10-Q 1 log_10qnov.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO _____________________. Commission file number: 0-25910 LOGANSPORT FINANCIAL CORP. (Exact name of registrant specified in its charter) Indiana 35-1945736 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 723 East Broadway P.O. Box 569 Logansport, Indiana 46947 (Address of principal executive offices including Zip Code) (574) 722-3855 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] The number of shares outstanding of the Registrant's common stock, without par value, as of November 1, 2003 was 877,444. Logansport Financial Corp. Form 10-Q Index Page No. PART 1. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Financial Condition as of September 30, 2003 and December 31, 2002 3 Consolidated Statements of Earnings for the three and nine months ended September 30, 2003 and 2002 4 Consolidated Statements of Shareholders' Equity for the nine months ended September 30, 2003 and 2002 5 Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002 6 Notes to Consolidated Condensed Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 16 Item 4. Controls and Procedures 17 PART II. OTHER INFORMATION Item 1. Legal Proceedings 18 Item 2. Changes in Securities and Use of Proceeds 18 Item 3. Defaults Upon Senior Securities 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 18 SIGNATURES 19
LOGANSPORT FINANCIAL CORP. Consolidated Statements of Financial Condition (In thousands, except share data) September 30, December 31, ASSETS 2003 2002 (unaudited) Cash and due from banks $ 989 $ 778 Interest-bearing deposits in other financial institutions 9,640 12,739 --------- --------- Cash and cash equivalents 10,629 13,517 Investment securities designated as available for sale - at market 10,185 8,060 Mortgage-backed securities designated as available for sale - at market 16,608 11,009 Loans receivable - net 106,720 110,386 Office premises and equipment - at depreciated cost 1,722 1,767 Federal Home Loan Bank stock - at cost 2,054 2,003 Investment in real estate partnership 968 1,026 Accrued interest receivable on loans 482 410 Accrued interest receivable on mortgage-backed securities 59 49 Accrued interest receivable on investments and interest-bearing deposits 109 107 Prepaid expenses and other assets 335 80 Cash surrender value of life insurance 1,317 1,317 Deferred income tax asset 533 364 Prepaid income taxes 31 4 --------- --------- Total assets $ 151,752 $ 150,099 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits $ 98,859 $ 98,325 Advances from the Federal Home Loan Bank 34,027 33,836 Notes payable 1,918 1,793 Accrued interest and other liabilities 860 772 --------- --------- Total liabilities 135,664 134,726 Shareholders' equity Preferred stock - no par value, 2,000,000 shares authorized; none issued - - Common stock - no par value, 5,000,000 shares authorized; 877,444 and 848,958 shares at aggregate value issued and outstanding at September 30, 2003 and December 31, 2002, respectively 1,752 1,446 Retained earnings - restricted 14,203 13,444 Less shares acquired by stock benefit plan (27) (44) Accumulated comprehensive income, unrealized gains on securities designated as available for sale, net of related tax effects 160 527 --------- --------- Total shareholders' equity 16,088 15,373 --------- --------- Total liabilities and shareholders' equity $ 151,752 $ 150,099 ========= =========
LOGANSPORT FINANCIAL CORP. Consolidated Statements of Earnings (In thousands, except share data) Three months ended Nine months ended September 30, September 30, 2003 2002 2003 2002 Interest income Loans $1,819 $2,087 $5,629 $6,272 Mortgage-backed securities 170 106 438 260 Investment securities 97 93 292 282 Interest-bearing deposits and other 62 66 156 186 ------ ------ ------ ------ Total interest income 2,148 2,352 6,515 7,000 Interest expense Deposits 650 741 1,942 2,256 Borrowings 490 474 1,451 1,425 ------ ------ ------ ------ Total interest expense 1,140 1,215 3,393 3,681 ------ ------ ------ ------ Net interest income 1,008 1,137 3,122 3,319 Provision for losses on loans 90 90 270 270 ------ ------ ------ ------ Net interest income after provision for losses on loans 918 1,047 2,852 3,049 Other income (loss) Service charges on deposit accounts 54 54 161 165 Gain (loss) on sale of investment and mortgage-backed securities (20) - 232 17 Gain on sale of loans 56 - 106 - Loss on equity investment (26) (21) (76) (77) Other operating 22 25 76 86 ------ ------ ------ ------ Total other income 86 58 499 191 General, administrative and other expense Employee compensation and benefits 345 341 1,047 971 Occupancy and equipment 46 58 165 184 Data processing 49 49 142 144 Other operating 132 131 428 458 ------ ------ ------ ------ Total general, administrative and other expense 572 579 1,782 1,757 ------ ------ ------ ------ Earnings before income taxes 432 526 1,569 1,483 Income tax expense 112 151 448 417 ------ ------ ------ ------ NET EARNINGS $ 320 $ 375 $1,121 $1,066 ====== ====== ====== ====== Other comprehensive income, net of tax: Unrealized gains (losses) on securities, net of tax $ (315) $ 151 $ (214) $ 260 Reclassification adjustment for realized (gains) losses included in earnings, net of taxes (benefits) of $(7), $79 and $6 for the respective periods 13 - (153) (11) ------ ------ ------ ------ COMPREHENSIVE INCOME $ 18 $ 526 $ 754 $1,315 ====== ====== ====== ====== EARNINGS PER SHARE Basic (based on net earnings) $.36 $.41 $1.30 $1.12 === === ==== ==== Diluted (based on net earnings) $.36 $.39 $1.27 $1.08 === === ==== ====
LOGANSPORT FINANCIAL CORP. Consolidated Statements of Shareholders' Equity (In thousands, except share data) Nine months ended September 30, 2003 2002 Balance at January 1 $15,373 $17,402 Purchase of shares - (2,466) Issuance of shares under stock option plan 306 291 Amortization of stock benefit plan 17 13 Cash dividends of $.42 in 2003 and $.38 in 2002 (362) (359) Unrealized gains (losses) on securities designated as available for sale, net of related tax effects (367) 249 Net earnings 1,121 1,066 ------- ------- Balance at September 30 $16,088 $16,196 ======= ======= Accumulated other comprehensive income $ 160 $ 504 ======= =======
LOGANSPORT FINANCIAL CORP. Consolidated Statements of Cash Flows (In thousands) Nine months ended September 30, 2003 2002 Cash flows from operating activities: Net earnings for the period $ 1,121 $ 1,066 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 82 80 Amortization of premiums on investments and mortgage-backed securities 48 34 Gain on sale of investment and mortgage-backed securities (232) (17) Amortization expense of stock benefit plan 17 13 Federal Home Loan Bank stock dividends (51) - Loans originated for sale in the secondary market (5,613) - Proceeds from the sale of loans in the secondary market 5,672 - Gain on sale of loans (59) - Provision for losses on loans 270 270 Loss on equity investment 76 77 Increase (decrease) in cash, due to changes in: Accrued interest receivable on loans (72) (36) Accrued interest receivable on mortgage-backed securities (10) (23) Accrued interest receivable on investments (2) 13 Prepaid expenses and other assets (255) 18 Accrued interest and other liabilities 88 69 Federal income taxes Current (27) (69) Deferred 21 22 -------- -------- Net cash provided by operating activities 1,074 1,517 Cash flows provided by (used in) investing activities: Proceeds from sale of investment securities 1,531 269 Purchase of investment securities (7,713) (3,712) Proceeds from maturities/calls of investment securities 3,925 2,235 Purchase of mortgage-backed securities (24,643) (8,024) Proceeds from sale of mortgage-backed securities 14,568 - Principal repayments on mortgage-backed securities 4,235 1,118 Purchase of Federal Home Loan Bank stock - (30) Loan disbursements (43,403) (33,518) Principal repayments on loans 46,646 31,370 Investment in real estate partnership (18) (21) Proceeds from sale of real estate acquired through foreclosure 153 65 Purchases and additions to office premises and equipment (37) (67) -------- -------- Net cash used in investing activities (4,756) (10,315) -------- -------- Net cash used in operating and investing activities (balance carried forward) (3,682) (8,798) -------- -------- LOGANSPORT FINANCIAL CORP. Consolidated Statements of Cash Flows (Continued) (In thousands) Nine months ended September 30, 2003 2002 Net cash used in operating and investing activities (balance brought forward) $ (3,682) $ (8,798) Cash flows provided by (used in) financing activities: Net increase in deposit accounts 534 13,114 Proceeds from Federal Home Loan Bank advances 4,445 9,950 Repayment of Federal Home Loan Bank advances (4,254) (8,864) Proceeds from note payable 200 - Repayment of note payable (75) (72) Proceeds from the exercise of stock options 306 291 Purchase of shares - (2,466) Dividends on common stock (362) (359) -------- -------- Net cash provided by financing activities 794 11,594 -------- -------- Net increase (decrease) in cash and cash equivalents (2,888) 2,796 Cash and cash equivalents, beginning of period 13,517 8,816 -------- -------- Cash and cash equivalents, end of period $ 10,629 $ 11,612 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest on deposits and borrowings $ 3,402 $ 3,674 ======== ======== Income taxes $ 455 $ 464 ======== ======== Dividends payable at end of period $ 123 $ 120 ======== ======== Supplemental disclosure of noncash financing activities: Recognition of mortgage servicing rights in accordance with SFAS No. 140 $ 47 $ - ======== ======== Transfers from loans to real estate acquired through foreclosure $ 153 $ - ======== ======== Unrealized gains (losses) on securities designated as available for sale, net of related tax effects $ (367) $ 249 ======== ========
Logansport Financial Corp. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS For the nine and three month periods ended September 30, 2003 and 2002 NOTE A: Basis of Presentation The unaudited interim consolidated condensed financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. Accordingly, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2002. In the opinion of management, the financial statements reflect all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Logansport Financial Corp.'s (the "Company") financial position as of September 30, 2003, and its results of operations and cash flows for the three and nine month periods ended September 30, 2003 and 2002. The results of operations for the three and nine month periods ended September 30, 2003 are not necessarily indicative of the results which may be expected for the entire year. NOTE B: Principles of Consolidation The unaudited interim consolidated condensed financial statements include the accounts of the Company and its subsidiary, Logansport Savings Bank, FSB (the "Bank"). All significant intercompany items have been eliminated. NOTE C: Earnings Per Share and Dividends Per Share Basic earnings per share is computed based upon the weighted-average shares outstanding during the period. Diluted earnings per share is computed taking into consideration common shares outstanding and dilutive potential common shares issued under the Company's stock option plan. The computations are as follows:
For the three months ended For the nine months ended September 30, September 30, 2003 2002 2003 2002 Weighted-average common shares outstanding (basic) 872,457 918,123 859,504 955,824 Dilutive effect of assumed exercise of stock options 22,261 30,121 20,442 29,512 ------- ------- ------- ------- Weighted-average common shares outstanding (diluted) 894,718 948,244 879,946 985,336 ======= ======= ======= =======
A cash dividend of $.14 per common share was declared on September 2, 2003, payable on October 10, 2003, to stockholders of record as of September 15, 2003. NOTE D: Critical Accounting Policies Certain of the Company's accounting policies are important to the portrayal of the Company's financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but without limitation, changes in interest rates, changes in the performance of the economy or changes in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses and determining the carrying value of mortgage servicing rights. The Company's critical accounting policies are discussed in detail in its Shareholder Annual Report for the year ended December 31, 2002 (incorporated by reference into the Company's 10K filing) in Note A of the Notes to the Consolidated Financial Statements under "Allowance for Loan Losses." If management were to underestimate the allowance for loan losses, earnings could be reduced in the future as a result of greater than expected net loan losses. Overestimations of the required allowance could result in future increases in income, as loan loss recoveries increase or provisions for losses on loans decrease. Mortgage servicing rights are accounted for pursuant to the provisions of SFAS No. 140. "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," which requires that the Company recognize as separate assets, rights to service mortgage loans for others, regardless of how those servicing rights are acquired. An institution that acquires mortgage servicing rights through either the purchase or origination of mortgage loans and sells those loans with servicing rights retained must allocate some of the cost of the loans to the mortgage servicing rights. SFAS No. 140 requires that capitalized mortgage servicing rights and capitalized excess servicing receivables be assessed for impairment. Impairment is measured based on fair value. The mortgage servicing rights recorded by the Company, calculated in accordance with the provisions of SFAS No. 140, were segregated into pools for valuation purposes, using as pooling criteria the loan term and coupon rate. Once pooled, each grouping of loans was evaluated on a discounted earnings basis to determine the present value of future earnings that a purchaser could expect to realize from each portfolio. Earnings were projected from a variety of sources including loan servicing fees, interest earned on float, net interest earned on escrows, miscellaneous income, and costs to service the loans. The present value of future earnings is the "economic" value of the pool, i.e., the net realizable present value to an acquiror of the acquired servicing. Fluctuations in the fair value of mortgage servicing rights may affect net earnings, as this asset is carried at the lower of amortized cost or fair value. NOTE E: Stock Option Plans During 1996, the Board of Directors adopted a Stock Option Plan that provided for the issuance of 132,250 shares of common stock at the fair value at the date of grant. During 1999, the Board of Directors adopted a second Stock Option Plan that provided for the issuance of 115,000 shares of common stock at the fair value at the date of grant. The Company accounts for its stock option plans in accordance with 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 Company applies APB Opinion No. 25 and related Interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for the plans. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant dates for awards under the plans consistent with the accounting method utilized in SFAS No. 123, there would have been no material effect on the Company's net earnings and earnings per share for the nine and three month periods ended September 30, 2003 and 2002. NOTE E: Stock Option Plans (continued) A summary of the status of the Company's stock option plans as of September 30, 2003 and December 31, 2002 and 2001, and changes during the periods ending on those dates is presented below:
September 30, December 31, 2003 2002 2001 Weighted- Weighted- Weighted- average average average exercise exercise exercise Shares price Shares price Shares price Outstanding at beginning of period 79,136 $10.63 106,796 $10.61 125,915 $10.59 Granted - - - - - - Exercised (28,486) 10.76 (27,660) 10.53 (15,463) 10.53 Forfeited - - - - (3,656) 10.53 ------ ----- ------ ----- ------- ----- Outstanding at end of period 50,650 $10.56 79,136 $10.63 106,796 $10.61 ====== ===== ====== ===== ======= ===== Options exercisable at period-end 50,150 $10.53 78,636 $10.61 105,796 $10.58 ====== ===== ====== ===== ======= =====
The following information applies to options outstanding at September 30, 2003: Number outstanding 50,650 Range of exercise prices $10.53-$13.75 Weighted-average exercise price $10.56 Weighted-average remaining contractual life 2.5 years NOTE F: Recent Accounting Pronouncements In December 2002, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for fiscal years beginning after December 15, 2002. The expanded annual disclosure requirements and the transition provisions are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. Management adopted the disclosure provisions of SFAS No. 148 effective December 31, 2002, without material effect on the Company's financial position or results of operations. In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing the guarantee. The Company has financial letters of credit which require the Company to make payment if the customer's financial condition deteriorates, as defined in the agreements. FIN 45 requires the Company to record an initial liability, generally equal to the fees received for these letters of credit when guaranteeing obligations. FIN 45 applies prospectively to letters of credit the Company issues or modifies subsequent to December 31, 2002. The Company defines the initial fair value of these letters of credit as the fee received from the customer. The maximum potential undiscounted amount of future payments of these letters of credit as of September 30, 2003 is $3.2 million and they expire through 2008. Amounts due under these letters of credit would be reduced by any proceeds that the Company would be able to obtain in liquidating the collateral for the loans, which varies depending on the customer. NOTE F: Recent Accounting Pronouncements (continued) In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns, or both. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to existing entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company has not established any variable interest entities subsequent to January 31, 2003. Management adopted FIN 46 effective July 1, 2003, as required, without material effect on the Company's financial position or results of operations. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," which clarifies certain implementation issues raised by constituents and amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," to include the conclusions reached by the FASB on certain FASB Staff Implementation Issues that, while inconsistent with Statement 133's conclusions, were considered by the Board to be preferable; amends SFAS No. 133's discussion of financial guarantee contracts and the application of the shortcut method to an interest-rate swap agreement that includes an embedded option and amends other pronouncements. The guidance in Statement 149 is effective for new contracts entered into or modified after June 30, 2003 and for hedging relationships designated after that date. Management adopted SFAS No. 149 effective July 1, 2003, as required, without material effect on the Company's financial position or results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," which changes the classification in the statement of financial position of certain common financial instruments from either equity or mezzanine presentation to liabilities and requires an issuer of those financial statements to recognize changes in fair value or redemption amount, as applicable, in earnings. SFAS No. 150 requires an issuer to classify certain financial instruments as liabilities, including mandatorily redeemable preferred and common stocks. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and, with one exception, is effective at the beginning of the first interim period beginning after June 15, 2003 (July 1, 2003 as to the Company). The effect of adopting SFAS No. 150 must be recognized as a cumulative effect of an accounting change as of the beginning of the period of adoption. Restatement of prior periods is not permitted. Management adopted SFAS No. 150 effective July 1, 2003, as required, without material effect on the Company's financial position or results of operations. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Forward Looking Statements In addition to historical information contained herein, 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 the Company's market area generally. Some of the forward-looking statements included herein are the statements regarding management's determination of the amount and adequacy of the allowance for loan losses, management's assessment of the Company's interest rate risk and the effect of recent accounting pronouncements. Discussion of Financial Condition Changes from December 31, 2002 to September 30, 2003 The Company reported total assets of $151.8 million at September 30, 2003, an increase of $1.7 million, or 1.1%, compared to December 31, 2002. Cash and cash equivalents decreased by $2.9 million, from $13.5 million at December 31, 2002, to $10.6 million at September 30, 2003. Investment and mortgage-backed securities totaled $26.8 million at September 30, 2003, an increase of $7.7 million, or 40.5%, over December 31, 2002. Purchases of securities totaling $32.4 million were partially offset by repayments, calls and maturities of $8.2 million and sales of $16.1 million. Net loans decreased from $110.4 million at December 31, 2002 to $106.7 million at September 30, 2003. Loan originations amounted to $49.0 million for the nine months ended September 30, 2003, while principal repayments amounted to $46.6 million and sales of one- to four-family residential real estate loans amounted to $5.6 million. Loan originations during 2003 were comprised primarily of loans secured by nonresidential and commercial real estate, other commercial property and commercial leases. The commercial and nonresidential loan portfolios totaled $41.9 million at September 30, 2003, compared to $35.8 million at December 31, 2002. Loans secured by one- to four-family residential real estate totaled $53.2 million at September 30, 2003, compared to $61.7 million at December 31, 2002. In the first quarter of 2003, the Company initiated a program to sell certain one- to four-family loans in the secondary market, dealing with the Federal Home Loan Bank of Indianapolis. Deposits totaled $98.9 million at September 30, 2003, an increase of $534,000, or .5%, from the balance at December 31, 2002. Borrowings increased slightly over the nine month period and at September 30, 2003, were comprised of $34.0 million of FHLB advances, a $1.0 note payable related to an equity investment in low income housing, and a $900,000 line of credit. Shareholders' equity totaled $16.1 million at September 30, 2003, an increase of $715,000, or 4.7%, over the $15.4 million total at December 31, 2002. The increase resulted from net earnings of $1.1 million and proceeds from exercise of stock options of $306,000, which were partially offset by dividends paid of $362,000 and a decrease of $367,000 in the unrealized gains on securities available for sale. Results of Operations Comparison of the Nine Months Ended September 30, 2003 and September 30, 2002 Net earnings for the nine months ended September 30, 2003 totaled $1,121,000, compared with $1,066,000 for the nine months ended September 30, 2002, an increase of $55,000, or 5.2%. Net interest income decreased by $197,000, total other income increased by $308,000 and general, administrative and other expense increased by $25,000, while the provision for losses on loans remained constant and income taxes increased by $31,000. Comparison of the Nine Months Ended September 30, 2003 and September 30, 2002 (continued) Interest income on loans decreased by $643,000, or 10.3%, for the nine months ended September 30, 2003, compared to the same period in 2002, due primarily to a decrease in the yield on loans and a decline in the average balance. Interest income on mortgage-backed securities, investments and other interest-earning assets totaled $886,000 for the nine months ended September 30, 2003, a $158,000, or 21.7%, increase over the nine months ended September 30, 2002. The increase was due primarily to an increase in the average balance outstanding year to year. Interest expense on deposits decreased by $314,000, or 13.9%, as the average cost of deposits decreased. Interest expense on borrowings increased by $26,000, or 1.8%, due primarily to the addition of a line of credit. The decreases in the level of yields on interest-earning assets and the average cost of interest-bearing liabilities were due primarily to the overall decrease in interest rates in the economy. As a result of the foregoing changes in interest income and interest expense, net interest income decreased by $197,000, or 5.9%. The Company maintains an allowance for loan losses that reflects an estimate of inherent losses based upon the types and categories of outstanding loans, as well as problem loans and current economic conditions in the Company's market area. The provision for losses on loans totaled $270,000 for each of the nine month periods ended September 30, 2003 and 2002. The provision for losses on loans was primarily attributable to the increasing percentage of commercial loans in the portfolio. At September 30, 2003 and December 31, 2002, the allowance amounted to $1.7 million and $1.5 million, respectively. In both periods, $200,000 of the total allowance was allocated for a specific reserve. The ratio of the total allowance to total loans was 1.54% at September 30, 2003 and 1.32% at December 31, 2002. Non-performing loans totaled $1.5 million at both September 30, 2003 and December 31, 2002. The ratio of the allowance for loan losses to non-performing loans amounted to 114.3% at September 30, 2003 and 98.3% at December 31, 2002. During the nine months ending September 30, 2003, the Company took three properties into real estate owned and wrote off $51,000 against the allowance to record them at a net realizable value of $153,000. During this period all three of the properties have been sold. Based on management's review of the loan portfolio, the allowance for loan losses at September 30, 2003 is considered adequate to cover potential losses inherent in the loan portfolio. However, there can be no assurance that additions to the allowance will not be necessary in future periods, which could adversely affect the Company's results of operations. Other income totaled $499,000 for the nine months ended September 30, 2003, a $308,000, or 161.3%, increase over the 2002 period. The increase was due primarily to a $215,000 increase in the gain on the sale of investment and mortgage-backed securities and a $106,000 gain on the sale of loans. General, administrative and other expense totaled $1.8 million for the nine-month period ended September 30, 2003, an increase of $25,000, or 1.4%, compared to the nine month period ended September 30, 2002. Employee compensation and benefits expense increased by $76,000, or 7.8%, due primarily to the resumption of the accrual for pension expense related to the Bank's multi-employer defined benefit pension plan, which accounted for $51,000 of the increase, and an increase in management staff and normal merit increases. All other operating expenses decreased by $51,000, or 6.5%, compared to the nine month period ended September 30, 2002, due primarily to decreases in advertising, professional fees, property taxes and repair and maintenance expenses. During the current quarter, routine internal audit procedures uncovered several unauthorized loan transactions by an employee whose employment has been terminated. The Bank has received full restitution from the former employee. The provision for income taxes totaled $448,000 for the nine months ended September 30, 2003, an increase of $31,000, or 7.4%, over the same period in 2002. The increase was due to an $86,000, or 5.8%, increase in pre-tax earnings. The Company's effective tax rates for the nine-month periods ended September 30, 2003 and 2002, were 28.6% and 28.1%, respectively. The effective tax rate remains low due to the tax credits available from the Company's investment in a low-income housing partnership. Comparison of the Three Months Ended September 30, 2003 and September 30, 2002 Net earnings for the three months ended September 30, 2003 totaled $320,000, compared with $375,000 for the three months ended September 30, 2002, a decrease of $55,000, or 14.7%. Net interest income decreased by $129,000, total other income increased by $28,000 and general, administrative and other expense decreased by $7,000, while the provision for losses on loans remained constant and income taxes decreased by $39,000. Interest income on loans decreased by $268,000, or 12.8%, for the three months ended September 30, 2003, compared to the same quarter in 2002, due primarily to a decrease in the yield on loans and a decline in the outstanding balance. Interest income on mortgage-backed securities, investments and other interest-earning assets totaled $329,000 for the three months ended September 30, 2003, a $64,000, or 24.2%, increase over the 2002 quarter. The increase was due primarily to an increase in the average balance outstanding year to year. Interest expense on deposits decreased by $91,000, or 12.3%, as the average cost of deposits decreased. Interest expense on borrowings increased by $16,000, or 3.4%, due primarily to the addition of a line of credit. The decreases in the level of yields on interest-earning assets and the average cost of interest-bearing liabilities were due primarily to the overall decrease in interest rates in the economy. As a result of the foregoing changes in interest income and interest expense, net interest income decreased by $129,000, or 11.3%. The Company maintains an allowance for loan losses that reflects an estimate of inherent losses based upon the types and categories of outstanding loans, as well as problem loans and current economic conditions in the Company's market area. The provision for losses on loans totaled $90,000 for each of the three month periods ended September 30, 2003 and 2002. The provision for losses on loans was primarily attributable to the increasing percentage of commercial loans in the portfolio. Based on management's review of the loan portfolio, the allowance for loan losses at September 30, 2003 is considered adequate to cover potential losses inherent in the loan portfolio. However, there can be no assurance that additions to the allowance will not be necessary in future periods, which could adversely affect the Company's results of operations. Other income totaled $86,000 for the three months ended September 30, 2003, a $28,000, or 48.3%, increase over the 2002 quarter. The increase was due primarily to a $56,000 gain on the sale of loans, which was partially offset by a $20,000 loss on the sale of investment and mortgage-backed securities. General, administrative and other expense totaled $572,000 for the three-month period ended September 30, 2003, a decrease of $7,000, or 1.2%, compared to the three month period ended September 30, 2002. Occupancy and equipment expenses declined by $12,000, or 20.7%, primarily as a result of the adjustment of the accrual for property taxes. The State of Indiana has been in a re-assessment period and involved in the process of converting to a Fair Market Value system for property taxes. The resolution of this conversion resulted in lower taxes than anticipated and allowed for the reversal of the prior accrual and the elimination of the accrual for the balance of 2003. The provision for income taxes totaled $112,000 for the three months ended September 30, 2003, an decrease of $39,000, or 25.8%, compared to the same period in 2002. The decrease was due to a $94,000, or 17.9%, decrease in pre-tax earnings. The Company's effective tax rates for the three-month periods ended September 30, 2003 and 2002, were 25.9% and 28.7%, respectively. The effective tax rate remains low due to the tax credits available from the Company's investment in a low income housing partnership. Capital Resources Pursuant to Office of Thrift Supervision ("OTS") capital regulations, savings associations must currently meet a 1.5% tangible capital requirement, a 4% leverage ratio (or core capital) requirement, and total risk-based capital to risk-weighted assets ratio of 8%. At September 30, 2003, the Bank's tangible and leverage capital ratios were each 11.0%, and its risk-based capital to risk-weighted assets ratio was 18.5%. Therefore, 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 levels as of September 30, 2003. Capital Standard Required Bank's Excess (In thousands) Tangible (1.5%) $2,272 $16,662 $14,390 Core (4.0%) 6,060 16,662 10,602 Risk-based (8.0%) 7,743 17,875 10,132 Off-balance Sheet Arrangements As of the date of this report, the Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, change in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term "off-balance sheet arrangement" generally means any transaction, agreement, or other contractual arrangement to which an entity unconsolidated with the Company is a party under which the Company has (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Bank, like other financial institutions, 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. The Office of Thrift Supervision ("OTS") uses a net market value methodology to measure the interest rate risk exposure of thrift institutions. As a part of its efforts to monitor its interest rate risk, the Bank utilizes the "net portfolio value" ("NPV") methodology to assess its exposure to interest rate risk. 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. Presented below, as of June 30, 2003 (the latest available date) 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 in accordance with OTS regulations. As illustrated in the table, the Bank's NPV is more sensitive to declining rates than rising rates. This occurs principally because, as rates rise, the market value of the Bank's investments, adjustable-rate mortgage loans and mortgage-backed securities increase due to the rate increases. Conversely, as interest rates decline, the market value of these adjustable-rate assets will decrease. The value of the Bank's deposits and borrowings change in approximately the same proportion in rising or falling rate scenarios. Change Net Portfolio Value NPV as % of PV of Assets In Rates $ Amount $ Change % Change NPV Ratio Change (Dollars in thousands) +300bp $15,786 $ 190 1% 9.87% 47bp +200bp 16,254 658 4 10.02 62 +100bp 16,279 683 4 9.91 51 - 15,596 - - 9.40 -100bp 14,333 (1,263) (8) 8.57 (83) Interest Rate Risk Measures: 200 Basis Point (bp) Rate Shock Pre-shock NPV Ratio: NPV as % of PV of Assets 9.40% Exposure Measure: Post-Shock NPV Ratio 8.57% Sensitivity Measure: Change in NPV Ratio 83bp 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 to 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 as adjustable-rate loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could likely deviate significantly from those assumed in calculating the table. Item 4. Controls and Procedures (a) Evaluation of disclosure controls and procedures. The Company's Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended), as of the end of the most recent fiscal quarter covered by this quarterly report (the "Evaluation Date"), have concluded that as of the Evaluation Date, the Company's disclosure controls and procedures were adequate and are designed to ensure that material information relating to the Company would be made known to such officers by others within the Company on a timely basis. (b) Changes in internal controls. There were no significant changes in the Company's internal control over financial reporting identified in connection with the Company's evaluation of controls that occurred during the Company's last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Part II. OTHER INFORMATION Item 1. Legal Proceedings Neither the Bank nor the Company were, during the nine-month period ended September 30, 2003, or are as of the date hereof, involved in any legal proceeding of a material nature. From time to time, the Bank is a party to legal proceedings wherein it enforces its security interests in connection with its mortgage and other loans. Item 2. Changes in Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. The following exhibits are attached to this report on Form 10-Q: 31(1) Certification required by 17 C.F.R. Section 240.13a-14(a) 31(2) Certification required by 17 C.F.R. Section 240.13a-14(a) 32 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K. The Registrant filed one report on Form 8-K filed during the quarter ended September 30, 2003. Date of Report: July 17, 2003 Items Reported: Press release dated July 17, 2003 announcing results of operations for the quarter ended June 30, 2003. Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on behalf of the undersigned thereto duly authorized. Logansport Financial Corp. Date: November 12, 2003 By: /s/ David G. Wihebrink ---------------------- --------------------------------------- David G. Wihebrink, President and Chief Executive Officer Date: November 12, 2003 By: /s/ Dottye Robeson ---------------------- --------------------------------------- Dottye Robeson, Secretary and Treasurer