10KSB 1 form10ksb40453-928.txt 10KSB 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, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------------------- ------------- Commission File Number 0-21170 FFW CORPORATION (Name of small business issuer in its charter) Delaware 35-1875502 ------------------------------- ------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 1205 N. Cass Street, Wabash, Indiana 46992-1027 --------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (219) 563-3185 ----------------------------------------------------------------- Securities Registered Pursuant to Section 12(b) of the Act: None -------------------------------------------------------------------------------- Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share -------------------------------------------------------------------------------- (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES [ X ] NO [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained herein, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] State the issuer's revenues for its most recent fiscal year: $18.8 million. The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the closing price per share of such stock on the Nasdaq Stock Market on September 17, 2001, was approximately $15.6 million. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant.) As of September 17, 2001, there were issued and outstanding 1,390,345 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, 2001. Part III of Form 10-KSB - Proxy Statement for 2001 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 completion of the Bank's conversion from mutual to 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, 2001, the Company had $231.2 million of assets and shareholders' equity of $22.0 million (or 9.51% 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 Government. 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, 2001, substantially all of the Bank's real estate mortgage loans (excluding mortgage-backed securities) were secured by properties located in Indiana. The Bank's revenues are derived primarily from interest on mortgage loans, mortgage- backed securities, consumer 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 deposit accounts 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 2 entering into repurchase agreements. At June 30, 2001, the Bank had FHLB advances totaling $62.4 million. 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. In December 2000, FirstFed acquired Pulley Financial Services, Inc. Subsequent to the acquisition, FirstFed continued to operate as a wholly-owned subsidiary of the Company and also appointed a new president of FirstFed. For the fiscal year ended June 30, 2001, FirstFed had net income of approximately $15,000. Forward-Looking Statements When used in this Form 10-KSB and in future filings by the Company with the Securities and Exchange Commission (the "SEC"), in the Company's press releases or other public or shareholder communications, and in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties, including but not limited to changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company's market area and competition, all or some of which could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made and are subject to the above- stated qualifications in any event. The Company wishes to advise readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake, and specifically declines any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Lending Activities of First Federal Market Area of the Bank. The main office of First Federal 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, Noble, Allen and Elkhart Counties in Indiana. 3 Wabash County is served by Conrail and the Norfolk Southern railroads, and also has a local municipal airport. Ft. Wayne, Indiana, 45 miles to the northeast, has a commercial airport served by two major airlines and several commuter affiliates. Wabash County has a mixed agriculture and industrial economy. Several major employers in Wabash County are suppliers to the automotive industry. Wabash County also has Manchester College, a four-year private undergraduate institution, and the Wabash County Hospital, a facility with 135 beds. Major manufacturing employers in Wabash County include: Jefferson Smurfitt; Eaton Corporation; Ford Meter Box Company, Inc.; GenCorp Automotive; Heckman Bindery; 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, 2001, the Bank's net loan portfolio totaled $152.2 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, ------------------------------------------------------------------------ 2001 vs. 2000 2000 vs. 1999 ----------------------------------- ---------------------------------- 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) ......................... $ 95 $ 484 $ 579 $ 476 $ (16) $ 460 Securities .................................. 171 26 197 463 95 558 Mortgage-backed securities .................. 101 (35) 66 (390) 30 (360) Interest-bearings deposits in other financial institutions ........................... 59 (44) 15 (43) 20 (23) ------- ------- ------- ------- ------- ------- Total interest-earning assets ................ $ 426 $ 431 $ 857 $ 506 $ 129 $ 635 ======= ======= ======= ======= ======= ======= Interest-bearing liabilities: Money market accounts ....................... $ 173 $ 10 $ 183 $ 31 $ 1 $ 32 NOW accounts ................................ 6 (2) 4 9 1 10 Passbook Savings accounts ................... (274) (39) (313) (133) (71) (204) Certificates of deposit ..................... 541 645 1,186 340 (52) 288 FHLB Advances ............................... (127) 211 84 152 (29) 123 ------- ------- ------- ------- ------- ------- Total interest bearing liabilities ........... $ 319 $ 825 $ 1,144 $ 399 $ (150) $ 249 ======= ======= ------- ======= ======= ======= Net interest income............................ $ (287) $ 386 ======= =======
-------------------- (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, -------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ----------------- ----------------- ---------------- ---------------- --------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- (Dollars in Thousands) Real Estate Loans: ----------------- One- to four-family........... $68,646 44.49 % $69,738 45.38% $ 67,825 44.34% $ 70,243 49.64% $ 64,921 56.21% Commercial and multi- family...................... 8,887 5.76 8,138 5.30 9,342 6.11 7,272 5.14 6,426 5.56 Construction.................. 4,163 2.70 2,344 1.53 899 .59 3,991 2.82 2,974 2.58 ------- ------ ------- ------ -------- ------ --------- ------ --------- ------ Total real estate loans.... 81,696 52.95 80,220 52.21 78,066 51.04 81,506 57.60 74,321 64.35 ------- ------ ------- ------ -------- ------ --------- ------ --------- ------ Other Loans: ----------- Consumer Loans: Deposit account.............. 314 .20 349 .23 504 .33 475 .34 451 .39 Automobile................... 27,163 17.60 31,368 20.41 36,334 23.75 33,814 23.90 22,625 19.59 Home equity and improvement................ 15,809 10.25 13,119 8.54 10,394 6.80 9,105 6.43 6,970 6.03 Manufactured home............ 212 .14 235 .15 249 .16 301 .21 350 .30 Other........................ 3,782 2.45 4,070 2.65 3,621 2.37 3,348 2.37 3,972 3.44 ------- ------ ------- ------ -------- ------ --------- ------ --------- ------ Total consumer loans....... 47,280 30.64 49,141 31.98 51,102 33.41 47,043 33.25 34,368 29.75 ------- ------ ------- ------ -------- ------ --------- ------ --------- ------ Commercial business loans..... 25,311 16.41 24,301 15.81 23,781 15.55 12,945 9.15 6,813 5.90 ------- ------ ------- ------ -------- ------ --------- ------ --------- ------ Total other loans............ 72,591 47.05 73,442 47.79 74,883 48.96 59,988 42.40 41,181 35.65 ------- ------ ------- ------ -------- ------ --------- ------ --------- ------ Total loans................ 154,287 100.00% 153,662 100.00% 152,949 100.00% 141,494 100.00% 115,502 100.00% ====== ====== ====== ====== ====== Less: ---- Loans in process.............. 565 1,335 444 1,716 1,134 Deferred fees, cost and discounts...................... (246) (444) (609) (599) (363) Allowance for loan losses..... 1,773 1,961 1,623 983 572 -------- -------- -------- -------- -------- Total loans, net........... $152,195 $150,810 $151,491 $139,394 $114,159 ======== ======== ======== ======== ========
6 The following table shows the composition of the Bank's loan portfolio by fixed and adjustable-rate at the dates indicated.
June 30, ------------------------------------------------------------------------------------------------ 2001 2000 1999 1998 1997 ----------------- ----------------- ---------------- ---------------- ------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- (Dollars in Thousands) Fixed-Rate Loans: ---------------- Real Estate: One- to four-family...............$ 17,690 11.47% $15,268 9.94% $ 16,976 11.10% $ 17,492 12.36% $ 8,588 7.43% Commercial and multi-family....... 4,566 2.96 2,253 1.46 6,671 4.36 2,307 1.63 1,676 1.45 Construction...................... 3,973 2.57 2,272 1.48 705 .46 2,110 1.49 1,222 1.06 -------- ------ ------- ------ --------- ------ ------- ------ -------- ------ Total real estate loans....... 26,229 17.00 19,793 12.88 24,352 15.92 21,909 15.48 11,486 9.94 -------- ------ ------- ------ --------- ------ ------- ------ -------- ------ Consumer........................... 38,915 25.22 49,024 31.90 45,140 29.51 42,370 29.94 31,222 27.03 Commercial business................ 12,376 8.02 8,666 5.64 6,853 4.48 5,540 3.92 2,921 2.53 -------- ------ -------- ------ --------- ----- ------- ------ -------- ------ Total fixed-rate loans........ 77,520 50.24 77,483 50.42 76,345 49.91 69,819 49.34 45,629 39.50 -------- ------ ------- ------ --------- ------ ------- ------ -------- ------ Adjustable-Rate Loans: --------------------- Real estate: One- to four-family.............. 50,956 33.03 54,470 35.44 50,849 33.24 52,751 37.28 56,333 48.77 Commercial and multi-family...... 4,321 2.80 5,885 3.83 2,671 1.75 4,965 3.51 4,750 4.11 Construction..................... 190 .12 72 .05 194 .13 1,881 1.33 1,752 1.52 -------- ------ ------- ------ --------- -------- ------ -------- ------ Total real estate loans....... 55,467 35.95 60,427 39.32 53,714 35.12 59,597 42.12 62,835 54.40 -------- ------ -------- ------ --------- ----- ------- ------ -------- ------ Consumer.......................... 8,365 5.43 117 .08 5,962 3.90 4,673 3.30 3,146 2.73 ------ Commercial business............... 12,935 8.38 15,635 10.18 16,928 11.07 7,405 5.24 3,892 3.37 -------- ------ ------- ------ --------- ------ ------- ------ -------- ------ Total adjustable-rate loans... 76,767 49.76 76,179 49.58 76,604 50.09 71,675 50.66 69,873 60.50 ------- ------ --------- ------ -------- ------ -------- ------- Total loans................... 154,287 100.00% 153,662 100.00% 152,949 100.00% 141,494 100.00% 115,502 100.00% ====== ====== ====== ====== ====== Less: ---- Loans in process.................. 565 1,335 444 1,716 1,134 Deferred fees, cost and discounts. (246) (444) (609) (599) (363) Allowance for loan losses......... 1,773 1,961 1,623 983 572 -------- -------- -------- -------- -------- Total loans, net..............$152,195 $150,810 $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, 2001. 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 ------------------------------------------------------- Commercial One- to four-family Commercial Construction Consumer Business Total ------------------ --------------- ---------------- ---------------- --------------- --------------- Weighted Weighted Weighted Weighted Weighted Average Average Average Average Average Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Percent ------ ---- ------ ---- ------ ---- ------ ---- ------ ---- ------ ------- (Dollars in Thousands) Due During Years Ending June 30, ------------- 2002 ............. $ 303 8.84% $ 877 8.50% $ 4,163 8.78 $ 3,391 12.39% $15,272 8.88 $ 24,006 15.56% 2003 - 2006 ...... 795 8.34 205 7.75 28,229 10.26 4,031 9.13 33,260 21.56 2007 and following 67,548 8.25 7,805 8.62 15,660 8.46 6,008 8.83 97,021 62.88 -------- -------- -------- ------- ------- -------- $ 68,646 8.25% $ 8,887 8.59% $ 4,163 8.78% $47,280 9.82% $25,311 8.91% $154,287 100.00% ======== ======== ======== ======= ======= ========
The total amount of loans due after June 30, 2002 which have fixed interest rates is $65.5 million, while the total amount of loans due after such dates which have floating or adjustable interest rates is $64.8 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, 2001, the Bank's one- to four-family residential mortgage loans totaled $68.6 million, or approximately 44.5% 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 a stated interest rate margin over applicable Treasury rates. These loans have a fixed-rate for the stated period and, thereafter, such loans adjust annually. Depending on whether a one-, three-, five-, or seven-year loan is selected, per-year and lifetime caps and floors 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 floors, 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 less than 15 years in its portfolio. The Bank reserves the right to discontinue, adjust or create new lending programs to respond to its needs and to competitive factors. 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. Properties in Wabash county securing real estate loans made by First Federal are appraised by the Bank's salaried appraisers. Properties located outside of Wabash county securing real estate loans and all properties securing commercial loans 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 9 currently originates substantially all of its consumer loans in its primary market area and surrounding areas. The Bank originates consumer loans on both a direct and indirect basis. Direct loans are made when the Bank extends credit directly to the borrower. Indirect loans are obtained when the Bank purchases loan contracts from retailers of goods or services which have extended credit to their customers. The only indirect lending by First Federal began in the early 1980s, and is with selected automobile and boat dealers located in the Bank's primary market and surrounding areas. The Bank underwrites each indirect loan in accordance with its normal consumer loan standards. At June 30, 2001, the Bank's consumer loan portfolio totaled $47.3 million, or 30.6% 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, 2001, $163,000 or approximately 0.34% of the consumer loan portfolio was non- accruing. 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, 2001, automobile loans totaled $27.2 million, or approximately 17.6% 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, 2001, home equity and home improvement loans, most of which are secured by second mortgages, amounted to $15.8 million, or 10.3% 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 10 single family homes in the Bank's primary market area and surrounding areas. At June 30, 2001, the Bank had $4.2 million of gross construction loans, most of which were to borrowers who intended to live in the properties upon completion of construction. Construction loans to individuals for their residences are structured to be converted to permanent loans at the end of the construction phase, which typically runs for six months. During the construction phase, the borrower pays interest only. Residential construction loans are generally underwritten pursuant to the same guidelines used for originating permanent residential loans. Construction loans to builders of one- to four-family residences require the payment of interest only for up to 12 months. In most cases, these loans carry fixed interest rates. At June 30, 2001, the Bank had $1.9 million in construction loans outstanding to builders. Construction lending generally affords the Bank an opportunity to receive interest at rates higher than those obtainable from permanent residential loans and to receive higher origination and other loan fees. In addition, construction loans are generally made with fixed 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, 2001, 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 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, 2001, the Bank had $8.9 million of commercial and multi-family real estate loans, which represented 5.8% of the Bank's total gross loan portfolio. The largest commercial or multi-family real estate loan outstanding at June 30, 2001 was $1.7 million, which was performing in accordance with its repayment terms. At June 30, 2001, substantially all of the Bank's commercial and multi-family real estate loan portfolio was secured by properties located in Indiana. Loans secured by commercial and multi-family real estate properties are generally larger and involve a greater degree of credit risk than one- to four-family residential mortgage loans. Because payments on loans secured by commercial real estate properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. If the cash flow from the project is reduced (for example, if leases are not obtained or renewed), the borrower's ability to repay the loan may be impaired. 11 The Bank's commercial and multi-family real estate loan portfolio is secured primarily by apartment buildings and, to a lesser extent, office buildings and nursing homes. Commercial and multi-family real estate loans generally have terms that do not exceed 20 years. The Bank has a variety of rate adjustment features and other terms in its commercial and multi-family real estate loan portfolio. Generally, the loans are made in amounts up to 75% of the appraised value of the security property. Commercial real estate loans provide for a margin over a designated index which is generally the prime rate and multi-family loans provide for a margin over the one-year Treasury bill rate. The Bank currently analyzes the financial condition of the borrower, the borrower's credit history, and the reliability and predictability of the cash flow generated by the property securing the loan. The Bank generally requires personal guaranties of the borrowers. Appraisals on properties securing commercial real estate loans originated by the Bank are performed by independent appraisers. Commercial Business Lending. The Bank began increasing its commercial loan portfolio in fiscal 1999. At June 30, 2001, approximately $25.3 million, or 16.4% 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. 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. 12 Generally, when a loan becomes delinquent 90 days or more or when the collection of principal or interest becomes doubtful, the Bank will place the loan on a non-accrual status and, as a result, previously accrued interest income on the loan is taken out of current income. The loan will remain on a non-accrual status as long as the loan is 90 days delinquent. The following table sets forth information concerning delinquent mortgage and other loans at June 30, 2001. 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...... 20 $734 1.07% --- $ --- ---% 3 $ 134 0.19% 23 $ 868 1.26% Commercial and Multi-Family............. -- -- -- -- ---- -- 1 346 0.39 1 346 0.39 Construction............. --- --- --- --- ---- --- ---- ---- ---- Consumer................... 138 895 1.89 37 265 .56 24 163 0.34 199 1,323 2.79 Commercial business........ 21 1,091 4.31 10 59 .023 27 676 2.67 58 1,825 7.21 --- ------ --- ----- -- ------ --- ------ Total delinquent loans 179 $2,720 1.76% 47 $324 0.21% 55 $1,319 0.85% 281 $4,363 2.82% === ====== ==== === ==== ==== == ====== ==== === ====== ====
The ratio of delinquent loans to total loans (net), was 2.87% at June 30, 2001. 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. 13
June 30 ------------------------------------------------------ 2001 2000 1999 1998 1997 ------ ------ ------ ------ ------ (Dollars in Thousands) Non-accruing loans: One- to four-family ................... $ 134 $ 137 $ 1 $ 521 $ -- Commercial and multi-family real estate 1,022 39 317 -- -- Consumer .............................. 163 75 92 193 248 ------ ------ ------ ------ ------ Total non-accruing loans ....... 1,319 251 410 714 248 ------ ------ ------ ------ ------ Foreclosed and repossessed assets: One- to four-family ................... 230 -- 274 -- -- Commercial and multi-family real estate -- -- 101 101 -- Consumer .............................. 69 39 57 58 33 ------ ------ ------ ------ ------ Total foreclosed assets ........ 299 39 432 159 33 ------ ------ ------ ------ ------ Troubled debt restructurings ............ -- -- -- -- -- Total non-performing assets ............. $1,618 $ 290 $ 842 $ 873 $ 281 ====== ====== ====== ====== ====== Total as a percentage of total assets ... 0.70% 0.13% 0.39% 0.43% 0.16% ====== ====== ====== ====== ======
Non-Performing Assets. Included in non-accruing loans at June 30, 2001 were 24 consumer loans totaling $103,000 secured by property including automobiles, manufactured homes and other collateral. Foreclosed and repossessed assets included automobiles and commercial property totaling $69,000 at June 30, 2001. Other Loans of Concern. Including the non-accruing loans set forth in the preceding table, as of June 30, 2001 there was also an aggregate of $4.7 million in net book value of loans classified by the Bank with respect to the majority of which known information about the possible credit problems of the borrowers or the cash flows of the security properties have caused management to have some doubts as to the ability of the borrowers to comply with present loan repayment terms and which may result in the future inclusion of such items in the non-performing asset categories. The principal components of loans of concern are 85 consumer loans aggregating $631,000, 13 one- to four-family loans aggregating $668,000 and 23 commercial loans aggregating $3.5 million at June 30, 2001. The principal components of loans of concern at June 30, 2000 consisted of 64 consumer loans aggregating $572,000, 18 one- to four-family loans aggregating $889,000 and 25 commercial loans aggregating $2.7 million. As of June 30, 2001, 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. 14 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 bank 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 bank 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. First Federal's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the District Director at the regional OTS office, who may order the establishment of additional general or specific loss allowances. In accordance with its classification of assets policy, the Bank regularly reviews the loans in its portfolio to determine whether any loans require classification. On the basis of management's review of its assets, at June 30, 2001, the Bank had classified a total of approximately $2.5 million of its assets as substandard, $248,000 as doubtful, none as loss, and $2.0 million as special mention. At June 30, 2001, total classified and non-performing assets comprised $5.0 million, or 25.6% of the Bank's capital, or 2.2% of the Bank's total assets. Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risk inherent in its loan portfolio and changes in the nature and volume of its loan activity. Such evaluation, which includes a review of loans for which full collectibility may not be reasonably assured, considers among other matters, the estimated fair value of the underlying collateral, economic conditions, historical loan loss experience and other factors that warrant recognition in providing for an adequate loan loss allowance. Real estate properties acquired through foreclosure are recorded at fair value. If fair value at the date of foreclosure is lower than the balance of the related loan, the difference will be charged-off to the allowance at the time of transfer. Valuations are periodically updated by management and if the value declines, a specific provision for losses on such property is established by a charge to operations. 15 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, 2001, the Bank had a total allowance for loan losses of $1.8 million or 1.15% 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. The following table sets forth an analysis of the Bank's allowance for loan losses.
Year Ended June 30 ------------------------------------------------------ 2001 2000 1999 1998 1997 ------ ------ ------ ------ ------ (Dollars in Thousands) Balance at beginning of period .............. $1,961 $1,623 $ 983 $ 572 $ 553 Charge-offs: One- to four-family ........................ 113 -- 26 -- 3 Consumer ................................... 1,277 507 439 285 181 Commercial Business ........................ 802 276 -- 47 -- ------ ------ ------ ------ ------ 2,192 783 465 332 184 Recoveries: Consumer ................................... 139 82 95 38 83 Commercial and multi-family real estate .... 150 5 -- -- -- ------ ------ ------ ------ ------ 289 87 95 38 83 Net charge-offs ............................. 1,903 696 370 294 101 Additions charged to operations ............. 1,715 1,034 1,010 705 120 ------ ------ ------ ====== ------ Balance at end of period .................... $1,773 $1,961 $1,623 $ 983 $ 572 ====== ====== ====== ====== ====== Ratio of net charge-offs during the period to average loans outstanding during the period ...................................... 1.23% 0.45% 0.25% 0.23% .09 % ====== ====== ====== ====== ======
16 The distribution of the Bank's allowance for loan losses at the dates indicated is summarized as follows:
June 30, ---------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ------------------- ----------------- ------------------ ----------------- ------------------ Percent Percent Percent Percent Percent of Loans of Loans of Loans of Loans of Loans in Each in Each in Each in Each in Each Category Category Category Category Category to Total to Total to Total to Total to Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- (Dollars in Thousands) One- to four-family.......... $ 184 44.49% $ 274 45.38% $ 113 44.34% $105 49.64% $ 95 56.21% Commercial and multi-family real estate............... 215 5.76 120 5.30 225 6.11 230 5.14 70 5.56 Construction................. --- 2.70 -- 1.53 --- 0.59 28 2.82 25 2.58 Consumer..................... 454 30.64 825 31.98 700 33.41 445 33.25 325 29.75 Commercial business.......... 859 16.41 571 15.81 405 15.55 165 9.15 50 5.90 Unallocated.................. 61 --- 171 --- 180 --- 10 --- 7 --- ------- ------ ------ ------ ------ ------ ---- ------ ---- ------ Total................... $ 1,773 100.00% $1,961 100.00% $1,623 100.00% $983 100.00% $572 100.00 % ======= ====== ====== ====== ====== ====== ==== ====== ==== ======
17 Investment Activities Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. Historically, the Bank has generally maintained its liquid assets above the minimum requirements previously 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, 2001, the Bank's liquidity ratio (liquid assets as a percentage of net withdrawable savings deposits and current borrowings) was 7.94%, a level deemed by management to be consistent with safe and sound banking practices. 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, 2001, the Company 18 had no securities classified as held to maturity and $61.0 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, 2001, 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 3.6 years. OTS regulations restrict investments in corporate debt and equity securities by the Bank. These restrictions include prohibitions against investments in the debt securities of any one issuer in excess of 15% of the Bank's unimpaired capital and unimpaired surplus as defined by federal regulations, which totaled $19.4 million as of June 30, 2001, 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, ------------------------------------------------------------------ 2001 2000 1999 ---------------------- -------------------- ------------------ Carrying % of Carrying % of Carrying % of Value Total Value Total Value Total ----------- ---------------------------------------------- -------- (Dollars in Thousands) Securities available for sale: Federal agency obligations..................... $ 11,134 27.55% $21,952 49.41% $23,187 53.0% Commercial notes and commercial paper.......... 4,631 11.46 1,499 3.37 237 0.54 State and local government obligations......... 8,094 20.02 8,498 19.13 8,343 19.08 Other equity securities........................ 13,160 32.56 9,073 20.43 8,569 19.59 -------- ------- ------- ------- ------ Total securities available for sale.......... 37,019 91.59 41,022 92.34 40,336 92.22 -------- ------- ------- ------- ------ FHLB stock..................................... 3,401 8.41 3,401 7.66 3,401 7.78 -------- ------ ------- ------ ------- ------- Total securities............................. $40,420 100.00 $44,423 100.00% $43,737 100.00% ======= ====== ======= ====== ======= ====== Weighted average remaining life or term to repricing, excluding FHLB stock and other equity securities available for sale......... 3.6 yrs. 8.7 yrs. 8.2 yrs. Other Interest-Earning Assets: Interest-earning deposits with banks........... $ 2,158 $1,102 $ 188 ======= ====== =======
19 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, 2001 --------------------------------------------------------------------------------- Less Than 1 to 5 5 to 10 Over 10 Total 1 Year Years Years Years Securities ------ ----- ----- ----- ---------------------- Amortized Amortized Amortized Amortized Amortized Market Cost Cost Cost Cost Cost Value ---- ---- ---- ---- ---- ----- (Dollars in Thousands) Federal agency obligations................. $ 0 $ 0 $ 9,000 $2,062 $11,062 $11,134 Commercial notes and commercial paper........... 2,194 0 0 2,259 4,453 4,631 State and local government obligations...... 582 1,181 1,044 5,213 8,020 8,094 -------- ------- -------- ------- ------ -------- Total debt securities........ $2,776 $1,181 $10,044 $9,534 $23,535 $23,859 ====== ====== ======= ====== ======= ======= Weighted average yield(1).... 5.68% 5.24% 6.24% 6.72% 6.32%
----------------------- (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, 2001 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, ------------------------------------------- 2001 2000 1999 ------- ------- ------- (In thousands) Fannie Mae ............... $ 6,991 $ 1,219 $ 283 Ginnie Mae ............... 12,650 10,110 10,290 Freddie Mac .............. 3,856 73 103 ------- ------- ------- Total ................ $23,497 $11,402 $10,676 ======= ======= =======
20 The following table sets forth the contractual maturities of the Company's mortgage-backed securities based on amortized cost at June 30, 2001. 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, --------------------------------------------- 2000 5 Years 5 to 10 10 to 20 Over 20 Balance or Less Years Years Years Outstanding ---------- ---------- ----------------------- ------------- (Dollars In Thousands) Fannie Mae....................... $ --- $ --- $ --- $ 6,991 $ 6,991 Ginnie Mae....................... --- --- --- 12,650 12,650 Freddie Mac...................... --- --- --- 3,856 3,856 -------- ------- ------- ------ --------- Total....................... $ --- $ --- $ --- $23,497 $23,497 ======= ====== ====== ======= ======= Weighted average yield........... ---% ---% ---% 6.48% 6.48%
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 deposit accounts 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. Nonetheless, the Bank has become more susceptible to short-term fluctuations in deposit flows, as customers have become more interest rate conscious. The Bank endeavors to manage the pricing of its deposits in keeping with its asset/liability management and profitability objectives. Based on its experience, the Bank believes that its passbook savings, money market savings accounts, NOW, money market checking and regular checking accounts are relatively stable sources of deposits. However, the ability of the Bank to attract and maintain certificates of deposit and its passbook accounts and the rates paid on these deposits has been and will continue to be significantly affected by market conditions. 21 The following table sets forth the savings flows at the Bank during the periods indicated.
Year Ended June 30, ---------------------------------------------- 2001 2000 1999 --------- --------- --------- (In thousands) Opening balance ......... $ 133,105 $ 130,401 $ 125,256 Purchased deposits ...... -- -- -- Net deposits ............ 5,723 (2,213) 246 Interest credited ....... 5,802 4,917 4,899 --------- --------- --------- Ending balance .......... $ 144,630 $ 133,105 $ 130,401 ========= ========= ========= Net increase ............ $ 11,525 $ 2,704 $ 5,145 ========= ========= ========= Percent increase ........ 8.66% 2.07% 4.11% ========= ========= =========
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, ------------------------------------------------------------------------------------- 2001 2000 1999 -------------------------- -------------------------- ---------------------- Percent Percent Percent Amount of Total Amount of Total Amount of Total ------ -------- ------ -------- ------ -------- (Dollars in Thousands) Interest Rate Range: ------------------- Passbook Accounts.................... $ 35,376 24.46% $ 37,775 28.38% $45,653 35.01% Demand accounts(1)................... 9,161 6.33 8,876 6.67 8,171 6.26 Money Market Accounts................ 5,621 3.88 2,884 2.17 568 0.44 NOW Accounts......................... 7,129 4.93 7,539 5.66 6,640 5.09 --------- ------ --------- ------ Total Non-Certificates............... 57,287 39.60 57,074 42.88 61,032 46.80 --------- ------ --------- ------ ------- ------ Certificates: ------------- 0.00 - 3.99%....................... 2,293 1.59 --- --- --- --- 4.00 - 5.99%....................... 26,651 18.43 37,129 27.89 53,305 40.88 6.00 - 7.99%....................... 58,319 40.32 38,902 29.23 16,064 12.32 8.00 - 9.99%....................... 80 .06 -- --- --- --- --------- ------ --------- ------ Total Certificates................... 87,343 60.40 76,031 57.12 69,369 53.20 --------- ------ --------- ------- --------- ------- Total Deposits....................... $ 144,630 100.00% $ 133,105 100.00% $130,401 100.00% ======== ====== ========= ====== ======== ======
---------------- (1) Non-interest-bearing accounts. 22 The following table shows rate and maturity information for the Bank's certificates of deposit as of June 30, 2001.
0.00- 4.00- 6.00- Percent 3.99% 5.99% 7.99% Total of Total ----- ----- ----- ----- -------- (Dollars in Thousands) Certificate accounts maturing in quarter ending: September 30, 2001....................... $ 509 $ 4,908 $ 9,736 $15,153 17.35% December 31, 2001........................ 345 2,896 4,315 7,556 8.65 March 31, 2002........................... 982 4,063 3,832 8,877 10.16 June 30, 2002............................ 365 2,746 20,610 23,721 27.16 September 30, 2002....................... 32 3,280 12,379 15,691 17.97 December 31, 2002........................ 60 2,943 1,498 4,501 5.15 March 31, 2003........................... --- 473 1,565 2,038 2.33 June 30, 2003............................ --- 1,669 1,635 3,304 3.78 September 30, 2003....................... --- 608 144 752 .86 December 31, 2003........................ --- 301 298 599 .69 March 31, 2004........................... --- 670 137 807 .92 June 30, 2004............................ --- 458 195 653 .75 Thereafter............................... --- 1,636 2,055 3,691 4.23 ----- ------- ------- ------- ------ Total............................... 2,293 $26,651 $58,399 $87,343 100.00% ===== ======= ======= ======= ====== Percent of total......................... 2.63% 30.51% 66.86% 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, 2000.
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....... $10,926 $ 5,597 $ 24,441 $ 26,851 $ 67,815 Certificates of deposit of $100,000 or more...... 4,052 1,892 6,762 5,165 17,871 Public funds(1).................................. 175 67 1,395 20 1,657 ------- ------- -------- -------- -------- Total certificates of deposit.................... $15,153 $ 7,556 $32,598 $ 32,036 $ 87,343 ======= ======= ======= ======== ========
-------------------- (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. 23 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, 2001, the Bank had $62.4 million in FHLB advances, and a $500,000 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, 2001, 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, ------------------------------------ 2001 2000 1999 ---- ---- ---- (In thousands) Maximum Balance: --------------- FHLB advances and line of credit...................... $ 64,168 $66,300 $66,300 Securities sold under agreements to repurchase........ --- --- -- Average Balance: --------------- FHLB advances and line of credit...................... 62,585 64,770 62,106 Securities sold under agreements to repurchase........ --- --- -- Average Rate Paid On: -------------------- FHLB advances and line of credit...................... 6.02% 5.68% 5.73% Securities sold under agreements to repurchase........ -- --- --
24 The following table sets forth the Bank's borrowings at the dates indicated.
Year Ended June 30, --------------------------------------- 2001 2000 1999 ---------- ------------ ----------- (In thousands) FHLB advances and line of credit....... $ 62,397 $64,168 $66,300 Due to brokers......................... -- --- --- ---------- ------------ ----------- Total borrowings................... $ 62,397 $64,168 $66,300 ======== ======= =======
Subsidiary Activities As a federally chartered savings association, First Federal is permitted by OTS regulations to invest up to 2% of its assets, or $4.6 million at June 30, 2001, 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, 2001. 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 savings and loan 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. 25 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, 2001 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. 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, 2001, 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, 2001, the Bank's lending limit under this restriction was approximately $3.0 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. 26 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, 2001, the Bank met the requirements of a well- capitalized institution. The premium schedule for BIF and SAIF insured institutions ranged from 0 to 27 basis points. However, SAIF insured institutions and BIF insured institutions are required to pay a Financing Corporation assessment in order to fund the interest on bonds issued to resolve thrift failures in the 1980s. This amount is currently equal to about 1.88 points for each $100 in domestic deposits for BIF and SAIF insured institutions. These assessments, which may be revised based upon the level of BIF and SAIF deposits, will continue until the bonds mature in 2017 through 2019. 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, 2001, 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, 2001, the Bank had no subsidiaries. At June 30, 2001, the Bank had tangible capital of $18.4 million, or 8.07% of adjusted total assets, which is approximately $9.3 million above the minimum requirement of 4.0% of adjusted total assets in effect on that date. The capital standards also effectively require core capital equal to at least 4% of adjusted total assets. Core capital generally consists of tangible capital plus certain intangible assets, 27 including a limited amount of purchased credit card relationships. At June 30, 2001 the Bank had certain intangible assets related to the branch purchase which were subject to these tests. At June 30, 2001, the Bank had core capital equal to $18.4 million, or 8.07% of adjusted total assets, which is $9.3 million above the minimum leverage ratio requirement of 4% as in effect on that date. The OTS risk-based requirement requires savings associations to have total capital of at least 8% of risk-weighted assets. Total capital consists of core capital, as defined above, and supplementary capital. Supplementary capital consists of certain permanent and maturing capital instruments that do not qualify as core capital and general valuation loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used to satisfy the risk-based requirement only to the extent of core capital. The OTS is also authorized to require a savings association to maintain an additional amount of total capital to account for concentration of credit risk and the risk of non-traditional activities. At June 30, 2001, First Federal had no capital instruments that qualify as supplementary capital and $1.8 million of general loss reserves, which was not more 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, 2001. 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. On June 30, 2001, the Bank had total risk-based capital of $20.1 million (including $18.4 million in core capital and $1.7 million in qualifying supplementary capital) and risk-weighted assets of $148.0 million (including, converted off-balance sheet assets); or total capital of 13.6% of risk-weighted assets. This amount was $8.3 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 28 not make capital distributions. The OTS is authorized to impose the additional restrictions, discussed below, that are applicable to significantly undercapitalized associations. As a condition to the approval of the capital restoration plan, any company controlling an undercapitalized association must agree that it will enter into a limited capital maintenance guarantee with respect to the institution's achievement of its capital requirements. Any savings association that fails to comply with its capital plan or is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios of less than 3% or a risk-based capital ratio of less than 6%) must be made subject to one or more additional actions and operating restrictions which may cover all aspects of its operations and include a forced merger or acquisition of the association; and any other action the OTS deems appropriate. An association that becomes "critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is subject to further mandatory restrictions on its activities in addition to those applicable to significantly undercapitalized associations. In addition, the OTS must appoint a receiver (or conservator with the concurrence of the FDIC) for a savings association, with certain limited exceptions, within 90 days after it becomes critically undercapitalized. Any undercapitalized association is also subject to the general enforcement authority of the OTS and the FDIC, including the appointment of a receiver or conservator. The OTS is also generally authorized to reclassify an association into a lower capital category and impose the restrictions applicable to such category if the institution is engaged in unsafe or unsound practices or is in an unsafe or unsound condition. The imposition by the OTS or the FDIC of any of these measures on the Bank may have a substantial adverse effect on the Bank's operations and profitability. Limitations on Dividends and Other Capital Distributions. OTS regulations impose various restrictions or requirements on savings associations with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account. OTS regulations permit a federal savings association to pay dividends in any calendar year equal to net income for that year plus retained earnings for the preceding two years (less any dividends paid). 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, 2001, 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. 29 Any savings association that fails to meet the QTL test must convert to a national bank charter, unless it requalifies as a QTL and thereafter remains a QTL. If an association does not requalify and converts to a national bank charter, it must remain SAIF-insured until the FDIC permits it to transfer to the BIF. If such an association has not yet requalified or converted to a national bank, its new investments and activities are limited to those permissible for both a savings association and a national bank, and it is limited to national bank branching rights in its home state. In addition, the association is immediately ineligible to receive any new FHLB borrowings and is subject to national bank limits for payment of dividends. If such association has not requalified or converted to a national bank within three years after the failure, it must divest of all investments and cease all activities not permissible for a national bank. In addition, it must repay promptly any outstanding FHLB borrowings, which may result in prepayment penalties. If any association that fails the QTL test is controlled by a holding company, then within one year after the failure, the holding company must register as a bank holding company and become subject to all restrictions on bank holding companies. See "- Holding Company Regulation." Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"), every FDIC insured institution has a continuing and affirmative obligation consistent with safe and sound banking practices to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with the examination of the Bank, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications, such as a merger or the establishment of a branch, by the Bank. An unsatisfactory rating may be used as the basis for the denial of an application by the OTS. The federal banking agencies, including the OTS, have recently revised the CRA regulations and the methodology for determining an institution's compliance with the CRA. Due to the heightened attention being given to the CRA in the past few years, the Bank may be required to devote additional funds for investment and lending in its local community. The Bank was examined for CRA compliance in June 1996 and received a rating of satisfactory. Transactions with Affiliates. Generally, transactions between a savings association or its subsidiaries and its affiliates are required to be on terms as favorable to the association as trans actions with non-affiliates. In addition, certain of these transactions, such as loans to an affiliate, are restricted to a percentage of the association's capital. Affiliates of First Federal include the Company and any company which is under common control with the Bank. In addition, a savings association may not lend to any affiliate engaged in activities not permissible for a bank holding company or acquire the securities of most affiliates. The OTS has the discretion to treat subsidiaries of savings associations as affiliates on a case by case basis. Certain transactions with directors, officers or controlling persons are also subject to conflict of interest regulations enforced by the OTS. These conflict of interest regulations and other statutes also impose restrictions on loans to such persons and their related interests. Among other things, 30 such loans must be made on substantially the same terms and conditions as loans to unaffiliated persons. At June 30, 2001, 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 that has been in existence prior to May 4, 1999, 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." Federal Securities Law. The stock of the Company is registered with the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the SEC under the Exchange Act. Company stock held by persons who are affiliates (generally officers, directors and principal stockholders) of the Company may not be resold without registration or unless sold in accordance with certain resale restrictions. If the Company meets specified current public information requirements, each affiliate of the Company is able to sell in the public market, without registration, a limited number of shares in any three-month period. Federal Reserve System. The Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily checking, NOW and Super NOW checking accounts). At June 30, 2001, 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. Savings associations are authorized to borrow from the Federal Reserve Bank "discount window," but Federal Reserve Board regulations require associations to exhaust other reasonable 31 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, 2001, 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, 2001. For the year ended June 30, 2001, dividends paid by the FHLB of Indianapolis to First Federal totaled $283,000 and was approximately $272,000 in fiscal year 2000. The $283,000 dividend received for the fiscal year ended June 30, 2001 reflects an annualized rate of 8.3%. Federal Taxation. 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. 32 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, 2001, the portion of the Bank's reserves subject to this treatment 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. The Company and its subsidiaries have not been audited by the IRS within the last ten years. Indiana Taxation. The State of Indiana imposes an 8.5% franchise tax on the net income (as defined) for financial (including thrift) institutions, exempting them from the current gross income, supplemental net income and intangible taxes. Net income for franchise tax purposes will constitute federal taxable income before net operating loss deductions and special deductions, adjusted for certain items, including Indiana income taxes, tax exempt interest and bad debts. Other applicable Indiana taxes include sales, use and property taxes. Delaware Taxation. As a Delaware holding company, the Holding Company is exempted from Delaware corporate income tax but is required to file an annual report with and pay an annual fee to the State of Delaware. The Company is also subject to an annual franchise tax imposed by the State of Delaware which is generally based upon authorized shares. Competition First Federal faces strong competition, both in originating real estate and other loans and in attracting deposits. Competition in originating real estate loans comes primarily from other commercial banks, savings associations, credit unions and mortgage bankers making loans secured by real estate located in the Bank's market area. Commercial banks and finance companies provide vigorous competition in consumer lending. The Bank competes for real estate and other loans 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, Allen, Noble 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. 33 Employees At June 30, 2001, the Company and its affiliates had a total of 66 employees, including 11 part-time employees. The Company's employees are not represented by any collective bargaining group. Management considers its employee relations to be good. Executive Officers of the Company and the Bank Who Are Not Directors The following information as to the business experience during the past five years is supplied with respect to executive officers of the Company and the Bank who do not serve on the Company's or the Bank's Board of Directors. There are no arrangements or understandings between the persons named and any other person pursuant to which such officers were selected. Christine Noonan, age 51, is Vice President and Chief Operations Officer and Secretary of First Federal, and also serves as Secretary of the Company. Mrs. Noonan joined First Federal in 1987 as secretary to the President and became the Data Processing Manager in 1989. Other duties over the years include new accounts, customer service, IRA administrator, loan clerk, mortgage lending, and compliance. Prior to joining First Federal, Mrs. Noonan worked for a company in Warsaw, Indiana for nine years that handled all aspects of qualified pension plans and financial planning. Timothy A. Sheppard, age 33, is Vice President and Controller of First Federal, and also serves as Treasurer and Chief Accounting Officer of the Company, positions he has held since October 2000. Prior to joining First Federal, Mr. Sheppard was employed by Home Bancorp and Home Loan Bank fsb located in Fort Wayne, Indiana from 1995 to 2000 in a variety of positions, including Assistant Treasurer from 1995 to 1999 and Treasurer from 1999 to 2000. Noah T. Smith, age 30, is Vice President of Commercial Loans of First Federal, a position he has held since August 2000. Prior to joining First Federal, Mr. Smith was employed by Indiana Lawrence Bank located in North Manchester, Indiana from 1993 to 2000 in a variety of lending positions, including Assistant Vice President from 1997 to 2000. 34 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, 2001 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, 2001. 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 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, 2001. 35 PART II Item 5. Market for Common Equity and Related Stockholder Matters -------------------------------------------------------- Page 32 of the attached 2001 Annual Report to Stockholders is herein incorporated by reference. Item 6. Management's Discussion and Analysis or Plan of Operation --------------------------------------------------------- Pages 4 through 11 of the attached 2001 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, 2001, 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....................................... 11 Consolidated Balance Sheets as of June 30, 2001 and 2000............. 12 Consolidated Statements of Income Years Ended June 30, 2001, 2000 and 1999............................. 13 Consolidated Statement of Changes in Shareholders' Equity Years Ended June 30, 2001, 2000 and 1999............................. 14 Consolidated Statements of Cash Flows Years Ended June 30, 2001, 2000 and 1999............................. 15 Notes to Consolidated Financial Statements........................... 16 to 30 With the exception of the information listed in Items 5-7 above, the Company's Annual Report to Stockholders for the year ended June 30, 2001, is not deemed filed as part of this Annual Report on Form 10-KSB. 36 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 on October 23, 2001. 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 ------------------------------------------------------- Information concerning Section 16(a) Beneficial Ownership Reporting Compliance is incorporated herein by reference from the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on October 23, 2001. 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 on October 23, 2001. 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 on October 23, 2001. Item 12. Certain Relationships and Related Transactions ---------------------------------------------- 37 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 on October 23, 2001. 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, 2001. 38 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FFW CORPORATION Date: September 28, 2001 By: /s/ Roger K. Cromer ------------------ -------------------- ROGER K. CROMER (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/ Roger K. Cromer /s/ Wayne W. Rees -------------------------------------------- ----------------- ROGER K. CROMER WAYNE W. REES --------------- ------------- President and Chief Executive Officer Chairman of the Board (Principal Executive and Operating Officer) Date: September 28, 2001 Date: September 28, 2001 ----- ------------------------------- ----- ------------------ /s/ Timothy A. Sheppard /s/ Joseph W. McSpadden -------------------------------------------- ----------------------- TIMOTHY A. SHEPPARD JOSEPH W. MCSPADDEN ------------------- ------------------- Treasurer (Principal Accounting Officer) Director Date: September 28, 2001 Date: September 28, 2001 ----- ------------------------------- ----- ------------------ /s/ J. Stanley Myers /s/ Ronald D. Reynolds -------------------------------------------- ---------------------- J. STANLEY MYERS RONALD D. REYNOLDS ---------------- ------------------ Director Director Date: September 28, 2001 Date: September 28, 2001 ----- ------------------------------- ------------------ /s/ Thomas L. Frank -------------------------------------------- THOMAS L. FRANK Director Date: September 28, 2001 39
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 Roger K. ** Cromer and the Bank (b) 1992 Stock Option and Incentive Plan * (c) Management Recognition and Retention *** Plan (d) 1998 Omnibus Incentive Plan **** (e) Employment Agreement between Timothy 10(e) A. Sheppard and the Company (f) Employment Agreement between Noah T. 10(f) Smith and the Company (g) Employment Agreement between 10(g) Christine K. Noonan and the Company 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
----------------------- * 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. Such previously filed document is hereby incorporated herein by reference in accordance with Item 601 of Regulation S-B. ** Filed as Exhibit 10(b) to the Company's Annual Report on Form 10-KSB for the fiscal year ended June 30, 1999 (File No. 0-21170). This previously filed document is incorporated herein by reference in accordance with Item 601 of Regulation S-B. 40 *** 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. 41