FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _______________
Commission File Number 0-25910
LOGANSPORT FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
INDIANA 35-1945736
(State or other Jurisdiction (I.R.S. Employer Identification
of Incorporation or Organization) Number)
723 East Broadway, Logansport, Indiana 46947
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code:
(219) 722-3855
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 NO Indicate by check mark if disclosure
of delinquent filers pursuant to Item 405, Regulation S-K (ss. 229.405 of this
chapter) is not contained herein, and will not 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-K or any amendment to this
Form 10-K. The aggregate market value of the issuer's voting stock held by
non-affiliates, as of March 22, 1999, was $13,755,605.
The number of shares of the Registrant's Common Stock, without par value,
outstanding as of March 22, 1999, was 1,198,710 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended December 31,
1998, are incorporated into Part II. Portions of the Proxy Statement for the
1999 Annual Meeting of Shareholders are incorporated in Part I and Part III.
Exhibit Index on Page 30
Page 1 of 30 Pages
<PAGE>
LOGANSPORT FINANCIAL CORP.
Form 10-K
INDEX
Page
Forward Looking Statements.................................................. 1
PART I
Item 1. Business........................................................ 1
Item 2. Properties...................................................... 25
Item 3. Legal Proceedings............................................... 25
Item 4. Submission of Matters to a Vote of Security Holders............. 25
Item 4.5. Executive Officers of Registrant................................ 25
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................... 26
Item 6. Selected Financial Data......................................... 27
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...... 27
Item 8. Financial Statements and Supplementary Data..................... 27
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................... 27
PART III
Item 10. Directors and Executive Officers of Registrant.................. 27
Item 11. Executive Compensation.......................................... 27
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................ 27
Item 13. Certain Relationships and Related Transactions.................. 27
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................................... 28
Signatures...................................................... 29
<PAGE>
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K ("Form 10-K") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-K and include statements regarding the intent, belief,
outlook, estimate or expectations of the Company (as defined below), its
directors or its officers primarily with respect to future events and the future
financial performance of the Company. Readers of this Form 10-K are cautioned
that any such forward looking statements are not guarantees of future events or
performance and involve risks and uncertainties, and that actual results may
differ materially from those in the forward looking statements as a result of
various factors. The accompanying information contained in this Form 10-K
identifies important factors that could cause such differences. These factors
include changes in interest rates; loss of deposits and loan demand to other
savings and financial institutions; substantial changes in financial markets;
changes in real estate values and the real estate market; regulatory changes; or
unanticipated results in pending legal proceedings.
PART I
Item 1. Business.
General
Logansport Financial Corp. (the "Holding Company" and, together with
the Bank (as defined below), the "Company") is an Indiana corporation organized
in February, 1995, to become a unitary savings and loan holding company. The
Holding Company became a unitary savings and loan holding company upon the
conversion of Logansport Savings Bank, FSB (the "Bank") from a federal mutual
savings bank to a federal stock savings bank on June 13, 1995. The principal
asset of the Holding Company consists of 100% of the issued and outstanding
shares of common stock, $.01 par value per share, of the Bank. The Bank began
operations in Logansport, Indiana under the name Logansport Building and Loan
Association in 1925. In 1962, the Bank changed its name to Logansport Savings
and Loan Association, and in 1992, the Bank converted to a federally charted
savings bank known as Logansport Savings Bank, FSB. The Bank serves the needs of
primarily residents of Cass County, Indiana.
The Bank is the oldest financial institution headquartered in
Logansport, Indiana. Management believes the Bank has developed a solid
reputation among its loyal customer base because of its commitment to personal
service and its strong support of the local community. The Bank offers a number
of consumer and commercial financial services. These services include: (i)
residential real estate loans; (ii) home equity loans; (iii) home improvement
loans; (iv) construction loans; (v) share loans; (vi) commercial real estate
loans; (vii) multi-family loans; (viii) consumer loans; (ix) NOW accounts; (x)
passbook savings accounts; (xi) certificates of deposit; (xii) consumer and
commercial demand deposit accounts; and (xiii) individual retirement accounts.
In the fourth quarter of 1998 the Bank decided to offer a complete line of
commercial lending to include operating lines of credit secured by receivables
and inventory and term financing for equipment purchases. The Holding Company
and the Bank conduct business out of their main office located in Logansport,
Indiana. The Bank is and historically has been a significant real estate
mortgage lender in Cass County, Indiana, originating approximately 28.3% of the
mortgage loan volume recorded in Cass County by Cass County institutions during
the year ended December 31, 1998.
The Bank historically has concentrated its lending activities on the
origination of loans secured by first mortgage liens for the purchase,
construction or refinancing of one- to four-family residential real property.
One- to four-family residential mortgage loans continue to be the major focus of
the Bank's loan origination activities, representing 69.4% of the Company's
total loan portfolio at December 31, 1998. The Bank also offers multi-family
mortgage loans, commercial real estate loans, construction loans, and consumer
loans. Mortgage loans secured by multi-family properties and commercial real
estate totaled approximately 2.1% and 4.6%, respectively, of the Company's total
loan portfolio at December 31, 1998. Residential, multi-family and commercial
real estate construction loans constituted approximately 4.6% of the Company's
total loan portfolio at December 31, 1998. Installment, share, home equity, and
home improvement loans constituted approximately 10.0%, .4%, 1.5%, and 7.4%,
respectively, of the Company's total loan portfolio at December 31, 1998.
- 1 -
<PAGE>
Lending Activities
Loan Portfolio Data. The following table sets forth the composition of
the Company's loan portfolio by loan type and security type as of the dates
indicated, including a reconciliation of gross loans receivable after
consideration of the allowance for loan losses and loans in process.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------- --------------- ---------------- ---------------- ----------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN
Mortgage loans:
Residential................. $52,205 69.35% $46,419 72.48% $41,109 72.05% $36,608 73.15% $33,402 74.92%
Commercial real estate...... 3,492 4.64 3,072 4.80 2,701 4.73 1,620 3.24 2,718 6.10
Multi-family................ 1,584 2.10 1,844 2.88 2,370 4.15 1,915 3.83 722 1.62
Construction:
Residential ................ 1,742 2.31 1,333 2.08 574 1.01 575 1.15 330 .74
Commercial
real estate............... 1,400 1.86 --- --- 194 .34 198 .39 --- ---
Multi-family................ 350 .47 --- --- 248 .43 250 .50 680 1.52
Commercial paper .............. --- --- --- --- --- --- 878 1.75 500 1.12
Consumer loans:
Installment (2)............. 7,507 9.97 5,409 8.44 4,615 8.09 3,729 7.45 2,778 6.23
Share ...................... 314 .42 313 .49 286 .50 219 .44 244 .55
Home equity................. 1,090 1.45 685 1.07 595 1.04 398 .79 300 .67
Home improvement............ 5,589 7.43 4,972 7.76 4,368 7.66 3,656 7.31 2,911 6.53
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Gross loans receivable.... $75,273 100.00% $64,047 100.00% $57,060 100.00% $50,046 100.00% $44,585 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
TYPE OF SECURITY
Residential (1)............. $61,291 81.42% $53,409 83.39% $46,689 81.83% $41,407 82.74% $36,943 82.86%
Commercial real estate...... 4,108 5.46 3,212 5.02 2,895 5.07 1,818 3.63 2,718 6.10
Multi-family................ 1,934 2.57 1,844 2.88 2,618 4.59 2,165 4.33 1,402 3.14
Deposits.................... 314 .42 313 .49 286 .50 219 .44 244 .55
Auto........................ 2,210 2.94 2,148 3.35 2,042 3.58 1,288 2.57 1,005 2.26
Consumer residential (2).... 1,918 2.55 1,617 2.52 1,074 1.88 1,232 2.46 846 1.90
Other security.............. 3,498 4.64 1,504 2.35 1,456 2.55 1,039 2.08 917 2.05
Unsecured (3)............... --- --- --- --- --- --- 878 1.75 510 1.14
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Gross loans receivable.... 75,273 100.00% 64,047 100.00% 57,060 100.00% 50,046 100.00 44,585 100.00
Deduct:
Allowance for loan losses...... 285 .38 245 .38 236 .41 223 .45 206 .46
Loans in process............... 1,915 2.54 167 .26 22 .04 116 .23 359 .81
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Net loans receivable........ $73,073 97.08% $63,635 99.36% $56,802 99.55% $49,707 99.32% $44,020 98.73%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Mortgage Loans:
Adjustable-rate............. $45,552 74.95% $42,984 81.61% $38,729 82.06% $34,715 84.33% $31,057 82.05%
Fixed-rate.................. 15,221 25.05 9,684 18.39 8,467 17.94 6,451 15.67 6,795 17.95
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total..................... $60,773 100.00% $52,668 100.00% $47,196 100.00% $41,166 100.00% $37,852 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
(1) Includes home equity, residential construction and home improvement
loans.
(2) Includes "one-pay" notes due in less than one year secured by
residential real estate.
(3) Includes commercial paper and bankers' acceptances.
- 2 -
<PAGE>
The following table sets forth certain information at December 31,
1998, regarding the dollar amount of loans maturing in the Company's loan
portfolio based on the date that final payment is due under the terms of the
loan. Demand loans having no stated schedule of repayments and no stated
maturity and overdrafts are reported as due in one year or less. This schedule
does not reflect the effects of possible prepayments or enforcement of
due-on-sale clauses. Management expects prepayments will cause actual maturities
to be shorter.
<TABLE>
<CAPTION>
Balance Due during years ending December 31,
Outstanding 2002 2004 2009 2014
at December 31, to to to and
1998 1999 2000 2001 2003 2008 2013 following
------- ------ ---- ------ ------ ------- ------- -------
(In thousands)
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential .................... $53,947 $ 323 $ 41 $ 277 $ 602 $7,502 $13,329 $31,873
Multi-family.................... 1,934 --- --- --- 190 634 760 350
Commercial real estate.......... 4,892 2 1 30 67 1,251 923 2,618
Consumer loans:
Home improvement................ 5,589 41 153 518 867 2,276 1,423 311
Home equity..................... 1,090 --- --- --- --- --- 1,090 ---
Installment..................... 7,507 2,777 517 711 1,886 1,339 277 ---
Share........................... 314 314 --- --- --- --- --- ---
------- ------ ---- ------ ------ ------- ------- -------
Total ............................ $75,273 $3,457 $712 $1,536 $3,612 $13,002 $17,802 $35,152
======= ====== ==== ====== ====== ======= ======= =======
</TABLE>
The following table sets forth, as of December 31, 1998, the dollar
amount of all loans due after one year which have fixed interest rates and
floating or adjustable rates.
<TABLE>
<CAPTION>
Due After December 31, 1999
--------------------------------------------------------
Fixed Rates Variable Rates Total
(In thousands)
Mortgage loans:
<S> <C> <C> <C>
Residential ................. $ 13,542 $40,082 $53,624
Multi-family................. --- 1,934 1,934
Commercial real estate....... 1,400 3,490 4,890
Consumer loans:
Home improvement............. 5,548 --- 5,548
Home equity.................. --- 1,090 1,090
Installment.................. 4,730 --- 4,730
------- ------- -------
Total...................... $25,220 $46,596 $71,816
======= ======= =======
</TABLE>
Residential Loans. Residential loans consist primarily of one- to
four-family loans. Approximately $52.2 million, or 69.4% of the Company's
portfolio of loans at December 31, 1998, consisted of one- to four-family
residential mortgage loans, of which approximately 75.0% had adjustable rates.
The Bank currently offers adjustable-rate one- to four-family
residential mortgage loans ("ARMs") which adjust annually and are indexed to the
one-year U.S. Treasury securities yields adjusted to a constant maturity. These
ARMs have a current margin above such index of 2.75%, or 3.00% if interest is
amortized and payments are due bi-weekly. Interest rates cannot adjust lower
than the rate at the time of origination. Many of the residential ARMs in the
Company's portfolio at December 31, 1998 provided for a maximum rate adjustment
per year of 1%, although the Bank began originating residential ARMs which
provide for a maximum rate adjustment of 2% per year in 1995. The Bank's
residential ARMs provide for a maximum rate adjustment of 5% over the life of
the loan. These ARMs generally bear terms of between 15 and 25 years.
The Bank also currently offers fixed-rate loans which provide for the
payment of principal and interest over a period that generally does not exceed
15 years. At December 31, 1998, 25.0% of the Company's residential mortgage
loans had fixed rates of interest.
The Bank does not currently originate residential mortgage loans if the
ratio of the loan amount to the lesser of current cost or appraised value of the
property (i.e., the "loan-to-value ratio") exceeds 95% and does not currently
require private mortgage insurance on its residential single-family mortgage
loans.
- 3 -
<PAGE>
Substantially all of the residential mortgage loans that the Bank
originates include "due-on-sale" clauses, which give the Bank the right to
declare a loan immediately due and payable in the event that, among other
things, the borrower sells or otherwise disposes of the real property subject to
the mortgage and the loan is not repaid.
The Bank's residential mortgage loans are not originated on terms and
conditions and using documentation that conform with the standard underwriting
criteria required to sell such loans on the secondary market. The Bank generally
retains its loans in its portfolio and does not anticipate the need to sell its
non-conforming loans. See "-- Origination, Purchase and Sale of Loans."
At December 31, 1998, residential loans amounting to $269, or .36% of
total loans, were included in non-performing assets. See "-- Non-Performing and
Problem Assets."
Commercial Real Estate Loans. At December 31, 1998, $3.5 million, or
4.6% of the Company's total loan portfolio, consisted of commercial real estate
loans. Of these loans, $427,000 constituted participations in loans secured by
commercial real estate which were purchased from other financial institutions.
The commercial real estate loans included in the Company's portfolio are
primarily secured by non-residential real estate such as small office buildings,
nursing homes and churches. The Bank currently originates commercial real estate
loans as adjustable-rate loans indexed to the one-year U.S. Treasury securities
yields adjusted to a constant maturity with a margin of 4.75% above such index
or as fixed rate loans. Many of the commercial real estate loans in the
Company's portfolio at December 31, 1998 provided for a maximum rate adjustment
per year of 1%, although the Bank began originating commercial real estate ARMs
which provide for a maximum rate adjustment of 2% per year in 1995. In addition,
the maximum rate adjustment over the life of the loan is 5%, and these loans
have a maximum loan-to-value ratio of 80%. The Bank underwrites these loans on a
case-by-case basis and, in addition to its normal underwriting criteria, the
Bank evaluates the borrower's ability to service the debt from the net operating
income of the property. No single commercial real estate loan at December 31,
1998 exceeded $363,000. No commercial real estate loans were included in
non-performing assets at that date.
Loans secured by commercial real estate generally are larger than one-
to four-family residential loans and involve a greater degree of risk.
Commercial real estate loans often involve large loan balances to single
borrowers or groups of related borrowers. Payments on these loans depend to a
large degree on results of operations and management of the properties and may
be affected to a greater extent by adverse conditions in the real estate market
or the economy in general. Accordingly, the nature of the loans makes them more
difficult for management to monitor and evaluate.
Multi-Family Loans. Approximately $1.6 million, or 2.1% of the
Company's portfolio of loans at December 31, 1998, consisted of multi-family
loans. These loans are generally purchased participations and secured by
apartment complexes and other multi-family residential properties. At December
31, 1998, none of the multi-family loans included in the Company's portfolio was
included in non-performing assets.
Construction Loans. The Bank offers construction loans with respect to
owner-occupied residential real estate and, in limited cases, to builders or
developers constructing such properties on a speculative investment basis (i.e.,
before the builder/developer obtains a commitment from a buyer). The Bank may
also purchase participations.
At December 31, 1998, $3.5 million, or 4.6%, of the Company's total
loan portfolio consisted of construction loans. Construction loans at December
31, 1998 consisted of $1.7 million in residential loans, $1.4 million in
commercial loans and $350,000 of multi-family purchased participations. The
largest construction loan at December 31, 1998 was approximately $800,000 which
included the construction of a commercial business facility. No construction
loans were included in non-performing assets on that date.
Construction loans originated by the Bank are written such that
interest only is payable during the construction phase, which is typically
limited to six (6) months, and following the construction phase, a permanent
loan is made. Inspections are made prior to any disbursement under a
construction loan.
- 4 -
<PAGE>
Consumer Loans. Federal laws and regulations permit federally chartered
savings associations to make secured and unsecured consumer loans in an
aggregate amount up to 35% of the association's total assets. In addition, a
federally chartered savings association has lending authority above the 35%
limit for certain consumer loans, such as property improvement loans and deposit
account secured loans. However, the Qualified Thrift Lender test places
additional limitations on a savings association's ability to make consumer
loans. See "Regulation -- Qualified Thrift Lender."
The Company's consumer loans, consisting primarily of installment,
share, home improvement, and home equity loans, aggregated $14.5 million as of
December 31, 1998, or 19.3% of the Company's total loan portfolio. The Bank
consistently originates consumer loans to meet the needs of its customers and to
assist in meeting its asset/liability management goals. All of the Bank's
consumer loans originated by the Bank, except home equity loans, are fixed-rate
loans, and substantially all are secured loans.
Installment loans, totaling $7.5 million, or 10.0% of total loans at
December 31, 1998, are fixed-rate loans generally secured by collateral,
including automobiles, and are made for maximum terms of up to 10 years
(depending on the collateral). The Bank's installment loans also include
"one-pay" notes, some of which are secured by residential real estate and all of
which amortize at rates similar to those for home improvement loans and have
maximum terms of 6 months to one year.
Share loans, totaling $314,000, or .4% of total loans at December 31,
1998, are made up to 80% of the original account balance and accrue at a rate of
2-3% over the underlying certificate of deposit rate. Interest on share loans is
paid quarterly. Home improvement loans totaled $5.6 million, or 7.4% of the
Company's total loan portfolio at December 31, 1998, and are close-ended
fixed-rate loans made for maximum terms up to 15 years. The Bank's home
improvement loans are generally made only to those borrowers for whom the Bank
holds the primary mortgage on the property, if any.
The Bank also offers open-ended lines of credit secured by a lien on
the equity in the borrower's home in amounts up to 90% of the appraised value of
the real estate (taking into account any other mortgages on the property). The
Bank's home equity loans are adjustable-rate loans with interest rates equal to
the national prime rate plus 2%, and payments equal to the greater of 2% of the
outstanding loan balance or $50. The Bank's home equity loans are generally made
only to those borrowers for whom the Bank holds the primary mortgage on the
property, if any, and generally have a maximum term of 15 years. At December 31,
1998, the Bank had approved $1,691,000 of home equity loans, of which $1,090,000
were outstanding.
As a general rule, consumer loans involve a higher level of risk than
one- to four-family residential mortgage loans because consumer loans are
generally made based upon the borrower's ability to repay the loan, which is
subject to change, rather than the value of the underlying collateral, if any.
However, the relatively higher yields and shorter terms to maturity of consumer
loans are believed to be helpful in reducing interest-rate risk. The Bank has
thus far been successful in managing consumer loan risk. As of December 31,
1998, consumer loans totaling $46,000 were included in non-performing assets.
Letters of Credit Securing Tax-Exempt Bonds. The Bank currently
maintains four letters of credit, each in the amount of $253,000, to secure
payments required under tax-exempt bonds issued to raise funds for low-income
housing projects in Franklin, Kokomo, Michigan City, Indiana and Hamilton, Ohio.
The issuer of the tax-exempt bonds is permitted to draw against these letters of
credit only in the event it defaults in making payments required under the
bonds, and any such draws made against the letters of credit would be secured by
a mortgage on the subject housing project. No draws against any letters of
credit had been made as of December 31, 1998.
Origination, Purchase and Sale of Loans. In an effort to control costs
incurred by its mortgage customers, the Bank currently originates its mortgage
loans pursuant to its own underwriting standards which are not in conformity
with the standard criteria of the Federal Home Loan Mortgage Corporation
("FHLMC") or Federal National Mortgage Association ("FNMA"). If it desired to
sell its mortgage loans, the Bank might therefore experience some difficulty
selling such loans quickly in the secondary market. The Bank has no intention,
however, of attempting to sell such loans. The Bank's ARMs vary from secondary
market criteria because, among other things, the Bank does not require current
property surveys in most cases and does not require escrow accounts for taxes
and insurance.
- 5 -
<PAGE>
The Bank confines its loan origination activities primarily to Cass
County, Indiana. At December 31, 1998, no loans were secured by property located
outside of Indiana. The Bank's loan originations are generated from referrals
from real estate dealers and existing customers, and newspaper and periodical
advertising. All loan applications are processed and underwritten at the Bank's
main office.
Under the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 ("FIRREA"), a savings association generally may not make any loan to a
borrower or its related entities if the total of all such loans by the savings
association exceeds 15% of its capital (plus up to an additional 10% of capital
in the case of loans fully collateralized by readily marketable collateral);
provided, however, that loans up to $500,000 regardless of the percentage
limitations may be made and certain housing development loans of up to $30
million or 30% of capital, whichever is less, are permitted. The maximum amount
which the Bank could have loaned to one borrower and the borrower's related
entities under the 15% of capital limitation was $2.5 million at December 31,
1998. The Company's portfolio of loans currently contains no loans that exceed
the 15% of capital limitation.
The Bank's loan approval process is intended to assess the borrower's
ability to repay the loan, the viability of the loan and the adequacy of the
value of the property that will secure the loan. To assess the borrower's
ability to repay, the Bank studies the employment and credit history and
information on the historical and projected income and expenses of its
mortgagors.
The Bank generally requires appraisals or loan officer evaluations on
all property securing its loans and requires title insurance or an abstract and
a valid lien on its mortgaged real estate. Appraisals for residential real
property are performed either by an in-house appraiser who is a state-licensed
residential appraiser or an independent state-licensed residential appraiser.
From time to time, the Bank also uses the services of certified residential
appraisers, who are not in-house, for performance of appraisals related to loans
in excess of $250,000. The Bank requires fire and extended coverage insurance in
amounts at least equal to the principal amount of the loan. It also requires
flood insurance to protect the property securing its interest if the property is
in a flood plain.
The Bank's underwriting standards for consumer loans are intended to
protect against some of the risks inherent in making consumer loans. Borrower
character, paying habits and financial strengths are important considerations.
The Bank historically has not participated in the secondary market as a
seller of its mortgage loans, but does occasionally purchase participations in
commercial real estate and multi-family loans from other financial institutions.
- 6 -
<PAGE>
The following table shows loan origination, purchase and repayment
activity for the Bank during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1998 1997 1996
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Gross loans receivable
at beginning of period...................... $64,047 $57,060 $50,046
Originations:
Mortgage loans:
Residential............................... 14,691 13,102 11,277
Commercial real estate and
multi-family............................ 1,400 417 1,885
------- ------- -------
Total mortgage loans...................... 16,091 13,519 13,162
Consumer loans:
Installment............................... 7,321 3,476 3,757
Share..................................... 294 101 259
Home improvement.......................... 2,333 2,510 1,774
Home equity............................... 736 163 319
------- ------- -------
Total consumer loans.................... 10,684 6,250 6,109
------- ------- -------
Total originations................. 26,775 19,769 19,271
Purchases:
Commercial real estate and multi-family... 350 --- 1,046
Commercial paper.......................... --- --- ---
------- ------- -------
Total originations and purchases........ 27,125 19,769 20,317
Repayments:
Commercial paper.......................... --- --- 878
Other loans and deductions................ 15,899 12,782 12,425
------- ------- -------
Gross loans receivable at end of period..... $75,273 $64,047 $57,060
======= ======= =======
</TABLE>
Origination and Other Fees. The Company realizes income from
origination fees, late charges, checking account service charges, credit card
fees, and fees for other miscellaneous services. The Bank currently charges $300
plus closing costs on its adjustable-rate mortgage loans. Points may be charged
on fixed-rate loans. Late charges are generally assessed if payment is not
received within a specified number of days after it is due. The grace period
depends on the individual loan documents.
Non-Performing and Problem Assets
Mortgage loans are reviewed by the Bank on a regular basis and are
placed on a non-accrual status when the loans become contractually past due
ninety days or more. At the end of each month, delinquency notices are sent with
respect to all mortgage loans for which payments have not been received. Contact
by phone or in person is made, if feasible, with respect to all such loans. When
loans are sixty days in default, an additional delinquency notice is sent and
personal contact is made with the borrower to establish an acceptable repayment
schedule. When loans are ninety days in default, contact is made with the
borrower by the Senior Loan Officer who attempts to establish an acceptable
repayment schedule. Management is authorized to commence foreclosure proceedings
for any loan upon making a determination that it is prudent to do so. All loans
for which foreclosure proceedings have been commenced are placed on non-accrual
status.
Consumer loans are reviewed by the Bank on a daily basis. Notices are
sent to borrowers when any consumer loan is 5, 10 and 15 days past due. After
consumer loans are 15 days delinquent, a late fee in the amount of 10% of the
payment is imposed until the loan is brought current.
Non-Performing Assets. At December 31, 1998, $315,000, or .33% of the
Company's total assets, were non-performing assets (loans delinquent more than
90 days, non-accruing loans, real estate owned ("REO"), troubled debt
restructurings and non-accruing investments), compared to $537,000, or .62%, of
the Company's total assets at December 31, 1997. At December 31, 1998,
residential loans, multi-family loans, commercial real estate loans, consumer
loans and REO accounted for 85.4%, 0%, 0%, 14.6% and 0%, respectively, of
non-performing assets. There were no non-accruing investments at December 31,
1998.
- 7 -
<PAGE>
The table below sets forth the amounts and categories of the Company's
non-performing assets (non-accruing investments, non-accruing loans, and real
estate owned). It is the policy of the Company that all earned but uncollected
interest on all loans be reviewed monthly to determine if any portion thereof
should be classified as uncollectible for any loan past due in excess of 90
days.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
----- ------- ------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing investments (1)......................... $ --- $ --- $ --- $ --- $ 150
Non-accruing loans (2)............................... 315 431 406 311 337
Real estate owned, net............................... --- 106 --- --- ---
---- ---- ---- ---- -----
Total non-performing assets....................... $315 $537 $406 $311 $ 487
==== ==== ==== ==== =====
Non-performing loans to total loans, net (3)......... .42% .67% .71% .63% .76%
Non-performing assets to total assets................ .33 .62 .52 .42 .82
</TABLE>
- ---------------
(1) Non-accruing investments consist of certain corporate obligations at
market value.
(2) The Company generally places loans on a non-accruing status when the
loans become contractually past due 90 days or more. At December 31,
1998, $269,000 of non-accruing loans were residential loans and $46,000
were consumer loans. For the year ended December 31, 1998, the income
that would have been recorded had the non-accruing loans not been in a
non-performing status totaled $26,000 compared to actual income
recorded of $5,200.
(3) Total loans less loans in process.
Classified Assets. Federal regulations and the Bank's Internal Loan
Review policy 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" assets. 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 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. Assets which do not currently expose the insured institution
to sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are required to be designated "special
mention" by management.
An insured institution is required to establish general allowances for
loan losses in an amount deemed prudent by management for loans classified
substandard or doubtful, as well as for other problem loans. 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 an insured
institution classifies problem assets as "loss," it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount. An institution's determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the OTS which can order the establishment of
additional general or specific loss allowances.
- 8 -
<PAGE>
At December 31, 1998, the aggregate amount of the Company's classified
assets, and of the Company's general and specific loss allowances were as
follows:
At December 31, 1998
--------------------
(In thousands)
Substandard loans......................................... $315
Doubtful loans............................................ ---
Loss loans................................................ ---
----
Total classified loans................................. $315
====
General loss allowances................................... $285
Specific loss allowances.................................. ---
----
Total allowances....................................... $285
====
The Company regularly reviews its loan portfolio to determine whether
any loans require classification in accordance with applicable regulations.
Allowance for Loan Losses
The allowance for loan losses is maintained through the provision for
loan losses, which is charged to earnings. The provision for loan losses is
determined in conjunction with management's review and evaluation of current
economic conditions (including those of the Bank's lending area), changes in the
character and size of the loan portfolio, loan delinquencies (current status as
well as past and anticipated trends) and adequacy of collateral securing loan
delinquencies, historical and estimated net charge-offs, and other pertinent
information derived from a review of the loan portfolio. In management's
opinion, the Company's allowance for loan losses is adequate to absorb
anticipated future losses from loans at December 31, 1998. However, there can be
no assurance that regulators, when reviewing the Company's loan portfolio in the
future, will not require increases in its allowances for loan losses or that
changes in economic conditions will not adversely affect the Company's loan
portfolio.
Summary of Loan Loss Experience. The following table analyzes changes
in the allowance for loan losses during the past five (5) one-year periods ended
December 31, 1998.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
----- ----- ----- ------ ------
(Dollars in thousands)
Balance of allowance at beginning
<S> <C> <C> <C> <C> <C>
of period................................ $245 $ 236 $ 223 $ 206 $ 201
Recoveries.................................. --- 1 1 --- ---
Less charge-offs:
Residential real estate loans............ 13 10 --- --- ---
Consumer loans........................... 10 8 --- 3 1
---- ---- ---- ---- -----
Net charge-offs............................. 23 18 --- 3 1
Provisions for losses on loans.............. 63 26 12 20 6
---- ---- ---- ---- -----
Balance of allowance at end of period....... $285 $245 $236 $223 $ 206
==== ==== ==== ==== =====
Net charge-offs to total average
loans receivable for period............ .03 .03 --- (*) (*)
Allowance at end of period to
net loans receivable at end
of period (1).......................... .39 .38 .41 .45 .47
Allowance to total non-performing
loans at end of period................. 90.48 56.84 58.12 71.61 61.13
- -------------------
</TABLE>
(1) Total loans less loans in process.
(*) Less than .01%.
- 9 -
<PAGE>
Allocation of Allowance for Loan Losses. The following table presents
an analysis of the allocation of the Company's allowance for loan losses at the
dates indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- --------------- ---------------- ---------------- ---------------
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in each
category category category category category
of total of total of total of total of total
Amount loans Amount loans Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of period
applicable to:
Residential.................. $232 69.35% $193 72.48% $158 72.05% $122 73.15% $103 74.92%
Commercial real estate....... 6 4.64 6 4.80 6 4.73 6 3.24 6 6.10
Multi-family................. 1 2.10 1 2.88 1 4.15 1 3.83 2 1.62
Construction loans........... --- 4.64 --- 2.08 --- 1.78 --- 2.04 --- 2.26
Commercial paper and
bankers' acceptances...... --- --- --- --- --- --- --- 1.75 --- 1.12
Consumer loans............... 46 19.27 45 17.76 71 17.29 86 15.99 80 13.98
Unallocated.................. --- --- --- --- --- --- 8 --- 15 ---
---- ------ ---- ------ ---- ------ ---- ------ ---- ------
Total..................... $285 100.00% $245 100.00% $236 100.00% $223 100.00% $206 100.00%
==== ====== ==== ====== ==== ====== ==== ====== ==== ======
</TABLE>
Investments and Mortgage- and Other Asset-Backed Securities
Federally chartered savings associations have the authority to invest
in various types of liquid assets, including U.S. Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, repurchase agreements and federal funds
sold. Subject to various restrictions, federally chartered savings associations
may also invest a portion of their assets in corporate debt securities and
asset-backed securities. The investment policy of the Bank, which is established
and implemented by the Bank's Investment Committee, is designed primarily to
maximize the yield on the investment portfolio subject to minimal liquidity
risk, default risk, interest rate risk, and prudent asset/liability management.
The Company's investments consist of U.S. government and other agency
securities, mortgage- and other asset-backed securities, state and municipal
bonds, corporate obligations, marketable equity securities, certificates of
deposit, and FHLB stock. At December 31, 1998, approximately $13.2 million, or
13.7% of the Company's total assets, consisted of such investments.
At December 31, 1998, the Company had $8.1 million of mortgage- and
other asset-backed securities outstanding, all of which were classified as
available for sale. These fixed-rate mortgage- and other asset-backed securities
may be used as collateral for borrowings and through repayments, as a source of
liquidity. Mortgage- and other asset-backed securities offer yields above those
available for investments of comparable credit quality and duration.
Mortgage-backed securities are qualifying thrift investments under the Qualified
Thrift Lender test. See "Regulation--Qualified Thrift Lender."
- 10 -
<PAGE>
The following table sets forth the carrying value and market value of
the Company's investments and mortgage- and other asset-backed securities at the
dates indicated.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------
1998 1997 1996
--------------------- -------------------- ----------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
----- ----- ----- ----- ----- -----
(In thousands)
Securities available for sale:
<S> <C> <C> <C> <C> <C> <C>
Federal agencies................... $ 2,845 $ 2,825 $3,598 $3,451 $ 5,245 $ 4,880
State and municipal................ 1,323 1,393 1,780 1,847 2,194 2,242
Mortgage- and other asset-backed
securities....................... 8,193 8,129 9,998 9,932 6,768 6,674
Corporate obligations.............. 561 571 200 209 350 348
Marketable equity securities....... 4 244 6 243 6 159
------- ------- ------- ------- ------- -------
Total securities
available for sale............... 12,926 13,162 15,582 15,682 14,563 14,303
Certificate of deposit (1)............ --- --- 100 100 100 100
FHLB stock (1)........................ 568 568 494 494 387 387
------- ------- ------- ------- ------- -------
Total investments................ $13,494 $13,730 $16,176 $16,276 $15,050 $14,790
======= ======= ======= ======= ======= =======
</TABLE>
(1) Market value approximates carrying values.
Included in the Company's investment portfolio at December 31, 1998
were approximately $300,000 (amortized cost) in derivative securities, which
were structured notes issued by the FHLBs. The fair value of these security
investments was approximately $289,000 at December 31, 1998. These structured
notes, which are not obligations of, or guaranteed by, the United States,
represent obligations to repay principal with interest that is either fixed or
fluctuates in accordance with an interest formula tied to various indices. The
interest on the Company's structured notes generally adjusts quarterly or
semi-annually based on certain indices such as the LIBOR and the CMT. This
structured note had fluctuating interest rates that adjust on the basis of a
formula tied to two different indices, such as the CMT and an inverse LIBOR
rate. This dually indexed security was classified as available for sale at
December 31, 1998.
The average yield at December 31, 1998, of these derivative securities,
was 2.64%. In a rising interest rate environment, it is anticipated that the
yield on and market value of these securities will decline, and may decline
substantially.
- 11 -
<PAGE>
The following table sets forth investment securities, mortgage- and
other asset-backed securities and FHLB stock which mature during each of the
periods indicated and the weighted average yields for each range of maturities
at December 31, 1998.
<TABLE>
<CAPTION>
Amount at December 31, 1998, which matures in
-------------------------------------------------------------------------------------
One One to Five to Over
Year or Less Five Years Ten Years Ten Years(4)
------------------- ------------------ ------------------- -------------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale (1)(3) :
Federal agencies.............. $ --- ---% $ 800 4.75% $1,845 6.66% $ 200 6.80%
State and municipal (2)....... 25 6.88 175 4.72 1,113 5.27 10 7.25
Mortgage- and other
asset-backed securities.... 2,337 4.13 2,723 5.05 875 6.45 2,258 6.87
Corporate obligations......... --- --- --- --- 461 6.12 100 7.41
Marketable equity securities.. --- --- --- --- --- --- 4 50.77
------ ---- ------- ---- ------ ---- ------ ----
Total securities
available for sale....... 2,362 4.16 3,698 4.97 4,294 6.20 2,572 6.96
FHLB stock....................... --- --- --- --- --- --- 568 8.00
------ ---- ------- ---- ------ ---- ------ ----
Total investments........... $2,362 4.16% $ 3,698 4.97% $4,294 6.20% $3,140 7.14%
====== ==== ======= ==== ====== ==== ====== ====
</TABLE>
(1) Securities available for sale are set forth at amortized cost for
purposes of this table.
(2) Fully taxable equivalent basis.
(3) No effect is given for possible prepayments.
(4) Includes perpetual marketable equity securities.
Sources of Funds
General. Deposits have traditionally been the Bank's primary source of
funds for use in lending and investment activities. In addition to deposits, the
Company derives funds from scheduled loan payments, loan prepayments, retained
earnings and income on earning assets. While scheduled loan payments and income
on earning assets are relatively stable sources of funds, deposit inflows and
outflows can vary widely and are influenced by prevailing interest rates, market
conditions and levels of competition. Borrowings from the FHLB of Indianapolis
may be used in the short-term to compensate for reductions in deposits or
deposit inflows at less than projected levels. The Bank rarely borrows on a
longer-term basis, for example, to support expanded activities or to assist in
its asset/liability management.
Deposits. Deposits are attracted, principally from within Cass County,
through the offering of a broad selection of deposit instruments including NOW
and other transaction accounts, fixed-rate certificates of deposit, individual
retirement accounts, and savings accounts. The Bank does not actively solicit or
advertise for deposits outside of Cass County. Substantially all of the Bank's
depositors are residents of that county. Deposit account terms vary, with the
principal differences being the minimum balance required, the amount of time the
funds remain on deposit and the interest rate. The Bank does not pay a fee for
any deposits it receives.
Deposits totaled $70.0 million at December 31, 1998.
Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by the Bank on a periodic basis. Determination of
rates and terms are predicated on funds acquisition and liquidity requirements,
rates paid by competitors, growth goals, and federal regulations. The Bank
relies, in part, on customer service and long-standing relationships with
customers to attract and retain its deposits, but also closely prices its
deposits in relation to rates offered by its competitors.
- 12 -
<PAGE>
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 manages 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, NOW and non-interest-bearing
checking accounts are relatively stable sources of deposits. However, the
ability of the Bank to attract and maintain certificates of deposit, and the
rates paid on these deposits, has been and will continue to be significantly
affected by market conditions.
An analysis of the Bank's deposit accounts by type, maturity, and rate
at December 31, 1998, is as follows:
<TABLE>
<CAPTION>
Minimum Balance at Weighted
Opening December 31, % of Average
Type of Account Balance 1998 Deposits Rate
- --------------- ------- ---- -------- ----
(Dollars in thousands)
Withdrawable:
<S> <C> <C> <C> <C>
Passbook savings accounts......................... $ 25 $ 3,171 4.53% 2.98%
Regular money market accounts..................... 2,500 1,153 1.65 3.23
Hi yield money market accounts.................... 10,000 19,362 27.66 4.07
Super NOW accounts................................ 2,500 366 .52 2.33
NOW and other transaction accounts................ 200 4,790 6.84 2.02
Other transaction accounts........................ 100 1,492 2.13 ---
------- ------
Total withdrawable................................... 30,334 43.33 3.38
Certificates (original terms):
91 days........................................... 1,000 1,227 1.75 4.57
6 months.......................................... 1,000 3,591 5.13 4.86
12 months......................................... 1,000 5,971 8.53 5.28
18 months......................................... 500 1,832 2.62 5.48
24 months......................................... 500 11,133 15.90 5.49
30 months......................................... 500 7,569 10.81 5.83
60 months......................................... 1,000 3,619 5.17 5.65
IRAs
18 months......................................... 100 4,735 6.76 5.11
------- ------
Total certificates................................... 39,677 56.67
------- ------
Total deposits ...................................... $70,011 100.00% 5.40%
======= ====== ====
</TABLE>
The following table sets forth by various interest rate categories the
composition of time deposits of the Bank at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------
1998 1997 1996
------- ------- -------
(In thousands)
<C> <C> <C> <C>
4.00% and under................ $ 234 $ 136 $ 199
4.01 - 6.00 %.................. 39,027 35,087 32,499
6.01 - 8.00%................... 416 508 1,285
------- ------- -------
Total ........................ $39,677 $35,731 $33,983
======= ======= =======
</TABLE>
- 13 -
<PAGE>
The following table represents, by various interest rate categories,
the amounts of time deposits maturing during each of the three years following
December 31, 1998, and the total amount maturing thereafter. Matured
certificates which have not been renewed as of December 31, 1998, have been
allocated based upon certain rollover assumptions:
Amounts At
December 31, 1998, Maturing in
----------------------------------------------------------
One Year Two Three Greater Than
or Less Years Years Three Years
------- ----- ----- -----------
(In thousands)
4.00% and under... $ 234 $ --- $ --- $ ---
4.01 - 6.00 %..... 21,930 13,784 1,366 1,947
6.01-8.00%........ 178 218 --- 20
------- ------- ------ ------
Total ........... $22,342 $14,002 $1,366 $1,967
======= ======= ====== ======
The following table indicates the amount of the Bank's certificates of
deposit of greater than $100,000 by time remaining until maturity as of December
31, 1998.
Maturity (In thousands)
-------- --------------
Three months or less................................... $ 475
Greater than three months
through six months................................ 1,141
Greater than six months
through twelve months............................. 1,044
Over twelve months..................................... 817
------
Total............................................. $3,477
======
- 14 -
<PAGE>
The following table sets forth the dollar amount of savings in the
various types of deposits programs offered by the Bank at the dates indicated,
and the amount of increase or decrease in such deposits as compared to the
previous period.
<TABLE>
<CAPTION>
Deposit Activity
------------------------------------------------------------------------------
Increase Increase
(Decrease) (Decrease)
Balance at from Balance at from
December 31, % of December 31, December 31, % of December 31,
1998 Deposits 1997 1997 Deposits 1996
---- -------- ---- ---- -------- ----
(Dollars in thousands)
Withdrawable:
<S> <C> <C> <C> <C> <C> <C>
Passbook savings accounts............ $3,171 4.53% $ 101 $3,070 5.07% $ (49)
Regular money market accounts........ 1,153 1.65 103 1,050 1.73 (108)
Hi yield money market accounts....... 19,362 27.66 3,676 15,686 25.89 1,198
Super NOW accounts................... 366 .52 (98) 464 .76 (222)
NOW accounts......................... 4,790 6.84 1,058 3,732 6.16 401
Other transaction accounts........... 1,492 2.13 630 862 1.42 231
------- ------ ------ ------- ------ ------
Total withdrawable...................... 30,334 43.33 5,470 24,864 41.03 1,451
Certificates (original terms):
91 days.............................. 1,227 1.75 865 362 .60 43
6 months............................. 3,591 5.13 50 3,541 5.84 (1,023)
12 months............................ 5,971 8.53 220 5,751 9.49 789
18 months............................ 1,832 2.62 813 1,019 1.68 75
24 months............................ 11,133 15.90 603 10,530 17.38 (930)
30 months............................ 7,569 10.81 1,287 6,282 10.37 2,952
60 months............................ 3,619 5.17 67 3,552 5.86 (205)
IRAs
18 months............................ 4,735 6.76 41 4,694 7.75 47
------- ------ ------ ------- ------ ------
Total certificates...................... 39,677 56.67 3,946 35,731 58.97 1,748
------- ------ ------ ------- ------ ------
Total deposits.......................... $70,011 100.00% $9,416 $60,595 100.00% $3,199
======= ====== ====== ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
Deposit Activity
-----------------------------------------------
Increase
(Decrease)
Balance at from
December 31, % of December 31,
1996 Deposits 1995
------------ -------- ------------
(Dollars in thousands)
Withdrawable:
<S> <C> <C> <C>
Passbook savings accounts............ $ 3,119 5.43% $ (77)
Regular money market accounts........ 1,158 2.02 (179)
Hi yield money market accounts....... 14,488 25.24 1,796
Super NOW accounts................... 686 1.20 124
NOW accounts......................... 3,331 5.80 101
Other transaction.................... 631 1.10 162
------- ------ ------
Total withdrawable...................... 23,413 40.79 1,927
Certificates (original terms):
91 days.............................. 319 .56 (621)
6 months............................. 4,564 7.95 1,056
12 months............................ 4,962 8.65 (310)
18 months............................ 944 1.64 (149)
24 months............................ 11,460 19.97 4,236
30 months............................ 3,330 5.80 (1,231)
60 months............................ 3,757 6.54 (401)
IRAs
18 months............................ 4,647 8.10 428
------- ------ ------
Total certificates...................... 33,983 59.21 3,008
------- ------ ------
Total deposits ......................... $57,396 100.00% $4,935
======= ====== ======
</TABLE>
- 15 -
<PAGE>
Borrowings. The Bank focuses on generating high quality loans and then
seeks the best source of funding from deposits, investments or borrowings. There
are regulatory restrictions on advances from the FHLBs. See "Regulation --
Federal Home Loan Bank System" and "-- Qualified Thrift Lender." At December 31,
1998, the Company had $5.0 million in borrowings from the FHLB of Indianapolis
which mature within one year and $2.0 million which mature in one to two years.
The weighted average interest rate related to these borrowings was 5.24% at
December 31, 1998. The Company does not anticipate any difficulty in obtaining
advances appropriate to meet its requirements in the future. At December 31,
1998 and 1997, notes payable consisted of construction borrowings secured by the
Bank's investment in a real estate partnership. The Bank pays only interest
until completion of the project at which time repayment terms will convert to a
ten year amortization. The interest rate on the variable rate borrowing was
3.02% and 4.35% at December 31, 1998 and 1997, respectively.
Employees
As of December 31, 1998, the Bank employed 14 persons on a full-time
basis and four persons on a part-time basis. None of the Bank's employees are
represented by a collective bargaining group. Management considers its employee
relations to be excellent.
The Bank's employee benefits for full-time employees include, among
other things, a Financial Institutions Retirement Fund ("FIRF" or the "Pension
Plan") defined benefit pension plan and major medical and long-term disability
insurance.
Employee benefits are considered by management to be competitive with
those offered by other financial institutions and major employers in the Bank's
market area. See "Executive Compensation and Related Transactions."
Competition
The Bank operates in North Central Indiana and makes almost all of its
loans to and accepts most of its deposits from residents of Cass County in
Indiana.
The Bank is subject to competition from various financial institutions,
including state and national banks, state and federal savings institutions,
credit unions, certain non-banking consumer lenders, and other companies or
firms, including brokerage houses and mortgage brokers, that provide similar
services in Cass County. The Bank must also compete with money market funds and
with insurance companies with respect to its individual retirement accounts. See
"Regulation--Acquisitions or Dispositions and Branching."
The primary factors in competing for deposits are interest rates and
convenience of office locations. The Bank competes for loan originations
primarily through the efficiency and quality of services it provides borrowers
and through interest rates and loan fees it charges. Competition is affected by,
among other things, the general availability of lendable funds, general and
local economic conditions, current interest rate levels, and other factors which
are not readily predictable.
REGULATION
General
As a federally chartered, SAIF-insured savings association, the Bank is
subject to extensive regulation by the OTS and the FDIC. For example, the Bank
must obtain OTS approval before it may engage in certain activities and must
file reports with the OTS regarding its activities and financial condition. The
OTS periodically examines the Bank's books and records and, in conjunction with
the FDIC in certain situations, has examination and enforcement powers. This
supervision and regulation are intended primarily for the protection of
depositors and the federal deposit insurance funds. The Bank's semi- annual
assessment owed to the OTS, which is based upon a specified percentage of
assets, is approximately $14,000.
The Bank is also subject to federal and state regulation as to such
matters as loans to officers, directors, or principal shareholders, required
reserves, limitations as to the nature and amount of its loans and investments,
regulatory approval of any merger or consolidation, issuance or retirements of
securities, and limitations upon other aspects of banking operations. In
addition, the Bank's activities and operations are subject to a number of
additional detailed, complex and sometimes overlapping federal and state laws
- 16 -
<PAGE>
and regulations. These include state usury and consumer credit laws, state laws
relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Community Reinvestment Act, anti-redlining legislation and antitrust
laws.
The United States Congress is considering legislation that would require
all federal savings associations, such as the Bank, to either convert to a
national bank or a state-chartered financial institution by a specified date to
be determined. In addition, under the legislation, the Holding Company likely
would not be regulated as a savings and loan holding company but rather as a
bank holding company. This proposed legislation would abolish the OTS and
transfer its functions among the other federal banking regulators. Certain
aspects of the legislation remain to be resolved and, therefore, no assurance
can be given as to whether or in what form the legislation will be enacted or
its effect on the Holding Company and the Bank.
Savings and Loan Holding Company Regulation
As the holding company for the Bank, the Holding Company is regulated as a
"non-diversified savings and loan holding company" within the meaning of the
Home Owners' Loan Act, as amended ("HOLA"), and subject to regulatory oversight
by the Director of the OTS. As such, the Holding Company is registered with the
OTS and thereby subject to OTS regulations, examinations, supervision and
reporting requirements. As a subsidiary of a savings and loan holding company,
the Bank is subject to certain restrictions in its dealings with the Holding
Company and with other companies affiliated with the Holding Company.
In general, the HOLA prohibits a savings and loan holding company, without
prior approval of the Director of the OTS, from acquiring control of another
savings association or savings and loan holding company or retaining more than
5% of the voting shares of a savings association or of another holding company
which is not a subsidiary. The HOLA also restricts the ability of a director or
officer of the Holding Company, or any person who owns more than 25% of the
Holding Company's stock, from acquiring control of another savings association
or savings and loan holding company without obtaining the prior approval of the
Director of the OTS.
The Holding Company's Board of Directors presently intends to continue to
operate the Holding Company as a unitary savings and loan holding company. OTS
regulations generally do not restrict the permissible business activities of a
unitary savings and loan holding company.
Notwithstanding the above rules as to permissible business activities of
unitary savings and loan holding companies, if the savings association
subsidiary of such a holding company fails to meet the Qualified Thrift Lender
("QTL") test, then such unitary holding company would become subject to the
activities restrictions applicable to multiple holding companies. (Additional
restrictions on securing advances from the FHLB also apply.) At December 31,
1998, the Bank's asset composition was in excess of that required to qualify as
a Qualified Thrift Lender.
If the Holding Company were to acquire control of another savings
association other than through a merger or other business combination with the
Bank, the Holding Company would thereupon become a multiple savings and loan
holding company. Except where such acquisition is pursuant to the authority to
approve emergency thrift acquisitions and where each subsidiary savings
association meets the QTL test, the activities of the Holding Company and any of
its subsidiaries (other than the Bank or other subsidiary savings associations)
would thereafter be subject to further restrictions. The HOLA provides that,
among other things, no multiple savings and loan holding company or subsidiary
thereof which is not a savings association shall commence or continue for a
limited period of time after becoming a multiple savings and loan holding
company or subsidiary thereof, any business activity other than (i) furnishing
or performing management services for a subsidiary savings association, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary savings association,
(iv) holding or managing properties used or occupied by a subsidiary savings
association, (v) acting as trustee under deeds of trust, (vi) those activities
previously directly authorized by the FSLIC by regulation as of March 5, 1987,
to be engaged in by multiple holding companies, or (vii) those activities
authorized by the Federal Reserve Board (the "FRB") as permissible for bank
holding companies, unless the Director of the OTS by regulation prohibits or
limits such activities for savings and loan holding companies. Those activities
described in (vii) above must also be approved by the Director of the OTS before
a multiple holding company may engage in such activities.
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The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 5, 1987, or if
the laws of the state in which the association to be acquired is located
specifically permit associations to be acquired by state-chartered associations
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings associations). Also, the Director of the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
Indiana law permits federal and state savings association holding
companies with their home offices located outside of Indiana to acquire savings
associations whose home offices are located in Indiana and savings association
holding companies with their principal place of business in Indiana ("Indiana
Savings Association Holding Companies") upon receipt of approval by the Indiana
Department of Financial Institutions. Moreover, Indiana Savings Association
Holding Companies may acquire savings associations with their home offices
located outside of Indiana and savings association holding companies with their
principal place of business located outside of Indiana upon receipt of approval
by the Indiana Department of Financial Institutions.
No subsidiary savings association of a savings and loan holding company
may declare or pay a dividend on its permanent or nonwithdrawable stock unless
it first gives the Director of the OTS 30 days advance notice of such
declaration and payment. Any dividend declared during such period or without
giving notice shall be invalid.
Federal Home Loan Bank System
The Bank is a member of the FHLB of Indianapolis, which is one of 12
regional FHLBs. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from funds deposited by
savings associations and 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. All FHLB advances must be fully secured by sufficient collateral as
determined by the FHLB. The Federal Housing Finance Board ("FHFB"), an
independent agency, controls the FHLB System, including the FHLB of
Indianapolis.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Indianapolis in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts, or similar obligations at
the beginning of each year. At December 31, 1998, the Bank's investment in stock
of the FHLB of Indianapolis was $568,000. The FHLB imposes various limitations
on advances such as limiting the amount of certain types of real estate-related
collateral to 30% of a member's capital and limiting total advances to a member.
Interest rates charged for advances vary depending upon maturity, the cost of
funds to the FHLB of Indianapolis and the purpose of the borrowing.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. For the fiscal year ended December 31, 1998, dividends paid by
the FHLB of Indianapolis to the Bank totaled approximately $44,000, for an
annual rate of 8.01%.
Insurance of Deposits
Deposit Insurance. The FDIC is an independent federal agency that insures
the deposits, up to prescribed statutory limits, of banks and thrifts and
safeguards the safety and soundness of the banking and thrift industries. The
FDIC administers two separate insurance funds, the Bank Insurance Fund (the
"BIF") for commercial banks and state savings banks and the SAIF for savings
associations such as the Bank and banks that have acquired deposits from savings
associations. The FDIC is required to maintain designated levels of reserves in
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each fund. As of September 30, 1996, the reserves of the SAIF were below the
level required by law, primarily because a significant portion of the
assessments paid into the SAIF have been used to pay the cost of prior thrift
failures, while the reserves of the BIF met the level required by law in May,
1996. However, on September 30, 1996, provisions designed to recapitalize the
SAIF and eliminate the premium disparity between the BIF and SAIF were signed
into law. See "-- Assessments" below.
Assessments. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance for members of the BIF and members of the
SAIF. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to the target level
within a reasonable time and may decrease these rates if the target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary depending on the risk the
institution poses to its deposit insurance fund. An institution's risk level is
determined based on its capital level and the FDIC's level of supervisory
concern about the institution.
On September 30, 1996, President Clinton signed into law legislation which
included provisions designed to recapitalize the SAIF and eliminate the
significant premium disparity between the BIF and the SAIF. Under the new law,
the Bank was charged a one-time special assessment equal to $.657 per $100 in
assessable deposits at March 31, 1996. The Bank paid this one-time assessment of
$335,000 in November 1996. This special assessment significantly increased
noninterest expense and adversely affected the Holding Company's results of
Operations for the three months ended September 30, 1996. The assessment was
fully deductible for both federal and state income tax purposes. Beginning
January 1, 1997, the Bank's annual deposit insurance premium was reduced from
.23% to .0644% of total assessable deposits. BIF institutions pay lower
assessments than comparable SAIF institutions because BIF institutions pay only
20% of the rate being paid by SAIF institutions on their deposits with respect
to obligations issued by the federally-chartered corporation which provided some
of the financing to resolve the thrift crisis in the 1980s ("FICO"). The 1996
law also provides for the merger of the SAIF and the BIF by 1999, but not until
such time as bank and thrift charters are combined. Until the charters are
combined, savings associations with SAIF deposits may not transfer deposits into
the BIF system without paying various exit and entrance fees, and SAIF
institutions will continue to pay higher FICO assessments. Such exit and
entrance fees need not be paid if a SAIF institution converts to a bank charter
or merges with a bank, as long as the resulting bank continues to pay applicable
insurance assessments to the SAIF, and as long as certain other conditions are
met.
Savings Association Regulatory Capital
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. Core capital is generally defined as common shareholders' equity
(including retained income), noncumulative perpetual preferred stock and related
surplus, certain minority equity interests in subsidiaries, qualifying
supervisory goodwill, purchased mortgage servicing rights and purchased credit
card relationships (subject to certain limits) less nonqualifying intangibles.
Under the tangible capital requirement, a savings association must maintain
tangible capital (core capital less all intangible assets except purchased
mortgage servicing rights which may be included after making the above-noted
adjustment in an amount up to 100% of tangible capital) of at least 1.5% of
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total assets. Under the risk-based capital requirements, a minimum amount of
capital must be maintained by a savings association to account for the relative
risks inherent in the type and amount of assets held by the savings association.
The risk-based capital requirement requires a savings association to maintain
capital (defined generally for these purposes as core capital plus general
valuation allowances and permanent or maturing capital instruments such as
preferred stock and subordinated debt less assets required to be deducted) equal
to 8.0% of risk-weighted assets. Assets are ranked as to risk in one of four
categories (0-100%). A credit risk-free asset, such as cash, requires no
risk-based capital, while an asset with a significant credit risk, such as a
non-accrual loan, requires a risk factor of 100%. Moreover, a savings
association must deduct from capital, for purposes of meeting the core capital,
tangible capital and risk-based capital requirements, its entire investment in
and loans to a subsidiary engaged in activities not permissible for a national
bank (other than exclusively agency activities for its customers or mortgage
banking subsidiaries). At December 31, 1998, the Bank was in compliance with all
capital requirements imposed by law.
The OTS has promulgated a rule which sets forth the methodology for
calculating an interest rate risk component to be used by savings associations
in calculating regulatory capital. The OTS has delayed the implementation of
this rule, however. The rule requires savings associations with "above normal"
interest rate risk (institutions whose portfolio equity would decline in value
by more than 2% of assets in the event of a hypothetical 200-basis-point move in
interest rates) to maintain additional capital for interest rate risk under the
risk-based capital framework. If the OTS were to implement this regulation, the
Bank would not be required to maintain additional capital at December 31, 1998
under the terms of the OTS proposed interest rate risk rule. The OTS recently
updated its standards regarding management of interest rate risk to include
summary guidelines to assist savings associations in determining their exposures
to interest rate risk.
Prompt Corrective Regulatory Action
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FedICIA") requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to institutions that do
not meet minimum capital requirements. For these purposes, FedICIA establishes
five capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. At December 31,
1998, the Bank was categorized as "adequately capitalized," meaning that its
total risk-based capital ratio exceeded 8%, its Tier I risk-based capital ratio
exceeded 4%, its leverage ratio exceeded 4%, and it was not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure.
The FDIC may order savings associations which have insufficient capital to
take corrective actions. For example, a savings association which is categorized
as "undercapitalized" would be subject to growth limitations and would be
required to submit a capital restoration plan, and a holding company that
controls such a savings association would be required to guarantee that the
savings association complies with the restoration plan. "Significantly
undercapitalized" savings associations would be subject to additional
restrictions. Savings associations deemed by the FDIC to be "critically
undercapitalized" would be subject to the appointment of a receiver or
conservator.
Dividend Limitations
The OTS recently adopted a regulation, which becomes effective on April 1,
1999, that revises the current restrictions that apply to "capital
distributions" by savings associations. The amended regulation defines a capital
distribution as a distribution of cash or other property to a savings
association's owners, made on account of their ownership. This definition
includes a savings association's payment of cash dividends to shareholders, or
any payment by a savings association to repurchase, redeem, retire, or otherwise
acquire any of its shares or debt instruments that are included in total
capital, and any extension of credit to finance an affiliate's acquisition of
those shares or interests. The amended regulation does not apply to dividends
consisting only of a savings association's shares or rights to purchase such
shares.
The amended regulation exempts certain savings associations from the
current requirement that all savings associations file either a notice or an
application with the OTS before making any capital distribution. As revised, the
regulation requires a savings association to file an application for approval of
a proposed capital distribution with the OTS if the association is not eligible
for expedited treatment under OTS's application processing rules, or the total
amount of all capital distributions, including the proposed capital
distribution, for the applicable calendar year would exceed an amount equal to
the savings association's net income for that year to date plus the savings
association's retained net income for the preceding two years (the "retained net
income standard"). Based on the Bank's retained net income standard, the Bank
would be required to file a notice or application with the OTS before making any
capital distribution. A savings association must also file an application for
approval of a proposed capital distribution if, following the proposed
distribution, the association would not be at least adequately capitalized under
the OTS prompt corrective action regulations, or if the proposed distribution
would violate a prohibition contained in any applicable statute, regulation, or
agreement between the association and the OTS or the FDIC.
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The amended regulation requires a savings association to file a notice of
a proposed capital distribution in lieu of an application if the association or
the proposed capital distribution do not meet the conditions described above,
and: (1) the savings association will not be at least well capitalized (as
defined under the OTS prompt corrective action regulations) following the
capital distribution; (2) the capital distribution would reduce the amount of,
or retire any part of the savings association's common or preferred stock, or
retire any part of debt instruments such as notes or debentures included in the
association's capital under the OTS capital regulation; or (3) the savings
association is a subsidiary of a savings and loan holding company. Because the
Bank is a subsidiary of a savings and loan holding company, this latter
provision will require, at a minimum, that the Bank file a notice with the OTS
30 days before making any capital distributions to the Holding Company.
In addition to these regulatory restrictions, the Bank's plan of
conversion imposes additional limitations on the amount of capital distributions
it may make to the Holding Company. The plan of conversion by which the Bank
converted from the mutual to the stock form of ownership (the "Plan of
Conversion") requires the Bank to establish and maintain a liquidation account
for the benefit of Eligible Account Holders and Supplemental Eligible Account
Holders (as those terms are defined in the Plan of Conversion) and prohibits the
Bank from making capital distributions to the Holding Company if its net worth
would be reduced below the amount required for the liquidation account.
Liquidity
Federal law requires that savings associations maintain an average daily
balance of liquid assets in an amount not less than 4% or more than 10% of their
withdrawable accounts plus short-term borrowings. Liquid assets include cash,
certain time deposits, certain bankers' acceptances, specified U.S. government,
state or federal agency obligations, certain corporate debt securities,
commercial paper, certain mutual funds, certain mortgage-related securities, and
certain first-lien residential mortgage loans. The OTS recently amended its
regulation that implements this statutory liquidity requirement to reduce the
amount of liquid assets a savings association must hold from 5% of net
withdrawable accounts and short-term borrowings to 4%. The OTS also eliminated
the requirement that savings associations maintain short-term liquid assets
constituting at least 1% of their average daily balance of net withdrawable
deposit accounts and current borrowings. The revised OTS rule also permits
savings associations to calculate compliance with the liquidity requirement
based upon their average daily balance of liquid assets during each quarter
rather than during each month, as was required under the prior rule. The OTS may
impose monetary penalties on savings associations that fail to meet these
liquidity requirements. As of December 31, 1998, the Bank had liquid assets of
$16.3 million, and a regulatory liquidity ratio of 33.42%.
Limitations on Rates Paid for Deposits
Regulations promulgated by the FDIC pursuant to FedICIA limit the ability
of insured depository institutions to accept, renew or roll over deposits by
offering rates of interest which are significantly higher than the prevailing
rates of interest on deposits offered by other insured depository institutions
having the same type of charter in the institution's normal market area. Under
these regulations, "well-capitalized" depository institutions may accept, renew
or roll such deposits over without restriction, "adequately capitalized"
depository institutions may accept, renew or roll such deposits over with a
waiver from the FDIC (subject to certain restrictions on payments of rates) and
"undercapitalized" depository institutions may not accept, renew or roll such
deposits over. The regulations contemplate that the definitions of "well
capitalized," "adequately capitalized" and "undercapitalized" will be the same
as the definition adopted by the agencies to implement the corrective action
provisions of FedICIA. The Bank does not believe that these regulations will
have a materially adverse effect on its current operations.
Safety and Soundness Standards
On February 2, 1995, the federal banking agencies adopted final safety and
soundness standards for all insured depository institutions. The standards,
which were issued in the form of guidelines rather than regulations, relate to
internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
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capital becomes impaired. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan may result in enforcement
proceedings. On August 27, 1996, the federal banking agencies added asset
quality and earning standards to the safety and soundness guidelines.
Real Estate Lending Standards
OTS regulations require savings associations to establish and maintain
written internal real estate lending policies. Each association's lending
policies must be consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its
operations. The policies must establish loan portfolio diversification
standards; establish prudent underwriting standards, including loan-to-value
limits, that are clear and measurable; establish loan administration procedures
for the association's real estate portfolio; and establish documentation,
approval, and reporting requirements to monitor compliance with the
association's real estate lending policies. The association's written real
estate lending policies must be reviewed and approved by the association's Board
of Directors at least annually. Further, each association is expected to monitor
conditions in its real estate market to ensure that its lending policies
continue to be appropriate for current market conditions.
Loans to One Borrower
Under OTS regulations, the Bank may not make a loan or extend credit to a
single or related group of borrowers in excess of 15% of its unimpaired capital
and surplus. Additional amounts may be lent, not in excess of 10% of unimpaired
capital and surplus, if such loans or extensions of credit are fully secured by
readily marketable collateral, including certain debt and equity securities but
not including real estate. In some cases, a savings association may lend up to
30 percent of unimpaired capital and surplus to one borrower for purposes of
developing domestic residential housing, provided that the association meets its
regulatory capital requirements and the OTS authorizes the association to use
this expanded lending authority. At December 31, 1998, the Bank did not have any
loans or extensions of credit to a single or related group of borrowers in
excess of its lending limits.
Qualified Thrift Lender
Savings associations must meet a QTL test. If the Bank maintains an
appropriate level of qualified thrift investments ("QTIs") (primarily
residential mortgages and related investments, including certain
mortgage-related securities) and otherwise qualify as a QTL, the Bank will
continue to enjoy full borrowing privileges from the FHLB of Indianapolis. The
required percentage of QTIs is 65% of portfolio assets (defined as all assets
minus intangible assets, property used by the association in conducting its
business and liquid assets equal to 10% of total assets). Certain assets are
subject to a percentage limitation of 20% of portfolio assets. In addition,
savings associations may include shares of stock of the FHLBs, FNMA, and FHLMC
as QTIs. Compliance with the QTL test is determined on a monthly basis in nine
out of every twelve months. As of December 31, 1998, the Bank was in compliance
with its QTL requirement, with approximately 90.23% of its assets invested in
QTIs.
A savings association which fails to meet the QTL test must either convert
to a bank (but its deposit insurance assessments and payments will be those of
and paid to the SAIF) or be subject to the following penalties: (i) it may not
enter into any new activity except for those permissible for a national bank and
for a savings association; (ii) its branching activities shall be limited to
those of a national bank; (iii) it shall not be eligible for any new FHLB
advances; and (iv) it shall be bound by regulations applicable to national banks
respecting payment of dividends. Three years after failing the QTL test the
association must (i) dispose of any investment or activity not permissible for a
national bank and a savings association and (ii) repay all outstanding FHLB
advances. If such a savings association is controlled by a savings and loan
holding company, then such holding company must, within a prescribed time
period, become registered as a bank holding company and become subject to all
rules and regulations applicable to bank holding companies (including
restrictions as to the scope of permissible business activities).
Acquisitions or Dispositions and Branching
The Bank Holding Company Act specifically authorizes a bank holding
company, upon receipt of appropriate regulatory approvals, to acquire control of
any savings association or holding company thereof wherever located. Similarly,
a savings and loan holding company may acquire control of a bank. Moreover,
federal savings associations may acquire or be acquired by any insured
depository institution. Regulations promulgated by the FRB restrict the
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branching authority of savings associations acquired by bank holding companies.
Savings associations acquired by bank holding companies may be converted to
banks if they continue to pay SAIF premiums, but as such they become subject to
branching and activity restrictions applicable to banks.
Subject to certain exceptions, commonly-controlled banks and savings
associations must reimburse the FDIC for any losses suffered in connection with
a failed bank or savings association affiliate. Institutions are commonly
controlled if one is owned by another or if both are owned by the same holding
company. Such claims by the FDIC under this provision are subordinate to claims
of depositors, secured creditors, and holders of subordinated debt, other than
affiliates.
The OTS has adopted regulations which permit nationwide branching to the
extent permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets the
domestic building and loan test in ss.7701(a)(19) of the Code or the asset
composition test of ss.7701(c) of the Code. Branching that would result in the
formation of a multiple savings and loan holding company controlling savings
associations in more than one state is permitted if the law of the state in
which the savings association to be acquired is located specifically authorizes
acquisitions of its state-chartered associations by state-chartered associations
or their holding companies in the state where the acquiring association or
holding company is located. Moreover, Indiana banks and savings associations are
permitted to acquire other Indiana banks and savings associations and to
establish branches throughout Indiana.
Finally, The Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks
in other states and, with state consent and subject to certain limitations,
allows banks to acquire out-of-state branches either through merger or de novo
expansion. The State of Indiana enacted legislation establishing interstate
branching provisions for Indiana state-chartered banks consistent with those
established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana
Branching Law authorizes Indiana banks to branch interstate by merger or de novo
expansion, provided that such transactions are not permitted to out-of-state
banks unless the laws of their home states permit Indiana banks to merge or
establish de novo banks on a reciprocial basis. The Indiana Branching Law became
effective March 15, 1996.
Federal Reserve System
Under FRB regulations, the Bank is required to maintain reserves
against its transaction accounts (primarily checking and NOW accounts) and
non-personal money market deposit accounts. The effect of these reserve
requirements is to increase the Bank's cost of funds. The Bank is in compliance
with its reserve requirements. A federal savings association, like other
depository institutions maintaining reservable accounts, may borrow from the
Federal Reserve Bank "discount window," but the FRB's regulations require the
savings association to exhaust other reasonable alternative sources, including
borrowing from its regional FHLB, before borrowing from the Federal Reserve
Bank. Current law imposes certain limitations on the ability of undercapitalized
depository institutions to borrow from Federal Reserve Banks.
Limitations on Repurchase of Common Stock of Holding Company
OTS regulations currently provide that the Holding Company is
prohibited from repurchasing any of its shares within one year of the
Conversion, which occured on June 13, 1995. So long as the Bank continues to
meet certain capitalization requirements, the Holding Company may repurchase
shares in an open-market repurchase program (which cannot exceed 5% of its
outstanding shares in a twelve-month period) during the second and third years
following its Conversion by giving appropriate prior notice to the OTS. The OTS
has the authority to waive these restrictions under certain circumstances.
Unless repurchases are permitted under the foregoing regulations, the Holding
Company may not, for a period of three years from the date of the Conversion,
repurchase any of its capital stock from any person, except in the event of an
offer to purchase by the Holding Company on a pro rata basis from all of its
shareholders which is approved in advance by the OTS or except in exceptional
circumstances established to the satisfaction of the OTS.
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Under Indiana law, the Holding Company will be precluded from
repurchasing its equity securities if, after giving effect to such repurchase,
the Holding Company would be unable to pay its debts as they become due or the
Holding Company's assets would be less than its liabilities and obligations to
preferential shareholders.
Transactions with Affiliates
The Bank and the Holding Company are subject to Sections 22(h), 23A and
23B of the Federal Reserve Act, which restrict financial transactions between
banks and affiliated companies. The statute limits credit transactions between a
bank or savings association and its executive officers and its affiliates,
prescribes terms and conditions for bank affiliate transactions deemed to be
consistent with safe and sound banking practices, and restricts the types of
collateral security permitted in connection with a bank's extension of credit to
an affiliate.
Federal Securities Law
The shares of Common Stock of the Holding Company are registered with the
Securities and Exchange Commission (the "Commission") under the Securities
Exchange Act of 1934, as amended (the "1934 Act"). The Holding Company is
subject to the information, proxy solicitation, insider trading restrictions and
other requirements of the 1934 Act and the rules of the Commission thereunder.
Shares of Common Stock held by persons who are affiliates of the Holding
Company may not be resold without registration unless sold in accordance with
the resale restrictions of Rule 144 under the Securities Act of 1933, as amended
(the "1933 Act"). If the Holding Company meets the current public information
requirements under Rule 144, each affiliate of the Holding Company who complies
with the other conditions of Rule 144 (including those that require the
affiliate's sale to be aggregated with those of certain other persons) will be
able to sell in the public market, without registration, a number of shares not
to exceed, in any three-month period, the greater of (i) 1% of the outstanding
shares of the Holding Company or (ii) the average weekly volume of trading in
such shares during the preceding four calendar weeks.
Community Reinvestment Act Matters
Federal law requires that ratings of depository institutions under the
Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes
both a four-unit descriptive rating -- outstanding, satisfactory, needs to
improve, and substantial noncompliance -- and a written evaluation of an
institution's performance. Each FHLB is required to establish standards of
community investment or service that its members must maintain for continued
access to long-term advances from the FHLBs. The standards take into account a
member's performance under the CRA and its record of lending to first-time home
buyers. The OTS has designated the Bank's record of meeting community credit
needs as satisfactory.
TAXATION
Federal Taxation
Historically, savings associations, such as the Bank, have been
permitted to compute bad debt deductions using either the bank experience method
or the percentage of taxable income method. However, for years beginning after
December 31, 1995, the Bank is no longer able to use the percentage of taxable
income method of computing its allocable tax bad debt deduction. The Bank is
required to compute its allocable deduction using the experience method. As a
result of the repeal of the percentage of taxable income method, reserves taken
after 1987 using the percentage of taxable income method generally must be
included in future taxable income over a six-year period, although a two-year
delay may be permitted for institutions meeting a residential mortgage loan
origination test. In addition, the pre-1988 reserve, in which no deferred taxes
have been recorded, will not have to be recaptured into income unless (i) the
Bank no longer qualifies as a bank under the Code, or (ii) excess dividends are
paid out by the Bank.
Depending on the composition of its items of income and expense, a
savings institution may be subject to the alternative minimum tax. A savings
institution must pay an alternative minimum tax equal to the amount (if any) by
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which 20% of alternative minimum taxable income ("AMTI"), as reduced by an
exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular
taxable income increased or decreased by certain tax preferences and
adjustments, including depreciation deductions in excess of that allowable for
alternative minimum tax purposes, tax-exempt interest on most private activity
bonds issued after August 7, 1986 (reduced by any related interest expense
disallowed for regular tax purposes), the amount of the bad debt reserve
deduction claimed in excess of the deduction based on the experience method and
75% of the excess of adjusted current earnings over AMTI (before this adjustment
and before any alternative tax net operating loss). AMTI may be reduced only up
to 90% by net operating loss carryovers, but alternative minimum tax paid that
is attributable to most preferences (although not to post-August 7, 1986
tax-exempt interest) can be credited against regular tax due in later years.
State Taxation
The Bank is subject to Indiana's Financial Institutions Tax ("FIT"),
which is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted
gross income," for purposes of FIT, begins with taxable income as defined by
Section 63 of the Code and, thus, incorporates federal tax law to the extent
that it affects the computation of taxable income. Federal taxable income is
then adjusted by several Indiana modifications, the most notable of which is the
required addback of interest that is tax-free for federal income tax purposes.
Other applicable state taxes include generally applicable sales and use taxes
plus real and personal property taxes.
Item 2. Properties.
At December 31, 1998, the Bank and the Holding Company conducted
business from a single office at 723 East Broadway, Logansport, Indiana. The
following table provides certain information with respect to the Company's
office as of December 31, 1998:
<TABLE>
<CAPTION>
Total Deposits Net Book Value
at of Property,
Owned or Year December 31, Furniture & Approximate
Description and Address Leased Opened 1998 Fixtures Square Footage
---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
723 East Broadway Owned 1962 $70,011 $1,528 4,200
</TABLE>
Logansport, Indiana 46947
The Company owns computer and data processing equipment which is used for
transaction processing and accounting. The net book value of electronic data
processing equipment owned by the Company was $16,500 at December 31, 1998.
The Bank also has contracted for the data processing and reporting
services of the Intrieve Data Center in Cincinnati, Ohio. The cost of these data
processing services is approximately $10,000 per month.
Item 3. Legal Proceedings.
Neither the Holding Company nor the Bank is a party to any pending
legal proceedings, other than routine litigation incidental to its business.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the Holding Company's shareholders
during the quarter ended December 31, 1998.
Item 4.5. Executive Officers of the Registrant.
Presented below is certain information regarding the executive officers
of the Holding Company:
Name Position
------------------ -------------------------------------
Thomas G. Williams President and Chief Executive Officer
Charles J. Evans Vice President
Dottye Robeson Secretary/Treasurer
- 25 -
<PAGE>
Thomas G. Williams (age 66) has served as President of the Bank since
1971 and as President and Chief Executive Officer of the Holding Company since
its organization.
Charles J. Evans (age 53) has served as Vice President and Senior Loan
Officer of the Bank since 1980 and as Vice President of the Holding Company
since its organization.
Dottye Robeson (age 49) has served as Chief Financial Officer of the
Bank since 1994 and as Secretary/Treasurer of the Holding Company since its
organization. From 1990 to 1994, she served as Cashier, Vice President and Chief
Financial Officer of Bright National Bank in Flora, Indiana. From 1984 to 1990
she was employed by Smith, Thompson & Wihebrink (Logansport). She has been a
certified public accountant since 1987.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
Logansport Savings Bank, FSB converted from a mutual savings bank to a
stock form federal savings bank effective June 13, 1995 (the "Conversion") and
simultaneously formed a savings and loan holding company, Logansport Financial
Corp. The Holding Company's common stock, without par value ("Common Stock"), is
quoted on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ"), Small Cap Market, under the symbol "LOGN." The following
table sets forth the high and low bid prices and dividends paid per share of
Common Stock for the quarters indicated. Such over-the-counter quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission,
and may not necessarily represent actual transactions.
Quarter Ended High Bid Low Bid Dividends Declared
---------------------------------------------------------------------
March 31, 1997 $ 15 $ 11 1/8 $ .10
June 30, 1997 14 12 1/2 .10
September 30, 1997 16 13 1/4 .10
December 31, 1997 18 15 .10
March 31, 1998 18 1/8 16 .10
June 30, 1998 19 5/8 16 1/2 .11
September 30, 1998 17 1/4 13 .11
December 31, 1998 16 3/8 13 3/8 .11
As of February 12, 1999, there were 832 record holders of the Holding
Company's Common Stock. The Holding Company has established a policy of paying
regular periodic cash dividends, and the Board of Directors intends to continue
this policy, subject to the Holding Company's operating results, financial
condition, capital, income tax considerations, regulatory restrictions, and
other relevant factors.
Since the Holding Company has no independent operations other than
investment-related activities or other subsidiaries to generate income, its
ability to accumulate earnings for the payment of cash dividends to its
shareholders will be directly dependent upon the ability of the Bank to pay
dividends to the Holding Company.
Under OTS regulations, a converted savings institution may not declare
or pay a cash dividend if the effect would be to reduce its net worth below the
amount required for the liquidation account created at the time it converted. In
addition, under OTS regulations, the extent to which a savings institution may
make a "capital distribution," which includes, among other things, cash
dividends, will depend upon in which one of three categories, based upon levels
of capital, that savings institution is classified. The Bank is now and expects
to continue to be a "tier one institution" and therefore would be able to pay
cash dividends to the Holding Company during any calendar year up to 100% of its
net income during that calendar year plus the amount that would reduce by one
half its "surplus capital ratio" (the excess over its fully phased-in capital
requirements) at the beginning of the calendar year. See "Regulation -- Capital
Distributions Regulation." Prior notice of any dividend to be paid by the Bank
to the Holding Company will have to be given to the OTS.
- 26 -
<PAGE>
Income of the Bank appropriated to bad debt reserves and deducted for
federal income tax purposes is not available for payment of cash dividends or
other distributions to the Holding Company without the payment of federal income
taxes by the Bank on the amount of such income deemed removed from the reserves
at the then-current income tax rate. At December 31, 1998, approximately $1.7
million of the Bank's retained income represented bad debt deductions for which
no federal income tax provision had been made.
See "Taxation--Federal Taxation."
Unlike the Bank, generally there is no regulatory restriction on the
payment of dividends by the Holding Company. Indiana law, however, would
prohibit the Holding Company from paying a dividend if, after giving effect to
the payment of that dividend, the Holding Company would not be able to pay its
debts as they become due in the usual course of business or the Holding
Company's total assets would be less than the sum of its total liabilities plus
preferential rights of holders of preferred stock, if any.
Item 6. Selected Financial Data.
The information required by this item is incorporated by reference to
the material under the heading "Selected Consolidated Financial Data of
Logansport Financial Corp. and Subsidiary" on pages 4 and 5 of the Holding
Company's 1998 Shareholder Annual Report (the "Shareholder Annual Report").
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation.
The information required by this item is incorporated by reference to
pages 6 through 20 of the Shareholder Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is incorporated by reference to
pages 14 through 15 of the Shareholder Annual Report.
Item 8. Financial Statements and Supplementary Data.
The Holding Company's Consolidated Financial Statements and Notes
thereto contained on pages 23 through 52 in the Shareholder Annual Report are
incorporated herein by reference. The Company's unaudited quarterly results of
operations contained on page 52 in the Shareholder Annual Report are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item with respect to directors is
incorporated by reference to pages 2 through 4 of the Holding Company's Proxy
Statement for its 1999 Annual Shareholder Meeting (the "1999 Proxy Statement").
Information concerning the Holding Company's executive officers is included in
Item 4.5 in Part I of this report.
Item 11. Executive Compensation.
The information required by this item with respect to executive
compensation is incorporated by reference to pages 5 to 8 of the Holding
Company's 1999 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated by reference to
pages 2 and 3 of the 1999 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to
page 8 of the 1999 Proxy Statement.
- 27 -
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
<TABLE>
<CAPTION>
(a) List the following documents filed as part of the report:
<S> <C>
Financial Statements
Independent Auditor's Report (Grant Thornton LLP)............ See Shareholder Annual Report
Page 22
Consolidated Statements of Financial Condition
at December 31, 1998, and 1997........................... See Shareholder Annual Report
Page 23
Consolidated Statements of Earnings
for the Years Ended
December 31, 1998, 1997, and 1996........................ See Shareholder Annual Report
Page 24
Consolidated Statements of Comprehensive Income
for the Years Ended December 31, 1998, 1997 and 1996..... See Shareholder Annual Report
Page 25
Consolidated Statements of Changes
in Shareholders' Equity
for the Years Ended December 31, 1998, 1997 and 1996..... See Shareholder Annual Report
Page 26
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997, and 1996........................ See Shareholder Annual Report
Page 27
Notes to Consolidated Financial Statements................... See Shareholder Annual Report
Page 29
</TABLE>
(b) Reports on Form 8-K.
The Holding Company filed no reports on Form 8-K during the
fourth quarter of its 1998 fiscal year.
(c) The exhibits filed herewith or incorporated by reference
herein are set forth on the Exhibit Index on page E-1.
Included in those exhibits are Executive Compensation Plans
and Arrangements which are identified as Exhibits 10(1)
through 10(12).
(d) All schedules are omitted as the required information either
is not applicable or is included in the Consolidated Financial
Statements or related notes.
- 28 -
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on behalf of the undersigned, thereto duly authorized.
LOGANSPORT FINANCIAL CORP.
Date: March 15, 1999 By: /s/ Thomas G. Williams
-----------------------------------
Thomas G. Williams, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 15th day of March, 1999.
/s/ Thomas G. Williams
- --------------------------------------
Thomas G. Williams
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Dottye Robeson
- --------------------------------------
Dottye Robeson,
Secretary/Treasurer (Principal Financial and
Accounting Officer)
/s/ Norbert E. Adrian
- --------------------------------------
Norbert E. Adrian, Director
/s/ Charles J. Evans
- --------------------------------------
Charles J. Evans, Vice President and Director
/s/ Donald G. Pollitt
- --------------------------------------
Donald G. Pollitt, Director
/s/ Susanne S. Ridlen
- --------------------------------------
Susanne S. Ridlen, Director
/s/ William Tincher, Jr.
- --------------------------------------
William Tincher, Jr., Director
/s/ David Wihebrink
- --------------------------------------
David Wihebrink, Director
- 29 -
<PAGE>
EXHIBIT INDEX
Exhibit Page
3(1) The Articles of Incorporation of the Registrant are
incorporated by reference to Exhibit 3(1) to the
Registration Statement on Form S-1 (Registration No.
33-89788).
3(2) The Code of By-Laws of the Registrant are
incorporated by reference to Exhibit 3.2 to the Form
10-Q for the period ended June 30, 1997, filed with
the Commission on August 13, 1997 and resolutions
dated October 13, 1998, filed herewith.
10(1) The Registrant's Stock Option Plan is incorporated
by reference to Exhibit A to the Registrant's Proxy
Statement for its Annual Shareholder Meeting held on
April 9, 1996 and resolutions dated July 14, 1998,
amending the Registrant's Stock Option Plan are
incorporated by reference to Exhibit 10.1 to the
Form 10-Q for the period ended September 30, 1998,
filed with the Commission on November 12, 1998.
10(2) Logansport Savings Bank, FSB Recognition and
Retention Plan and Trust is incorporated by
reference to Exhibit B to the Registrant's Proxy
Statement for its Annual Shareholder Meeting held on
April 9, 1996, and resolutions dated July 14, 1998,
amending the Logansport Savings Bank, FSB
Recognition and Retention Plan and Trust are
incorporated by reference to Exhibit 10.2 to the
Form 10-Q for the period ended September 30, 1998,
filed with the Commission on November 12, 1998.
10(3) Logansport Savings Bank, FSB Employee Stock
Ownership Plan and Trust Agreement is incorporated
by reference to Exhibit 10(4) to the Registration
Statement on Form S-1 (Registration No. 33-89788).
10(4) Employment Agreement between Logansport Savings
Bank, FSB and Thomas G. Williams is incorporated by
reference to Exhibit 10(5) to the Registration
Statement on Form S-1 (Registration No. 33-89788).
10(5) Employment Agreement between Logansport Savings
Bank, FSB and Charles J. Evans is incorporated by
reference to Exhibit 10(6) to the Registration
Statement on Form S-1 (Registration No. 33-89788).
10(6) Director Deferred Compensation Agreement between
Logansport Savings Bank, FSB and Thomas G. Williams,
effective 4/1/92 is incorporated by reference to
Exhibit 10(7) to the Registration Statement on Form
S-1 (Registration No. 33-89788).
- 30 -
<PAGE>
10(7) Director Deferred Compensation Agreement between
Logansport Savings Bank, FSB and Don Pollitt,
effective 4/1/92 is incorporated by reference to
Exhibit 10(8) to the Registration Statement on Form
S-1 (Registration No. 33-89788).
10(8) Director Deferred Compensation Agreement between
Logansport Savings Bank, FSB and Norbert Adrian,
effective 4/1/92 is incorporated by reference to
Exhibit 10(9) to the Registration Statement on Form
S-1 (Registration No. 33-89788).
10(9) Director Deferred Compensation Agreement between
Logansport Savings Bank, FSB and Susanne Ridlen,
effective 4/1/92 is incorporated by reference to
Exhibit 10(10) to the Registration Statement on Form
S-1 (Registration No. 33-89788).
10(10)Director Deferred Compensation Agreement between
Logansport Savings Bank, FSB and David Wihebrink,
effective 4/1/92 is incorporated by reference to
Exhibit 10(11) to the Registration Statement on Form
S-1 (Registration No. 33-89788).
10(11) Executive Supplemental Retirement Income Agreement
between Logansport Savings Bank, FSB and Thomas G.
Williams, executed May 7, 1992 is incorporated by
reference to Exhibit 10(12) to the Registration
Statement on Form S-1 (Registration No. 33-89788).
10(12) Executive Supplemental Retirement Income Agreement
between Logansport Savings Bank, FSB and Charles J.
Evans, executed May 7, 1992 is incorporated by
reference to Exhibit 10(13) to the Registration
Statement on Form S-1 (Registration No. 33-89788).
13 1998 Shareholder Annual Report ______
21 Subsidiaries of the Registrant are incorporated by
reference to Exhibit 21 to the Registration
Statement on Form S-1 (Registration No. 33-89788).
23 Independent Auditor's Consent (Grant Thornton LLP) ______
27 Financial Data Schedule for the twelve month period
ended December 31, 1998 ______
Exhibit 3(2)
RESOLUTIONS OF THE
BOARD OF DIRECTORS OF
LOGANSPORT FINANCIAL CORP.
ON October 13, 1998
RESOLVED, that, pursuant to Section 1 of Article IV of the Code of By-Laws of
the Corporation, the number of directors on the Corporation's Board be increased
from 7 to 8.
[FRONT COVER]
LOGANSPORT FINANCIAL CORP.
[ARTWORK OF LOGANSPORT SAVINGS BANK BRANCH]
1998
SHAREHOLDER ANNUAL REPORT
<PAGE>
[ARTWORK APPEARS ON OUTSIDE MARGIN OF EVERY
PAGE OF THE 1998 SHAREHOLDER ANNUAL REPORT]
TABLE OF CONTENTS
Page
Directors and Officers 2
President's Message to Shareholders 3
Selected Consolidated Financial Data 4
Management's Discussion and Analysis 6
Independent Auditor's Report 22
Consolidated Statements of Financial Condition 23
Consolidated Statements of Earnings 24
Consolidated Statements of Comprehensive Income 25
Consolidated Statements of Changes in Stockholders' Equity 26
Consolidated Statements of Cash Flows 27
Notes to Consolidated Financial Statements 29
BUSINESS OF LOGANSPORT FINANCIAL
Logansport Financial Corp. (the "Company"), an Indiana corporation, became a
unitary savings and loan holding company upon the conversion of Logansport
Savings Bank, FSB (the "Bank") from a federal mutual savings bank to a federal
stock savings bank in June, 1995. The Company and the Bank conduct business from
a single office in Logansport, Cass County, Indiana. The Bank is and
historically has been among the top real estate mortgage lenders in Cass County
and is the oldest financial institution headquartered in Cass County. The Bank
offers a variety of retail deposit and lending services. The Company has no
other business activity than being the holding company for the Bank. The Company
is the sole shareholder of the Bank.
MISSION STATEMENT
"The Board of Directors, management and staff of Logansport Savings Bank are
dedicated to serving the needs of our customers, providing them with the best
possible service in an efficient, friendly, caring atmosphere. As a vital part
of this community, Logansport Savings Bank seeks to continue partnering with
local business and individuals. The customers, employees, and shareholders are
an integral part of Logansport Savings Bank and are best served if the Bank
remains an independent, locally controlled and operated, profitable financial
institution."
1
<PAGE>
Logansport Financial Corp.
DIRECTORS AND OFFICERS
DIRECTORS
Norbert E. Adrian (age 69) retired as the General Manager of Rockwell
International ("Rockwell") in 1984 after 12 years of service. Rockwell is
located in Logansport, Indiana, and manufactures custom automotive parts. Prior
to his employment with Rockwell, Mr. Adrian was employed by the accounting firm
of Bailey, Cord and Williams.
Donald G. Pollit (age 71) is the former Business and Promotion Manager of
the Logansport Pharos-Tribune and a former President of the Rolling Hills Golf
Course in Logansport, Indiana.
Susanne S. Ridlen (age 59) has served as an adjunct faculty member of
Indiana University Kokomo ("IUK") since 1969. Ms. Ridlen also currently serves
as a member of the Board of Directors of the Logansport Art Association and the
Cass County Children's Home in Logansport, Indiana.
William Tincher, Jr. (age 59) has served as Plant Manager for the Modine
Manufacturing Company ("Modine") since 1977. Modine is located in Logansport,
Indiana, and manufactures automotive cooling systems.
David G. Wihebrink (age 51) has served as Vice President and Chief
Financial Officer of TM Morris Manufacturing Co., Inc. ("Morris") since 1988.
Morris is located in Logansport, Indiana, and manufactures lead wire assemblies
and wiring harnesses and stampings. Prior to his employment with Morris, Mr.
Wihebrink was a member of the accounting firm Smith, Thompson & Wihebrink
(Logansport) for 15 years. Mr. Wihebrink also currently serves as a member of
the Board of Directors of the Neal House retirement home in Logansport, Indiana.
Thomas G. Williams (age 66) has served as President of Logansport Savings
Bank, FSB since 1971.
Charles J. Evans (age 53) has served as Vice President and Senior Loan
Officer of Logansport Savings Bank, FSB since 1980.
Brian J. Morrill (age 41) is the founder and President of Cass County Title
Company, Inc. The firm provides title insurance policies and real estate
searches for lenders, realtors, attorneys, and the general public. Prior to
founding Cass County Title Company, Morrill served for ten years as the
Executive Director of the Cass County Family YMCA in Logansport, Indiana.
Morrill has served on several community boards and is currently President-elect
of the Logansport/Cass County Chamber of Commerce.
LOGANSPORT FINANCIAL CORP. LOGANSPORT SAVINGS BANK, FSB
Officers Officers
THOMAS G. WILLIAMS THOMAS G. WILLIAMS
President and Chief President
Executive Officer
CHARLES J. EVANS
CHARLES J. EVANS Vice President
Vice President
DIANNE HOFFMAN
DOTTYE ROBESON Secretary/Treasurer
Secretary/Treasurer
DOTTYE ROBESON
Chief Financial Officer
2
<PAGE>
Dear Shareholder:
We are extremely pleased to share with you the achievements experienced by
Logansport Financial Corp. and its subsidiary, Logansport Savings Bank, during
1998. This was the most profitable year in our history and our total assets also
reached a record high, ending the year at just over $96 million. Our growth is
an important factor in our success. Total assets for the year ended December 31,
1997 were $86.1 million compared to $96.1 million at December 31, 1998. Total
loans increased by $9.4 million during the year and deposits also increased by
$9.4 million. Earnings for 1998 were $1,247,000 compared to $1,232,000 in 1997.
Basic earnings per share were $1.00 in 1998 compared to $.98 in 1997.
We are proud to report a 1.37% return on average assets and a 7.45% return on
average equity. Our excellent earnings performance and an additional repurchase
of 5% of our stock combined to improve the value of our stock to shareholders.
Since our conversion in 1995 we have repurchased 10% of our stock and each
repurchase enhances shareholder value. The Board of Directors also increased the
per share quarterly dividend to $.11 per share from $.10 during 1998. We have
paid quarterly dividends since our conversion to a stock institution and realize
that dividends are important to our shareholders.
We have been working hard for a couple of years to address all the concerns
related to the Y2K issue and we will continue to monitor the issue throughout
the year. We have upgraded all our computer equipment to be Y2K compliant and it
is currently installed and in use. Testing has been performed and additional
tests will be performed throughout the year to ensure that all systems perform
correctly.
During 1998 we initiated a new commercial loan department and now have on board
Mr. Allen Schieber, a local, well-known commercial loan officer. Allen has been
named a vice president of the Bank and is doing an excellent job in loan
production for the Bank. We expect this division to enhance the earnings of the
Bank as well as provide a much needed service to the community. We welcome Allen
to the Bank.
We have also named a new member to our Board of Directors, Mr. Brian Morrill.
Brian is well known in the community for his past work as director of the Cass
County YMCA. He is currently the owner of Cass County Title Company, Inc. He is
very active in the community and will be a great asset to the Company. Two of
our longtime directors will be retiring from the Board during 1999. Mr. Donald
Pollitt was elected to the Board of the Bank in 1961 and Mr. Norbert Adrian was
elected in 1979. Both have served for many years and have made valuable
contributions to the growth and strength of the Company as it is today. They
will be missed.
The expansion of our facility is progressing nicely. It is anticipated that we
will be moving into the new portion of the Bank by late February 1999. The
entire project, which includes remodeling the old portion of the facility and
additional outside work, will probably not be completed until late April. It is
going to be a beautiful building and one that we can be extremely proud of. We
are adding an additional 7,000 square feet and when completed the facility will
total 11,000 square feet. Three drive-up windows and an ATM machine are also
being added. This is a much needed improvement that will allow us to better
serve our customers. We invite you to visit us when the facility is complete.
Our thanks to you all for your continued support and also to our Directors,
Officers and employees for a very successful year.
Sincerely,
/s/ Thomas G. Williams
Thomas G. Williams
3
<PAGE>
Logansport Financial Corp.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth certain information concerning Logansport
Financial's consolidated financial position, results of operations and other
data at the dates and for the periods indicated.
<TABLE>
<CAPTION>
At December 31,
Statement of Financial Condition Data: 1998 1997 1996 1995 1994
------- ------- ------- ------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Total assets $96,085 $86,115 $77,668 $74,647 $59,351
Loans receivable, net 73,073 63,635 56,802 49,707 44,020
Mortgage-backed securities 8,129 9,932 6,674 7,468 1,229
Cash and cash equivalents 4,328 2,269 3,759 3,243 1,645
Investment securities 5,033 5,750 7,629 11,285 10,009
Certificates of deposit in other financial
institutions - 100 100 100 -
Deposits 70,011 60,595 57,396 52,461 51,202
Borrowings 8,375 8,025 3,400 1,000 1,000
Shareholders' equity - net 16,488 16,542 15,427 20,454 6,833
Year ended December 31,
Summary of Operating Results: 1998 1997 1996 1995 1994
------- ------- ------- ------- --------
(In thousands, except share data)
Interest income $6,579 $6,101 $5,653 $4,775 $4,031
Interest expense 3,476 3,115 2,719 2,468 2,043
------- ------- ------- ------- --------
Net interest income 3,103 2,986 2,934 2,307 1,988
Provision for loan losses 63 26 12 20 6
------- ------- ------- ------- --------
Net interest income after provision for
loan losses 3,040 2,960 2,922 2,287 1,982
Other income 285 170 82 179 79
General, administrative and other expense 1,322 1,170 1,584 1,032 957
------- ------- ------- ------- --------
Earnings before income taxes 2,003 1,960 1,420 1,434 1,104
Income taxes 756 728 507 526 370
------- ------- ------- ------- --------
Net earnings $1,247 $1,232 $ 913 $ 908 $ 734
====== ======= ======= ======= ========
Basic earnings per share $ 1.00 $ .98 $.69 N/A (1) N/A (1)
====== ======= ======= ======= ========
Diluted earnings per share $ .97 $ .95 $.69 N/A (1) N/A (1)
====== ======= ======= ======= ========
Cash dividends per share
Regular $ .43 $ .40 $.40 $ .20 N/A (1)
====== ======= ======= ======= ========
Special (2) N/A N/A $3.00 N/A N/A
====== ======= ======= ======= ========
</TABLE>
Footnotes on following page.
4
<PAGE>
Logansport Financial Corp.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA (CONTINUED)
<TABLE>
<CAPTION>
Year ended December 31,
Supplemental Data: 1998 1997 1996 1995 1994
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Return on assets (3) 1.37% 1.50% 1.18% 1.34% 1.27%
Return on equity (4) 7.45 7.69 4.76 6.33 10.78
Interest rate spread (5) 2.70 2.94 2.80 2.77 3.32
Net yield on interest earning assets (6) 3.61 3.86 3.99 3.64 3.67
General, administrative and other
expense to average assets 1.45 1.42 2.04 1.53 1.65
Net interest income to general,
administrative and other expense 234.72 255.21 185.23 223.55 207.73
Equity-to-assets (7) 17.16 19.21 19.86 27.40 11.51
Average interest-earning assets to
average interest-bearing liabilities 122.72 123.36 132.80 122.90 109.64
Non-performing assets to total assets .33 .62 .52 .42 .82
Non-performing loans to total loans .42 .67 .71 .63 .76
Loan loss allowance to total loans, net .38 .38 .41 .45 .47
Loan loss allowance to non-performing
loans 90.48 56.84 58.12 71.61 61.13
Dividend payout ratio 43.00 40.82 57.97(8) - (1) - (1)
Net charge-offs to average loans .03 .03 * * *
* Less than .01%
</TABLE>
(1) Information prior to 1996 is not meaningful.
(2) Special one-time cash distribution which qualified as a non-taxable return
of capital pursuant to an IRS Private Letter Ruling.
(3) Net earnings divided by average total assets.
(4) Net earnings divided by average total equity.
(5) Interest rate spread is calculated by subtracting combined weighted average
interest rate cost from combined weighted average interest rate earned for
the period indicated.
(6) Net interest income divided by average interest-earning assets.
(7) Total equity divided by assets.
(8) Excludes special one-time $3.00 per share cash distribution.
5
<PAGE>
Logansport Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company was formed as part of the conversion of the Bank from a federal
mutual savings bank to a federal stock savings bank which was completed June 13,
1995. Since the Company only recently began operations, certain of the financial
information presented herein prior to June 13, 1995 relates primarily to the
Bank, a wholly-owned subsidiary of the Company. All references to the Company at
or before June 13, 1995 refer to the Bank only. The Company has no activity
other than being the holding company for the Bank.
The principal business of savings associations, including the Bank, has
historically consisted of attracting deposits from the general public and making
loans secured by residential and other real estate. The Bank and all other
savings associations are significantly affected by prevailing economic
conditions, as well as government policies and regulations concerning, among
other things, monetary and fiscal affairs, housing and financial institutions.
Deposit flows are influenced by a number of factors, including interest rates
paid on competing investments, account maturities and level of personal income
and savings. In addition, deposit growth is affected by how customers perceive
the stability of the financial services industry amid various current events
such as regulatory changes, failures of other financial institutions and
financing of the deposit insurance fund. Lending activities are influenced by
the demand for and supply of housing lenders, the availability and cost of funds
and various other items. Sources of funds for lending activities of the Bank
include deposits, payments on loans, borrowings and income provided from
operations. The Bank's earnings are primarily dependent upon its net interest
income, the difference between interest income and interest expense.
Interest income is a function of the balances of loans and investments
outstanding during a given period and the yield earned on such loans and
investments. Interest expense is a function of the amount of deposits and
borrowings outstanding during the same period and interest rates paid on such
deposits and borrowings. The Bank's earnings are also affected by provisions for
loan losses, service charges, operating expenses and income taxes.
Forward-Looking Statements
In the following pages, management presents an analysis of the Company's
financial condition as of December 31, 1998, and the results of operations for
the year ended December 31, 1998, as compared to prior periods. In addition to
this historical information, the following discussion contains forward-looking
statements that involve risks and uncertainties. Economic circumstances, the
Company's operations and the Company's actual results could differ significantly
from those discussed in the forward-looking statements. Some of the factors that
could cause or contribute to such differences are discussed herein but also
include changes in the economy and interest rates in the nation and in the
Company's general market area.
Without limiting the foregoing, some of the forward-looking statements include
the following:
1. Management's establishment of an allowance for loan losses and its
statements regarding the adequacy of such allowance for loan losses.
2. Management's opinion as to the financial statement effect of recent
accounting pronouncements.
3. Management's opinion as to the effect of the Year 2000 on the Company's
information technology system.
6
<PAGE>
Logansport Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Changes in Financial Condition from December 31, 1997 to December 31, 1998
General
The Company's total assets were $96.1 million at December 31, 1998, an increase
of $10.0 million, or 11.6%, over the $86.1 million total at December 31, 1997.
The increase in assets was funded primarily through growth in deposits of $9.4
million and increases in borrowings of $500,000. The percentage of
interest-earning assets to total assets was 96.0% at December 31, 1998 and 1997.
At December 31, 1998, the total of securities was $13.2 million compared to
$15.7 million at December 31, 1997, a decrease of $2.5 million, or 16.1%. The
primary investments added to the portfolio were asset-backed securities and FHLB
callable fixed rate notes. At December 31, 1998, the Company held $571,000 of
corporate obligations all of which was debt of domestic corporations rated AA or
better by Moody's Investors Service, Inc. The Company had $300,000 of structured
FHLB notes in its investment portfolio at December 31, 1998.
Total loans increased by $9.4 million from December 31, 1997 to December 31,
1998, an increase of 14.8%. Most of the increase occurred in the one- to
four-family mortgages and consumer loans. One- to four-family mortgage loans
increased by $5.8 million, and consumer loans, by $3.1 million. The increase was
funded primarily by the increase in deposits and advances.
During 1997, the Company invested $1.5 million in a limited partnership which
will construct and manage residential real estate apartments for low and
moderate income residents. This investment reflects a 49.5% participation in the
partnership. The affordable housing project is expected to generate significant
tax credits for the Bank in future years, beginning in 1999. This investment
resulted in an increase to total assets of $1.5 million with a corresponding
increase in other liabilities. At December 31, 1998, the project was just
beginning to rent apartments; therefore, there was no material income or loss to
allocate to the Company.
Deposits increased by $9.4 million to $70.0 million at December 31, 1998 from
$60.6 million at December 31, 1997. Non-interest bearing deposits, NOW accounts,
passbook savings and money market savings increased by $5.5 million while
certificates of deposit increased by $3.9 million. Borrowings increased by
$500,000 during the year. At December 31, 1998, borrowings consisted of $7.0
million in FHLB advances and at December 31, 1997 borrowings consisted of $6.5
million in FHLB advances.
Shareholders' equity remained steady during 1998. Equity was used to fund
regular quarterly dividends and a 5% common stock buy back. Equity was increased
by the amortization of the Company's RRP, a recovery of unrealized losses on
available for sale securities and net earnings for the year ended December 31,
1998 of $1.2 million.
Comparison of Results of Operations for the Years Ended December 31, 1998 and
1997
Net earnings totaled $1.2 million for the year ended December 31, 1998, a
$15,000, or 1.2%, increase over the net earnings reported for 1997. The increase
in net earnings resulted primarily from a $117,000 increase in net interest
income and a $115,000 increase in other income, which were partially offset by a
$37,000 increase in the provision for losses on loans, a $152,000 increase in
general, administrative and other expense and a $28,000 increase in the
provision for federal income taxes.
7
<PAGE>
Logansport Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Years Ended December 31, 1998 and
1997 (continued)
Interest Income
The Company's total interest income was $6.6 million for the year ended December
31, 1998, compared to $6.1 million during 1997, an increase of $478,000, or
7.8%. The increase in average interest earning assets from $78.6 million in 1997
to $86.7 million in 1998 helped contribute to the increase. However, falling
loan rates contributed to a 21 basis point decrease in the average yield on
interest earning assets to 7.62% in 1998 compared to 7.83% in 1997. Average loan
yield, yield on mortgage-backed securities, investment securities and
interest-earning deposits all declined during the year.
Interest Expense
Interest expense increased by $361,000, or 11.6%, for the year ended December
31, 1998 compared to 1997. This increase was the result of an increase in the
average balance of interest-bearing liabilities by $7.0 million and the increase
in the average cost of these liabilities by 3 basis points, from 4.89% during
1997 to 4.92% in 1998. Local competition resulted in pressure to maintain
competitive rates, resulting in a continued decline in the interest rate spread.
Net Interest Income
Net interest income increased by $117,000 for 1998 to approximately $3.1 million
as compared with $3.0 million in 1997. The net yield on weighted average
interest-earning assets declined in 1998 to 3.61% from 3.86% in 1997.
Provision for Losses on Loans
The Company's provision for losses on loans for the year ended December 31, 1998
and 1997 was $63,000 and $26,000, respectively. A larger provision was made in
1998 due to the development of a commercial loan department. This provision and
the related increase in the allowance for loan losses were considered adequate
based on the degree of delinquencies in the loan portfolio and the Company's
loan loss history. There were no recoveries in 1998 and recoveries of $1,100 in
1997, and charge-offs of $23,000 in 1998 and $18,256 in 1997. The Bank also
recorded as a charitable donation an $8,000 property held in real estate
acquired through foreclosure during 1997 which the Bank donated to Habitat for
Humanity of Cass County, Indiana, Inc. The Company provides a general allowance
that reflects an estimate of inherent losses based upon the types and categories
of outstanding loans as well as problem loans. At December 31, 1998 and 1997,
the allowance was $285,000 and $245,000, respectively, a ratio of .38% of total
loans at each date. Non-performing loans at these dates were $315,000 and
$431,000, respectively. The ratio of allowance for loan losses to non-performing
loans increased from 56.8% at December 31, 1997 to 90.5% at December 31, 1998.
Based on management's review of the loan portfolio during these years, the
allowance for loan losses at December 31, 1998 and 1997 is considered adequate
to cover potential losses inherent in the loan portfolio.
Other Income
The Company's other income for the years ended December 31, 1998 and 1997 was
$285,000 and $170,000, respectively. The year ended December 31, 1997 included a
$24,000 recovery on investments previously written off. During 1997, the Company
recorded $50,000 of net losses on sales of securities. Structured notes of $2.0
million were sold at a net loss and the proceeds were reinvested in higher
yielding securities, primarily mortgage and other asset-backed securities.
During 1998, the Company had net gains of $4,000 on security sales. Service
charges on deposit accounts increased by $18,000 in 1998 compared to 1997.
8
<PAGE>
Logansport Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Years Ended December 31, 1998 and
1997 (continued)
General, Administrative and Other Expense
General, administrative and other expense totaled $1.3 million in 1998 compared
to $1.2 million in 1997, an increase of $152,000, or 13.0%. Employee
compensation and benefits increased by $95,000, or 14.6%, due primarily to a
general compensation increase and additional personnel. Data processing fees
increased $14,000, or 14.6%, for the year. Various other operating expenses
increased by $30,000. The majority of the increase was related to additional
operating costs associated with increased account volume, new services and
advertising.
Income Tax Expense
Income tax expense for the years ended December 31, 1998 and 1997 was $756,000
and $728,000, respectively. Pretax income increased only slightly in 1998 over
1997. This resulted in a corresponding increase in income tax expense. The
effective tax rates amounted to 37.7% and 37.1% for the years ended December 31,
1998 and 1997, respectively.
Comparison of Results of Operations for the Years Ended December 31, 1997 and
1996
Net earnings for the fiscal year ended December 31, 1997 totaled $1.2 million,
an increase of $319,000, or 34.9%, from the $913,000 in net earnings recorded in
1996. The increase was primarily attributable to an increase in net interest
income of $52,000 and a decrease in general, administrative and other expense of
$414,000, including the effects of the $335,000 charge in fiscal 1996 related to
the Savings Association Insurance Fund ("SAIF") recapitalization assessment,
which was partially offset by an increase of $221,000 in the provision for
income taxes.
Interest Income
The Company's total interest income was $6.1 million for the year ended December
31, 1997, compared to $5.7 million during 1996, an increase of $448,000, or
7.9%. The increase in average interest earning assets from $74.9 million in 1996
to $78.6 million in 1997, combined with stable loan rates, contributed to a 21
basis point increase in the average yield on interest earning assets to 7.83% in
1997 compared to 7.62% in 1996. While average loan yield remained constant,
yield on mortgage-backed securities, investment securities and interest-earning
deposits all improved during the year.
Interest Expense
Interest expense increased by $396,000, or 14.6%, for the year ended December
31, 1997 compared to 1996. This increase was the result of an increase in the
average balance of interest-bearing liabilities of $7.3 million, or 13.0%, and
the increase in the average cost of these liabilities by 7 basis points, from
4.82% during 1996 to 4.89% in 1997. Local competition resulted in pressure to
maintain competitive rates, however, the interest rate spread improved in 1997.
Net Interest Income
Net interest income increased by $52,000 for 1997 to approximately $3.0 million
as compared with $2.9 million in 1996. Net yield on weighted average
interest-earning assets declined in 1997 to 3.86% from 3.99% in 1996.
9
<PAGE>
Logansport Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Fiscal Years Ended December 31, 1997
and 1996 (continued)
Provision for Losses on Loans
The Company's provision for losses on loans for the year ended December 31, 1997
and 1996 was $26,000 and $12,000, respectively. This provision and the related
increase in the allowance for loan losses were considered adequate based on the
degree of delinquencies in the loan portfolio and the Company's loan loss
history. There were recoveries of $1,100 in 1997 and $1,270 in 1996, and
charge-offs of $18,256 in 1997; there were no charge-offs in 1996. The Bank also
recorded as a charitable donation an $8,000 property held in real estate
acquired through foreclosure during 1997 which the Bank donated to Habitat for
Humanity of Cass County, Indiana, Inc. The Company provides a general allowance
that reflects an estimate of inherent losses based upon the types and categories
of outstanding loans as well as problem loans. At December 31, 1997 and 1996,
the allowance was $245,000 and $236,000, respectively, a ratio of 0.38% and
0.41% of total loans at each date. Non-performing loans at these dates were
$431,000 and $406,000, respectively. The ratio of allowance for loan losses to
non-performing loans decreased from 58.1% at December 31, 1996 to 56.8% at
December 31, 1997. Based on management's review of the loan portfolio during
these years, the allowance for loan losses at December 31, 1997 and 1996 is
considered to be adequate to cover potential losses inherent in the loan
portfolio.
Other Income
The Company's other income for the years ended December 31, 1997 and 1996 was
$170,000 and $82,000, respectively. The year ended December 31, 1996 included a
$17,000 recovery on investments previously written off while 1997 included
$24,000 of additional recovery. During 1997, the Company recorded $50,000 of net
losses on sales of securities. Structured notes of $2.0 million were sold at a
net loss and the proceeds were reinvested in higher yielding securities,
primarily mortgage and other asset-backed securities. This strategy resulted in
a higher yield in mortgage and other asset-backed securities for the year and a
corresponding increase in interest income. Service charges on deposit accounts
increased by $21,000 in 1997 compared to 1996.
General, Administrative and Other Expense
General, administrative and other expense totaled $1.2 million in 1997 compared
to $1.6 million in 1996, a decrease of $414,000, or 26.1%. Employee compensation
and benefits decreased by $12,000, or 1.8%, due primarily to a general increase
in deferred loan origination costs year-to-year. Deposit insurance costs
decreased by $412,000 due to the absence of the one-time SAIF recapitalization
assessment in 1997 and the new FDIC premium rates. Data processing fees
increased $5,000, or 5.5%, for the year. Various other operating expenses
increased by $8,000. The majority of the increase was related to additional
operating costs associated with increased account volume, new services and
advertising.
Income Tax Expense
Income tax expense for the years ended December 31, 1997 and 1996 was $728,000
and $507,000, respectively. Pretax income increased significantly in 1997 over
1996, mainly due to the SAIF assessment in 1996. This resulted in a
corresponding increase in income tax expense. The effective tax rates amounted
to 37.1% and 35.7% for the years ended December 31, 1997 and 1996, respectively.
10
<PAGE>
AVERAGE BALANCE, YIELD, RATE AND VOLUME DATA
The following table presents for the periods indicated the month-end average
balances of each category of the Company's interest-earning assets and
interest-bearing liabilities, and the average yields earned and interest rates
paid on such balances. Such yields and costs are determined by dividing income
or expense by the average balance of assets or liabilities, respectively, for
the periods presented.
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
---------------------------------- ---------------------------- --------------------------------
Average Interest Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate balance paid rate
------- ---- ----- ----------- ---- ---- ------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits $ 4,699 $ 232 4.93% $ 3,398 $ 179 5.27% $ 3,192 $ 160 5.01%
Mortgage- and other asset-
backed securities (1) 9,327 522 5.60 8,380 559 6.67 7,916 510 6.44
Other investment securities (1) 4,337 277 6.39 6,715 444 6.61 9,965 587 5.89
Loans receivable (2) 67,793 5,535 8.16 59,606 4,932 8.27 53,409 4,421 8.28
Stock in FHLB of Indianapolis 549 44 8.01 466 37 7.94 376 29 7.71
-------- ------- -------- ------- -------- -------
Total interest-earning assets 86,705 6,610 7.62 78,565 6,151 7.83 74,858 5,707 7.62
Non-interest-earning assets 4,562 3,650 2,709
------- ------- -------
Total assets $91,267 $82,215 $77,567
====== ====== ======
Interest-bearing liabilities:
Savings accounts $ 3,258 98 3.01 $ 3,347 101 3.02 $ 3,298 100 3.03
NOW and money market accounts 23,185 930 4.01 20,169 823 4.08 18,751 769 4.10
Certificates of deposit 37,581 2,069 5.50 35,636 1,940 5.44 32,432 1,744 5.38
Borrowings 6,628 379 5.72 4,535 251 5.53 1,889 106 5.61
------- ------ ------- ------ ------- ------
Total interest-bearing
liabilities 70,652 3,476 4.92 63,687 3,115 4.89 56,370 2,719 4.82
----- -------- ----- -------- ----- --------
Other liabilities 3,862 2,506 2,016
------- ------- -------
Total liabilities 74,514 66,193 58,386
Shareholders' equity 16,753 16,022 19,181
------ ------ ------
Total liabilities and
shareholders' equity $91,267 $82,215 $77,567
====== ====== ======
Net interest-earning assets $16,053 $14,878 $18,488
====== ====== ======
Net interest income $3,134 $3,036 $2,988
===== ===== =====
Interest rate spread (3) 2.70% 2.94% 2.80%
======== ==== ====
Net yield on weighted average
interest-earning assets (4) 3.61% 3.86% 3.99%
======== ==== ====
Average interest-earning assets
to average interest-bearing liabilities 122.72% 123.36% 132.80%
======== ====== ======
Adjustment of interest on tax-exempt
securities to a tax-equivalent basis $ 31 $ 50 $ 54
</TABLE>
- --------------------------
(1) Includes securities available for sale at amortized cost prior to SFAS No.
115 adjustments.
(2) Total loans less loans in process.
(3) Interest rate spread is calculated by subtracting weighted average interest
rate cost from weighted average interest rate yield for the period
indicated.
(4) The net yield on weighted average interest-earning assets is calculated by
dividing net interest income by weighted average interest-earning assets
for the period indicated.
11
<PAGE>
Logansport Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Rate/Volume Table
The table below describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected the Company's interest income and expense during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (change in volume multiplied by prior year rate), (ii) changes in rate
(change in rate multiplied by prior year volume) and (iii) total changes in rate
and volume. The combined effects of changes in both volume and rate, which
cannot be separately identified, have been allocated proportionately to the
change due to volume and the change due to rate.
<TABLE>
<CAPTION>
Year ended December 31,
1998 vs. 1997 1997 vs. 1996
Increase Increase
(decrease) (decrease)
due to due to
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Interest-earning deposits $ 65 $ (12) $ 53 $ 8 $ 11 $ 19
Mortgage-backed securities 59 (96) (37) 27 22 49
Investment securities (152) (15) (167) (224) 81 (143)
Loans receivable 670 (67) 603 503 8 511
Stock in FHLB of Indianapolis 7 - 7 7 1 8
---- ------ ---- ----- ----- -----
Total interest-earning assets 649 (190) 459 321 123 444
Interest-bearing liabilities:
Savings accounts (2) (1) (3) 1 - 1
NOW and money market accounts 121 (14) 107 58 (4) 54
Certificates of deposit 108 21 129 172 24 196
Borrowings 119 9 128 144 1 145
---- ------ ---- ----- ----- -----
Total interest-bearing liabilities 346 15 361 375 21 396
---- ------ ---- ----- ----- -----
Change in net interest income
(fully taxable equivalent basis) 303 (205) 98 (54) 102 48
Tax equivalent adjustment 16 3 19 3 1 4
---- ------ ---- ----- ----- -----
Change in net interest income $319 $(202) $117 $ (51) $103 $ 52
=== ==== === ==== === ====
</TABLE>
12
<PAGE>
Logansport Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Rate/Volume Table (continued)
The Company's results of operations have been determined primarily by net
interest income and, to a lesser extent, fee income, miscellaneous income and
general and administrative expenses. Net interest income is determined by the
interest rate spread between the yields earned on interest-earning assets and
the rates paid on interest-bearing liabilities and by the relative amounts of
interest-earning assets and interest-bearing liabilities.
The following table sets forth the weighted average effective interest rate
earned by the Company on its loan and investment portfolio, the weighted average
effective costs of the Company's deposits and borrowings, the interest rate
spread of the Company, and the net yield on weighted average interest-earning
assets for the periods and as of the date shown. Average balances are based on
month-end average balances.
<TABLE>
<CAPTION>
At December 31, Year Ended December 31,
1998 1998 1997 1996
Weighted average interest rate earned on:
<S> <C> <C> <C> <C>
Interest-earning deposits 4.43% 4.93% 5.27% 5.01%
Mortgage-backed securities 5.91 5.60 6.67 6.44
Investment securities 6.13 6.39 6.61 5.89
Loans receivable 7.99 8.16 8.27 8.28
Stock in FHLB of Indianapolis 8.06 8.01 7.94 7.71
Total interest-earning assets 7.55 7.62 7.83 7.62
Weighted average interest rate cost of:
Savings accounts 2.98 3.01 3.02 3.03
NOW and money market accounts 3.62 4.01 4.08 4.10
Certificates of deposit 5.40 5.50 5.44 5.38
Borrowings 5.24 5.72 5.53 5.61
Total interest-bearing liabilities 4.68 4.92 4.89 4.82
Interest rate spread (1) 2.87 2.70 2.94 2.80
Net yield on weighted average
interest-earning assets (2) N/A 3.61 3.86 3.99
</TABLE>
(1) Interest rate spread is calculated by subtracting weighted average
interest rate cost from weighted average interest rate earned for the
period indicated. Interest rate spread figures must be considered in
light of the relationship between the amounts of interest-earning assets
and interest-bearing liabilities. Since the Company's interest-earning
assets exceeded its interest-bearing liabilities for each of the three
years shown above, a positive interest rate spread resulted in net
interest income.
(2) The net yield on weighted average interest-earning assets is calculated
by dividing net interest income by weighted average interest-earning
assets for the period indicated. No net yield percentage is presented at
December 31, 1998, because the computation of net yield is applicable
only over a period rather than at a specific date.
13
<PAGE>
Logansport Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Asset/Liability Management
The Bank, like other savings associations, is subject to interest rate risk to
the degree that its interest-bearing liabilities, primarily deposits with short-
and medium-term maturities, mature or reprice at different rates than its
interest-earning assets. Management of the Bank believes it is critical to
manage the relationship between interest rates and the effect on the Bank's net
portfolio value ("NPV"). Generally, NPV is the discounted present value of the
difference between incoming cash flows on interest-earning and other assets and
outgoing cash flows on interest-bearing liabilities. Management of the Bank's
assets and liabilities is done within the context of the marketplace, regulatory
limitations and within limits established by the Board of Directors on the
amount of change in NPV which is acceptable given certain interest rate changes.
The Office of Thrift Supervision ("OTS") issued a regulation, effective January
1, 1994, which uses a net market value methodology to measure the interest rate
risk exposure of thrift institutions. Under OTS regulations, an institution's
"normal" level of interest rate risk in the event of an assumed change in
interest rates is a decrease in the institution's NPV in an amount not exceeding
2% of the present value of its assets. Thrift institutions with over $300
million in assets or less than a 12% risk-based capital ratio are required to
file OTS Schedule CMR. Data from Schedule CMR is used by the OTS to calculate
changes in NPV (and the related "normal" level of interest rate risk) based upon
certain interest rate changes (discussed below). Institutions which do not meet
either of the filing requirements are not required to file OTS Schedule CMR, but
may do so voluntarily. The Bank does not currently meet either of these
requirements, but it does voluntarily file Schedule CMR. Presented below, as of
September 30, 1998 (the latest available date) and December 31, 1997, is an
analysis performed by the OTS of the Bank's interest rate risk as measured by
changes in NPV for instantaneous and sustained parallel shifts in the yield
curve, in 100 basis point increments, up and down 400 basis points and in
accordance with OTS regulations. As illustrated in the table, the Bank's NPV is
more sensitive to rising rates than declining rates. This occurs principally
because, as rates rise, the market value of the Bank's investments,
adjustable-rate mortgage loans (many of which have maximum per year adjustments
of 1%), fixed-rate loans and mortgage-backed securities declines due to the rate
increases. The value of the Bank's deposits and borrowings change in
approximately the same proportion in rising or falling rate scenarios.
<TABLE>
<CAPTION>
September 30, 1998
Change in
interest rate Net Portfolio Value NPV as % of PV of Assets
(Basis Points) $ Amount $ Change % Change NPV Ratio Change
- -------------- -------- -------- -------- --------- ------
(In thousands)
<S> <C> <C> <C> <C> <C>
+400 $12,526 $(4,582) (27)% 14.33% (394 bp)
+300 14,099 (3,009) (18) 15.77 (250 bp)
+200 15,429 (1,679) (10) 16.93 (134 bp)
+100 16,394 (714) (4) 17.72 (55 bp)
- 17,108 - - 18.27 -
-100 17,721 613 4 18.70 43 bp
-200 18,527 1,419 8 19.29 102 bp
-300 19,610 2,502 15 20.09 182 bp
-400 20,852 3,744 22 20.99 272 bp
</TABLE>
14
<PAGE>
Logansport Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Asset and Liability Management (continued)
<TABLE>
<CAPTION>
December 31, 1997
Change in
interest rate Net Portfolio Value NPV as % of PV of Assets
(Basis Points) $ Amount $ Change % Change NPV Ratio Change
- -------------- -------- -------- -------- --------- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
+400 $11,904 $(6,160) (34)% 14.85% (579 bp)
+300 13,766 (4,298) (24) 16.73 (391 bp)
+200 15,512 (2,552) (14) 18.40 (224 bp)
+100 16,991 (1,073) (6) 19.73 (91 bp)
- 18,064 - - 20.64 -
-100 18,830 766 4 21.25 61 bp
-200 19,514 1,450 8 21.76 112 bp
-300 20,468 2,404 13 22.49 185 bp
-400 21,701 3,637 20 23.43 279 bp
</TABLE>
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods of repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such a adjustable-rate loans, have features which
restrict changes in interest rates on a short-term basis and over the life of
the assets. Further, in the event of a change in interest rates, expected rates
of prepayment on loans and early withdrawal from certificates could likely
deviate significantly from those assumed in calculating the table.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, proceeds from principal and
interest payments of loans, and proceeds from maturing securities. While
maturities and scheduled amortization of loans are a predictable source of
funds, deposit flows and mortgage prepayments are generally influenced by
general interest rates, economic conditions and competition.
The primary investing activity of the Company is the origination of mortgage
loans and the purchase of investment securities. During the years ended December
31, 1998, 1997 and 1996, the Company originated mortgage loans in the amounts of
$16.3 million, $13.5 million and $13.2 million, respectively. The Company
originated consumer loans of $10.5 million, $6.2 million and $6.1 million,
respectively. The Company purchased loans in the amount of $350,000 in 1998. The
Company purchased no loans, excluding commercial paper, in 1997, and purchased
loans, excluding commercial paper of $1.0 million in 1996. Loan repayments,
excluding commercial paper, totaled $17.6 million, $12.8 million and $11.4
million for 1998, 1997 and 1996, respectively.
15
<PAGE>
Logansport Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (continued)
During the years ended December 31, 1998, 1997 and 1996, the Company purchased
investment securities in the amounts of $6.1 million, $7.2 million and $8.0
million, respectively. Sales or maturities of such securities held by the
Company and payments on mortgage-backed or other asset-backed securities were
$8.6 million, $6.1 million and $13.2 million for 1998, 1997 and 1996,
respectively.
Deposits grew by $3.2 million from December 31, 1996 to December 31, 1997, and
by $9.4 million from December 31, 1997 to December 31, 1998.
Cash and cash equivalents increased by $2.1 million from December 31, 1997 to
December 31, 1998.
The Company had outstanding loan commitments including undisbursed loans in
process and standby letters of credit totaling $5.8 million and $3.1 million, at
December 31, 1998 and 1997, respectively. The Company anticipates that it will
have sufficient funds available to meet its current loan commitments.
Certificates of deposit which are scheduled to mature in one year or less from
December 31, 1998 and 1997 totaled $22.3 million and $22.5 million,
respectively. Based upon historical deposit flow data, the Company's competitive
pricing in its market and management's experience, management believes that a
significant portion of such deposits will remain with the Company.
Liquidity management is both a daily and long-term function of the Company's
management strategy. In the event that the Company should require funds beyond
its ability to generate them internally, additional funds are available through
the use of FHLB advances, and also may be available through sales of securities,
although no sales of securities are planned. At December 31, 1998 and 1997, the
Company had outstanding FHLB advances of $7.0 million and $6.5 million,
respectively.
For each calendar month, the Bank is required to maintain an average daily
balance of liquid assets (cash, certain time deposits, bankers' acceptances,
specified United States Government, state or federal agency obligations, shares
of certain mutual funds and certain corporate debt securities and commercial
paper) equal to an amount not less than a specified percentage of its net
withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4% to 10% depending upon economic conditions and the savings flows of
member institutions. The OTS recently reduced the level of liquid assets that
must be held by a savings association from 5% to 4% of the association's net
withdrawable accounts plus short-term borrowings based upon the average daily
balance of such liquid assets for each quarter of the association's fiscal year.
The OTS may impose monetary penalties upon savings associations that fail to
comply with those liquidity requirements. As of December 31, 1998, the Bank had
liquid assets of $16.3 million, and a regulatory liquidity ratio of 33.42%.
16
<PAGE>
Logansport Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (continued)
Pursuant to OTS capital regulations, savings associations must currently meet a
1.5% tangible capital requirement, a 3% leverage ratio (or core capital)
requirement, and a total risk-based capital to risk-weighted assets ratio of 8%.
At December 31, 1998, the Bank's tangible capital ratio as 16.9%, its leverage
ratio was 16.9%, and its risk-based capital to risk-weighted assets ratio was
30.1%. Therefore, at December 31, 1998, the Bank's capital significantly
exceeded all of the capital requirements currently in effect. The following
table provides the minimum regulatory capital requirements and the Bank's
capital ratios as of December 31, 1998.
<TABLE>
<CAPTION>
OTS Requirement The Bank's Capital Level
% of % of Amount
Assets Amount Assets (1) Amount of excess
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible capital 1.5% $1,436 16.9% $16,263 $14,827
Core capital (2) 3.0 2,873 16.9 16,263 13,390
Risk-based capital 8.0 4,398 30.1 16,548 (3) 12,150
</TABLE>
(1) Tangible and core capital levels are shown as a percentage of total assets;
risk-based capital levels are shown as a percentage of risk-weighted
assets.
(2) The OTS has proposed and is expected to adopt a core capital requirement
for savings associations comparable to that recently adopted by the
Comptroller of the Currency for national banks. The new regulation, as
proposed, would require at least 3% of total adjusted assets for savings
associations that received the highest supervisory rating for safety and
soundness, and 4% to 5% for all other savings associations. The final form
of such new OTS core capital requirement may differ from that which has
been proposed. The Bank expects to be in compliance with such new
requirements.
(3) The Bank's risk-based capital includes $285,000 of general valuation
allowances.
As of December 31, 1998, management is not aware of any current recommendations
by regulatory authorities which, if they were to be implemented, would have, or
are reasonably likely to have, a material adverse effect on the Bank's
liquidity, capital resources or results of operations.
Impact of Inflation
The audited consolidated financial statements presented elsewhere herein have
been prepared in accordance with generally accepted accounting principles. These
principles require the measurement of financial position and operating results
in terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation.
17
<PAGE>
Logansport Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Effects of Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
that provides accounting guidance on transfers of financial assets, servicing of
financial assets, and extinguishment of liabilities. SFAS No. 125 introduces an
approach to accounting for transfers of financial assets that provides a means
of dealing with more complex transactions in which the seller disposes of only a
partial interest in the assets, retains rights or obligations, makes use of
special purpose entities in the transaction, or otherwise has continuing
involvement with the transferred assets. The new accounting method, the
financial components approach, provides that the carrying amount of the
financial assets transferred be allocated to components of the transaction based
on their relative fair values. SFAS No. 125 provides criteria for determining
whether control of assets has been relinquished and whether a sale has occurred.
If the transfer does not qualify as a sale, it is accounted for as a secured
borrowing. Transactions subject to the provisions of SFAS No. 125 include, among
others, transfers involving repurchase agreements, securitizations of financial
assets, loan participations, factoring arrangements, and transfers of
receivables with recourse.
An entity that undertakes an obligation to service financial assets recognizes
either a servicing asset or liability for the servicing contract (unless related
to a securitization of assets, and all the securitized assets are retained and
classified as held-to-maturity). A servicing asset or liability that is
purchased or assumed is initially recognized at its fair value. Servicing assets
and liabilities are amortized in proportion to and over the period of estimated
net servicing income or net servicing loss and are subject to subsequent
assessments for impairment based on fair value.
SFAS No. 125 provides that a liability is removed from the balance sheet only if
the debtor either pays the creditor and is relieved of its obligation for the
liability or is legally released from being the primary obligor.
SFAS No. 125 is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1997, and is to be
applied prospectively. Earlier or retroactive application is not permitted.
Management adopted SFAS No. 125 during 1998, as required, without material
effect on the Company's consolidated financial position or results of
operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. It does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in that
financial statement.
18
<PAGE>
Logansport Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Effects of Recent Accounting Pronouncements (continued)
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. Management adopted SFAS No. 130
effective January 1, 1998, as required, without material effect on the Company's
financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 significantly changes the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about reportable segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 uses a
"management approach" to disclose financial and descriptive information about an
enterprise's reportable operating segments which is based on reporting
information the way that management organizes the segments within the enterprise
for making operating decisions and assessing performance. For many enterprises,
the management approach will likely result in more segments being reported. In
addition, SFAS No. 131 requires significantly more information to be disclosed
for each reportable segment than is presently being reported in annual financial
statements and requires that selected information be reported in interim
financial statements. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997. Management adopted SFAS No. 131
effective January 1, 1998, as required, without material effect on the Company's
financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires entities to recognize all
derivatives in their financial statements as either assets or liabilities
measured at fair value. SFAS No. 133 also specifies new methods of accounting
for hedging transactions, prescribes the items and transactions that may be
hedged, and specifies detailed criteria to be met to qualify for hedge
accounting.
The definition of a derivative financial instrument is complex, but in general,
it is an instrument with one or more underlyings, such as an interest rate or
foreign exchange rate, that is applied to a notional amount, such as an amount
of currency, to determine the settlement amount(s). It generally requires no
significant initial investment and can be settled net or by delivery of an asset
that is readily convertible to cash. SFAS No. 133 applies to derivatives
embedded in other contracts, unless the underlying of the embedded derivative is
clearly and closely related to the host contract.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. On
adoption, entities are permitted to transfer held-to-maturity debt securities to
the available-for-sale or trading category without calling into question their
intent to hold other debt securities to maturity in the future. SFAS No. 133 is
not expected to have a material impact on the Company's financial position or
results of operations.
19
<PAGE>
Logansport Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Effects of Recent Accounting Pronouncements (continued)
The foregoing discussion of the effects of recent accounting pronouncements
contains forward-looking statements that involve risks and uncertainties.
Changes in economic circumstances, interest rates or the balance of loan
servicing rights sold and retained by the Company could cause the effects of the
accounting pronouncements to differ from management's foregoing assessment.
Year 2000 Compliance Issues
As with all providers of financial services, the Company's operations are
heavily dependent on information technology systems. The Bank is addressing the
potential problems associated with the possibility that the computers that
control or operate the Bank's information technology systems and infrastructure
may not be programmed to read four-digit date codes and, upon arrival of the
year 2000, may recognize the two-digit code "00" as the year 1900, causing
systems to fail to function or to generate erroneous data. The Bank is working
with the companies that supply or service its information technology systems to
identify and remedy any year 2000 related problems.
Management and the Board of Directors recognize and understand Year 2000 ("Y2K")
risks, are active in overseeing corrective efforts, and are ensuring that all
necessary resources are available to address the problem. The awareness and
assessment phases of the Company's Year 2000 plan have been completed and the
testing phase will begin soon. The Company's data processing is performed
primarily by a third party servicer. The Company also uses software and hardware
which are covered under maintenance agreements with third party vendors.
Consequently the Company is dependent on these vendors to conduct its business.
The Company has contacted each vendor to request time tables for Year 2000
compliance and the expected costs, if any, to be passed along to the Company.
The Company has been informed that its primary service provider is on schedule
and testing was conducted in the fourth calendar quarter of 1998.
During 1998 the Company has replaced or upgraded all equipment to be Year 2000
compliant at a cost of less than $40,000. As of December 31, 1998, management
has developed an estimate of expenses that are reasonably likely to be incurred
by the Bank in connection with this issue; however, the Company does not expect
to incur significant expenses to implement the necessary corrective measures,
and additional costs related to the Y2K issues are not expected to have a
material impact on the Company's 1999 financial statements.
Should the Company's data center become unable to provide the necessary services
upon arrival of the Year 2000, the Company will have the capability to account
for transactions on a manual basis until the data center returns to normal
operations, or the Company will consider the need to contract with an alternate
service provider.
In addition to possible expense related to its own systems, the Bank could incur
losses if loan payments are delayed due to year 2000 problems affecting any
major borrowers in the Bank's primary market area. Because the Bank's loan
portfolio is highly diversified with regard to individual borrowers and types of
businesses, and the Bank's primary market areas are not significantly dependent
upon any one employer or industry, the Bank does not expect any significant or
prolonged difficulties that will affect net earnings or cash flow.
20
<PAGE>
MARKET PRICE OF LOGANSPORT FINANCIAL'S
COMMON SHARES AND RELATED SECURITY HOLDER MATTERS
The common stock of the Company is traded on the National Association of
Securities Dealers Automated Quotation System ("Nasdaq") Small Cap Market, under
the symbol "LOGN." As of February 12, 1999, there were 832 shareholders of
record of the Company's common stock. The table below presents the high and low
trade prices for the common shares of the Company, together with dividends
declared per share, for each quarter of the fiscal years ended December 31,
1998, 1997 and 1996. Such price information was obtained from Nasdaq.
Per Share
Fiscal Year Ending December 31, High Low dividends
1998
Quarter ending March 31, 1998 $18.125 $16.000 $0.10
Quarter ending June 30, 1998 19.625 16.500 0.11
Quarter ending September 30, 1998 17.250 13.000 0.11
Quarter ending December 31, 1998 16.375 13.375 0.11
1997
Quarter ending March 31, 1997 $15.000 $11.125 $0.10
Quarter ending June 30, 1997 14.000 12.500 0.10
Quarter ending September 30, 1997 16.000 13.250 0.10
Quarter ending December 31, 1997 18.000 15.000 0.10
1996
Quarter ending March 31, 1996 $13.250 $12.375 $0.10
Quarter ending June 30, 1996 13.750 12.375 0.10
Quarter ending September 30, 1996 14.750 12.500 0.10
Quarter ending December 31, 1996 14.750 11.250 3.10 (1)
(1) This includes a $3.00 per share one-time special cash distribution which
qualified as a non-taxable return of capital pursuant to an IRS Private
Letter Ruling.
TRANSFER AGENT AND REGISTRAR. The Fifth Third Bank of Cincinnati, Ohio ("Fifth
Third") is the Company's stock transfer agent and registrar. Fifth Third
maintains the Company's shareholder records. To change name, address or
ownership of stock, to report lost certificates, or to consolidate accounts,
contact:
Fifth Third Bank
Corporate Trust Operations
Mail Drop 1090D2
38 Fountain Square
Cincinnati, Ohio 45263
(800) 837-2755
GENERAL COUNSEL. INDEPENDENT AUDITOR.
Barnes & Thornburg Grant Thornton LLP
11 South Meridian Street 625 Eden Park Drive, Suite 900
Indianapolis, Indiana 46204 Cincinnati, Ohio 45202
SHAREHOLDER & GENERAL INQUIRIES. The Company is required to file an Annual
Report on Form 10-K for its year ended December 31, 1998 with the Securities and
Exchange Commission. Copies of this annual report may be obtained without charge
upon written request to:
Dottye Robeson
Logansport Financial Corp.
723 East Broadway, Box 569
Logansport, Indiana 46947
(219) 722-3855
OFFICE LOCATION.
723 East Broadway
Logansport, Indiana 46947
(219) 722-3855
Fax - (219) 722-3857
Email - [email protected]
21
<PAGE>
[GRANT THORNTON LETTERHEAD]
Report of Independent Certified Public Accountants
Board of Directors
Logansport Financial Corp.
We have audited the accompanying consolidated statements of financial condition
of Logansport Financial Corp. as of December 31, 1998 and 1997, and the related
consolidated statements of earnings, shareholders' equity, comprehensive income
and cash flows for each of the years ended December 31, 1998, 1997 and 1996.
These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Logansport
Financial Corp. as of December 31, 1998 and 1997, and the consolidated results
of its operations, comprehensive income and its cash flows for each of the years
ended December 31, 1998, 1997 and 1996, in conformity with generally accepted
accounting principles.
/s/ Grant Thornton LLP
Cincinnati, Ohio
February 19, 1999
22
<PAGE>
Logansport Financial Corp.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
Cash and due from banks $ 363 $ 589
Interest-bearing deposits in other financial institutions 3,965 1,680
------- -------
Cash and cash equivalents 4,328 2,269
Certificates of deposit in other financial institutions - 100
Investment securities designated as available for sale - at market 5,033 5,750
Mortgage-backed securities designated as available for sale - at market 8,129 9,932
Loans receivable - net 73,073 63,635
Real estate acquired through foreclosure - net - 106
Office premises and equipment - at depreciated cost 1,528 465
Federal Home Loan Bank stock - at cost 568 494
Investment in real estate partnership 1,566 1,540
Accrued interest receivable on loans 337 299
Accrued interest receivable on mortgage-backed securities 66 83
Accrued interest receivable on investments and interest-bearing deposits 62 121
Prepaid expenses and other assets 36 33
Cash surrender value of life insurance 1,135 1,085
Deferred income tax asset 195 203
Prepaid income taxes 29 -
------- -------
Total assets $96,085 $86,115
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $70,011 $60,595
Advances from the Federal Home Loan Bank 7,000 6,500
Notes payable 1,375 1,525
Accrued interest and other liabilities 1,211 861
Accrued income taxes - 92
------- -------
Total liabilities 79,597 69,573
Commitments - -
Shareholders' equity
Preferred stock - no par value, 2,000,000 shares authorized; none issued - -
Common stock - no par value, 5,000,000 shares authorized; 1,198,710
and 1,260,920 shares at aggregate value issued and outstanding at
December 31, 1998 and 1997 6,670 7,566
Retained earnings - restricted 10,031 9,316
Less shares acquired by stock benefit plan (368) (400)
Unrealized gains on securities designated as available for sale,
net of related tax effects 155 60
------- -------
Total shareholders' equity 16,488 16,542
------- -------
Total liabilities and shareholders' equity $96,085 $86,115
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
23
<PAGE>
Logansport Financial Corp.
CONSOLIDATED STATEMENTS OF EARNINGS
For the year ended December 31,
(In thousands, except share data)
<TABLE>
<CAPTION>
1998 1997 1996
Interest income
<S> <C> <C> <C>
Loans $ 5,538 $ 4,932 $ 4,421
Mortgage-backed securities 522 559 510
Investment securities 243 394 533
Interest-bearing deposits and other 276 216 189
------- ------- -------
Total interest income 6,579 6,101 5,653
Interest expense
Deposits 3,097 2,864 2,613
Borrowings 379 251 106
------- ------- -------
Total interest expense 3,476 3,115 2,719
------- ------- -------
Net interest income 3,103 2,986 2,934
Provision for losses on loans 63 26 12
------- ------- -------
Net interest income after provision for losses on loans 3,040 2,960 2,922
Other income
Service charges on deposit accounts 106 88 67
Gain (loss) on sale of investment and mortgage-backed securities 4 (50) (47)
Gain on sale of real estate acquired through foreclosure 6 1 1
Other operating 169 131 61
------- ------- -------
Total other income 285 170 82
General, administrative and other expense
Employee compensation and benefits 744 649 661
Occupancy and equipment 90 78 81
Federal deposit insurance premiums 38 37 449
Data processing 110 96 91
Other operating 340 310 302
------- ------- -------
Total general, administrative and other expense 1,322 1,170 1,584
------- ------- -------
Earnings before income taxes 2,003 1,960 1,420
Income taxes
Current 789 761 580
Deferred (33) (33) (73)
------- ------- -------
Total income taxes 756 728 507
------- ------- -------
NET EARNINGS $ 1,247 $ 1,232 $ 913
======= ======= =======
EARNINGS PER SHARE
Basic $ 1.00 $ .98 $ .69
======= ======= =======
Diluted $ .97 $ .95 $ .69
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
24
<PAGE>
Logansport Financial Corp.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the year ended December 31,
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net earnings $ 1,247 $ 1,232 $ 913
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities
during the period 98 186 (196)
Reclassification adjustment for realized (gains)
losses included in earnings (3) 31 29
------- ------- -------
Comprehensive income $ 1,342 $ 1,449 $ 746
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
25
<PAGE>
Logansport Financial Corp.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended December 31,
1998, 1997 and 1996
(In thousands, except share data)
<TABLE>
<CAPTION>
Unrealized
Shares gains (losses)
acquired on securities
by stock designated as
Common Retained benefit available
stock earnings plan for sale Total
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $12,670 $7,774 $- $ 10 $20,454
Net earnings for the year ended
December 31, 1996 - 913 - - 913
Return of capital distribution to
shareholders (3,930) - - - (3,930)
Purchase of shares for stock benefit plan - - (615) - (615)
Purchase of shares (799) - - - (799)
Unrealized losses on securities
designated as available for sale, net of
related tax effects - - - (167) (167)
Amortization of stock benefit plan - - 93 - 93
Cash dividends of $.40 per share (423) (99) - - (522)
------ ------- ----- ---- -------
Balance at December 31, 1996 7,518 8,588 (522) (157) 15,427
Net earnings for the year ended
December 31, 1997 - 1,232 - - 1,232
Issuance of shares under stock option plan 48 - - - 48
Unrealized gains on securities designated
as available for sale, net of related
tax effects - - - 217 217
Amortization of stock benefit plan - - 122 - 122
Cash dividends of $.40 per share - (504) - - (504)
------ ------- ----- ---- -------
Balance at December 31, 1997 7,566 9,316 (400) 60 16,542
Net earnings for the year ended
December 31, 1998 - 1,247 - - 1,247
Purchase of shares for stock benefit plan - - (93) - (93)
Purchase of shares (945) - - - (945)
Issuance of shares under stock option plan 9 - - - 9
Unrealized gains on securities designated
as available for sale, net of related
tax effects - - - 95 95
Amortization of stock benefit plan 40 - 125 - 165
Cash dividends of $.43 per share - (532) - - (532)
------ ------- ----- ---- -------
Balance at December 31, 1998 $6,670 $10,031 $(368) $155 $16,488
====== ======= ===== ==== =======
</TABLE>
The accompanying notes are an integral part of these statements.
26
<PAGE>
Logansport Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31,
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings for the year $ 1,247 $ 1,232 $ 913
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization 39 37 38
Amortization of premiums on investments and mortgage-backed securities 200 104 36
Amortization expense of stock benefit plan 165 122 93
(Gain) loss on sale of investment and mortgage-backed securities (4) 50 47
Provision for losses on loans 63 26 12
Gain on sale of real estate acquired through foreclosure (6) (1) (1)
Increase (decrease) in cash, due to changes in:
Accrued interest receivable on loans (38) (33) (37)
Accrued interest receivable on mortgage-backed securities 17 (29) (2)
Accrued interest receivable on investments 59 6 58
Prepaid expenses and other assets (3) 9 425
Accrued interest and other liabilities 350 (530) 617
Federal income taxes
Current (121) 38 (32)
Deferred (33) (33) (73)
-------- -------- --------
Net cash provided by operating activities 1,935 998 2,094
Cash flows provided by (used in) investing activities:
Decrease in certificates of deposit in other financial institutions 100 -- --
Proceeds from sale of investment securities designated as available for sale 806 2,495 3,835
Purchase of investment securities designated as available for sale (3,057) (2,100) (2,834)
Maturities of investment securities designated as available for sale 3,104 1,471 2,877
Purchase of Federal Home Loan Bank stock (74) (107) (38)
Proceeds from sale of mortgage-backed securities designated as
available for sale 1,174 421 3,503
Purchase of mortgage-backed securities designated as available for sale (3,039) (5,126) (5,178)
Principal repayments on mortgage-backed securities designated as
available for sale 3,472 1,665 2,971
Purchase of loans (350) -- (1,046)
Loan disbursements (26,775) (19,769) (19,286)
Investment in real estate partnership (176) (15) --
Principal repayments on loans 17,585 12,791 12,252
Purchases and additions to office premises and equipment (1,102) (26) (83)
Proceeds from sale of real estate acquired through foreclosure 151 14 15
Increase in cash surrender value of life insurance policy (50) (45) (35)
-------- -------- --------
Net cash used in investing activities (8,231) (8,331) (3,047)
-------- -------- --------
Net cash used in operating and investing activities
(subtotal carried forward) (6,296) (7,333) (953)
-------- -------- --------
</TABLE>
27
<PAGE>
Logansport Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31,
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net cash used in operating and investing activities
(subtotal brought forward) $ (6,296) $ (7,333) $ (953)
Cash provided by (used in) financing activities:
Net increase in deposit accounts 9,416 3,199 4,935
Proceeds from Federal Home Loan Bank advances 8,000 10,500 4,600
Proceeds from note payable -- 100 1,400
Repayment of Federal Home Loan Bank advances (7,500) (6,000) (5,000)
Repayment of note payable -- (1,500) --
Proceeds from the exercise of stock options 9 48 --
Return of capital distribution -- -- (3,930)
Purchase of shares for stock benefit plan (93) -- (615)
Dividends on common stock (532) (504) (522)
Purchase of shares (945) -- (799)
-------- -------- --------
Net cash provided by financing activities 8,355 5,843 1,469
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 2,059 (1,490) 516
Cash and cash equivalents at beginning of year 2,269 3,759 3,243
-------- -------- --------
Cash and cash equivalents at end of year $ 4,328 $ 2,269 $ 3,759
======== ======== ========
Supplemental disclosure of cash flow information: Cash paid during the year for:
Income taxes $ 689 $ 680 $ 629
======== ======== ========
Interest on deposits and borrowings $ 3,465 $ 3,129 $ 2,699
======== ======== ========
Supplemental disclosure of noncash investing and financing activities:
Foreclosed mortgage loans transferred to real estate acquired
through foreclosure $ 40 $ 136 $ 18
======== ======== ========
Investment in real estate partnership via financing from notes payable $ -- $ 1,525 $ --
======== ======== ========
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects $ 95 $ 217 $ (167)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
28
<PAGE>
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES
Logansport Financial Corp. (the "Corporation") is a savings and loan holding
company whose activities are primarily limited to holding the common stock
of Logansport Savings Bank, FSB (the "Savings Bank"). The Savings Bank
conducts a general banking business in north-central Indiana which consists
of attracting deposits from the general public and applying those funds to
the origination of loans for residential, consumer and nonresidential
purposes. The Savings Bank's profitability is significantly dependent on its
net interest income, which is the difference between interest income
generated from interest-earning assets (i.e. loans and investments) and the
interest expense paid on interest-bearing liabilities (i.e. customer
deposits and borrowed funds). Net interest income is affected by the
relative amount of interest-earning assets and interest-bearing liabilities
and the interest received or paid on these balances. The level of interest
rates paid or received by the Savings Bank can be significantly influenced
by a number of environmental factors, such as governmental monetary policy,
that are outside of management's control.
The financial information presented herein has been prepared in accordance
with generally accepted accounting principles ("GAAP") and general
accounting practices within the financial services industry. In preparing
consolidated financial statements in accordance with GAAP, management is
required to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and
revenues and expenses during the reporting period. Actual results could
differ from such estimates.
The following is a summary of the Corporation's significant accounting
policies which have been consistently applied in the preparation of the
accompanying consolidated financial statements.
1. Principles of Consolidation
The consolidated financial statements include the accounts of the
Corporation and its subsidiary, the Savings Bank. All significant
intercompany balances and transactions have been eliminated.
2. Investment and Mortgage-backed Securities
The Corporation accounts for investments and mortgage-backed securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities". SFAS No.
115 requires that investments be categorized as held-to-maturity, trading,
or available for sale. Securities classified as held to maturity are carried
at cost only if the Corporation has the positive intent and ability to hold
these securities to maturity. Trading securities and securities available
for sale are carried at fair value with resulting unrealized gains or losses
charged to operations or shareholders' equity, respectively.
At December 31, 1998 and 1997, the Corporation's shareholders' equity
accounts reflected a net unrealized gain on available for sale securities of
$155,000 and $60,000, respectively.
Realized gains and losses on sales of securities are recognized using the
specific identification method.
29
<PAGE>
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
3. Loans Receivable
Loans receivable are stated at the principal amount outstanding, adjusted
for the allowance for loan losses. Interest is accrued as earned, unless the
collectibility of the loan is in doubt. Uncollectible interest on loans that
are contractually past due is charged off, or an allowance is established
based on management's periodic evaluation. The allowance is established by a
charge to interest income equal to all interest previously accrued, and
income is subsequently recognized only to the extent that cash payments are
received until, in management's judgment, the borrower's ability to make
periodic interest and principal payments has returned to normal, in which
case the loan is returned to accrual status. If the ultimate collectibility
of the loan is in doubt, in whole or in part, all payments received on
nonaccrual loans are applied to reduce principal until such doubt is
eliminated.
4. Loan Origination Fees
The Savings Bank accounts for loan origination fees in accordance with SFAS
No. 91, "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases". Pursuant
to the provisions of SFAS No. 91, origination fees received from loans, net
of certain direct origination costs, are deferred and amortized to interest
income using the interest method, giving effect to actual loan prepayments.
Additionally, SFAS No. 91 generally limits the definition of loan
origination costs to the direct costs attributable to originating a loan,
i.e. principally actual personnel costs. Fees received for loan commitments
that are expected to be drawn upon, based on the Savings Bank's experience
with similar commitments, are deferred and amortized over the life of the
loan using the level-yield method. Fees for other loan commitments are
deferred and amortized over the loan commitment period on a straight-line
basis.
5. Allowance for Losses on Loans
It is the Savings Bank's policy to provide valuation allowances for
estimated losses on loans based on past loss experience, trends in the level
of delinquent and problem loans, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying
collateral and current and anticipated economic conditions in the primary
lending area. When the collection of a loan becomes doubtful, or otherwise
troubled, the Savings Bank records a loan loss provision equal to the
difference between the fair value of the property securing the loan and the
loan's carrying value. Major loans and major lending areas are reviewed
periodically to determine potential problems at an early date. The allowance
for loan losses is increased by charges to earnings and decreased by
charge-offs (net of recoveries).
The Savings Bank accounts for impaired loans in accordance with SFAS No.
114, "Accounting by Creditors for Impairment of a Loan". SFAS No. 114
requires that impaired loans be measured based upon the present value of
expected future cash flows discounted at the loan's effective interest rate
or, as an alternative, at the loan's observable market price or fair value
of the collateral. The Savings Bank's current procedures for evaluating
impaired loans result in carrying such loans at the lower of cost or fair
value.
30
<PAGE>
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
5. Allowance for Losses on Loans (continued)
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In applying the provisions of SFAS No. 114, the Savings Bank
considers its investment in one- to four-family residential loans and
consumer installment loans to be homogeneous and therefore excluded from
separate identification for evaluation of impairment. With respect to the
Savings Bank's investment in nonresidential and multi-family residential
real estate loans, and its evaluation of impairment thereof, such loans are
generally collateral dependent and, as a result, are carried as a practical
expedient at the lower of cost or fair value.
Collateral dependent loans which are more than ninety days delinquent are
considered to constitute more than a minimum delay in repayment and are
evaluated for impairment under SFAS No. 114 at that time.
At December 31, 1998 and 1997, the Savings Bank had no loans that would be
defined as impaired under SFAS No. 114.
6. Real Estate Acquired Through Foreclosure
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost) or fair value less estimated selling
expenses at the date of acquisition. Real estate loss provisions are
recorded if the properties' fair value subsequently declines below the value
determined at the recording date. In determining the lower of cost or fair
value at acquisition, costs relating to development and improvement of
property are capitalized. Costs relating to holding real estate acquired
through foreclosure, net of rental income, are charged against earnings as
incurred.
7. Office Premises and Equipment
Office premises and equipment are carried at cost and include expenditures
which extend the useful lives of existing assets. Maintenance, repairs and
minor renewals are expensed as incurred. For financial reporting,
depreciation and amortization are provided on the straight-line and
accelerated methods over the useful lives of the assets, estimated to be
thirty to forty years for buildings, five to twenty years for building
improvements, five to fifteen years for furniture and equipment and five
years for automobiles. An accelerated method is used for tax reporting
purposes.
8. Investment in Real Estate Partnership
During 1997, the Corporation invested $1.5 million in a real estate
partnership which will construct and manage residential real estate
apartments for low and moderate income residents. The investment reflects a
49.5% participation in the partnership. This affordable housing project is
expected to generate significant tax credits for the Savings Bank in future
years.
31
<PAGE>
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
9. Income Taxes
The Corporation accounts for income taxes pursuant to SFAS No. 109,
"Accounting for Income Taxes". In accordance with SFAS No. 109, a deferred
tax liability or deferred tax asset is computed by applying the current
statutory tax rates to net taxable or deductible temporary differences
between the tax basis of an asset or liability and its reported amount in
the consolidated financial statements that will result in net taxable or
deductible amounts in future periods. Deferred tax assets are recorded only
to the extent that the amount of net deductible temporary differences or
carryforward attributes may be utilized against current period earnings,
carried back against prior years' earnings, offset against taxable temporary
differences reversing in future periods, or utilized to the extent of
management's estimate of future taxable income. A valuation allowance is
provided for deferred tax assets to the extent that the value of net
deductible temporary differences and carryforward attributes exceeds
management's estimates of taxes payable on future taxable income. Deferred
tax liabilities are provided on the total amount of net temporary
differences taxable in the future.
Deferral of income taxes results primarily from the different methods of
accounting for certain retirement plans, general loan loss allowances and
percentage of earnings bad debt deductions. Additional temporary differences
result from depreciation computed using accelerated methods for tax
purposes.
10. Benefit Plans
Employees of the Savings Bank are covered by the Pentegra Group, previously
the Financial Institutions Retirement Fund (the "Fund"), which is a defined
benefit pension plan to which contributions are made for the benefit of the
employees. Contributions are determined to cover the normal cost of pension
benefits, the one-year cost of the pre-retirement death and disability
benefits and the amortization of any unfunded accrued liabilities.
The Fund had previously advised the Savings Bank that the pension plan meets
the criteria of a multi-employer pension plan as defined in SFAS No. 87,
"Employers' Accounting for Pensions". In accordance with SFAS No. 87, net
pension cost is recognized for any required contribution for the period. A
liability is recognized for any contributions due and unpaid. During 1993,
the Savings Bank acquired additional benefits for all qualified employees
covered by the Fund which were paid for by reducing the overfunded amount.
Due to a continuation of the funds overfunded status, no contributions were
made to the pension plan during the years ended December 31, 1998, 1997 and
1996. The provision for pension expense was computed by the Fund's actuaries
utilizing the projected unit credit cost method and assuming a 7.5% return
on Fund assets.
The Savings Bank has purchased life insurance policies on certain officers
and directors. The insurance policies had an approximate cash surrender
value of $1.1 million at December 31, 1998 and 1997. The Savings Bank has
approved compensation arrangements that provide retirement benefits to
certain officers and deferral of fees for directors covered by the policies.
The benefit arrangement for one individual requires that the individual
provide consulting services to the Savings Bank during the five-year period
following retirement. The benefits to be paid, excluding amounts
attributable to consulting, are being accrued from the date of approval of
the arrangements to the date that full eligibility is attained. Expense
related to the above described plans totaled $81,000, $99,000 and $87,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
32
<PAGE>
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
10. Benefit Plans (continued)
The Savings Bank adopted the Logansport Savings Bank, FSB Employee Stock
Ownership Plan and Trust Agreement ("ESOP") in 1995, for eligible employees
of the Savings Bank. The ESOP will be funded by discretionary employer
contributions made in cash, which will be invested in shares of the
Corporation's common stock. No contributions were made to the ESOP during
the years ended December 31, 1998, 1997 or 1996.
In April 1996, the Corporation's shareholders approved the Logansport
Savings Bank, FSB Recognition and Retention Plan and Trust ("RRP"). The RRP
may acquire up to 52,900 shares of the Corporation's common stock, an amount
equal to 4.0% of the number of shares issued in the Conversion, for awards
to management. Shares awarded to management under the RRP vest at a rate of
20% at the end of each full twelve months of service with the Savings Bank
after the date of grant. During 1996, the Savings Bank contributed $615,000
to the RRP for the purchase of 46,675 shares of the Corporation's common
stock awarded to management and recorded the amount as unearned
compensation. During 1998, the Savings Bank contributed $93,000 for the
purchase of the 6,225 remaining allowable shares. Amortization expense under
the RRP totaled $125,000, $123,000 and $92,000 for the years ended December
31, 1998, 1997 and 1996, respectively.
11. Earnings Per Share and Cash Distributions Per Share
Basic earnings per share is computed based upon the weighted-average shares
outstanding during the year. Weighted-average common shares outstanding
totaled 1,243,972, 1,259,162 and 1,316,372 for the years ended December 31,
1998, 1997 and 1996, respectively. Diluted earnings per share is computed
taking into consideration common shares outstanding and dilutive potential
common shares to be issued under the Corporation's stock option plan.
Weighted-average common shares deemed outstanding for purposes of computing
diluted earnings per share, which gives effect to 43,879, 32,384 and 8,600
incremental shares from assumed exercise of stock options, totaled
1,287,851, 1,291,546 and 1,324,972 for the years ended December 31, 1998,
1997 and 1996, respectively.
12. Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents includes
cash and due from banks and interest-bearing deposits in other financial
institutions with original maturities of less than 90 days.
13. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of fair value of financial instruments, both assets and
liabilities, whether or not recognized in the consolidated statement of
financial condition, for which it is practicable to estimate that value. For
financial instruments where quoted market prices are not available, fair
values are based on estimates using present value and other valuation
methods.
The methods used are greatly affected by the assumptions applied, including
the discount rate and estimates of future cash flows. Therefore, the fair
values presented may not represent amounts that could be realized in an
exchange for certain financial instruments.
33
<PAGE>
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
13. Fair Value of Financial Instruments (continued)
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments at December
31, 1998 and 1997:
Cash and cash equivalents: The carrying amounts presented in
the consolidated statements of financial condition for cash
and cash equivalents are deemed to approximate fair value.
Certificates of deposit: The carrying amount presented in the
consolidated statements of financial condition is deemed to
approximate fair value.
Investment and mortgage-backed securities: For investment and
mortgage-backed securities, fair value is deemed to equal the
quoted market price.
Loans receivable: The loan portfolio has been segregated into
categories with similar characteristics, such as one- to
four-family residential, multi-family residential,
nonresidential real estate and consumer. These loan categories
were further delineated into fixed-rate and adjustable-rate
loans. The fair values for the resultant loan categories were
computed via discounted cash flow analysis, using current
interest rates offered for loans with similar terms to
borrowers of similar credit quality.
Federal Home Loan Bank stock: The carrying amount presented in
the consolidated statements of financial condition is deemed
to approximate fair value.
Deposits: The fair value of NOW accounts, passbook and club
accounts, and money market deposits is deemed to approximate
the amount payable on demand at December 31, 1998 and 1997.
Fair values for fixed-rate certificates of deposit have been
estimated using a discounted cash flow calculation using the
interest rates currently offered for deposits of similar
remaining maturities.
Federal Home Loan Bank advances: The fair value of Federal
Home Loan Bank advances has been estimated using discounted
cash flow analysis, based on the interest rates currently
offered for advances of similar remaining maturities.
Notes Payable: The fair value of notes payable is deemed to
approximate the carrying value.
Commitments to extend credit: For fixed-rate and
adjustable-rate loan commitments, the fair value estimate
considers the difference between current levels of interest
rates and committed rates. At December 31, 1998 and 1997, the
difference between the fair value and notional amount of loan
commitments was not material.
34
<PAGE>
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
13. Fair Value of Financial Instruments (continued)
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Corporation's financial instruments are as follows at December
31:
<TABLE>
<CAPTION>
1998 1997
Carrying Fair Carrying Fair
value value value value
(In thousands)
Financial assets
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 4,328 $ 4,328 $ 2,269 $ 2,269
Certificates of deposit -- -- 100 100
Investment securities 5,033 5,033 5,750 5,750
Mortgage-backed securities 8,129 8,129 9,932 9,932
Loans receivable 73,073 74,668 63,635 66,286
Federal Home Loan Bank stock 568 568 494 494
------- ------- ------- -------
$91,131 $92,726 $82,180 $84,831
======= ======= ======= =======
Financial liabilities
Deposits $70,011 $70,406 $60,595 $60,554
Advances from Federal Home Loan Bank 7,000 6,999 6,500 6,499
Notes payable 1,375 1,375 1,525 1,525
------- ------- ------- -------
$78,386 $78,780 $68,620 $68,578
======= ======= ======= =======
</TABLE>
14. Advertising
Advertising costs are expensed when incurred.
15. Reclassifications
Certain prior year amounts have been reclassified to conform to the 1998
consolidated financial statement presentation.
35
<PAGE>
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses, and
estimated fair value of investment securities designated as available for
sale at December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
<S> <C> <C> <C> <C>
U.S. Government agency obligations $2,845 $ 3 $ 23 $2,825
State and municipal obligations 1,323 70 - 1,393
FHLMC stock 4 240 - 244
Corporate debt obligations 561 10 - 571
------ ---- -- ------
Total investment securities $4,733 $323 $ 23 $5,033
===== === ==== =====
1997
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
U.S. Government agency obligations $3,598 $ 6 $153 $3,451
State and municipal obligations 1,780 67 - 1,847
FHLMC stock 6 237 - 243
Corporate debt obligations 200 9 - 209
------ ----- -- ------
Total investment securities $5,584 $319 $153 $5,750
===== === === =====
</TABLE>
36
<PAGE>
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost and estimated fair value of investment securities by term
to maturity at December 31, 1998, are shown below.
Estimated
Amortized fair
cost value
(In thousands)
Due in one year or less $ 25 $ 25
Due after one year through five years 975 969
Due after five through ten years 3,419 3,482
Due after ten years 310 313
------ ------
4,729 4,789
FHLMC stock 4 244
------ ------
$4,733 $5,033
===== =====
Proceeds from sales and calls of investment securities available for sale
during the year ended December 31, 1998, totaled $3.7 million, resulting in
gross realized gains of $96,000 and gross realized losses of $92,000.
Proceeds from sales and calls of investment securities available for sale
during the year ended December 31, 1997, totaled $3.7 million, resulting in
gross realized gains of $2,000 and gross realized losses of $54,000.
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of mortgage-backed securities at December 31, 1998 and
1997 are presented below.
<TABLE>
<CAPTION>
1998
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Federal Home Loan Mortgage
<S> <C> <C> <C> <C>
Corporation participation certificates $ 994 $ 1 $ 4 $ 991
Government National Mortgage
Association participation certificates 3,701 1 60 3,642
Federal National Mortgage
Association participation certificates 1,584 7 10 1,581
Federal Housing Authority participation
certificates 874 10 - 884
Small Business Administration
participation certificates 1,040 1 10 1,031
----- ----- ---- -----
Total mortgage-backed securities $8,193 $ 20 $ 84 $8,129
===== ==== ==== =====
</TABLE>
37
<PAGE>
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES (continued)
<TABLE>
<CAPTION>
1997
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Federal Home Loan Mortgage
<S> <C> <C> <C> <C>
Corporation participation certificates $ 949 $ 1 $ 14 $ 936
Government National Mortgage
Association participation certificates 3,880 5 51 3,834
Federal National Mortgage
Association participation certificates 2,849 6 16 2,839
Federal Housing Authority participation
certificates 884 6 -- 890
Small Business Administration
participation certificates 1,298 1 5 1,294
Other 138 1 -- 139
------ ------ ------ ------
Total mortgage-backed securities $9,998 $ 20 $ 86 $9,932
====== ====== ====== ======
</TABLE>
The amortized cost and estimated fair value of mortgage-backed securities at
December 31, 1998 and 1997, by contractual terms to maturity, are shown
below. Expected maturities will differ from contractual maturities because
borrowers may generally prepay obligations without prepayment penalties.
<TABLE>
<CAPTION>
1998 1997
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
(In thousands)
<S> <C> <C> <C> <C>
Due within one year $2,337 $2,309 $1,927 $1,915
Due after one year to three years 1,859 1,838 2,285 2,266
Due after three years to five years 864 861 1,349 1,337
Due after five years to ten years 875 868 1,825 1,806
Due after ten years 2,258 2,253 2,612 2,608
----- ----- ----- -----
Total mortgage-backed securities $8,193 $8,129 $9,998 $9,932
===== ===== ===== =====
</TABLE>
Proceeds from sales of mortgage-backed securities during the year ended
December 31, 1998, totaled $1.2 million, resulting in gross realized gains
of $3,000 and gross realized losses of $3,000.
Proceeds from sales of mortgage-backed securities during the year ended
December 31, 1997, totaled $421,000, resulting in gross realized gains of
$2,000 and no gross realized losses.
38
<PAGE>
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at December 31 is as follows:
1998 1997
(In thousands)
Residential real estate
One- to four-family residential $52,205 $46,419
Multi-family residential 1,584 1,844
Construction 3,492 1,333
Nonresidential real estate and land 3,492 3,072
Consumer and other 14,500 11,379
------- -------
75,273 64,047
Less:
Undisbursed portion of loans in process 1,915 167
Allowance for loan losses 285 245
------- -------
$73,073 $63,635
======= =======
The Savings Bank's lending efforts have historically focused on one- to
four-family residential and multi-family residential real estate loans,
which comprised approximately $55.4 million, or 76%, of the total loan
portfolio at December 31, 1998, and $49.4 million, or 78% of the total
portfolio at December 31, 1997. Generally, such loans have been underwritten
on the basis of no more than an 80% loan-to-value ratio, which has
historically provided the Savings Bank with adequate collateral coverage in
the event of default. Nevertheless, the Savings Bank, as with any lending
institution, is subject to the risk that real estate values could
deteriorate in its primary lending area of north-central Indiana, thereby
impairing collateral values. However, management is of the belief that real
estate values in the Savings Bank's primary lending area are presently
stable.
In the normal course of business, the Savings Bank has made loans to its
directors, officers and their related business interests. Related party
loans are made on the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with unrelated
persons and do not involve more than the normal risk of collectibility.
Loans to officers and directors totaled approximately $721,000 and $431,000,
at December 31, 1998 and 1997, respectively.
39
<PAGE>
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE D - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses for the year ended December 31
is as follows:
1998 1997 1996
(In thousands)
Beginning balance $ 245 $ 236 $ 223
Provision for loan losses 63 26 12
Recoveries (charge-offs) of loans - net (23) (17) 1
----- ----- -----
Ending balance $ 285 $ 245 $ 236
===== ===== =====
At December 31, 1998, the Savings Bank's allowance for loan losses was
comprised entirely of a general loan loss allowance which is includible as a
component of regulatory risk-based capital.
At December 31, 1998, 1997 and 1996, the Savings Bank had loans of $315,000,
$431,000 and $406,000, respectively, which had been placed on nonaccrual
status due to concerns as to borrowers' ability to pay. Interest income that
would have been recognized had nonaccrual loans performed pursuant to
contractual terms totaled approximately $26,000, $24,000 and $22,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment is comprised of the following at December 31:
1998 1997
(In thousands)
Land $ 203 $203
Buildings and improvements 1,459 460
Furniture and equipment 367 264
------ ---
2,029 927
Less accumulated depreciation and amortization (501) (462)
------ ---
$1,528 $465
===== ===
The Corporation commenced an expansion of its main office facility in 1998.
As of December 31, 1998, the Corporation had outstanding commitments of
approximately $352,000 for such expansion and renovation which is expected
to be completed during 1999.
40
<PAGE>
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE F - DEPOSITS
Deposits consist of the following major classifications at December 31:
<TABLE>
<CAPTION>
Deposit type and weighted average
interest rate 1998 1997
(In thousands)
NOW accounts
<S> <C>
December 31, 1998 - 2.04% $ 5,156
December 31, 1997 - 1.99% $ 4,196
Passbook and club accounts
December 31, 1998 - 2.98% 3,171
December 31, 1997 - 3.00% 3,070
Money market deposit accounts
December 31, 1998 - 4.02% 20,515
December 31, 1997 - 4.61% 16,736
Non-interest bearing accounts 1,492 862
------- --------
Total demand, transaction and passbook deposits 30,334 24,864
Certificates of deposit
Original maturities of:
Less than 12 months
December 31, 1998 - 4.69% 4,818
December 31, 1997 - 5.01% 3,903
12 months to 18 months
December 31, 1998 - 5.33% 7,803
December 31, 1997 - 5.42% 6,770
24 months to 30 months
December 31, 1998 - 5.62% 18,702
December 31, 1997 - 5.65% 16,812
More than 30 months
December 31, 1998 - 5.65% 3,619
December 31, 1997 - 5.53% 3,552
Individual retirement accounts
December 31, 1998 - 5.11% 4,735
December 31, 1997 - 5.63% 4,694
------- -------
Total certificates of deposit 39,677 35,731
------ ------
Total deposits $70,011 $60,595
====== ======
</TABLE>
At December 31, 1998 and 1997, the Savings Bank had certificate of deposit
accounts with balances greater than $100,000 totaling $3.5 million and $3.8
million, respectively.
41
<PAGE>
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE F - DEPOSITS (continued)
Interest expense on deposits for the year ended December 31 is summarized as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Passbook and money market deposit accounts $ 923 $ 837 $ 763
NOW accounts 105 87 106
Certificates of deposit 2,069 1,940 1,744
----- ----- -----
$3,097 $2,864 $2,613
===== ===== =====
</TABLE>
Maturities of outstanding certificates of deposit at December 31 are
summarized as follows:
1998 1997
(In thousands)
Less than one year $22,342 $22,523
One to three years 15,368 11,989
Over three years 1,967 1,219
------- -------
$39,677 $35,731
====== ======
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at December 31,
1998 by a blanket pledge of residential mortgage loans totaling $50.2
million, and the Savings Bank's investment in certain U.S. Government agency
securities and mortgage-backed securities totaling $11.0 million, are
summarized as follows:
<TABLE>
<CAPTION>
Maturing year December 31,
Interest rate ending December 31, 1998 1997
(In thousands)
<S> <C> <C> <C>
5.70% - 5.89% 1998 $ - $4,000
5.19% - 6.09% 1999 5,000 -
4.87% - 6.09% 2000 2,000 2,500
----- -----
$7,000 $6,500
===== =====
Weighted-average interest rate 5.24% 5.79%
==== ====
</TABLE>
42
<PAGE>
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE H - NOTES PAYABLE
At December 31, 1998 and 1997, notes payable consists of construction
borrowings secured by the Savings Bank's investment in a real estate
partnership. The Savings Bank pays only interest until completion of the
project at which time repayment terms will convert to a ten year
amortization. The interest rate on the variable rate borrowing was 3.02% and
4.35% at December 31, 1998 and 1997, respectively.
NOTE I - INCOME TAXES
The provision for income taxes differs from that computed at the statutory
corporate tax rate for the year ended December 31 as follows:
<TABLE>
<CAPTION>
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Federal income taxes computed at the statutory rate $681 $666 $483
Increase (decrease) in taxes resulting from:
Tax exempt interest (23) (34) (37)
Increase in cash surrender value of life insurance (17) (15) (12)
State income taxes 116 112 79
Other (1) (1) (6)
---- ----- -----
Income tax provision per consolidated
financial statements $756 $728 $507
=== === ===
</TABLE>
43
<PAGE>
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE I - INCOME TAXES (continued)
The composition of the Corporation's net deferred tax asset at December 31
is as follows:
<TABLE>
<CAPTION>
Taxes (payable) refundable on temporary 1998 1997
differences at statutory rate: (In thousands)
<S> <C> <C>
Deferred tax assets:
Other than temporary declines in investment securities $ 23 $ 23
Retirement expense 134 132
General loan loss allowance 115 104
Stock benefit plan expense 91 83
Other 10 7
---- -----
Total deferred tax assets 373 349
Deferred tax liabilities:
State income taxes (27) (23)
Percentage of earnings bad debt deduction (61) (74)
Unrealized gains on securities designated as available for sale (81) (40)
Book vs. tax depreciation (9) (9)
----- -----
Total deferred tax liabilities (178) (146)
--- ---
Net deferred tax asset $195 $203
=== ===
</TABLE>
The Savings Bank was allowed a special bad debt deduction based on a
percentage of earnings, generally limited to 8% of otherwise taxable income,
or the amount of qualifying and nonqualifying loans outstanding and subject
to certain limitations based on aggregate loans and savings account balances
at the end of the year. This percentage of earnings bad debt deduction had
accumulated to approximately $1.7 million as of December 31, 1998. If the
amounts that qualify as deductions for federal income taxes are later used
for purposes other than bad debt losses, including distributions in
liquidation, such distributions will be subject to federal income taxes at
the then current corporate income tax rate. The approximate amount of
unrecognized deferred tax liability relating to the cumulative bad debt
deduction is approximately $500,000 at December 31, 1998. See Note L for
additional information regarding future percentage of earnings bad debt
deductions.
NOTE J - COMMITMENTS
The Savings Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers including commitments to extend credit. Such commitments involve,
to varying degrees, elements of credit and interest-rate risk in excess of
the amount recognized in the consolidated statement of financial condition.
The contract or notional amounts of the commitments reflect the extent of
the Savings Bank's involvement in such financial instruments.
The Savings Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit
is represented by the contractual notional amount of those instruments. The
Savings Bank uses the same credit policies in making commitments and
conditional obligations as those utilized for on-balance-sheet instruments.
44
<PAGE>
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE J - COMMITMENTS (continued)
At December 31, 1998, the Savings Bank had outstanding commitments of
approximately $1.2 million to originate loans. Additionally, the Savings
Bank had unused lines of credit totaling $1.6 million at December 31, 1998.
In the opinion of management, all loan commitments equaled or exceeded
prevalent market interest rates as of December 31, 1998, and will be funded
from normal cash flow from operations. Finally, the Savings Bank had a
commitment under a standby letter of credit totaling $1.0 million at
December 31, 1998. Standby letters of credit are conditional commitments
issued by the Savings Bank to guarantee the performance of a customer to a
third party.
NOTE K - REGULATORY CAPITAL
The Savings Bank is subject to minimum capital requirements promulgated by
the Office of Thrift Supervision ("OTS"). Failure to meet minimum capital
requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a
direct material effect on the Corporation's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Savings Bank must meet specific capital guidelines
that involve quantitative measures of the Savings Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Savings Bank's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. Such minimum capital
standards generally require the maintenance of regulatory capital sufficient
to meet each of three tests, hereinafter described as the tangible capital
requirement, the core capital requirement and the risk-based capital
requirement. The tangible capital requirement provides for minimum tangible
capital (defined as shareholders' equity less all intangible assets) equal
to 1.5% of adjusted total assets. The core capital requirement provides for
minimum core capital (tangible capital plus certain forms of supervisory
goodwill and other qualifying intangible assets) equal to 3.0% of adjusted
total assets. An OTS proposal, if adopted in present form, would increase
the core capital requirement to a range of 4.0% - 5.0% of adjusted total
assets for substantially all savings institutions. Management anticipates no
material change to the Savings Bank's present excess regulatory capital
position as a result of this proposed change to the regulatory capital
requirement. The risk-based capital requirement currently provides for the
maintenance of core capital plus general loan loss allowances equal to 8.0%
of risk-weighted assets. In computing risk-weighted assets, the Savings Bank
multiplies the value of each asset on its statement of financial condition
by a defined risk-weighting factor, e.g., one- to four-family residential
loans carry a risk-weighted factor of 50%.
As of December 31, 1998 and 1997, management believes that the Savings Bank
met all capital adequacy requirements to which it is subject.
<TABLE>
<CAPTION>
1998: To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $16,263 17.0% *$1,436 *1.5% *$4,787 * 5.0%
Core capital $16,263 17.0% *$2,873 *3.0% *$5,745 * 6.0%
Risk-based capital $16,548 30.1% *$4,398 *8.0% *$5,498 *10.0%
</TABLE>
* Greater than or equal to
45
<PAGE>
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE K - REGULATORY CAPITAL (continued)
<TABLE>
<CAPTION>
1997: To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $16,412 19.1% *$1,289 *1.5% *$4,297 * 5.0%
Core capital $16,412 19.1% *$2,578 *3.0% *$5,156 * 6.0%
Risk-based capital $16,657 35.2% *$3,781 *8.0% *$4,726 * 10.0%
</TABLE>
* Greater than or equal to
The Savings Bank's management believes that, under the current regulatory
capital regulations, the Savings Bank will continue to meet its minimum
capital requirements in the foreseeable future. However, events beyond the
control of the Savings Bank, such as increased interest rates or a downturn
in the economy in the primary market areas, could adversely affect future
earnings and, consequently, the ability to meet future minimum regulatory
capital requirements.
Regulations of the OTS impose limitations on the payment of dividends and
other capital distributions by savings associations. The OTS recently
amended its capital distribution regulation in a final rule which takes
effect on April 1, 1999. Because the Savings Bank is a subsidiary of a
savings and loan holding company, it is required to file a notice with the
OTS 30 days before making any capital distributions to the Holding Company.
It may also have to file an application for approval of a proposed capital
distribution with the OTS if the association is not eligible for expedited
treatment under the OTS's application processing rules, or the total amount
of all capital distributions, including the proposed capital distribution,
for the applicable calendar year would exceed an amount equal to the savings
association's net income for that year to date plus the savings
association's retained net income for the preceding two years. A savings
association must also file an application for approval of a proposed capital
distribution if, following the proposed distribution, the association would
not be at least adequately capitalized under the OTS prompt corrective
action regulations, or if the proposed distribution would violate a
prohibition contained in any applicable statute, regulation, or agreement
between the OTS or the FDIC.
NOTE L - LEGISLATIVE DEVELOPMENTS
The deposit accounts of the Savings Bank and of other savings associations
are insured by the Federal Deposit Insurance Corporation ("FDIC") through
the SAIF. The reserves of the SAIF were below the level required by law,
because a significant portion of the assessments paid into the fund had been
used to pay the cost of prior thrift failures. The deposit accounts of
commercial banks are insured by the FDIC in the Bank Insurance Fund ("BIF"),
except to the extent such banks have acquired SAIF deposits. The reserves of
the BIF met the level required by law in 1995. As a result of the respective
reserve levels of the funds, deposit insurance assessments paid by healthy
savings associations exceeded those paid by healthy commercial banks by
approximately $.19 per $100 in deposits in 1995. In 1996, no BIF assessments
were required for healthy commercial banks except for a $2,000 minimum fee.
On September 30, 1996, the President enacted legislation to recapitalize the
SAIF which provided for a special assessment of $.657 per $100 of deposits
held at March 31, 1995. The Savings Bank had $50.9 million in SAIF deposits
at March 31, 1995, resulting in an assessment of approximately $335,000, or
$221,000 after-tax, which was recorded as a charge in 1996.
46
<PAGE>
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE L - LEGISLATIVE DEVELOPMENTS (continued)
Congress is considering legislation to eliminate the federal savings and
loan charter and the separate federal regulation of savings and loan
associations. Pursuant to such legislation, Congress may eliminate the OTS,
and the Savings Bank may be regulated under federal law as a bank holding
company. Such change in regulation would likely change the range of
activities in which the Savings Bank may engage and would probably subject
the Savings Bank to more regulation by the FDIC. In addition, the
Corporation might become subject to a different form of holding company
regulation, which may limit the activities in which the Corporation may
engage, and subject the Corporation to other additional regulatory
requirements, including separate capital requirements. At this time, the
Corporation cannot predict when or whether Congress may actually pass
legislation regarding the Corporation's or the Savings Bank's regulatory
requirements. Although such legislation may change the activities in which
either the Corporation and the Savings Bank may engage, it is not
anticipated that the current activities of both the Corporation and the
Savings Bank will be materially affected by those activity limits.
Under separate legislation related to the recapitalization plan, the Savings
Bank is required to recapture as taxable income approximately $220,000,
representing its post-1987 percentage of earnings bad debt deduction. The
Savings Bank has provided deferred taxes for this amount and is permitted by
such legislation to recapture such income over a six year period commencing
in 1998.
NOTE M - STOCK OPTION PLAN
During 1996, the Board of Directors adopted a Stock Option Plan that
provided for the issuance of 132,250 shares of authorized, but unissued
shares of common stock at the fair market value at the date of grant. In
April 1996, the Corporation granted options to purchase 108,691 shares at an
exercise price of $12.50 per share. As a result of the return of capital
distribution of $3.00 per share during fiscal 1996, the number of shares
awarded and exercise price were adjusted to ensure equivalent economic
consequences to option holders following the distribution.
In 1996, the Corporation adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which contains a fair value-based method for valuing
stock-based compensation that entities may use, which measures compensation
cost at the grant date based on the fair value of the award. Compensation is
then recognized over the service period, which is usually the vesting
period. Alternatively, SFAS No. 123 permits entities to continue to account
for stock options and similar equity instruments under Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees."
Entities that continue to account for stock options using APB Opinion No. 25
are required to make pro forma disclosures of net earnings and earnings per
share, as if the fair value-based method of accounting defined in SFAS No.
123 had been applied.
The Corporation applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plan. Accordingly, no compensation cost has
been recognized for the plan. Had compensation cost for the Corporation's
stock option plan been determined based on the fair value at the grant dates
for awards under the plan consistent with the accounting method utilized in
SFAS No. 123, the Corporation's net earnings and earnings per share would
have been reduced to the pro forma amounts indicated below:
47
<PAGE>
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE M - STOCK OPTION PLAN (continued)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C> <C>
Net earnings (In thousands) As reported $ 1,247 $ 1,232 $ 913
======= ========= ========
Pro-forma $ 1,246 $ 1,232 $ 883
======= ========= ========
Basic earnings per share As reported $ 1.00 $ .98 $ .69
======= ========= ========
Pro-forma $ 1.00 $ .98 $ .67
======= ========= ========
Diluted earnings per share As reported $ .97 $ .95 $ .69
======= ========= ========
Pro-forma $ .97 $ .95 $ .67
======= ========= ========
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the modified Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in 1998 and 1996; dividend
yield of 3.14% and 3.67% and expected volatility of 11.5%; risk-free
interest rate of 6.5% and expected lives of seven years.
A summary of the status of the Corporation's stock option plan as of
December 31, 1998, 1997 and 1996, and changes during the periods ending on
those dates is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of year 124,795 $10.53 129,340 $10.53 - $ -
Granted 2,500 $13.75 - $ - 108,691 $12.50
Adjustment for return of capital
distribution - $ - - $ - 20,649 $ (1.97)
Exercised 880 $10.53 4,545 $10.53 - $ -
Forfeited - $ - - $ - - $ -
------- --------- --------- --------- --------- -----
Outstanding at end of year 126,415 $10.59 124,795 $10.53 129,340 $10.53
======= ===== ======= ===== ======= =====
Options exercisable at year-end 46,311 $10.53 21,323 $10.53 - $ -
====== ===== ======== ===== ========= =====
Weighted-average fair value of
options granted during the year $2.77 N/A $ 1.81
===== ===== ======
</TABLE>
The following information applies to options outstanding at December 31,
1998:
Number outstanding 126,415
Range of exercise prices $10.53 - $13.75
Weighted-average exercise price $10.59
Weighted-average remaining contractual life 7.33 years
48
<PAGE>
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE N - CONDENSED FINANCIAL STATEMENTS OF LOGANSPORT FINANCIAL CORP.
The following condensed financial statements summarize the financial
position of Logansport Financial Corp. as of December 31, 1998 and 1997, and
the results of its operations and cash flows for the years ended December
31, 1998, 1997 and 1996.
Logansport Financial Corp.
STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands)
ASSETS 1998 1997
Cash and cash equivalents $ 152 $ 160
Investment in subsidiary 16,418 16,471
Prepaid expenses and other 5 5
-------- --------
Total assets $ 16,575 $ 16,636
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expenses and other liabilities $ 87 $ 94
Shareholders' equity
Common stock 6,670 7,566
Retained earnings 10,031 9,316
Shares acquired by stock benefit plan (368) (400)
Unrealized gains on securities designated
as available for sale, net 155 60
-------- --------
Total shareholders' equity 16,488 16,542
-------- --------
Total liabilities and shareholders' equity $ 16,575 $ 16,636
======== ========
49
<PAGE>
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE N - CONDENSED FINANCIAL STATEMENTS OF LOGANSPORT FINANCIAL CORP.
(continued)
Logansport Financial Corp.
STATEMENTS OF EARNINGS
Year ended December 31,
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
Revenue
<S> <C> <C> <C>
Interest income $ 13 $ 12 $ 174
Equity in earnings of subsidiary 1,279 1,270 869
------- ------- -------
1,292 1,282 1,043
Interest expense -- 5 --
General and administrative expenses 66 70 100
------- ------- -------
Earnings before income taxes (credits) 1,226 1,207 943
Income taxes (credits) (21) (25) 30
------- ------- -------
NET EARNINGS $ 1,247 $ 1,232 $ 913
======= ======= =======
</TABLE>
50
<PAGE>
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE N - CONDENSED FINANCIAL STATEMENTS OF LOGANSPORT FINANCIAL CORP.
(continued)
Logansport Financial Corp.
STATEMENTS OF CASH FLOWS
Year ended December 31,
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net earnings for the year $ 1,247 $ 1,232 $ 913
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
(Undistributed earnings of ) excess distributions from
consolidated subsidiary 221 730 (869)
Decreases in cash due to changes in:
Other liabilities (7) (34) --
Other (1) (1) (4)
------- ------- -------
Net cash provided by operating activities 1,460 1,927 40
Cash flows provided by (used in) investing activities:
Purchase of securities available for sale -- -- (1,638)
Maturities of investment securities available for sale -- -- 2,245
Proceeds from sale of securities designated as available
for sale -- -- 1,824
Loan repayments -- -- 878
------- ------- -------
Net cash provided by (used in) investment activities -- -- 3,309
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock 9 48 --
Proceeds from note payable -- 100 1,400
Return of capital distribution -- -- (3,930)
Repayment of note payable -- (1,500) --
Dividends on common stock (532) (504) (522)
Purchase of shares (945) -- (799)
------- ------- -------
Net cash used in financing activities (1,468) (1,856) (3,851)
------- ------- -------
Net increase (decrease) in cash and cash equivalents (8) 71 (502)
Cash and cash equivalents at beginning of year 160 89 591
------- ------- -------
Cash and cash equivalents at end of year $ 152 $ 160 $ 89
======= ======= =======
</TABLE>
51
<PAGE>
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE O - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes the Corporation's quarterly results for
the years ended December 31, 1998 and 1997. Certain amounts, as previously
reported, have been reclassified to conform to the 1998 presentation.
<TABLE>
<CAPTION>
Three Months Ended
March 31, June 30, September 30, December 31,
1998: (In thousands, except per share data)
<S> <C> <C> <C> <C>
Total interest income $1,588 $1,639 $1,664 $1,688
Total interest expense 826 857 894 899
------ ------ ------ ------
Net interest income 762 782 770 789
Provision for losses on loans 9 9 13 32
Other income 52 70 60 103
General, administrative and other expense 317 320 320 365
------ ------ ------ ------
Earnings before income taxes 488 523 497 495
Income taxes 184 198 189 185
------ ------ ------ ------
Net earnings $ 304 $ 325 $ 308 $ 310
====== ====== ====== ======
Earnings per share:
Basic $ .24 $ .26 $ .24 $ .26
====== ====== ====== ======
Diluted $ .23 $ .25 $ .24 $ .25
====== ====== ====== ======
Three Months Ended
March 31, June 30, September 30, December 31,
1997: (In thousands, except per share data)
Total interest income $1,452 $1,504 $1,570 $1,620
Total interest expense 729 761 804 821
------ ------ ------ ------
Net interest income 723 743 766 799
Provision for losses on loans 3 5 9 9
Other income 4 41 19 38
General, administrative and other expense 282 286 292 287
------ ------ ------ ------
Earnings before income taxes 442 493 484 541
Income taxes 159 179 176 214
------ ------ ------ ------
Net earnings $ 283 $ 314 $ 308 $ 327
====== ====== ====== ======
Earnings per share:
Basic $ .22 $ .24 $ .23 $ .29
====== ====== ====== ======
Diluted $ .21 $ .24 $ .23 $ .27
====== ====== ====== ======
52
</TABLE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration
Statements on Form S-8, File No. 33-89788, of our report dated February 19, 1999
contained in the 1998 Annual Report to Shareholders of Logansport Financial
Corp., which is incorporated by reference in this Form 10-K.
/s/ Grant Thornton LLP
Cincinnati, Ohio
March 25, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000939928
<NAME> Logansport Financial Corporation
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1.000
<CASH> 363
<INT-BEARING-DEPOSITS> 3,965
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,162
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 73,073
<ALLOWANCE> 285
<TOTAL-ASSETS> 96,085
<DEPOSITS> 70,011
<SHORT-TERM> 5,000
<LIABILITIES-OTHER> 2,586
<LONG-TERM> 2,000
<COMMON> 0
0
0
<OTHER-SE> 16,488
<TOTAL-LIABILITIES-AND-EQUITY> 96,085
<INTEREST-LOAN> 5,538
<INTEREST-INVEST> 765
<INTEREST-OTHER> 276
<INTEREST-TOTAL> 6,579
<INTEREST-DEPOSIT> 3,097
<INTEREST-EXPENSE> 3,476
<INTEREST-INCOME-NET> 3,103
<LOAN-LOSSES> 63
<SECURITIES-GAINS> 4
<EXPENSE-OTHER> 1,322
<INCOME-PRETAX> 2,003
<INCOME-PRE-EXTRAORDINARY> 1,247
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,247
<EPS-PRIMARY> 1.00
<EPS-DILUTED> .97
<YIELD-ACTUAL> 3.61
<LOANS-NON> 315
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 245
<CHARGE-OFFS> 23
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 285
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 285
</TABLE>
