-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TZkV8AkRDmkL6kBmb2D96JofAQeYEDMhxEeJFPye2mchFZzykj1keBZG7I5qZm8H SQQ5OBRuJtGQqC0oDJ5aXQ== 0000908834-99-000073.txt : 19990311 0000908834-99-000073.hdr.sgml : 19990311 ACCESSION NUMBER: 0000908834-99-000073 CONFORMED SUBMISSION TYPE: DEF 14A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990310 FILED AS OF DATE: 19990310 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LOGANSPORT FINANCIAL CORP CENTRAL INDEX KEY: 0000939928 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 351945736 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: DEF 14A SEC ACT: SEC FILE NUMBER: 000-25910 FILM NUMBER: 99562230 BUSINESS ADDRESS: STREET 1: 723 E BROADWAY STREET 2: PO BOX 569 CITY: LOGANSPORT STATE: IN ZIP: 46947 BUSINESS PHONE: 2197223855 MAIL ADDRESS: STREET 1: 723 EAST BROADWAY STREET 2: P O BOX 569 CITY: LOGANSPORT STATE: IN ZIP: 46947 DEF 14A 1 PROXY STATEMENT AND NOTICE OF ANNUAL MEETING SCHEDULE 14A Information Required in Proxy Statement SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 Filed by the Registrant: Yes. Filed by a Party other than the Registrant: No. Check the appropriate box: [ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission Only (as Permitted by Rule 14a-6(e)(2)) [X] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12 LOGANSPORT FINANCIAL CORP. (Name Of Registrant As Specified In Its Charter) LOGANSPORT FINANCIAL CORP. (Name of Person(s) Filing Proxy Statement) Payment of Filing Fee (Check the appropriate box): [X] No fee required [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11 (1) Title of each class of securities to which transaction applies: N/A (2) Aggregate number of securities to which transaction applies: N/A (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): N/A (4) Proposed maximum aggregate value of transaction: N/A (5) Total fee paid: [ ] Fee paid previously with preliminary materials [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. N/A (1) Amount Previously Paid: (2) Form, Schedule or Registration Statement No.: (3) Filing Party: (4) Date Filed: [LOGO] LOGANSPORT FINANCIAL CORP. 723 East Broadway Logansport, Indiana 46947 (219) 722-3855 ---------------------------------------- NOTICE OF ANNUAL MEETING OF SHAREHOLDERS ---------------------------------------- To Be Held On April 13, 1999 Notice is hereby given that the Annual Meeting of Shareholders of Logansport Financial Corp. (the "Holding Company") will be held at the Holding Company's office at 723 East Broadway, Logansport, Indiana, on Tuesday, April 13, 1999, at 2:00 p.m., Eastern Standard time. The Annual Meeting will be held for the following purposes: 1. Election of Directors. Election of three of the directors of the Holding Company for terms expiring in 2002 and one director for a term expiring in 2001. 2. Approval of 1999 Stock Option Plan. Approval and ratification of the Logansport Financial Corp. 1999 Stock Option Plan (the "1999 Option Plan"). 3. Other Business. Such other matters as may properly come before the meeting or any adjournment thereof. Shareholders of record at the close of business on February 12, 1999, are entitled to vote at the meeting or any adjournment thereof. We urge you to read the enclosed Proxy Statement carefully so that you may be informed about the business to come before the meeting, or any adjournment thereof. At your earliest convenience, please sign and return the accompanying proxy in the postage-paid envelope furnished for that purpose. A copy of our Annual Report for the fiscal year ended December 31, 1998, is enclosed. The Annual Report is not a part of the proxy soliciting material enclosed with this letter. By Order of the Board of Directors /s/ Thomas G. Williams Thomas G. Williams, President and Chief Executive Officer Logansport, Indiana March 10, 1999 IT IS IMPORTANT THAT THE PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR NOT YOU PLAN TO BE PRESENT IN PERSON AT THE ANNUAL MEETING, PLEASE SIGN, DATE AND COMPLETE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. LOGANSPORT FINANCIAL CORP. 723 East Broadway Logansport, Indiana 46947 (219) 722-3855 --------------- PROXY STATEMENT --------------- FOR ANNUAL MEETING OF SHAREHOLDERS April 13, 1999 This Proxy Statement is being furnished to the holders of common stock, without par value (the "Common Stock"), of Logansport Financial Corp. (the "Holding Company"), an Indiana corporation, in connection with the solicitation of proxies by the Board of Directors of the Holding Company to be voted at the Annual Meeting of Shareholders to be held at 2:00 p.m., Eastern Standard time, on April 13, 1999, at the Holding Company's office at 723 East Broadway, Logansport, Indiana, and at any adjournment of such meeting. 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 Logansport Savings Bank, FSB ("Logansport Savings"). This Proxy Statement is expected to be mailed to the shareholders on or about March 10, 1999. The proxy solicited hereby, if properly signed and returned to the Holding Company and not revoked prior to its use, will be voted in accordance with the instructions contained therein. If no contrary instructions are given, each proxy received will be voted for each of the matters described below and, upon the transaction of such other business as may properly come before the meeting, in accordance with the best judgment of the persons appointed as proxies. Any shareholder giving a proxy has the power to revoke it at any time before it is exercised by (i) filing with the Secretary of the Holding Company written notice thereof (Dottye Robeson, 723 East Broadway, Logansport, Indiana 46947), (ii) submitting a duly executed proxy bearing a later date, or (iii) by appearing at the Annual Meeting and giving the Secretary notice of his or her intention to vote in person. Proxies solicited hereby may be exercised only at the Annual Meeting and any adjournment thereof and will not be used for any other meeting. VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF Only shareholders of record at the close of business on February 12, 1999 ("Voting Record Date"), will be entitled to vote at the Annual Meeting. On the Voting Record Date, there were 1,198,710 shares of the Common Stock issued and outstanding, and the Holding Company had no other class of equity securities outstanding. Each share of Common Stock is entitled to one vote at the Annual Meeting on all matters properly presented at the Annual Meeting. The holders of over 50% of the outstanding shares of Common Stock as of the Voting Record Date must be present in person or by proxy at the Annual Meeting to constitute a quorum. In determining whether a quorum is present, shareholders who abstain, cast broker non-votes, or withhold authority to vote on one or more director nominees will be deemed present at the Annual Meeting. The following table sets forth certain information regarding the beneficial ownership at the Common Stock as of February 12, 1999, by each person who is known by the Holding Company to own beneficially 5% or more of the Common Stock. Unless otherwise indicated, the named beneficial owner has sole voting and dispositive power with respect to the shares.
Number of Shares of Name and Address of Common Stock Percent of Beneficial Owner (1) Beneficially Owned Class (2) -------------------- ------------------ --------- Friedman, Billings, Ramsey Group, Inc. (3) 107,900 9.00% Eric F. Billings Emanuel J. Friedman W. Russell Ramsey 1001 19th Street North Arlington, Virginia 22209-1710 Bay Pond Partners, L.P. (4) 81,000 6.75% Wellington Management Company, LLP Wellington Hedge Management LLC Wellington Hedge Management, Inc. 75 State Street Boston, Massachusetts 02109 John Hancock Advisers, Inc. (5) 77,500 6.46% John Hancock Mutual Life Insurance Company John Hancock Subsidiaries, Inc. The Berkeley Financial Group 101 Huntington Avenue Boston, Massachusetts 02199
(1) The information in this chart is based on Schedule 13D and 13G Reports filed by the above-listed persons with the Securities and Exchange Commission (the "SEC") containing information concerning shares held by them, and information provided to the Holding Company after such filing was made. It does not reflect any changes in those shareholdings which may have occurred since the date of such information provided to the Holding Company. (2) Based upon 1,198,710 shares of Common Stock outstanding which does not include options for 126,415 shares of Common Stock granted to certain directors, officers and employees of the Holding Company and Logansport Savings. (3) A Schedule 13G was filed by these persons indicating that they share dispositive and voting power with respect to these shares. Friedman, Billings, Ramsey Group, Inc. controls FBR Fund Advisors, Inc., which acts as adviser to the FBR Family of Funds which may beneficially own over 5% of the Holding Company's outstanding shares. (4) In Schedules 13G and 13D filed with the SEC, the entities listed above indicate they may be the beneficial owners of the foregoing shares and that over 5% of the Holding Company's outstanding shares may be deemed to be beneficially owned by the Bay Pond Partners, L.P. ("Bay Pond"), a Delaware limited partnership. Any shares not beneficially owned by Bay Pond may be held by other clients of Wellington Management Company, LLP ("WMC"), a Massachusetts limited partnership and a registered investment adviser. WMC's clients share with WMC investment and voting power with respect to the shares held by those clients. Bay Pond also shares dispositive power with respect to certain shares with Wellington Hedge Management LLC ("WHM"), a Massachusetts limited liability company, which is the sole general partner of Bay Pond, and with Wellington Hedge Management, Inc., a Massachusetts corporation, which is the managing member of WHM. (5) In a Schedule 13G amendment filed with the SEC, the entities listed above indicate they may be the beneficial owners of the foregoing shares, which are held by the John Hancock Regional Bank Fund, a registered investment company. John Hancock Advisers, Inc. ("Advisers") acts as investment adviser to that fund. The other entities listed above are parent company affiliates of Advisers. Advisers has sole power to vote and dispose of the shares. PROPOSAL I -- ELECTION OF DIRECTORS The Board of Directors consists of eight members. The By-Laws provide that the Board of Directors is to be divided into three classes as nearly equal in number as possible. The members of each class are to be elected for a term of three years and until their successors are elected and qualified. One class of directors is to be elected annually. The four nominees for election as a director this year are Charles J. Evans, Brian Morrill, David G. Wihebrink, and Thomas G. Williams, each whom currently serves as a director whose term will expire upon the completion of the election at the Annual Meeting. Mr. Morrill was added to the Holding Company's Board of Directors in October, 1998. Messrs. Evans, Wihebrink and Williams each have been nominated to serve for a three-year term ending in 2002. Mr. Morrill has been nominated to serve for a two-year term ending in 2001. Unless otherwise directed, each proxy executed and returned by a shareholder will be voted for the election of the nominees listed below. If any person named as a nominee should be unable or unwilling to stand for election at the time of the Annual Meeting, the proxy holders will nominate and vote for a replacement nominee recommended by the Board of Directors. At this time, the Board of Directors knows of no reason why the nominees listed below may not be able to serve as directors if elected. -2- The following table sets forth certain information regarding the nominees for the position of director of the Holding Company and each director continuing in office after the Annual Meeting, including the number and percent of shares of Common Stock beneficially owned by such persons as of the Voting Record Date. Unless otherwise indicated, each director or nominee has sole investment and/or voting power with respect to the shares shown as beneficially owned by him. No nominee for director or director is related to any other nominee for director, director, or executive officer of the Holding Company by blood, marriage, or adoption, and there are no arrangements or understandings between any nominee and any other person pursuant to which such nominee was selected. The table also sets forth the number of shares of Holding Company Common Stock beneficially owned by all directors and executive officers of the Holding Company as a group.
Director Common Stock Director of of the Beneficially Expiration of Logansport Holding Owned as of Term as Savings Company February 12, Percentage Name Director Since Since 1999 (1) of Class - ------------------------------------------------------------------------------------------------------------------ Director Nominees - ----------------- Charles J. Evans 2002 1997 1995 39,511(2) 3.2% Brian Morrill 2001 1998 1998 -0- David G. Wihebrink 2002 1991 1995 16,374(3) 1.4% Thomas G. Williams 2002 1962 1995 56,732(4) 4.6% Directors - --------- Continuing in Office Norbert E. Adrian 2000 1979 1995 25,306(5) 2.1% Donald G. Pollitt 2001 1960 1995 19,614(6) 1.6% Susanne S. Ridlen 2001 1982 1995 9,864(7) .8% William Tincher, Jr. 2000 1994 1995 22,399(8) 1.9% All directors and executive officers as a group (10 persons) 215,292(9) 17.0%
(1) Based upon information furnished by the respective directors or director nominees. Under applicable regulations, shares are deemed to be beneficially owned by a person if he or she directly or indirectly has or shares the power to vote or dispose of the shares, whether or not he or she has any economic power with respect to the shares. Includes shares benefically owned by members of the immediate families of the directors or director nominees residing in their homes. (2) Includes 7,290 shares held jointly by Mr. Evans and his spouse, 23,607 shares subject to a stock option granted under the Logansport Financial Corp. Stock Option Plan (the "Option Plan") and 7,935 shares are held under the Logansport Savings Bank, FSB Recognition and Retention Plan and Trust (the "RRP"). Does not include stock options for 15,738 shares which are not exercisable for a period of 60 days following the Voting Record Date. (3) Of these shares, 1,406 are held by Mr. Wihebrink as custodian for his minor children, 3,146 shares are subject to a stock option granted under the Option Plan and 1,587 shares are held under the RRP. Does not include stock options for 3,150 shares which are not exercisable for a period of 60 days following the Voting Record Date. (4) Includes 23,607 shares subject to a stock option granted under the Option Plan and 7,935 shares held under the RRP. Does not include stock options for 15,738 shares which are not exercisable for a period of 60 days following the Voting Record Date. (5) Includes 8,000 shares held jointly by Mr. Adrian and his son, 4,719 shares subject to a stock option granted under the Option Plan and 1,587 shares held under the RRP. Does not include stock options for 3,150 shares which are not exercisable for a period of 60 days following the Voting Record Date. (6) Includes 14,008 shares held jointly by Mr. Pollitt and his spouse, 4,019 shares subject to a stock option granted under the Option Plan and 1,587 shares held under the RRP. Does not include stock options for 3,150 shares which are not exercisable for a period of 60 days following the Voting Record Date. (7) Includes 1,058 shares held jointly by Ms. Ridlen and her spouse, 4,719 shares subject to a stock option granted under the Option Plan and 1,587 shares held under the RRP. Does not include stock options for 3,150 shares which are not exercisable for a period of 60 days following the Voting Record Date. (8) Of these shares, 17,552 are held jointly by Mr. Tincher with his spouse and children, 3,146 shares are subject to a stock option granted under the Option Plan and 1,587 shares are held under the RRP. Does not include stock options for 3,150 shares which are not exercisable for a period of 60 days following the Voting Record Date. (9) The total of such shares includes 68,748 shares subject to stock options granted under the Option Plan and 27,105 shares which are held under the RRP. Does not include stock options for 48,416 shares which are not exercisable within a period of 60 days following the Voting Record Date. -3- Presented below is certain information concerning the director nominees of the Holding Company: Norbert E. Adrian (age 69) retired as the General Manager of Rockwell International ("Rockwell") in 1984 after 20 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. Charles J. Evans (age 52) has served as Vice President and Senior Loan Officer of Logansport Savings since 1980. Brian Morrill (age 41) has served as President of Cass County Title Company, Inc., a title insurance company founded by him which is based in Logansport, Indiana, since 1994; prior thereto he served as Executive Director of Cass County Family YMCA in Logansport, Indiana. Donald G. Pollitt (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 58) has served as Faculty member of Indiana University Kokomo since 1969. Ms. Ridlen also currently serves as a member of the Board of Directors of the Cass County Community Foundation 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 Home retirement home in Logansport, Indiana. Thomas G. Williams (age 65) has served as President of Logansport Savings since 1971. THE DIRECTORS SHALL BE ELECTED UPON RECEIPT OF A PLURALITY OF VOTES CAST AT THE ANNUAL SHAREHOLDERS MEETING. PLURALITY MEANS THAT INDIVIDUALS WHO RECEIVE THE LARGEST NUMBER OF VOTES CAST ARE ELECTED UP TO THE MAXIMUM NUMBER OF DIRECTORS TO BE CHOSEN AT THE MEETING. ABSTENTIONS, BROKER NON-VOTES, AND INSTRUCTIONS ON THE ACCOMPANYING PROXY TO WITHHOLD AUTHORITY TO VOTE FOR ONE OR MORE OF THE NOMINEES WILL RESULT IN THE RESPECTIVE NOMINEE RECEIVING FEWER VOTES. HOWEVER, THE NUMBER OF VOTES OTHERWISE RECEIVED BY THE NOMINEE WILL NOT BE REDUCED BY SUCH ACTION. The Board of Directors and its Committees During the fiscal year ended December 31, 1998, the Board of Directors of the Holding Company met or acted by written consent ten times. No director attended fewer than 75% of the aggregate total number of meetings during the last fiscal year of the Board of Directors of the Holding Company held while he served as director and of meetings of committees which he served during that fiscal year. The Board of Directors of the Holding Company has an Audit Committee, a Stock Compensation Committee and Nominating Committee, among its other Board Committees. All committee members are appointed by the Board of Directors. -4- The Holding Company's Audit Committee is comprised of all members of the Board of Directors, recommends the appointment of the Holding Company's independent accountants, and meets with them to outline the scope and review the results of audits. The Audit Committee met one time during 1998. The Stock Compensation Committee administers the Option Plan and the RRP, and will administer the 1999 Option Plan if it is approved by the shareholders of the Holding Company. The members of that Committee are Susanne Ridlen, William Tincher, Jr., and David G. Wihebrink. It met two times during 1998. The Board of Directors nominated the slate of directors set forth in the Proxy Statement. Although the Board of Directors of the Holding Company will consider nominees recommended by shareholders, it has not actively solicited recommendations for nominees from shareholders nor has it established procedures for this purpose. Article III, Section 12 of the Holding Company's By-Laws provides that shareholders entitled to vote for the election of directors may name nominees for election to the Board of Directors but there are certain requirements that must be satisfied in order to do so. Among other things, written notice of a proposed nomination must be received by the Secretary of the Holding Company not less than 60 days prior to the Annual Meeting; provided, however, that in the event that less than 70 days' notice or public disclosure of the date of the meeting is given or made to shareholders (which notice or public disclosure includes the date of the Annual Meeting specified in the Holding Company's By-Laws if the Annual Meeting is held on such date), notice must be received not later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Management Remuneration and Related Transactions Remuneration of Named Executive Officer During the fiscal year ended December 31, 1998, no cash compensation was paid directly by the Holding Company to any of its executive officers. Each of such officers was compensated by Logansport Savings. The following table sets forth information as to annual, long-term and other compensation for services in all capacities to the Holding Company and its subsidiaries for each of the three fiscal years ended December 31, 1998, of the person who served as chief executive officer of the Holding Company during the fiscal year ended December 31, 1998 (the "Named Executive Officer"). There were no other executive officers of the Holding Company who earned over $100,000 in salary and bonuses during that fiscal year.
Summary Compensation Table Long Term Compensation Annual Compensation Awards -------------------------------------- ------------------------ Other All Annual Restricted Securities Other Name and Fiscal Compen- Stock Underlying Compen- Principal Position Year Salary ($)(1) Bonus ($) sation($)(2) Awards($) Options(#) sation($) - ------------------------------------------------------------------------------------------------------------------- Thomas G. Williams 1998 $79,800 $40,347 --- --- --- --- President, Chief Executive 1997 $76,800 $38,898 --- --- --- --- Officer and Director 1996 $74,800 $32,611 --- $165,313(3) 33,063 (4) ---
(1) Includes fees received for service on Logansport Savings Board of Directors, including fees deferred pursuant to Mr. Williams' deferred compensation agreement. Does not include commissions received on the sale of credit life and mortgage life insurance or fees for appraisal services. See "Transactions with Certain Related Persons." (2) The Named Executive Officer of the Holding Company receives certain perquisites, but the incremental cost of providing such perquisites does not exceed the lesser of $50,000 or 10% of the officer's salary and bonus. (3) The value of the restricted stock awards was determined by multiplying the fair market value of the Common Stock on the date the shares were awarded by the number of shares awarded. These shares vest over a five year period. As of December 31, 1998, the number and aggregate value of restricted stock holdings by Mr. Williams were 7,935 and $107,123, respectively. Dividends paid on the restricted shares are payable to the grantee as the shares are vested and are not included in the table. (4) Effective January 14, 1997, these options were adjusted so as to be for the purchase of 39,345 shares as a result of the Corporation's special cash distribution paid on December 10, 1996. -5- Stock Options The following table includes the number of shares covered by stock options held by the Named Executive Officer as of December 31, 1998. Also reported are the values for "in-the-money" options (options whose exercise price is lower than the market value of the shares at fiscal year end) which represent the spread between the exercise price of any such existing stock options and the fiscal year-end market price of the stock. The Named Executive Officer did not exercise any stock options during the fiscal year. Outstanding Stock Option Grants and Value Realized As Of 12/31/98
Number of Unexercised Value of Unexercised In-the-Money Options at Fiscal Year End Options at Fiscal Year End (1) --------------------------------- ----------------------------------- Name Exercisable Unexercisable(2) Exercisable Unexercisable(2) ---- ----------- ---------------- ----------- ---------------- Thomas G. Williams 15,738 23,607 $ 46,742 $70,113
(1) Amounts reflecting gains on outstanding options are based on the average between the high and low prices for the shares on December 31, 1998, which was $13.50 per share. (2) The shares represented could not be acquired by the Named Executive Officer as of December 31, 1998. Employment Contracts Logansport Savings has entered into three-year employment contracts with Mr. Williams, the Holding Company's President and Chief Executive Officer, and Charles J. Evans, the Holding Company's Vice President (together, the "Employees"). The contracts with the Employees extend annually for an additional one-year term to maintain their three-year term if the Board of Directors of Logansport Savings determines to so extend them, unless notice not to extend is properly given by either party to the contract. Each Employee receives an initial salary under the contract equal to his current salary subject to increases approved by the Board of Directors. The contracts also provide, among other things, for participation in other fringe benefits and benefit plans available to Logansport Savings' employees. Each Employee may terminate his employment upon sixty days' written notice to Logansport Savings. Logansport Savings may discharge each Employee for cause (as defined in the contract) at any time or in certain events specified by Office of Thrift Supervision ("OTS") regulations. If Logansport Savings terminates an Employee's employment for other than cause or if the employee terminates his own employment for cause (as defined in the contract), the Employee will receive his base compensation under the contract for an additional three years if the termination follows a change of control in the Holding Company (as defined below). In addition, during such period, the employee will continue to participate in Logansport Savings' group insurance plans or receive comparable benefits. Moreover, within a period of three months after such termination following a change of control, the employee will have the right to cause Logansport Savings to purchase any stock options he holds for a price equal to the fair market value (as defined in the contact) of the shares subject to such options minus their option price. If the payments provided for in the contract, together with any other payments made to the employee by Logansport Savings, are deemed to be payments in violation of the "golden parachute" rules of the Code, such payments will be reduced to the largest amount which would not cause Logansport Savings to lose a tax deduction for such payments under those rules. As of the date hereof, the cash compensation which would be paid under the contracts to the Employees if the contracts were terminated either after a change of control of the Holding Company, without cause by Logansport Savings, or for cause by the Employees, would be $345,250 for Mr. Williams and $239,250 for Mr. Evans. For purposes of these employment contracts, a change of control of the Holding Company is generally an acquisition of control, as defined in regulations issued under the Change in Bank Control Act and the Savings and Loan Holding Company Act. The employment contracts provide Logansport Savings protection of its confidential business information and protection from competition by the Employees should they voluntarily terminate their employment without cause or be terminated by Logansport Savings for cause. Executive Supplemental Retirement Income Agreements. Logansport Savings has entered into supplemental retirement agreements with Messrs. Williams and Evans (each, an "Executive"). These agreements provide that upon retirement after attaining age 65, assuming continuous service to Logansport Savings until that date, the Executive is entitled to receive annual supplemental retirement benefits in an amount equal to 40% of the highest salary received by the Executive during any 12 month period during his term of service with Logansport Savings, subject to a maximum benefit of $42,000 annually in the case of Mr. Williams and $52,000 annually in the case of Mr. Evans (the "Annual Retirement Benefit"). These benefits are payable in equal monthly installments over a period of 180 months following retirement. The Executives may elect to receive early retirement benefits upon attaining age 62, assuming continuous service to Logansport Savings until that date. Upon an Executive's election to receive such benefits, the Executive is entitled to receive his Annual Retirement Benefit, reduced by 3% in the case of Mr. Williams and 2% in the case of Mr. Evans, for each year or fraction thereof that the Executive's early retirement date precedes his normal retirement date. These early retirement benefit payments begin at the Executive's normal retirement date. However, earlier payment may be requested by the Executive, subject to Board approval. If early payment is approved by the Board of -6- Directors, the Executive's benefit amount is reduced to the present value using a discount rate equal to Logansport Savings' average cost of deposits for the most recent 12 month period. If early payment is not approved by the Board, the Executive is entitled to receive that portion of his Annual Retirement Benefit which is required to be expensed and accrued under generally accepted accounting principles (the "Accrued Benefit") and is vested. Mr. Williams' benefits are fully vested. Mr. Evans' benefits are 60% vested and will continue to vest at the rate of 20% for each additional calendar year of his service through calendar year 2000. If the Executive dies prior to retirement, his beneficiary will receive an annual survivor's benefit in an amount equal to 40% of the Executive's annual salary at death, subject to a maximum $42,000 in the case of Mr. Williams and $52,000 in the case of Mr. Evans. The survivor's benefit is payable in equal monthly installments over a period of 180 months. If the Executive dies after he has begun receiving retirement benefits under his agreement, his beneficiary will continue to receive the balance of the payments otherwise payable to the Executive under his agreement. Upon the Executive's death, his beneficiary also will receive a one-time lump sum death benefit in the amount of $12,500. If the Executive is disabled prior to retirement, the Executive is entitled to receive his Accrued Benefit payable in equal monthly installments over a period of 180 months. If the Executive dies while receiving disability benefit payments, his beneficiary is entitled to receive an annual survivor's benefit in an amount equal to $42,000 in the case of Mr. Williams and $52,000 in the case of Mr. Evans payable in equal monthly installments for the remainder of the Executive's 180 month disability benefit period. In addition, at the Executive's death, if the total disability benefit payments received, or to be received, are less than $250,000, the Executive's beneficiary is entitled to a lump sum payment in an amount sufficient to make the total benefits equal to $250,000. Payments of benefits under the agreements are conditioned upon (1) the Executive not becoming employed by a competitor of Logansport Savings or otherwise competing with Logansport Savings while receiving benefits under the agreements and (2) in the case of Mr. Williams, the Executive rendering reasonable business consulting advisory services to Logansport Savings for a period of five years following his retirement. Mr. Evans' agreement provides that if he is terminated for any reason other than cause, he is entitled to receive that portion of his Accrued Benefit which has vested. No benefits are provided if Mr. Evans voluntarily terminates his employment before he is otherwise entitled to benefits under the agreement. If an Executive's employment is terminated for cause, all benefits under his agreement are forfeited and the agreement is rendered null and void. Logansport Savings expensed $61,541 in connection with these agreements for the year ended December 31, 1998. Logansport Savings has purchased paid-up life insurance on the lives of the Executives to fund the benefits payable under the supplemental retirement agreements. See "-- Insurance to Fund Certain Benefits." Compensation of Directors All directors of Logansport are entitled to receive a monthly director fee of $400. Total fees paid to directors for the year ended December 31, 1998 were $38,772. Logansport Savings' directors may, pursuant to deferred compensation agreements, defer payment of some or all of the directors' fees until after they retire or otherwise no longer serve as directors. Upon their attainment of age 70, directors who participate in the deferred compensation plan receive fixed monthly payments for 180 months, but may also elect to receive their benefits in a lump sum. The amount of each director's monthly payments depends on the amount of fees deferred and the period over which the fees were deferred. The agreements also provide for the payment of disability benefits and death benefits. The beneficiary of a director participating in the deferred compensation plan also receives a $7,500 lump sum death benefit upon the director's death. Logansport Savings has purchased paid-up life insurance on the lives of directors participating in the deferred compensation plans to fund benefits payable thereunder. Logansport Savings expensed $14,691 in connection with these agreements for the year ended December 31, 1998. See "-- Insurance to Fund Certain Benefits." Advisory Director, Forrest H. Montgomery, receives a monthly advisory director fee of $331 pursuant to the terms of an amended death benefit agreement. See "-- Death Benefit Agreement with Advisory Director." Directors of the Holding Company are not currently paid directors' fees. The Holding Company may, if it believes it is necessary to attract qualified directors or otherwise beneficial to the Holding Company, adopt a policy of paying directors' fees. Death Benefit Agreement with Advisory Director Logansport Savings has entered into an amended death benefit agreement with Forrest H. Montgomery, an advisory director to Logansport. This agreement provides for the payment of a monthly benefit in the amount of $331 which commenced on April, 1992 upon Mr. Montgomery's retirement and continues for a 120-month period. If Mr. Montgomery dies while receiving monthly benefits under -7- the Agreement, the unpaid balance of the monthly payments will be paid monthly to his designated beneficiary for the remainder of the period. The payment of these benefits is conditioned upon (i) Mr. Montgomery's continued service as an advisory director to Logansport and (ii) Mr. Montgomery not becoming employed by a competitor of Logansport Savings or otherwise competing with Logansport Savings while receiving benefits under the agreement and for a period of two (2) years thereafter. Logansport Savings has purchased paid-up life insurance on the life of Mr. Montgomery to fund the benefits payable under the amended death benefit agreement. See "-- Insurance to Fund Certain Benefits." Insurance to Fund Certain Benefits Logansport Savings has purchased paid-up life insurance on the lives of the Executives covered under the supplemental retirement income agreements with Mr. Williams and Mr. Evans, and on the lives of the directors and the advisory director covered under the deferred compensation agreements and the amended death benefit agreement to fund the obligations under these agreements. The insurance is provided by Transamerica Life Insurance Company. At December 31, 1998, the cash surrender value of the policies was carried on the books of Logansport at an amount equal to $1,135,348. Transactions With Certain Related Persons Logansport Savings has followed a policy of offering to its directors, officers, and employees real estate mortgage loans secured by their principal residence and other loans. These loans are made in the ordinary course of business with the same collateral, interest rates and underwriting criteria as those of comparable transactions prevailing at the time and do not involve more than the normal risk of collectibility or present other unfavorable features. Loans to directors and executive officers totaled approximately $364,000, or 2.21% of shareholders' equity on a consolidated basis at December 31, 1998. In addition to their compensation from Logansport Savings, Mr. Williams and Mr. Evans also receive commissions on sales of credit life insurance and mortgage life insurance to Logansport Savings' customers. Mr. Williams and Mr. Evans are duly licensed to sell such products and retain 50% of the commissions received on credit life and mortgage life insurance sales. Logansport Savings receives the other half of the commissions earned by Mr. Williams and Mr. Evans from the sales of these products. For the year ended December 31, 1998, Mr. Williams received $9,368 in commissions from the sale of credit life and mortgage life insurance. Mr. Evans received no commissions for 1998. Logansport Savings currently utilizes Mr. Evans, who is a state licensed appraiser, as a staff appraiser for substantially all residential mortgage loans under $250,000. Mr. Williams serves as a review appraiser for all appraisals performed by Mr. Evans. As part of closing costs, Logansport charges an appraisal fee of approximately $100 for all residential mortgage loans. In connection with their appraisal work, Mr. Evans and Mr. Williams receive 60% and 40%, respectively, of this appraisal fee. For the year ended December 31, 1998, Mr. Evans and Mr. Williams received $11,550 and $3,450, respectively, as compensation for their appraisal work. Logansport Savings currently utilizes Cass County Title Company, Inc. to provide title insurance or to perform real estate searches in connection with its mortgage lending. Brian Morrill, a director of the Holding Company and of Logansport Savings, is President and principal owner of Cass County Title Company, Inc. During 1998, that company received fees for such title insurance and real estate searches from Logansport Savings in the amount of $31,710, an amount in excess of 5% of the gross revenues of Cass County Title Company, Inc. PROPOSAL II -- STOCK OPTION PLAN The Board of Directors of the Holding Company adopted the Logansport Financial Corp. 1999 Stock Option Plan (the "1999 Option Plan") on February 9, 1999. The essential features of the 1999 Option Plan are summarized below, but the 1999 Option Plan is set forth in full in Exhibit A to this Proxy Statement, and all statements made in this summary are qualified by reference to the full text of the 1999 Option Plan. Purpose The purpose of the 1999 Option Plan is to provide to certain directors, officers and other key employees of the Holding Company and its subsidiaries -8- (currently approximately ten persons) a favorable opportunity to acquire Common Stock of the Holding Company and thereby increase the incentive of such persons to work for the success of the Holding Company and its subsidiaries and better enabling such entities to attract or retain capable directors and executive personnel. The 1999 Option Plan provides for the grant of both incentive stock options (options that afford favorable tax treatment to recipients upon compliance with certain restrictions and that do not normally result in tax deductions to the Holding Company) and options that do not so qualify (non-qualified stock options). Administration The 1999 Option Plan is administered, construed and interpreted by a committee consisting of at least two members of the Holding Company's Board of Directors. The Holding Company's Stock Compensation Committee will administer the 1999 Option Plan. The Stock Compensation Committee selects the individuals to whom options or cash awards will be granted and determines the time of grant, the number of shares of stock to be covered by each option, the amount of any cash awards, the option price, the period within which the option may be exercised, whether the option is an incentive stock option or non-qualified stock option, and any other terms and conditions of the options or cash awards granted. Members of the Stock Compensation Committee must be nonemployee directors of the Holding Company. The current members of that Committee are set forth on page 4 of this Proxy Statement. Reservation of Shares The Holding Company has reserved 115,000 shares of its Common Stock for issuance upon exercise of options to be granted under the 1999 Option Plan. No stock options have been granted under the 1999 Option Plan as yet. Shares issued under the 1999 Option Plan may be authorized but unissued shares or treasury shares of the Holding Company. In the event of corporate changes affecting the Holding Company's Common Stock, such as reorganizations, recapitalizations, stock splits, stock dividends, mergers, consolidations, liquidations, and extraordinary distributions (consisting of cash, securities, or other assets), the Stock Compensation Committee may make appropriate adjustments in the number and kind of shares reserved under the 1999 Option Plan and in the option price under, and the number and kind of shares covered by, outstanding options granted under the 1999 Option Plan. Any shares subject to an option which expires or is terminated before exercise will again be available for issuance under the 1999 Option Plan. Options and cash awards may be granted to directors, officers (including officers who are members of the Board of Directors) and other key employees of the Holding Company and its subsidiaries who are materially responsible for the management or operation of the business of the Holding Company or its subsidiaries and have provided valuable services to the Holding Company or its subsidiaries. Such individuals may be granted more than one option under the 1999 Option Plan. However, no employee may be granted options under the 1999 Option Plan for more than 35,000 shares of Common Stock in any calendar year. Terms of the Options Stock Option Price. The price to be paid for shares of Common Stock upon the exercise of each incentive stock option shall not be less than the fair market value of such shares on the date on which the option is granted. However, the Committee does have the discretion to award non-qualified stock options to eligible employees and directors of the Holding Company or of its subsidiaries at a price no less than 85% of the fair market value of the Common Stock on the date the option is granted. Incentive stock options granted to holders of more than 10% of the combined voting power of all classes of stock of the Holding Company may be granted at an option price no less than 110% of the fair market value of the stock on the date of grant. Option Term. No option may have a term longer than ten years and one day from the date grant. However, under the Internal Revenue Code of 1986, as amended (the "Code"), incentive stock options may not have terms in excess of ten years. Incentive stock options granted to holders of more than 10% of the combined voting power of all classes of stock of the Holding Company may not have terms in excess of five years. Exercise of Option. The option price of each share of stock is to be paid in full in cash at the time of exercise. Under certain circumstances, the 1999 Option Plan permits optionees to deliver a notice to their broker to deliver to the Holding Company the total option price in cash and the amount of any taxes -9- to be withheld from the optionee's compensation as a result of any withholding tax obligation of the Holding Company. With the approval of the Stock Compensation Committee, payment of the option price may also be effected by tendering whole shares of the Holding Company's Common Stock owned by the Optionee and cash having a fair market value equal to the cash exercise price of the shares with respect to which the option is being exercised. Options may be exercisable in full at any time during their term or in such installments, on a cumulative basis, as the Stock Compensation Committee may determine, except that no option may be exercised at any time as to fewer than 100 shares unless the exercise is with respect to an entire residue of fewer than 100 shares, and no option may be exercised during the first six months of its term. Exercise of Options by Other than Outside Directors. Except as provided below, upon termination of an optionholder's employment by the Holding Company and its subsidiaries, all rights under any options granted to him but not yet exercised terminate. In the event that an optionee retires pursuant to any then existing pension plan of the Holding Company or its subsidiaries, his option may be exercised by him in whole or in part within three years after his retirement until the expiration of the option term fixed by the Committee, whether or not the option was otherwise exercisable by him at his date of retirement; provided, however, that if he remains a director or director emeritus of the Holding Company he may exercise such option until the later of (a) three years after his retirement or (b) six months after he ceases to be a director or director emeritus of the Holding Company. If an optionee's employment by the Holding Company and its subsidiaries terminates by reason of permanent and total disability, his option may be exercised by him in whole or in part within one year after such termination of employment, whether or not the option was otherwise exercisable by him at the time of such termination of employment. If the optionee dies while employed by the Holding Company or its subsidiaries, within three years after his retirement (or, if later, six months following his termination of service as a director or director emeritus of the Holding Company), or within one year after his termination of employment because of permanent and total disability, his option may be exercised by his estate or by the person or persons entitled thereto by will or by the applicable laws of descent or distribution at any time within one year after the date of such death, whether or not the option was otherwise exercisable by the optionee at the date of his death. Notwithstanding the foregoing, in no event may any option be exercised after the expiration of the option term set by the Stock Compensation Committee. Exercise of Options by Outside Directors. Options granted to Outside Directors terminate six months after the date such Outside Director ceases to be a director and director emeritus of the Holding Company for any reason. If an optionee who is an Outside Director ceases to be a director and a director emeritus by reason of disability, any option granted to him may be exercised in whole or in part within one year of such termination of service, whether or not the option was otherwise exercisable by him at the time of such termination of service. In the event of the death of an Outside Director while serving as a director or director emeritus of the Holding Company, within six months after he ceases to be a director and a director emeritus of the Holding Company, or within one year after he ceases to be a director and a director emeritus of the Holding Company by reason of disability, any option granted to him may be exercised by his estate or by the person or persons entitled thereto by will or by the applicable laws of descent or distribution at any time within one year after the date of such death, whether or not the option was exercisable by the optionee at the date of his death. Notwithstanding the foregoing, in no event may any option be exercised after the expiration of the option term set by the Stock Compensation Committee. Nontransferability of Option. Options may not be transferred except by will or the laws of descent and distribution or pursuant to a qualified domestic relations order. During the lifetime of an optionee, they may be exercised only by him or his guardian or legal representative. Maximum Incentive Stock Options. The aggregate fair market value of stock with respect to which incentive stock options are exercisable for the first time by an optionee during any calendar year under the 1999 Option Plan may not exceed $100,000. For purposes of these computations, the fair market value of the shares is to be determined as of the date the option is granted and computed in the manner determined by the Stock Compensation Committee consistent with the requirements of the Code. This limitation does not apply to non-qualified stock options granted under the 1999 Option Plan. -10- Cash Awards. The Stock Compensation Committee may grant to optionees who are granted non-qualified stock options the right to receive a cash amount which is intended to reimburse the optionee for all or a portion of the federal, state and local income taxes imposed upon the optionee as a result of the exercise of a non-qualified stock option and the receipt of a cash award. Replacement and Extension of the Terms of Options and Cash Awards. The Stock Compensation Committee from time to time may permit an optionee under the 1999 Option Plan or any other stock option plan adopted by the Holding Company or any of its subsidiaries, to surrender for cancellation any unexercised outstanding stock option and receive from the optionee's employing corporation in exchange therefor an option for such number of shares of Common Stock as may be designated by the Stock Compensation Committee. Such optionees may also be granted related cash awards. Change of Control. In the event of a change of control of the Holding Company, outstanding options which are not otherwise exercisable will become immediately exercisable. Change of control, for this purpose, means an acquisition of control of the Holding Company or of Logansport Savings within the meaning of 12 C.F.R. ss. 574.4(a) (other than a change of control resulting from a trustee or other fiduciary holding shares of Common Stock under an employee benefit plan of the Holding Company or any of its subsidiaries). This provision could result in adverse tax consequences to the Holding Company and to the optionee as a result of the golden parachute provisions in the Code. Under the golden parachute provisions, compensatory payments made by the Holding Company to an employee following a change in control which are contingent on a change in control and which exceed certain limits based on the average annual compensation of the employee for the five calendar years before the change in control are not deductible by the Holding Company and would subject the optionee to a 20% excise tax. The value of any option which would become immediately exercisable following a change in control (the spread between the then fair market value of the option shares and the option price) could be deemed to be a compensatory payment contingent on a change in control, and, thus, if such amount, when added to any other payments made by the Holding Company to the employee which are contingent on a change in control, would exceed the limits described above, the excess amounts would be non-deductible and subject to the excise tax. The effect of this change of control provision which, under certain circumstances, could accelerate benefits to optionholders may be to increase the cost of a potential business combination or acquisition of control of the Holding Company. To the extent that this increased cost is significant, potential acquirors may be deterred from pursuing a transaction involving the Holding Company, and its shareholders may be deprived of an opportunity to sell their shares at a favorable price. However, the options which may be granted under the 1999 Option Plan may be fully exercisable within six months following the date of the grant, so the change of control provision described above may not have a significant deterrent effect. Moreover, to the extent this provision could operate to accelerate benefits under stock options awarded in the future, the Board of Directors believes that the expected benefits of these provisions in attracting and retaining qualified management personnel outweigh these possible disadvantages. Other Provisions The Stock Compensation Committee may provide for such other terms, provisions and conditions of an option as are not inconsistent with the 1999 Option Plan. The Stock Compensation Committee may also prescribe, and amend, waive and rescind rules and regulations relating to the 1999 Option Plan, may accelerate the vesting of stock options or cash awards granted or made under the 1999 Option Plan, may make amendments or modifications in the terms and conditions (including exercisability) of the options relating to the effect of termination of employment of the optionees, and may waive any restrictions or conditions applicable to any option or the exercise thereof. Amendment and Termination The Board of Directors of the Holding Company may amend the 1999 Option Plan from time to time, and, with the consent of the optionee, the terms and provisions of his option or cash award, provided, however, that (1) no amendment may, without the consent of an optionee, make any changes in any outstanding -11- option or cash award which would adversely affect the rights of the optionee and (2) without approval of the holders of at least a majority of the shares of the Holding Company voting in person or by proxy at a duly constituted meeting, or adjournment thereof, the following changes in the 1999 Option Plan may not be made: an increase in the number of shares reserved for issuance under the 1999 Option Plan (except as permitted by the antidilutive provisions in the 1999 Option Plan); an extension of the option terms to more than 10 years and one day from the date of grant of the option; or a material modification of the class of employees eligible to receive options or cash awards under the 1999 Option Plan. The Board of Directors of the Holding Company may terminate the 1999 Option Plan at any time. In any event, no incentive stock options may be granted under the Stock 1999 Option Plan after April 13, 2009. Federal Income Tax Consequences The grant of incentive and non-qualified stock options will have no federal tax consequences to the Holding Company or the optionee. Moreover, if an incentive stock option is exercised (a) while the employee is employed by the Holding Company or its subsidiaries, (b) within three months after the optionee ceases to be an employee of the Holding Company or its subsidiaries, (c) after the optionee's death, or (d) within one year after the optionee ceases to be an employee of the Holding Company or its subsidiaries if the optionee's employment is terminated because of permanent and total disability (within the meaning of ss. 22(e)(3) of the Code), the exercise of the incentive stock option will ordinarily have no federal income tax consequences to the Holding Company or the optionee. However, the amount by which the fair market value of the shares at the time of exercise exceeds the option price of the option will, along with other specified items, be considered taxable income in the taxable year of the optionee in which the option was exercised for purposes of determining the applicability of the alternative minimum tax. As a result, the exercise of an incentive stock option may subject an optionee to an alternative minimum tax depending on that optionee's particular circumstances. On the other hand, the recipient of a non-qualified stock option generally will realize taxable ordinary income at the time of exercise of his option in an amount equal to the excess of the fair market value of the shares acquired at the time of such exercise over the option price. A like amount is generally deductible by the Holding Company for federal income tax purposes as of that date, as long as the Holding Company withholds federal income tax with respect to that taxable amount, assuming the optionholder's income is subject to income tax withholding by the Holding Company. The 1999 Option Plan permits, under certain circumstances, holders of non-qualified stock options to satisfy their withholding obligation by having shares equal in value to the applicable withholding taxes withheld from the shares which they would otherwise receive upon the exercise of a non-qualified stock option. Upon the sale of the shares acquired upon the exercise of an incentive stock option no sooner than two years after the grant of the option and no sooner than one year after receipt of the shares by the optionee, any capital gain recognized would be taxed to the optionee at long-term rates. Upon the sale of shares acquired upon the exercise of an incentive stock option prior to two years after the grant of an option or prior to one year after receipt of the shares by the optionee, the optionee will generally recognize, in the year of disposition, ordinary income equal to the lesser of (a) the spread between the fair market value of the shares on the date of exercise and the exercise price; and (b) the gain realized upon the disposition of those shares. The Holding Company will be entitled to a deduction equal to the amount of income recognized as ordinary income by the optionee, so long as the Holding Company withholds federal income tax with respect to that taxable amount (assuming the optionholder's income is subject to income tax withholding by the Holding Company). If the spread is the basis for determining the amount of ordinary income realized by the optionee, there will be additional long-term or short-term capital gain realized if the proceeds of such sale exceed such spread. Upon the subsequent sale of shares acquired upon exercise of a non-qualified stock option, the optionholder will recognize long-term capital gain or loss if the shares are deemed to have been held for 18 months or more, and short-term capital gain or loss in all other cases. Currently, long-term capital gains for noncorporate taxpayers are generally taxed at a maximum rate of 20%. Short-term capital gains are taxed at the same rates as ordinary income. Financial Accounting Consequences At this time, neither the grant of incentive or non-qualified stock options nor the issuance of shares upon exercise of such options will result in a -12- compensation expense charge to the Holding Company's earnings for financial accounting purposes, except that for non-qualified stock options, earnings will be charged with the excess, if any, of the fair market value on the date of grant over the exercise price of the option shares. Option proceeds from the exercise of these options and tax savings from non-qualified stock options (other than tax savings resulting from charges to earnings made when the exercise price is less than fair market value of the option shares on the date of grant) are credited to capital. The Financial Accounting Standards Board (the "FASB") has adopted rules that require increased disclosure about the value of stock options in financial statements for the Holding Company, including their impact on earnings. THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE TO APPROVE AND RATIFY THE 1999 OPTION PLAN. SUCH ACTION REQUIRES THE APPROVAL OF THE HOLDERS OF AT LEAST A MAJORITY OF THE SHARES OF THE HOLDING COMPANY'S COMMON STOCK VOTING IN PERSON OR BY PROXY AND ENTITLED TO VOTE AT THE ANNUAL MEETING, OR ANY ADJOURNMENT THEREOF. ABSTENTIONS WILL BE INCLUDED IN THE NUMBER OF SHARES PRESENT AND ENTITLED TO VOTE ON THE PROPOSAL AND ACCORDINGLY TREATED AS "NO" VOTES, BUT BROKER NON-VOTES WILL BE EXCLUDED FROM THE NUMBER OF SHARES PRESENT AND ENTITLED TO VOTE ON THE PROPOSAL AND WILL HAVE NO EFFECT ON THE VOTE. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the 1934 Act requires that the Holding Company's officers and directors and persons who own more than 10% of the Holding Company's Common Stock file reports of ownership and changes in ownership with the Securities and Exchange Commission (the "SEC"). Officers, directors and greater than 10% shareholders are required by SEC regulations to furnish the Holding Company with copies of all Section 16(a) forms that they file. Based solely on its review of the copies of such forms received by it, and/or written representations from certain reporting persons that no Forms 5 were required for those persons, the Holding Company believes that for the fiscal year ended December 31, 1998, all filing requirements applicable to its officers, directors and greater than 10% beneficial owners with respect to Section 16(a) of the 1934 Act were satisfied in a timely manner. ACCOUNTANTS Grant Thornton LLP has served as auditors for the Holding Company since 1997. A representative of Grant Thornton LLP is expected to be present at the Annual Meeting with the opportunity to make a statement if he so desires. He will also be available to respond to any appropriate questions shareholders may have. Grant Thornton LLP has been selected as the independent public accounting firm to audit the Holding Company's books, records and accounts for the fiscal year ended December 31, 1999. SHAREHOLDER PROPOSALS Any proposal which a shareholder wishes to have presented at the next Annual Meeting of the Holding Company and included in the Holding Company's proxy statement and form of proxy relating to that meeting, must be received at the main office of the Holding Company no later than 120 days in advance of March 10, 2000. Any such proposal should be sent to the attention of the Secretary of the Holding Company at 723 East Broadway, Logansport, Indiana 46947. A shareholder proposal being submitted outside the processes of Rule 14a-8 promulgated under the Securities and Exchange Act of 1934 Act will be considered untimely if it is received by the Holding Company later than 60 days in advance of the Annual Meeting. OTHER MATTERS Management is not aware of any business to come before the Annual Meeting other than those matters described in the Proxy Statement. However, if any other matters should properly come before the Annual Meeting, it is intended that the proxies solicited hereby will be voted with respect to those other matters in accordance with the judgment of the persons voting the proxies. -13- The cost of solicitation of proxies will be borne by the Holding Company. The Holding Company will reimburse brokerage firms and other custodians, nominees and fiduciaries for reasonable expenses incurred by them in sending proxy material to the beneficial owners of the Common Stock. In addition to solicitation by mail, directors, officers, and employees of the Holding Company may solicit proxies personally or by telephone without additional compensation. Each shareholder is urged to complete, date and sign the proxy and return it promptly in the enclosed envelope. By Order of the Board of Directors /s/ Thomas G. Williams Thomas G. Williams, President and Chief Executive Officer March 10, 1999 -14- Exhibit A LOGANSPORT FINANCIAL CORP. 1999 STOCK OPTION PLAN 1. Purpose. The purpose of the Logansport Financial Corp. 1999 Stock Option Plan (the "Plan") is to provide to directors, officers and other key employees of Logansport Financial Corp. (the "Holding Company") and its majority-owned and wholly-owned subsidiaries (individually a "Subsidiary" and collectively the "Subsidiaries"), including, but not limited to, Logansport Savings Bank, FSB (the "Bank"), who are materially responsible for the management or operation of the business of the Holding Company or a Subsidiary and have provided valuable services to the Holding Company or a Subsidiary, a favorable opportunity to acquire Common Stock, without par value ("Common Stock"), of the Holding Company, thereby providing them with an increased incentive to work for the success of the Holding Company and its Subsidiaries and better enabling each such entity to attract and retain capable directors and executive personnel. 2. Administration of the Plan. The Plan shall be administered, construed and interpreted by a committee (the "Committee") consisting of at least two members of the Board of Directors of the Holding Company, each of whom is a "Non-Employee Director" within the meaning of the definition of that term contained in Reg. ss. 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the "1934 Act"). The members of the Committee shall be designated from time to time by the Board of Directors of the Holding Company. The decision of a majority of the members of the Committee shall constitute the decision of the Committee, and the Committee may act either at a meeting at which a majority of the members of the Committee is present or by a written consent signed by all members of the Committee. The Committee shall have the sole, final and conclusive authority to determine, consistent with and subject to the provisions of the Plan: (a) the individuals (the "Optionees") to whom options or successive options or cash awards shall be granted under the Plan; (b) the time when options or cash awards shall be granted hereunder; (c) the number of shares of Common Stock to be covered under each option and the amount of any cash awards; (d) the option price to be paid upon the exercise of each option; (e) the period within which each such option may be exercised; (f) the extent to which an option is an incentive stock option or a non-qualified stock option; and (g) the terms and conditions of the respective agreements by which options granted or cash awards shall be evidenced. The Committee shall also have authority to prescribe, amend, waive, and rescind rules and regulations relating to the Plan, to accelerate the vesting of any stock options or cash awards made hereunder, to make amendments or modifications in the terms and conditions (including exercisability) of the options relating to the effect of termination of employment of the optionee (subject to the last sentence of Section 12 hereof), to waive any restrictions or conditions applicable to any option or the exercise thereof, and to make all other determinations necessary or advisable in the administration of the Plan. 3. Eligibility. The Committee may, consistent with the purposes of the Plan, grant options and cash awards to officers and other key employees and directors of the Holding Company or of a Subsidiary who in the opinion of the A - 1 Committee are from time to time materially responsible for the management or operation of the business of the Holding Company or of a Subsidiary and have provided valuable services to the Holding Company or a Subsidiary; provided, however, that in no event may any employee who owns (after application of the ownership rules in ss. 425(d) of the Internal Revenue Code of 1986, as amended (the "Code")) shares of stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Holding Company or any of its Subsidiaries be granted an incentive stock option hereunder unless at the time such option is granted the option price is at least 110% of the fair market value of the stock subject to the option and such option by its terms is not exercisable after the expiration of five (5) years from the date such option is granted. No employee may be granted options under the Plan for more than 35,000 shares of Common Stock in any calendar year. Subject to the foregoing provisions, an individual who has been granted an option under the Plan (an "Optionee"), if he is otherwise eligible, may be granted an additional option or options if the Committee shall so determine. 4. Stock Subject to the Plan. There shall be reserved for issuance upon the exercise of options granted under the Plan, 115,000 shares of Common Stock of the Holding Company, which may be authorized but unissued shares or treasury shares of the Holding Company. Subject to Section 7 hereof, the shares for which options may be granted under the Plan shall not exceed that number. If any option shall expire or terminate or be surrendered for any reason without having been exercised in full, the unpurchased shares subject thereto shall (unless the Plan shall have terminated) become available for other options under the Plan. 5. Terms of Options. Each option granted under the Plan shall be subject to the following terms and conditions and to such other terms and conditions not inconsistent therewith as the Committee may deem appropriate in each case: (a) Option Price. The price to be paid for shares of stock upon the exercise of each option shall be determined by the Committee at the time such option is granted, but such price in no event shall be less than the fair market value, as determined by the Committee consistent with Treas. Reg. ss. 20.2031-2 and any requirements of ss. 422A of the Code, of such stock on the date on which such option is granted; provided, however that the Committee shall have discretion to award non-qualified stock options to eligible employees or directors of the Holding Company or of a Subsidiary at a price no less than 85% of the fair market value of the Common Stock on the date of grant, as determined by the Committee consistent with Treas. Reg ss. 20.2031-2. (b) Period for Exercise of Option. An option shall not be exercisable after the expiration of such period as shall be fixed by the Committee at the time of the grant thereof, but such period in no event shall exceed ten (10) years and one day from the date on which such option is granted; provided, that incentive stock options granted hereunder shall have terms not in excess of ten (10) years and non-qualified stock options shall be for a period not in excess of ten (10) years and one day from the date of grant thereof. Options shall be subject to earlier termination as hereinafter provided. (c) Exercise of Options. The option price of each share of stock purchased upon exercise of an option shall be paid in full at the time of such exercise. Payment may be in (i) cash, (ii) if the Optionee may do so in conformity with Regulation T (12 C.F.R. ss. 220.3(e)(4)) without violating ss. 16(b) or ss. 16(c) of the 1934 Act, pursuant to a broker's cashless exercise procedure, by delivering a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Holding Company the total option price in cash and, if desired, the amount of any taxes to be withheld from the Optionee's compensation as a result of any withholding tax obligation of the Holding Company or any of its Subsidiaries, as specified in such notice, or (iii) with the approval of the Committee, by tendering whole A - 2 shares of the Holding Company's Common Stock owned by the Optionee and cash having a fair market value equal to the cash exercise price of the shares with respect to which the option is being exercised. For this purpose, any shares so tendered by an Optionee shall be deemed to have a fair market value equal to the mean between the highest and lowest quoted selling prices for the shares on the date of exercise of the option (or if there were no sales on such date the weighted average of the means between the highest and lowest quoted selling prices for the shares on the nearest date before and the nearest date after the date of exercise of the options as prescribed by Treas. Reg. ss. 20-2031-2), as reported in The Wall Street Journal or a similar publication selected by the Committee. The Committee shall have the authority to grant options exercisable in full at any time during their term, or exercisable in such installments at such times during their term as the Committee may determine; provided, however, that options shall not be exercisable during the first six (6) months of their term. Installments not purchased in earlier periods shall be cumulated and be available for purchase in later periods. Subject to the other provisions of this Plan, an option may be exercised at any time or from time to time during the term of the option as to any or all whole shares which have become subject to purchase pursuant to the terms of the option or the Plan, but not at any time as to fewer than one hundred (100) shares unless the remaining shares which have become subject to purchase are fewer than one hundred (100) shares. An option may be exercised only by written notice to the Holding Company, mailed to the attention of its Secretary, signed by the Optionee (or such other person or persons as shall demonstrate to the Holding Company his or their right to exercise the option), specifying the number of shares in respect of which it is being exercised, and accompanied by payment in full in either cash or by check in the amount of the aggregate purchase price therefor, by delivery of the irrevocable broker instructions referred to above, or, if the Committee has approved the use of the stock swap feature provided for above, followed as soon as practicable by the delivery of the option price for such shares. (d) Certificates. The certificate or certificates for the shares issuable upon an exercise of an option shall be issued as promptly as practicable after such exercise. An Optionee shall not have any rights of a shareholder in respect to the shares of stock subject to an option until the date of issuance of a stock certificate to him for such shares. In no case may a fraction of a share be purchased or issued under the Plan, but if, upon the exercise of an option, a fractional share would otherwise be issuable, the Holding Company shall pay cash in lieu thereof. (e) Termination of Option. If an Optionee (other than a director of the Holding Company or a Subsidiary who is not an employee of the Holding Company or a Subsidiary (an "Outside Director")) ceases to be an employee of the Holding Company and the Subsidiaries for any reason other than retirement, permanent and total disability (within the meaning of ss. 22(e)(3) of the Code), or death, any option granted to him shall forthwith terminate. Leave of absence approved by the Committee shall not constitute cessation of employment. If an Optionee (other than an Outside Director) ceases to be an employee of the Holding Company and the Subsidiaries by reason of retirement, any option granted to him may be exercised by him in whole or in part within three (3) years after the date of his retirement, whether or not the option was otherwise exercisable at the date of his retirement; provided, however, that if such employee remains a director or director emeritus of the Holding Company, the option granted to him may be exercised by him in whole or in part until the later of (a) three (3) years after the date of his retirement, or (b) six months after his service as a director or director emeritus of the Holding Company A - 3 terminates. (The term "retirement" as used herein means such termination of employment as shall entitle such individual to early or normal retirement benefits under any then existing pension plan of the Holding Company or a Subsidiary.) If an Optionee (other than an Outside Director) ceases to be an employee of the Holding Company and the Subsidiaries by reason of permanent and total disability (within the meaning of ss. 22(e)(3) of the Code), any option granted to him may be exercised by him in whole or in part within one (1) year after the date of his termination of employment by reason of such disability whether or not the option was otherwise exercisable at the date of such termination. Options granted to Outside Directors shall cease to be exercisable six (6) months after the date such Outside Director is no longer a director or director emeritus of the Holding Company or a Subsidiary for any reason other than death or disability. If an Optionee who is an Outside Director ceases to be a director and a director emeritus by reason of disability, any option granted to him may be exercised in whole or in part within one (1) year after the date the Optionee ceases to be a director and a director emeritus by reason of such disability, whether or not the option was otherwise exercisable at such date. In the event of the death of an Optionee while in the employ or service as a director or director emeritus of the Holding Company or a Subsidiary, or, if the Optionee is not an Outside Director, within three (3) years after the date of his retirement (or, if later, six months following his termination of service as a director or director emeritus of the Holding Company or a Subsidiary) or within one (1) year after the termination of his employment by reason of permanent and total disability (within the meaning of ss. 22(e)(3) of the Code), or, if the Optionee is an Outside Director, within six (6) months after he is no longer a director and a director emeritus of the Holding Company or of Subsidiary for reasons other than disability or, within one (1) year after the termination of his service by reason of disability, any option granted to him may be exercised in whole or in part at any time within one (1) year after the date of such death by the executor or administrator of his estate or by the person or persons entitled to the option by will or by applicable laws of descent and distribution until the expiration of the option term as fixed by the Committee, whether or not the option was otherwise exercisable at the date of his death. Notwithstanding the foregoing provisions of this subsection (e), no option shall in any event be exercisable after the expiration of the period fixed by the Committee in accordance with subsection (b) above. (f) Nontransferability of Option. No option may be transferred by the Optionee otherwise than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder, and during the lifetime of the Optionee options shall be exercisable only by the Optionee or his guardian or legal representative. (g) No Right to Continued Service. Nothing in this Plan or in any agreement entered into pursuant hereto shall confer on any person any right to continue in the employ or service of the Holding Company or its Subsidiaries or affect any rights the Holding Company, a Subsidiary, or the shareholders of the Holding Company may have to terminate his service at any time. (h) Maximum Incentive Stock Options. The aggregate fair market value of stock with respect to which incentive stock options (within the meaning of ss. 422A of the Code) are exercisable for the first time by an Optionee during any calendar year under the Plan or any other plan of the Holding Company or its Subsidiaries shall not exceed $100,000. For this purpose, the fair market value of such shares shall be determined as of the date the option is granted and shall be computed in such manner as shall be determined by the Committee, consistent with the requirements of ss. 422A of the Code. (i) Agreement. Each option shall be evidenced by an agreement between the Optionee and the Holding Company which shall provide, among other things, that, with respect to incentive stock options, the Optionee will advise the Holding Company immediately upon any sale or transfer of the shares of Common Stock received upon exercise of the option to the extent such sale or transfer takes place prior to the later of (a) two (2) years from the date of grant or (b) one (1) year from the date of exercise. (j) Investment Representations. Unless the shares subject to an option are registered under applicable federal and state securities laws, each Optionee by accepting an option shall be deemed to agree for himself and his legal representatives that any option granted to him and any and all shares of Common Stock purchased upon the exercise of the option shall be acquired for investment and not with a view to, or for the sale in connection with, any distribution thereof, and each notice of the exercise of any portion of an option shall be accompanied by a representation in writing, signed by the Optionee or his legal representatives, as the case may be, that the shares of Common Stock are being acquired in good faith for investment and not with a view to, or for sale in connection with, any distribution thereof (except in case of the Optionee's legal representatives for distribution, but not for sale, to his legal heirs, legatees and other testamentary beneficiaries). Any shares issued pursuant to an exercise of an option may bear a legend evidencing such representations and restrictions. 6. Incentive Stock Options and Non-Qualified Stock Options. Options granted under the Plan may be incentive stock options under ss. 422A of the Code or non-qualified stock options, provided, however, that Outside Directors shall be granted only non-qualified stock options. All options granted hereunder will be clearly identified as either incentive stock options or non-qualified stock options. In no event will the exercise of an incentive stock option affect the right to exercise any non-qualified stock option, nor shall the exercise of any non-qualified stock option affect the right to exercise any incentive stock option. Nothing in this Plan shall be construed to prohibit the grant of incentive stock options and non-qualified stock options to the same person, provided, further, that incentive stock options and non-qualified stock options shall not be granted in a manner whereby the exercise of one non-qualified stock option or incentive stock option affects the exercisability of the other. 7. Adjustment of Shares. In the event of any change after the effective date of the Plan in the outstanding stock of the Holding Company by reason of A - 4 any reorganization, recapitalization, stock split, stock dividend, combination of shares, exchange of shares, merger or consolidation, liquidation, extraordinary distribution (consisting of cash, securities, or other assets), or any other change after the effective date of the Plan in the nature of the shares of stock of the Holding Company, the Committee shall determine what changes, if any, are appropriate in the number and kind of shares reserved under the Plan, and the Committee shall determine what changes, if any, are appropriate in the option price under and the number and kind of shares covered by outstanding options granted under the Plan. Any determination of the Committee hereunder shall be conclusive. 8. Cash Awards. The Committee may, at any time and in its discretion, grant to any Optionee who is granted a non-qualified stock option the right to receive, at such times and in such amounts as determined by the Committee in its discretion, a cash amount ("cash award") which is intended to reimburse the Optionee for all or a portion of the federal, state and local income taxes imposed upon such Optionee as a consequence of the exercise of a non-qualified stock option and the receipt of a cash award. 9. Replacement and Extension of the Terms of Options and Cash Awards. The Committee from time to time may permit an Optionee under the Plan or any other stock option plan heretofore or hereafter adopted by the Holding Company or any Subsidiary to surrender for cancellation any unexercised outstanding stock option and receive from his employing corporation in exchange therefor an option for such number of shares of Common Stock as may be designated by the Committee. Such Optionees also may be granted related cash awards as provided in Section 8 hereof. 10. Change in Control. In the event of a Change in Control, all options previously granted and still outstanding under the Plan regardless of their terms, shall become exercisable. For this purpose, "Change in Control" shall mean a change in control of the Holding Company or the Bank, within the meaning of 12 C.F.R. ss. 574.4(a) (other than a change of control resulting from a trustee or other fiduciary holding shares of Common Stock under an employee benefit plan of the Holding Company or any of its Subsidiaries). 11. Tax Withholding. Whenever the Holding Company proposes or is required to issue or transfer shares of Common Stock under the Plan, the Holding Company shall have the right to require the Optionee or his or her legal representative to remit to the Holding Company an amount sufficient to satisfy any federal, state and/or local withholding tax requirements prior to the delivery of any certificate or certificates for such shares, and whenever under the Plan payments are to be made in cash, such payments shall be net of an amount sufficient to satisfy any federal, state and/or local withholding tax requirements. If permitted by the Committee and pursuant to procedures established by the Committee, an Optionee may make a written election to have shares of Common Stock having an aggregate fair market value, as determined by the Committee, consistent with the requirements of Treas. Reg. ss. 20.2031-2, sufficient to satisfy the applicable withholding taxes, withheld from the shares otherwise to be received upon the exercise of a non-qualified option. 12. Amendment. The Board of Directors of the Holding Company may amend the Plan from time to time and, with the consent of the Optionee, the terms and provisions of his option or cash award, except that without the approval of the holders of at least a majority of the shares of the Holding Company voting in person or by proxy at a duly constituted meeting or adjournment thereof: (a) the number of shares of stock which may be reserved for issuance under the Plan may not be increased, except as provided in Section 7 hereof; (b) the period during which an option may be exercised may not be extended beyond ten (10) years and one day from the date on which such option was granted; and (c) the class of persons to whom options or cash awards may be granted under the Plan shall not be modified materially. No amendment of the Plan, however, may, without the consent of the Optionees, make any changes in any outstanding options or cash awards theretofore granted under the Plan which would adversely affect the rights of such Optionees. 13. Termination. The Board of Directors of the Holding Company may terminate the Plan at any time and no option or cash award shall be granted thereafter. Such termination, however, shall not affect the validity of any option or cash award theretofore granted under the Plan. In any event, no incentive stock option may be granted under the Plan after the date which is ten (10) years from the effective date of the Plan. 14. Successors. This Plan shall be binding upon the successors and assigns of the Holding Company. A - 5 15. Governing Law. The terms of any options granted hereunder and the rights and obligations hereunder of the Holding Company, the Optionees and their successors in interest shall be governed by Indiana law. 16. Government and Other Regulations. The obligations of the Holding Company to issue or transfer and deliver shares under options granted under the Plan or make cash awards shall be subject to compliance with all applicable laws, governmental rules and regulations, and administrative action. 17. Effective Date. The Plan shall become effective on the date the Plan is approved by the holders of at least a majority of the shares of the Holding Company voting in person or by proxy at a duly constituted meeting or adjournment thereof and any options granted pursuant to the Plan may not be exercised until the Board of Directors of the Holding Company has been advised by counsel that such approval has been obtained and all other applicable legal requirements have been met. A - 6 REVOCABLE PROXY LOGANSPORT FINANCIAL CORP. Annual Meeting of Shareholders April 13, 1999 The undersigned hereby appoints Dianne Hoffman and Dottye Robeson, with full powers of substitution, to act as attorneys and proxies for the undersigned to vote all shares of common stock of Logansport Financial Corp. which the undersigned is entitled to vote at the Annual Meeting of Shareholders to be held at the office of Logansport Financial Corp. at 723 East Broadway, Logansport, Indiana, on Tuesday, April 13, 1999, at 2:00 P.M., and at any and all adjournments thereof, as follows: 1. The election as directors of all nominees listed below, except as marked to the contrary [ ] FOR [ ] VOTE WITHHELD INSTRUCTIONS: To withhold authority to vote for any individual nominee, strike a line through the nominee's name on the list below: Charles J. Evans David G. Wihebrink Thomas G. Williams (each for a three-year term) Brian Morrill (for a two-year term) 2. Approval and ratification of the Logansport Financial Corp. 1999 Stock Option Plan [ ] FOR [ ] AGAINST [ ] ABSTAIN In their discretion, the proxies are authorized to vote on any other business that may properly come before the Meeting or any adjournment thereof. The Board of Directors recommends a vote "FOR" each of the listed propositions. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS This Proxy may be revoked at any time prior to the voting thereof. The undersigned acknowledges receipt from Logansport Financial Corp., prior to the execution of this Proxy, of Notice of the Meeting, a Proxy Statement and an Annual Report to Shareholders. THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS PROXY WILL BE VOTED FOR EACH OF THE DIRECTOR NOMINEES AND APPROVAL OF LOGANSPORT 1999 STOCK OPTION PLAN. IF ANY OTHER BUSINESS IS PRESENTED AT SUCH MEETING, THIS PROXY WILL BE VOTED BY THOSE NAMED IN THIS PROXY IN THEIR BEST JUDGMENT. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO OTHER BUSINESS TO BE PRESENTED AT THE MEETING. ____________________, 1999 --------------------------- Signature of Shareholder --------------------------- Signature of Shareholder Please sign as your name appears on the envelope in which this card was mailed. When signing as attorney, executor, administrator, trustee or guardian, please give your full title. If shares are held jointly, each holder should sign. EX-13 2 1998 SHAREHOLDER ANNUAL REPORT [FRONT COVER] LOGANSPORT FINANCIAL CORP. [ARTWORK OF LOGANSPORT SAVINGS BANK BRANCH] 1998 SHAREHOLDER ANNUAL REPORT [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 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 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 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.
At December 31, Statement of Financial Condition Data: 1998 1997 1996 1995 1994 ------- ------- ------- ------- -------- (In thousands) 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 ====== ======= ======= ======= ========
Footnotes on following page. 4 Logansport Financial Corp. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA (CONTINUED)
Year ended December 31, Supplemental Data: 1998 1997 1996 1995 1994 ------- ------- ------- ------- -------- 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%
(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 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 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 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 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 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 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.
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) 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
- -------------------------- (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 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.
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: 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 === ==== === ==== === ====
12 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.
At December 31, Year Ended December 31, 1998 1998 1997 1996 Weighted average interest rate earned on: 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
(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 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.
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) +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
14 Logansport Financial Corp. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Asset and Liability Management (continued)
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) +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
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 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 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.
OTS Requirement The Bank's Capital Level % of % of Amount Assets Amount Assets (1) Amount of excess (Dollars in thousands) 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
(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 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 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 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 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 - logansavings@cqc.com 21 [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 Logansport Financial Corp. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, (In thousands, except share data)
ASSETS 1998 1997 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 ======= =======
The accompanying notes are an integral part of these statements. 23 Logansport Financial Corp. CONSOLIDATED STATEMENTS OF EARNINGS For the year ended December 31, (In thousands, except share data)
1998 1997 1996 Interest income 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 ======= ======= =======
The accompanying notes are an integral part of these statements. 24 Logansport Financial Corp. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the year ended December 31, (In thousands)
1998 1997 1996 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 ======= ======= =======
The accompanying notes are an integral part of these statements. 25 Logansport Financial Corp. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the years ended December 31, 1998, 1997 and 1996 (In thousands, except share data)
Unrealized Shares gains (losses) acquired on securities by stock designated as Common Retained benefit available stock earnings plan for sale Total 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 ====== ======= ===== ==== =======
The accompanying notes are an integral part of these statements. 26 Logansport Financial Corp. CONSOLIDATED STATEMENTS OF CASH FLOWS For the year ended December 31, (In thousands)
1998 1997 1996 Cash flows from 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: 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) -------- -------- --------
27 Logansport Financial Corp. CONSOLIDATED STATEMENTS OF CASH FLOWS For the year ended December 31, (In thousands)
1998 1997 1996 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) ======== ======== ========
The accompanying notes are an integral part of these statements. 28 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 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 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 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 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 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 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:
1998 1997 Carrying Fair Carrying Fair value value value value (In thousands) Financial assets 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 ======= ======= ======= =======
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 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:
1998 Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value (In thousands) 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 ===== === === =====
36 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.
1998 Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value (In thousands) Federal Home Loan Mortgage 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 ===== ==== ==== =====
37 Logansport Financial Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES (continued)
1997 Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value (In thousands) Federal Home Loan Mortgage 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 ====== ====== ====== ======
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.
1998 1997 Estimated Estimated Amortized fair Amortized fair cost value cost value (In thousands) 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 ===== ===== ===== =====
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 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 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 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:
Deposit type and weighted average interest rate 1998 1997 (In thousands) NOW accounts 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 ====== ======
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 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:
1998 1997 1996 (In thousands) 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 ===== ===== =====
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:
Maturing year December 31, Interest rate ending December 31, 1998 1997 (In thousands) 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% ==== ====
42 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:
1998 1997 1996 (In thousands) 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 === === ===
43 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:
Taxes (payable) refundable on temporary 1998 1997 differences at statutory rate: (In thousands) 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 === ===
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 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.
1998: To be "well- capitalized" under For capital prompt corrective Actual adequacy purposes action provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) 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%
* Greater than or equal to 45 Logansport Financial Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE K - REGULATORY CAPITAL (continued)
1997: To be "well- capitalized" under For capital prompt corrective Actual adequacy purposes action provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) 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%
* 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 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 Logansport Financial Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE M - STOCK OPTION PLAN (continued)
1998 1997 1996 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 ======= ========= ========
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:
1998 1997 1996 Weighted- Weighted- Weighted- average average average exercise exercise exercise Shares price Shares price Shares price 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 ===== ===== ======
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 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 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)
1998 1997 1996 Revenue 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 ======= ======= =======
50 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)
1998 1997 1996 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 ======= ======= =======
51 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.
Three Months Ended March 31, June 30, September 30, December 31, 1998: (In thousands, except per share data) 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
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