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, 2000 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-21170
FFW CORPORATION
--------------------------------------------------------------------------------
(Name of small business issuer in its charter)
Delaware 35-1875502
----------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1205 N. Cass Street, Wabash, Indiana 46992-1027
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (219) 563-3185
-----------------------------
Securities Registered Pursuant to Section 12(b) of the Act:
None
----
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
---------------------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. YES X . NO ___.
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State the issuer's revenues for its most recent fiscal year: $18.5
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 15, 2000, was approximately $15.4
million. (The exclusion from such amount of the market value of the shares owned
by any person shall not be deemed an admission by the registrant that such
person is an affiliate of the registrant.)
As of September 15, 2000, there were issued and outstanding 1,423,627
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, 2000.
Part III of Form 10-KSB - Proxy Statement for 2000 Annual Meeting of
Stockholders.
<PAGE>
PART I
Item 1. Description of Business
-----------------------
General
The Company. FFW Corporation (the "Company") a Delaware corporation,
was formed in December 1992 to act as the holding company for First Federal
Savings Bank of Wabash ("First Federal" or the "Bank") upon 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, 2000, the Company had $219.0 million of assets and
shareholders' equity of $19.6 million (or 8.95% 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, 2000, all of the
Bank's real estate mortgage loans (excluding mortgage-backed securities) were
secured by properties located in Indiana.
The Bank's revenues are derived primarily from interest on mortgage
loans, mortgage-backed securities, consumer and other loans, investment
securities, income from service charges and loan originations and loan servicing
fee income. The Bank does not originate loans to fund leveraged buyouts, has no
loans to foreign corporations or governments and is not engaged in land
development or construction activities through joint ventures or subsidiaries.
The Bank offers a variety of accounts having a wide range of interest
rates and terms. The Bank's deposits include passbook accounts, money market
savings accounts, NOW, money market checking and regular checking accounts, and
certificate accounts with terms of three to sixty months. The Bank solicits
deposits in its primary market area. The Bank also has, from time to time,
borrowed funds, both in the form of Federal Home Loan Bank ("FHLB") advances and
by entering into repurchase agreements. At June 30, 2000, the Bank had FHLB
advances totaling $64.2 million.
2
<PAGE>
FirstFed Financial of Wabash, Inc. During fiscal 1993, the Company
acquired FirstFed Financial of Wabash, Inc. ("FirstFed") from the Bank. FirstFed
offers insurance products, including life insurance, mutual funds, annuity and
brokerage services through a registered broker dealer. FirstFed, which is
located in Wabash, Indiana was incorporated in 1989. FirstFed had net income of
approximately $51,000 for the fiscal year ended June 30, 2000.
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, and Elkhart Counties in Indiana.
Wabash County is served by Conrail and the Norfolk Southern railroads,
and also has a local municipal airport. Ft. Wayne, Indiana, 45 miles to the
northeast, has a commercial airport served by two major airlines and several
commuter affiliates. Wabash County has a mixed agriculture and industrial
economy. Several major employers in Wabash County are suppliers to the
automotive industry. Wabash County also has Manchester College, a four-year
private undergraduate institution, and the Wabash County Hospital, a facility
with 135 beds. Major manufacturing employers in
3
<PAGE>
Wabash County include: Jefferson Smurfitt; Eaton Corporation; Ford Meter Box
Company, Inc.; GenCorp Automotive; Heckman Bindery; Hiz Inc.; Blue Sky, Inc.;
United Technologies, Inc.; Wabash Alloys; Cast Molding Industries, Inc.; and
Wabash Magnetics.
Kosciusko County's economy includes a mix of recreational,
manufacturing, biomedical and manufactured home industries. Major private
employers in Kosciusko County include: GTI Corporation; Dalton Foundries, Inc.;
Maple Leaf Farms, Inc.; Biomet, Inc.; Danek Group; Zimmer Inc.; R. R. Donnelley;
Depuy Inc.; Kemole Glass, Inc.; Othy, Inc.; and Creighton Brothers.
Whitley County's economy includes a mix of agriculture and light
manufacturing related to electronics, musical instruments and printing. Major
private employers in Whitley County include: Fox Products; Stumps Printing Co.;
Wheatherhead; Magnavox; and Essex Corporation.
General. Historically, the Bank has originated fixed-rate, one- to
four-family mortgage loans. In the early 1980s, the Bank began to focus on the
origination of adjustable-rate mortgage ("ARM") loans and short-term loans for
retention in its portfolio in order to increase the percentage of loans in its
portfolio with more frequent repricing or shorter maturities, and in some cases
higher yields, than fixed-rate mortgage loans. While the Bank has continued to
originate fixed-rate mortgage loans in response to customer demand, currently,
the Bank originates and sells most of its fixed-rate, first mortgage loans with
maturities of greater than 15 years in the secondary market with servicing
retained.
The Bank also originates consumer (including automobile), commercial
and multi-family real estate, commercial business, and residential construction
loans in its primary market area. At June 30, 2000, the Bank's net loan
portfolio totaled $150.8 million.
The Executive Committee of the Bank, comprised of any three outside
directors selected by and including the Chairman, has the responsibility for the
supervision of the Bank's loan portfolio with an overview by the Board of
Directors. The Bank's loan policy requires Executive Committee or full Board
approval on mortgage, commercial and consumer loans over certain dollar
thresholds, loan extensions, special loan situations, assumptions and loan
participation. The Board of Directors has responsibility for the overall
supervision of the Bank's loan portfolio and in addition, reviews all
foreclosure actions or the taking of deeds-in-lieu of foreclosure.
4
<PAGE>
The following schedule presents the dollar amount of changes in
interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. It distinguishes between changes
related to higher or lower outstanding balances and changes due to the levels
and changes in interest rates. For each category of interest-earning assets and
interest- bearing liabilities, information is provided on changes attributable
to (i) changes in volume (i.e., changes in volume multiplied by old rate) and
(ii) changes in rate (i.e., changes in rate multiplied by old volume). For
purposes of this table, changes attributable to both rate and volume, which
cannot be segregated, have been allocated proportionately to the change due to
volume and the change due to rate.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------------
2000 vs. 1999 1999 vs. 1998
----------------------------------- -----------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
--------------------- Increase -------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
--------------------- --------- -------- ------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1) $ 476 $ (16) $ 460 $ 1,720 $ (321) $ 1,399
Securities 372 186 558 450 (117) 333
Mortgage-backed securities (426) 66 (360) (159) (102) (261)
Interest-bearings deposits in other financial
institutions (43) 20 (23) (151) 143 (8)
------- ------- ------- ------- ------- -------
Total interest-earning assets $ 379 $ 256 $ 635 $ 1,860 $ (397) $ 1,463
======= ======= ------- ======= ------- =======
Interest-bearing liabilities:
Money market accounts $ 31 $ 1 $ 32 (13) 14 1
NOW accounts 9 1 10 (6) 21 15
Passbook Savings accounts (133) (71) (204) 96 (70) 26
Certificates of deposit 340 (52) 288 297 (158) 139
FHLB Advances 152 (29) 123 724 (130) 594
------- ------- ------- ------- ------- -------
Total interest bearing liabilities $ 399 $ (150) $ 249 $ 1,098 $ (323) $ 775
======= ======= ------- ======= ======= -------
Net interest income $ 386 $ 688
======= =======
</TABLE>
--------------------
(1) Includes the impact of non-accruing loans and loan fees.
5
<PAGE>
Loan Portfolio Composition. The following table contains information
concerning the composition of the Bank's loan portfolio in dollar amounts and in
percentages (before deductions for loans in process, deferred fees, cost and
discounts and allowances for loan losses) as of the dates indicated.
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------------
2000 1999 1998
---------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Real Estate Loans:
-----------------
<S> <C> <C> <C> <C> <C> <C>
One- to four-family............ $69,738 45.38% $ 67,825 44.34% $ 70,243 49.64%
Commercial and multi-
family....................... 8,138 5.30 9,342 6.11 7,272 5.14
Construction................... 2,344 1.53 899 .59 3,991 2.82
------- --------- ----------- -------- ---------- ------- -
Total real estate loans..... 80,220 52.21 78,066 51.04 81,506 57.60
------ -------- --------- ------ --------- ------
Other Loans:
-----------
Consumer Loans:
Deposit account............... 349 .23 504 .33 475 .34
Automobile.................... 31,368 20.41 36,334 23.75 33,814 23.90
Home equity and
improvement................. 13,119 8.54 10,394 6.80 9,105 6.43
Manufactured home............. 235 .15 249 .16 301 .21
Other......................... 4,070 2.65 3,621 2.37 3,348 2.37
--------- --------- ---------- -------- --------- ------- -
Total consumer loans........ 49,141 31.98 51,102 33.41 47,043 33.25
-------- -------- --------- ------- -------- ------
Commercial business loans...... 24,301 15.81 23,781 15.55 12,945 9.15
-------- -------- --------- ------- -------- ------- -
Total other loans............. 73,442 47.79 74,883 48.96 59,988 42.40
-------- -------- --------- ------- -------- ------
Total loans................. 153,662 100.00% 152,949 100.00% 141,494 100.00%
====== -------- ====== ======
Less:
----
Loans in process............... 1,335 444 1,716
Deferred fees, cost and
discounts....................... (444) (609) (599)
Allowance for loan losses...... 1,961 1,623 983
-------- ---------- -----------
Total loans, net............ $150,810 $151,491 $139,394
======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1997 1996
-------------------------- ---------------------------
Real Estate Loans: Amount Percent Amount Percent
----------------- ---------- -------- ------ --------
<S> <C> <C> <C> <C>
One- to four-family............ $ 64,921 56.21% $60,732 59.32%
Commercial and multi-
family....................... 6,426 5.56 7,218 7.05
Construction................... 2,974 2.58 2,676 2.61
---------- -------- ------ --------
Total real estate loans..... 74,321 64.35 70,626 68.98
---------- ------- ------- -------
Other Loans:
-----------
Consumer Loans:
Deposit account............... 451 .39 226 .22
Automobile.................... 22,625 19.59 18,464 18.03
Home equity and
improvement................. 6,970 6.03 4,624 4.52
Manufactured home............. 350 .30 481 .47
Other......................... 3,972 3.44 3,583 3.50
---------- -------- - -------- --------
Total consumer loans........ 34,368 29.75 27,378 26.74
---------- ------- -------- -------
Commercial business loans...... 6,813 5.90 4,378 4.28
---------- -------- - -------- --------
Total other loans............. 41,181 35.65 31,756 31.02
---------- ------- -------- -------
Total loans................. 115,502 100.00% 102,382 100.00%
====== ======
Less:
----
Loans in process............... 1,134 1,548
Deferred fees, cost and
discounts....................... (363) (248)
Allowance for loan losses...... 572 553
---------- --------
Total loans, net............ $114,159 $100,529
======== ========
</TABLE>
6
<PAGE>
The following table shows the composition of the Bank's loan portfolio
by fixed and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------------
2000 1999 1998
--------------------- ------------------- --------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Fixed-Rate Loans:
----------------
<S> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family..................... $15,268 9.94% $ 16,976 11.10% $17,492 12.36%
Commercial and multi-family............. 2,253 1.46 6,671 4.36 2,307 1.63
Construction............................ 2,272 1.48 705 .46 2,110 1.49
-------- -------- ----------- --------- ---------- --------
Total real estate loans............. 19,793 12.88 24,352 15.92 21,909 15.48
------- ------- --------- ------- --------- -------
Consumer................................. 49,024 31.90 45,140 29.51 42,370 29.94
Commercial business...................... 8,666 5.64 6,853 4.48 5,540 3.92
-------- -------- ---------- -------- ---------- --------
Total fixed-rate loans.............. 77,483 50.42 76,345 49.91 69,819 49.34
------- ------- --------- ------- --------- -------
Adjustable-Rate Loans:
---------------------
Real estate:
One- to four-family.................... 54,470 35.44 50,849 33.24 52,751 37.28
Commercial and multi-family............ 5,885 3.83 2,671 1.75 4,965 3.51
Construction........................... 72 .05 194 .13 1,881 1.33
---------- -------- ----------- ---------- --------
Total real estate loans............. 60,427 39.32 53,714 35.12 59,597 42.12
------- ------ --------- ------- --------- -------
Consumer................................ 117 .08 5,962 3.90 4,673 3.30
--------
Commercial business..................... 15,635 10.18 16,928 11.07 7,405 5.24
------- ------- --------- ------- ---------- -------
Total adjustable-rate loans......... 76,179 49.58 76,604 50.09 71,675 50.66
------- ------- --------- ------- --------- ------
Total loans......................... 153,662 100.00% 152,949 100.00% 141,494 100.00%
====== ====== ======
Less:
----
Loans in process........................ 1,335 444 1,716
Deferred fees, cost and discounts....... (444) (609) (599)
Allowance for loan losses............... 1,961 1,623 983
-------- ----------- -----------
Total loans, net.................... $150,810 $151,491 $139,394
======== ======== ========
<CAPTION>
1997 1996
----------------------- -----------------------
Amount Percent Amount Percent
----------- -------- -------- -------
Fixed-Rate Loans:
----------------
<S> <C> <C> <C> <C>
Real Estate:
One- to four-family..................... $ 8,588 7.43% $ 8,302 8.11%
Commercial and multi-family............. 1,676 1.45 2,248 2.19
Construction............................ 1,222 1.06 1,094 1.07
----------- -------- -------- ------
Total real estate loans............. 11,486 9.94 11,644 11.37
---------- -------- ------- -----
Consumer................................. 31,222 27.03 26,839 26.21
Commercial business...................... 2,921 2.53 1,430 1.40
----------- -------- -------- ------
Total fixed-rate loans.............. 45,629 39.50 39,913 38.98
---------- ------- ------- -----
Adjustable-Rate Loans:
---------------------
Real estate:
One- to four-family.................... 56,333 48.77 52,430 51.21
Commercial and multi-family............ 4,750 4.11 4,970 4.85
Construction........................... 1,752 1.52 1,582 1.55
----------- -------- -------- ------
Total real estate loans............. 62,835 54.40 58,982 57.61
---------- ------- ------- -----
Consumer................................ 3,146 2.73 539 .53
Commercial business..................... 3,892 3.37 2,948 2.88
----------- -------- -------- -----
Total adjustable-rate loans......... 69,873 60.50 62,469 61.02
---------- ------- ------- -----
Total loans......................... 115,502 100.00% 102,382 100.00%
====== ======
Less:
----
Loans in process........................ 1,134 1,548
Deferred fees, cost and discounts....... (363) (248)
Allowance for loan losses............... 572 553
----------- ---------
Total loans, net.................... $114,159 $100,529
======== ========
</TABLE>
7
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Bank's loan portfolio (including non-accruing loans) at June 30, 2000. Mortgages
which have adjustable or renegotiable interest rates are shown as maturing in
the period during which the contract is due. The schedule does not reflect the
effects of possible prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
-------------------------------------------------------------
Commercial
One- to four-family Commercial Construction Consumer Business
-------------------- ------------------ ------------------ ------------------- --------------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Due During
Years Ending
June 30,
-------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2001 $ 158 9.50 $ 476 9.56% $ 2,344 9.16 $ 2,854 11.40% $ 12,126 10.38%
2002 - 2005 745 7.90 149 9.62 -- -- 32,698 9.83 6,532 9.50
2006 and following 68,835 7.90 7,513 8.78 -- -- 13,589 10.06 5,643 9.03
------- ---- ------- ---- --------- ---- ---------- ---- ---------- ----
$69,738 7.90% $ 8,138 8.84% $ 2,344 9.16% $ 49,141 9.98% $ 24,301 9.83%
======= ==== ======= ==== ========= ==== ========== ==== ========== ====
<CAPTION>
Total
-------------------------
Amount Percent
-------- ------
<C> <C> <C>
2001 $ 17,958 11.69%
2002 - 2005 40,124 26.11
2006 and following 95,580 62.20
-------- ------
$153,662 100.00%
======== ======
</TABLE>
The total amount of loans due after June 30, 2001 which have fixed
interest rates is $66.0 million, while the total amount of loans due after such
dates which have floating or adjustable interest rates is $69.7 million.
8
<PAGE>
One- to Four-Family Residential Mortgage Lending. Residential loan
originations of this type are generated by the Bank's marketing efforts, its
present and walk-in customers, and referrals from real estate agents and
builders. The Bank focuses its lending efforts primarily on the origination of
loans secured by first mortgages on owner-occupied, one- to four-family
residences. At June 30, 2000, the Bank's one- to four-family residential
mortgage loans totaled $69.7 million, or approximately 45.4% of the Bank's total
gross loan portfolio.
The Bank currently originates up to a maximum of 30-year
adjustable-rate, one- to four- family residential mortgage loans in amounts up
to 95% of the appraised value of the security property provided that private
mortgage insurance is obtained in an amount sufficient to reduce the Bank's
exposure to at or below the 80% loan-to-value level. The Bank's one- to
four-family residential mortgage originations are primarily in its market and
surrounding areas.
The Bank currently offers one-, three-, five-, and seven-year ARM loans
with an interest rate margin generally 275 basis points over the one year
Treasury rates. These loans have a fixed-rate for the stated period and,
thereafter, such loans adjust annually. These loans provide for up to a 200
basis points annual cap and a lifetime cap of 600 basis points over the initial
rate. Under the current ARM program, such loans will never adjust more than 150
basis points below the initial rate. Depending on whether a one-, three-, five-,
or seven-year loan is selected, per-year and lifetime caps will range from 100
to 200 basis points, and 300 to 600 basis points. As a consequence of using an
initial fixed-rate, caps and floor, the interest rates on these loans may not be
as rate sensitive as is the Bank's cost of funds. The Bank's ARM loans do not
permit negative amortization of principal. The Bank qualifies borrowers at the
fully indexed rate.
Due to consumer demand, the Bank also offers fixed-rate 10- through
15-year and 15- through 30-year mortgage loans, most of which conform to the
secondary market standards of Freddie Mac. Interest rates charged on these
fixed-rate loans are competitively priced according to market conditions.
Residential loans generally do not include prepayment penalties. Most of the
fixed-rate loans with maturities of 15 to 30 years are sold in the secondary
market. The Bank generally retains servicing rights on such loans. Generally,
the Bank will retain fixed-rate loans with maturities of 15 years or less in its
portfolio. The Bank reserves the right to discontinue, adjust or create new
lending programs to respond to its needs and to competitive factors.
In underwriting one- to four-family residential real estate loans,
First Federal evaluates both the borrower's ability to make monthly payments and
the value of the property securing the loan. Virtually all properties securing
real estate loans made by First Federal are appraised by independent fee
appraisers approved and qualified by the Board of Directors. First Federal
generally requires borrowers to obtain an attorney's title opinion or title
insurance, and fire and property insurance (including flood insurance, if
necessary) in an amount not less than the amount of the loan. Real estate loans
originated by the Bank generally contain a "due on sale" clause allowing the
Bank to declare the unpaid principal balance due and payable upon the sale of
the security property.
Consumer Lending. First Federal offers a variety of secured consumer
loans, including automobile, home equity, home improvement and student loans,
and loans secured by savings deposits. In addition, First Federal offers other
secured and unsecured consumer loans. The Bank currently originates
substantially all of its consumer loans in its primary market area and
surrounding
9
<PAGE>
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, 2000, the Bank's consumer loan
portfolio totaled $49.1 million, or 32.0% 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, 2000, $114,000 or approximately .23% of the
consumer loan portfolio was non- performing. There can be no assurance that
delinquencies will not increase in the future.
The largest component of First Federal's consumer loan portfolio
consists of automobile loans. At June 30, 2000, automobile loans totaled $31.4
million, or approximately 20.4% 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, 2000, home equity and home improvement loans, most of
which are secured by second mortgages, amounted to $13.1 million, or 8.5% of the
Bank's gross loan portfolio.
Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. Loans secured by
deposit accounts at the Bank are currently originated for up to 90% of the
account balance with a hold placed on the account restricting the withdrawal of
the account balance. The interest rate on such loans is typically equal to 200
basis points above the deposit contract rate.
The underwriting standards employed by the Bank for consumer loans
include an application, a determination of the applicant's payment history on
other debts and an assessment of ability to meet existing obligations and
payments on the proposed loan. Although creditworthiness of the applicant is a
primary consideration, the underwriting process also includes a comparison of
the value of the security, if any, in relation to the proposed loan amount.
Construction Lending. The Bank engages in limited amounts of
construction lending to individuals for the construction of their residences as
well as to builders for the construction of single family homes in the Bank's
primary market area and surrounding areas. At June 30, 2000, the Bank
10
<PAGE>
had $2.3 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, 2000, the Bank had $1.0 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, 2000, the Bank had no construction loans
outstanding which were over thirty days delinquent.
Commercial and Multi-Family Real Estate Lending. The Bank has also
engaged in limited commercial and multi-family real estate lending in the Wabash
market area and surrounding areas and has purchased participation interests in
loans from other financial institutions throughout Indiana and neighboring
jurisdictions. At June 30, 2000, the Bank had $8.1 million of commercial and
multi-family real estate loans, which represented 5.3% of the Bank's total gross
loan portfolio. The largest commercial or multi-family real estate loan
outstanding at June 30, 2000 was $1.1 million, which was performing in
accordance with its repayment terms. At June 30, 2000, all of the Bank's
commercial and multi-family real estate loan portfolio was secured by properties
located in Indiana.
Loans secured by commercial and multi-family real estate properties are
generally larger and involve a greater degree of credit risk than one- to
four-family residential mortgage loans. Because payments on loans secured by
commercial real estate properties are often dependent on the successful
operation or management of the properties, repayment of such loans may be
subject to adverse conditions in the real estate market or the economy. If the
cash flow from the project is reduced (for example, if leases are not obtained
or renewed), the borrower's ability to repay the loan may be impaired.
The Bank's commercial and multi-family real estate loan portfolio is
secured primarily by apartment buildings and, to a lesser extent, office
buildings and nursing homes. Commercial and multi-family real estate loans
generally have terms that do not exceed 20 years. The Bank has a
11
<PAGE>
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 due to the addition of a commercial loan officer.
At June 30, 2000, approximately $24.3 million, or 15.8% 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.
Generally, when a loan becomes delinquent 90 days or more or when the
collection of principal or interest becomes doubtful, the Bank will place the
loan on a non-accrual status and, as a result, previously accrued interest
income on the loan is taken out of current income. The loan will remain on a
non-accrual status as long as the loan is 90 days delinquent.
12
<PAGE>
The following table sets forth information concerning delinquent
mortgage and other loans at June 30, 2000. The amounts presented represent the
total remaining principal balances of the related loans, rather than the actual
payment amounts which are overdue.
<TABLE>
<CAPTION>
Loans Delinquent For:
---------------------------------------------------------------------------------------------------------
30-59 Days 60-89 Days 90 Days and Over Total Delinquent Loans
------------------------- ------------------------- ---------------------- -------------------------
Percent Percent Percent Percent
of Loan of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ---------------------- ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family 14 $ 646 .92% 1 $ 39 .06% -- $-- --% 15 $ 685 .98%
Commercial and
Multi-Family 2 69 .85 4 499 6.13 -- -- -- 6 568 6.98
Construction -- -- -- -- -- -- -- -- -- -- -- --
Consumer 75 498 1.01 44 377 .77 -- -- -- 119 875 1.78
Commercial business 10 1,041 4.28 10 305 1.26 -- -- -- 20 1,346 5.54
------ ---- ------ --- --- ------ ----
Total delinquent loans 101 $2,254 1.47% 59 $1,220 .79% -- $-- --% 160 $3,474 2.26%
====== ==== ====== ==== === ====== ====
</TABLE>
The ratio of delinquent loans to total loans (net), was 2.30% at June
30, 2000.
13
<PAGE>
The table below sets forth the amounts and categories of non-performing
assets in the Bank's loan portfolio at the dates indicated. Loans are placed on
non-accrual status when the collection of principal and/or interest become
doubtful or when the loan is in excess of 90 days delinquent. Foreclosed and
repossessed assets include assets acquired in settlement of loans. See Notes 1
and 4 to Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
June 30
---------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family $137 $ 1 $521 $-- --
Commercial and multi-family real estate 39 317 -- -- --
Consumer 75 92 193 248 65
---- ---- ---- ---- ----
Total non-accruing loans 251 410 714 248 65
---- ---- ---- ---- ----
Foreclosed and repossessed assets:
One- to four-family -- 274 -- -- --
Commercial and multi-family real estate -- 101 101 -- --
Consumer 39 57 58 33 27
---- ---- ---- ---- ----
Total foreclosed assets 39 432 159 33 27
---- ---- ---- ---- ----
Troubled debt restructurings -- -- -- -- --
Total non-performing assets $290 $842 $873 $281 $ 92
==== ==== ==== ==== ====
Total as a percentage of total assets 0.13% 0.39% 0.43% 0.16% 0.06%
==== ==== ==== ==== ====
</TABLE>
Non-Performing Assets. Included in non-accruing loans at June 30, 2000
were 14 consumer loans totaling $75,000 secured by property including
automobiles, manufactured homes and other collateral. Foreclosed and repossessed
assets included automobiles and commercial property totaling $39,000 at June 30,
2000. While total non-performing assets and total non-performing assets as a
percentage of total assets decreased from June 30, 1999 to June 30, 2000,
management believes it is not unlikely that these numbers will increase after
June 30, 2000 as delinquent loans are placed on non-accrual status.
Other Loans of Concern. In addition to the non-performing loans and
foreclosed and repossessed assets set forth in the preceding table, as of June
30, 2000 there was also an aggregate of $4.1 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 69 consumer loans
aggregating $572,000, 18 one- to four-family loans aggregating $889,000 and 25
commercial loans aggregating $2.7 million at June 30, 2000. The principal
components of loans of concern at June 30, 1999 consisted of 132 consumer loans
aggregating $1.1 million, five one- to four-family loans aggregating $344,000
and three commercial loans aggregating $460,000.
As of June 30, 2000, 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
<PAGE>
Classified Assets. Federal regulations provide for the classification
of loans and other assets such as debt and equity securities considered by the
OTS to be of lesser quality as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the savings association will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
When a savings association classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When a savings association classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge-off such amount. An association's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the association's District Director at the regional OTS
office, who may order the establishment of additional general or specific loss
allowances.
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, 2000, the Bank had classified a total of approximately $1.9 million of
its assets as substandard, $434,000 as doubtful, $3,000 as loss, and $2.0
million as special mention. At June 30, 2000, total classified and
non-performing assets comprised $4.6 million, or 23.45% of the Bank's capital,
or 2.1% of the Bank's total assets.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity. Such evaluation, which includes a review of loans for which full
collectibility may not be reasonably assured, considers among other matters, the
estimated fair value of the underlying collateral, economic conditions,
historical loan loss experience and other factors that warrant recognition in
providing for an adequate loan loss allowance.
Real estate properties acquired through foreclosure are recorded at
fair value. If fair value at the date of foreclosure is lower than the balance
of the related loan, the difference will be charged- off to the allowance at the
time of transfer. Valuations are periodically updated by management and if the
value declines, a specific provision for losses on such property is established
by a charge to operations.
Although management believes that it uses the best information
available to determine the allowances, unforeseen market conditions could result
in adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the
15
<PAGE>
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, 2000, the Bank had a total allowance for loan
losses of $1.96 million or 1.3% 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.
<TABLE>
<CAPTION>
Year Ended June 30
-----------------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $1,623 $ 983 $ 572 $ 553 $ 484
Charge-offs:
One- to four-family -- 26 -- 3 16
Consumer 507 439 285 181 64
Commercial Business 276 -- 47 -- --
------ ------ ------ ------ ------
783 465 332 184 80
Recoveries:
Consumer 82 95 38 83 10
Commercial and multi-family real estate 5 -- -- -- 44
------ ------ ------ ------ ------
87 95 38 83 54
Net charge-offs 696 370 294 101 26
Additions charged to operations 1,034 1,010 705 120 95
------ ------ ====== ------ ------
Balance at end of period $1,961 $1,623 $ 983 $ 572 $ 553
====== ====== ====== ====== ======
Ratio of net charge-offs during the period to
average loans outstanding during the period 0.45% 0.25% 0.23% 0.09% 0.03%
====== ====== ====== ====== ======
</TABLE>
16
<PAGE>
The distribution of the Bank's allowance for loan losses at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------------------
2000 1999 1998
---------------------- --------------------- ---------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family......................... $274 45.38% $113 44.34% $105 49.64%
Commercial and multi-family
real estate.............................. 120 5.30 225 6.11 230 5.14
Construction................................ -- 1.53 --- 0.59 28 2.82
Consumer.................................... 825 31.98 700 33.41 445 33.25
Commercial business......................... 571 15.81 405 15.55 165 9.15
Unallocated................................. 171 --- 180 --- 10 ---
------ ------ ------ ------ ---- ------
Total.................................. $1,961 100.00% $1,623 100.00% $983 100.00%
====== ====== ====== ====== ==== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------
1997 1996
------------------- -------------------
Percent Percent
of Loan of Loans
in Each in Each
Category Category
to Total to Total
Amount Loans Amount Loans
------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
One- to four-family......................... $ 95 56.21% $100 59.32%
Commercial and multi-family
real estate.............................. 70 5.56 75 7.05
Construction................................ 25 2.58 20 2.61
Consumer.................................... 325 29.75 315 26.74
Commercial business......................... 50 5.90 35 4.28
Unallocated................................. 7 --- 8 ---
---- ------ ---- ------
Total.................................. $572 100.00 % $553 100.00%
==== ====== ==== ======
</TABLE>
17
<PAGE>
Investment Activities
First Federal must maintain minimum levels of investments that qualify
as liquid assets under OTS regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans. Historically, the Bank has generally
maintained its liquid assets above the minimum requirements imposed by the OTS
regula tions and at a level believed adequate to meet requirements of normal
daily activities, repayment of maturing debt and potential deposit outflows. As
of June 30, 2000, the Bank's liquidity ratio (liquid assets as a percentage of
net withdrawable savings deposits and current borrowings) was 7.03%. See
"Regulation - Liquidity."
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of the Bank is to invest funds among
various categories of investments and maturities based upon the Bank's need for
liquidity, to achieve the proper balance between its desire to minimize risk and
maximize yield, to provide collateral for borrowings, and to fulfill the Bank's
asset/liability management policies.
First Federal's investment and mortgage-backed securities portfolios
are managed in accordance with a written investment policy adopted by the Board
of Directors. Other than certificates of deposit and mortgage-backed securities,
investments may be made by the President of First Federal only with the approval
of the Investment Committee.
Statement of Financial Accounting Standards No. 115 "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS No. 115"), requires
that securities and mortgage-backed securities be classified as held to
maturity, available for sale or trading purposes. Under SFAS No. 115, securities
that the Company has the positive intent and ability to hold until maturity are
classified as held to maturity and are reported at amortized cost. Securities
classified as available for sale are those the Company may sell in response to
liquidity needs, for asset/liability management purposes and other reasons and
are reported at fair value. Unrealized gains and losses on securities available
for sale are reported as a separate component of equity, net of tax. Trading
securities are those which are purchased for sale in the near future and are
reported at fair value. Unrealized gains and losses on trading securities are
included in income. Transfers between categories are accounted for as sales and
repurchases at fair value. For any sales or transfers of securities classified
as held to maturity, the cost basis, the realized gain or loss, and the
circumstances leading to the decision to sell are required to be disclosed. At
the time of purchase of new securities, management of the Company makes a
determination as to the appropriate classification of securities as available
for sale or held to maturity. At June 30, 2000, the Company had no securities
classified as held to maturity and $52.0 million classified as available for
sale including mortgage-backed securities. No securities were held for trading
purposes on such date.
18
<PAGE>
Securities. It is the Company's general policy to purchase securities
which are U.S. Government securities and federal agency obligations, state and
local government obligations, commercial paper, short-term corporate debt
securities and overnight federal funds. At June 30, 2000, the weighted average
term to maturity or repricing of the investment securities portfolio, excluding
the FHLB, Fannie Mae stock and other equity securities available for sale, was
8.7 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 $18.5 million as of June 30, 2000, plus an additional
10% if the investments are fully secured by readily marketable collateral. See
"Regulation - Federal Regulation of Savings Associations" for a discussion of
additional restrictions on the Bank's investment activities.
The following table sets forth the composition of the Company's
securities portfolio excluding mortgage-backed securities, at the dates
indicated.
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------------
2000 1999 1998
--------------------- ----------------------- ---------------------
Carrying
Carrying % of Value % of Carrying % of
Value Total Total Total Value Total
---------- -------- --------- ----- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
Federal agency obligations..................... $21,952 49.41% $23,187 53.0% $13,186 37.94%
Commercial notes and commercial paper.......... 1,499 3.37 237 0.54 242 0.70
State and local government obligations......... 8,498 19.13 8,343 19.08 9,102 26.19
Other equity securities........................ 9,073 20.43 8,569 19.59 9,468 27.24
------- ------ ------- ------
Total securities available for sale.......... 41,022 92.34 40,336 92.22 31,998 92.07
------ ------ ------- ------ ------- ------
FHLB stock..................................... 3,401 7.66 3,401 7.78 2,757 7.93
------ ------ ------- ------
Total securities............................. $44,423 100.00% $43,737 100.00% $34,755 100.00%
======= ====== ======= ====== ======= ======
Weighted average remaining life or term to
repricing, excluding FHLB stock and other
equity securities available for sale......... 8.7 yrs. 8.2 yrs. 6.8 yrs.
Other Interest-Earning Assets:
Interest-earning deposits with banks........... $1,102 $ 188 $ 386
====== ======== ========
</TABLE>
19
<PAGE>
The composition and maturities of the securities portfolio, excluding
mortgage-backed securities, FHLB of Indianapolis stock and other equity
securities, are indicated in the following table.
<TABLE>
<CAPTION>
June 30, 2000
-------------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 10 Years Total
1 Year Years Years Over Securities
------------ --------- --------- --------- -------------------------
Amortized Amortized Amortized Amortized Amortized Market
Cost Cost Cost Cost Cost Value
------------- ---------- --------- --------- --------- -------
(Dollars in Thousands)
Federal agency
<S> <C> <C> <C> <C> <C> <C>
obligations................. $ -- $2,499 $18,250 $2,535 $23,284 $21,952
Commercial notes and
commercial paper........... -- -- -- 1,508 1,508 1,499
State and local
government obligations...... 2,269 1,857 663 3,974 8,763 8,498
----- ----- --------- ------ ------- -------
Total debt securities........ $2,269 $4,356 $18,913 $8,017 $33,555 $31,949
====== ======= ======= ====== ======= =======
Weighted average yield(1).... 5.63% 5.76% 6.62% 7.10% 6.56%
</TABLE>
-----------------------
(1) Yields reflected have not been computed on a tax equivalent basis.
Except for obligations of state and local governments, the Company's
securities portfolio at June 30, 2000 contained neither tax-exempt securities
nor securities of any issuer with an aggregate book value in excess of 10% of
the Company's shareholders' equity, excluding those issued by the United States
Government, or its agencies.
Mortgage-Backed Securities. The Company's investment in mortgage-backed
securities can serve as collateral for borrowings and, through repayments, as a
source of liquidity. In addition, management from time to time has purchased
mortgage-backed securities in order to supplement loan originations. For
information regarding the carrying and market values of the Company's
mortgage-backed securities portfolio, see Note 3 of the Notes to Consolidated
Financial Statements in the Annual Report attached hereto as Exhibit 13.
The following table sets forth the amortized cost of the Company's
mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
June 30,
-------------------------------------------
2000 1999 1998
-------------------------------------------
(In thousands)
<S> <C> <C> <C>
Fannie Mae....................................... $ 1,219 $ 283 $ 454
Ginnie Mae....................................... 10,110 10,290 16,490
Freddie Mac...................................... 73 103 137
Other Mortgage-backed Securities................. -- --- 471
---------- ------------ ----------
Total........................................ $11,402 $10,676 $17,552
======== ======= =======
</TABLE>
20
<PAGE>
The following table sets forth the contractual maturities of the
Company's mortgage-backed securities based on amortized cost at June 30, 2000.
Not considered in the preparation of the table below is the effect of
prepayments, periodic principal repayments and the adjustable-rate nature of
these instruments.
<TABLE>
<CAPTION>
Due in June 30,
----------------------------------------------- 2000
5 Years 5 to 10 10 to 20 Over 20 Balance
or Less Years Years Years Outstanding
--------- ------- -------- ----------- -------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Fannie Mae............................................ $ -- $ -- $230 $ 789 $ 1,219
Ginnie Mae............................................ 4 18 8 10,080 10,110
Freddie Mac........................................... -- 38 35 -- 73
------ ----- ----- --------- ---------
Total............................................ $ 4 $ 56 $273 $11,069 $11,407
====== ==== ==== ======= =======
Weighted average yield................................ 7.28% 8.47% 6.44% 6.83% 6.83%
</TABLE>
Sources of Funds
General. The Bank's primary sources of funds are deposits, borrowings,
amortization and prepayment of loan principal (including interest earned on
mortgage-backed securities), sales of whole loans and loan participations,
interest earned on or sales and maturation of investment securities and
short-term investments, and funds provided from operations.
Borrowings, including FHLB advances and reverse repurchase agreements,
may be used at times to compensate for seasonal reductions in deposits or
deposit inflows at less than projected levels, and may be used on a longer term
basis to support expanded lending activities.
Deposits. First Federal offers a variety of deposit accounts having a
wide range of interest rates and terms. The Bank's deposits consist of passbook
savings accounts, money market savings accounts, NOW, money market checking and
regular checking accounts, and certificate accounts ranging in terms from 91
days to 60 months. The Bank only solicits deposits from its market area and
currently does not use brokers to obtain deposits. The Bank relies primarily on
competitive pricing policies, advertising and customer service to attract and
retain these deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates, and
competition.
The variety of deposit accounts offered by the Bank has allowed it to
be competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. The Bank has become more susceptible to short-term fluctuations
in deposit flows, as customers have become more interest rate conscious. The
Bank endeavors to manage the pricing of its deposits in keeping with its
asset/liability management and profitability objectives. Based on its
experience, the Bank believes that its passbook savings, money market savings
accounts, NOW, money market checking and regular checking accounts are
relatively stable sources of deposits. However, the ability of the 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
<PAGE>
The following table sets forth the savings flows at the Bank during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------
2000 1999 1998
---------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance..................................... $130,401 $125,256 $116,118
Purchased deposits.................................. --- --- ---
Net deposits........................................ (2,213) 246 4,535
Interest credited................................... 4,917 4,899 4,603
-------- --------- -----------
Ending balance...................................... $133,105 $130,401 $125,256
======== ======== ========
Net increase........................................ $ 2,704 $ 5,145 $ 9,138
======== ========= ==========
Percent increase.................................... 2.07% 4.11% 7.87%
==== ==== ====
</TABLE>
The following table sets forth the dollar amount of deposits in the
various types of deposit programs offered by the Bank at the dates indicated.
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------------------------
2000(1) 1999 1998
------------------------ -------------------------- --------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
---------- --------- -------- --------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Rate Range:
-------------------
Passbook Accounts $ 37,775 28.38% $ 45,653 35.01% $ 44,249 35.32%
Demand accounts(1) 8,876 6.67 8,171 6.26 6,935 5.54
Money Market Accounts 2,884 2.17 568 0.44 1,217 .97
NOW Accounts 7,539 5.66 6,640 5.09 6,020 4.81
-------- ------ -------- ------
Total Non-Certificates $ 57,074 42.88% 61,032 46.80 58,421 46.64
-------- ------ -------- ------ -------- ------
Certificates:
-------------
0.00 - 3.99% -- -- -- -- -- --
4.00 - 5.99% 37,129 27.89 53,305 40.88 37,894 30.25
6.00 - 7.99% 38,902 29.23 16,064 12.32 28,722 22.94
8.00 - 9.99% -- -- -- -- 219 .17
------ ------ ------ ------ ------
Total Certificates 76,031 57.12 69,369 53.20 66,835 53.36
-------- ------ -------- ------ -------- ------
Total Deposits $133,105 100.00% $130,401 100.00% $125,256 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
<PAGE>
------------
(1) Non-interest-bearing accounts.
22
<PAGE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of June 30, 2000.
<TABLE>
<CAPTION>
4.00- 6.00- Percent
5.99% 7.99% Total of Total
---------- ------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Certificate accounts maturing in quarter ending:
September 30, 2000......................... $17,458 $2,343 $19,801 26.04%
December 31, 2000.......................... 6,510 1,332 7,842 10.31
March 31, 2001............................. 3,333 339 3,672 4.83
June 30, 2001.............................. 2,394 5,506 7,900 10.39
September 30, 2001......................... 1,371 2,681 4,052 5.33
December 31, 2001.......................... 485 1,094 1,579 2.08
March 31, 2002............................. 962 2,530 3,492 4.59
June 30, 2002.............................. 424 14,609 15,033 19.77
September 30, 2002......................... 416 2,851 3,267 4.30
December 31, 2002.......................... 424 1,219 1,643 2.16
March 31, 2003............................. 535 1,112 1,647 2.17
June 30, 2003.............................. 393 1,368 1,761 2.32
Thereafter................................. 2,424 1,918 342 5.71
--------- --------- --------- --------
Total................................. $37,129 $38,902 $76,031 100.00%
======= ======= ======= ======
Percent of total........................... 48.83% 51.17% 100.00%
====== ====== ======
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of June 30, 2000.
<TABLE>
<CAPTION>
Maturity
-----------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
---------- -------- -------- ---------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000....... $15,922 $5,292 $ 8,710 $30,905 $60,829
Certificates of deposit of $100,000 or more...... 3,332 2,338 2,513 5,899 14,082
Public funds(1).................................. 544 211 353 12 1,120
---------- ----------- ---------- ------------ ---------
Total certificates of deposit.................... $19,798 $7,841 $11,576 $36,816 $76,031
======= ======= ======= ======== =======
</TABLE>
--------------------
(1)Deposits from governmental and other public entities.
Generally, the Bank does not pay interest rates on its jumbo
certificates of deposit (certificates of deposit with balances of $100,000 or
more) in excess of the interest rates paid on certificates of deposit with
balances of less than $100,000.
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.
23
<PAGE>
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, 2000, the Bank had $64.2 million in FHLB
advances, and a $1 million overdraft line of credit was available from the FHLB.
From time to time, First Federal has entered into repurchase agreements
through a nationally recognized broker-dealer firm. These agreements are
accounted for as borrowings by the Bank and are secured by certain of the Bank's
securities. The broker-dealer takes possession of the securities during the
period that the repurchase agreement is outstanding. The terms of the agreements
have typically ranged from 30 days to a maximum of six months. The proceeds of
these transactions are used to meet cash flow needs of the Bank. At June 30,
2000, the Bank had no repurchase agreements outstanding.
The following table sets forth the maximum month-end balance and
average balance of FHLB advances and line of credit from the FHLB and securities
sold under agreements to repurchase at the dates indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------
2000 1999 1998
-------------- ---------------- ------------
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum Balance:
---------------
FHLB advances and line of credit................................. $66,300 $66,300 $51,500
Securities sold under agreements to repurchase................... --- --- ---
Average Balance:
---------------
FHLB advances and line of credit................................. 64,770 62,106 49,543
Securities sold under agreements to repurchase................... --- --- ---
Average Rate Paid On:
--------------------
FHLB advances and line of credit................................. 5.68% 5.73% 5.98%
Securities sold under agreements to repurchase................... --- --- ---
</TABLE>
The following table sets forth the Bank's borrowings at the dates
indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------
2000 1999 1998
---------- -------------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances and line of credit.................. $64,200 $66,300 $51,500
Due to brokers.................................... --- --- 5,000
--------- ----------- --------
Total borrowings.............................. $64,200 $66,300 $56,500
======= ======= =======
</TABLE>
Subsidiary Activities
As a federally chartered savings association, First Federal is
permitted by OTS regulations to invest up to 2% of its assets, or $4.4 million
at June 30, 2000, in the stock of, or loans to, service corporation
subsidiaries. First Federal may invest an additional 1% of its assets in service
24
<PAGE>
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, 2000.
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.
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, 2000 was approximately
$54,000.
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
25
<PAGE>
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, 2000, 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, 2000,
the Bank's lending limit under this restriction was approximately $2.9 million.
First Federal is in compliance with the loans-to-one borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan.
Insurance of Accounts and Regulation by the FDIC. First Federal is a
member of the SAIF, which is administered by the FDIC. Deposits are insured up
to applicable limits by the FDIC and such insurance is backed by the full faith
and credit of the United States Government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the SAIF or the BIF. The FDIC also has the
authority to initiate enforcement actions against savings associations, after
giving the OTS an opportunity to take such action, and may terminate the deposit
insurance if it determines that the institution has engaged in unsafe or unsound
practices, or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system, under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period. As
of June 30, 2000, the Bank met the requirements of a well- capitalized
institution.
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.
26
<PAGE>
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, 2000, 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, 2000, the Bank had no
subsidiaries.
At June 30, 2000, the Bank had tangible capital of $17.2 million, or
7.92% of adjusted total assets, which is approximately $8.5 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At June 30, 2000 the Bank
had certain intangible assets related to the branch purchase which were subject
to these tests.
At June 30, 2000, the Bank had core capital equal to $17.2 million, or
7.9% of adjusted total assets, which is $8.5 million above the minimum leverage
ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At June 30, 2000, First Federal had
no capital instruments that qualify as supplementary capital and $2.0 million of
general loss reserves, which was $300,000 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
27
<PAGE>
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, 2000.
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, 2000, the Bank had total risk-based capital of $18.9
million (including $17.2 million in core capital and $1.7 million in qualifying
supplementary capital) and risk-weighted assets of $139.2 million (including,
converted off-balance sheet assets); or total capital of 13.6% of risk-weighted
assets. This amount was $7.8 million above the 8.0% requirement in effect on
that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be an association with less than either a 4% core capital ratio, a 4% Tier 1
risk-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions, discussed below, that are applicable to significantly
undercapitalized associations.
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
28
<PAGE>
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.
Liquidity. All savings associations, including First Federal, are
required to maintain an average daily balance of liquid assets equal to a
certain percentage of the average daily balance of its liquidity base during the
preceding calendar quarter or a percentage of the amount of its liquidity base
at the end of the preceding quarter. For a discussion of what the Bank includes
in liquid assets, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" in the
Annual Report attached as Exhibit 13. This liquid asset ratio requirement may
vary from time to time (between 4% and 10%) depending upon economic conditions
and savings flows of all savings associations. At the present time, the minimum
liquid asset ratio is 4%.
Penalties may be imposed upon associations for violations of the liquid
asset ratio requirement. At June 30, 2000, the Bank was in compliance with the
requirement with an overall liquid asset ratio of 7.03%.
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, 2000, the Bank met the
test and has always met the test since its effectiveness.
The test requires a savings association to have at least 65% of its
portfolio assets (as defined by regulation) in qualified thrift investments on a
monthly average in nine out of every 12 months on a rolling basis. As an
alternative, the savings association may maintain 60% of its assets in those
assets specified in Section 7701(a)(19) of the Internal Revenue Code. Under
either test, such assets primarily consist of residential housing, related loans
and investments.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
29
<PAGE>
Community Reinvestment Act. Under the Community Reinvestment Act
("CRA"), every FDIC insured institution has a continuing and affirmative
obligation consistent with safe and sound banking practices to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with the examination of the Bank, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications, such as a
merger or the establishment of a branch, by the Bank. An unsatisfactory rating
may be used as the basis for the denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in June 1996 and received a rating of satisfactory.
Transactions with Affiliates. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as trans actions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of First
Federal include the Company and any company which is under common control with
the Bank. In addition, a savings association may not lend to any affiliate
engaged in activities not permissible for a bank holding company or acquire the
securities of most affiliates. The OTS has the discretion to treat subsidiaries
of savings associations as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on substantially the same terms and conditions as loans to
unaffiliated persons. At June 30, 2000, the Bank was in compliance with the
above restrictions.
Holding Company Regulation. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is registered and files reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Company and its non-savings association subsidiaries which also permits the OTS
to restrict or prohibit activities that are determined to be a serious risk to
the subsidiary savings association.
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings association)
would become subject to such restrictions unless such other associations each
qualify as a QTL and were acquired in a supervisory acquisition.
30
<PAGE>
If the Bank fails the QTL test, the Company must obtain the approval of
the OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan holding company. See
"Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal Securities Law. The stock of the Company is registered with the
SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At June 30, 2000, the Bank was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS. See "- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Indianapolis, which is one of 12 regional FHLBs that administers the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the board of directors of the FHLB which
are subject to the oversight of the Federal Housing Finance Board. All advances
from the FHLB are required to be fully secured by sufficient collateral as
determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.
31
<PAGE>
As a member, First Federal is required to purchase and maintain stock
in the FHLB of Indianapolis. At June 30, 2000, 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, 2000.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in First Federal's capital.
For the year ended June 30, 2000, dividends paid by the FHLB of
Indianapolis to First Federal totaled $272,000and was approximately $259,000 in
fiscal year 1999. The $272,000 dividend received for the fiscal year ended June
30, 2000 reflects an annualized rate of 8.0%.
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.
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, 2000, 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
32
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fee to the State of Delaware. The Company is also subject to an annual franchise
tax imposed by the State of Delaware which is generally based upon authorized
shares.
Competition
First Federal faces strong competition, both in originating real estate
and other loans and in attracting deposits. Competition in originating real
estate loans comes primarily from other commercial banks, savings associations,
credit unions and mortgage bankers making loans secured by real estate located
in the Bank's market area. Commercial banks and finance companies provide
vigorous competition in consumer lending. The Bank competes for real estate and
other loans principally on the basis of the quality of services it provides to
borrowers, interest rates and loan fees it charges, and the types of loans it
originates.
The Bank attracts all of its deposits through its retail banking
offices, primarily from the communities in which those retail banking offices
are located; therefore, competition for those deposits is principally from other
commercial banks, savings associations and credit unions located in the same
communities, as well as mutual funds. The Bank competes for these deposits by
offering a variety of deposit accounts at competitive rates, convenient business
hours, and convenient branch locations with interbranch deposit and withdrawal
privileges at each.
The Bank serves Wabash, Kosciukso, Grant, Miami, Huntington, Whitley
and Elkhart Counties in Indiana. The Bank's primary market area, however, is the
Counties of Wabash, Kosciukso and Whitley, Indiana. There are four commercial
banks and one credit union which compete for deposits and loans in Wabash
County. In Kosciukso County, there are six commercial banks, one credit union
and one savings bank competing for market share. In Whitley County, there are
five commercial banks, one credit union and one savings bank competing for
market share.
Employees
At June 30, 2000, the Company and its affiliates had a total of 61
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.
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Roger K. Cromer, age 35, is President and Chief Executive Officer of
the Company and First Federal, positions he has held since April 2000, and also
serves as Treasurer and Chief Financial Officer of the Company and First
Federal, positions he has held since October 1998. Prior to joining First
Federal, Mr. Cromer was employed by 1st Source Corporation located in South
Bend, Indiana from 1988 to 1998 in a variety of positions, including Accounting
Manager from 1995 to 1998.
Christine Noonan, age 50, is Vice President and Chief Operations
Officer and Secretary of First Federal Savings Bank, and also serves as
Secretary of FFW Corporation. 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 for nine years that handled all
aspects of qualified pension plans and financial planning.
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, 2000 was $2.0
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, 2000.
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.
34
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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, 2000.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Page 34 of the attached 2000 Annual Report to Stockholders is herein
incorporated by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
Pages 5 through 11 of the attached 2000 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, 2000, 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...................................... 12
Consolidated Balance Sheets as of June 30, 2000 and 1999............ 13
Consolidated Statements of Income
Years Ended June 30, 2000, 1999 and 1998............................ 14
Consolidated Statement of Changes in Shareholders' Equity
Years Ended June 30, 2000, 1999 and 1998............................ 15
Consolidated Statements of Cash Flows
Years Ended June 30, 2000, 1999 and 1998............................ 16
Notes to Consolidated Financial Statements.......................... 17 to 32
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, 2000, is not
deemed filed as part of this Annual Report on Form 10-KSB.
35
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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.
36
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Directors
Information concerning Directors of the Company is incorporated herein
by reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in October 2000, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
Executive Officers
Information regarding the business experience of the executive officers
of the Company and the Bank contained in Part I of this Form 10-KSB is
incorporated herein by reference.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10% of
the Company's Common Stock (or any other equity securities, of which there is
none), to file with the SEC initial reports of ownership and reports of changes
in ownership of the Company's Common Stock. Officers, directors and greater than
10% shareholders are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended June 30, 2000, all Section
16(a) filing requirements applicable to its officers, directors and greater than
10% beneficial owners were complied with except for the inadvertent failure to
timely report on Form 4 one transaction by each of Thomas L. Frank, a director
of the Company, and Nicholas M. George, the former President and Chief Executive
Officer of the Company.
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in October 2000, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in October 2000, a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
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<PAGE>
Item 12. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions
is incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in October 2000, a copy of which will
be filed not later than 120 days after the close of the fiscal year.
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
See Index to Exhibits.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30,
2000.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FFW CORPORATION
Date: September 28, 2000 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/ Wayne W. Rees /s/ Roger K. Cromer
---------------------------------- -------------------
WAYNE W. REES, Chairman of the ROGER K. CROMER,
Board President and Chief Executive Officer
and Chief Financial Officer (Principal
Executive and Operating Officer and
Principal Financial and Accounting
Officer)
Date: September 28, 2000 Date: September 28, 2000
------------------------- ------------------
/s/ Joseph W. McSpadden /s/ J. Stanley Myers
---------------------------------- --------------------
JOSEPH W. MCSPADDEN, Director J. STANLEY MYERS, Director
Date: September 28, 2000 Date: September 28, 2000
------------------------- ------------------
/s/ Ronald D. Reynolds /s/ Thomas L. Frank
---------------------------------- -------------------
RONALD D. REYNOLDS, Director THOMAS L. FRANK, Director
Date: September 28, 2000 Date: September 28, 2000
------------------------- ------------------
39
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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 ****
11 Statement re: computation of per share earnings *****
13 Annual Report to Security Holders 13
21 Subsidiaries of Registrant 21
23 Consents of Experts and Counsel 23
27 Financial Data Schedule 27
-----------------------
* Filed as an Exhibit to the Company's Form S-1 Registration Statement
filed on December 21, 1992 (File No. 33-56110) pursuant to Section 5
of the Securities Act of 1933. 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.
*** 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.
40
