the following discussion relates primarily to the operations of the Bank. The principal business of savings banks, including First Federal, has historically consisted of attracting deposits from the general public and making loans secured by residential real estate. The Bank's earnings are primarily dependent on net interest income, the difference between interest income and interest expense. Interest income is a function of the balances of loans, mortgage-backed securities and investments outstanding during the period and the yield earned on such assets. Interest expense is a function of the balances of deposits and borrowings outstanding during the same period and the rates paid on such deposits and borrowings. The Bank's earnings are also affected by provisions for loan losses, service charges and income taxes. Operating expenses consist primarily of employee compensation and benefits, occupancy and equipment expenses, federal deposit insurance premiums and other general and administrative expenses. The Company is significantly affected by prevailing economic conditions as well as federal regulations concerning financial institutions and monetary and fiscal policies. Deposit balances are influenced by a number of factors including interest rates paid on competing personal investments and the level of personal income and savings within the institution's market. In addition, growth of deposit balances is influenced by the perceptions of customers regarding the stability of the financial services industry. Lending activities are influenced by the demand for housing as well as competition from other lending institutions. The primary sources of funds for lending activities include deposits, loan repayments, borrowings, sales and maturities of securities available for sale and funds provided from operations. FINANCIAL CONDITION The Company's total assets increased from $180.1 million at June 30, 1997 to $203.3 million at June 30, 1998, an increase of $23.2 million, or 12.9%. This increase was funded by an increase in deposits of $9.2 million, an increase in advances outstanding from Federal Home Loan Bank of Indianapolis (FHLB) of $6.7 million and an increase in due to brokers of $5.0 million. These funds, along with cash on hand, were used to originate loans, resulting in an increase in net loans of $25.2 million. An additional $1.0 million was invested in FHLMC preferred stock and an increase in government agencies and municipals of $8.9 million. Total securities available for sale increased from $40.4 million at June 30, 1997 to $50.3 million at June 30, 1998. During fiscal 1998, state and municipal securities increased from $7.4 million at June 30, 1997 to $9.1 million at June 30, 1998 due to two purchases during the course of the year totaling $2.4 million. During fiscal 1998, management continued to diversify the investment portfolio by investing $1.0 million in a 5-year non-callable FHLMC preferred stock, of which the dividends are 70% excluded for tax purposes. Government agency securities increased from $6.0 million at June 30, 1997 to $13.2 million at June 30, 1998, which reflected the investment of the interest-bearing deposits at the end of June 30, 1997. The Company has net unrealized appreciation of $685,000, net of tax at June 30, 1998 for securities available for sale. Mortgage-backed securities decreased from $18.9 million at June 30, 1997 to $18.3 million at June 30, 1998. This decrease was primarily due to the $355,000 proceeds from the sale of a privately issued mortgaged-backed security, which had previously been written down $319,000 in 1995. The sale of this security resulted in a gain on sale of $264,000. Net loans increased $25.2 million, or 22.1%, from $114.2 million at June 30, 1997 to $139.4 million at June 30, 1998. The increases in the loan portfolio were comprised primarily of automobile, commercial, and mortgage loans which increased $11.2 million, $6.1 million, and $6.6 million, respectively, during fiscal 1998. The loan portfolio is comprised primarily of first mortgage loans secured by one-to-four family residential real estate located in the Company's market area. At June 30, 1998, first mortgage loans secured by one-to-four family real estate comprise $70.2 million, or 50.4% of the loan portfolio. The Company also had $7.3 million of commercial and multi-family real estate loans and $4.0 million of construction loans. The consumer loan portfolio included $33.8 million of automobile loans, $9.1 million of home equity and improvement loans, $12.9 million in commercial business loans and $4.1 million in other consumer loans at June 30, 1998. 6 Total deposits increased $9.2 million, or 7.9%, from $116.1 million at June 30, 1997 to $125.3 million at June 30, 1998. During fiscal 1998, passbook and checking accounts increased $2.1 million, or 3.8%, and certificates of deposit increased $7.0 million, or 11.7%. The increase resulted from increased commercial accounts and targeted pricing of short term certificates of deposit. Assuming interest rates remain at present levels during the next fiscal year, management anticipates that deposits will continue to increase above current levels. As a result, management will continue to control the overall increases in interest rates in deposits by targeting certain terms and offering "specials" rather than across the board increases for all deposit products. If deposit growth lags behind loan demand, then an increase in FHLB advances may be necessary to fund the Company's lending and investment activities during fiscal 1999. [GRAPHIC-PIE CHART DEPICTING LOAN MIX] Total shareholders' equity increased $2.0 million to $19.1 million at June 30, 1998. The increase primarily resulted from net income of $1.9 million, $183,000 change in unrealized appreciation on securities available for sale, net of tax, $269,000 for the release of ESOP shares and $177,820 of proceeds from the exercise of stock options, which were offset by dividends paid of $542,000. RESULTS OF OPERATIONS Comparison of Years Ended June 30, 1998 and June 30, 1997 General. Net income for the year ended June 30, 1998 was $1.9 million, a increase of $556,000 compared to net income for the year ended June 30, 1997. The increase was primarily the result of an increase of $1.0 million in net interest income, which was partially offset by an increase of $217,000 in noninterest expense and an increase in income taxes of $252,000. Further details of the changes in these items are discussed below. Net Interest Income. Net interest income increased $1.0 million, or 20.0%, from $5.0 million to $6.0 million for the year ended June 30, 1998. The increase in net interest income was due to an increase of $2.4 million in interest income, partially offset by an increase of $1.3 million in interest expense. The increase in net interest income was primarily a result of an increase in average interest-earning assets exceeding the increase in average interest-bearing liabilities and an improvement in net interest margin as discussed below. [GRAPHIC-GRAPH DEPICTING NET INCOME] Interest income increased $2.4 million, or 19.7 %, for fiscal 1998 compared to fiscal 1997 primarily due to an increase in the average balance of loans and investments. These increases exceeded the increases in the interest-bearing liabilities for the same period. To a lesser extent the increase in interest income resulted from an increase in the average rate on earning assets to 8.04% in fiscal 1998 from 7.98% in fiscal 1997. Interest expense increased $1.4 million, or 19.4%, for fiscal 1998 compared to fiscal 1997 primarily due to an increase in the average balance of certificates of deposit and FHLB advances outstanding, partially offset by a decrease in the average rate on interest-bearing liabilities to 5.26% in fiscal 1998 from 5.29% in fiscal 1997. Management plans to continue using FHLB advances to fund loan growth if there is not sufficient deposit growth. 7 Provision for Loan Losses. The provision for loan losses increased $585,000 from $120,000 in fiscal 1997 to $705,000 in fiscal 1998. The amounts provided during the fiscal year were based on management's quarterly analysis of the allowance for loan losses, and the changing composition of the total loan portfolio from one-to-four family to commercial and consumer loans. The inherent risk of commercial and consumer loans requires a higher level of provisions for loan losses. This year the Company has seen an increase in its non-performing loans and has been increasing and will continue to increase its loan loss allowance to deal with potential losses. The Company will continue to monitor its allowance for loan losses and make future additions to the allowance through the provision for loan losses as economic and regulatory conditions dictate. Although the Company maintains its allowance for loan losses at a level which it considers to be adequate to provide for potential losses, there can be no assurance that future losses will not exceed estimated amounts or that additional provisions for loan losses will not be required in future periods. In addition, the Company's determination as to the amount of the allowance for loan losses is subject to review by the regulatory agencies, which can order the establishment of additional general or specific allowances. Noninterest Income. Noninterest income increased from $674,000 in fiscal 1997 to $1.3 million in fiscal 1998. This increase of $626,000 was primarily the result of increases of $264,000, $61,000, $61,000 and $220,000 in gains on sale of securities, gains on sale of loans, commission income, and service charges, respectively. The increase in service charges resulted from our increased transaction account activity from our South Whitley office, which was acquired in June of 1997. Management intends to continue to sell newly originated fixed-rate mortgage loans with maturities greater than 15 years. The loans to be sold are classified as held for sale at the date of origination. Management continues to price these loans based on rates offered by a government agency that purchases these products for the secondary market. Noninterest Expense. Noninterest expense increased from $3.6 million in fiscal 1997 to $3.8 million in fiscal 1998. This increase of $200,000, or 5.6%, was primarily the result of increases in salaries and employee benefits of $391,000, amortization of goodwill and core deposit premium of $164,000, data processing expense of $80,000, correspondent bank charges of $64,000 and office occupancy of $63,000. These increases were partially offset by a decrease in SAIF deposit insurance premium of $613,000. The decrease in the SAIF deposit insurance premiums was related to the one time assessment of $556,000 paid in November 1996. The increase in salaries and employee benefits, office occupancy, amortization of goodwill and core deposit premium, data processing and correspondent bank charges was primarily the result of additional costs related to our branch in South Whitley, which was acquired in June of 1997. Income Tax Expense. Income tax expense was $858,000 in fiscal 1998 compared to $606,000 in fiscal 1997, an increase of $252,000, or 41.6%. Income taxes increased primarily as a result of the tax effect of higher income before income taxes resulting primarily from the one time SAIF assessment in 1997. Comparison of Years Ended June 30, 1997 and June 30, 1996 General. Net income for the year ended June 30, 1997 was $1.3 million, a decrease of $243,000 compared to net income for the year ended June 30, 1996. The decrease was primarily the result of an increase of $1.0 million in noninterest expense, which was partially offset by an increase of $613,000 in net interest income and a decrease in income taxes of $120,000. Further details of the changes in these items are discussed below. Net Interest Income. Net interest income increased $613,000, or 14.0%, from $4.4 million to $5.0 million for the year ended June 30, 1997. The increase in net interest income was due to an increase of $1.1 million in interest income, partially offset by an increase of $447,000 in interest expense. The increase in net interest income was primarily a result of an increase in average interest-earning assets exceeding the increase in average interest-bearing liabilities and an improvement in net interest margin as discussed below. Interest income increased $1.1 million, or 9.5%, for fiscal 1997 compared to fiscal 1996 primarily due to an increase in the average balance of loans and investments. These increases exceeded the increases in the interest-bearing liabilities for the same period. To a lesser extent the increase in interest income resulted from an increase in the average rate on earning assets to 7.98% in fiscal 1997 from 7.83% in fiscal 1996. Interest expense increased $447,000, or 6.6%, for fiscal 1997 compared to fiscal 1996 due to an increase in the average balance of certificates of deposit and FHLB advances outstanding, partially offset by a decrease in the average rate on interest-bearing liabilities to 5.29% in fiscal 1997 from 5.38% in fiscal 1996. Management plans to continue using FHLB advances to fund loan growth if there is not sufficient deposit growth. 8 Provision for Loan Losses. The provision for loan losses increased $25,000 from $95,000 in fiscal 1996 to $120,000 in fiscal 1997. The amounts provided during the fiscal year were based on management's quarterly analysis of the allowance for loan losses. The Company will continue to monitor its allowance for loan losses and make future additions to the allowance through the provision for loan losses as economic and regulatory conditions dictate. Although the Company maintains its allowance for loan losses at a level which it considers to be adequate to provide for potential losses, there can be no assurance that future losses will not exceed estimated amounts or that additional provisions for loan losses will not be required in future periods. In addition, the Company's determination as to the amount of the allowance for loan losses is subject to review by the regulatory agencies which can order the establishment of additional general or specific allowances. Noninterest Income. Noninterest income increased from $628,000 in fiscal 1996 to $674,000 in fiscal 1997. This increase of $46,000 was primarily the result of increases of $48,000, $63,000 and $34,000 in commission income, service charges and other income, respectively. These increases were offset by decreases of $43,000 and $58,000 in gains on sale of loans and gains on sale of securities, respectively. Management intends to continue to sell newly originated fixed-rate mortgage loans with maturities greater than 15 years. The loans to be sold are classified as held for sale at the date of origination. Management continues to price these loans based on rates offered by a government agency which purchases these products in the secondary market. Noninterest Expense. Noninterest expense increased from $2.6 million in fiscal 1996 to $3.6 million in fiscal 1997. This increase of $1.0 million, or 38.5%, was primarily the result of increases in SAIF deposit insurance premiums of $489,000, other expense of $133,000, and salaries and employee benefits of $277,000. The increase in SAIF deposit insurance premiums was related to the one time assessment of $556,000 paid in November 1996. The increase in salaries and employee benefits was primarily the result of increases in staff for a commercial loan department, and additional employees related to our new branch in South Whitley and normal salary increases. The increase in other expense was primarily due to costs related to the branch acquisition, and start up costs for our commercial loan department. Income Tax Expense. Income tax expense was $606,000 in fiscal 1997 compared to $726,000 in fiscal 1996, a decrease of $120,000, or 16.6%. Income taxes decreased primarily as a result of the tax effect of lower income before income taxes resulting primarily from the one time SAIF assessment. Asset and Liability Management and Market Risk General - The principal market risk affecting the Company is interest-rate risk. The Company does not maintain a trading account for any class of financial instrument, and the Company is not affected by foreign currency exchange rate risk or commodity price risk. The Company, like other financial institutions, is subject to interest rate risk to the extent that its interest-earning assets reprice differently than its interest-bearing liabilities. One of the Company's principal financial objectives is to achieve long-term profitability while reducing and managing its exposure to fluctuations in interest rates. The Company has sought to reduce exposure to its earnings to changes in market interest rates by managing asset and liability maturities and interest rates primarily by reducing the effective maturity of assets through the use of adjustable rate mortgage-backed securities and adjustable rate loans and by extending funding maturities through the use of other borrowings such as FHLB Advances. Quantitative Aspects of Market Risk - As part of its efforts to monitor and manage interest rate risk, the Company uses the "net portfolio value" (NPV) methodology adopted by the OTS as part of its capital regulations. In essence, this approach calculates the difference between the present value of expected cash flows from assets and the present value of expected cash flows from liabilities, as well as cash flows from off balance sheet contracts, arising from an assumed 200 basis point increase or decrease in interest rates (whichever results in the greater pro forma decrease in NPV). Under OTS regulations, an institution's "normal" level of interest rate risk in the event of this assumed change in interest rates is a decrease in the institution's NPV in an amount not exceeding 2% of the present value of its assets. The Company's asset/liability management strategy dictates acceptable limits on the amounts of change in NPV given certain changes in interest rates. The table presented here, as of March 31, 1998, is an analysis of the Company's interest rate risk as measured by changes in NPV for instantaneous and sustained parallel shifts in the yield curve, in 100 basis point increments, up and down 400 basis points and compared to the Company policy limits. 9
Change in NPV as % of Portfolio Interest Rates Net Portfolio Value Value of Assets In Basis ----------------------------------------------- --------------------------- Points NPV (Rate Shock) (1) $ Amount $Change %Change Ratio Change (1) - ---------------- -------- ------- ------- ----- ---------- (Dollars in thousands) 400 $11,607 $(8,620) (43)% 6.29% (386) 300 13,994 (6,233) (31) 7.43 (272) 200 16,311 (3,916) (19) 8.49 (166) 100 18,450 (1,777) (9) 9.42 (73) Static 20,227 10.15 (100) 22,446 2,219 11 11.05 90 (200) 25,246 5,019 25 12.16 201 (300) 28,676 8,449 42 13.47 332 (400) 32,894 12,667 63 15.02 487
(1) Expressed in basis points. As illustrated in the table, the Company's NPV declines in a rising interest rate environment. Specifically, the table indicates that, at March 31, 1998, the Company's NPV was $17.5 million (or 8.91% of the market value of portfolio assets). Based upon the assumptions utilized, an immediate increase in market interest rates of 200 basis points would result in a $3.8 million or 22.00% decline in the Company's NPV and would result in a 168 basis point or 18.9% decline in the Company's NPV ratio to 7.23%. The percentage decline in the Company's NPV at March 31, 1998 was within the limit in the Company's Board-approved guidelines. In evaluating the Company's exposure to interest rate risk, certain shortcomings inherent in the method of analysis presented in the foregoing table must be considered. For example, although certain assets and liabilities may have similar maturities or period to repricing, they may react in different degrees to changes in market interest rates. In addition, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Furthermore, in the event of a change in interest rates, prepayments and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of many borrowers to service their debt may decrease in case of an interest rate increase. Therefore, the actual effect of changing interest rates may differ from that presented in the foregoing table. The Board of Directors and management of the Company believe that certain factors afford the Company the ability to operate successfully despite its exposure to interest rate risk. The Company manages its interest rate risk by originating adjustable rate loans and purchasing adjustable rate mortgage-backed securities and by maintaining capital well in excess of regulatory requirements and by selling a portion of fixed rate one-to four-family real estate loans. The Company focuses lending efforts toward offering competitively priced adjustable rate loan products as an alternative to more traditional fixed rate mortgage loans. In addition, while the Company generally originates mortgage loans for its own portfolio, sales of fixed-rate first mortgage loans with maturities of 15 years or greater are currently undertaken to manage interest rate risk. These loans are currently classified as held for sale by the Company at origination. There were no loans held for sale at June 30, 1998. The Company retains the servicing on loans sold in the secondary market and, at June 30, 1998, $25.9 million in such loans were being serviced for others. The primary objective of the Company's investment strategy is to provide liquidity necessary to meet funding needs as well as address daily, cyclical and long-term changes in the asset/liability mix while contributing to profitability by providing a stable flow of dependable earnings. Generally, the Company invests funds among various categories of investments and maturities based on the Company's liquidity needs and to achieve the proper balance between the desire to minimize risk and maximize yield to fulfill the Company's asset/liability management policies. The Company's cost of funds responds to changes in interest rates due to the relatively short-term nature of its deposit portfolio. Consequently, the levels of short-term interest rates influence the results of operations. The Company offers a range of maturities on its deposit products at competitive rates and monitors the maturities on an ongoing basis. 10 Average Balances, Interest Rates and Yields The following tables set forth the weighted average effective interest rate earned by the Company on its loan and investment portfolios, the weighted average effective cost of the Company's deposits and other interest-bearing liabilities, the interest rate spread of the Company, and the net yield on weighted average interest-earning assets for the periods and as of the dates shown.
Year Ended June 30 - --------------------------------------------------------------------------------------------------------------------------- Average 1998 Yield/ Average 1997 Yield/ Average 1996 Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate - --------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Interest-earning assets: Loans receivable (1) $127,127 $11,029 8.68% $107,082 $ 9,197 8.59% $ 97,473 $ 8,287 8.50% Securities (2) (3) 30,843 1,965 6.46 24,248 1,475 6.08 20,730 1,238 5.97 Mortgage-backed securities (3) 18,732 1,427 7.84 18,781 1,445 7.69 19,432 1,425 7.33 Interest-bearing deposits in other financial institutions 6,370 168 2.64 3,112 107 3.44 4,911 214 4.36 -------- ------- -------- ------- -------- ------- Total interest-earning assets 183,072 14,589 8.01% 153,223 12,224 7.98% 142,546 11,164 7.83% Other assets 7,398 4,895 2,959 Total assets $190,470 $158,118 $145,505 Interest-bearing liabilities: Money market accounts $ 1,022 $ 26 2.54% $ 298 $ 8 2.68% $ 295 $ 7 2.37% NOW accounts 7,040 132 1.88 4,242 84 1.98 3,926 78 1.99 Passbook savings accounts 42,983 1,817 4.23 40,982 1,772 4.32 41,682 1,841 4.42 Certificates of deposit 62,666 3,652 5.83 49,907 2,914 5.84 41,155 2,446 5.94 FHLB advances 49,543 2,964 5.98 41,470 2,468 5.95 39,296 2,427 6.18 -------- ------- -------- ------- ---- -------- ------- ---- Total interest- bearing liabilities 163,254 8,591 5.26% 136,899 7,246 5.29% 126,354 6,799 5.38% ------- ---- ------- ---- ------- ---- Other liabilities 9,133 5,238 3,115 -------- -------- -------- Total liabilities 172,387 142,137 129,469 Shareholders' equity 18,083 15,981 16,036 -------- -------- -------- Total liabilities and Shareholders' equity $190,470 $158,118 $145,505 ======== ======== ======== Net interest income/ interest rate spread $5,998 2.75% $4,978 2.69% $4,365 2.45% ====== ==== ====== ==== ====== ==== Net interest margin (4) 3.31% 3.25% 3.06% ==== ==== ====
(1) Average outstanding balances include non-accruing loans. Interest on loans receivable includes fees. The inclusion of nonaccrual loans and fees does not have a material effect on either the average outstanding balance or the average yield. (2) Yields reflected have not been computed on a tax equivalent basis. (3) Yields computed using the average fair value for securities available for sale. (4) Net interest income divided by average interest earning assets. 11
At June 30 - --------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Weighted average rate on: Loans receivable (1) 8.67% 8.72% 8.57% Securities (2) 6.09 6.10 5.96 Mortgage-backed securities 7.84 7.79 7.14 Interest-bearing deposits in other financial institutions 5.06 6.27 4.83 Combined weighted average yield on interest-earning assets 8.18 8.05 7.89 Weighted average rate paid on: Money market accounts 4.04 2.60 2.42 NOW accounts 1.85 1.96 1.99 Passbook savings accounts 4.21 4.23 4.29 Certificates of deposit 5.77 5.78 5.74 FHLB advances 5.82 5.94 5.92 Combined weighted average rate paid on interest-bearing liabilities 5.22 5.23 5.22 Spread 2.96 2.82 2.67
(1) Includes impact of non-accruing loans and loan fees. (2) Yields reflected have not been computed on a tax equivalent basis. Rate/Volume Analysis The following schedule presents the dollar amount of change in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between changes related to higher or lower outstanding balances and changes due to the levels and changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.
Year Ended June 30, -------------------------------------------------------------------------- 1998 vs. 1997 1997 vs. 1996 ---------------------------------- ----------------------------------- Increase Increase (Decrease) (Decrease) Due to Total Due to Total ----------------- Increase ------------------ Increase Volume Rate (Decrease) Volume Rate (Decrease) - ------------------------------------------------------------------------------------------------------------------- Interest-earning assets: Loans receivable (1) $1,738 $ 94 $1,832 $825 $ 85 $ 910 Securities 393 98 491 214 23 237 Mortgage-backed securities (45) 26 (19) (49) 69 20 Interest-bearings deposits in other financial institutions 79 (18) 61 (68) (39) (107) - ------------------------------------------------------------------------------------------------------------------- Total interest-earning assets $2,165 $200 $2,365 $922 $ 138 $1,060 =================================================================================================================== Interest-bearing liabilities: Money market accounts $18 $-- $18 $-- $ 1 $ 1 NOW accounts 53 (5) 48 6 -- 6 Passbook savings accounts 85 (40) 45 (31) (38) (69) Certificates of deposit 744 (6) 738 512 (44) 468 FHLB advances 483 13 496 131 (90) 41 - ------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities $1,383 $(38) $1,345 $618 $(171) $ 447 =================================================================================================================== Net interest income $1,020 $ 613 ===================================================================================================================
(1) Includes the impact of non-accruing loans and loan fees. 12 Asset Quality Total non-performing assets increased to $873,000 at June 30, 1998 compared to $281,000 at June 30, 1997. The ratio of non-performing assets to total assets at June 30, 1998 was .43% compared to .16% at June 30, 1997. Included in non-performing assets at June 30, 1998 were five one-to-four family mortgage loans totaling $521,000 and 21 consumer loans totaling $193,000. Repossessed assets totaled $160,000 at June 30, 1998. In addition to the non-performing assets listed above, as of June 30, 1998 and 1997, there was $1.7 million and $1.5 million, respectively, in net loans designated by the Bank as "of concern" due to management's doubts as to the ability of the borrowers to comply with loan repayment terms. Based on management's review as of June 30, 1998, $802,000 of loans were classified as special mention, $1.6 million as substandard, $30,000 as doubtful and $25,000 as loss. As of June 30, 1997, $802,000 were classified as special mention, $899,000 as substandard, $82,000 as doubtful and none as loss. The increases for non-performing and substandard loans were primarily due to four borrowers with first and second mortgages, which totaled $563,000, and were classified as substandard and non-performing. Foreclosure proceedings have begun against these borrowers. We believe the loan loss allowance will cover any potential loss on these loans and we do not anticipate any material losses. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of funds are deposits, borrowings, principal and interest payments on loans and mortgage-backed securities and sales and maturities of securities available for sale. While maturities of securities and scheduled amortization of loans and mortgage-backed securities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. The standard measure of liquidity for thrift institutions is the ratio of cash and eligible investments to a certain percentage of net withdrawable savings and borrowings due within one year. The minimum required ratio is currently set by OTS regulations at 4%, of which 1% must be comprised of short-term investments (i.e. generally with a term of less than one year). At June 30, 1998, the Bank's liquidity ratio was 12.05%, of which 6.83% was comprised of short-term investments. Year Ended June 30, 1998. During the year ended June 30, 1998 there was a net decrease of $12.7 million in cash and cash equivalents. Major sources of cash during the year were an increase in deposits of $9.1 million and proceeds from sales of loans held for sale provided $9.2 million. Management continued to sell fixed rate first mortgage loans with maturities of 15 to 30 years in the secondary market to manage interest rate risk. Major uses of cash during the year which offset the sources of cash included funding an increase of $26.0 million in the loan portfolio, net purchases of $10.0 million in securities available for sale and originations of $9.0 million of loans to be sold in the secondary market. Year Ended June 30, 1997. During the year ended June 30, 1997 there was a net increase of $14.3 million in cash and cash equivalents. Another major source of cash during the year was an increase in deposits of $23.6 million of which $17.1 million was the result of the acquisition of the NBD Bank branch in South Whitley, Indiana on June 13, 1997. In addition, proceeds from sales of loans held for sale provided $3.7 million. Management continued to sell fixed rate first mortgage loans with maturities of 15 to 30 years in the secondary market to manage interest rate risk. Major uses of cash during the year which offset the sources of cash included funding an increase of $13.6 million in the loan portfolio, purchase of $500,000 in FHLMC preferred stock and originations of $3.2 million of loans to be sold in the secondary market. Year Ended June 30, 1996. During the year ended June 30, 1996 there was a net decrease of $11.1 million in cash and cash equivalents. A major source of cash during the year was an increase in deposits of $6.6 million. In addition, proceeds from the sale of mortgage loans provided $6.8 million. Management continued to sell fixed rate first mortgage loans with maturities of 15 to 30 years in the secondary market to manage interest rate risk. Major uses of cash during the year which offset the sources of cash included funding an increase of $8.1 million in the loan portfolio, purchasing $5.0 million in a callable FHLB bond and $4.0 million in FHLMC preferred stock and originations of $6.9 million of loans to be sold in the secondary market. Borrowings may be used as a source of funds to offset reductions in other sources of funds such as deposits and to assist in asset/liability management. Management believes that a diversified blend of borrowings from the FHLB offers flexibility and is an important tool to be used in the balanced growth of the Company. As such, borrowings out- 13 standing at June 30, 1998 consist of advances from the FHLB totaling $51.5 million and due to brokers of $5.0 million. Also, the Company had commitments to fund loan originations, unused lines of credit and standby lines of credit with borrowers of $12.0 million at June 30, 1998. In the opinion of management, the Company has sufficient cash flow and borrowing capacity to meet current and anticipated funding commitments. Pursuant to federal law, thrift institutions must meet a 1.5% tangible capital requirement, a 4% core capital requirement and an 8% total risk-based capital to risk weighted assets requirement. At June 30, 1998, the Bank exceeded all fully phased in capital requirements. Tangible and core capital totaled $13.8 million, or 6.9% of adjusted total assets (as defined by regulation) and risk-based capital totaled $14.7 million, or 12.1% of risk-weighted assets (as defined by regulation). See Note 11 of the Notes to Consolidated Financial Statements for additional information regarding capital requirements applicable to the Bank. IMPACT OF INFLATION The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or magnitude as the prices of goods and services. YEAR 2000 CONSIDERATIONS The Board of Directors and management view the year 2000-date (Y2K) issue as a potentially serious interruption to the conduct of our day to day operations. To alleviate this potential interruption, the bank has formed a year 2000 committee that consists of the Senior Vice-President/Treasurer, Vice-President of Operations and our computer technician. This committee reports to the Board at least quarterly about the status and progress of our Y2K plan. Our Y2K action plan covers five areas; awareness of the problem, inventory & assessment of hardware and software for Y2K problems, renovation of necessary systems, validation of testing plans and implementation of system changes. At the time of this report we have completed the first two steps of the plan and are working on the next two steps. We anticipate that we will be through the testing phase by the end of 1998 and will have implementation completed by the middle of 1999. Our major Y2K system critical function lies with our third party data processing center, BISYS. BISYS is working closely with their clients and we believe that they will be Y2K compliant before the middle of the 1999 deadline. They have conducted most of their testing, and we will be testing their results on our system by the end of 1998. The training, hardware and software costs for Y2K have been preliminarily budgeted at $100,000. All of the costs for training and software are being expensed as incurred. Hardware cost will be capitalized and expensed under our fixed asset guidelines. While we believe this amount will be sufficient to complete the requirements of becoming Y2K compliant, it is an estimate. As such, we will review our budget monthly to help ensure that we have allocated sufficient resources to this project. Any deviations to the preliminary budget will be reported to the Board of Directors. The impact on the Company for Y2K risk are many and include, but are not limited to, the risk of insufficient liquidity, communication loss, power loss and the inability to process customer data. The potential impact to the profitability of the Company related to these risks and those not yet identified cannot be measured or known at this time. At the time of this report the Company had not finalized a contingency plan. However, the contingency plan when completed will address those risks that have been identified and how to minimize those risks. The contingency plan is scheduled to be completed before we hold our annual meeting. 14 Report of Independent Auditors Board of Directors and Shareholders FFW Corporation Wabash, Indiana We have audited the accompanying consolidated balance sheets of FFW Corporation as of June 30, 1998 and 1997 and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended June 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FFW Corporation as of June 30, 1998 and 1997 and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1998 in conformity with generally accepted accounting principles. /s/Crowe, Chizek and Company LLP -------------------------------- Crowe, Chizek and Company LLP South Bend, Indiana August 14, 1998 15
FFW Corporation Consolidated Balance Sheets June 30, 1998 and 1997 1998 1997 ------------ ------------ ASSETS Cash and due from financial institutions $ 4,023,917 $ 1,620,716 Interest-bearing deposits in other financial institutions - short-term 386,435 15,499,898 Total cash and cash equivalents 4,410,352 17,120,614 Securities available for sale 50,293,229 40,449,698 Loans receivable, net of allowance for loan losses of $982,532 in 1998 and $571,751 in 1997 139,393,692 114,158,745 Federal Home Loan Bank stock, at cost 2,757,200 2,397,600 Accrued interest receivable 1,428,927 1,123,623 Premises and equipment, net 2,205,458 1,926,910 Investment in limited partnership 704,990 749,952 Other assets 2,117,415 2,128,339 ------------ ------------ Total assets $203,311,263 $180,055,481 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Deposits Noninterest-bearing demand $ 6,935,426 $ 5,751,478 Savings, NOW and MMDA 51,485,630 50,529,826 Other time 66,835,247 59,837,170 ------------ ------------ Total deposits 125,256,303 116,118,474 Other borrowings 56,500,000 44,800,000 Obligation relative to limited partnership 300,000 712,500 Accrued interest payable 204,036 157,521 Accrued expenses and other liabilities 1,922,197 1,125,700 ------------ ------------ Total liabilities 184,182,536 162,914,195
Shareholders' equity Preferred stock, $.01 par value; 500,000 shares authorized; none issued and outstanding -- -- Common stock, $.01 par value; 2,000,000 shares authorized; shares issued: 1,775,096 - 1998 and 869,766 - 1997; shares outstanding: 1,458,032 - 1998 and 711,234 - 1997 17,751 8,698 Additional paid-in capital 8,793,133 8,439,565 Retained earnings substantially restricted 12,468,144 11,119,378 Net unrealized appreciation (depreciation) on securities available for sale, net of tax of $489,649 in 1998 and $405,385 in 1997 685,432 502,183 Unearned Employee Stock Ownership Plan shares (151,748) (244,553) Treasury stock at cost, 317,064 - 1998 and 158,532 - 1997, common shares (2,683,985) (2,683,985) ------------ ------------ Total shareholders' equity 19,128,727 17,141,286 ------------ ------------ Total liabilities and shareholders' equity $203,311,263 $180,055,481 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 16
FFW Corporation Consolidated Statements of Income Years ended June 30, 1998, 1997 and 1996 1998 1997 1996 ----------- ----------- ----------- Interest and dividend income Loans receivable, including fees $11,028,576 $ 9,197,093 $ 8,287,276 Taxable securities 2,978,403 2,465,026 2,118,899 Nontaxable securities 413,504 455,056 544,165 Other 168,410 106,640 213,832 ----------- ----------- ----------- Total interest and dividend income 14,588,893 12,223,815 11,164,172 Interest expense Deposits 5,626,941 4,777,282 4,371,748 Federal Home Loan Bank advances 2,964,036 2,468,441 2,427,205 ----------- ----------- ----------- Total interest expense 8,590,977 7,245,723 6,798,953 ----------- ----------- ----------- Net interest income 5,997,916 4,978,092 4,365,219 Provision for loan losses 705,000 120,000 95,153 ----------- ----------- ----------- Net interest income after provision for loan losses 5,292,916 4,858,092 4,270,066 Noninterest income Net realized gains on sales/calls of securities available for sale 266,215 2,024 59,779 Net realized gains on sales of loans held for sale 104,148 43,341 86,039 Net unrealized gains (losses) on loans held for sale -- 639 (639) Commission income 215,051 154,213 106,710 Service charges and fees 551,211 331,057 267,664 Other income 127,859 142,835 108,598 ----------- ----------- ----------- Total noninterest income 1,264,484 674,109 628,151 Noninterest expense Salaries and employee benefits 1,892,039 1,501,292 1,224,121 Occupancy and equipment expense 332,894 269,638 255,855 SAIF deposit insurance premium 113,521 726,684 238,033 Correspondent bank charges 211,420 147,581 140,533 Data processing expense 365,522 285,754 231,322 Printing, postage and supplies 192,935 163,820 140,971 Amortization of goodwill & core deposit premium 164,474 -- -- Other expense 527,184 488,005 355,210 ----------- ----------- ----------- Total noninterest expense 3,799,989 3,582,774 2,586,045 ----------- ----------- -----------
Income before income taxes 2,757,411 1,949,427 2,312,172 Income tax expense 857,743 605,767 725,991 ----------- ----------- ----------- Net income $ 1,899,668 $ 1,343,660 $ 1,586,181 =========== =========== =========== Earnings per common and common equivalent share Basic earnings per common share $ 1.36 $ 1.00 $ 1.11 Diluted earnings per common share $ 1.32 $ 0.97 $ 1.08
The accompanying notes are an integral part of these consolidated financial statements. 17
FFW Corporation Consolidated Statements of Changes in Stockholders' Equity Years ended June 30, 1998, 1997 and 1996 Net Unrealized Appreciation Unearned (Depreciation) Employee on Securities Stock Additional Available Ownership Common Paid-In Retained for Sale, Plan Stock Capital Earnings Net of Tax Shares - ------------------------------------------------------------------------------------------------------------------------------------ Balance at June 30, 1995 ................... $ 8,484 $ 8,007,476 $ 9,014,804 $ (61,618) $ (412,064) Cash dividends declared on common stock - $0.26 per share ................... -- -- (382,075) -- -- 17,117 shares committed to be released under the ESOP ............................ -- 73,100 -- -- 80,875 Amortization of MRP contribution ........... -- -- -- -- -- Purchase of 139,764 shares of treasury stock -- -- -- -- -- Issuance of 10,392 shares of common stock due to exercise of stock options .......... 52 51,908 -- -- -- Net change in unrealized appreciation (depreciation) on securities available for sale, net of tax of ($69,436) ............. -- -- -- (141,665) -- Net income for year ended June 30, 1996 .... -- -- 1,586,181 -- -- ------------ ------------ ------------ ------------ ------------ Balance at June 30, 1996 ................... 8,536 8,132,484 10,218,910 (203,283) (331,189) Cash dividends declared on common stock - $0.32 per share ................... -- -- (443,192) -- -- 17,117 shares committed to be released under the ESOP ............................ -- 145,503 -- -- 86,636 Amortization of MRP contribution ........... -- -- -- -- -- Purchase of 32,000 shares of treasury stock -- -- -- -- -- Issuance of 32,348 shares of common stock due to exercise of stock options .......... 162 161,578 -- -- -- Net change in unrealized appreciation (depreciation) on securities available for sale, net of tax of $474,821 .............. -- -- -- 705,466 -- Net income for year ended June 30, 1997 .... -- -- 1,343,660 -- -- ------------ ------------ ------------ ------------ ------------ Balance at June 30, 1997 ................... 8,698 8,439,565 11,119,378 502,183 (244,553) Cash dividends declared on common stock - $0.38 per share ................... -- -- (542,101) -- -- 17,117 shares committed to be released under the ESOP ............................ -- 176,000 -- -- 92,805 100% stock dividend ........................ 8,801 -- (8,801) -- -- Issuance of 35,564 shares of common stock due to exercise of stock options .......... 252 177,568 -- -- -- Net change in unrealized appreciation (depreciation) on securities available for sale, net of tax of $84,263 ............... -- -- -- 183,249 -- Net income for year ended June 30, 1998 .... -- -- 1,899,668 -- -- ------------ ------------ ------------ ------------ ------------ Balance at June 30, 1998 ................... $ 17,751 $ 8,793,133 $ 12,468,144 $ 685,432 $ (151,748) ============ ============ ============ ============ ============
Unearned Management Retention Total Plan Treasury Shareholders' Shares Stock Equity ------------ ------------ ------------ Balance at June 30, 1995 ................... $ (56,678) $ (1,008,836) $ 15,491,568 Cash dividends declared on common stock - $0.26 per share ................... -- -- (382,075) 17,117 shares committed to be released under the ESOP ............................ -- -- 153,975 Amortization of MRP contribution ........... 43,599 -- 43,599 Purchase of 139,764 shares of treasury stock -- (1,345,400) (1,345,400) Issuance of 10,392 shares of common stock due to exercise of stock options .......... -- -- 51,960 Net change in unrealized appreciation (depreciation) on securities available for sale, net of tax of ($69,436) ............. -- -- (141,665) Net income for year ended June 30, 1996 .... -- -- 1,586,181 ------------ ------------ ------------ Balance at June 30, 1996 ................... (13,079) (2,354,236) 15,458,143 Cash dividends declared on common stock - $0.32 per share ................... -- -- (443,192) 17,117 shares committed to be released under the ESOP ............................ -- -- 232,139 Amortization of MRP contribution ........... 13,079 -- 13,079 Purchase of 32,000 shares of treasury stock -- (329,749) (329,749) Issuance of 32,348 shares of common stock due to exercise of stock options .......... -- -- 161,740 Net change in unrealized appreciation (depreciation) on securities available for sale, net of tax of $474,821 .............. -- -- 705,466 Net income for year ended June 30, 1997 .... -- -- 1,343,660 ------------ ------------ ------------ Balance at June 30, 1997 ................... -- (2,683,985) 17,141,286 Cash dividends declared on common stock - $0.38 per share ................... -- -- (542,101) 17,117 shares committed to be released under the ESOP ............................ -- -- 268,805 100% stock dividend ........................ -- -- -- Issuance of 35,564 shares of common stock due to exercise of stock options .......... -- -- 177,820 Net change in unrealized appreciation (depreciation) on securities available for sale, net of tax of $84,263 ............... -- -- 183,249 Net income for year ended June 30, 1998 .... -- -- 1,899,668 ------------ ------------ ------------ Balance at June 30, 1998 ................... $ -- $ (2,683,985) $ 19,128,727 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 18
FFW Corporation Consolidated Statements of Cash Flows Years ended June 30, 1998, 1997 and 1996 1998 1997 1996 ----------- ----------- ----------- Cash flows from operating activities Net income $ 1,899,668 $ 1,343,660 $ 1,586,181 Adjustments to reconcile net income to net cash from operating activities Depreciation and amortization, net of accretion (80,662) 89,006 114,705 Provision for loan losses 705,000 120,000 95,153 Equity in loss of investment in limited partnership 44,962 48 -- Net (gains) losses on sales of: Securities available for sale (266,215) (2,024) (59,779) Loans held for sale (104,148) (43,341) (86,039) Foreclosed real estate owned and repossessed assets 13,901 (4,783) 48,514 Net unrealized (gains) losses on loans held for sale -- (639) 639 Originations of loans held for sale (9,045,410) (3,183,214) (6,913,224) Proceeds from sales of loans held for sale 9,149,558 3,650,555 6,789,253 ESOP expense 268,805 232,139 153,975 Amortization of MRP contribution -- 13,079 43,599 Net change in accrued interest receivable (305,304) (21,012) (129,935) Net change in other assets (127,251) (208,073) (7,367) Amortization of goodwill and core deposit intangibles 164,474 -- -- Net change in accrued interest payable, accrued expenses and other liabilities 758,749 147,137 147,485 ----------- ----------- ----------- Net cash from operating activities 3,076,127 2,132,538 1,783,160 Cash flows from investing activities Net change in interest-bearing deposits in other financial institutions - long-term -- 362,664 16,336 Proceeds from: Sales/calls of securities available for sale 19,407,977 377,024 1,595,398 Calls of securities held to maturity -- -- 500,000 Maturities of securities available for sale 600,000 1,060,000 3,252,000 Maturities of securities held to maturity -- -- 300,000 Purchase of: Securities available for sale (29,770,835) (690,200) (7,161,658) Securities held to maturity -- -- (5,000,000) Federal Home Loan Bank stock (359,600) -- (57,200) Principal collected on mortgage-backed securities 691,510 594,865 770,030 Net change in loans receivable (26,445,499) (13,732,583) (8,150,023) Purchases of premises and equipment, net (436,341) (234,855) (453,024) Investment in limited partnership (412,500) (37,500) -- Cash received for net liabilities assumed in acquisition of branch -- 15,300,519 -- Proceeds from sales of foreclosed real estate and repossessed assets 465,351 315,344 113,735 ----------- ----------- ----------- Net cash from investing activities (36,259,937) 3,315,278 (14,274,406)
The accompanying notes are an integral part of these consolidated financial statements. 19
FFW Corporation Consolidated Statements of Cash Flows (continued) Years ended June 30, 1998, 1997 and 1996 1998 1997 1996 ----------- ----------- ----------- Cash flows from financing activities Net change in deposits $ 9,137,829 $ 6,495,792 $ 6,560,253 Proceeds from other borrowings 52,975,956 37,500,000 27,300,000 Repayment of other borrowings (41,275,956) (34,500,000) (30,800,000) Proceeds from exercise of stock options 177,820 161,740 51,960 Purchase of treasury stock -- (329,749) (1,345,400) Cash dividends paid (542,101) (443,192) (382,075) ----------- ----------- ----------- Net cash from financing activities 20,473,548 8,884,591 1,384,738 ----------- ----------- ----------- Net change in cash and cash equivalents (12,710,262) 14,332,407 (11,106,508) Cash and cash equivalents at beginning of period 17,120,614 2,788,207 13,894,715 ----------- ----------- ----------- Cash and cash equivalents at end of period $ 4,410,352 $17,120,614 $ 2,788,207 =========== =========== =========== Supplemental disclosures of cash flow information Cash paid during the period for Interest $ 8,544,462 $ 7,238,694 $ 6,795,414 Income taxes $ 895,000 $ 526,000 $ 620,238 Supplemental schedule of non-cash investing activities Transfer from: Securities held to maturity to securities available for sale $ -- $ -- $15,194,732 Increases related to branch acquisition and purchase accounting adjustments: Loans, net $ -- $ 16,750 $ -- Premises and equipment, net -- 132,320 -- Core deposit intangibles -- 447,000 -- Goodwill -- 1,248,030 -- Other liabilities -- 12,048 -- Deposits -- 17,132,571 --
The accompanying notes are an integral part of these consolidated financial statements. 20 FFW Corporation Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The accompanying consolidated financial statements include FFW Corporation (the Company), and its wholly-owned subsidiaries, First Federal Savings Bank of Wabash (the Bank) and FirstFed Financial of Wabash, Incorporated. All significant inter-company transactions and balances have been eliminated in consolidation. Nature of Business and Concentrations of Credit Risk: The primary source of income for the Company is the origination of commercial and residential real estate loans in Wabash County and the surrounding areas. Loans secured by real estate mortgages comprise approximately 57% of the loan portfolio at June 30, 1998. Use of Estimates In Preparing Financial Statements: Preparing financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period, as well as the disclosures provided. Areas involving the use of estimates and assumptions include the allowance for loan losses, fair values of securities and other financial instruments, determination and carrying value of impaired loans and intangible assets, the carrying value of loans held for sale, the value of mortgage servicing rights, the accrued liability for deferred compensation, the fair value of stock options, the realization of deferred tax assets, and the determination of depreciation of premises and equipment. Actual results could differ from those estimates. Estimates associated with the allowance for loan losses, the classification and carrying value of loans held for sale, the fair value of stock options and the fair value of securities and other financial instruments are particularly susceptible to material change in the near term. Cash Flow Reporting: For reporting cash flows, cash and cash equivalents include cash on hand, due from financial institutions and interest-bearing deposits in other financial institutions - short-term. Net cash flows are reported for customer loan and deposit transactions and interest-bearing deposits in other financial institutions - long-term. Securities: Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported separately in shareholders' equity, net of tax. Securities are classified as trading when held for short term periods in anticipation of market gains, and are carried at fair value. Securities are written down to fair value when a decline in fair value is not temporary. Gains and losses on sales are determined using the amortized cost of the specific security sold. Interest income includes amortization of purchase premiums and discounts. Loans Held for Sale: Mortgage loans intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized in a valuation allowance by charges to income. Loans Receivable: Loans receivable are reported at the principal balance outstanding, net of deferred loan fees and costs, the allowance for loan losses, and charge-offs. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Interest income is not reported when full loan repayment is in doubt, typically when payments are past due over 90 days. Payments received on such loans are reported as principal reductions. Allowance for Loan Losses: Because some loans may not be repaid in full, an allowance for loan losses is recorded. The allowance for loan losses is increased by a provision for loan losses charged to expense and decreased by charge-offs (net of recoveries). Estimating the risk of loss and the amount of loss on any loan is necessarily subjective. Accordingly, the allowance is maintained by management at a level considered adequate to cover losses that are currently anticipated. Management's periodic evaluation of the adequacy of the allowance is based on past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, and current economic conditions. While management may periodically allocate portions of the allowance for specific problem loan situations, the whole allowance is available for any loan charge-offs that occur. 21 FFW Corporation Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Loans are considered impaired if full principal or interest payments are not anticipated in accordance with the contractual loan terms. Impaired loans are carried at the present value of expected future cash flows discounted at the loan's effective interest rate or at the fair value of the collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is less than the unpaid balance. If these allocations cause the allowance for loan losses to require increase, such increase is reported in the provision for loan losses. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. Smaller-balance homogeneous loans such as residential first mortgage loans, are evaluated for impairment in total. When analysis of borrower operating results and financial condition indicates that underlying cash flows of the borrower's business are not adequate to meet debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 30 days or more. Nonaccrual loans are often also considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible. Foreclosed Real Estate: Real estate properties acquired through, or in lieu of, loan foreclosure are initially recorded at fair value at acquisition, establishing a new cost basis. Any reduction to fair value from the carrying value of the related loan at the time of acquisition is accounted for as a loan loss and charged against the allowance for loan losses. Valuations are periodically performed by management and valuation allowances are adjusted through a charge to income for changes in fair value or estimated selling costs. There was one foreclosed property at June 30, 1998, and no foreclosed real estate held at June 30, 1997. Premises and Equipment: Asset cost is reported net of accumulated depreciation. Depreciation expense is calculated on the straight-line method over asset useful lives. These assets are reviewed for impairment under SFAS No. 121 when events indicate the carrying amount may not be recoverable. Intangible Assets: Intangible assets arising from the acquisition of the NBD Bank, N.A., South Whitley Branch (the Branch), on June 13, 1997, include goodwill and core deposit intangibles. Goodwill represents the excess of the purchase price over the net value of tangible assets acquired and related core deposit intangibles identified. Goodwill is being amortized on a straight-line basis for a period of 15 years. The core deposit intangibles are being amortized on an accelerated basis for a period of 10 years, which represents the estimated life of the deposits acquired. As of June 30, 1998, unamortized goodwill totaled $1,165,000 and unamortized core deposit intangibles totaled $366,000. Income Taxes: Income tax expense is the sum of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Servicing Rights: Prior to adopting Statement of Financial Accounting Standards (SFAS) No. 122 on July 1, 1996, servicing right assets were recorded only for purchased rights to service mortgage loans. Subsequent to adopting this standard, servicing rights represent both purchased rights and the allocated value of servicing rights retained on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, as to geographic and prepayment characteristics. Any impairment of a grouping is reported as a valuation allowance. The effect of adopting this standard was not material. Employee Stock Ownership Plan: The Company accounts for its employee stock ownership plan (ESOP) under AICPA Statement of Position (SOP) 93-6. The cost of shares issued to the ESOP, but not yet allocated to participants, are presented as a reduction of shareholders' equity. Compensation expense is based on the market price of the shares committed to be released for allocation to participant accounts. The difference between the market price and the cost of shares committed to be released is adjusted to additional paid-in capital. Dividends on allocated ESOP shares reduce retained earnings; dividends on unearned ESOP shares reduce debt and accrued interest. 22 FFW Corporation Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Stock Compensation: Expense for employee compensation under stock option plans is based on Accounting Principles Board (APB) Opinion 25, with expense reported only if options are granted below market price at grant date. If applicable, disclosures of net income and earnings per share are provided as if the fair value method of SFAS No. 123 were used for stock-based compensation. Financial Instruments with Off-Balance-Sheet Risk: The Company, in the normal course of business, makes commitments to make loans which are not reflected in the financial statements. A summary of these commitments is disclosed in Note 12. Earnings and Dividends Per Common Share: Basic and diluted earnings per common share are computed under a new accounting standard effective beginning with the quarter ended December 31, 1997. All prior earnings per common share amounts have been restated to be comparable. Basic earnings per common share is based on the net income divided by the weighted average number of common shares outstanding during the period. ESOP shares are considered outstanding for earnings per common share calculations as they are committed to be released; unearned shares are not considered outstanding. Recognition and retention plan ("RRP") shares are considered outstanding for earnings per common share calculations as they become vested. Diluted earnings per common share shows the dilutive effect of additional potential common shares issuable under stock options and nonvested shares issued under the RRP. Earnings and dividends per common share are restated for all stock splits and dividends. Stock Split: Common share amounts and market values and price per share disclosures related to stock repurchase programs, stock-based compensation plans and earnings and dividends per share disclosures have been restated for the two-for-one stock split effected in the form of a 100% stock dividend which was declared on November 25, 1997 and paid on December 31, 1998. Stock dividends in excess of 20% are reported by transferring the par value of the stock issued from retained earnings to common stock. Stock dividends for 20% or less are reported by transferring the market value, as of the ex-dividend date, of the stock issued from retained earnings to common stock and additional paid-in capital. Fractional share amounts are paid in cash with a reduction in retained earnings. Reclassifications: Certain amounts in the 1997 and 1996 financial statements were reclassified to conform with the 1998 presentation. NOTE 2 - EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE A reconciliation of the numerators and denominators used in the computation of the basic earnings per common share and diluted earnings per common share is presented below:
Year ended June 30, 1998 1997 1996 ----------- ----------- ----------- Basic Earnings Per Common Share Numerator Net income $ 1,899,668 $ 1,343,660 $ 1,586,181 =========== =========== =========== Denominator Weighted average common shares outstanding 1,449,938 1,411,099 1,532,856 Less: Average unallocated ESOP shares (51,352) (68,468) (85,584) Less: Average nonvested RRP shares -- -- (12,125) ----------- ----------- ----------- Weighted average common shares outstanding for basic earnings per common share 1,398,586 1,342,631 1,435,147 =========== =========== =========== Basic earnings per common share $ 1.36 $ 1.00 $ 1.11 =========== =========== ===========
23 FFW Corporation Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 NOTE 2 - EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE (continued)
Year ended June 30, 1998 1997 1996 ----------- ----------- ----------- Diluted Earnings Per Common Share Numerator Net income $ 1,899,668 $ 1,343,660 $ 1,586,181 =========== =========== =========== Denominator Weighted average common shares outstanding for basic earnings per common share 1,398,586 1,342,631 1,435,147 Add: Dilutive effects of average nonvested RRP shares -- -- 6,826 Add: Dilutive effects of assumed exercises of stock options 41,593 49,023 27,478 ----------- ----------- ----------- Weighted average common shares and dilutive potential common shares outstanding 1,440,179 1,391,654 1,469,451 =========== =========== =========== Diluted earnings per common share $ 1.32 $ .97 $ 1.08 =========== =========== ===========
Stock options for 8,000 shares of common stock, granted during the year ended June 30, 1997, were not considered in computing diluted earnings per common share for the year ended June 30, 1997 because they were antidilutive. NOTE 3 - SECURITIES At June 30, securities were as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ----------- -------- ----------- Available for sale 1998 U.S. government and agency $13,166,099 $ 19,527 $ -- $13,185,626 State and municipal 8,905,135 205,283 (8,462) 9,101,956 Other 237,716 4,663 -- 242,379 Mortgage backed 17,551,985 759,441 (16,133) 18,295,293 Equity 9,257,214 296,855 (86,094) 9,467,975 ----------- ----------- -------- ----------- $49,118,149 $ 1,285,769 $ (110,689) $50,293,229 =========== =========== ========== =========== Available for sale 1997 U.S. government and agency $ 6,000,000 $ -- $ (19,663) $ 5,980,337 State and municipal 7,244,059 198,770 (29,695) 7,413,134 ----------- ----------- -------- ----------- Other 239,749 6,364 -- 246,113 Mortgage backed 18,217,843 668,318 (23,995) 18,862,166 Equity 7,840,479 153,750 (46,281) 7,947,948 ----------- ----------- -------- ----------- $39,542,130 $ 1,027,202 $ (119,634) $40,449,698 =========== =========== ========== ===========
Contractual maturities of debt securities at June 30, 1998 were as follows. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations. Securities not due at a single maturity date are shown separately. 24 FFW Corporation Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 NOTE 3 - SECURITIES (continued)
Amortized Fair Cost Value ----------- ----------- Due in one year or less $ 8,071,201 $ 8,072,854 Due from one to five years 6,256,049 6,422,004 Due from five to ten years 7,861,700 7,906,665 Due after ten years 120,000 128,438 Mortgage backed 17,551,985 18,295,293 Equities 9,257,214 9,467,975 ----------- ----------- $49,118,149 $50,293,229 =========== ===========
Sales/calls of securities available for sale for the years ended June 30 were: 1998 1997 1996 ----------- ---------- ----------- Sales $ 9,356,977 $ 377,024 $ 1,595,398 Calls 10,051,000 -- -- Gross gains 266,215 2,024 59,369 Calls of securities held to maturity for the years ended June 30 were: Proceeds $-- $ -- $ 500,000 Gross gains -- -- 410 The June 30, 1995 balance of mortgage-backed securities was reduced by $318,900 to reflect an other than temporary decline in the fair value of a security. Collateral for this security was multi-family mortgage obligations primarily located in Southern California. The decline in the fair value of the security was due to increased delinquency in the underlying loans and a decline in the cash reserve fund and losses incurred on foreclosed real estate. On April 29, 1998 this security was sold and a gain on sale of $264,028 was recognized from the previously written down balance. NOTE 4 - LOANS RECEIVABLE, NET Loans receivable as of June 30 were as follows: 1998 1997 ----------- ----------- Mortgage loans (principally conventional) Principal Secured by one-to-four family residences $70,243,040 $64,921,190 Secured by other properties 7,272,108 6,425,510 Construction 3,990,770 2,974,100 ----------- ----------- 81,505,918 74,320,800 Undisbursed portion of construction loans (1,715,762) (1,134,371) Net deferred loan origination fees (47,280) (63,059) ----------- ----------- Total mortgage loans 79,742,876 73,123,370 25 FFW Corporation Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 NOTE 4 - LOANS RECEIVABLE, NET (continued) 1998 1997 ------------ ------------ Consumer and other loans Principal Automobile $ 33,813,611 $ 22,625,031 Manufactured home 301,445 350,293 Home equity and improvement 9,104,988 6,969,879 Commercial 12,945,444 6,812,814 Other 3,822,697 4,422,631 ------------ ------------ 59,988,185 41,180,648 Net deferred loan origination costs 645,163 426,478 ------------ ------------ Total consumer and other loans 60,633,348 41,607,126 Less allowance for loan losses (982,532) (571,751) ------------ ------------ $139,393,692 $114,158,745 ============ ============ Activity in the allowance for loan losses for the years ended June 30 is as follows: 1998 1997 1996 -------- -------- -------- Beginning balance $571,751 $553,440 $483,780 Provision for loan losses 705,000 120,000 95,153 Charge-offs (331,702) (184,797) (79,520) Recoveries 37,483 83,108 54,027 -------- -------- -------- Ending balance $982,532 $571,751 $553,440 ======== ======== ======== At June 30, 1998 and 1997, no portion of the allowance for loan losses was allocated to impaired loan balances as there were no loans considered to be impaired as of or for the years ended June 30, 1998 or 1997. NOTE 5 - LOAN SERVICING Mortgage loans serviced for others are not reported as assets in the balance sheets. These loans totaled $25,861,772 and $21,397,561 at June 30, 1998 and 1997. Related escrow deposit balances were $56,700 and $34,000 at June 30, 1998 and 1997. NOTE 6 - PREMISES AND EQUIPMENT, NET Premises and equipment at June 30 were as follows: 1998 1997 ----------- ----------- Land $ 350,121 $ 267,999 Buildings 2,063,539 1,914,153 Furniture, fixtures and equipment 815,480 639,072 ----------- ----------- Total cost 3,229,140 2,821,224 Less accumulated depreciation (1,023,682) (894,314) ----------- ----------- $ 2,205,458 $ 1,926,910 =========== =========== 26 FFW Corporation Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 NOTE 7 - DEPOSITS Deposit accounts individually exceeding $100,000 totaled $27,940,314 and $20,253,000 at June 30, 1998 and 1997. At June 30, 1998, stated maturities of certificates of deposit were: 1999 $43,399,983 2000 15,492,801 2001 3,954,973 2002 1,710,414 2003 and thereafter 2,277,076 ----------- $66,835,247 =========== NOTE 8 - OTHER BORROWINGS Federal Home Loan Bank (FHLB) advances total $51,500,000 at June 30, 1998. The majority of the advances have fixed interest rates ranging from 5.32% to 7.94% and the scheduled maturities during the years ended June 30 were as follows: 1999 $28,000,000 2000 5,000,000 2001 4,000,000 2002 500,000 Thereafter 14,000,000 ----------- $51,500,000 =========== The Bank also maintains a $1,000,000 overdraft line of credit agreement with the FHLB which terminates on May 20, 1999. As of June 30, 1998 and 1997 no amounts were outstanding under this agreement. FHLB advances and the overdraft line of credit agreement are secured by all stock in the FHLB, qualifying first mortgage loans, government, agency and mortgage-backed securities. At June 30, 1998, collateral of approximately $92.0 million is pledged to the FHLB to secure advances outstanding. At June 30, 1998, the Bank had a due to broker for $5.0 million for a security purchase which settled on July 1, 1998. NOTE 9 - EMPLOYEE BENEFITS Employee Pension Plan: The pension plan is part of a noncontributory multi-employer defined-benefit pension plan covering substantially all employees. The plan is administered by the Financial Institutions Retirement Fund. Because the plan is a multi-employer plan, there is no separate actuarial valuation of plan benefits nor segregation of plan assets specifically for the Company. As of July 1, 1997, the latest actuarial valuation, total plan assets exceeded the actuarially determined value of total vested benefits. The plan has reached its full funding limitation for Internal Revenue Code purposes and a full contribution is not required. As a result, other than administrative expenses, there was no pension expense for the years ended June 30, 1998, 1997 and 1996. 401(k) Plan: A retirement savings 401(k) plan covers all full time employees who are 21 or older and have completed one year of service. Participants may defer up to 15% of compensation. The Company matches 50% of elective deferrals on the first 6% of the participants' compensation. Expenses under this plan were $28,000, $21,000 and $20,000 for the years ended June 30, 1998, 1997 and 1996. Management Recognition and Retention Plans: The Management Recognition and Retention Plans (MRP) provide directors, officers and other key employees of the Company with a proprietary interest in the Company to encourage such persons to remain with the Company. Eligible directors, officers and other key employees of the Company become vested in shares of common stock awarded at a rate of 25% per year commencing April 1, 1993. In 1993 the Bank contributed funds to the MRP to enable the Plans to acquire 64,670 shares of common stock at an average price of $6.47 per share. The plan fully vested in April of 1997. Expense of $0, $13,000, and $44,000 was recorded for these Plans for the years ended June 30, 1998, 1997 and 1996. 27 FFW Corporation Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 NOTE 9 - EMPLOYEE BENEFITS (continued) Employee Stock Ownership Plan (ESOP): In conjunction with the stock conversion, the Company established an ESOP. Employees with 1,000 hours of employment with the Bank and who have attained age 21 are eligible to participate. The ESOP borrowed $591,500 from the Company to purchase 118,300 shares of the common stock issued in the conversion at $5 per share. Collateral for the 7% loan is the unearned shares of common stock purchased by the ESOP with the loan proceeds. The loan will be repaid principally from the Bank's discretionary contributions to the ESOP over seven years. Shares purchased by the ESOP are held in suspense until allocated among participants as the loan is repaid. ESOP expense of $269,000, $232,000 and $154,000 was recorded for the years ended June 30, 1998, 1997 and 1996. Contributions to the ESOP were $93,000, $87,000 and $54,000 during the years ended June 30, 1998, 1997 and 1996. Contributions to the ESOP and shares released from suspense proportional to the repayment of the ESOP loan are allocated among ESOP participants on the basis of compensation in the year of allocation. Benefits are 100% vested after five years of credited service including credit for years of service prior to July 1, 1992. Prior to the five years of credited service, a participant who terminates employment for reasons other than death, normal retirement, or disability does not receive any ESOP benefit. Forfeitures are reallocated among remaining participating employees, in the same proportion as contributions. Benefits are payable in stock or cash upon termination of employment. The Company's contributions to the ESOP are not fixed, so benefits payable under the ESOP cannot be estimated. ESOP participants receive distributions from their ESOP accounts only upon termination of service. For the years ended June 30, 1998, 1997 and 1996, 17,117 shares with an average fair value of $17.31, $13.57 and $9.00 per share, were committed to be released. The ESOP shares as of June 30 were:
1998 1997 1996 -------- -------- -------- Allocated (including shares committed to be released) 92,623 75,506 58,390 Unearned 25,677 42,794 59,910 Shares withdrawn from the plan by participants (7,110) -- -- -------- -------- -------- Total ESOP shares held in the plan 111,190 118,300 118,300 ======== ======== ======== Fair value of unearned shares at June 30 $443,442 $577,719 $576,634 ======== ======== ========
Stock Option Plan: The 1992 Stock Option and Incentive Plan (the "Plan") was adopted in conjunction with the stock conversion. The options authorized under the Plan are 10% or 169,000 shares of common stock from the initial public offering. Officers, directors and employees of the Company and its subsidiaries are eligible to participate. The option exercise price is at least 100% of the market value (as defined in the Plan) of the common stock on the date of the grant, and the option term cannot exceed 10 years. Options awarded may be exercised at a rate of 25% per year. No compensation expense was recognized for stock options for the years ended June 30, 1998, 1997 and 1996. SFAS No. 123, which became effective for the year ended June 30, 1997, requires pro forma disclosures for companies that do not adopt its fair value accounting method for stock-based employee compensation. The effects on the Company's net income and earnings per share under the provisions of SFAS No. 123 were not material for the years ended June 30, 1998, 1997 and 1996. In future years, the pro forma effect of not applying this standard is expected to increase as additional options are granted. Information about option grants follows. 28 FFW Corporation Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 NOTE 9 - EMPLOYEE BENEFITS (continued)
Available Options For Grant Outstanding Exercise Price --------- ----------- -------------- Outstanding, June 30, 1995 32,116 130,092 $5.00 Exercised -- (10,392) 5.00 ------ ------- Outstanding, June 30, 1996 32,116 119,700 5.00 Granted (8,000) 8,000 10.94 Granted (8,000) 8,000 13.38 Exercised -- (32,348) 5.00 ------ ------- Outstanding, June 30, 1997 16,116 103,352 5.00-13.38 Exercised -- (35,564) 5.00 ------ ------- Outstanding, June 30, 1998 16,116 67,788 5.00-13.38 ====== =======
Options exercisable at June 30, 1998 were as follows. Number of Options Exercise Price ------- -------------- 59,788 $5.00-13.38 Deferred Compensation: The Company has a deferred compensation plan for certain directors of the Company and a salary continuation plan for a certain executive of the Bank. Under these plans, the Company/Bank is obligated to pay each such individual or beneficiaries the amount of accumulated contributions plus interest credited thereon over a period of three to fifteen years for the deferred compensation plan and a lump sum payment for the salary continuation plan beginning with the individual's termination of service. A deferred compensation liability of $211,000 and $176,000 at June 30, 1998 and 1997 has been accrued for the obligations under these plans. To fund the benefits that will be payable under these plans, life insurance on the participants was purchased. The cash surrender value of such insurance was $248,000 and $246,000 at June 30, 1998 and 1997 and is included in other assets in the consolidated balance sheets. The expense incurred for these plans was $36,000, $36,000, and $31,000 for the years ending June 30, 1998, 1997 and 1996. NOTE 10 - INCOME TAXES The Company and the Bank file consolidated income tax returns on a fiscal year basis. Prior to fiscal year 1997, if certain conditions were met in determining taxable income as reported on the consolidated federal income tax return, the Bank was allowed a special bad debt deduction based on a percentage of taxable income (8% for fiscal 1996) or on specified experience formulas. The Bank used the percentage-of-taxable-income method for the tax years ended June 30, 1996. Tax legislation passed in August 1996 now requires the Bank to deduct a provision for bad debts for tax purposes based on actual loss experience and recapture the excess bad debt reserve accumulated in tax years beginning after June 30, 1987. The related amount of deferred tax liability which must be recaptured is approximately $135,000 and is payable over a six year period beginning no later than the tax year ending June 30, 1999. Income tax expense for the years ended June 30 was:
1998 1997 1996 -------- -------- -------- Federal Current $626,763 $438,181 $466,577 Deferred 11,209 2,124 65,482 -------- -------- -------- 637,972 440,305 532,059 State Current 216,357 129,438 189,930 Deferred 3,414 36,024 4,002 -------- -------- -------- 219,771 165,462 193,932 -------- -------- -------- Income tax expense $857,743 $605,767 $725,991 -------- -------- --------
29 FFW Corporation Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 NOTE 10 - INCOME TAXES (continued) Income tax expense differed from amounts computed using the U.S. federal income tax rate of 34% on income before income taxes for the years ended June 30 as follows:
1998 1997 1996 -------- -------- -------- Income taxes at 34% statutory rate $937,519 $662,805 $786,138 Tax effect of: Tax-exempt income (126,981) (147,117) (170,230) State tax, net of federal income tax effect 156,126 109,205 127,995 Dividends received deduction (69,246) (61,794) (17,297) Fair market value of ESOPshares in excess of cost 59,840 49,471 23,834 Other (99,515) (6,803) (24,449) -------- -------- -------- Total income tax expense $857,743 $605,767 $725,991 ======== ======== ========
Components of the net deferred tax liability as of June 30 are:
1998 1997 --------- --------- Deferred tax assets: Bad debts $ 254,122 $ 91,412 Deferred compensation 83,523 69,781 Core deposit intangible 20,388 -- Securities writedown -- 126,316 Other 11,023 1,976 --------- --------- 369,056 289,485 Deferred tax liabilities: Accretion (50,164) (48,190) Net deferred loan costs (236,821) (143,950) Net unrealized appreciation on securities available for sale (465,448) (385,716) Other (6,739) (7,390) --------- --------- (759,172) (585,246) Valuation allowance (24,199) (19,669) --------- --------- Net deferred tax asset (liability) $(414,315) $(315,430) ========= =========
A valuation allowance is established for the tax effect of unrealized depreciation on marketable equity securities available for sale. It increased $4,530 in 1998 and decreased $26,801 in 1997. Federal income tax laws provide savings banks with additional bad debt deductions through 1987, totaling $1,156,000 for the Bank. Accounting standards do not require a deferred tax liability to be recorded on this amount, which liability otherwise would total $393,000 at June 30, 1998 and 1997. If the Bank was liquidated or otherwise ceased to be a bank or if tax laws were to change, the $393,000 would be recorded as expense. NOTE 11 - REGULATORY MATTERS The Bank is subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain offbalance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. 30 FFW Corporation Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 NOTE 11 - REGULATORY MATTERS (continued) The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If only adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. The Bank's actual capital and required capital amounts and ratios are presented below:
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) As of June 30, 1998 Total Capital (to risk weighted assets) $14,743 12.08% $9,764 8.00% $12,205 10.00% Tier I (Core) Capital (to risk weighted assets) 13,786 11.30% 4,882 4.00% 7,323 6.00% Tier I (Core) Capital (to adjusted total assets) 13,786 6.94% 5,958 3.00% N/A N/A Tangible Capital (to adjusted total assets) 13,786 6.94% 2,979 1.50% N/A N/A Tier I (Core) Capital (to average assets) 13,786 7.28% 7,573 4.00% 9,466 5.00% As of June 30, 1997 Total Capital (to risk weighted assets) $12,124 12.71% $7,628 8.00% $ 9,535 10.00% Tier I (Core) Capital (to risk weighted assets) 11,552 12.11% 3,814 4.00% 5,721 6.00% Tier I (Core) Capital (to adjusted total assets) 11,552 6.62% 5,236 3.00% N/A N/A Tangible Capital (to adjusted total assets) 11,552 6.62% 2,618 1.50% N/A N/A Tier I (Core) Capital (to average assets) 11,552 7.31% 6,323 4.00% 7,904 5.00%
Regulations of the Office of Thrift Supervision limit the dividends that may be paid without prior approval of the Office of Thrift Supervision. The Bank is currently a "well-capitalized" Tier 1 institution and can make distributions during a year of 100% of its net income to date during the year plus one-half its "surplus capital ratio" (the excess over its capital requirements) at the beginning of the calendar year. Accordingly, at June 30, 1998 approximately $3.2 million of the Bank's retained earnings is available for distribution to the Company. 31 FFW Corporation Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 NOTE 12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONTINGENCIES Various outstanding commitments and contingent liabilities are not reflected in the financial statements. Commitments to make loans at June 30 were as follows:
1 9 9 8 1 9 9 7 ------------------------------ --------------------------- Fixed Variable Fixed Variable Rate Rate Rate Rate ---------- ----------- -------- ---------- Commitments to make loans $1,278,000 $ 628,000 $905,000 $1,598,000 Unused lines of credit -- 8,844,000 -- 5,370,000 Standby letters of credit -- 1,232,000 -- 1,229,000 ---------- ----------- -------- ---------- $1,278,000 $10,704,000 $905,000 $8,197,000 ========== =========== ======== ==========
Fixed rate loan commitments at June 30, 1998 were at current rates, ranging primarily from 7.50% to 12.50%. Variable rate loan commitments, unused lines of credit and standby letters of credit at June 30, 1998 were at current rates ranging from 7.00% to 11.50% for loan commitments, 8.50% to 11.50% for unused lines of credit and primarily at the national prime rate of interest plus 100 to 300 basis points for standby letters of credit. Since commitments to make loans and to fund unused lines of credit, loans in process and standby letters of credit may expire without being used, the amounts do not necessarily represent future cash commitments. In addition, commitments are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The maximum exposure to credit loss in the event of nonperformance by the other party is the contractual amount of these instruments. The same credit policy is used to make such commitments as is used for loans receivable. Under employment agreements with three of its officers, certain events leading to separation from the Company could result in cash payments totaling $687,000. The Company and the Bank are subject to certain claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated financial position or results of operation of the Company. The Bank has a 3% limited partner interest in House Investments-Midwest Corporate Tax Credit Fund II, L.P. which was formed for the construction, ownership and management of affordable housing projects located throughout the midwest. The Bank is one of 13 investors and has subscribed for two of the 65.27 shares. Each subscription represents a commitment to invest $375,000. As part of the partnership agreement, the Bank signed a demand note for $750,000 for a term not longer than ten years. As of June 30, 1998, the Bank had invested $450,000 as a payment on the demand note and had recorded equity in the operating loss of the limited partnership of $45,000 and $48 for the years ended June 30, 1998 and 1997. At June 30, 1998 and 1997, the obligation due to the limited partnership was $300,000 and $712,500 which represents the amount of principal payment remaining on the demand note. Terms of the partnership agreement allocate 3% of the eligible tax credits to the Bank as a limited partner. For the years ended June 30, 1998 and 1997, the Bank received approximately $15,000 and $18 in tax credits from the limited partnership. NOTE 13 - SIGNIFICANT CONCENTRATIONS OF CREDIT RISK Real estate and consumer loans, including automobile, home equity and improvement, manufactured home and other consumer loans are granted primarily in Wabash and Kosciusko counties. Loans secured by one to four family residential real estate mortgages make up 50% of the loan portfolio. The Company is also involved in selling loans and servicing these loans for secondary market agencies. The policy for collateral on mortgage loans allows borrowings up to 95% of the appraised value of the property as established by appraisers approved by the Company's Board of Directors, if private mortgage insurance is obtained to reduce the Company's exposure to or below the 80% loan-to-value level. Loan-to-value percentages and documentation guidelines are designed to protect the Company's interest in the collateral as well as to comply with guidelines for sale in the secondary market. 32 FFW Corporation Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 NOTE 14 - RELATED PARTY TRANSACTIONS Certain directors, executive officers and principal shareholders of the Company, including associates of such persons, are loan customers. A summary of the related party loan activity, for loans aggregating $60,000 or more to any one related party, is as follows: Balance June 30, 1997 $ 726,674 New loans 479,347 Repayments (127,554) Other changes 190,478 ---------- Balance - June 30, 1998 $1,268,945 ========== Other changes include adjustments for loans applicable to one reporting period that are excludable from the other reporting period. NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS Presented below are condensed financial statements for the parent company, FFW Corporation.
CONDENSED BALANCE SHEETS June 30, 1998 and 1997 1998 1997 ----------- ----------- Cash and cash equivalents $ 414,301 $ 502,580 Investment in Bank subsidiary 16,014,935 13,794,878 Investment in non-bank subsidiary 224,206 168,171 Securities available for sale 2,284,236 2,402,056 Loan receivable from ESOP 151,748 244,553 Other assets 52,248 33,141 ----------- ----------- Total assets $19,141,674 $17,145,379 =========== ===========
LIABILITIES Accrued expenses and other liabilities $ 12,947 $ 4,093 SHAREHOLDERS' EQUITY Common stock 17,751 8,698 Additional paid-in capital 8,793,133 8,439,565 Retained earnings - substantially restricted 12,468,144 11,119,378 Net unrealized appreciation (depreciation) on securities available for sale, net of tax of $489,649 in 1998 and $405,385 in 1997 685,432 502,183 Unearned Employees Stock Ownership Plan shares (151,748) (244,553) Treasury stock, at cost (2,683,985) (2,683,985) ----------- ----------- Total shareholders' equity 19,128,727 17,141,286 ----------- ----------- Total liabilities and shareholders' equity $19,141,674 $17,145,379 =========== ===========
33 FFW Corporation Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS (continued)
CONDENSED STATEMENTS OF INCOME For the years ended June 30, 1998, 1997 and 1996 1998 1997 1996 ----------- ----------- ----------- Interest income $ 117,349 $ 152,696 $ 223,511 Net realized gains on sales of securities available for sale -- 1,924 59,279 Other income -- -- 1,175 ----------- ----------- ----------- 117,349 154,620 283,965 Operating expense 136,776 154,287 121,779 ----------- ----------- ----------- Income before income taxes and equity in undistributed income of subsidiaries (19,427) 333 162,186 Equity in undistributed income of subsidiaries Bank 1,817,183 1,271,803 1,406,430 Non-bank 56,035 32,541 9,732 ----------- ----------- ----------- Income before income taxes 1,853,791 1,304,677 1,578,348 Income tax expense (benefit) (45,877) (38,983) (7,833) ----------- ----------- ----------- Net income $ 1,899,668 $ 1,343,660 $ 1,586,181 =========== =========== ===========
34 FFW Corporation Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS (continued)
CONDENSED STATEMENTS OF CASH FLOWS For the years ended June 30, 1998, 1997 and 1996 1998 1997 1996 ----------- ----------- ----------- Cash flows from operating activities Net income $ 1,899,668 $ 1,343,660 $ 1,586,181 Adjustments to reconcile net income to net cash from operating activities Equity in undistributed income of subsidiaries Bank (1,817,183) (1,271,803) (1,406,430) Non-bank (56,035) (32,541) (9,732) Other (30,964) 30,486 (37,098) ----------- ----------- ----------- Net cash from operating activities (4,514) 69,802 132,921 Cash flows from investing activities Net change in interest-bearing deposits in other financial institutions - long-term -- 173,664 (173,664) Proceeds from sales of securities available for sale -- 175,000 1,595,398 Maturities of securities available for sale 455,000 635,000 -- Maturities of securities held to maturity -- -- 70,000 Purchase of securities available for sale (267,289) (45,842) (78,511) Repayments on loan receivable from ESOP 92,805 86,636 80,875 ----------- ----------- ----------- Net cash from investing activities 280,516 1,024,458 1,494,098 Cash flows from financing activities Proceeds from exercise of stock options 177,820 161,740 51,960 Purchase of treasury stock -- (329,749) (1,345,400) Cash dividends paid (542,101) (443,192) (382,075) ----------- ----------- ----------- Net cash from financing activities (364,281) (611,201) (1,675,515) ----------- ----------- ----------- Net change in cash and cash equivalents (88,279) 483,059 (48,496) Cash and cash equivalents at beginning of period 502,580 19,521 68,017 ----------- ----------- ----------- Cash and cash equivalents at end of period $ 414,301 $ 502,580 $ 19,521 =========== =========== ===========
The extent to which the Company may pay cash dividends to shareholders will depend on the cash currently available at the Company, as well as the Bank's ability to pay dividends to the Company (see Note 11). 35 FFW Corporation Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS The following table shows estimated fair values and related carrying amounts of the Company's financial instruments at June 30. Items which are not financial instruments are not included.
1 9 9 8 1 9 9 7 ------------------------- -------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value (In thousands) (In thousands) Cash and cash equivalents $ 4,410 $ 4,410 $ 17,121 $ 17,121 Securities available for sale 50,293 50,293 40,450 40,450 Loans receivable, net 139,394 138,749 114,159 114,432 Federal Home Loan Bank stock 2,757 2,757 2,398 2,398 Accrued interest receivable 1,429 1,429 1,124 1,124 Investment in limited partnership 705 705 750 750 Noninterest-bearing demand deposits (6,935) (6,935) (5,751) (5,751) Savings, NOW and MMDA deposits (51,486) (51,486) (50,530) (50,530) Other time deposits (66,835) (67,039) (59,837) (60,140) Other borrowings (56,500) (56,240) (44,800) (44,841) Obligation relative to limited partnership (300) (300) (713) (713) Accrued interest payable (204) (204) (158) (158)
For purposes of the above disclosures of estimated fair value, the following assumptions were used as of June 30, 1998 and 1997. The estimated fair value for cash and cash equivalents, Federal Home Loan Bank stock, accrued interest receivable, investment in limited partnership, noninterest-bearing demand deposits, savings, NOW and MMDA deposits, obligation relative to limited partnership and accrued interest payable is considered to approximate cost. The estimated fair value for securities available for sale is based on quoted market values for the individual securities or for equivalent securities. The estimated fair value for loans receivable, net, is based on estimates of the rate the Bank would charge for similar loans at June 30, 1998 and 1997 applied for the time period until the loans are assumed to reprice or be paid. The estimated fair value for other time deposits as well as Federal Home Loan Bank advances is based on estimates of the rate the Bank would pay on such liabilities at June 30, 1998 and 1997, applied for the time period until maturity. While these estimates of fair value are based on management's judgment of the most appropriate factors, there is no assurance that was the Company to have disposed of such items at June 30,1998 and 1997, the estimated fair values would necessarily have been achieved at that date, since market values may differ depending on various circumstances. The estimated fair values at June 30, 1998 and 1997 should not necessarily be considered to apply to subsequent dates. In addition, other assets and liabilities of the Company that are not defined as financial instruments are not included in the above disclosures, such as premises and equipment. Also, non-financial instruments typically not recognized in financial statements nevertheless may have value but are not included in the above disclosures. These include, among other items, the estimated earnings power of core deposit accounts, the trained work force, customer goodwill and similar items. 36 FFW Corporation Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 NOTE 17 - SAIF DEPOSIT INSURANCE PREMIUM The deposits of savings associations such as the Bank are insured by the Savings Association Insurance Fund ("SAIF"). A recapitalization plan signed into law on September 30, 1996 provided for a one-time assessment of 65.7 basis points applied to all SAIF deposits as of March 31, 1995. Based on the Bank's deposits as of this date, a one-time assessment of approximately $556,000 was paid and recorded as federal deposit insurance premium expense for the year ended June 30, 1997. NOTE 18 - IMPACT OF NEW ACCOUNTING STANDARDS SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, was issued in 1996. It revised the accounting for transfers of financial assets, such as loans and securities, and for distinguishing between sales and secured borrowings. It became effective for some transactions in 1997 and others beginning in 1998. The effect on the consolidated financial statements was not material. A new accounting standard, SFAS No. 130, Reporting Comprehensive Income, will require future reporting of comprehensive income beginning with the quarter ended September 30, 1998. Comprehensive income is net income plus changes in the net unrealized gain (loss) on securities available for sale, net of tax. A new accounting standard, SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, will require future reporting of additional information related to material business segments beginning with the year ended June 30, 1999. A new accounting standard, SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, will require all derivatives to be recognized at fair value as either assets or liabilities in the Consolidated Balance Sheets beginning with the quarter ended September 30, 1999. Changes in the fair value of derivatives not designated as hedging instruments are to be recognized currently in earnings. Gains or losses on derivatives designated as hedging instruments are either to be recognized currently in earnings or are to be recognized as a component of other comprehensive income, depending on the intended use of the derivatives and the resulting designations. The Corporation does not believe adoption of this new standard will have a material impact on its consolidated financial position or results of operations. 37 Directors and Officers FFW CORPORATION Officers Wayne W. Rees Chairman of the Board and Secretary Nicholas M. George President and Chief Executive Officer Board of Directors Wayne W. Rees Owner and Publisher The Paper of Wabash County, Inc. Nicholas M. George President and Chief Executive Officer FFW Corporation President and Chief Executive Officer First Federal Savings Bank of Wabash President FirstFed Financial of Wabash, Inc. Maynard E. Vollmer Retired J. Stanley Myers Owner and Operator Servisoft Water Conditioning, Inc. Thomas L. Frank Comptroller, B. Walter & Company Joseph W. McSpadden Vice President and Part Owner Beauchamp & McSpadden Ronald D. Reynolds Owner, J. M. Reynolds Oil Co, Inc. FIRST FEDERAL SAVINGS BANK OF WABASH Officers Wayne W. Rees Chairman of the Board Nicholas M. George President and Chief Executive Officer Joyce K. Sanders Vice President and Senior Lending Officer Timothy T. Taylor Vice President Richard B. Conroy Vice President Marvin A. Goble Vice President Gregory A. Metz Vice President Christine K. Noonan Vice President Data Processing and Secretary Rebekah Steele Assistant Secretary Board of Directors Wayne W. Rees Nicholas M. George Maynard E. Vollmer J. Stanley Myers Thomas L. Frank Joseph W. McSpadden Ronald D. Reynolds 38 Shareholder Information Stock Listing Information First Federal Savings Bank of Wabash converted from a mutual to a stock savings bank effective April 1, 1993, and formed FFW Corporation to act as its holding company. FFW Corporation's common stock is traded on the National Association of Securities Dealers Automated Quotation (NASDAQ) Small-Cap Market under the symbol "FFWC". Stock Price Information As of September 7, 1998 there were approximately 349 shareholders of record, not including those shares held in nominee or street name through various brokerage firms or banks. The following table sets forth the high and low bid prices and dividends paid per share of common stock over the last two year period. The stock price information was provided by the NASD, Inc. All information has been adjusted for a 2 for 1 stock split on December 31, 1997. Quarter Dividend Ended High Low Declared - ------------------------------------------------------- Sept. 30, 1996 $10.00 $ 9.63 $.08 Dec. 31, 1996 11.00 10.00 .08 March 31, 1997 13.38 10.75 .08 June 30, 1997 13.50 12.75 .09 Sept. 30, 1997 15.88 13.00 .09 Dec. 31, 1997 20.88 15.13 .09 March 31, 1998 22.00 17.50 .09 June 30, 1998 20.00 17.00 .11 [GRAPHIC-GRAPH DEPICTING ENDING STOCK PRICE JUNE 30,] Dividends FFW declared and paid dividends of $0.38 per share for fiscal year 1997. The Board of Directors intends to continue the payment of quarterly cash dividends, dependent on the results of operations and financial condition of FFW, tax considerations, industry standards, economic conditions, general business practices and other factors. FFW's ability to pay dividends is dependent on the dividend payments it receives from its subsidiary, First Federal Savings Bank of Wabash (the "Bank"), which are subject to regulations and the Bank's continued compliance with all regulatory capital requirements. See Note 10 of the Notes to Consolidated Financial Statements for a discussion of regulations governing the Bank's ability to pay dividends. 39 Investor Information Shareholders, investors, and analysts interested in additional information may contact Nicholas M. George, President and Chief Executive Officer, FFW Corporation. Corporate Office FFW Corporation 1205 N. Cass Street Wabash, Indiana 46992 (219) 563-3185 Special Counsel Silver, Freedman & Taff, L.L.P. 1100 New York Ave., N.W. Washington, D.C. 20006 Independent Auditor Crowe, Chizek and Company LLP 330 E. Jefferson Blvd. South Bend, Indiana 46624 Stock Transfer Agent Inquiries regarding stock transfer, registration, lost certificates or changes in name and address should be directed to the stock transfer agent and registrar by writing: Registrar and Transfer Company 10 Commerce Drive Cranford, New Jersey 07016 Annual Meeting of Shareholders The Annual Meeting of Shareholders of FFW Corporation will be held at 2:30 p.m., October 27, 1998 at the executive office of FFW Corporation located at: 1205 N. Cass Street Wabash, Indiana 46992 Shareholders are welcome to attend. Annual Report on Form 10-KSB and Investor Information A copy of FFW Corporation's annual report on Form 10-KSB, filed with the Securities and Exchange Commission, is available without charge by writing: Nicholas M. George President and Chief Executive Officer FFW Corporation 1205 N. Cass Street Wabash, Indiana 46992 40 EX-21 3 Exhibit 21 Subsidiaries of the Registrant Exhibit 21
SUBSIDIARIES OF THE REGISTRANT Percent State of of Incorporation Parent Subsidiary Ownership or Organization ------ ---------- --------- --------------- FFW Corporation First Federal Savings Bank of 100% Federal Wabash FFW Corporation FirstFed Financial of Wabash, 100% Indiana Inc.
The financial statements of FFW Corporation are consolidated with those of its subsidiaries. EX-23 4 Exhibit 23 Consents of Experts and Counsel CONSENT OF INDEPENDENT AUDITORS We hereby consent to the incorporation by reference and use of our report, dated August 14, 1998 on the consolidated financial statements of FFW Corporation which appears in FFW Corporation's Annual Report to Shareholders and is incorporated by reference in FFW Corporation's Form 10-KSB for the fiscal year ended June 30, 1998, in FFW Corporation's previously filed Registration Statements on Form S-8. /s/ Crowe, Chizek and Company LLP --------------------------------- Crowe, Chizek and Company LLP South Bend, Indiana October 8, 1998 EX-27 5
9 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 YEAR JUN-30-1998 JUN-30-1998 4,024 386 0 0 50,293 0 0 139,394 983 203,311 125,256 0 2,426 56,500 18 0 0 19,111 203,311 11,029 3,392 168 14,589 5,627 8,591 5,998 705 266 3,800 2,757 1,900 0 0 1,900 1.36 1.32 3.31 714 0 0 1,700 572 332 38 983 973 0 10
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