-----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, NFmeXGjFZcQhSPJXXMwZ9WF+Pkuhzjk1XetSs/ZUyYIVMP0cdrjfbj3jLD2o9dUA 4NccUnm4DImEc3yp3ANTow== 0000914317-99-000579.txt : 19991018 0000914317-99-000579.hdr.sgml : 19991018 ACCESSION NUMBER: 0000914317-99-000579 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19991013 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: 99727680 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, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 0-21170 FFW CORPORATION - -------------------------------------------------------------------------------- (Name of small business issuer in its charter) Delaware 35-1875502 - ----------------------------------- ------------------------------------ (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 1205 N. Cass Street, Wabash, Indiana 46992-1027 - -------------------------------------------------------------------------------- (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: $18,041,945. The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the average of the bid and asked prices of such stock on the Nasdaq System as of September 15, 1999, was $15.5 million. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant.) As of September 15, 1999, there were issued and outstanding 1,438,449 shares of the Registrant's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Part II of Form 10-KSB - Portions of the Annual Report to Stockholders for the fiscal year ended June 30, 1999. Part III of Form 10-KSB - Proxy Statement for 1999 Annual Meeting of Stockholders. PART I Item 1. Description of Business General The Company. FFW Corporation (the "Company") a Delaware corporation, was formed in December 1992 to act as the holding company for First Federal Savings Bank of Wabash ("First Federal" or the "Bank") upon the completion of the Bank's conversion from the mutual to the stock form (the "Conversion"). The Conversion was completed on April 1, 1993. The Company's business consists primarily of the Business of First Federal. The Company also offers insurance products through its wholly-owned subsidiary, FirstFed Financial of Wabash, Inc. The executive offices of the Company are located at 1205 N. Cass Street, Wabash, Indiana 46992, and its telephone number at that address is (219) 563-3185. At June 30, 1999, the Company had $217.5 million of assets and shareholders' equity of $19.4 million (or 8.92% of total assets). First Federal. First Federal is a federally chartered stock savings bank headquartered in Wabash, Indiana and regulated by the Office of Thrift Supervision ("OTS"). Its deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation (the "FDIC"), which is backed by the full faith and credit of the United States. In June 1997 First Federal closed on the acquisition of a NBD Bank branch in South Whitley, Indiana. First Federal's primary market area covers Wabash, Kosciusko and Whitley Counties in northeast and central Indiana, which are serviced through its four offices in Wabash, North Manchester, Syracuse and South Whitley, Indiana. The principal business of the Bank consists of attracting retail deposits from the general public and investing those funds primarily in one- to four-family residential mortgage and consumer (primarily automobile) loans, and, to a lesser extent, commercial and multi-family real estate, construction and commercial business loans primarily in the Bank's market area. The Bank also purchases mortgage-backed securities and invests in U.S. Government and agency obligations and other permissible investments. At June 30, 1999, all of the Bank's real estate mortgage loans (excluding mortgage-backed securities) were secured by properties located in Indiana. The Bank's revenues are derived primarily from interest on mortgage loans, mortgage-backed securities, consumer and other loans, investment securities, income from service charges and loan originations and loan servicing fee income. The Bank does not originate loans to fund leveraged buyouts, has no loans to foreign corporations or governments and is not engaged in land development or construction activities through joint ventures or subsidiaries. The Bank offers a variety of accounts having a wide range of interest rates and terms. The Bank's deposits include passbook accounts, money market savings accounts, NOW, money market checking and regular checking accounts, and certificate accounts with terms of three to sixty months. The Bank solicits deposits in its primary market area. The Bank also has, from time to time, borrowed funds, both in the form of Federal Home Loan Bank ("FHLB") advances and by entering into repurchase agreements. At June 30, 1999, the Bank had FHLB advances totaling $66.3 million. 2 FirstFed Financial of Wabash, Inc. During fiscal 1993, the Company acquired FirstFed Financial of Wabash, Inc. ("FirstFed") from the Bank. FirstFed offers insurance products, including life insurance, mutual funds, annuity and brokerage services through a registered broker dealer. FirstFed, which is located in Wabash, Indiana was incorporated in 1989. FirstFed had net income of approximately $51,000 for the fiscal year ended June 30, 1999. Forward-Looking Statements When used in this Form 10-KSB and in future filings by the Company with the Securities and Exchange Commission (the "SEC"), in the Company's press releases or other public or shareholder communications, and in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties, including but not limited to changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company's market area and competition, all or some of which could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made and are subject to the above-stated qualifications in any event. The Company wishes to advise readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake, and specifically declines any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Lending Activities of the Bank Market Area of the Bank. The main office of the Bank is located in Wabash, Indiana, which is located in Wabash County. The Bank operates three branches: the first in North Manchester, the second in Syracuse, and the third in South Whitley, Indiana. North Manchester is located in Wabash County, Syracuse is located in adjacent Kosciusko County, and South Whitley is located in adjacent Whitley County. The Bank considers Wabash, Kosciusko and Whitley Counties as its primary market area. The Bank also serves Grant, Miami, Huntington, and Elkhart Counties in Indiana. Wabash County is served by Conrail and the Norfolk Southern railroads, and also has a local municipal airport. Ft. Wayne, Indiana, 45 miles to the northeast, has a commercial airport served by two major airlines and several commuter affiliates. Wabash County has a mixed agriculture and industrial economy. Several major employers in Wabash County are suppliers to the automotive industry. Wabash County also has Manchester College, a four-year private undergraduate institution, and the Wabash County Hospital, a facility with 135 beds. Major manufacturing employers in Wabash County include: Jefferson Smurfitt; Eaton Corporation; Ford Meter Box 3 Company, Inc.; GenCorp Automotive; Heckman Bindery; Hiz Inc.; Blue Sky, Inc.; United Technologies, Inc.; Wabash Alloys; Cast Molding Industries, Inc.; and Wabash Magnetics. Kosciusko County's economy includes a mix of recreational, manufacturing, biomedical and manufactured home industries. Major private employers in Kosciusko County include: GTI Corporation; Dalton Foundries, Inc.; Maple Leaf Farms, Inc.; Biomet, Inc.; Danek Group; Zimmer Inc.; R. R. Donnelley; Depuy Inc.; Kemole Glass, Inc.; Othy, Inc.; and Creighton Brothers. Whitley County's economy includes a mix of agriculture and light manufacturing related to electronics, musical instruments and printing. Major private employers in Whitley County include: Fox Products; Stumps Printing Co.; Wheatherhead; Magnavox; and Essex Corporation. General. Historically, the Bank has originated fixed-rate, one- to four-family mortgage loans. In the early 1980s, the Bank began to focus on the origination of adjustable-rate mortgage ("ARM") loans and short-term loans for retention in its portfolio in order to increase the percentage of loans in its portfolio with more frequent repricing or shorter maturities, and in some cases higher yields, than fixed-rate mortgage loans. While the Bank has continued to originate fixed-rate mortgage loans in response to customer demand, currently, the Bank originates and sells most of its fixed-rate, first mortgage loans with maturities of greater than 15 years in the secondary market with servicing retained. The Bank also originates consumer (including automobile), commercial and multi-family real estate, commercial business, and residential construction loans in its primary market area. At June 30, 1999, the Bank's net loan portfolio totaled $151.5 million. The Executive Committee of the Bank, comprised of any three outside directors selected by and including the Chairman, has the responsibility for the supervision of the Bank's loan portfolio with an overview by the Board of Directors. The Bank's loan policy requires Executive Committee or full Board approval on mortgage, commercial and consumer loans over certain dollar thresholds, loan extensions, special loan situations, assumptions and loan participation. The Board of Directors has responsibility for the overall supervision of the Bank's loan portfolio and in addition, reviews all foreclosure actions or the taking of deeds-in-lieu of foreclosure. 4 The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between changes related to higher or lower outstanding balances and changes due to the levels and changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
Year Ended June 30, ----------------------------------------------------------------------------- 1999 vs. 1998 1998 vs. 1997 ------------------------------------- ------------------------------------- Increase Increase (Decrease) (Decrease) Due to Total Due to Total ---------------------- Increase -------------------- Increase Volume Rate (Decrease) Volume Rate (Decrease) -------- -------- ------------ -------- ------- ------------ (Dollars in Thousands) Interest-earning assets: Loans receivable(1)........................... $1,720 $(321) $1,399 $1,738 $94 $1,832 Securities.................................... 450 (117) 333 393 98 491 Mortgage-backed securities.................... (159) (102) (261) (45) 26 (19) Interest-bearings deposits in other financial institutions............................. (151) 143 (8) 79 (18) 61 ------ ------ ------ ------ ---- ------ Total interest-earning assets.................. $1,860 $(397) $1,463 $2,165 $200 $2,365 ====== ------ ====== ====== ==== ------ Interest-bearing liabilities: Money market accounts......................... (13) 14 1 $18 $--- $18 NOW accounts.................................. (6) 21 15 53 (5) 48 Passbook Savings accounts..................... 96 (70) 26 85 (40) 45 Certificates of deposit....................... 297 (158) 139 744 (6) 738 FHLB Advances................................. 724 (130) 594 483 13 496 ------ ------ ---- ------ ----- ------ Total interest bearing liabilities............. $1,098 $(323) $775 $1,383 $(38) $1,345 ====== ====== ---- ====== ===== ------ Net interest income............................ $688 $1,020 ==== ======
- ------------------- (1) Includes the impact of non-accruing loans and loan fees. 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, ---------------------------------------------------------------------------------------------- 1999 1998 1997 ----------------------------- -------------------------------- ------------------------------- Amount Percent Amount Percent Amount Percent ------------- --------------- ------------- ---------------- -------------- --------------- (Dollars in Thousands) Real Estate Loans: One- to four-family.................. $ 67,825 44.34% $ 70,243 49.64% $ 64,921 56.21% Commercial and multi-family.......... 9,342 6.11 7,272 5.14 6,426 5.56 Construction......................... 899 .59 3,991 2.82 2,974 2.58 -------- ------ -------- ------- -------- ------ Total real estate loans........... 78,066 51.04 81,506 57.60 74,321 64.35 -------- ------ -------- ------ -------- ------ Other Loans: Consumer Loans: Deposit account..................... 504 .33 475 .34 451 .39 Automobile.......................... 36,334 23.75 33,814 23.90 22,625 19.59 Home equity and improvement......... 10,394 6.80 9,105 6.43 6,970 6.03 Manufactured home................... 249 .16 301 .21 350 .30 Other............................... 3,621 2.37 3,348 2.37 3,972 3.44 -------- ------ -------- ------- -------- ------ Total consumer loans.............. 51,102 33.41 47,043 33.25 34,368 29.75 -------- ------ -------- ------ -------- ------ Commercial business loans............ 23,781 15.55 12,945 9.15 6,813 5.90 -------- ------ -------- ------- -------- ------ Total other loans................... 74,883 48.96 59,988 42.40 41,181 35.65 -------- ------ -------- ------ -------- ------ Total loans....................... 152,949 100.00% 141,494 100.00% 115,502 100.00% -------- ====== ====== ====== Less: Loans in process..................... 444 1,716 1,134 Deferred fees, cost and discounts.... (609) (599) (363) Allowance for loan losses............ 1,623 983 572 -------- -------- -------- Total loans, net.................. $151,491 $139,394 $114,159 ======== ======== ========
6 The following table shows the composition of the Bank's loan portfolio by fixed and adjustable-rate at the dates indicated.
June 30, ---------------------------------------------------------------------------------- 1999 1998 1997 -------------------------- --------------------------- -------------------------- Amount Percent Amount Percent Amount Percent ------------ ------------- -------------- ------------ ------------- ------------ (Dollars in Thousands) Fixed-Rate Loans: Real Estate: One- to four-family............................. $16,976 11.10% $17,492 12.36% $ 8,588 7.43% Commercial and multi-family..................... 6,671 4.36 2,307 1.63 1,676 1.45 Construction.................................... 705 .46 2,110 1.49 1,222 1.06 ------- ------ ------- ------ ------- ----- Total real estate loans..................... 24,352 15.92 21,909 15.48 11,486 9.94 ------- ------ ------- ------ ------- ----- Consumer......................................... 45,140 29.51 42,370 29.94 31,222 27.03 Commercial business.............................. 6,853 4.48 5,540 3.92 2,921 2.53 ------- ------ ------- ------ ------- ----- Total fixed-rate loans...................... 76,345 49.91 69,819 49.34 45,629 39.50 ------- ------ ------- ------ ------- ----- Adjustable-Rate Loans: Real estate: One- to four-family............................ 50,849 33.24 52,751 37.28 56,333 48.77 Commercial and multi-family.................... 2,671 1.75 4,965 3.51 4,750 4.11 Construction................................... 194 .13 1,881 1.33 1,752 1.52 ------- ------- ------ ------- ----- Total real estate loans..................... 53,714 35.12 59,597 42.12 62,835 54.40 ------- ------ ------- ------ ------- ----- Consumer........................................ 5,962 3.90 4,673 3.30 3,146 2.73 ------ Commercial business............................. 16,928 11.07 7,405 5.24 3,892 3.37 ------- ------ ------- ------ ------- ----- Total adjustable-rate loans................. 76,604 50.09 71,675 50.66 69,873 60.50 ------- ------ ------- ------ ------- ----- Total loans................................. 152,949 100.00% 141,494 100.00% 115,502 100.00% ====== ====== ====== Less: - ---- Loans in process................................ 444 1,716 1,134 Deferred fees, cost and discounts............... (609) (599) (363) Allowance for loan losses....................... 1,623 983 572 -------- ------- -------- Total loans, net............................ $151,491 $139,394 $114,159 ======== ======== ========
7 The following schedule illustrates the interest rate sensitivity of the Bank's loan portfolio (including non-accruing loans) at June 30, 1999. Mortgages which have adjustable or renegotiable interest rates are shown as maturing in the period during which the contract is due. The schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses.
Real Estate -------------------------------------------------------------------------- One- to four-family Commercial Construction ------------------------ ----------------------- ------------------------- Weighted Weighted Weighted Average Average Average Amount Rate Amount Rate Amount Rate ----------- ----------- ---------- -------------- ----------- ------------ (Dollars in Thousands) Due During Years Ending June 30, 2000.......................... $ 678 8.50% $ 93 8.75% $500 8.12% 2001 - 2004................... 2,035 8.50 280 9.25 399 8.75 2005 and following............ 65,112 8.22 8,969 9.05 --- --- ------ ---- ----- ---- ------ ----- $67,825 8.23% $9,342 9.05% $899 8.40% ====== ===== ===
Commercial Consumer Business Total ---------------------- ------------------------- -------------------- Weighted Weighted Average Average Amount Rate Amount Rate Amount Percent --------- ------------ ----------- ------------- ---------- --------- Due During Years Ending June 30, 2000.......................... $ 3,577 9.30% $ 9,988 8.84% $ 14,836 9.70% 2001 - 2004................... 39,144 8.55 6,183 8.40 48,041 31.41 2005 and following............ 8,381 8.35 7,610 9.01 90,072 58.89 ------- ---- ------- ---- -------- ----- $51,102 8.57% $23,781 8.78% $152,949 100.00% ====== ====== =======
The total amount of loans due after June 30, 2000 which have fixed interest rates is $67.2 million, while the total amount of loans due after such dates which have floating or adjustable interest rates is $70.9 million. 8 One- to Four-Family Residential Mortgage Lending. Residential loan originations of this type are generated by the Bank's marketing efforts, its present and walk-in customers, and referrals from real estate agents and builders. The Bank focuses its lending efforts primarily on the origination of loans secured by first mortgages on owner-occupied, one- to four-family residences. At June 30, 1999, the Bank's one- to four-family residential mortgage loans totaled $67.8 million, or approximately 44.3% of the Bank's total gross loan portfolio. The Bank currently originates up to a maximum of 30-year adjustable-rate, one- to four-family residential mortgage loans in amounts up to 95% of the appraised value of the security property provided that private mortgage insurance is obtained in an amount sufficient to reduce the Bank's exposure to at or below the 80% loan-to-value level. The Bank's one- to four-family residential mortgage originations are primarily in its market and surrounding areas. The Bank currently offers one-, three-, five-, and seven-year ARM loans with an interest rate margin generally 275 basis points over the one year Treasury rates. These loans have a fixed-rate for the stated period and, thereafter, such loans adjust annually. These loans provide for up to a 200 basis points annual cap and a lifetime cap of 600 basis points over the initial rate. Under the current ARM program, such loans will never adjust more than 150 basis points below the initial rate. Depending on whether a one-, three-, five-, or seven-year loan is selected, per-year and lifetime caps will range from 100 to 200 basis points, and 300 to 600 basis points. As a consequence of using an initial fixed-rate, caps and floor, the interest rates on these loans may not be as rate sensitive as is the Bank's cost of funds. The Bank's ARM loans do not permit negative amortization of principal. The Bank qualifies borrowers at the fully indexed rate. Due to consumer demand, the Bank also offers fixed-rate 10- through 15-year and 15- through 30-year mortgage loans, most of which conform to the secondary market standards of Freddie Mac. Interest rates charged on these fixed-rate loans are competitively priced according to market conditions. Residential loans generally do not include prepayment penalties. Most of the fixed-rate loans with maturities of 15 to 30 years are sold in the secondary market. The Bank generally retains servicing rights on such loans. Generally, the Bank will retain fixed-rate loans with maturities of 15 years or less in its portfolio. The Bank reserves the right to discontinue, adjust or create new lending programs to respond to its needs and to competitive factors. In underwriting one- to four-family residential real estate loans, First Federal evaluates both the borrower's ability to make monthly payments and the value of the property securing the loan. Virtually all properties securing real estate loans made by First Federal are appraised by independent fee appraisers approved and qualified by the Board of Directors. First Federal generally requires borrowers to obtain an attorney's title opinion or title insurance, and fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan. Real estate loans originated by the Bank generally contain a "due on sale" clause allowing the Bank to declare the unpaid principal balance due and payable upon the sale of the security property. Consumer Lending. First Federal offers a variety of secured consumer loans, including automobile, home equity, home improvement and student loans, and loans secured by savings deposits. In addition, First Federal offers other secured and unsecured consumer loans. The Bank currently originates substantially all of its consumer loans in its primary market area and surrounding areas. 9 The Bank originates consumer loans on both a direct and indirect basis. Direct loans are made when the Bank extends credit directly to the borrower. Indirect loans are obtained when the Bank purchases loan contracts from retailers of goods or services which have extended credit to their customers. The only indirect lending by First Federal began in the early 1980s, and is with selected automobile and boat dealers located in the Bank's primary market and surrounding areas. The Bank underwrites each indirect loan in accordance with its normal consumer loan standards. At June 30, 1999, the Bank's consumer loan portfolio totaled $51.1 million, or 33.4% of its total gross loan portfolio. Consumer loans may entail greater credit risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles or mobile homes. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. At June 30, 1999, $92,000 or approximately 0.18% of the consumer loan portfolio was non-performing. There can be no assurance that delinquencies will not increase in the future. The largest component of First Federal's consumer loan portfolio consists of automobile loans. At June 30, 1999, automobile loans totaled $36.3 million, or approximately 23.8% of the Bank's gross loan portfolio. Loans secured by second mortgages, together with loans secured by all prior liens, are currently limited to 100% or less of the appraised value of the property securing the loan. Generally, such loans have a maximum term of up to 20 years. As of June 30, 1999, home equity and home improvement loans, most of which are secured by second mortgages, amounted to $10.4 million, or 6.8% of the Bank's gross loan portfolio. Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower. Loans secured by deposit accounts at the Bank are currently originated for up to 90% of the account balance with a hold placed on the account restricting the withdrawal of the account balance. The interest rate on such loans is typically equal to 200 basis points above the deposit contract rate. The underwriting standards employed by the Bank for consumer loans include an application, a determination of the applicant's payment history on other debts and an assessment of ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of the value of the security, if any, in relation to the proposed loan amount. Construction Lending. The Bank engages in limited amounts of construction lending to individuals for the construction of their residences as well as to builders for the construction of single family homes in the Bank's primary market area and surrounding areas. At June 30, 1999, the Bank had $899,000 of gross construction loans, most of which were to borrowers who intended to live in the properties upon completion of construction. 10 Construction loans to individuals for their residences are structured to be converted to permanent loans at the end of the construction phase, which typically runs for six months. During the construction phase, the borrower pays interest only. Residential construction loans are generally underwritten pursuant to the same guidelines used for originating permanent residential loans. Construction loans to builders of one- to four-family residences require the payment of interest only for up to 12 months. In most cases, these loans carry adjustable interest rates. At June 30, 1999, the Bank had $194,000 in construction loans outstanding to builders. Construction lending generally affords the Bank an opportunity to receive interest at rates higher than those obtainable from permanent residential loans and to receive higher origination and other loan fees. In addition, construction loans are generally made with adjustable rates of interest or for relatively short terms. Nevertheless, construction lending is generally considered to involve a higher level of credit risk than one- to four-family residential lending due to the concentration of principal in a limited number of loans and borrowers and the effects of general economic conditions on development projects, real estate developers and managers. In addition, the nature of these loans is such that they are more difficult to evaluate and monitor. Finally, the risk of loss on construction loans is dependent largely upon the accuracy of the initial estimate of the individual property's value upon completion of the project and the estimated cost (including interest) of the project. If the cost estimate proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to permit completion of the project. At June 30, 1999, the Bank had no construction loans outstanding which were over thirty days delinquent. Commercial and Multi-Family Real Estate Lending. The Bank has also engaged in limited commercial and multi-family real estate lending in the Wabash market area and surrounding areas and has purchased participation interests in loans from other financial institutions throughout Indiana and neighboring jurisdictions. At June 30, 1999, the Bank had $9.3 million of commercial and multi-family real estate loans, which represented 6.1% of the Bank's total gross loan portfolio. The largest commercial or multi-family real estate loan outstanding at June 30, 1999 was $630,000, which was performing in accordance with its repayment terms. At June 30, 1999, all of the Bank's commercial and multi-family real estate loan portfolio was secured by properties located in Indiana. Loans secured by commercial and multi-family real estate properties are generally larger and involve a greater degree of credit risk than one- to four-family residential mortgage loans. Because payments on loans secured by commercial real estate properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. If the cash flow from the project is reduced (for example, if leases are not obtained or renewed), the borrower's ability to repay the loan may be impaired. The Bank's commercial and multi-family real estate loan portfolio is secured primarily by apartment buildings and, to a lesser extent, office buildings and nursing homes. Commercial and multi-family real estate loans generally have terms that do not exceed 20 years. The Bank has a variety of rate adjustment features and other terms in its commercial and multi-family real estate loan portfolio. Generally, the loans are made in amounts up to 75% of the appraised value of the security property. Commercial real estate loans provide for a margin over a designated index which is generally the prime rate and multi-family loans provide for a margin over the one-year Treasury bill rate. 11 The Bank currently analyzes the financial condition of the borrower, the borrower's credit history, and the reliability and predictability of the cash flow generated by the property securing the loan. The Bank generally requires personal guaranties of the borrowers. Appraisals on properties securing commercial real estate loans originated by the Bank are performed by independent appraisers. Commercial Business Lending. The Bank began increasing its commercial loan portfolio last year due to the addition of a commercial loan officer. At June 30 1999, approximately $23.8 million, or 15.6% of the Bank's total gross loan portfolio was comprised of commercial loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower's ability to make repayment from his or her employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans typically are made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself (which, in turn, is likely to be dependent upon the general economic environment). The Bank's commercial business loans are usually, but not always, secured by business assets. However, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. At June 30, 1999, First Federal's commercial business loan portfolio was performing substantially in accordance with its repayment terms. The Bank recognizes the generally increased risks associated with commercial business lending. First Federal's commercial business lending policy includes credit file documentation and analysis of the borrower's character, capacity to repay the loan, the adequacy of the borrower's capital and collateral as well as an evaluation of conditions affecting the borrower. Analysis of the borrower's past, present and future cash flows is also an important aspect of First Federal's current credit analysis. Non-Performing Assets and Classified Assets When a borrower fails to make a required payment on real estate secured loans and consumer loans within 30 days after the payment is due, the Bank generally institutes collection procedures by mailing a delinquency notice. The customer is contacted again, by notice and/or telephone, when the payment is 31 days past due and when 60 days past due. In most cases, delinquencies are cured promptly; however, if a loan secured by real estate or other collateral has been delinquent for more than 90 days, satisfactory payment arrangements must be adhered to or the Bank will initiate foreclosure or repossession. Generally, when a loan becomes delinquent 90 days or more or when the collection of principal or interest becomes doubtful, the Bank will place the loan on a non-accrual status and, as a result, previously accrued interest income on the loan is taken out of current income. The loan will remain on a non-accrual status as long as the loan is 90 days delinquent. 12 The following table sets forth information concerning delinquent mortgage and other loans at June 30, 1999. The amounts presented represent the total remaining principal balances of the related loans, rather than the actual payment amounts which are overdue.
Loans Delinquent For: --------------------------------------------------------------------------------- 30-59 Days 60-89 Days 90 Days and Over Total Delinquent Loans -------------------------- -------------------------- --------------------------- ----------------------- Percent Percent Percent Percent of Loan of Loan of Loan of Loan Number Amount Category Number Amount Category Number Amount Category Number Amount Category ------- -------- --------- ------ -------- --------- -------- ------- ---------- ------ -------- -------- (Dollars in Thousands) Real Estate: One- to four-family...... 7 $ 190 0.28% 6 $282 0.42% --- $--- ---% 13 $ 472 0.70% Commercial and Multi-Family............ 2 84 0.90 --- --- --- --- --- 2 84 0.90 Construction............. --- --- --- --- --- --- --- --- --- --- --- --- Consumer................... 111 877 1.72 23 188 0.36 --- --- --- 134 1,065 2.08 Commercial business........ 13 785 3.30 3 81 0.34 --- --- --- 16 866 3.64 ----- ---- ---- ---- --- --- ----- ---- Total delinquent loans 133 $1,936 1.27% 32 $551 0.36% --- $--- ---% 165 $ 2,487 1.63% ===== ==== === ==== === === ===== ====
The ratio of delinquent loans to total loans (net), was 1.63% at June 30, 1999. The table below sets forth the amounts and categories of non-performing assets in the Bank's loan portfolio at the dates indicated. Loans are placed on non-accrual status when the collection of principal and/or interest become doubtful or when the loan is in excess of 90 days delinquent. Foreclosed and repossessed assets include assets acquired in settlement of loans. See Notes 1 and 4 to Notes to Consolidated Financial Statements.
June 30 ---------------------------------------------- 1999 1998 1997 -------------- -------------- ---------------- (Dollars in Thousands) Non-accruing loans: One- to four-family............................ $ 1 $521 $ --- Commercial and multi-family real estate........ 317 --- Consumer....................................... 92 193 248 ---- ---- ---- Total non-accruing loans................ 410 714 248 --- ---- --- Foreclosed and repossessed assets: One- to four-family............................ 274 --- --- Commercial and multi-family real estate........ 101 101 --- Consumer....................................... 57 58 33 ---- ----- ----- Total foreclosed assets................. 432 159 33 --- ---- ----- Troubled debt restructurings..................... --- --- --- Total non-performing assets...................... $842 $ 873 $281 === ===== ==== Total as a percentage of total assets............ 0.39% 0.43% 0.16% ==== ==== ====
13 For the fiscal year ended June 30, 1999, gross interest income which would have been recorded had the non-accruing loans been current amounted to $16,000. The amount that was included in interest income on such loans was $18,000 for the fiscal year ended June 30, 1999. Non-Performing Assets. Included in non-accruing loans at June 30, 1999 were 15 consumer loans totaling $92,000 secured by property including automobiles, manufactured homes and other collateral. Foreclosed and repossessed assets included automobiles and commercial property totaling $158,000 at June 30, 1999. Other Loans of Concern. In addition to the non-performing loans and foreclosed and repossessed assets set forth in the preceding table, as of June 30, 1999 there was also an aggregate of $1.9 million in net book value of loans classified by the Bank with respect to the majority of which known information about the possible credit problems of the borrowers or the cash flows of the security properties have caused management to have some doubts as to the ability of the borrowers to comply with present loan repayment terms and which may result in the future inclusion of such items in the non-performing asset categories. The principal components of loans of concern are 132 consumer loans aggregating $1.1 million, five one- to four-family loans aggregating $344,000 and three commercial loans aggregating $460,000 at June 30, 1999. As of June 30, 1999, there were no other loans not included on the foregoing table or discussed above where known information about the possible credit problems of borrowers caused management to have doubts as to the ability of the borrower to comply with present loan repayment terms and which may result in disclosure of such loans in the future. Classified Assets. Federal regulations provide for the classification of loans and other assets such as debt and equity securities considered by the OTS to be of lesser quality as "substandard," "doubtful" or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the savings association will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. When a savings association classifies problem assets as either substandard or doubtful, it may establish general allowances for loan losses in an amount deemed prudent by management. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When a savings association classifies problem assets as "loss," it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An association's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the association's District Director at the regional OTS office, who may order the establishment of additional general or specific loss allowances. 14 In accordance with its classification of assets policy, the Bank regularly reviews the loans in its portfolio to determine whether any loans require classification. On the basis of management's review of its assets, at June 30, 1999, the Bank had classified a total of approximately $543,000 of its assets as substandard, $72,000 as doubtful, $46,000 as loss, and $1.3 million special mention. At June 30, 1999, total classified and non-performing assets comprised $2.8 million, or 17.3% of the Bank's capital, or 1.3% of the Bank's total assets. Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risk inherent in its loan portfolio and changes in the nature and volume of its loan activity. Such evaluation, which includes a review of loans for which full collectibility may not be reasonably assured, considers among other matters, the estimated fair value of the underlying collateral, economic conditions, historical loan loss experience and other factors that warrant recognition in providing for an adequate loan loss allowance. Real estate properties acquired through foreclosure are recorded at fair value. If fair value at the date of foreclosure is lower than the balance of the related loan, the difference will be charged-off to the allowance at the time of transfer. Valuations are periodically updated by management and if the value declines, a specific provision for losses on such property is established by a charge to operations. Although management believes that it uses the best information available to determine the allowances, unforeseen market conditions could result in adjustments and net earnings could be significantly affected if circumstances differ substantially from the assumptions used in making the final determination. Future additions to the Bank's allowances will be the result of periodic loan, property and collateral reviews and thus cannot be predicted in advance. At June 30, 1999, the Bank had a total allowance for loan losses of $1.6 million or 1.06% of total loans, net. See Note 4 of the Notes to Consolidated Financial Statements in the Annual Report to Stockholders (the "Annual Report"), attached hereto as Exhibit 13. 15 The following table sets forth an analysis of the Bank's allowance for loan losses.
Year Ended June 30 --------------------------------------- 1999 1998 1997 --------------- ------------ ---------- (Dollars in Thousands) Balance at beginning of period................................................ $983 $572 $553 Charge-offs: One- to four-family.......................................................... 26 --- 3 Consumer..................................................................... 439 285 181 Commercial Business.......................................................... --- 47 --- ----- ---- ----- 465 332 184 Recoveries: Consumer..................................................................... 95 38 83 Commercial and multi-family real estate...................................... --- --- --- --- ----- ------- 95 38 83 Net charge-offs............................................................... 370 294 101 Additions charged to operations............................................... 1,010 705 120 ----- ===== ----- Balance at end of period...................................................... $1,623 $983 $572 ===== ==== ==== Ratio of net charge-offs during the period to average loans outstanding during the period................................. 0.25% 0.23% 0.09% ==== ==== ====
The distribution of the Bank's allowance for loan losses at the dates indicated is summarized as follows:
June 30, ----------------------------------------------------------------------------- 1999 1998 1997 ----------------------- ------------------------ ---------------------------- Percent Percent Percent of Loans of Loans of Loans in Each in Each in Each Category Category Category to Total to Total to Total Amount Loans Amount Loans Amount Loans ---------- ----------- ----------- ----------- ------------ ------------ (Dollars in Thousands) One- to four-family......................... $113 44.34% $105 49.64% $ 95 56.21% Commercial and multi-family real estate.............................. 225 6.11 230 5.14 70 5.56 Construction................................ --- 0.59 28 2.82 25 2.58 Consumer.................................... 700 33.41 445 33.25 325 29.75 Commercial business......................... 405 15.55 165 9.15 50 5.90 Unallocated................................. 180 --- 10 --- 7 --- ------ ------ ---- ------ ---- ------ Total.................................. $1,623 100.00% $983 100.00% $572 100.00% ===== ====== ==== ====== ==== ======
Investment Activities First Federal must maintain minimum levels of investments that qualify as liquid assets under OTS regulations. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. Historically, the Bank has 16 generally maintained its liquid assets above the minimum requirements imposed by the OTS regulations and at a level believed adequate to meet requirements of normal daily activities, repayment of maturing debt and potential deposit outflows. As of June 30, 1999, the Bank's liquidity ratio (liquid assets as a percentage of net withdrawable savings deposits and current borrowings) was 12.05%. See "Regulation - Liquidity." Federally chartered savings institutions have the authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, certain bankers' acceptances, repurchase agreements and federal funds. Subject to various restrictions, federally chartered savings institutions may also invest their assets in commercial paper, investment grade corporate debt securities and mutual funds whose assets conform to the investments that a federally chartered savings institution is otherwise authorized to make directly. Generally, the investment policy of the Bank is to invest funds among various categories of investments and maturities based upon the Bank's need for liquidity, to achieve the proper balance between its desire to minimize risk and maximize yield, to provide collateral for borrowings, and to fulfill the Bank's asset/liability management policies. First Federal's investment and mortgage-backed securities portfolios are managed in accordance with a written investment policy adopted by the Board of Directors. Other than certificates of deposit and mortgage-backed securities, investments may be made by the President of First Federal only with the approval of the Investment Committee. Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No. 115"), requires that securities and mortgage-backed securities be classified as held to maturity, available for sale or trading purposes. Under SFAS No. 115, securities that the Company has the positive intent and ability to hold until maturity are classified as held to maturity and are reported at amortized cost. Securities classified as available for sale are those the Company may sell in response to liquidity needs, for asset/liability management purposes and other reasons and are reported at fair value. Unrealized gains and losses on securities available for sale are reported as a separate component of equity, net of tax. Trading securities are those which are purchased for sale in the near future and are reported at fair value. Unrealized gains and losses on trading securities are included in income. Transfers between categories are accounted for as sales and repurchases at fair value. For any sales or transfers of securities classified as held to maturity, the cost basis, the realized gain or loss, and the circumstances leading to the decision to sell are required to be disclosed. At the time of purchase of new securities, management of the Company makes a determination as to the appropriate classification of securities as available for sale or held to maturity. At June 30, 1999, the Company had no securities classified as held to maturity and $51.0 million classified as available for sale including mortgage-backed securities. No securities were held for trading purposes on such date. Securities. It is the Company's general policy to purchase securities which are U.S. Government securities and federal agency obligations, state and local government obligations, commercial paper, short-term corporate debt securities and overnight federal funds. At June 30, 1999, the weighted average term to maturity or repricing of the investment securities portfolio, excluding the FHLB, Fannie Mae stock and other equity securities available for sale, was 8.2 years. 17 OTS regulations restrict investments in corporate debt and equity securities by the Bank. These restrictions include prohibitions against investments in the debt securities of any one issuer in excess of 15% of the Bank's unimpaired capital and unimpaired surplus as defined by federal regulations, which totaled $16.8 million as of June 30, 1999, plus an additional 10% if the investments are fully secured by readily marketable collateral. See "Regulation - Federal Regulation of Savings Associations" for a discussion of additional restrictions on the Bank's investment activities. The following table sets forth the composition of the Company's securities portfolio excluding mortgage-backed securities, at the dates indicated.
June 30, ------------------------------------------------------------------ 1999 1998 1997 --------------------- ----------------------- -------------------- Carrying % of Carrying %of Carrying % of Value Total Total Total ---------- --------- ------------- ----------- ---------- -------- (Dollars in Thousands) Securities available for sale: Federal agency obligations..................... 23,187 53.01 13,186 37.94 5,980 24.93 Commercial notes and commercial paper.......... 237 0.54 242 0.70 246 1.02 State and local government obligations......... 8,343 19.08 9,102 26.19 7,413 30.91 Other equity securities........................ 8,569 19.59 9,468 27.24 7,948 33.14 --------- ------ --------- -------- -------- ------- Total securities available for sale.......... 40,336 92.22 31,998 92.07 21,587 90.00 -------- ----- -------- ------- -------- ------- FHLB stock..................................... 3,401 7.78 2,757 7.93 2,398 10.00 --------- ------- --------- --------- -------- ------- Total securities............................. $43,737 100.00% $34,755 100.00% $23,985 100.00% ======= ====== ======= ====== ======= ====== Weighted average remaining life or term to repricing, excluding FHLB stock and other equity securities available for sale......... 8.2 yrs. 6.8 yrs. 3.9 yrs. Other Interest-Earning Assets: Interest-earning deposits with banks........... $ 188 $ 386 $15,500 ========= ======== =======
18 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, 1999 --------------------------------------------------------------------------------------- Less Than 1 to 5 5 to 10 Over Total 1 Year Years Years 10 Years Securities --------------- ------------- -------------- ------------- -------------- ------------- Amortized Amortized Amortized Amortized Amortized Market Cost Cost Cost Cost Cost Cost --------------- ------------- -------------- ------------- --------------- ------------ (Dollars in Thousands) Federal agency obligations................. $ --- $4,998 $16,500 $2,344 $23,842 $23,187 Commercial notes and commercial paper........... 235 --- --- --- 235 237 State and local government obligations...... 1,386 3,444 512 3,036 8,378 8,343 ------- ------- --------- ------- -------- ------- Total debt securities........ $1,621 $8,442 $17,012 $5,380 $32,455 $31,767 ====== ====== ======= ====== ======= ======= Weighted average yield(1).... 6.24% 5.61% 6.51% 6.59% 6.28% - -----------------------
(1) Yields reflected have not been computed on a tax equivalent basis. Except for obligations of state and local governments, the Company's securities portfolio at June 30, 1999 contained neither tax-exempt securities nor securities of any issuer with an aggregate book value in excess of 10% of the Company's shareholders' equity, excluding those issued by the United States Government, or its agencies. Mortgage-Backed Securities. The Company's investment in mortgage-backed securities can serve as collateral for borrowings and, through repayments, as a source of liquidity. In addition, management from time to time has purchased mortgage-backed securities in order to supplement loan originations. For information regarding the carrying and market values of the Company's mortgage-backed securities portfolio, see Note 3 of the Notes to Consolidated Financial Statements in the Annual Report attached hereto as Exhibit 13. The following table sets forth the amortized cost of the Company's mortgage-backed securities at the dates indicated.
June 30, ----------------------------------------- 1999 1998 1997 ----------- --------------- ------------- (In thousands) Fannie Mae............................................. $ 283 $ 454 $ 546 Ginnie Mae............................................. 10,290 16,490 16,737 Freddie Mac............................................ 103 137 177 Other Mortgage-backed Securities(1).................... --- 471 758 ------------ ---------- ---------- Total.............................................. $10,676 $17,552 $18,218 ======= ======= =======
- -------------------------------- (1) The June 30, 1997 principal balance and amortized cost of other mortgage-backed securities included an adjustment of $318,900 to reflect an other than temporary decline in the fair value of a security collateralized by multi-family mortgage obligations with underlying collateral primarily located in Southern California. During 1998 this security 19 was sold and a gain on sale of $264,028 was recognized. The decline in the fair value of the security was due to increased loan delinquencies, a decline in the cash reserve fund and losses incurred on foreclosed real estate which resulted in downgrades in the security's rating by various independent rating agencies. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report. The following table sets forth the contractual maturities of the Company's mortgage-backed securities based on amortized cost at June 30, 1999. Not considered in the preparation of the table below is the effect of prepayments, periodic principal repayments and the adjustable-rate nature of these instruments.
Due in ----------------------------------------------- June 30, 1999 5 Years 5 to 10 10 to 20 Over 20 Balance or Less Years Years Years Outstanding ---------- ---------- ------------ ------------ ------------ (Dollars In Thousands) Fannie Mae............................................ $ --- $ --- $283 $ --- $ 283 Ginnie Mae............................................ 1 20 22 10,247 10,290 Freddie Mac........................................... --- 53 --- 50 103 ----- ----- ----- ------- ------- Total............................................ $ 1 $ 73 $305 $10,297 $10,676 ===== ==== ==== ======= ======= Weighted average yield................................ 8.00% 7.85% 6.46% 6.72% 6.72%
Sources of Funds General. The Bank's primary sources of funds are deposits, borrowings, amortization and prepayment of loan principal (including interest earned on mortgage-backed securities), sales of whole loans and loan participations, interest earned on or sales and maturation of investment securities and short-term investments, and funds provided from operations. Borrowings, including FHLB advances and reverse repurchase agreements, may be used at times to compensate for seasonal reductions in deposits or deposit inflows at less than projected levels, and may be used on a longer term basis to support expanded lending activities. Deposits. First Federal offers a variety of deposit accounts having a wide range of interest rates and terms. The Bank's deposits consist of passbook savings accounts, money market savings accounts, NOW, money market checking and regular checking accounts, and certificate accounts ranging in terms from 91 days to 60 months. The Bank only solicits deposits from its market area and currently does not use brokers to obtain deposits. The Bank relies primarily on competitive pricing policies, advertising and customer service to attract and retain these deposits. The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates, and competition. The variety of deposit accounts offered by the Bank has allowed it to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. The Bank has become more susceptible to short-term fluctuations in deposit flows, as customers have become more interest rate conscious. The Bank endeavors to manage the pricing of its deposits in keeping with its asset/liability management and profitability objectives. Based on its experience, the Bank believes that its passbook savings, money market savings accounts, NOW, money market checking and regular checking accounts are relatively stable sources of deposits. However, the ability of the 20 Bank to attract and maintain certificates of deposit and its passbook accounts and the rates paid on these deposits has been and will continue to be significantly affected by market conditions. On June 13, 1997 deposits increased by $17.1 million with the purchase of the NBD Bank N.A. branch in South Whitley, Indiana. This purchase opened up a new market in a contiguous county to our existing operations. The following table sets forth the savings flows at the Bank during the periods indicated.
Year Ended June 30, -------------------------------------------------- 1999 1998 1997 --------------- ------------------ --------------- (Dollars in Thousands) Opening balance........................... $125,256 $116,118 $ 92,490 Purchased deposits........................ --- --- 17,133 Net deposits.............................. 246 4,535 2,470 Interest credited......................... 4,899 4,603 4,025 --------- ----------- ----------- Ending balance............................ $130,401 $125,256 $116,118 ======== ======== ======== Net increase.............................. $ 5,145 $ 9,138 $ 23,628 ========= ========== ========= Percent increase.......................... 4.11% 7.87% 25.55% ==== ==== =====
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, ---------------------------------------------------------------------------------- 1999 1998 1997 ---------------------------- ------------------------- --------------------------- Percent Percent Percent Amount of Total Amount of Total Amount of Total ----------- --------------- ------------ ------------ -------------- ------------ (Dollars in Thousands) Interest Rate Range: Passbook Accounts.................... $45,653 35.01% $ 44,249 35.32% $ 42,063 36.22% Demand accounts(1)................... 8,171 6.26 6,935 5.54 5,751 4.95 Money Market Accounts................ 568 0.44 1,217 .97 2,182 1.88 NOW Accounts......................... 6,640 5.09 6,020 4.81 6,285 5.41 --------- ------- --------- Total Non-Certificates............... 61,032 46.80 58,421 46.64 56,281 48.46 ------ ----- -------- ------- --------- ------- Certificates: 0.00 - 3.99%....................... --- --- --- --- 1 .01 4.00 - 5.99%....................... 53,305 40.88 37,894 30.25 34,029 29.31 6.00 - 7.99%....................... 16,064 12.32 28,722 22.94 25,589 22.03 8.00 - 9.99%....................... --- --- 219 .17 218 .19 --------- ------- --------- -------- --------- ------- Total Certificates................... 69,369 53.20 66,835 53.36 59,837 51.54 --------- ------- --------- ------- --------- ------- Total Deposits....................... $130,401 100.00% $125,256 100.00% $116,118 100.00% ======== ====== ======== ====== ======== ======
(1) Non-interest-bearing accounts. 21 The following table shows rate and maturity information for the Bank's certificates of deposit as of June 30, 1999.
4.00- 6.00- Percent 5.99% 7.99% Total of Total ------------ ------------- ---------- --------------- (Dollars in Thousands) Certificate accounts maturing in quarter ending: September 30, 1999......................... $ 9,786 $4,476 $14,262 20.56% December 31, 1999.......................... 10,812 2,625 13,437 19.37 March 31, 2000............................. 4,292 2,900 7,192 10.37 June 30, 2000.............................. 15,135 2,033 17,168 24.75 September 30, 2000......................... 4,398 499 4,897 7.06 December 31, 2000.......................... 1,260 412 1,672 2.41 March 31, 2001............................. 1,227 84 1,311 1.89 June 30, 2001.............................. 796 650 1,446 2.08 September 30, 2001......................... 842 307 1,149 1.65 December 31, 2001.......................... 388 443 831 1.20 March 31, 2002............................. 222 339 561 0.81 June 30, 2002.............................. 183 129 312 0.45 Thereafter................................. 3,964 1,167 5,131 7.40 -------- --------- ----- ---- Total................................. $53,305 $16,064 $69,369 100.00% ======= ======= ======= ====== Percent of total........................... 76.84% 23.16% 100.00% ===== ===== ======
The following table indicates the amount of the Bank's certificates of deposit and other deposits by time remaining until maturity as of June 30, 1999.
Maturity ------------------------------------------------------ Over Over 3 months 3 to 6 6 to 12 Over or Less Months Months 12 Months Total ----------- ------------ ------------ ---------------- --------- (In Thousands) Certificates of deposit less than $100,000....... $11,396 $ 8,096 $17,015 $15,214 $51,721 Certificates of deposit of $100,000 or more...... 2,668 2,765 7,044 2,096 14,573 Public funds(1).................................. 198 2,576 301 --- 3,075 --------- -------- --------- ----------- --------- Total certificates of deposit.................... $14,262 $13,437 $24,360 $17,310 $69,369 ======= ======= ======= ======= =======
- -------------------- (1)Deposits from governmental and other public entities. Generally, the Bank does not pay interest rates on its jumbo certificates of deposit (certificates of deposit with balances of $100,000 or more) in excess of the interest rates paid on certificates of deposit with balances of less than $100,000. 22 Borrowings. Although deposits are the Bank's primary source of funds, the Bank's policy has been to utilize borrowings when they are a less costly source of funds, can be invested at a positive interest rate spread or when the Bank desires additional capacity to fund loan demand. First Federal's borrowings historically have consisted of advances from the FHLB of Indianapolis upon the security of a blanket collateral agreement of a percentage of unencumbered loans. Such advances can be made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. At June 30, 1999, the Bank had $65.9 million in FHLB advances, and a $1.0 million overdraft line of credit was available from the FHLB. From time to time, First Federal has entered into repurchase agreements through a nationally recognized broker-dealer firm. These agreements are accounted for as borrowings by the Bank and are secured by certain of the Bank's securities. The broker-dealer takes possession of the securities during the period that the repurchase agreement is outstanding. The terms of the agreements have typically ranged from 30 days to a maximum of six months. The proceeds of these transactions are used to meet cash flow needs of the Bank. At June 30, 1999, the Bank had no repurchase agreements outstanding. The following table sets forth the maximum month-end balance and average balance of FHLB advances and line of credit from the FHLB and securities sold under agreements to repurchase at the dates indicated.
Year Ended June 30, ------------------------------------------ 1999 1998 1997 ------------ ----------------- ----------- (Dollars in Thousands) Maximum Balance: FHLB advances and line of credit................................. $66,300 $51,500 $44,800 Securities sold under agreements to repurchase................... --- --- --- Average Balance: FHLB advances and line of credit................................. 62,106 49,543 41,470 Securities sold under agreements to repurchase................... --- --- --- Average Rate Paid On: FHLB advances and line of credit................................. 5.73% 5.98% 5.95% Securities sold under agreements to repurchase................... --- --- ---
The following table sets forth the Bank's borrowings at the dates indicated.
Year Ended June 30, ------------------------------------------ 1999 1998 1997 ------------ -------------- -------------- (Dollars in Thousands) FHLB advances and line of credit................................. $66,300 $51,500 $44,800 Due to brokers................................................... --- 5,000 --- ----------- -------- ----------- Total borrowings............................................. $66,300 $56,500 $44,800 ======= ======= =======
23 Subsidiary Activities As a federally chartered savings association, First Federal is permitted by OTS regulations to invest up to 2% of its assets, or $4.3 million at June 30, 1999, in the stock of, or loans to, service corporation subsidiaries. First Federal may invest an additional 1% of its assets in service corporations where such additional funds are used for inner city or community development purposes. In addition to investments in service corporations, federal associations are permitted to invest an unlimited amount in operating subsidiaries engaged solely in activities which a federal association may engage in directly. First Federal had no subsidiaries at June 30, 1999. Regulation General. First Federal is a federally chartered savings bank, the deposits of which are federally insured and backed by the full faith and credit of the United States Government. Accordingly, First Federal is subject to broad federal regulation and oversight extending to all its operations. The Bank is a member of the FHLB of Indianapolis and is subject to certain limited regulation by the Board of Governors of the Federal Reserve System ("Federal Reserve Board"). As the savings and loan holding company of First Federal, the Company also is subject to federal regulation and oversight. The purpose of the regulation of the Holding Company and other holding companies is to protect subsidiary savings associations. The Bank is a member of the Savings Association Insurance Fund ("SAIF"), which together with the Bank Insurance Fund (the "BIF") are the two deposit insurance funds administered by the FDIC, and the deposits of the Bank are insured by the FDIC. As a result, the FDIC has certain regulatory and examination authority over the Bank. Certain of these regulatory requirements and restrictions are discussed below or elsewhere in this document. Federal Regulation of Savings Associations. The OTS has extensive authority over the operations of savings associations. As part of this authority, First Federal is required to file periodic reports with the OTS and is subject to periodic examinations by the OTS and the FDIC. When these examinations are conducted by the OTS and the FDIC, the examiners may require the Bank to provide for higher general or specific loan loss reserves. The last regular OTS examination of the Bank was as of July 1997. The last FDIC examination was as of May 1990. All savings associations are subject to a semi-annual assessment, based upon the association's total assets, to fund the operations of the OTS. The Bank's OTS assessment for the fiscal year ended June 30, 1999 was approximately $55,000. The OTS also has extensive enforcement authority over all savings institutions and their holding companies, including First Federal and the Company. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with the OTS. Except under certain circumstances, public disclosure of final enforcement actions by the OTS is required. 24 In addition, the investment, lending and branching authority of the Bank is prescribed by federal laws, and it is prohibited from engaging in any activities not permitted by such laws. For instance, no savings institution may invest in non-investment grade corporate debt securities. In addition, the permissible level of investment by federal associations in loans secured by non-residential real property may not exceed 400% of total capital, except with approval of the OTS. Federal savings associations are also generally authorized to branch nationwide. At June 30, 1999, First Federal was in compliance with each of the noted restrictions. The Bank's general permissible lending limit for loans-to-one borrower is the greater of $500,000 or 15% of unimpaired capital and surplus (except for loans fully secured by certain readily marketable collateral, in which case this limit is increased to 25% of unimpaired capital and surplus). At June 30, 1999, the Bank's lending limit under this restriction was approximately $2.5 million. First Federal is in compliance with the loans-to-one borrower limitation. The OTS, as well as the other federal banking agencies, has adopted guidelines establishing safety and soundness standards on such matters as loan underwriting and documentation, asset quality, earnings standards, internal controls and audit systems, interest rate risk exposure and compensation and other employee benefits. Any institution which fails to comply with these standards must submit a compliance plan. Insurance of Accounts and Regulation by the FDIC. First Federal is a member of the SAIF, which is administered by the FDIC. Deposits are insured up to applicable limits by the FDIC and such insurance is backed by the full faith and credit of the United States Government. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the SAIF or the BIF. The FDIC also has the authority to initiate enforcement actions against savings associations, after giving the OTS an opportunity to take such action, and may terminate the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices, or is in an unsafe or unsound condition. The FDIC's deposit insurance premiums are assessed through a risk-based system, under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their level of capital and supervisory evaluation. Under the system, institutions classified as well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1 or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at least 6% and a risk-based capital ratio of at least 10%) and considered healthy pay the lowest premium while institutions that are less than adequately capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a risk-based capital ratio of less than 8%) and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions will be made by the FDIC for each semi-annual assessment period. As of June 30, 1999, the Bank met the requirements of a well- capitalized institution. The FDIC is authorized to increase assessment rates, on a semiannual basis, if it determines that the reserve ratio of the SAIF will be less than the designated reserve ratio of 1.25% of SAIF insured deposits. In setting these increased assessments, the FDIC must seek to restore the reserve ratio to that designated reserve level, or such higher reserve ratio as established by the FDIC. The FDIC also may impose special assessments on SAIF members to repay amounts borrowed from the United States Treasury or for any other reason deemed necessary by the FDIC. 25 Effective January 1, 1997, the premium schedule for BIF and SAIF insured institutions ranged from 0 to 27 basis points. However, SAIF-insured institutions are required to pay a Financing Corporation (FICO) assessment, in order to fund the interest on bonds issued to resolve thrift failures in the 1980s, equal to approximately 6.48 basis points for each $100 in domestic deposits, while BIF-insured institutions pay an assessment equal to approximately 1.52 basis points for each $100 in domestic deposits. The assessment is expected to be reduced to 2.43 basis points no later than January 1, 2000, when BIF insured institutions fully participate in the assessment. These assessments, which may be revised based upon the level of BIF and SAIF deposits will continue until the bonds mature in the year 2015. Regulatory Capital Requirements. Federally insured savings associations, such as the Bank, are required to maintain a minimum level of regulatory capital. The OTS has established capital standards, including a tangible capital requirement, a leverage ratio (or core capital) requirement and a risk-based capital requirement applicable to such savings associations. These capital requirements must be generally as stringent as the comparable capital requirements for national banks. The OTS is also authorized to impose capital requirements in excess of these standards on individual associations on a case-by-case basis. The capital regulations require tangible capital of at least 1.5% of adjusted total assets (as defined by regulation). Tangible capital generally includes common stockholders' equity and retained income, and certain noncumulative perpetual preferred stock and related income. In addition, all intangible assets, other than a limited amount of purchased mortgage servicing rights, must be deducted from tangible capital for calculating compliance with this requirement. At June 30, 1999, First Federal did not have any unamortized purchased mortgage servicing rights, but did have certain intangible assets related to the purchase of the branch in South Whitley, Indiana. The OTS regulations establish special capitalization requirements for savings associations that own subsidiaries. As of June 30, 1999, the Bank had no subsidiaries. At June 30, 1999, the Bank had tangible capital of $15.3 million, or 7.1% of adjusted total assets, which is approximately $12.0 million above the minimum requirement of 1.5% of adjusted total assets in effect on that date. The capital standards also require core capital equal to at least 3% of adjusted total assets. Core capital generally consists of tangible capital plus certain intangible assets, including a limited amount of purchased credit card relationships. As a result of the prompt corrective action provisions discussed below, however, a savings association must maintain a core capital ratio of at least 4% to be considered adequately capitalized unless its supervisory condition is such to allow it to maintain a 3% ratio. At June 30, 1999 the Bank had certain intangible assets related to the branch purchase which were subject to these tests. At June 30, 1999, the Bank had core capital equal to $15.3 million, or 7.1% of adjusted total assets, which is $8.8 million above the minimum leverage ratio requirement of 3% as in effect on that date. The OTS risk-based requirement requires savings associations to have total capital of at least 8% of risk-weighted assets. Total capital consists of core capital, as defined above, and supplementary capital. Supplementary capital consists of certain permanent and maturing capital instruments that do not qualify as core capital and general valuation loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used to satisfy the risk-based requirement only to the extent of core capital. The OTS is also authorized to require a savings association to maintain an additional amount of total capital to account for concentration 26 of credit risk and the risk of non-traditional activities. At June 30, 1999, First Federal had no capital instruments that qualify as supplementary capital and $1.6 million of general loss reserves, which was less than 1.25% of risk-weighted assets. Certain exclusions from capital and assets are required to be made for the purpose of calculating total capital. Such exclusions consist of equity investments (as defined by regulation) and that portion of land loans and nonresidential construction loans in excess of an 80% loan-to-value ratio and reciprocal holdings of qualifying capital instruments. First Federal had no such exclusions from capital and assets at June 30, 1999. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet items, will be multiplied by a risk weight, ranging from 0% to 100% based on the risk inherent in the type of asset. For example, the OTS has assigned a risk weight of 50% for prudently underwritten permanent one- to four-family first lien mortgage loans not more than 90 days delinquent and having a loan to value ratio of not more than 80% at origination unless insured to such ratio by an insurer approved by the Fannie Mae or Freddie Mac. OTS regulations also require that every savings association with more than normal interest rate risk exposure to deduct from its total capital, for purposes of determining compliance with such requirement, an amount equal to 50% of its interest-rate risk exposure multiplied by the present value of its assets. This exposure is a measure of the potential decline in the net portfolio value of a savings association, greater than 2% of the present value of its assets, based upon a hypothetical 200 basis point increase or decrease in interest rates (whichever results in a greater decline). Net portfolio value is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. The rule will not become effective until the OTS evaluates the process by which savings associations may appeal an interest rate risk deduction determination. It is uncertain as to when this evaluation will be completed. Any savings association with less than $300 million in assets and a total capital ratio in excess of 12% is exempt from this requirement unless the OTS determines otherwise. Based on its asset size and total capital ratio at June 30, 1999, the Bank anticipates that it will be exempt from this rule. On June 30, 1999, the Bank had total risk-based capital of $16.8 million (including $15.3 million in core capital and $1.5 million in qualifying supplementary capital) and risk-weighted assets of $136.1 million (including, converted off-balance sheet assets); or total capital of 12.4% of risk-weighted assets. This amount was $5.9 million above the 8.0% requirement in effect on that date. The OTS and the FDIC are authorized and, under certain circumstances required, to take certain actions against savings associations that fail to meet their capital requirements. The OTS is generally required to take action to restrict the activities of an "undercapitalized association" (generally defined to be an association with less than either a 4% core capital ratio, a 4% Tier 1 risk-based capital ratio or an 8% risk-based capital ratio). Any such association must submit a capital restoration plan and until such plan is approved by the OTS may not increase its assets, acquire another institution, establish a branch or engage in any new activities, and generally may not make capital distributions. The OTS is authorized to impose the additional restrictions, discussed below, that are applicable to significantly undercapitalized associations. 27 As a condition to the approval of the capital restoration plan, any company controlling an undercapitalized association must agree that it will enter into a limited capital maintenance guarantee with respect to the institution's achievement of its capital requirements. Any savings association that fails to comply with its capital plan or is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios of less than 3% or a risk-based capital ratio of less than 6%) must be made subject to one or more additional actions and operating restrictions which may cover all aspects of its operations and include a forced merger or acquisition of the association; and any other action the OTS deems appropriate. An association that becomes "critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is subject to further mandatory restrictions on its activities in addition to those applicable to significantly undercapitalized associations. In addition, the OTS must appoint a receiver (or conservator with the concurrence of the FDIC) for a savings association, with certain limited exceptions, within 90 days after it becomes critically undercapitalized. Any undercapitalized association is also subject to the general enforcement authority of the OTS and the FDIC, including the appointment of a receiver or conservator. The OTS is also generally authorized to reclassify an association into a lower capital category and impose the restrictions applicable to such category if the institution is engaged in unsafe or unsound practices or is in an unsafe or unsound condition. The imposition by the OTS or the FDIC of any of these measures on the Bank may have a substantial adverse effect on the Bank's operations and profitability. Limitations on Dividends and Other Capital Distributions. OTS regulations impose various restrictions or requirements on savings associations with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account. OTS regulations also prohibit a savings association from declaring or paying any dividends or from repurchasing any of its stock if, as a result, the regulatory capital of the institution would be reduced below the amount required to be maintained for the liquidation account established in connection with its mutual to stock conversion. 28 Liquidity. All savings associations, including First Federal, are required to maintain an average daily balance of liquid assets equal to a certain percentage of the average daily balance of its liquidity base during the preceding calendar quarter or a percentage of the amount of its liquidity base at the end of the preceding quarter. For a discussion of what the Bank includes in liquid assets, see "Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources" in the Annual Report attached as Exhibit 13. This liquid asset ratio requirement may vary from time to time (between 4% and 10%) depending upon economic conditions and savings flows of all savings associations. At the present time, the minimum liquid asset ratio is 4%. Penalties may be imposed upon associations for violations of the liquid asset ratio requirement. At June 30, 1999, the Bank was in compliance with the requirement with an overall liquid asset ratio of 12.1%. Qualified Thrift Lender Test. All savings associations, including the Bank, are required to meet a qualified thrift lender ("QTL") test to avoid certain restrictions on their operations. At June 30, 1999, the Bank met the test and has always met the test since its effectiveness. The test requires a savings association to have at least 65% of its portfolio assets (as defined by regulation) in qualified thrift investments on a monthly average in nine out of every 12 months on a rolling basis. As an alternative, the savings association may maintain 60% of its assets in those assets specified in Section 7701(a)(19) of the Internal Revenue Code. Under either test, such assets primarily consist of residential housing, related loans and investments. Any savings association that fails to meet the QTL test must convert to a national bank charter, unless it requalifies as a QTL and thereafter remains a QTL. If an association does not requalify and converts to a national bank charter, it must remain SAIF-insured until the FDIC permits it to transfer to the BIF. If such an association has not yet requalified or converted to a national bank, its new investments and activities are limited to those permissible for both a savings association and a national bank, and it is limited to national bank branching rights in its home state. In addition, the association is immediately ineligible to receive any new FHLB borrowings and is subject to national bank limits for payment of dividends. If such association has not requalified or converted to a national bank within three years after the failure, it must divest of all investments and cease all activities not permissible for a national bank. In addition, it must repay promptly any outstanding FHLB borrowings, which may result in prepayment penalties. If any association that fails the QTL test is controlled by a holding company, then within one year after the failure, the holding company must register as a bank holding company and become subject to all restrictions on bank holding companies. See "- Holding Company Regulation." Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"), every FDIC insured institution has a continuing and affirmative obligation consistent with safe and sound banking practices to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with the examination of the Bank, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications, such as a merger or the establishment of a branch, by the Bank. An unsatisfactory rating may be used as the basis for the denial of an application by the OTS. The federal banking agencies, including the OTS, have recently revised the CRA regulations and the methodology for determining an institution's compliance with the CRA. Due to the heightened attention being given to the CRA in the past few years, the Bank may be required to devote additional funds for investment and lending in its local community. The Bank was examined for CRA compliance in June 1996 and received a rating of satisfactory. Transactions with Affiliates. Generally, transactions between a savings association or its subsidiaries and its affiliates are required to be on terms as favorable to the association as trans actions with non-affiliates. In addition, certain of these transactions, such as loans to an affiliate, are restricted to a percentage of the association's capital. Affiliates of First Federal include the Company and any company which is under common control with the Bank. In addition, a savings association 29 may not lend to any affiliate engaged in activities not permissible for a bank holding company or acquire the securities of most affiliates. The OTS has the discretion to treat subsidiaries of savings associations as affiliates on a case by case basis. Certain transactions with directors, officers or controlling persons are also subject to conflict of interest regulations enforced by the OTS. These conflict of interest regulations and other statutes also impose restrictions on loans to such persons and their related interests. Among other things, such loans must be made on substantially the same terms and conditions as loans to unaffiliated persons. At June 30, 1999, the Bank was in compliance with the above restrictions. Holding Company Regulation. The Company is a unitary savings and loan holding company subject to regulatory oversight by the OTS. As such, the Company is registered and files reports with the OTS and is subject to regulation and examination by the OTS. In addition, the OTS has enforcement authority over the Company and its non-savings association subsidiaries which also permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association. As a unitary savings and loan holding company, the Company generally is not subject to activity restrictions. If the Company acquires control of another savings association as a separate subsidiary, it would become a multiple savings and loan holding company, and the activities of the Company and any of its subsidiaries (other than the Bank or any other SAIF-insured savings association) would become subject to such restrictions unless such other associations each qualify as a QTL and were acquired in a supervisory acquisition. If the Bank fails the QTL test, the Company must obtain the approval of the OTS prior to continuing after such failure, directly or through its other subsidiaries, any business activity other than those approved for multiple savings and loan holding companies or their subsidiaries. In addition, within one year of such failure the Company must register as, and will become subject to, the restrictions applicable to bank holding companies. The activities authorized for a bank holding company are more limited than are the activities authorized for a unitary or multiple savings and loan holding company. See "Qualified Thrift Lender Test." The Company must obtain approval from the OTS before acquiring control of any other SAIF-insured association. Such acquisitions are generally prohibited if they result in a multiple savings and loan holding company controlling savings associations in more than one state. However, such interstate acquisitions are permitted based on specific state authorization or in a supervisory acquisition of a failing savings association. Federal Securities Law. The stock of the Company is registered with the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the SEC under the Exchange Act. Company stock held by persons who are affiliates (generally officers, directors and principal stockholders) of the Company may not be resold without registration or unless sold in accordance with certain resale restrictions. If the Company meets specified current public information 30 requirements, each affiliate of the Company is able to sell in the public market, without registration, a limited number of shares in any three-month period. Federal Reserve System. The Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily checking, NOW and Super NOW checking accounts). At June 30, 1999, the Bank was in compliance with these reserve requirements. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements that may be imposed by the OTS. See "- Liquidity." Savings associations are authorized to borrow from the Federal Reserve Bank "discount window," but Federal Reserve Board regulations require associations to exhaust other reasonable alternative sources of funds, including FHLB borrowings, before borrowing from the Federal Reserve Bank. Federal Home Loan Bank System. The Bank is a member of the FHLB of Indianapolis, which is one of 12 regional FHLBs that administers the home financing credit function of savings associations. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of directors of the FHLB which are subject to the oversight of the Federal Housing Finance Board. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term advances are required to provide funds for residential home financing. As a member, First Federal is required to purchase and maintain stock in the FHLB of Indianapolis. At June 30, 1999, First Federal had $3.4 million in FHLB stock, which was in compliance with this requirement. In past years, the Bank has received substantial dividends on its FHLB stock. Over the past five fiscal years such dividends have averaged 8.0% and were 8.0% for the fiscal year ended June 30, 1999. Under federal law, the FHLBs are required to provide funds for the resolution of troubled savings associations and to contribute to low- and moderately priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have affected adversely the level of FHLB dividends paid and could continue to do so in the future. These contributions could also have an adverse effect on the value of FHLB stock in the future. A reduction in value of the Bank's FHLB stock may result in a corresponding reduction in First Federal's capital. For the year ended June 30, 1999, dividends paid by the FHLB of Indianapolis to First Federal totaled $259,000 and was approximately $209,000 in fiscal year 1998. The $259,000 dividend received for the fiscal year ended June 30, 1999 reflects an annualized rate of 8.0%. Federal Taxation. Savings associations such as the Bank that meet certain conditions prescribed by the Internal Revenue Code of 1986, as amended (the "Code"), are permitted to establish reserves for bad debts and to make annual additions thereto which may, within specified formula limits, be taken as a deduction in computing taxable income for federal income tax purposes. 31 The amount of the bad debt reserve deduction for "non-qualifying loans" was computed under the experience method. The amount of the bad debt reserve deduction is computed under the experience method. Under the experience method, the bad debt reserve deduction is an amount determined under a formula based generally upon the bad debts actually sustained by the savings association over a period of years. In August 1996, legislation was enacted that repealed the percentage of taxable income method used by many thrifts, including the Bank, to calculate their bad debt reserve for federal income tax purposes. As a result, thrifts such as the Bank must recapture that portion of the reserve that exceeds the amount that could have been taken under the experience method for tax years beginning after December 31, 1987. The recapture will occur over a six-year period, the commencement of which will be delayed until the first taxable year beginning after December 31, 1997, provided the institution meets certain residential lending requirements. The management of the Company does not believe that the legislation will have a material impact on the Company or the Bank. In addition to the regular income tax, corporations, including savings associations such as the Bank, generally are subject to a minimum tax. An alternative minimum tax is imposed at a minimum tax rate of 20% on alternative minimum taxable income, which is the sum of a corporation's regular taxable income (with certain adjustments) and tax preference items, less any available exemption. The alternative minimum tax is imposed to the extent it exceeds the corporation's regular income tax and net operating losses can offset no more than 90% of alternative minimum taxable income. A portion of the Bank's reserves for losses on loans may not, without adverse tax consequences, be utilized for the payment of cash dividends or other distributions to a shareholder (including distributions on redemption, dissolution or liquidation) or for any other purpose (except to absorb bad debt losses). As of June 30, 1999, the Bank's Excess for tax purposes totaled approximately $1.2 million. The Company and its subsidiaries file consolidated federal income tax returns on a fiscal year basis using the accrual method of accounting. Savings associations, such as the Bank, that file federal income tax returns as part of a consolidated group are required by applicable Treasury regulations to reduce their taxable income for purposes of computing the percentage bad debt deduction for losses attributable to activities of the non-savings association members of the consolidated group that are functionally related to the activities of the savings association member. The Company and its subsidiaries have not been audited by the IRS within the last ten years. Indiana Taxation. The State of Indiana imposes an 8.5% franchise tax on the net income (as defined) for financial (including thrift) institutions, exempting them from the current gross income, supplemental net income and intangible taxes. Net income for franchise tax purposes will constitute federal taxable income before net operating loss deductions and special deductions, adjusted for certain items, including Indiana income taxes, tax exempt interest and bad debts. Other applicable Indiana taxes include sales, use and property taxes. Delaware Taxation. As a Delaware holding company, the Holding Company is exempted from Delaware corporate income tax but is required to file an annual report with and pay an annual 32 fee to the State of Delaware. The Company is also subject to an annual franchise tax imposed by the State of Delaware which is generally based upon authorized shares. Competition First Federal faces strong competition, both in originating real estate and other loans and in attracting deposits. Competition in originating real estate loans comes primarily from other commercial banks, savings associations, credit unions and mortgage bankers making loans secured by real estate located in the Bank's market area. Commercial banks and finance companies provide vigorous competition in consumer lending. The Bank competes for real estate and other loans principally on the basis of the quality of services it provides to borrowers, interest rates and loan fees it charges, and the types of loans it originates. The Bank attracts all of its deposits through its retail banking offices, primarily from the communities in which those retail banking offices are located; therefore, competition for those deposits is principally from other commercial banks, savings associations and credit unions located in the same communities, as well as mutual funds. The Bank competes for these deposits by offering a variety of deposit accounts at competitive rates, convenient business hours, and convenient branch locations with interbranch deposit and withdrawal privileges at each. The Bank serves Wabash, Kosciukso, Grant, Miami, Huntington, Whitley and Elkhart Counties in Indiana. The Bank's primary market area, however, is the Counties of Wabash, Kosciukso and Whitley, Indiana. There are four commercial banks and one credit union which compete for deposits and loans in Wabash County. In Kosciukso County, there are six commercial banks, one credit union and one savings bank competing for market share. In Whitley County, there are five commercial banks, one credit union and one savings bank competing for market share. Employees At June 30, 1999, the Company and its affiliates had a total of 62 employees, including 12 part-time employees. The Company's employees are not represented by any collective bargaining group. Management considers its employee relations to be good. 33 Executive Officers of the Company and the Bank Who Are Not Directors The following information as to the business experience during the past five years is supplied with respect to executive officers of the Company and the Bank who do not serve on the Company's or the Bank's Board of Directors. There are no arrangements or understandings between the persons named and any other person pursuant to which such officers were selected. Roger K. Cromer, age 34, is Treasurer and Chief Financial Officer of the Company and First Federal, positions he has held since October 1998. Mr. Cromer is responsible for all accounting and investment functions. Prior ro joining First Federal, Mr. Cromer was employed by 1st Source Corporation located in South Bend, Indiana from 1988 to 1998 in a variety of positions, including Accounting Manager from 1995 to 1998. Item 2. Description of Property The Bank conducts its business at its main office and three other locations in its primary market area. The Bank owns all of its offices. The total net book value of the Bank's premises and equipment (including land, buildings and furniture, fixtures and equipment) at June 30, 1999 was $2.1 million. See Note 6 of Notes to Consolidated Financial Statements in the Annual Report attached as Exhibit 13. The following table sets forth information relating to each of the Bank's offices as of June 30, 1999.
Date Total Approximate Location Acquired Square Footage - -------------------------------------------------------------------------------- Main Office: 1982 10,185(1) 1205 N. Cass Street Wabash, Indiana 500 S. Huntington 1977 2,400(2) Syracuse, Indiana(2) 1306 Street Road 114 West N. 1968 1,325 Manchester, Indiana 105 E. Columbia Street 1997 5,300(4) South Whitley, Indiana(3)
(1) The Bank leases space in this office to its affiliate, FirstFed Financial. (2) A new branch at this site was completed in September 1995. (3) NBD Bank Branch acquired on June 13, 1997. (4) Includes basement. Item 3. Legal Proceedings The Company and First Federal are involved from time to time as plaintiff or defendant in various legal actions arising in the normal course of its business. FirstFed, the Company's other wholly owned subsidiary is not a party to any legal action. While the ultimate outcome of these 34 proceedings cannot be predicted with certainty, it is the opinion of management, after consultation with counsel representing the Company and First Federal in the proceedings, that the resolution of these proceedings should not have a material effect on the Company's consolidated financial position or results of operations. Item 4. Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended June 30, 1999. PART II Item 5. Market for Common Equity and Related Stockholder Matters Page 35 of the attached 1999 Annual Report to Stockholders is herein incorporated by reference. Item 6. Management's Discussion and Analysis or Plan of Operation Pages 5 through 13 of the attached 1999 Annual Report to Stockholders are herein incorporated by reference. Item 7. Financial Statements The following information appearing in the Company's Annual Report to Stockholders for the year ended June 30, 1999, is incorporated by reference in this Annual Report on Form 10-KSB as Exhibit 13. Pages in Annual Annual Report Section Report Report of Independent Auditors.................................... 14 Consolidated Balance Sheets as of June 30, 1999 and 1998.......... 15 Consolidated Statements of Income Years Ended June 30, 1999, 1998 and 1997.......................... 16 Consolidated Statement of Changes in Shareholders' Equity Years Ended June 30, 1999, 1998 and 1997.......................... 17 Consolidated Statements of Cash Flows Years Ended June 30, 1999, 1998 and 1997.......................... 18 Notes to Consolidated Financial Statements........................19 to 33 35 With the exception of the aforementioned information, the Company's Annual Report to Stockholders for the year ended June 30, 1999, is not deemed filed as part of this Annual Report on Form 10-KSB. Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure There has been no Current Report on Form 8-K filed within 24 months prior to the date of the most recent financial statements reporting a change of accountants and/or reporting disagreements on any matter of accounting principle or financial statement disclosure. PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act Directors Information concerning Directors of the Company is incorporated herein by reference from the definitive Proxy Statement for the Annual Meeting of Stockholders to be held in October 1999, a copy of which will be filed not later than 120 days after the close of the fiscal year. Executive Officers Information regarding the business experience of the executive officers of the Company and the Bank contained in Part I of this Form 10-KSB is incorporated herein by reference. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than 10% of the Company's Common Stock (or any other equity securities, of which there is none), to file with the SEC initial reports of ownership and reports of changes in ownership of the Company's Common Stock. Officers, directors and greater than 10% shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required during the fiscal year ended June 30, 1999, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10% beneficial owners were complied with except that Mr. George and Mr. Frank inadvertently failed to timely file Form 4s to report one transaction each. Mr. George and Mr. Frank reported their transactions on Form 4s dated July 28, 1999. 36 Item 10. Executive Compensation Information concerning executive compensation is incorporated herein by reference from the definitive Proxy Statement for the Annual Meeting of Stockholders to be held in October 1999, a copy of which will be filed not later than 120 days after the close of the fiscal year. Item 11. Security Ownership of Certain Beneficial Owners and Management Information concerning security ownership of certain beneficial owners and management is incorporated herein by reference from the definitive Proxy Statement for the Annual Meeting of Stockholders to be held in October 1999, a copy of which will be filed not later than 120 days after the close of the fiscal year. Item 12. Certain Relationships and Related Transactions Information concerning certain relationships and related transactions is incorporated herein by reference from the definitive Proxy Statement for the Annual Meeting of Stockholders to be held in October 1999, a copy of which will be filed not later than 120 days after the close of the fiscal year. PART IV Item 13. Exhibits and Reports on Form 8-K (a) Exhibits See Index to Exhibits. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended June 30, 1999. 37 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FFW CORPORATION Date: October 12, 1999 By: /s/ Nicholas M. George ---------------------- ----------------------- NICHOLAS M. GEORGE (Duly Authorized Representative) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Wayne W. Rees /s/ Nicholas M. George - ------------------------------------ ------------------------------------ WAYNE W. REES, Chairman of the NICHOLAS M. GEORGE, President, Board and Secretary Chief Executive Officer and Director (Principal Executive and Operating Officer) Date: October 12, 1999 Date: October 12, 1999 --------------------------- --------------------------- /s/ Joseph W. McSpadden /s/ Stanley Myers - ------------------------------------ ------------------------------------ JOSEPH W. MCSPADDEN, Director STANLEY MYERS, Director Date: October 12, 1999 Date: October 12, 1999 --------------------------- -------------------------- /s/ Ronald D. Reynolds /s/ Thomas L. Frank - ------------------------------------ ------------------------------------ RONALD D. REYNOLDS, Director THOMAS L. FRANK, Director Date: October 12, 1999 Date: October 12, 1999 --------------------------- -------------------------- /s/ Roger K. Cromer - ------------------------------------ ROGER K. CROMER, Chief Financial Officer (Principal Financial and Accounting Officer) Date: October 12, 1999 ---------------------------
Index to Exhibits Reference to Prior Filing Regulation S-B 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) Employment Contract between Roger K. 10(b) Cromer and the Bank (c) 1992 Stock Option and Incentive Plan * (d) Management Recognition and Retention Plan ** (e) 1998 Omnibus Incentive Plan *** 11 Statement re: computation of per share earnings **** 13 Annual Report to Security Holders 13 21 Subsidiaries of Registrant 21 23 Consents of Experts and Counsel 23 27 Financial Data Schedule 27
- ----------------------- * Filed as an Exhibit to the Company's Form S-1 Registration Statement filed on December 21, 1992 (File No. 33-56110) pursuant to Section 5 of the Securities Act of 1933. All of such previously filed documents are hereby incorporated herein by reference in accordance with Item 601 of Regulation S-B. ** Filed as Exhibit 10-1 to the Company's Annual Report on Form 10-KSB for the fiscal year ended June 30, 1994 (File No. 0-21170). This previously filed document is hereby incorporated herein by reference in accordance with Item 601 of Regulation S-B. *** Filed as an Exhibit to the Company's Definitive Proxy Statement on Schedule 14A on September 25, 1998 (File No. 0-21170). This previously filed document is hereby incorporated herein by reference in accordance with Item 601 of Regulation S-B. **** See Note 2 of Notes to Consolidated Financial Statements included in the Annual Report to Security Holders under Exhibit 13. EX-10 2 Exhibit 10(b) Employment Contract EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of this 22nd day of June, 1999 by and between FIRST FEDERAL SAVINGS BANK OF WABASH, WABASH, INDIANA, a federally chartered savings bank (hereinafter referred to as the "Bank" whether in the mutual or stock form), whose address in 1205 North Cass Street, Wabash, Indiana 46992 and Roger K. Cromer (the "Employee") whose address is 1073 Mitten Dr., Wabash, Indiana. WHEREAS, the Employee is currently serving as Treasurer and Chief Financial Officer of the Bank; and WHEREAS, the Board of Directors of the Bank recognizes that, as is the case with publicly held corporations generally, the possibility of a change in control of FFW Corporation (the "Holding Company") may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of key management personnel to the detriment of the Bank, the Holding Company and its stockholders; and WHEREAS, the Board of Directors of the Bank believes it is in the best interests of the Bank to enter into this Agreement with the Employee in order to assure continuity of management of the Bank and to reinforce and encourage the continued attention and dedication of the Employee to his assigned duties without distraction in the face of potentially disruptive circumstances arising from the possibility of a change in control of the Holding Company, although no such change is now contemplated; and WHEREAS, the Board of Directors of the Bank has approved and authorized the execution of this Agreement with the Employee to take effect as stated in Section 4 hereof; NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein contained, it is AGREED as follows: 1. Employment. The Employee will be employed as Treasurer and Chief Financial Officer of the Bank. As Treasurer and Chief Financial Officer, Employee shall render administrative and management services as are customarily performed by persons situated in similar executive capacities, and shall have other powers and duties as may from time to time be prescribed by the Board, provided that such duties are consistent with the Employee's position as Treasurer and Chief Financial Officer. The Employee shall continue to devote his best efforts and substantially all his business time and attention to the business and affairs of the Bank and affiliated companies. 2. Compensation. (a) Salary. The Bank agrees to pay the Employee during the term of this Agreement a salary established by the Board of Directors. The salary hereunder as of the Commencement Date (as defined in Section 4 hereof) shall be at least the Employee's current salary. The salary provided for herein shall be payable not less frequently than monthly in accordance with the practices of the Bank, provided, however, that no such salary is required to be paid by the terms of this Agreement 1 in respect of any month or portion thereof subsequent to the termination of this Agreement and provided further, that the amount of such salary shall be reviewed by the Bank not less often than annually and may be increased (but not decreased) from time to time in such amounts as the Bank in its discretion may decide, subject to the customary withholding tax and other employee taxes as required with respect to compensation paid by a corporation to an employee. (b) Discretionary Bonuses. The Employee shall be entitled to participate in an equitable manner with all other executive officers of the Bank in discretionary bonuses as authorized and declared by the Board of Directors of the Bank to its executive employees. No other compensation provided for in this Agreement shall be deemed a substitute for the Employee's right to participate in such bonuses when and as declared by the Board of Directors. (c) Expenses. During tho term of his employment hereunder, the Employee shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by his (in accordance with policies and procedures at least as favorable to the Employee as those presently applicable to the senior executive officers of the Bank) in performing services hereunder, provided that the Employee properly accounts therefor in accordance with Bank policy. 3. Benefits. (a) Participation in Retirement and Employee Benefit Plans. The Employee shall be entitled while employed hereunder to participate in, and receive benefits under, all plans relating to stock options, stock purchases, pension, thrift, profit-sharing, group life insurance, medical coverage, education, cash or stock bonuses, and other retirement or employee benefits or combinations thereof, that are now or hereafter maintained for the benefit of the Bank's executive employees or for its employees generally. (b) Fringe Benefits. The Employee shall be eligible while employed hereunder to participate in, and receive benefits under, any other fringe benefits which are or may become applicable to the Bank's executive employees or to its employees generally. 4. Term. The term of employment under this Agreement shall be a period of three (3) years commencing on the date of approval of this Agreement by the Board of Directors ("Commencement Date") , subject to earlier termination as provided herein. Beginning on the first anniversary of the Commencement Date, and on each anniversary thereafter, the term of employment under this Agreement shall be extended for a period of one year unless either the Bank or the Employee gives contrary written notice to the other not less than 90 days in advance of the date on which the term of employment under this Agreement would otherwise be extended. Notwithstanding any other statement or provision in this Agreement, this Agreement will not be automatically extended unless, prior thereto, such extension is approved by the Board of Directors of the Bank following the Board's review of a formal performance evaluation of the Employee performed by the disinterested members of the Board of Directors of the Bank and reflected in the minutes of the Board of Directors. Reference herein to the term of employment under this Agreement shall refer to both such initial term and such extended terms. 2 5. Vacations. The Employee shall be entitled, without loss of pay, to absent himself voluntarily from the performance of his employment under this Agreement, all such voluntary absences to count as vacation time, provided that: (a) The Employee shall be entitled to an annual vacation of not less than two (2) weeks per year, subject to increase as provided in the Bank's personnel manual as may be from time to time amended; (b) The timing of vacations shall be scheduled in a reasonable manner by the Employee;and (c) management shall, solely at the Employee's request, be entitled to grant to the Employee a leave or leaves of absence with or without pay at such time or times and upon such terms and conditions as management, in its discretion, may determine. 6. Termination of Employment; Death. (a) The Board of Directors may terminate the Employee's employment at any time, but any termination by the Bank's Board of Directors, other than termination for cause, shall not prejudice the Employee's right to compensation or other benefits under the Agreement. If the employment of the Employee is involuntarily terminated, other than for "cause" as provided in this Section 6(a) or pursuant to any of Sections 6(d) through 6(g), or by reason of death or disability as provided in Sections 6(c) or 7, the Employee shall be entitled to receive, (i) his then applicable salary for the then-remaining term of the Agreement as calculated in accordance with Section 4 hereof, payable in such manner and at such times as such salary would have been payable to the Employee under Section 2 had he remained in the employ of the Bank, and (ii) health insurance benefits as maintained by the Bank for the benefit of its senior executive employees or its employees generally over the then-remaining term of the Agreement as calculated in accordance with Section 4 hereof. The terms "termination" or "involuntarily terminated", in this Agreement shall refer to the termination of the employment of Employee without his express written consent. The Employee shall be considered to be involuntarily terminated (1) if the employment of the Employee is involuntarily terminated for any reason other than for "cause", as provided in this Section 6(a), pursuant to any of Sections 6(d) through 6(g) or by reason of death or disability as provided in Sections 6(c) and 7; or (2) there occurs a material diminution of or interference with the Employee's duties, responsibilities and benefits as Treasurer and Chief Financial Officer of the Bank. By way of example and not by way of limitation, any of the following actions, if unreasonable or materially adverse to the Employee, shall constitute such diminution or interference unless consented to in writing by the Employee: (i) a change in the principal workplace of the Employee to a location outside of Wabash, Indiana; (ii) a material demotion of the Employee, a reduction in the number or seniority of other Bank personnel reporting to the Employee, or a reduction in the frequency with which, or in the nature of the matters with respect to which, such personnel are to report to the Employee, other than as part of a Bank or Holding Company-wide reduction in staff; or (iii) a reduction or adverse change in the salary, perquisites, benefits, contingent benefits or vacation time which had theretofore been provided to the Employee, other than as part of an overall program 3 applied uniformly and with equitable effect to all members of the senior management of the Bank or the Holding Company. In case of termination of the Employee's employment for cause, the Bank shall pay the Employee his salary through the date of termination, and the Bank shall have no further obligation to the Employee under this Agreement. The Employee shall have no right to receive compensation or other benefits for any period after termination for cause. For purposes of this Agreement, termination for "cause" shall include termination because of the Employee's personal dishonesty, incompetence, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. Notwithstanding the foregoing, the Employee shall not be deemed to have been terminated for cause unless and until there shall have been delivered to the Employee a copy of a resolution, duly adopted by the affirmative vote of not less than a majority of the disinterested members of the Board of Directors of the Bank at a meeting of the Board called and held for such purpose (after reasonable notice to the Employee and an opportunity for the Employees, together with the Employee's counsel, to be heard before the Board), stating that in the good faith opinion of the Board the Employee was guilty of conduct constituting "cause" as set forth above and specifying the particulars thereof in detail. (b) The Employee's employment may be voluntarily terminated by the Employee at any time upon ninety (90) days written notice to the Bank or upon such shorter period as may be agreed upon between the Employee and the Board of Directors of the Bank. In the event of such voluntary termination, the Bank shall be obligated to continue to pay the Employee his salary only through the date of termination, at the time such payments are due, and the Bank shall have no further obligation to the Employee under this Agreement. (c) In the event of the death of the Employee during the term of employment under this Agreement and prior to any termination hereunder, the Employee's estate, or such person as the Employee may have previously designated in writing, shall be entitled to receive from the Bank the salary of the Employee through the last day of the calendar month in which his death shall have occurred, and the term of employment under this Agreement shall end on such last day of the month. (d) If the Employee is suspended from office and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA"), 12 U.S.C. ss.ss. 1818(e)(3) or (g)(1), the Bank's obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion (i) pay the Employee all or part of the compensation withheld while its obligations under this Agreement were suspended and (ii) reinstate in whole or in part any of the obligations which were suspended. (e) If the Employee is removed from office and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8 (e) (4) or (g) (1) of the FDIA, 12 U.S.C. ss.ss. 1818(e)(4) or (g)(1), all obligations of the Bank under this Agreement 4 shall terminate, as of the effective date of the order, but vested rights of the parties shall not be affected. (f) If the Bank is in default (as defined in Section 3 (x) (1) of the FDIA, 12 U. S. C. ss. 1813 (x) (1) ), all obligations under this Agreement shall terminate as of the date of default, but this provision shall not affect any vested rights of the parties. (g) All obligations under this Agreement shall be terminated, except to the extent determined that continuation of this Agreement is necessary for the continued operation of the Bank: (i) by the Director of the Office of Thrift Supervision ("OTS") or his or her designee at the time the Federal Deposit Insurance Corporation or the Resolution Trust Corporation enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13 (c) of the FDIA, 12 U.S.C. ss. 1823 (c) ; or (ii) by the Director of the OTS or his or her designee at the time the Director of the OTS or his or her designee approves a supervisory merger to resolve problems related to operation of the Bank or when the Bank is determined by the Director of the OTS to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by any such action. (h) In the event the Bank purports to terminate the Employee for cause, but it is determined by a court of competent jurisdiction or by an arbitrator pursuant to Section 18 that cause did not exist for such termination, or if in any event it is determined by any such court or arbitrator that the Bank has failed to make timely payment of any amounts owed to the Employee under this Agreement, the Employee shall be entitled to reimbursement for all reasonable costs, including attorneys' fees, incurred in challenging such termination or collecting such amounts. Such reimbursement shall be in addition to all rights to which the Employee is otherwise entitled under this Agreement. 7. Disability. (a) During the term of this Agreement, in addition to the long-term disability income plan maintained by the Bank for qualified employees of the Bank, during the first ninety-one (91) days of disability, the Employee shall be paid his regular compensation by the Bank. In such event, the rights of the Employee to receive the salary stated in Section 2 hereof shall be suspended after a period of ninety-one (91) days until the Employee is no longer disabled, subject to the provisions of Section 7 (c) of this Agreement. (b) The definition of "disability" shall be as stated in the disability income plan in effect at the time the Employee becomes disabled. The commencement of disability shall be the date which is accepted by the disability insurance company. (c) After the Employee has been continuously disabled for a period of twelve (12) months, his employment automatically shall be terminated. This Agreement may not otherwise be terminated by the Bank at any time except as provided in this Agreement. 5 8. Change in Control. (a) Involuntary Termination. If the Employee's employment is involuntarily terminated (other than for cause or pursuant to any of Sections 6(c) through 6(g) or Section 7 of this Agreement) in connection with or within twelve (12) months after a change in control which occurs at any time during the term of employment under this Agreement, the Bank shall pay to the Employee in a lump sum in cash within twenty-five (25) business days after the Date of Termination (as hereinafter defined) of employment an amount equal to 299 percent of the Employee's "base amount" of compensation, as defined in Section 280G(b) (3) of the Internal Revenue Code of 1986, as amended ("Code") . (b) Definitions. For purposes of Sections 8, 9 and 12 of this Agreement, "Date of Termination" means the earlier of (i) the date upon which the Bank gives notice to the Employee of the termination of his employment with the Bank or (ii) the date upon which the Employee ceases to serve as an Employee of the Bank, and "change in control" is defined solely as any acquisition of control (other than by a trustee or other fiduciary holding securities under an employee benefit plan of the Holding Company or a subsidiary of the Holding Company), as defined in 12 C.F.R. ss. 574.4, or any successor regulation, of the Bank or Holding Company which would require the filing of an application for acquisition of control or notice of change in control in a manner as set forth in 12 C.F.R. ss. 574.3, or any successor regulation. (c) Compliance with Capital Requirements. Notwithstanding anything in this Agreement to the contrary, no payments may be made pursuant to Section 8 hereof without the prior approval of the Regional Deputy Director of the OTS if following such payment the Bank would not be in compliance with its fully phased-in capital requirements as defined in OTS regulations. 9. Certain Reduction of Payments by the Bank. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Bank to or for the benefit of the Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (a "Payment") would be nondeductible (in whole or part) by the Bank for Federal income tax purposes because of Section 280G of the Code, then the aggregate present value of amounts payable or distributable to or for the benefit of the Employee pursuant to this Agreement (such amounts payable or distributable pursuant to this Agreement are hereinafter referred to as "Agreement Payments") shall be reduced to the Reduced Amount. The "Reduced Amount" shall be an amount, not less than zero (0), expressed in present value which maximizes the aggregate present value of Agreement Payments without causing any Payment to be nondeductible by the Bank because of Section 280G of the Code. For Purposes of this Section 9, present value shall be determined in accordance with Section 280G(d)(4) of the Code. (b) All determinations required to be made under this Section 9 shall be made by the Bank's independent auditors, or at the election of such auditors by such other firm or individuals of recognized expertise as such auditors may select (such auditors or, if applicable, such other firm or individual, are hereinafter referred to as the "Advisory Firm"). The Advisory Firm shall within ten 6 business days of the Date of Termination, or at such earlier time as is requested by the Bank, provide to both the Bank and the Employee an opinion (and detailed supporting calculations) that the Bank has substantial authority to deduct for federal income tax purposes the full amount of the Agreement Payments and that the Employee has substantial authority not to report on his federal income tax return any excise tax imposed by Section 4999 of the Code with respect to the Agreement Payments. Any such determination and opinion by the Advisory Firm shall be binding upon the Bank and the Employee. The Employee shall determine which and how much, if any, of the Agreement Payments shall be eliminated or reduced consistent with the requirements of this Section 9, provided that, if the Employee does not make such determination within ten (10) business days of the receipt of the calculations made by the Advisory Firm, the Bank shall elect which and how much, if any, of the Agreement Payments shall be eliminated or reduced consistent with the requirements of this Section 9 and shall notify the Employee promptly of such election. Within five (5) business days of the earlier of (i) the Bank's receipt of the Employee's determination pursuant to the immediately preceding sentence of this Agreement or (ii) the Bank's election in lieu of such determination, the Bank shall pay to or distribute to or for the benefit of the Employee such amounts as are then due the Employee under this Agreement. The Bank and the Employee shall cooperate fully with the Advisory Firm, including without limitation providing to the Advisory Firm all information and materials reasonably requested by it, in connection with the making of the determinations required under this Section 9. (c) As a result of uncertainty in application of Section 280G of the Code at the time of the initial determination by the Advisory Firm hereunder, it is possible that Agreement Payments will have been made by the Bank which should not have been made ("Overpayment") or that additional Agreement Payments will not have been made by the Bank which should have been made ("Underpayment"), in each case, consistent with the calculations required to be made hereunder. In the event that the Advisory Firm, based upon the assertion by the Internal Revenue Service against the Employee of a deficiency which the Advisory Firm believes has a high probability of success determines that an Overpayment has been made, any such Overpayment paid or distributed by the Bank to or for the benefit of Employee shall be treated for all purposes as a loan ab initio which the Employee shall repay to the Bank together with interest at the applicable federal rate provided for in Section 7872(f) (2) of the Code; provided, however, that no such loan shall be deemed to have been made and no amount shall be payable by the Employee to the Bank if and to the extent such deemed loan and payment would not either reduce the amount on which the Employee is subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Advisory Firm, based upon controlling preceding or other substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Bank to or for the benefit of the Employee together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code. (d) Notwithstanding anything in this Agreement to the contrary, in no event shall the sum of a payment to the Employee under Section 8 of this Agreement and payments of salary under Section 6 of this Agreement exceed an amount that is three (3) times the Employee's average annual compensation (based upon the last five (5) years taxable years) as of the date of termination of employment. 7 (e) Any payments made to the Employee pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U. S.C. ss. 1828(k) and any regulations promulgated thereunder. 10. Confidential Information; Loyalty; Non-Competition. (a) During the term of the Employee's employment hereunder and thereafter, the Employee shall not, except as may be required to perform his duties hereunder or as required by law, disclose to others or use, whether directly or indirectly, any Confidential Information. "Confidential Information" means information about the Bank and the Bank's clients and customers which is not available to the general public and was or shall be learned by the Employee in the course of his employment by the Bank, including without limitation any data, formulae, information, proprietary knowledge, trade secrets, and credit reports and analyses owned, developed and used in the course of the business of the Bank, including client and customer lists and information related thereto; and all papers, resumes, records and other documents (and all copies thereof) containing such Confidential Information. The Employee acknowledges that such Confidential Information is specialized, unique in nature and of great value to the Bank. The Employee agrees that upon the expiration of the Employee's term of employment hereunder or in the event the Employee's employment hereunder is terminated prior thereto for any reason whatsoever, the Employee will promptly deliver to the Bank all documents (and all copies thereof) containing any Confidential Information. (b) The Employee shall devote his full time to the performance of his employment under this Agreement; provided, however, that the Employee may serve, without compensation, with charitable, community and industry organizations and continue to serve, with compensation, as a director of any business corporation of which he is currently a director to the extent such directorships do not inhibit the performance of his duties thereunder or conflict with the business of the Bank. During the term of the Employee's employment hereunder, the Employee shall not engage in any business or activity contrary to the business affairs or interests of the Bank. (c) Upon the expiration of the term of the Employee's employment hereunder or in the event the Employee's employment hereunder terminates prior thereto for any reason whatsoever, the Employee shall not, for a period of three (3) years after the occurrence of such event, for himself or as the agent of, on behalf of, or in conjunction with, any person or entity, solicit or attempt to solicit, whether directly or indirectly: (i) any employee of the Bank to terminate such employee's employment relationship with the Bank; or (ii) any savings and loan, banking or similar business from any person or entity that is or was a client, employee, or customer of the Bank and had dealt with the Employee or any other employee of the Bank under the supervision of the Employee. (d) In the event the Employee voluntarily resigns pursuant to Section 6(b) of this Agreement, or in the event the Employee's employment hereunder is terminated for cause, the Employee shall not, for a period of one year from the date of termination, directly or indirectly, own, manage, operate or control, or participate in the ownership, management, operation or control of, or be employed by or connected in any manner with, any financial institution having an office located within twenty (20) miles of any office of the Bank as of the date of termination. 8 (e) The provisions of subsections (b) and (d) hereof shall not prevent the Employee from purchasing, solely for investment, not more than five (5%) percent of any other financial institution's stock or other securities which are traded on any national or regional securities exchange or are actively traded in the over-the-counter market and registered under Section 12 (g) of the Securities Exchange Act of 1934. (f) The provisions of this Section shall survive the termination of the Employee's employment hereunder whether by expiration of the term thereof or otherwise. 11. No Mitigation. The Employee shall not be required to mitigate the amount of any salary or other payment or benefit provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by the Employee as the result of employment by another employer, by retirement benefits after the date of termination or otherwise. 12. No Assignments. (a) This Agreement is personal to each of the parties hereto, and neither party may assign or delegate any of its rights or obligations hereunder without first obtaining the written consent of the other party; provided, however, that the Bank will require any successor or assign (whether direct or indirect, by purchase, merger consolidation or otherwise) to all or substantially all of the business and/or assets of the Bank, by an assumption agreement in form and substance satisfactory to the Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Bank would be required to perform it if no such succession or assignment had taken place. Failure of the Bank to obtain such an assumption agreement prior to the effectiveness of any such succession or assignment shall be a breach of this Agreement and shall entitle the Employee to compensation from the Bank in the same amount and on the same terms as the compensation pursuant to Section 8 (a) hereof. For purposes of implementing the provisions of this Section 12(a), the date on which any such succession becomes effective shall be deemed the Date of Termination. (b) This Agreement and all rights of the Employee hereunder shall inure to the benefit of and be enforceable by the Employee's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Employee should die while any amounts would still be payable to the Employee hereunder if the Employee had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Employee's devisee, legatee or other designee or if there is no such designee, to the Employee's estate. 13. Notice. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement (provided that all notices to the Bank shall be directed to the attention of the Board of Directors of the Bank with a copy to the 9 Secretary of the Bank), or to such other address as either party may have furnished to the other in writing in accordance herewith. 14. Prior Agreements/Amendments. Upon the Commencement Date of this Agreement, all prior agreements, still in effect, among the parties related to the employment of the Employee as Treasurer and Chief Financial Officer of the Bank shall be deemed null and void and have no effect. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties, except as herein otherwise provided. 15. Paragraph Headings. The paragraph headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. 16. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 17. Governing Law. This Agreement shall be governed by the laws of the United States to the extent applicable and otherwise by the laws of the State of Indiana. 18. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. 10 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES. FIRST FEDERAL SAVINGS BANK OF WABASH By: /s/ Nicholas M. George --------------------------------- Nicholas M. George, President and Chief Executive Officer EMPLOYEE /s/ Roger K. Cromer --------------------------------- Roger K. Cromer 11 EX-13 3 FFW Corporation Wabash, Indiana Table of Contents PRESIDENT'S MESSAGE ..................................................... 3 SELECTED CONSOLIDATED FINANCIAL INFORMATION ............................. 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................................... 5 REPORT OF INDEPENDENT AUDITORS ................................. 14 CONSOLIDATED BALANCE SHEETS June 30, 1999 and 1998 ....................................... 15 CONSOLIDATED STATEMENTS OF INCOME Years Ended June 30, 1999, 1998 and 1997 ..................... 16 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years Ended June 30, 1999, 1998 and 1997 ..................... 17 CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended June 30, 1999, 1998 and 1997 ..................... 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ..................... 19 DIRECTORS AND EXECUTIVE OFFICERS ........................................ 34 SHAREHOLDER INFORMATION ................................................. 35 1 [GRAPHIC-PHOTO OF BANK BUILDING] President's Message Dear Shareholder: Fiscal 1999 was a year of record earnings and preparation for the future. In this, our sixth year as public company, net income was up 11.1% over the previous year to $2,111,000 with diluted earnings per share up 10.6% to $1.46. Our earnings were aided by a strong loan demand, a solid local economy, and reflected the commitment our employees have made to provide service to the customer. During the year, your company emphasized expansion of its small business relationships and consumer lending programs. Both have shown profitable growth which will help us meet our long term goals. Our preparation for the future has been primarily focused on two issues, systems and people. During this fiscal year we have been diligently working to identify, test, and install software and hardware systems that will serve our needs well into the next century. Accordingly, at this time, we are Y2K compliant. Our second focus for the future is people. The future success of our company relies on our ability to attract, train, and retain qualified people. The continued effort to upgrade technology, products, and personnel will be vital to our ability to compete in the new millennium. During this next year, our training programs will be based on proactive relationships with our customers. We will be more sales oriented, and we will continue to stress "service for our customer." In conclusion, I would like to thank and recognize our dedicated employees for their loyalty and service to First Federal and the communities they serve. I would also like to thank you, our customers and shareholders, for your continued faith and support. We look forward to the challenge of the upcoming year and every effort will be made to justify your continued confidence. Sincerely, /s/Nicholas M. George - --------------------- Nicholas M. George President and Chief Executive Officer 3 Selected Financial Information at or for the Year Ended June 30,:
1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- (In Thousands) Selected Financial Condition Data: $ 217,489 $ 203,311 $ 180,055 $ 150,467 $ 147,293 Total assets 151,491 139,394 114,159 100,529 92,475 Loans 51,029 50,293 40,450 40,566 34,983 Securities 130,401 125,256 116,118 92,490 85,930 Deposits 66,300 56,500 44,800 41,800 45,300 Borrowings 19,357 19,129 17,141 15,458 15,492 Equity Selected Operations Data: Total interest income $ 16,052 $ 14,589 $ 12,224 $ 11,164 $ 9,409 Net interest income 6,686 5,998 4,978 4,365 3,779 Provision for loan losses (1,010) (705) (120) (95) (34) Non-interest income 1,990 1,265 674 628 145 Non-interest expense (4,591) (3,800) (3,583) (2,586) (2,356) Income tax expense (964) (858) (605) (726) (435) --------- --------- --------- --------- --------- Net income $ 2,111 $ 1,900 $ 1,344 $ 1,586 $ 1,099 ========= ========= ========= ========= ========= Per Share: Basic earnings per share (1) $ 1.48 $ 1.36 $ 1.00 $ 1.11 $ 0.75 Diluted earnings per share (1) $ 1.46 $ 1.32 $ 0.97 $ 1.08 $ 0.74 Dividends declared (1) $ .42 $ 0.38 $ 0.32 $ 0.26 $ 0.23 Dividend payout ratio 28.38% 27.94% 32.00% 23.42% 30.67% Other Data: Net interest margin (2) 3.28% 3.31% 3.25% 3.06% 2.99% Average interest-earning assets to average interest-bearing liabilities . 1.11x 1.11x 1.12x 1.13x 1.14x Non-performing assets (3) to total assets at end of period .39% .43% .16% .06% .09% Equity-to-total assets (end of period) . 8.90 9.41 9.52 10.27 10.52 Return on assets (ratio of net income to average total assets) .99 1.00 .85 1.09 .85 Return on equity (ratio of net income to average equity) 10.68 10.51 8.41 9.89 7.62 Equity-to-assets ratio (ratio of average equity to average total assets) 9.25 9.49 10.11 11.02 11.15 Number of full-service offices 4 4 4 3 3
(1) Restated for 100% stock dividend. (2) Net interest income divided by average interest-earning assets. (3) Includes non-accruing loans, accruing loans delinquent more than 90 days and foreclosed assets. 4 Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL FFW Corporation (the Company) owns First Federal Savings Bank of Wabash (the Bank or First Federal), and the Company's earnings are primarily dependent on the operations of First Federal. The following discussion relates primarily to the Bank. The principal business of First Federal is attracting deposits from the general public and making loans secured by residential real estate. The Bank's earnings are primarily dependent on net interest income, the difference between interest income and interest expense. Interest income is a function of the balances of loans, mortgage-backed securities and investments outstanding during the period and the yield earned on such assets determines interest income. The balances of deposits and borrowings and the rates paid on such deposits and borrowings determines interest expense. Operating expenses consist of employee compensation and benefits, occupancy and equipment, federal deposit insurance and other general and administrative expenses. Economic conditions as well as federal regulations concerning financial institutions and monetary and fiscal policies affect the Company. Deposit balances are influenced by a number of factors including interest rates paid on competing personal investments and the level of personal income and savings in our market. Deposit balances are influenced by the perceptions of customers regarding the stability of the financial services industry. Lending activities are influenced by the demand for housing and by competition from other lending institutions. The primary sources of funds for lending activities include deposits, loan repayments, borrowings, sales and maturities of securities available for sale and funds provided from operations. FINANCIAL CONDITION Total assets increased $14.2 million during the year to $217.5 million at June 30, 1999. This increase was funded by an increase in deposits of $5.1 million and an increase in advances outstanding from Federal Home Loan Bank of Indianapolis (FHLB) of $9.8 million. These funds, along with cash on hand, were used to originate loans, resulting in an increase in net loans of $12.1 million. An additional $0.7 million was invested in government agencies, municipals and other securities. Total securities available for sale increased from $50.3 million at June 30, 1998 to $51.0 million at June 30, 1999. During fiscal 1999, state and municipal securities decreased from $9.1 million at June 30, 1998 to $8.3 million at June 30, 1999 due to maturities during the course of the year totaling $1.0 million. Government agency securities increased from $13.2 million at June 30, 1998 to $23.2 million at June 30, 1999, which reflected the investment of $7.0 million of called mortgage-backed securities during 1999. The Company has net unrealized depreciation of $(455,000), net of tax at June 30, 1999 in its portfolio of securities available for sale. Mortgage-backed securities decreased from $18.3 million at June 30, 1998 to $10.7 million at June 30, 1999. This decrease was primarily due to the $6.7 million of proceeds from the call of a privately issued mortgaged-backed security. The call on this security resulted in a gain on sale of $724,000. Net loans increased $12.1 million, or 8.7%, from $139.4 million at June 30, 1998 to $151.5 million at June 30, 1999. The increases in the loan portfolio were comprised primarily of automobile and commercial loans which increased $2.5 million and $10.8 million, respectively, during fiscal 1999. The loan portfolio is comprised primarily of first mortgage loans secured by one-to-four family residential real estate located in the Company's market area. At June 30, 1999, first mortgage loans secured by real estate comprise $78.1 million, or 47.8% of the loan portfolio. The consumer and other loan portfolio included $36.3 million of automobile loans, $10.4 million of home equity and improvement loans, $23.8 million in commercial loans and $4.4 million in other consumer loans at June 30, 1999. Total deposits increased $5.1 million, or 4.1%, from $125.3 million at June 30, 1998 to $130.4 at June 30, 1999. During fiscal 1999, passbook and checking accounts increased $2.6 million, or 4.5%, and certificates of deposit increased $2.5 million, or 3.8%. The increase resulted from increased core deposit accounts and targeted pricing of short term certificates of deposit. Assuming interest rates remain at present levels during the next fiscal year, management anticipates that deposits will continue to increase above current levels. As a result, management will continue to control the overall increases in interest rates in deposits by targeting certain terms and offering "specials" rather than across the board increases for all deposit products. If deposit growth lags behind loan demand, then an increase in FHLB advances may be necessary to fund the Company's lending and investment activities during fiscal 2000. 5 Total shareholders' equity increased $228,000 to $19.4 million at June 30, 1999. The increase primarily resulted from net income of $2.11 million, $245,000 for the release of ESOP shares and $27,000 of proceeds from the exercise of stock options, which were offset by dividends paid of $609,000, $1.1 million change in unrealized appreciation on securities available for sale, net of tax, and $406,000 of treasury stock purchases. RESULTS OF OPERATIONS Comparison of Years Ended June 30, 1999 and June 30, 1998 General. Net income for the year ended June 30, 1999 was $2.1 million, an increase of $211,000 compared to net income of $1.9 million for the year ended June 30, 1998, an increase of 10.53%. The increase was primarily the result of an increase of $688,000 in net interest income and $725,000 in noninterest income, which was partially offset by an increase of $791,000 in noninterest expense, a $305,000 increase in provisions for loan losses and an increase in income taxes of $106,000. Further details of the changes in these items are discussed below. Net Interest Income. Net interest income increased $688,000, or 11.5%, from $6.0 million to $6.7 million for the year ended June 30, 1999. The increase in net interest income was due to an increase of $1.5 million in interest income, partially offset by an increase of $775,000 in interest expense. The increase in net interest income was primarily a result of an increase in average interest-earning assets exceeding the increase in average interest-bearing liabilities. [GRAPHIC-GRAPH DEPICTING (1) Year of one time assessment by Savings Association Insurance Fund] Net interest margin, the ratio of net interest income to average earning assets, is affected by movements in interest rates and changes in the mix of earning assets and the liabilities that fund those assets. Net interest margin was 3.28% in 1999 compared to 3.31% in 1998. The net interest margin decreased because of competitive pricing pressure. In addition, First Federal has relied more on FHLB advances to meet loan demand. The yield on earning assets in 1999 was 7.88% compared to 8.01% in 1998. Average earning assets increased 10.9% in 1999, following a 19.5% increase in 1998. The effective rate on interest bearing liabilities was 5.13% in 1999, compared to 5.26% in 1998. Provision for Loan Losses. The provision for loan losses increased $305,000 from $705,000 in fiscal 1998 to $1.0 million in fiscal 1999. The amounts provided during the fiscal year were based on management's quarterly analysis of the allowance for loan losses, and the changing composition of the total loan portfolio from one-to-four family to commercial and consumer loans. The inherent and identified risks of commercial and consumer loans require a higher level of provisions for loan losses. The Company has monitored the historical results in net charge-offs in the consumer loan portfolio for the last three years and had increased the provision for loan losses accordingly. The 6 Company will continue to monitor its allowance for loan losses and make future additions to the allowance through the provision for loan losses as economic and regulatory conditions dictate. Although the Company maintains its allowance for loan losses at a level which it considers to be adequate to provide for potential losses, there can be no assurance that future losses will not exceed estimated amounts or that additional provisions for loan losses will not be required in future periods. In addition, the Company's determination as to the amount of the allowance for loan losses is subject to review by the regulatory agencies, which can order the establishment of additional general or specific allowances. Non-interest Income. Supplementing the growth in net interest income was an increase in noninterest income of 57.3% over 1998. The factors influencing the growth were increased service fees, commission income, gains on sale of securities and loans. Gains on sale of securities were $736,000 in 1999, compared to $266,000 in 1998. The increase was due to a call on a mortgage-backed security for $724,000. The gain on sale of loans increased $44,000 as management continued to sell newly originated fixed-rate mortgage loans with maturities greater than 15 years. Service charges and fees increased 44.2% from 1998 due to increase volume in our loan and deposit areas. Non-interest Expense. During 1999, First Federal experienced an increase in noninterest expense of 20.8%, from $4.6 million in 1999 to $3.8 million in 1998. The increase was primarily attributed to professional consulting expenses, data processing, furniture and equipment expense and salaries and benefits. Stringent cost control and better utilization of resources continues to be a major focus at First Federal. Salaries and benefits increased 7.4% in 1999 compared to 26.0% in 1998. The smaller increase in 1999 is due to branch expansion which took place in 1998. Occupancy and equipment costs increased 11.0% from the prior year. The increase is due to additional furniture purchased and the related depreciation costs. Data processing increased 33.9% and other expense increased 84.0% from the prior year. The majority of the increase in other expenses was in professional consulting. The increase in professional consulting expense was attributed to upgrading various computer systems for Year 2000 (Y2K) compliance, employee acquisition and training, and professional consulting for collection and repossession expenses. Income Tax Expense. Income tax expense was $964,000 in fiscal 1999 compared to $858,000 in fiscal 1998, an increase of $106,000, or 12.4%. Income taxes increased primarily as a result of the tax effect of higher income before taxes. Comparison of Years Ended June 30, 1998 and June 30, 1997 General. Net income for the year ended June 30, 1998 was $1.9 million, a increase of $556,000 compared to net income for the year ended June 30, 1997. The increase was primarily the result of an increase of $1.0 million in net interest income, which was partially offset by an increase of $217,000 in non-interest expense and an increase in income taxes of $252,000. Further details of the changes in these items are discussed below. Net Interest Income. Net interest income increased $1.0 million, or 20.0%, from $5.0 million to $6.0 million for the year ended June 30, 1998. The increase in net interest income was due to an increase of $2.4 million in interest income, partially offset by an increase of $1.4 million in interest expense. The increase in net interest income was primarily a result of an increase in average interest-earning assets exceeding the increase in average interest-bearing liabilities and an improvement in net interest margin as discussed below. Interest income increased $2.4 million, or 19.7 %, for fiscal 1998 compared to fiscal 1997 primarily due to an increase in the average balance of loans and investments. These increases exceeded the increases in the interest bearing liabilities for the same period. To a lesser extent the increase in interest income resulted from an increase in the average rate on earning assets to 8.01% in fiscal 1998 from 7.98% in fiscal 1997. Interest expense increased $1.4 million, or 19.4%, for fiscal 1998 compared to fiscal 1997 primarily due to an increase in the average balance of certificates of deposit and FHLB advances, outstanding, partially offset by a decrease in the average rate on interest-bearing liabilities to 5.26% in fiscal 1998 from 5.29% in fiscal 1997. Management plans to continue using FHLB advances to fund loan growth if there is not sufficient deposit growth. Provision for Loan Losses. The provision for loan losses increased $585,000 from $120,000 in fiscal 1997 to $705,000 in fiscal 1998. The amounts provided during the fiscal year were based on management's quarterly analysis of the allowance for loan losses, and the changing composition of the total loan portfolio from one-to-four family to commercial and consumer loans. The inherent risk of commercial and consumer loans requires a higher level of provisions for loan losses. This year the Company has seen an increase in its non-performing loans and has been increasing and will continue to increase its loan loss allowance to deal with potential losses. 7 Non-interest Income. Non-interest income increased from $674,000 in fiscal 1997 to $1.3 million in fiscal 1998. This increase of $626,000 was primarily the result of increases of $264,000, $61,000, $61,000 and $220,000 in gains on sale of securities, gains on sale of loans, commission income, and service charges, respectively. The increase in service charges resulted from our increased transaction account activity from our South Whitley office, which was acquired in June of 1997. Management intends to continue to sell newly originated fixed-rate mortgage loans with maturities greater than 15 years. The loans to be sold are classified as held for sale at the date of origination. Management continues to price these loans based on rates offered by a government agency that purchases these products for the secondary market. Non-interest Expense. Non-interest expense increased from $3.6 million in fiscal 1997 to $3.8 million in fiscal 1998. This increase of $200,000, or 5.6%, was primarily the result of increases in salaries and employee benefits of $391,000, amortization of goodwill and core deposit premium of $164,000, data processing expense of $80,000, correspondent bank charges of $64,000 and office occupancy of $63,000. These increases were partially offset by a decrease in SAIF deposit insurance premium of $613,000. The decrease in the SAIF deposit insurance premium was related to the one time assessment of $556,000 paid in November 1996. The increase in salaries and employee benefits, office occupancy, amortization of goodwill and core deposit premium, data processing and correspondent bank charges were primarily the result of additional costs related to our branch in South Whitley, which was acquired in June of 1997. Income Tax Expense. Income tax expense was $858,000 in fiscal 1998 compared to $606,000 in fiscal 1997, an increase of $252,000, or 41.6%. Income taxes increased primarily as a result of the tax effect of higher income before income taxes resulting primarily from the one time SAIF assessment in 1997. Asset and Liability Management and Market Risk General. The principal market risk affecting the Company is interest-rate risk. The Company does not maintain a trading account and is not affected by foreign currency exchange rate risk or commodity price risk. The Company is subject to interest rate risk to the extent its interest-earning assets reprice differently than its interest-bearing liabilities. The Company reduces exposure to changes in market interest rates by managing asset and liability maturities and interest rates, primarily by reducing the effective maturity of assets through the use of adjustable rate mortgage-backed securities and adjustable rate loans and by extending funding maturities through the use of other borrowings such as FHLB Advances. Quantitative Aspects of Market Risk. As part of its efforts to monitor and manage interest rate risk, the Company uses the "net portfolio value" (NPV) methodology adopted by the OTS. This approach calculates the difference between the present value of expected cash flows from assets and liabilities, as well as cash flows from off balance sheet contracts, arising from an assumed 200 basis point increase or decrease in interest rates. Under OTS regulations, an institution's "normal" level of interest rate risk for this assumed change in interest rates is a decrease in the institution's NPV not exceeding 2% of assets. The Company's asset/liability management strategy sets limits on the change in NPV given certain changes in interest rates. The table presented here, as of March 31, 1999, is the Company's interest rate risk measured by changes in NPV for instantaneous parallel shifts in the yield curve, in 100 basis point increments, up and down 300 basis points.
Change in NPV as % of Portfolio Interest Rates Net Portfolio Value Value of Assets In Basis --------------------------------------------------- --------------------------- Points NPV (Rate Shock) $ Amount $Change %Change Ratio Change (1) - ------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 300 $15,429 $(4,012) (21)% 7.60% (140) 200 17,071 (2,369) (12) 8.23 (77) 100 18,414 (1,026) (5) 8.69 (31) Static 19,441 9.00 (100) 21,459 2,018 10 9.69 69 (200) 23,600 4,160 21 10.39 139 (300) 26,224 6,784 35 11.22 222
8 As illustrated in the table, the Company's NPV declines in a rising interest rate environment. Specifically, the table indicates that, at March 31, 1999, the Company's NPV was $19.4 million (or 9% of portfolio assets). Based upon the assumptions used, an immediate increase in market interest rates of 200 basis points would result in a $2.4 million or 12% decline in NPV and a 77 basis point or 8.6% decline in the Company's NPV ratio to 8.23%. This is within the Company's guidelines. In evaluating the exposure to interest rate risk, certain simplifications in analysis must be considered. For example, although assets and liabilities may have similar maturities or period to repricing, they may react differently to changes in market interest rates. In addition, the rates on some assets and liabilities may fluctuate before changes in market interest rates, while interest rates on other types may lag behind. Further, if rates change, prepayments and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of many borrowers to service their debt may decrease in case of an interest rate increase. Therefore, the actual effect of changing interest rates may differ from that presented in the foregoing table. The Board of Directors and management of the Company believe that certain factors afford the Company the ability to operate successfully despite its exposure to interest rate risk. The Company manages its interest rate risk by originating adjustable rate loans and purchasing adjustable rate mortgage-backed securities by maintaining capital well in excess of regulatory requirements and by selling a portion of fixed rate one-to four-family real estate loans. The Company focuses lending efforts toward offering competitively priced adjustable rate loan products as an alternative to more traditional fixed rate mortgage loans. In addition, while the Company generally originates mortgage loans for its own portfolio, sales of fixed-rate first mortgage loans with maturities of 15 years or greater are currently undertaken to manage interest rate risk. These loans are currently classified as held for sale by the Company at origination. There were no loans held for sale at June 30, 1999. The Company retains the servicing on loans sold in the secondary market and, at June 30, 1999, $32.4 million in such loans were being serviced for others. The primary objective of the Company's investment strategy is to provide liquidity necessary to meet funding needs as well as address daily, cyclical and long-term changes in the asset/liability mix while contributing to profitability by providing a stable flow of dependable earnings. Generally, the Company invests funds among various categories of investments and maturities based on the Company's liquidity needs and to achieve the proper balance between the desire to minimize risk and maximize yield to fulfill the Company's asset/liability management policies. The Company's cost of funds responds to changes in interest rates due to the relatively short-term nature of its deposit portfolio. Consequently, the levels of short-term interest rates influence the results of operations. The Company offers a range of maturities on its deposit products at competitive rates and monitors the maturities on an ongoing basis. 9 Average Balances, Interest Rates and Yields This following table shows weighted average interest rates on loans, investments, deposits, other interest-bearing liabilities, and the interest rate spread and the net yield on weighted average interest-earning assets.
Year Ended June 30 ----------------------------------------------------------------------------------------- Average 1999 Yield/ Average 1998 Yield/ Average 1997 Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate ------- -------- ---- ------- -------- ---- ------- -------- ---- (Dollars in Thousands) Interest-earning assets: Loans receivable (1) $147,437 $12,428 8.43% $127,127 $11,029 8.68% $107,082 $ 9,197 8.59% Securities (2) (3) 38,304 2,298 6.09 30,843 1,965 6.46 24,248 1,475 6.08 Mortgage-backed securities (3) 15,703 1,166 7.25 18,732 1,427 7.84 18,781 1,445 7.69 Other interest- bearing deposits 2,398 160 6.67 6,370 168 2.64 3,112 107 3.44 -------- ------- -------- ------- -------- ------- Total interest-earning assets. 203,842 16,052 7.88% 183,072 14,589 8.01% 153,223 12,224 7.98% Other assets 9,817 7,398 4,895 -------- -------- -------- Total assets $213,659 $190,470 $158,118 ======== ======== ======== Interest-bearing liabilities: Money market accounts $ 625 $ 27 4.32% $ 1,022 $26 2.54% $298 $8 2.68% NOW accounts 6,726 147 2.19 7,040 132 1.88 4,242 84 1.98 Passbook savings accounts 45,317 1,843 4.07 42,983 1,817 4.23 40,982 1,772 4.32 Certificates of deposit 67,916 3,791 5.58 62,666 3,652 5.83 49,907 2,914 5.84 FHLB advances 62,106 3,558 5.73 49,543 2,964 5.98 41,470 2,468 5.95 -------- ------- -------- ------- -------- ------- Total interest- bearing liabilities 182,690 9,366 5.13% 163,254 8,591 5.26% 136,899 7,246 5.29% Other liabilities 11,212 ------ ---- 9,133 ------- ---- 5,238 ------- ---- -------- -------- -------- Total liabilities 172,387 142,137 Equity 19,757 18,083 15,981 -------- -------- -------- Total liabilities and Shareholders' equity $213,659 $190,470 $158,118 ======== ======== ======== Net interest income/ interest rate spread $ 6,686 2.75% $5,998 2.75% $4,978 2.69% ======= ==== ====== ==== ====== ==== Net interest margin (4) 3.28% 3.31% 3.25% ==== ==== ====
(1) Average outstanding balances include non-accruing loans. Interest on loans receivable includes fees. The inclusion of nonaccrual loans and fees does not have a material effect on either the average outstanding balance or the average yield. (2) Yields reflected have not been computed on a tax equivalent basis. (3) Yields computed using the average amortized cost for securities available for sale. (4) Net interest income divided by average interest earning assets. Asset Quality Total non-performing assets decreased to $842,000 at June 30, 1999 compared to $873,000 at June 30, 1998. The ratio of non-performing assets to total assets at June 30, 1999 was .39% compared to .43% at June 30, 1998. Included in non-performing assets at June 30, 1999 were $410,000 in non-accruing loans, $375,000 other real estate and $57,000 in repossessed assets. In addition to the non-performing assets listed above, as of June 30, 1999 and 1998, there was $1.9 million and $1.7 million, respectively, in net loans designated by the Bank as "of concern" due to management's doubts as to the ability of the borrowers to comply with loan repayment terms. Based on management's review as of June 30, 1999, $1.3 million of loans were classified as special mention, $543,000 million as substandard, $72,000 as doubtful and $46,000 as loss. As of June 30, 1998, $802,000 were classified as special mention, $899,000 as substandard, $82,000 as doubtful and none as loss. 10 LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of funds are deposits, borrowings, principal and interest payments on loans and mortgage-backed securities and sales and maturities of securities available for sale. While maturities of securities and scheduled amortization of loans and mortgage-backed securities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. The standard measure of liquidity for thrift institutions is the ratio of cash and eligible investments to a certain percentage of net withdrawable savings and borrowings due within one year. The minimum required ratio is currently set by OTS regulations at 4%, of which 1% must be comprised of short-term investments (i.e. generally with a term of less than one year). At June 30, 1999, the Bank's liquidity ratio was 12.05%, of which 6.83% was comprised of short-term investments. Year Ended June 30, 1999. During the year ended June 30, 1999 there was a net increase of $429,000 in cash and cash equivalents. Major source of cash during the year were an increase in deposits and borrowings of $5.1 million and $9.8 million, and the proceeds from the sales of loans held for sale and the sale, call and maturity of securities provided $14.4 million and $22.8 million. Management continued to sell fixed rate first mortgage loans with maturities of 15 to 30 years in the secondary market to manage interest rate risk. Major uses of cash during the year which offset the sources of cash included funding an increase of $14.3 million in the loan portfolio, net purchases of $25.0 million in securities available for sale and originations of $14.3 million of loans to be sold in the secondary market. Year EndedJune 30, 1998. During the year ended June 30, 1998 there was a net decrease of $12.7 million in cash and cash equivalents. Major sources of cash during the year were an increase in deposits of $9.1 million and proceeds from sales of loans held for sale provided $9.2 million. Management continued to sell fixed rate first mortgage loans with maturities of 15 to 30 years in the secondary market to manage interest rate risk. Major uses of cash during the year which offset the sources of cash included funding an increase of $26.0 million in the loan portfolio, net purchases of $10.0 million in securities available for sale and originations of $9.0 million of loans to be sold in the secondary market. Year Ended June 30, 1997. During the year ended June 30, 1997 there was a net increase of $14.3 million in cash and cash equivalents, Another major source of cash during the year was an increase in deposits of $23.6 million of which $17.1 million was the result of the acquisition of the NBD Bank branch in South Whitley, Indiana on June 13, 1997. In addition, proceeds from sales of loans held for sale provided $3.7 million. Management continued to sell fixed rate first mortgage loans with maturities of 15 to 30 years in the secondary market to manage interest rate risk. Major uses of cash during the year which offset the sources of cash included funding an increase of $13.6 million in the loan portfolio, purchase of $500,000 in FHLMC preferred stock and originations of $3.2 million of loans to be sold in the secondary market. Borrowings may be used as a source of funds to offset reductions in other sources of funds such as deposits and to assist in asset/liability management. Management believes that a diversified blend of borrowings from the FHLB offers flexibility and is an important tool to be used in the balanced growth of the Company. As such, borrowings outstanding at June 30, 1999 consist of advances from the FHLB totaling $66.3 million. Also, the Company had commitments to fund loan originations, unused lines of credit and standby lines of credit with borrowers of $11.9 million at June 30, 1999. In the opinion of management, the Company has sufficient cash flow and borrowing capacity to meet current and anticipated funding commitments. Pursuant to federal law, thrift institutions must meet a 1.5% tangible capital requirement, a 4% core capital requirement and an 8% total risk-based capital to risk weighted assets requirement. At June 30, 1999, the Bank exceeded all fully phased in capital requirements. Tangible and core capital totaled $15.3 million, or 7.10% of adjusted total assets (as defined by regulation) and risk-based capital totaled $16.8 million, or 12.38% of risk-weighted assets (as defined by regulation). See Note 11 of the Notes to Consolidated Financial Statements for additional information regarding capital requirements applicable to the Bank. IMPACT OF INFLATION The financial statements and related data are in terms of historical dollars without considering changes in purchasing power of money over time due to inflation. The primary assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on performance than the general levels of inflation. Interest rates do not necessarily move in the same direction or magnitude as the prices of goods and services. 11 YEAR 2000 CONSIDERATIONS The Year 2000 issue is the result of potential problems with computer systems or any equipment with computer chips that store the year portion of the date as just two digits (e.g., 98 for 1998). Systems using this two-digit approach may not be able to determine whether "00" represents the Year 2000 or 1900. The problem, if not corrected, may make those systems fail altogether or, even worse, allow them to generate incorrect calculations causing a disruption of normal operations. In 1997, a comprehensive project plan to address the Year 2000 issue as it relates to the Company's operation was developed, approved by the Board of Directors and implemented. The scope of the plan includes five phases, Awareness, Assessment, Renovation, Validation (testing), and Implementation as defined by federal banking regulatory agencies. A project team was assigned and consists of key members of management. This team was to assess our systems and equipment and our vendors to ascertain their readiness and to develop the overall plan to bring our systems into compliance. Additionally, it was to assess the readiness of our customers and determine what risk, if any, our key customers pose to the Bank with regards to their Year 2000 readiness. The duties of the Vice President of Operations were realigned to serve as the Year 2000 Project Manager. An assessment of the impact of the year 2000 issue on the Company's computer systems has been completed. The scope of the project also includes other operational and environmental systems since they may be impacted if embedded computer chips control the functionality of those systems. From the assessment, the Company has identified and prioritized those systems deemed to be mission critical or those that have a significant impact on normal operations. The Company relies on third-party vendors and service providers for much of its data processing capabilities and to maintain its computer systems. Formal communications with these providers and other external counter parties were initiated in 1997 to assess the Year 2000 readiness of their products and services. Their progress in meeting their targeted schedules is being monitored continually for any indication that they may not be able to address the problems in time. Thus far, responses indicate that all of the significant providers currently have compliant versions available or are well into the renovation and testing phases with completion scheduled for sometime in 1999. However, the Company can give no guarantee that the systems of these service providers and vendors on which the Company's systems rely will be timely renovated. Additionally, the Company has implemented a plan to manage the potential credit risk posed by the impact of the Year 2000 issue on its major borrowing customers. Formal communications have been initiated, and the assessment was substantially completed on June 30, 1999. Loan losses attributed to the Year 2000 issue are not anticipated to be material to the Company. The project team feels that the Company's Year 2000 readiness project is on schedule. The following table provides a summary of the current status of the five phases involved and a projected timetable for completion. PROJECT PHASE % COMPLETION Awareness 100% Assessment 100% Renovation 100% Validation 100% Implementation 100% The estimated total project cost is estimated to be between $100,000 and $150,000. The total amount expended on the project through June 30, 1999, was $115,000 of which approximately $36,000 was related to the cost of replacement software, $30,000 was related to four training workshops with our data processor and Arthur Anderson, a national consulting/CPA firm, and the creation of a test bank using 5% of our data base. The remaining amount was associated with hardware upgrades and replacements. Funds have been provided from our normal operating budget and costs are expensed as they are incurred. The total cost to the Company of these Year 2000 readiness activities has not been, and is not anticipated to be, material to its financial position or results or operations in any given year. No specific other projects have been deferred due to this project. Much of the work done within this project is an acceleration of work that would have been done in the normal course of business. The costs and timetable in which the Company plans to complete the Year 2000 readiness activities are based on management's best estimates, which were derived using numerous assumptions of future events including the continued availability of certain resources, third-party readiness plans and other factors. The Company can make no guarantee that these estimates will be achieved and actual results could differ from such plans. 12 Based upon current information related to the progress of its major vendors and service providers, management has determined that the Year 2000 issue will not pose significant operational problems for its computer systems. This determination is based on the ability of those vendors and service providers to renovate, in a timely manner, the products and services on which the Company's systems rely. However, the Company can give no guarantee that the systems of these suppliers will be renovated in a timely manner. Realizing that some disruption may occur despite our best efforts, the Company has developed contingency plans for each critical system in the event that one or more of those systems fail. While this is an ongoing process, the Company has the plan substantially documented as of June 30, 1999. 13 Report of Independent Auditors Board of Directors and Shareholders FFW Corporation Wabash, Indiana We have audited the accompanying consolidated balance sheets of FFW Corporation as of June 30, 1999 and 1998 and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended June 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FFW Corporation as of June 30, 1999 and 1998 and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1999 in conformity with generally accepted accounting principles. /s/Crowe, Chizek and Company LLP -------------------------------- Crowe, Chizek and Company LLP South Bend, Indiana August 6, 1999 14
FFW Corporation Consolidated Balance Sheets June 30, 1999 and 1998 1999 1998 ------------- ------------- ASSETS Cash and due from financial institutions $ 4,650,866 $ 4,023,917 Interest-bearing deposits in other financial institutions - short-term 188,369 386,435 ------------- ------------- Total cash and cash equivalents 4,839,235 4,410,352 Securities available for sale 51,028,563 50,293,229 Loans receivable, net of allowance for loan losses of $1,623,293 in 1999 and $982,532 in 1998 151,491,090 139,393,692 Federal Home Loan Bank stock 3,400,900 2,757,200 Accrued interest receivable 1,616,479 1,428,927 Premises and equipment, net 2,124,656 2,205,458 Other assets 2,987,971 2,822,405 ------------- ------------- Total assets $ 217,488,894 $ 203,311,263 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest-bearing $ 8,171,372 $ 6,935,426 Interest-bearing 122,229,981 118,320,877 ------------- ------------- Total deposits 130,401,353 125,256,303 Borrowings 66,300,388 56,500,000 Accrued expenses and other liabilities 1,430,313 2,426,233 ------------- ------------- Total liabilities 198,132,054 184,182,536 Shareholders' equity Preferred stock, $.01 par; 500,000 shares authorized; none issued -- -- Common stock, $.01 par; 2,000,000 shares authorized; issued: 1,785,288 - 1999 and 1,775,096 - 1998; outstanding: 1,441,224 - 1999 and 1,458,032 - 1998 17,853 17,751 Additional paid-in capital 8,965,882 8,793,133 Retained earnings 13,970,694 12,468,144 Accumulated other comprehensive income (455,386) 685,432 Unearned Employee Stock Ownership Plan shares (52,331) (151,748) Treasury stock at cost, 344,064 - 1999 and 317,064 - 1998, shares (3,089,872) (2,683,985) ------------- ------------- Total shareholders' equity 19,356,840 19,128,727 ------------- ------------- Total liabilities and shareholders' equity $ 217,488,894 $ 203,311,263 ============= =============
See accompanying notes. 15
FFW Corporation Consolidated Statements of Income Years ended June 30, 1999, 1998 and 1997 1999 1998 1997 ----------- ----------- ----------- Interest and dividend income Loans, including fees $12,428,098 $11,028,576 $ 9,197,093 Taxable securities 3,000,394 2,978,403 2,465,026 Nontaxable securities 464,433 413,504 455,056 Other 159,565 168,410 106,640 ----------- ----------- ----------- Total interest and dividend income 16,052,490 14,588,893 12,223,815 Interest expense Deposits 5,807,809 5,626,941 4,777,282 Borrowings 3,558,563 2,964,036 2,468,441 ----------- ----------- ----------- Total interest expense 9,366,372 8,590,977 7,245,723 ----------- ----------- ----------- Net interest income 6,686,118 5,997,916 4,978,092 Provision for loan losses 1,010,000 705,000 120,000 ----------- ----------- ----------- Net interest income after provision for loan losses 5,676,118 5,292,916 4,858,092 Noninterest income Net gains on sales of securities 735,649 266,215 2,024 Net gains on sales of loans 148,096 104,148 43,341 Commission income 234,362 215,051 154,213 Service charges and fees 782,572 551,211 331,057 Other income 88,776 127,859 143,474 ----------- ----------- ----------- Total noninterest income 1,989,455 1,264,484 674,109
Noninterest expense Salaries and benefits 2,032,452 1,892,039 1,501,292 Occupancy and equipment 369,647 332,894 269,638 Deposit insurance premium 121,423 113,521 726,684 Correspondent bank charges 205,883 211,420 147,581 Data processing 489,372 365,522 285,754 Printing, postage and supplies 245,031 192,935 163,820 Amortization of goodwill & core deposit premium 156,347 164,474 -- Other expense 970,372 527,184 488,005 ---------- ---------- ---------- Total noninterest expense 4,590,527 3,799,989 3,582,774 ---------- ---------- ---------- Income before income taxes 3,075,046 2,757,411 1,949,427 Income tax expense 963,991 857,743 605,767 ---------- ---------- ---------- Net income $2,111,055 $1,899,668 $1,343,660 ========== ========== ========== Earnings per share Basic $ 1.48 $ 1.36 $ 1.00 Diluted $ 1.46 $ 1.32 $ 0.97
See accompanying notes. 16
FFW Corporation Consolidated Statements of Changes in Stockholders' Equity Years ended June 30, 1999, 1998 and 1997 Unearned Employee Unearned Accumulated Stock Management Additional Other Ownership Retention Common Paid-In Retained Comprehensive Plan Plan Stock Capital Earnings Income Shares Shares ------- ---------- ----------- --------- --------- -------- Balance at June 30, 1996 $ 8,536 $8,132,484 $10,218,910 $(203,283) $(331,189) $(13,079) Cash dividends - $0.32 per share -- -- (443,192) -- -- -- 17,117 shares released under ESOP -- 145,503 -- -- 86,636 -- Amortization of MRP contribution -- -- -- -- -- 13,079 Purchase 32,000 shares -- -- -- -- -- -- Issue 32,348 shares on stock options 162 161,578 -- -- -- -- Net income -- -- 1,343,660 -- -- -- Other comprehensive income, net of tax: Unrealized appreciation (depreciation) on securities available for sale, net of tax of $474,821 -- -- -- 705,466 -- -- ------- ---------- ----------- --------- --------- -------- Total other comprehensive income -- -- -- 705,466 -- -- ------- ---------- ----------- --------- --------- -------- Comprehensive income -- -- -- -- -- -- ------- ---------- ----------- --------- --------- -------- Balance at June 30, 1997 8,698 8,439,565 11,119,378 502,183 (244,553) -- Cash dividends - $0.38 per share -- -- (542,101) -- -- -- 17,117 shares released under ESOP -- 176,000 -- -- 92,805 -- 100% stock dividend 8,801 -- (8,801) -- -- -- Issue 35,564 shares on stock options 252 177,568 -- -- -- -- Net income -- -- 1,899,668 -- -- -- Other comprehensive income, net of tax: Unrealized appreciation (depreciation) on securities available for sale, net of tax of $84,263 -- -- -- 183,249 -- -- ------- ---------- ----------- --------- --------- -------- Total other comprehensive income -- -- -- 183,249 -- -- ------- ---------- ----------- --------- --------- -------- Comprehensive income -- -- -- -- -- -- ------- ---------- ----------- --------- --------- --------
Balance at June 30, 1998 $17,751 $8,793,133 $12,468,144 $ 685,432 $(151,748) $ -- Cash dividends - $0.42 per share -- -- (608,505) -- -- -- 17,117 shares released under ESOP -- 145,495 -- -- 99,417 -- Purchased 27,000 shares -- -- -- -- -- -- Issue 10,192 shares, net, on stock options 102 27,254 -- -- -- -- Net income -- -- 2,111,055 -- -- -- Other comprehensive income, net of tax: Unrealized appreciation (depreciation) on securities available for sale, net of tax of $(746,117) -- -- -- (1,140,818) -- -- ------- ---------- ----------- --------- --------- -------- Total other comprehensive income -- -- -- (1,140,818) -- -- ------- ---------- ----------- --------- --------- -------- Comprehensive income -- -- -- -- -- -- ------- ---------- ----------- --------- --------- -------- Balance at June 30, 1999 $17,853 $8,965,882 $13,970,694 $ (455,386) $ (52,331) $ -- ======= ========== =========== ========== ========== ========
Total Treasury Shareholders' Stock Equity ----------- ----------- Balance at June 30, 1996 $(2,354,236) $15,458,143 Cash dividends - $0.32 per share (443,192) 17,117 shares released under ESOP 232,139 Amortization of MRP contribution -- 13,079 Purchase 32,000 shares (329,749) (329,749) Issue 32,348 shares on stock options -- 161,740 Net income -- 1,343,660 Other comprehensive income, net of tax: Unrealized appreciation (depreciation) on securities available for sale, net of tax of $474,821 -- ----------- ----------- Total other comprehensive income -- 705,466 ----------- ----------- Comprehensive income -- 2,049,126 ----------- ----------- Balance at June 30, 1997 (2,683,985) 17,141,286 Cash dividends - $0.38 per share -- (542,101) 17,117 shares released under ESOP -- 268,805 100% stock dividend -- -- Issue 35,564 shares on stock options -- 177,820 Net income -- 1,899,668 Other comprehensive income, net of tax: Unrealized appreciation (depreciation) on securities available for sale, net of tax of $84,263 -- ----------- ----------- Total other comprehensive income -- 183,249 ----------- ----------- Comprehensive income -- 2,082,917 ----------- -----------
Balance at June 30, 1998 $(2,683,985) $19,128,727 Cash dividends - $0.42 per share -- (608,505) 17,117 shares released under ESOP -- 244,912 Purchased 27,000 shares (405,887) (405,887) Issue 10,192 shares, net, on stock options -- 27,356 Net income -- 2,111,055 Other comprehensive income, net of tax: Unrealized appreciation (depreciation) on securities available for sale, net of tax of $(746,117) -- ----------- ----------- Total other comprehensive income -- (1,140,818) ----------- ----------- Comprehensive income -- 970,237 ----------- ----------- Balance at June 30, 1999 $(3,089,872) $19,356,840 =========== ===========
17
FFW Corporation Consolidated Statements of Cash Flows Years ended June 30, 1999, 1998 and 1997 1999 1998 1997 ------------ ------------ ------------ Cash flows from operating activities Net income $ 2,111,055 $ 1,899,668 $ 1,343,660 Adjustments to reconcile net income to net cash from operating activities Depreciation and amortization (60,899) (80,662) 89,006 Provision for loan losses 1,010,000 705,000 120,000 Net (gains) losses on sales of: Securities (735,649) (266,215) (2,024) Loans held for sale (148,096) (104,148) (43,341) Foreclosed real estate (6,174) 13,901 (4,783) Originations of loans held for sale (14,262,865) (9,045,410) (3,183,214) Proceeds from sales of loans held for sale 14,410,961 9,149,558 3,650,555 ESOP expense 244,912 268,805 232,139 Amortization of MRP contribution -- -- 13,079 Net change in accrued interest receivable and other assets 11,984 (387,593) (229,676) Amortization of goodwill and core deposit intangibles 156,347 164,474 -- Net change in accrued interest payable and other liabilities (249,803) 758,749 147,137 ------------ ------------ ------------ Net cash from operating activities 2,481,773 3,076,127 2,132,538 Cash flows from investing activities Proceeds from: Sales, calls and maturities of securities available for sale 22,808,126 20,007,977 1,799,688 Sales of foreclosed real estate 903,878 465,351 315,344 Purchase of: Securities available for sale (25,049,872) (29,770,835) (690,200) Federal Home Loan Bank stock (643,700) (359,600) -- Principal collected on mortgage-backed securities 609,858 691,510 594,865 Net change in loans receivable (14,301,551) (26,445,499) (13,732,583) Purchases of premises and equipment, net (113,031) (436,341) (234,855) Investment in limited partnership (225,000) (412,500) (37,500) Cash received for net liabilities assumed in branch purchase -- -- 15,300,519 ------------ ------------ ------------ Net cash from investing activities (16,011,292) (36,259,937) 3,315,278
Cash flows from financing activities Net change in deposits $ 5,145,050 $ 9,137,829 $ 6,495,792 Proceeds from borrowings 42,500,000 52,975,956 37,500,000 Repayment of borrowings (32,699,612) (41,275,956) (34,500,000) Proceeds from stock options 27,356 177,820 161,740 Purchase of treasury stock (405,887) -- (329,749) Cash dividends paid (608,505) (542,101) (443,192) ------------ ------------ ------------ Net cash from financing activities 13,958,402 20,473,548 8,884,591 ------------ ------------ ------------ Net change in cash and cash equivalents 428,883 (12,710,262) 14,332,407 Beginning cash and cash equivalents 4,410,352 17,120,614 2,788,207 ------------ ------------ ------------ Ending cash and cash equivalents $ 4,839,235 $ 4,410,352 $ 17,120,614 ============ ============ ============
18 FFW Corporation Notes to Consolidated Financial Statements June 30, 1999, 1998 and 1997 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include FFW Corporation (the Company), and its wholly-owned subsidiaries, First Federal Savings Bank of Wabash (the Bank) and FirstFed Financial of Wabash, Incorporated. All significant inter-company transactions and balances have been eliminated in consolidation. Nature of Business and Concentrations of Credit Risk: The primary source of income for the Company is the origination of commercial and residential real estate loans (see Note 13). Use of Estimates In Preparing Financial Statements: Preparing financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period, as well as the disclosures provided. Areas involving the use of estimates and assumptions include the allowance for loan losses, fair values of securities and other financial instruments, determination and carrying value of impaired loans and intangible assets, the carrying value of loans held for sale, the value of mortgage servicing rights, the accrued liability for deferred compensation, the fair value of stock options, the realization of deferred tax assets, and the determination of depreciation of premises and equipment. Actual results could differ from those estimates. Estimates associated with the allowance for loan losses, the classification and carrying value of loans held for sale, the fair value of stock options and the fair value of securities and other financial instruments are particularly susceptible to material change in the near term. Cash Flow Reporting: For reporting cash flows, cash and cash equivalents include cash on hand, due from financial institutions and interest-bearing deposits in other financial institutions - short-term. Net cash flows are reported for customer loan and deposit transactions. Securities: Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported separately in shareholders' equity, net of tax. Securities are classified as trading when held for short term periods in anticipation of market gains, and are carried at fair value. Securities are written down to fair value when a decline in fair value is not temporary. Gains and losses on sales are determined using the amortized cost of the specific security sold. Interest income includes amortization of purchase premiums and discounts. Loans Held for Sale: Mortgage loans intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized in a valuation allowance by charges to income. Loans Receivable: Loans receivable are reported at the principal balance outstanding, net of deferred loan fees and costs, the allowance for loan losses and charge-offs. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Interest income is not reported when full loan repayment is in doubt, typically when payments are past due over 90 days. Payments received on such loans are reported as principal reductions. Allowance for Loan Losses: Because some loans may not be repaid in full, an allowance for loan losses is recorded. The allowance for loan losses is increased by a provision for loan losses charged to expense and decreased by charge-offs (net of recoveries). Estimating the risk of loss and the amount of loss on any loan is necessarily subjective. Accordingly, the allowance is maintained by management at a level considered adequate to cover losses that are currently anticipated. Management's periodic evaluation of the adequacy of the allowance is based on past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral and current economic conditions. While management may periodically allocate portions of the allowance for specific problem loan situations, the whole allowance is available for any loan charge-offs that occur. 19 FFW Corporation Notes to Consolidated Financial Statements June 30, 1999, 1998 and 1997 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Loans are considered impaired if full principal or interest payments are not anticipated in accordance with the contractual loan terms. Impaired loans are carried at the present value of expected future cash flows discounted at the loan's effective interest rate or at the fair value of the collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is less than the unpaid balance. If these allocations cause the allowance for loan losses to require an increase, such increase is reported in the provision for loan losses. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. Smaller-balance homogeneous loans such as residential first mortgage loans, are evaluated for impairment in total. When analysis of borrower operating results and financial condition indicates that underlying cash flows of the borrower's business are not adequate to meet debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 30 days or more. Nonaccrual loans are often also considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible. Foreclosed Real Estate: Real estate properties acquired through, or in lieu of, foreclosure are initially recorded at fair value at acquisition, establishing a new cost basis. Any reduction to fair value from the carrying value of the related loan at the time of acquisition is accounted for as a loan loss and charged against the allowance for loan losses. Valuations are periodically performed by management and valuation allowances are adjusted through a charge to income for changes in fair value or estimated selling costs. There were two foreclosed properties at June 30, 1999, and one foreclosed property held at June 30, 1998. Premises and Equipment: Asset cost is reported net of accumulated depreciation. Depreciation expense is calculated on the straight-line method over asset useful lives. These assets are reviewed for impairment under SFAS No. 121 when events indicate the carrying amount may not be recoverable. Intangible Assets: Intangible assets arising from the acquisition of the South Whitley Branch, on June 13, 1997, include goodwill and core deposit intangibles. Goodwill represents the excess of the purchase price over the assets acquired. Goodwill is amortized on a straight-line basis over 15 years. Core deposit intangibles are amortized on an accelerated basis over 10 years. As of June 30, 1999, unamortized goodwill totaled $1,082,000 and unamortized core deposit intangibles totaled $293,000. Income Taxes: Income tax expense is the sum of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Servicing Rights: Servicing rights represent both purchased rights and the allocated value of servicing rights retained on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, as to geographic and prepayment characteristics. Any impairment of a grouping is reported as a valuation allowance. Employee Stock Ownership Plan: The Company accounts for its employee stock ownership plan (ESOP) under AICPA Statement of Position (SOP) 93-6. The cost of shares issued to the ESOP, but not yet allocated to participants, are presented as a reduction of shareholders' equity. Compensation expense is based on the market price of the shares committed to be released for allocation to participant accounts. The difference between the market price and the cost of shares committed to be released is adjusted to additional paid-in capital. Dividends on allocated ESOP shares reduce retained earnings; dividends on unearned ESOP shares reduce debt and accrued interest. Stock Compensation: Expense for employee compensation under stock option plans is based on Accounting Principles Board (APB) Opinion 25, with expense reported only if options are granted below market price at grant date. If applicable, disclosures of net income and earnings per share are provided as if the fair value method of SFAS No. 123 were used for stock-based compensation. 20 FFW Corporation Notes to Consolidated Financial Statements June 30, 1999, 1998 and 1997 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Financial Instruments with Off-Balance-Sheet Risk: The Company, in the normal course of business, makes commitments to make loans which are not reflected in the financial statements. A summary of these commitments is disclosed in Note 12. Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes the net change in net unrealized appreciation (depreciation) on securities available for sale, net of tax which is also recognized as a separate component of shareholders' equity. The accounting standard that requires reporting comprehensive income first applies for 1999, with prior information restated to be comparable. Earnings and Dividends Per Common Share: Basic earnings per common share is based on the net income divided by the weighted average number of common shares outstanding during the period. ESOP shares are considered outstanding for earnings per common share calculations as they are committed to be released; unearned shares are not considered outstanding. Diluted earnings per common share shows the dilutive effect of additional potential common shares issuable under stock options. Earnings and dividends per common share are restated for all stock splits and dividends. Stock Split: Common share amounts and market values and price per share disclosures related to stock repurchase programs, stock-based compensation plans and earnings and dividends per share disclosures have been restated for the two-for-one stock split effected in the form of a 100% stock dividend which was declared November 25, 1997 and paid on December 31, 1997. Stock dividends in excess of 20% are reported by transferring the par value of the stock issued from retained earnings to common stock. Stock dividends for 20% or less are reported by transferring the market value, as of the ex-dividend date, of the stock issued from retained earnings to common stock and additional paid-in capital. Reclassifications: Certain amounts in the 1998 and 1997 financial statements were reclassified to conform with the 1999 presentation. NOTE 2 - EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE A reconciliation of the numerators and denominators used in the computation of basic earnings per common share and diluted earnings per common share is presented below:
Year ended June 30, 1999 1998 1997 ----------- ----------- ----------- Basic Earnings Per Common Share Numerator: Net income $ 2,111,055 $ 1,899,668 $ 1,343,660 =========== =========== =========== Denominator: Weighted average common shares outstanding 1,464,857 1,449,938 1,411,099 Less: Average unallocated ESOP shares (34,236) (51,352) (68,468) ----------- ----------- ----------- Weighted average common shares outstanding 1,430,621 1,398,586 1,342,631 =========== =========== =========== Basic earnings per common share $ 1.48 $ 1.36 $ 1.00 =========== =========== =========== Year ended June 30, 1999 1998 1997 ----------- ----------- ----------- Diluted Earnings Per Common Share Numerator: Net income $2,111,055 $1,899,668 $1,343,660 ========== ========== ========== Denominator: Weighted average common shares outstanding for basic earnings per common share 1,430,621 1,398,586 1,342,631 Add: Dilutive effects of assumed exercise of stock options 20,083 41,593 49,023 ---------- ---------- ---------- Weighted average common shares and dilutive potential common shares outstanding 1,450,704 1,440,179 1,391,654 ========== ========== ========== Diluted earnings per common share $ 1.46 $ 1.32 $ .97 ========== ========== ==========
21 FFW Corporation Notes to Consolidated Financial Statements June 30, 1999, 1998 and 1997 NOTE 3 - SECURITIES At June 30, securities were as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------ ------------ ------------ ------------ Available for sale 1999 U.S. government and agency $ 23,842,475 $ -- $ (655,519) $ 23,186,956 State and municipal 8,377,975 131,593 (166,564) 8,343,004 Other 235,000 1,786 -- 236,786 Mortgage backed 10,675,605 27,585 (10,255) 10,692,935 Equity 8,609,362 145,781 (186,261) 8,568,882 ------------ ------------ ------------ ------------ $ 51,740,417 $ 306,745 $ (1,018,599) $ 51,028,563 ============ ============ ============ ============ Available for sale 1998 U.S. government and agency $ 13,166,099 $ 19,527 $ -- $ 13,185,626 State and municipal 8,905,135 205,283 (8,462) 9,101,956 Other 237,716 4,663 -- 242,379 Mortgage backed 17,551,985 759,441 (16,133) 18,295,293 Equity 9,257,214 296,855 (86,094) 9,467,975 ------------ ------------ ------------ ------------ $ 49,118,149 $ 1,285,769 $ (110,689) $ 50,293,229 ============ ============ ============ ============
Contractual maturities of debt securities at June 30, 1999 were as follows. Expected maturities may differ from contractual maturities because borrowers may call or prepay obligations. Securities not due at a single maturity date are shown separately.
Amortized Fair Cost Value ----------- ----------- Due in one year or less $ 1,621,005 $ 1,611,514 Due from one to five years 8,441,976 8,440,015 Due from five to ten years 17,011,941 16,482,587 Due after ten years 5,380,528 5,232,630 Mortgage backed 10,675,605 10,692,935 Equities 8,609,362 8,568,882 ----------- ----------- $51,740,417 $51,028,563 =========== ===========
Sales/calls of securities available for sale for the years ended June 30 were:
1999 1998 1997 ----------- ----------- -------- Sales $ 966,504 $ 9,356,977 $377,024 Calls 14,196,622 10,051,000 -- Gross gains 747,733 266,215 2,024 Gross losses 12,084 -- --
The June 30, 1999, gross gains included $724,000 from the call of a mortgage-backed security. The gain recognized was the result of a pre-payment penalty and the recognition of unaccreted discount. 22 FFW Corporation Notes to Consolidated Financial Statements June 30, 1999, 1998 and 1997 The June 30, 1995 balance of mortgage-backed securities was reduced by $318,900 to reflect an other than temporary decline in the fair value of a security. Collateral for this security was multi-family mortgage obligations primarily located in Southern California. The decline in the fair value of the security was due to increased delinquency in the underlying loans and a decline in the cash reserve fund and losses incurred on foreclosed real estate. On April 29, 1998 this security was sold and a gain on sale of $264,028 was recognized from the previously written down balance. NOTE 4 - LOANS RECEIVABLE, NET Loans receivable as of June 30 were as follows:
1999 1998 ------------- ------------- Mortgage loans (principally conventional) Secured by one-to-four family residences $ 67,825,242 $ 70,243,040 Secured by other properties 9,341,791 7,272,108 Construction 898,600 3,990,770 ------------- ------------- 78,065,633 81,505,918 Undisbursed portion of construction loans (444,459) (1,715,762) Net deferred loan origination fees (38,184) (47,280) ------------- ------------- Total mortgage loans 77,582,990 79,742,876 Consumer and other loans Automobile 36,334,413 33,813,611 Manufactured home 248,789 301,445 Home equity and improvement 10,393,878 9,104,988 Commercial 23,781,154 12,945,444 Other 4,125,094 3,822,697 ------------- ------------- 74,883,328 59,988,185 Net deferred loan origination costs 648,065 645,163 ------------- ------------- Total consumer and other loans 75,531,393 60,633,348 Less allowance for loan losses (1,623,293) (982,532) ------------- ------------- $ 151,491,090 $ 139,393,692 ============= =============
Activity in the allowance for loan losses for the years ended June 30 is as follows:
1999 1998 1997 ----------- ----------- ----------- Beginning balance $ 982,532 $ 571,751 $ 553,440 Provision for loan losses 1,010,000 705,000 120,000 Charge-offs (464,847) (331,702) (184,797) Recoveries 95,608 37,483 83,108 ----------- ----------- ----------- Ending balance $ 1,623,293 $ 982,532 $ 571,751 =========== =========== ===========
At June 30, 1999 and 1998, no portion of the allowance for loan losses was allocated to impaired loan balances as there were no loans considered impaired as of or for the years ended June 30, 1999 or 1998. NOTE 5 - LOAN SERVICING Mortgage loans serviced for others are not reported as assets in the balance sheets. These loans totaled $32,426,789 and $25,861,772 at June 30, 1999 and 1998. Related escrow deposit balances were $68,100 and $56,700 at June 30, 1999 and 1998. 23 FFW Corporation Notes to Consolidated Financial Statements June 30, 1999, 1998 and 1997 NOTE 6 - PREMISES AND EQUIPMENT, NET Premises and equipment at June 30 were as follows:
1999 1998 ----------- ----------- Land $ 350,121 $ 350,121 Buildings 2,090,511 2,063,539 Furniture, fixtures and equipment 901,539 815,480 ----------- ----------- Total cost 3,342,171 3,229,140 Less accumulated depreciation (1,217,515) (1,023,682) ----------- ----------- $ 2,124,656 $ 2,205,458 =========== ===========
NOTE 7 - DEPOSITS Deposit accounts individually exceeding $100,000 totaled $27,098,721 and $27,940,314 at June 30, 1999 and 1998. At June 30, 1999, stated maturities of certificates of deposit were: 2000 $52,058,153 2001 9,326,827 2002 2,853,616 2003 2,460,208 2004 2,670,754 Thereafter -- ----------- $69,369,558 =========== NOTE 8 - OTHER BORROWINGS Federal Home Loan Bank (FHLB) advances total $65,877,262 at June 30, 1999. The majority of the advances have fixed interest rates ranging from 4.59% to 7.94% and the scheduled maturities during the years ended June 30 were as follows: 2000 $40,500,000 2001 19,000,000 2002 500,000 2003 -- 2004 -- Thereafter 5,877,262 ----------- $65,877,262 =========== The Bank also maintains a $1,000,000 overdraft line of credit agreement with the FHLB which terminates on May 20, 2000. As of June 30, 1999 and 1998, $423,126 and $0 were outstanding under this agreement. FHLB advances and the overdraft line of credit agreement are secured by all stock in the FHLB, qualifying first mortgage loans, government, agency and mortgage-backed securities. At June 30, 1999, collateral of approximately $102 million is pledged to the FHLB to secure advances outstanding. NOTE 9 - EMPLOYEE BENEFITS Employee Pension Plan: The pension plan is part of a noncontributory multi-employer defined-benefit pension plan covering substantially all employees. There is no separate actuarial valuation of plan benefits nor segregation of plan assets specifically for the Company. As of July 1, 1998, the latest actuarial valuation, plan assets exceeded the actuarially determined 24 FFW Corporation Notes to Consolidated Financial Statements June 30, 1999, 1998 and 1997 NOTE 9 - EMPLOYEE BENEFITS (continued) value of total vested benefits. The plan has reached its full funding limitation for Internal Revenue Code purposes and a full contribution is not required. As a result, other than administrative expenses, there was no pension expense for 1999, 1998 and 1997. 401(k) Plan: A retirement savings 401(k) plan covers full time employees 21 or older and have completed one year of service. Participants may defer up to 15% of compensation. The Company matches 50% of elective deferrals on the first 6% of the participants' compensation. Expenses under this plan were $38,000, $28,000, and $21,000 for 1999, 1998 and 1997. Employee Stock Ownership Plan (ESOP): Employees with 1,000 hours of employment with the Bank and who have attained age 21 are eligible to participate in the ESOP. The ESOP borrowed $591,500 from the Company to purchase 118,300 shares of the common stock issued in the conversion at $5 per share. The loan will be repaid principally from the Bank's discretionary contributions to the ESOP over seven years. Shares purchased by the ESOP are held in suspense until allocated to participants as the loan is repaid. ESOP expense was $245,000, $269,000 and $232,000 for 1999, 1998 and 1997. Contributions to the ESOP were $99,000, $93,000 and $87,000 for 1999, 1998 and 1997. Contributions to the ESOP and shares released from suspense proportional to repayment of the ESOP loan are allocated among ESOP participants on the basis of compensation. Benefits are 100% vested after five years of service including credit for years of service prior to July 1, 1992. Prior to five years of credited service, a participant who terminates employment for reasons other than death, normal retirement, or disability does not receive any ESOP benefit. Forfeitures are reallocated among remaining participating employees, in the same proportion as contributions. Benefits are payable in stock or cash upon termination of employment. The Company's contributions to the ESOP are not fixed, so benefits payable under the ESOP cannot be estimated. For 1999, 1998 and 1997, 17,117 shares with an average fair value of $15.74, $17.31 and $13.57 per share, were committed to be released. ESOP shares as of June 30 were:
1999 1998 1997 --------- --------- --------- Allocated (including shares committed to be released) 109,740 92,623 75,506 Unearned 8,560 25,677 42,794 Shares withdrawn from the plan by participants (7,110) (7,110) -- --------- --------- --------- Total ESOP shares held in the plan 111,190 111,190 118,300 ========= ========= ========= Fair value of unearned shares at June 30 $ 115,560 $ 443,442 $ 577,719 ========= ========= =========
Stock Option Plan: The 1992 Stock Option and Incentive Plan authorizes options of 169,000 shares of common stock. During 1998, the Company registered with the Securities and Exchange Commission the 1998 Omnibus Incentive Plan. This plan authorizes options, restricted stock and SARs of 142,000 shares of common stock. For both plans when options are granted, option price is at least 100% of the market value of common stock on the date of grant, and the option term cannot exceed 10 years. Options awarded may be exercised at a rate of 25% per year. No compensation expense was recognized for stock options for 1999, 1998 and 1997. SFAS No. 123 requires proforma disclosures for companies that do not adopt its fair value accounting method for stock-based employee compensation. Accordingly, the following proforma information presents net loss per common share had the fair value method been used to measure compensation cost for stock option plans. 25 FFW Corporation Notes to Consolidated Financial Statements June 30, 1999, 1998 and 1997 NOTE 9 - EMPLOYEE BENEFITS (continued) The fair value of options granted during 1999 was estimated using the following weighted average information: risk-free interest rate of 5.25%, expected life of 10 years, expected volatility of stock price of .31 and expected dividends of 3.11% per year.
1999 ---------- Net income as reported $ 2,111,055 Proforma net income $ 2,103,759 Basic income per common share as reported $ 1.48 Diluted income per common share as reported $ 1.46 Proforma basic income per common share $ 1.47 Proforma diluted income per common share $ 1.45
In future years, the proforma effect of not applying this standard is expected to increase as additional options are granted. Stock option plans are used to reward employees and provide them with an additional equity interest. Options are issued for 10-year periods with varying vesting periods. Information about option grants follows:
Weighted Number of Weighted Average Outstanding Exercise Average Fair Value Options Price Exercise Price of Grants ------- ----- -------------- --------- Outstanding, June 30, 1996 119,700 $5.00 $5.00 Granted 8,000 10.94 10.94 Granted 8,000 13.38 13.38 Exercised 32,348 5.00 5.00 ------- Outstanding, June 30, 1997 103,352 5.00 - 13.38 6.11 Exercised 35,564 5.00 5.00 ------- Outstanding, June 30, 1998 67,788 5.00 - 13.38 6.69 Granted 16,116 18.50 18.50 $1.34 Granted 3,000 14.25 14.25 2.53 Exercised 14,725 5.00 - 13.38 5.22 ------- Outstanding, June 30, 1999 72,179 5.00 - 18.50 10.06 =======
The weighted average remaining contractual life of options outstanding at June 30, 1999 was approximately five years. Stock options exercisable at June 30, 1999, 1998 and 1997 totaled 53,063, 59,788 and 87,352 at a weighted average exercise price of $7.10, $5.79 and $5.00. As of June 30, 1999, 137,000 options remain available for future grants. Deferred Compensation: The Company has a deferred compensation plan for certain directors of the Company and a salary continuation plan for a Bank executive. The Company/Bank is obligated to pay each such individual or beneficiaries the accumulated contributions plus interest credited for the deferred compensation plan and a lump sum payment for the salary continuation plan, beginning with the individual's termination of service. A deferred compensation liability of $245,000 and $211,000 at June 30, 1999 and 1998 has been accrued for these obligations. Life insurance on the participants was purchased. The cash surrender value of such insurance was $234,000 and $248,000 at June 30, 1999 and 1998 and is included in other assets. Expense incurred for these plans was $36,000, $36,000, and $36,000 for 1999, 1998 and 1997. 26 FFW Corporation Notes to Consolidated Financial Statements June 30, 1999, 1998 and 1997 NOTE 10 - INCOME TAXES Income tax expense for the years ended June 30 was:
1999 1998 1997 --------- --------- --------- Federal Current $ 987,372 $ 626,763 $ 438,181 Deferred (291,260) 11,209 2,124 --------- --------- --------- 696,112 637,972 440,305 State Current 334,696 216,357 129,438 Deferred (66,817) 3,414 36,024 --------- --------- --------- 267,879 219,771 165,462 --------- --------- --------- Income tax expense $ 963,991 $ 857,743 $ 605,767 ========= ========= =========
Income tax expense differed from amounts computed using the U.S. federal income tax rate of 34% as follows:
1999 1998 1997 ----------- ----------- ----------- Income taxes at 34% statutory rate $ 1,045,516 $ 937,519 $ 662,805 Tax effect of: Tax-exempt income (146,615) (126,981) (147,117) State tax, net of federal income tax effect 199,357 156,126 109,205 Dividends received deduction (80,121) (69,246) (61,794) Fair market value of ESOP shares in excess of cost 49,468 59,840 49,471 Low income housing credits (64,739) (15,484) -- Other (38,875) (84,031) (6,803) ----------- ----------- ----------- Total income tax expense $ 963,991 $ 857,743 $ 605,767 =========== =========== ===========
Components of the net deferred tax liability as of June 30 are:
1999 1998 --------- --------- Deferred tax assets: Bad debts $ 530,437 $ 254,122 Deferred compensation 96,921 83,523 Core deposit intangible 61,165 20,388 Depreciation on securities available for sale 280,669 -- Other 12,803 11,023 --------- --------- 981,995 369,056 Deferred tax liabilities: Accretion (50,269) (50,164) Net deferred loan costs (241,574) (236,821) Appreciation on securities available for sale -- (465,448) Other (271) (6,739) --------- --------- (292,114) (759,172) Valuation allowance -- (24,199) --------- --------- Net deferred tax asset (liability) $ 689,881 $(414,315) ========= =========
27 FFW Corporation Notes to Consolidated Financial Statements June 30, 1999, 1998 and 1997 NOTE 10 - INCOME TAXES (continued) Federal income tax laws provided savings banks with additional bad debt deductions through 1987, totaling $1,156,000 for the Bank. Accounting standards do not require a deferred tax liability to be recorded on this amount, which liability otherwise would total $393,000 at June 30, 1999 and 1998. If the Bank was liquidated or otherwise ceased to be a bank or if tax laws were to change, the $393,000 would be recorded as expense. NOTE 11 - REGULATORY MATTERS The Bank is subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If only adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. 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, 1999 Total Capital $16,841 12.38% $10,886 8.00% $13,607 10.00% Tier I (Core) Capital (to risk-weighted assets) 15,264 11.22% 5,443 4.00% 8,164 6.00% Tier I (Core) Capital (to adjusted total assets) 15,264 7.10% 6,449 3.00% N/A N/A Tangible Capital 15,264 7.10% 3,224 1.50% N/A N/A As of June 30, 1998 Total Capital $14,743 12.08% $ 9,764 8.00% $12,205 10.00% Tier I (Core) Capital (to risk-weighted assets) 13,786 11.30% 4,882 4.00% 7,323 6.00% Tier I (Core) Capital (to adjusted total assets) 13,786 6.94% 5,958 3.00% N/A N/A Tangible Capital 13,786 6.94% 2,979 1.50% N/A N/A
Regulations of the Office of Thrift Supervision limit the dividends that may be paid without prior approval of the Office of Thrift Supervision. At June 30, 1999, approximately $3.9 million of the Bank's retained earnings is available for distribution to the Company. 28 FFW Corporation Notes to Consolidated Financial Statements June 30, 1999, 1998 and 1997 NOTE 12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONTINGENCIES Various outstanding commitments and contingent liabilities are not reflected in the financial statements. Commitments to make loans at June 30 were as follows:
1999 1998 --------------------------- --------------------------- Fixed Variable Fixed Variable Rate Rate Rate Rate ----------- ----------- ----------- ----------- Commitments to make loans $ 211,000 $ 270,000 $ 1,278,000 $ 628,000 Unused lines of credit .. -- 9,718,000 -- 8,844,000 Standby letters of credit -- 1,671,000 -- 1,232,000 ----------- ----------- ----------- ----------- $ 211,000 $11,659,000 $ 1,278,000 $10,704,000 =========== =========== =========== ===========
Fixed rate loan commitments at June 30, 1999 were at current rates, ranging primarily from 7.50% to 9.50%. Variable rate loan commitments, unused lines of credit and standby letters of credit at June 30, 1999 were at current rates ranging from 7.00% to 11.50% for loan commitments, 8.50% to 11.50% for unused lines of credit and primarily at the national prime rate of interest plus 100 to 300 basis points for standby letters of credit. Since commitments to make loans and to fund unused lines of credit, loans in process and standby letters of credit may expire without being used, the amounts do not necessarily represent future cash commitments. In addition, commitments are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The maximum exposure to credit loss in the event of nonperformance by the other party is the contractual amount of these instruments. The same credit policy is used to make such commitments as is used for loans receivable. Under employment agreements with two of its officers, certain events leading to separation from the Company could result in cash payments totaling $538,000. The Company and the Bank are subject to certain claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated financial position or results of operation of the Company. The Bank has a 3% limited partner interest in a limited partnership formed to construct, own and manage affordable housing projects. The Bank is one of 13 investors. As of June 30, 1999, the Bank had invested $675,000 and had recorded equity in the operating loss of the limited partnership of $79,000, $45,000 and $48 for the years ended June 30, 1999, 1998 and 1997. At June 30, 1999 and 1998, the obligation due to the limited partnership was $75,000 and $300,000. The Bank receives 3% of the eligible tax credits. For the years ended June 30, 1999, 1998 and 1997, the Bank received approximately $65,000, $15,000 and $18 in tax credits. NOTE 13 - SIGNIFICANT CONCENTRATIONS OF CREDIT RISK Real estate and consumer loans, including automobile, home equity and improvement, manufactured home and other consumer loans are granted primarily in Wabash, Kosciusko and Whitley counties. Loans secured by one to four family residential real estate mortgages make up 48% of the loan portfolio. The Company also sells loans and services loans for secondary market agencies. The policy for collateral on mortgage loans allows borrowings up to 95% of the appraised value of the property as established by appraisers approved by the Company's Board of Directors, if private mortgage insurance is obtained to reduce the Company's exposure to or below the 80% loan-to-value level. Loan-to-value percentages and documentation guidelines are designed to protect the Company's interest in the collateral as well as to comply with guidelines for sale in the secondary market. 29 FFW Corporation Notes to Consolidated Financial Statements June 30, 1999, 1998 and 1997 NOTE 14 - RELATED PARTY TRANSACTIONS Certain directors, executive officers and principal shareholders of the Company, including associates of such persons, are loan customers. A summary of the related party loan activity, for loans aggregating $60,000 or more to any one related party, is as follows: Balance - June 30, 1998 $1,268,945 New loans 191,150 Repayments (157,147) Other changes (88,056) ---------- Balance - June 30, 1999 $1,214,892 ========== Other changes include adjustments for loans applicable to one reporting period that are excludable from the other reporting period. 30 FFW Corporation Notes to Consolidated Financial Statements June 30, 1999, 1998 and 1997 NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS Presented below are condensed financial statements for the parent company, FFW Corporation.
CONDENSED BALANCE SHEETS June 30, 1999 and 1998 1999 1998 ------------ ------------ ASSETS Cash and cash equivalents $ 66,439 $ 414,301 Investment in Bank subsidiary 16,293,893 16,014,935 Investment in non-bank subsidiary 274,920 224,206 Securities available for sale 1,769,006 2,284,236 Other assets 1,026,058 203,996 ------------ ------------ Total assets $ 19,430,316 $ 19,141,674 ============ ============ LIABILITIES Accrued expenses and other liabilities $ 73,476 $ 12,947 SHAREHOLDERS' EQUITY Common stock 17,853 17,751 Additional paid-in capital 8,965,882 8,793,133 Retained earnings - substantially restricted 13,970,694 12,468,144 Accumulated other comprehensive income (455,386) 685,432 Unearned Employee Stock Ownership Plan shares (52,331) (151,748) Treasury stock (3,089,872) (2,683,985) ------------ ------------ Total shareholders' equity 19,356,840 19,128,727 ------------ ------------ Total liabilities and shareholders' equity $ 19,430,316 $ 19,141,674 ============ ============
CONDENSED STATEMENTS OF INCOME For the years ended June 30, 1999, 1998 and 1997 1999 1998 1997 ----------- ----------- ----------- Interest income $ 107,012 $ 117,349 $ 152,696 Dividend income 1,050,000 -- -- Other income -- -- 1,924 ----------- ----------- ----------- 1,157,012 117,349 154,620 Operating expense 251,650 136,776 154,287 Equity in undistributed income of subsidiaries Bank 1,222,359 1,817,183 1,271,803 Non-bank 50,714 56,035 32,541 ----------- ----------- ----------- Income before income taxes 2,178,435 1,853,791 1,304,677 Income tax expense (benefit) (67,380) (45,877) (38,983) ----------- ----------- ----------- Net income $ 2,111,055 $ 1,899,668 $ 1,343,660 =========== =========== ===========
31 FFW Corporation Notes to Consolidated Financial Statements June 30, 1999, 1998 and 1997 NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS (continued)
CONDENSED STATEMENTS OF CASH FLOWS For the years ended June 30, 1999, 1998 and 1997 1999 1998 1997 ----------- ----------- ----------- Cash flows from operating activities Net income $ 2,111,055 $ 1,899,668 $ 1,343,660 Adjustments to reconcile net income to net cash from operating activities Equity in undistributed income of subsidiaries (1,273,073) (1,873,218) (1,304,344) Other (876,351) (30,964) 30,486 ----------- ----------- ----------- Net cash from operating activities (38,369) (4,514) 69,802 Cash flows from investing activities Net change in interest-bearing deposits - long-term -- -- 173,664 Proceeds from sales of securities (574,108) -- 175,000 Maturities of securities available for sale 982,234 455,000 635,000 Purchase of securities available for sale -- (267,289) (45,842) Repayments on loan receivable from ESOP 170,000 92,805 86,636 ----------- ----------- ----------- Net cash from investing activities 677,543 280,516 1,024,458 Cash flows from financing activities Proceeds from stock options 27,356 177,820 161,740 Purchase of treasury stock (405,887) -- (329,749) Cash dividends paid (608,505) (542,101) (443,192) ----------- ----------- ----------- Net cash from financing activities (987,036) (364,281) (611,201) ----------- ----------- ----------- Net change in cash and cash equivalents (347,862) (88,279) 483,059 Beginning cash and cash equivalents 414,301 502,580 19,521 ----------- ----------- ----------- Ending cash and cash equivalents $ 66,439 $ 414,301 $ 502,580 =========== =========== ===========
The extent to which the Company may pay cash dividends to shareholders will depend on the cash currently available at the Company, as well as the Bank's ability to pay dividends to the Company (see Note 11). NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS The following table shows estimated fair values and related carrying amounts of the Company's financial instruments at June 30. Items which are not financial instruments are not included.
1999 1998 --------------------------- --------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ------ ---------- ------ ---------- (In thousands) (In thousands) Cash and cash equivalents $ 4,839 $ 4,839 $ 4,410 $ 4,410 Securities available for sale 51,029 51,029 50,293 50,293 Loans receivable, net 151,491 150,004 139,394 138,749 Federal Home Loan Bank stock 3,401 3,401 2,757 2,757 Accrued interest receivable 1,616 1,616 1,429 1,429 Non-interest-bearing deposits (8,171) (8,171) (6,935) (6,935) Interest-bearing deposits (122,230) (121,910) (118,321) (118,525) Borrowings (66,300) (64,927) (56,500) (56,240)
32 FFW Corporation Notes to Consolidated Financial Statements June 30, 1999, 1998 and 1997 NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS (continued) For purposes of the above disclosures of estimated fair value, the following assumptions were used as of June 30, 1999 and 1998. The estimated fair value for cash and cash equivalents, Federal Home Loan Bank stock, accrued interest receivable, and non-interest-bearing deposits is considered to approximate cost. The estimated fair value for securities available for sale is based on quoted market values for the individual securities or for equivalent securities. The estimated fair value for loans receivable, net, is based on estimates of the rate the Bank would charge for similar loans at June 30, 1999 and 1998 applied for the time period until the loans are assumed to reprice or be paid. The estimated fair value for interest-bearing deposits as well as borrowings is based on estimates of the rate the Bank would pay on such liabilities at June 30, 1999 and 1998, applied for the time period until maturity. While these estimates of fair value are based on management's judgment of the most appropriate factors, there is no assurance that, were the Company to have disposed of such items at June 30,1999 and 1998, the estimated fair values would necessarily have been achieved at that date, since market values may differ depending on various circumstances. The estimated fair values at June 30, 1999 and 1998 should not necessarily be considered to apply to subsequent dates. In addition, other assets and liabilities of the Company that are not defined as financial instruments are not included in the above disclosures, such as premises and equipment. Also, non-financial instruments typically not recognized in financial statements nevertheless may have value but are not included in the above disclosures. These include, among other items, the estimated earnings power of core deposit accounts, the trained work force, customer goodwill and similar items. NOTE 17 - SAIF DEPOSIT INSURANCE PREMIUM The deposits of savings associations such as the Bank are insured by the Savings Association Insurance Fund ("SAIF"). A recapitalization plan signed into law on September 30, 1996 provided for a one-time assessment of 65.7 basis points applied to all SAIF deposits as of March 31, 1995. Based on the Bank's deposits as of this date, a one-time assessment of approximately $556,000 was paid and recorded as federal deposit insurance premium expense for the year ended June 30, 1997. NOTE 18 - IMPACT OF NEW ACCOUNTING STANDARDS A new accounting standard, SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, will require all derivatives to be recognized at fair value as either assets or liabilities in the Consolidated Balance Sheets beginning with the quarter ended September 30, 2000. Changes in the fair value of derivatives not designated as hedging instruments are to be recognized currently in earnings. Gains or losses on derivatives designated as hedging instruments are either to be recognized currently in earnings or are to be recognized as a component of other comprehensive income, depending on the intended use of the derivatives and the resulting designations. The Corporation does not believe adoption of this new standard will have a material impact on its consolidated financial position or results of operations. 33 Directors and Officers FFW CORPORATION Officers Wayne W. Rees Chairman of the Board and Secretary Nicholas M. George President and Chief Executive Officer Roger K. Cromer Treasurer and Chief Financial and Accounting Officer Board of Directors Wayne W. Rees Owner and Publisher The Paper of Wabash County, Inc. Nicholas M. George President and Chief Executive Officer FFW Corporation President and Chief Executive Officer First Federal Savings Bank of Wabash Chairman of the Board FirstFed Financial of Wabash, Inc. J. Stanley Myers Owner and Operator Servisoft Water Conditioning, Inc. Thomas L. Frank Comptroller, B. Walter & Company Joseph W. McSpadden Vice President and Part Owner Beauchamp & McSpadden Ronald D. Reynolds Owner, J. M. Reynolds Oil Co, Inc. FIRST FEDERAL SAVINGS BANK OF WABASH Officers Wayne W. Rees Chairman of the Board Nicholas M. George President and Chief Executive Officer R. Linden Unger President of FirstFed Financial of Wabash, Inc. Roger K. Cromer Treasurer and Chief Financial Officer Timothy T. Taylor Vice President Richard B. Conroy Vice President Marvin A. Goble Vice President Gregory A. Metz Vice President Christine K. Noonan Vice President Data Processing and Secretary Sonia Niccom Assistant Vice President and Lending Officer Rebekah Steele Assistant Secretary Board of Directors Wayne W. Rees Nicholas M. George J. Stanley Myers Thomas L. Frank Joseph W. McSpadden Ronald D. Reynolds 34 Shareholder Information Stock Listing Information FFW Corporation's common stock is traded on the National Association of Securities Dealers Automated Quotation (NASDAQ) Small-Cap Market under the symbol "FFWC". Stock Price Information As of September 7, 1999 there were approximately 349 shareholders of record, not including those shares held in nominee or street name through various brokerage firms or banks. The following table sets forth the high and low bid prices and dividends paid per share The stock price information was provided by the NASD, Inc. All information has been adjusted for a 2 for 1 stock split on December 31, 1997. Quarter Dividend Ended High Low Declared - ----------------------------------------------------------- Sept. 30, 1997 $15.88 $13.00 $ .09 Dec. 31, 1997 20.88 15.13 .09 March 31, 1998 22.00 17.50 .09 June 30, 1998 20.00 17.00 .105 Sept. 30, 1998 19.50 15.63 .105 Dec. 31, 1998 16.75 15.50 .105 March 31, 1999 16.75 15.38 .105 June 30, 1999 16.00 13.50 .105 Dividends FFW declared and paid dividends of $0.42 per share for fiscal year 1999. The Board of Directors intends to continue payment of quarterly cash dividends, dependent on the results of operations and financial condition of FFW and other factors. Annual Meeting of Shareholders The Annual Meeting of Shareholders of FFW Corporation will be held at 2:30 p.m., October 26, 1999 at the executive office of FFW Corporation located at: 1205 N. Cass Street Wabash, Indiana 46992 Shareholders are welcome to attend. Annual Report on Form 10-KSB and Investor Information A copy of FFW Corporation's annual report on Form 10-KSB, filed with the Securities and Exchange Commission, is available without charge by writing: Roger K.Cromer Chief Financial Officer FFW Corporation 1205 N. Cass Street P.O.Box 259 Wabash, Indiana 46992 Stock Transfer Agent Inquiries regarding stock transfer, registration, lost certificates or changes in name and address should be directed to the stock transfer agent and registrar by writing: Registrar and Transfer Company 10 Commerce Drive Cranford, New Jersey 07016 Investor Information Shareholders, investors, and analysts interested in additional information may contact Nicholas M.George, President and Chief Executive Officer Corporate Office FFW Corporation 1205 N.Cass Street P.O. Box 259 Wabash, Indiana 46992 (219) 563-3185 Special Counsel Silver, Freedman &Taff, L.L.P. 1100 New York Ave., N.W. Washington, D.C. 20006 Independent Auditor Crowe, Chizek and Company LLP 330 E.Jefferson Blvd. South Bend, Indiana 46624 35 EX-21 4 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 5 Exhibit 23 Consents of Experts and Counsel CONSENT OF INDEPENDENT AUDITORS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Registration Nos. 33-71194 and 333-70179) of FFW Corporation (the "Company") of our report dated August 6, 1999, on the consolidated financial statements of the Company, which report is included in the Company's Annual Report to Shareholders and is incorporated by reference in the Company's Form 10-KSB for the year ended June 30, 1999. /s/ Crowe, Chizek and Company LLP - --------------------------------- Crowe, Chizek and Company LLP South Bend, Indiana October 12, 1999 EX-27 6
9 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 YEAR JUN-30-1999 JUN-30-1999 4,651 188 0 0 51,029 0 0 153,114 1,623 217,489 130,401 66,300 1,430 0 0 0 18 19,339 217,489 12,428 3,464 160 16,052 5,808 9,366 6,686 1,010 736 4,591 3,075 3,075 0 0 2,111 1.48 1.46 3.28 410 0 0 842 983 465 96 1,623 1,243 0 380
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