-----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, RKqHirSMLnyMt+i2DEDwDpm3tzBSTh42D2ikO3TGfSBQZZpFfrz1L3YYc1KWxreq RyoKK8dNY5Bwyo96eK6ctg== 0000908834-04-000236.txt : 20040329 0000908834-04-000236.hdr.sgml : 20040329 20040329143007 ACCESSION NUMBER: 0000908834-04-000236 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040329 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: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-25910 FILM NUMBER: 04695671 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 10-K 1 log_10k.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 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 as specified in its charter) INDIANA 35-1945736 --------------------------------- ------------------------------- (State or other Jurisdiction (I.R.S. Employer Identification of Incorporation or Organization) Number) 723 East Broadway, Logansport, Indiana 46947 - ---------------------------------------- ------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number including area code: (574) 722-3855 Securities Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, without par value (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES _X_ NO___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES ___ NO _X_ The aggregate market value of the issuer's voting stock held by non-affiliates, computed by reference to the the price at which the common equity was last sold on June 30, 2003, was $13,430,968. The number of shares of the Registrant's Common Stock, without par value, outstanding as of March 1, 2004, was 876,193 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the year ended December 31, 2003, are incorporated into Part II. Portions of the Proxy Statement for the 2004 Annual Meeting of Shareholders are incorporated in Part I and Part III. Exhibit Index on Page E-1 Page 1 of 30 Pages
LOGANSPORT FINANCIAL CORP. Form 10-K INDEX Page ---- Forward Looking Statements ....................................................... 1 PART I Item 1. Business .............................................................. 1 Item 2. Properties ............................................................ 24 Item 3. Legal Proceedings ..................................................... 25 Item 4. Submission of Matters to a Vote of Security Holders ................... 25 Item 4.5. Executive Officers of Registrant....................................... 25 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.. 25 Item 6. Selected Financial Data ............................................... 26 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................................... 26 Item 7A. Quantitative and Qualitative Disclosures About Market Risk ............ 26 Item 8. Financial Statements and Supplementary Data ........................... 26 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ................................................ 27 Item 9A. Controls and Procedures ............................................... 27 PART III Item 10. Directors and Executive Officers of Registrant ........................ 27 Item 11. Executive Compensation ................................................ 27 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ......................................... 27 Item 13. Certain Relationships and Related Transactions ........................ 28 Item 14. Principal Accountant Fees and Services ................................ 28 PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ...... 29 Signatures ....................................................................... 30
FORWARD LOOKING STATEMENTS This Annual Report on Form 10-K ("Form 10-K") contains statements which constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this Form 10-K and include statements regarding the intent, belief, outlook, estimate or expectations of the Company (as defined below), its directors or its officers primarily with respect to future events and the future financial performance of the Company. Readers of this Form 10-K are cautioned that any such forward looking statements are not guarantees of future events or performance and involve risks and uncertainties, and that actual results may differ materially from those in the forward looking statements as a result of various factors. The accompanying information contained in this Form 10-K identifies important factors that could cause such differences. These factors include but are not limited to changes in interest rates; loss of deposits and loan demand to other savings and financial institutions; substantial changes in financial markets; changes in real estate values and the real estate market; regulatory changes; or unanticipated results in pending legal proceedings. PART I Item 1. Business. General Logansport Financial Corp. (the "Holding Company" and, together with the Bank (as defined below), the "Company") is an Indiana corporation organized in February 1995, to become a unitary savings and loan holding company. The Holding Company became a unitary savings and loan holding company upon the conversion of Logansport Savings Bank, FSB (the "Bank") from a federal mutual savings bank to a federal stock savings bank on June 13, 1995. The principal asset of the Holding Company consists of 100% of the issued and outstanding shares of common stock, $.01 par value per share, of the Bank. The Bank began operations in Logansport, Indiana, under the name Logansport Building and Loan Association in 1925. In 1962, the Bank changed its name to Logansport Savings and Loan Association, and in 1992, the Bank converted to a federally chartered savings bank known as Logansport Savings Bank, FSB. The Bank serves the needs of primarily residents of Cass County, Indiana. The Bank is the oldest financial institution headquartered in Logansport, Indiana. Management believes the Bank has developed a solid reputation among its loyal customer base because of its commitment to personal service and its strong support of the local community. The Bank offers a number of consumer and commercial financial services. These services include: (i) residential real estate loans; (ii) home equity loans; (iii) home improvement loans; (iv) construction loans; (v) commercial real estate loans and other commercial loans, including operating lines of credit secured by receivables and inventory and term financing for equipment purchases, and agricultural loans; (vi) commercial leases, including equipment leases; (vii) multi-family loans; (viii) consumer loans; (ix) NOW accounts; (x) passbook savings accounts; (xi) certificates of deposit; (xii) consumer and commercial demand deposit accounts; and (xiii) individual retirement accounts. The Holding Company and the Bank conduct business out of their main office located in Logansport, Indiana. The Bank is and historically has been a significant real estate mortgage lender in Cass County, Indiana. The Bank historically has concentrated its lending activities on the origination of loans secured by first mortgage liens for the purchase, construction or refinancing of one- to four-family residential real property. One- to four-family residential mortgage loans continue to be the major focus of the Bank's loan origination activities, representing 49.1% of the Company's gross loans at December 31, 2003. The Bank also offers multi-family mortgage loans, commercial real estate loans, construction loans, commercial loans and leases and consumer loans. Mortgage loans secured by multi-family properties and commercial real estate totaled approximately 1.1% and 22.0%, respectively, of the Company's gross loans at December 31, 2003. Commercial loans constituted 12.4% and commercial leases 3.8% of the gross loans at December 31, 2003. Residential real estate construction loans constituted approximately .8% of the Company's gross loans at December 31, 2003. Installment, home equity, and home improvement loans constituted approximately 4.6%, 1.6%, and 4.6%, respectively, of the Company's total loan portfolio at December 31, 2003.
Lending Activities Loan Portfolio Data. The following table sets forth the composition of the Company's loan portfolio by loan type and security type as of the dates indicated, including a reconciliation of gross loans receivable after consideration of the allowance for loan losses and loans in process. At December 31, ----------------------------------------------------------------------------------------- 2003 2002 2001 2000 ------------------ ----------------- ------------------ ------------------ Percent Percent Percent Percent Amount of Total Amount of Total Amount of Total Amount of Total -------- -------- --------- -------- -------- -------- -------- -------- (Dollars in thousands) TYPE OF LOAN Mortgage loans: Residential .......................... $ 51,208 49.10% $ 61,717 55.02% $ 63,863 56.25% $ 62,277 59.73% Commercial real estate ............... 22,910 21.97 20,557 18.33 18,435 16.24 13,230 12.69 Multi-family ......................... 1,094 1.05 1,606 1.43 1,816 1.60 2,050 1.96 Construction: Residential .......................... 870 .83 1,317 1.17 2,278 2.01 2,814 2.70 Commercial real estate ............... -- -- -- -- -- -- -- -- Multi-family ......................... -- -- -- -- -- -- -- -- Commercial loans ....................... 12,931 12.40 10,924 9.74 9,586 8.44 7,088 6.80 Commercial leases ...................... 4,000 3.83 4,352 3.88 3,914 3.45 2,228 2.14 Consumer loans: Installment (1) ...................... 4,784 4.59 5,156 4.60 6,473 5.70 7,045 6.75 Share ................................ 11 .01 62 .06 144 .13 290 .28 Home equity .......................... 1,683 1.61 1,358 1.21 1,199 1.06 1,164 1.12 Home improvement ..................... 4,813 4.61 5,118 4.56 5,819 5.12 6,076 5.83 -------- ------ -------- ------ -------- ------ -------- ------ Gross loans receivable ............. $104,304 100.00% $112,167 100.00% $113,527 100.00% $104,262 100.00% ======== ====== ======== ====== ======== ====== ======== ====== TYPE OF SECURITY Residential (2) ...................... $ 58,574 56.16% $ 71,320 63.58% $ 74,097 65.27% $ 73,056 70.07% Commercial real estate ............... 22,910 21.96 20,557 18.33 18,725 16.49 13,606 13.05 Multi-family ......................... 1,094 1.05 1,606 1.43 1,816 1.60 2,050 1.96 Deposits ............................. 11 01 62 .06 144 .13 290 .28 Auto ................................. 2,197 2.11 2,382 2.12 2,857 2.52 3,223 3.09 Consumer (1) ......................... 2,587 2.48 1,646 1.47 2,388 2.10 2,722 2.61 Other security ....................... 16,931 16.23 14,594 13.01 13,500 11.89 9,315 8.94 -------- ------ -------- ------ -------- ------ -------- ------ Gross loans receivable ............. 104,304 100.00% 112,167 100.00% 113,527 100.00% 104,262 100.00% Deduct: Allowance for loan losses .............. 1,751 1.68 1,458 1.30 1,132 1.00 760 .73 Loans in process ....................... 200 .19 323 .29 699 .61 1,084 1.04 -------- ------ -------- ------ -------- ------ -------- ------ Net loans receivable ................. $102,353 98.13% $110,386 98.41% $111,696 98.39 $102,418 8.23% ======== ====== ======== ====== ======== ====== ======== ====== Mortgage Loans (including construction): Adjustable-rate ...................... $ 47,800 62.83% $ 48,068 56.42% $ 52,365 60.61% $ 51,664 64.28% Fixed-rate ........................... 28,282 37.17 37,129 43.58 34,027 39.39 28,707 35.72 -------- ------ -------- ------ -------- ------ -------- ------ Total .............................. $ 76,082 100.00% $ 85,197 100.00% $ 86,392 100.00% $ 80,371 100.00% ======== ====== ======== ====== ======== ====== ======== ====== (Table is continued on following page.)
(Table is continued from previous page.) At December 31, ------------------ 1999 ------------------ Percent Amount of Total ------ -------- (Dollars in thousands) TYPE OF LOAN Mortgage loans: Residential .......................... $ 57,889 62.23% Commercial real estate ............... 11,825 12.71 Multi-family ......................... 2,111 2.27 Construction: Residential .......................... 2,575 2.77 Commercial real estate ............... -- -- Multi-family ......................... -- -- Commercial loans ....................... 4,102 4.41 Commercial leases ...................... 1,609 1.73 Consumer loans: Installment (1) ...................... 6,107 6.56 Share ................................ 289 .31 Home equity .......................... 974 1.05 Home improvement ..................... 5,544 5.96 -------- ------ Gross loans receivable ............. $ 93,025 100.00% ======== ====== TYPE OF SECURITY Residential (2) ...................... $ 66,150 71.11% Commercial real estate ............... 12,334 13.26 Multi-family ......................... 2,088 2.25 Deposits ............................. 289 .31 Auto ................................. 2,477 2.66 Consumer (1) ......................... 1,599 1.72 Other security ....................... 8,088 8.69 -------- ------ Gross loans receivable ............. 93,025 100.00% Deduct: Allowance for loan losses .............. 440 .47 Loans in process ....................... 1,685 1.81 -------- ------ Net loans receivable ................. $ 90,900 97.72% ======== ====== Mortgage Loans (including construction): Adjustable-rate ...................... $ 48,119 64.68% Fixed-rate ........................... 26,281 35.32 -------- ------ Total .............................. $ 74,400 100.00% ======== ====== - ------------------------- (1) Includes "one-pay" notes due in less than one year. (2) Includes home equity, residential construction and home improvement loans.
The following table sets forth certain information at December 31, 2003, regarding the dollar amount of loans maturing in the Company's loan portfolio based on the date that final payment is due under the terms of the loan. Demand loans having no stated schedule of repayments and no stated maturity and overdrafts are reported as due in one year or less. This schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses. Management expects prepayments will cause actual maturities to be shorter.
Balance due during years ending December 31, --------------------------------------------------------------------------- Outstanding 2007 2009 2014 2019 at December 31, to to to and 2003 2004 2005 2006 2008 2013 2018 following --------------- -------- -------- -------- -------- --------- -------- --------- (In thousands) Mortgage loans (including construction): Residential ......................... $ 52,078 $ 746 $ 86 $ 339 $ 1,348 $ 6,029 $ 14,208 $ 29,322 Multi-family ........................ 1,094 178 -- -- -- 916 -- -- Commercial real estate .............. 22,910 2,117 120 408 897 3,273 4,227 11,868 Commercial loans ....................... 12,931 7,853 303 1,239 1,912 1,624 -- -- Commercial leases ...................... 4,000 1,228 987 926 743 116 -- -- Consumer loans: Home improvement .................... 4,813 66 73 200 879 1,852 1,730 13 Home equity ......................... 1,683 -- -- -- -- -- 1,683 -- Installment ......................... 4,784 1,762 493 809 1,069 423 228 -- Share ............................... 11 11 -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- -------- Total ............................ $104,304 $ 13,961 $ 2,062 $ 3,921 $ 6,848 $ 14,233 $ 22,076 $ 41,203 ======== ======== ======== ======== ======== ======== ======== ========
The following table sets forth, as of December 31, 2003, the dollar amount of all loans due after one year which have fixed interest rates and floating or adjustable rates. Due After December 31, 2004 ------------------------------------------ Fixed Rates Variable Rates Total ----------- -------------- ------------ (In thousands) Mortgage loans: Residential .......... $22,127 $29,205 $51,332 Multi-family ......... 498 418 916 Commercial real estate 5,343 15,450 20,793 Commercial loans ........ 3,902 1,176 5,078 Commercial leases ....... 2,772 -- 2,772 Consumer loans: Home improvement ..... 4,747 -- 4,747 Home equity .......... -- 1,683 1,683 Installment .......... 3,022 -- 3,022 ------- ------- ------- Total ............. $42,411 $47,932 $90,343 ======= ======= ======= Residential Loans. Residential loans consist primarily of one- to four-family loans. Approximately $51.2 million, or 49.1% of the Company's portfolio of loans at December 31, 2003, consisted of one- to four-family residential mortgage loans. The Bank currently offers adjustable-rate one- to four-family residential mortgage loans ("ARMs") which adjust annually and are indexed to the one-year U.S. Treasury securities yield adjusted to a constant maturity. These ARMs have a current margin above such index of 2.75%, or 3.00% for loans in which interest is amortized and payments are due monthly or bi-weekly. Many of the residential ARMs in the Company's portfolio at December 31, 2003, provided for a maximum rate adjustment per year of 1%, although the Bank began originating residential ARMs which provide for a maximum rate adjustment of 2% per year in 1995. The Bank's residential ARMs provide for a maximum rate adjustment of 5% over the life of the loan. These ARMs generally bear terms of between 15 and 30 years. The Bank also currently offers fixed-rate loans which provide for the payment of principal and interest over a period that generally does not exceed 15 years. At December 31, 2003, 37.2% of the Company's total mortgage portfolios, which includes residential, commercial real estate, multi-family loans and construction loans, had fixed rates of interest and 62.8% had adjustable rates. During 2003, the Bank initiated a program to originate certain mortgage loans for sale in the secondary market, retaining the servicing on loans sold. These sales transactions were conducted with the Federal Home Loan Bank of Indianapolis. Sales of loans during 2003 totaled $6.2 million. The Bank generally does not originate residential mortgage loans if the ratio of the loan amount to the lesser of current cost or appraised value of the property (i.e., the "loan-to-value ratio") exceeds 90% on ARMs or 80% on fixed-rate loans. However, in certain circumstances the Bank may originate loans exceeding the above loan-to-value ratios. In 2003, if the loan-to-value ratio on a residential single-family mortgage loan exceeded 90%, the Bank required private mortgage insurance. Substantially all of the residential mortgage loans that the Bank originates include "due-on-sale" clauses, which give the Bank the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the real property subject to the mortgage and the loan is not repaid. Historically, the Bank's residential mortgage loans have not been originated on terms and conditions and using documentation that conform to the standard underwriting criteria required to sell such loans on the secondary market. However, during 2003 the Bank conformed its origination process to meet FHLB of Indianapolis requirements. See "-- Origination, Purchase and Sale of Loans." At December 31, 2003, residential loans amounting to $269,000, or .26% of total loans, were included in non-performing assets. See "Non-Performing and Problem Assets." Commercial Real Estate Loans. At December 31, 2003, $22.9 million, or 22.0% of the Company's total loan portfolio, consisted of commercial real estate loans. Of these loans, $1.7 million constituted participations in loans secured by commercial real estate which were purchased from other financial institutions in 2003. The commercial real estate loans included in the Company's portfolio are primarily secured by non-residential real estate such as small office buildings, nursing homes, churches, light manufacturing facilities, retail and service outlets, warehouses, professional buildings and farm real estate. The Bank currently originates commercial real estate loans as adjustable-rate loans indexed to the one-, three- or five-year U.S. Treasury or the prime interest rate with various margins, or as fixed rate loans. The Bank underwrites these loans on a case-by-case basis and, in addition to its normal underwriting criteria, the Bank evaluates the borrower's ability to service the debt from the net operating income of the property. No single commercial real estate loan at December 31, 2003, exceeded $2,000,000. One commercial real estate loan was included in non-performing assets at December 31, 2003, amounting to $543,000. Loans secured by commercial real estate generally are larger than one- to four-family residential loans and involve a greater degree of risk. Commercial real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Payments on these loans depend to a large degree on results of operations and management of the properties and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. Accordingly, the nature of the loans makes them more difficult for management to monitor and evaluate. Multi-Family Loans. Approximately $1.1 million, or 1.1% of the Company's portfolio of loans at December 31, 2003, consisted of multi-family loans. These loans are generally purchased participations and secured by apartment complexes and other multi-family residential properties. At December 31, 2003, no multi-family loan was included in non-performing assets. Construction Loans. The Bank offers construction loans with respect to owner-occupied residential real estate and, in limited cases, to builders or developers constructing such properties on a speculative investment basis (i.e., before the builder/developer obtains a commitment from a buyer). The Bank may also purchase participations. At December 31, 2003, $870,000, or .8%, of the Company's total loan portfolio consisted of construction loans. All construction loans at December 31, 2003, were one- to four-family residential loans. The largest construction loan at December 31, 2003, was approximately $225,000. No construction loans were included in non-performing assets on that date. Construction loans originated by the Bank are written such that interest only is payable during the construction phase, which is typically limited to nine months, and following the construction phase, a permanent loan is made. Inspections are made prior to any disbursement under a construction loan. Commercial Loans. At December 31, 2003, $12.9 million, or 12.4% of the Company's total loan portfolio consisted of commercial loans provided to finance receivables, inventory or equipment. These loans were originated by the Bank and provided to existing businesses located primarily in Cass County and its contiguous counties. Loans are underwritten on a case-by-case basis with emphasis placed on cash flow analysis and the borrower's debt service capacity. The majority of the loans are written on a variable rate basis using the Bank's prime rate as the primary index rate. The weighted-average maturity of the variable rate portion of the portfolio was 11 months and the weighted-average maturity of the fixed rate portion of the portfolio was 53 months at December 31, 2003. One commercial loan was included in non-performing assets at December 31, 2003, amounting to $658,000. Commercial Leases. At December 31, 2003, $4.0 million, or 3.8% of the Company's total loan portfolio consisted of commercial leases provided to finance equipment. The Bank's lease portfolio consists of a joint marketing effort between the Bank and SCI Leasing Group, a Sheridan, Indiana based concern, with all credit decisions made solely by the Bank and following the same underwriting standards as are applied to traditional commercial loan requests. Commercial leases are a fixed rate financing tool with the weighted-average maturity of the Bank's lease portfolio at 44 months as of December 31, 2003. Consumer Loans. Federal laws and regulations permit federally chartered savings associations to make secured and unsecured consumer loans in an aggregate amount up to 35% of the association's total assets. In addition, a federally chartered savings association has lending authority above the 35% limit for certain consumer loans, such as property improvement loans and deposit account secured loans. However, the Qualified Thrift Lender test places additional limitations on a savings association's ability to make consumer loans. See "Regulation -- Qualified Thrift Lender." The Company's consumer loans, consisting primarily of installment, share, home improvement, and home equity loans, aggregated $11.3 million as of December 31, 2003, or 10.8% of the Company's total loan portfolio. The Bank consistently originates consumer loans to meet the needs of its customers and to assist in meeting its asset/liability management goals. All of the consumer loans originated by the Bank, except home equity loans, are fixed-rate loans, and substantially all are secured loans. Installment loans, totaling $4.8 million, or 4.6% of total loans at December 31, 2003, are fixed-rate loans generally secured by collateral, including automobiles, and are made for maximum terms of up to ten years (depending on the collateral). The Bank's installment loans also include "one-pay" notes, some of which are secured by residential real estate and have maximum terms of six months to one year. Share loans, totaling $11,000, or .01% of total loans at December 31, 2003, are made up to 80% of the original account balance and accrue at a rate of 2-3% over the underlying certificate of deposit rate. Interest on share loans is paid quarterly. Home improvement loans totaled $4.8 million, or 4.6% of the Company's total loan portfolio at December 31, 2003, and are close-ended fixed-rate loans made for maximum terms up to 15 years. The Bank's home improvement loans are generally made only to those borrowers for whom the Bank holds the primary mortgage on the property, if any. The Bank also offers open-ended lines of credit secured by a lien on the equity in the borrower's home in amounts up to 90% of the appraised value of the real estate (taking into account any other mortgages on the property). The Bank's home equity loans are adjustable-rate loans with interest rates equal to the national prime rate plus 0.5% and payments equal to the greater of 2% of the outstanding loan balance or $50. The Bank's home equity loans are generally made only to those borrowers for whom the Bank holds the primary mortgage on the property, if any, and generally have a maximum term of 15 years. At December 31, 2003, the Bank had approved $2.9 million of home equity loans, of which $1.7 million were outstanding. As a general rule, consumer loans involve a higher level of risk than one- to four-family residential mortgage loans because consumer loans are generally made based upon the borrower's ability to repay the loan, which is subject to change, rather than the value of the underlying collateral, if any. However, the relatively higher yields and shorter terms to maturity of consumer loans are believed to be helpful in reducing interest-rate risk, and compensating the Bank for assuming this additional credit risk. As of December 31, 2003, consumer loans totaling $45,000 were included in non-performing assets, which indicates the Bank's success in managing consumer loan risk. Letters of Credit Securing Tax-Exempt Bonds. The Bank currently maintains four letters of credit, each in the amount of $253,000, to secure payments required under tax-exempt bonds issued to raise funds for low-income housing projects in Franklin, Kokomo and Michigan City, Indiana and Hamilton, Ohio. The issuer of the tax-exempt bonds is permitted to draw against these letters of credit only in the event it defaults in making payments required under the bonds, and any such draws made against the letters of credit would be secured by a mortgage on the subject housing project. The Bank also has two letters of credit totaling $1.5 million associated with the equity investment owned by the Bank; these also secure payments required for tax-exempt bonds. No draws against any letters of credit had been made as of December 31, 2003. In addition to the above, the Bank held $210,000 in standby letters of credit for one commercial loan customer. Origination, Purchase and Sale of Loans. In an effort to control costs incurred by its mortgage customers, the Bank currently originates some mortgage loans pursuant to its own underwriting standards which are not in conformity with the standard criteria of the Federal Home Loan Mortgage Corporation ("FHLMC") or Federal National Mortgage Association ("FNMA"). If it desired to sell these mortgage loans, the Bank might therefore experience some difficulty selling such loans quickly in the secondary market. The Bank did sell selected loans originated in 2003 through the MPP program of the FHLB of Indianapolis in the amount of $6.2 million. The Bank confines its loan origination activities primarily to Cass County, Indiana. The Bank's loan originations are generated from referrals from real estate dealers and existing customers, and newspaper and periodical advertising. Business loan originations also arise from an active business development calling program. All loan applications are processed and underwritten at the Bank's main office. Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), a savings association generally may not make any loan to a borrower or its related entities if the total of all such loans by the savings association exceeds 15% of its capital (plus up to an additional 10% of capital in the case of loans fully collateralized by readily marketable collateral); provided, however, that loans up to $500,000 regardless of the percentage limitations may be made and certain housing development loans of up to $30 million or 30% of capital, whichever is less, are permitted. The maximum amount which the Bank could have loaned to one borrower and the borrower's related entities under the 15% of capital limitation was $2.7 million at December 31, 2003. The Company's portfolio of loans currently contains no loans that exceed the 15% of capital limitation. The Bank's loan approval process is intended to assess the borrower's ability to repay the loan, the viability of the loan and the adequacy of the value of the property that will secure the loan. To assess the borrower's ability to repay, the Bank studies the employment and credit history and information on the historical and projected income and expenses of its mortgagors. The Bank generally requires appraisals or loan officer evaluations on all property securing its loans and requires title insurance and a valid lien on its mortgaged real estate. Appraisals for residential real property are performed by a state-licensed residential appraiser or an independent state-licensed residential appraiser. The Bank also uses the services of certified residential appraisers for performance of appraisals related to loans in excess of $250,000. The Bank requires fire and extended coverage insurance in amounts at least equal to the principal amount of the loan. It also requires flood insurance to protect the property securing its interest if the property is in a flood plain. The Bank's underwriting standards for consumer loans are intended to protect against some of the risks inherent in making consumer loans. Borrower character, paying habits and financial strengths are important considerations. The Bank historically had not participated in the secondary market as a seller of its mortgage loans until 2003, but does occasionally purchase participations in commercial real estate and multi-family loans from other financial institutions. The following table shows loan origination, purchase and repayment activity for the Bank during the periods indicated.
Year Ended December 31, -------------------------------------- 2003 2002 2001 -------- -------- -------- (In thousands) Gross loans receivable at beginning of period ...... $112,167 $113,527 $104,262 Originations: Mortgage loans: Residential .................................. 13,438 14,737 18,243 Commercial real estate and lines of credit and multi-family .............................. 37,653 25,554 36,011 -------- -------- -------- Total mortgage loans and commercial loans .... 51,091 40,291 54,254 Consumer loans: Installment .................................. 3,196 3,176 4,342 Share ........................................ -- -- -- Home improvement ............................. 1,812 1,669 2,260 Home equity .................................. 648 418 226 -------- -------- -------- Total consumer loans ...................... 5,656 5,263 6,828 -------- -------- -------- Total originations ..................... 56,747 45,554 61,082 Purchases: Commercial real estate and multi-family ......... 1,771 171 499 -------- -------- -------- Total purchases .............................. 1,771 171 499 -------- -------- -------- Total originations and purchases .......... 58,518 45,725 61,581 Sales .............................................. 8,192 -- 416 Repayments and deductions .......................... 58,189 47,085 51,900 -------- -------- -------- Gross loans receivable at end of period ............ $104,304 $112,167 $113,527 ======== ======== ========
Origination and Other Fees. The Company realizes income from origination fees, late charges, checking account service charges, credit card fees, and fees for other miscellaneous services. The Bank currently charges $300 plus closing costs on its adjustable-rate mortgage loans. Points may be charged on fixed-rate loans. Late charges are generally assessed if payment is not received within a specified number of days after it is due. The grace period depends on the individual loan documents. Non-Performing and Problem Assets Mortgage loans are reviewed by the Bank on a regular basis and are placed on a non-accrual status when the loans become contractually past due 90 days or more. At the end of each month, delinquency notices are sent with respect to all mortgage loans for which payments have not been received. Contact by phone or in person is made, if feasible, with respect to all such loans. When loans are sixty days in default, an additional delinquency notice is sent and personal contact is made with the borrower to establish an acceptable repayment schedule. When loans are ninety days in default, contact is made with the borrower by the Senior Loan Officer who attempts to establish an acceptable repayment schedule. Management is authorized to commence foreclosure proceedings for any loan upon making a determination that it is prudent to do so. All loans for which foreclosure proceedings have been commenced are placed on non-accrual status. Late notices are sent to commercial loan borrowers at five and fifteen days after which personal contact by the Account Officer is made. Consumer loans are reviewed by the Bank on a daily basis. Notices are sent to borrowers when any consumer loan is 5, 10 and 15 days past due. After consumer loans are 15 days delinquent, a late fee in the amount of 10% of the payment is imposed until the loan is brought current. Non-Performing Assets. At December 31, 2003, $1.5 million, or .97% of the Company's total assets, were non-performing assets (loans delinquent more than 90 days, non-accruing loans, real estate owned ("REO"), troubled debt restructurings and non-accruing investments), compared to $1.5 million, or .99%, of the Company's total assets at December 31, 2002. At December 31, 2003, residential loans accounted for 17.76% and consumer loans accounted for 2.97% of non-performing assets. Commercial real estate loans accounted for 35.84% and commercial operating loans accounted for 43.43% of non-performing assets. There were no non-accruing investments at December 31, 2003. The table below sets forth the amounts and categories of the Company's non-performing assets (non-accruing loans and real estate owned) as of the date indicated. It is the policy of the Company that all earned but uncollected interest on all loans be reviewed monthly to determine if any portion thereof should be classified as uncollectible for any loan past due in excess of 90 days.
At December 31, ---------------------------------------------------------------------- 2003 2002 2001 2000 1999 --------- --------- ------ ------- ------- (Dollars in thousands) Non-accruing loans (1) ..................... $ 1,515 $ 1,484 $1,948 $ 336 $ 666 Real estate owned, net ..................... -- -- 65 -- -- --------- --------- ------ ------- ------- Total non-performing assets ............. $ 1,515 $ 1,484 $2,013 $ 336 $ 666 ========= ========= ====== ======= ======= Non-performing loans to total loans, net (2) 1.45% 1.34% 1.73% .32% .72% Non-performing assets to total assets ...... .97 .99 1.46 .25 .57 - ------------------------------ (1) The Company generally places loans on a non-accruing status when the loans become contractually past due 90 days or more. At December 31, 2003, $269,000 of non-accruing loans were residential loans, $45,000 were consumer loans, $543,000 were commercial real estate loans and $658,000 were commercial operating loans. For the year ended December 31, 2003, the income that would have been recorded had the non-accruing loans not been in a non-performing status totaled $115,000. (2) Total loans less loans in process.
Classified Assets. Federal regulations and the Bank's Internal Loan Review policy provide for the classification of loans and other assets such as debt and equity securities considered by the OTS to be of lesser quality as "substandard," "doubtful" or "loss" assets. An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the association will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated "special mention" by management. An insured institution should consider whether to establish general allowances for loan losses, in an amount deemed prudent by management, for loans classified substandard or doubtful, as well as for other problem loans. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as "loss," it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount. An institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS, which can order the establishment of additional general or specific loss allowances. At December 31, 2003, the aggregate amount of the Company's classified assets and the Company's general and specific loss allowances were as follows: At December 31, 2003 -------------------- (In thousands) Substandard assets ....... $2,254 Doubtful assets .......... 200 Loss assets .............. -- ------ Total classified assets $2,454 ====== General loss allowances .. $1,551 Specific loss allowances . 200 ------ Total allowances ...... $1,751 ====== The Company regularly reviews its loan portfolio to determine whether any loans require classification in accordance with applicable regulations. The substandard and doubtful loans consist of all nonaccrual loans totaling $1,515,000, a purchased participation loan secured by multi-family real estate of $177,000, which is current on payments but considered substandard because of cash flow and $762,000 of commercial loans which are current on payments but substandard because of cash flow. Allowance for Loan Losses The allowance for loan losses is maintained through the provision for losses on loans, which is charged to earnings. The provision for losses on loans is determined in conjunction with management's review and evaluation of current economic conditions (including those of the Bank's lending area), changes in the character and size of the loan portfolio, loan delinquencies (current status as well as past and anticipated trends) and adequacy of collateral securing loan delinquencies, historical and estimated net charge-offs, and other pertinent information derived from a review of the loan portfolio. In management's opinion, the Company's allowance for loan losses is adequate to absorb anticipated future losses from loans at December 31, 2003. However, there can be no assurance that regulators, when reviewing the Company's loan portfolio in the future, will not require increases in its allowance for loan losses or that changes in economic conditions will not adversely affect the Company's loan portfolio.
Summary of Loan Loss Experience. The following table analyzes changes in the allowance for loan losses during the past five one-year periods ended December 31, 2003. Year Ended December 31, --------------------------------------------------------- 2003 2002 2001 2000 1999 ------ ------ ------ ------ ------ (Dollars in thousands) Balance of allowance at beginning of period $1,458 $1,132 $ 760 $ 440 $ 285 Recoveries ............................. 6 4 -- 1 -- Less charge-offs: Residential real estate loans .......... 60 -- -- -- -- Consumer loans ......................... 13 38 20 13 7 ------ ------ ------ ------ ------ Net charge-offs ........................... 67 34 20 12 7 Provisions for losses on loans ............ 360 360 392 332 162 ------ ------ ------ ------ ------ Balance of allowance at end of period ..... $1,751 $1,458 $1,132 $ 760 $ 440 ====== ====== ====== ====== ====== Net charge-offs to total average loans receivable for period ......... .06% .03% .02% (*) (*) Allowance at end of period to net loans receivable at end of period (1) ....................... 1.68 1.30 1.00 .73 .47 Allowance to total non-performing loans at end of period .............. 115.58 98.25 58.11 226.19 66.07 - -------------------------- (1) Total loans less loans in process. (*) Less than .01%.
Allocation of Allowance for Loan Losses. The following table presents an analysis of the allocation of the Company's allowance for loan losses at the dates indicated. At December 31, -------------------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ---------------- ----------------- ----------------- ----------------- ---------------- Percent Percent Percent Percent Percent of loans of loans of loans of loans of loans in each in each in each in each in each category category category category category of total of total of total of total of total Amount loans Amount loans Amount loans Amount loans Amount loans ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- (Dollars in thousands) Balance at end of period applicable to: Residential ............ $ 37 49.10% $ 11 55.02% $ 16 56.25% $ 12 59.73% $ 270 62.23% Commercial real estate . 318 21.97 242 18.33 132 16.24 126 12.69 8 12.71 Multi-family ........... 36 1.05 62 1.43 100 1.60 100 1.96 117 2.27 Construction loans ..... -- .83 -- 1.17 -- 2.01 -- 2.70 -- 2.77 Commercial loans ....... 546 12.40 352 9.74 316 8.44 180 6.80 -- 4.41 Commercial leases ...... -- 3.83 -- 3.88 -- 3.45 -- 2.14 -- 1.73 Consumer loans ......... 67 10.82 47 10.43 27 12.01 15 13.98 45 13.88 Unallocated ............ 747 -- 744 -- 541 -- 327 -- -- -- ------ ------ ------ ------ ------ ------ ---- ------ ------ ------ Total ................ $1,751 100.00% $1,458 100.00% $1,132 100.00% $760 100.00% $ 440 100.00% ====== ====== ====== ====== ====== ====== ==== ====== ====== ======
Investments and Mortgage- and Other Asset-Backed Securities Federally chartered savings associations have the authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, repurchase agreements and federal funds sold. Subject to various restrictions, federally chartered savings associations may also invest a portion of their assets in corporate debt securities and asset-backed securities. The investment policy of the Bank, which is established and implemented by the Bank's Investment Committee, is designed primarily to maximize the yield on the investment portfolio subject to minimal liquidity risk, default risk and interest rate risk, and prudent asset/liability management. The Company's investments consist of U.S. government and other agency securities which are primarily callable fixed rate notes, mortgage- and other asset-backed securities, state and municipal bonds, corporate debt obligations, marketable equity securities, and FHLB stock. At December 31, 2003, approximately $34.6 million, or 22.08% of the Company's total assets, consisted of such investments. At December 31, 2003, the Company had $20.3 million of mortgage- and other asset-backed securities outstanding, all of which were classified as available for sale. These fixed-rate and adjustable-rate mortgage- and other asset-backed securities may be used as collateral for borrowings and through repayments, as a source of liquidity. Mortgage- and other asset-backed securities offer yields above those available for investments of comparable credit quality and duration. Mortgage-backed securities are qualifying thrift investments under the Qualified Thrift Lender test. See "Regulation--Qualified Thrift Lender." The following table sets forth the amortized cost and market value of the Company's investments and mortgage- and other asset-backed securities at the dates indicated.
At December 31, --------------------------------------------------------------------------- 2003 2002 2001 ------------------------ -------------------------- ----------------------- Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value ------------ ------- ----------- -------- ----------- ------- (In thousands) Securities available for sale: Federal agencies ................ $ 8,867 $ 8,812 $ 3,051 $ 3,120 $ 1,900 $ 1,908 State and municipal ............. 3,074 3,212 3,028 3,232 2,789 2,901 Mortgage- and other asset-backed securities ............. 20,437 20,307 10,779 11,009 4,418 4,419 Corporate debt obligations ...... -- -- 907 983 710 731 Marketable equity securities .... 4 218 504 725 4 248 ------- ------- ------- ------- ------- ------- Total securities available for sale ...................... 32,382 32,549 18,269 19,069 9,821 10,207 FHLB stock (1) ..................... 2,080 2,080 2,003 2,003 1,973 1,973 ------- ------- ------- ------- ------- ------- Total investments ............ $34,462 $34,629 $20,272 $21,072 $11,794 $12,180 ======= ======= ======= ======= ======= ======= - -------------------------------- (1) Market value approximates carrying values.
The following table sets forth investment securities, mortgage- and other asset-backed securities and FHLB stock which mature during each of the periods indicated and the weighted-average yields for each range of maturities at December 31, 2003. Amount at December 31, 2003, which matures in ------------------------------------------------------------------------------------ One One to Five to Over Year or Less Five Years Ten Years Ten Years (4) ------------------ ------------------ ------------------ ------------------ Weighted Weighted Weighted Weighted Amortized Average Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield Cost Yield --------- -------- --------- -------- --------- -------- --------- -------- (Dollars in thousands) Securities available for sale (1)(3): Federal agencies ...................... $ 2,274 3.15% $ 2,500 3.76 $ 3,343 4.70% $ 750 6.05% State and municipal (2) ............... 783 7.91 641 6.58 1,195 6.61 455 8.46 Mortgage- and other asset-backed securities .......................... 3,857 3.20 7,796 3.47 4,070 3.59 4,714 3.58 Corporate obligations ................. -- -- -- -- -- -- -- -- Marketable equity securities .......... -- -- -- -- -- -- 4 102.17 ------- ---- ------- ---- ------- ---- ------- ------ Total securities available for sale 6,914 10,937 8,608 5,923 4.33 FHLB stock ............................... -- -- -- 2,080 4.86 ------- ---- ------- ---- ------- ---- ------- ------ Total investments ................ $ 6,914 3.72% $10,937 3.72% $ 8,608 4.44% $ 8,003 4.47% ======= ==== ======= ==== ======= ==== ======= ====== - ----------------------- (1) Securities available for sale are set forth at amortized cost for purposes of this table. (2) Fully taxable equivalent basis. (3) No effect is given for possible prepayments or securities which are callable. (4) Includes perpetual marketable equity securities.
Sources of Funds General. Deposits have traditionally been the Bank's primary source of funds for use in lending and investment activities. In addition to deposits, the Company derives funds from scheduled loan payments, loan prepayments, and income on earning assets. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition. Borrowings from the FHLB of Indianapolis are also used to compensate for reductions in deposits or deposit inflows at less than projected levels. Deposits. Deposits are attracted, principally from within Cass County, through the offering of a broad selection of deposit instruments including NOW and other transaction accounts, fixed-rate certificates of deposit, individual retirement accounts, and savings accounts. The Bank does not actively solicit or advertise for deposits outside of Cass County. Substantially all of the Bank's depositors are residents of that county. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds remain on deposit and the interest rate. The Bank does not pay a fee for any deposits it receives. Deposits totaled $103.8 million at December 31, 2003. Interest rates paid, maturity terms, service fees and withdrawal penalties are established by the Bank on a periodic basis. Determination of rates and terms are predicated on funds acquisition and liquidity requirements, rates paid by competitors, growth goals, and federal regulations. The Bank relies, in part, on customer service and long-standing relationships with customers to attract and retain its deposits, but also closely prices its deposits in relation to rates offered by its competitors. The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates, and competition. The variety of deposit accounts offered by the Bank has allowed it to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. The Bank has become more susceptible to short-term fluctuations in deposit flows as customers have become more interest rate conscious. The Bank manages the pricing of its deposits in keeping with its asset/liability management and profitability objectives. Based on its experience, the Bank believes that its passbook, NOW and non-interest-bearing checking accounts are relatively stable sources of deposits. However, the ability of the Bank to attract and maintain certificates of deposit, and the rates paid on these deposits, has been and will continue to be significantly affected by market conditions. An analysis of the Bank's deposit accounts by type, maturity, and rate at December 31, 2003, is as follows:
Minimum Balance at Weighted Opening December 31, % of Average Type of Account Balance 2003 Deposits Rate - --------------- ----------- ------------ -------- -------- (Dollars in thousands) Withdrawable: Passbook savings accounts ........ $ 25 $ 4,635 4.47% 1.02% Regular money market accounts .... 2,500 651 .63 .59 Hi yield money market accounts ... 10,000 19,536 18.83 1.12 Super NOW accounts ............... 2,500 10,717 10.33 .97 NOW and other transaction accounts 200 6,304 6.07 .43 Non-interest bearing accounts .... 100 4,038 3.89 -- -------- ------ ---- Total withdrawable .................. 45,881 44.22 .88% Certificates (original terms): 91 days .......................... 1,000 2,725 2.62 1.13 6 months ......................... 1,000 3,141 3.03 1.10 12 months ........................ 1,000 5,793 5.58 1.57 18 months ........................ 500 2,869 2.76 2.19 24 months ........................ 500 2,985 2.88 2.37 30 months ........................ 500 16,777 16.17 4.68 36-60 months ..................... 1,000 15,555 15.00 4.48 IRAs 18 months ........................ 100 8,031 7.74 3.51 -------- ------ ---- Total certificates .................. 57,876 55.78 3.52 -------- ------ ---- Total deposits ...................... $103,757 100.00% 2.35% ======== ====== ====
The following table sets forth by various interest rate categories the composition of time deposits of the Bank at the dates indicated: At December 31, 2003 2002 2001 ------- ------- ------- (In thousands) 4.00% and under $28,616 $22,082 $ 8,157 4.01 - 6.00 % . 29,000 34,253 42,598 6.01 - 8.00% .. 260 269 888 ------- ------- ------- Total ...... $57,876 $56,604 $51,643 ======= ======= ======= The following table represents, by various interest rate categories, the amounts of time deposits maturing during each of the three years following December 31, 2003, and the total amount maturing thereafter. Matured certificates which have not been renewed as of December 31, 2003, have been allocated based upon certain rollover assumptions: Amounts At December 31, 2003 Maturing in -------------------------------------------------- One Year Two Three Greater Than or Less Years Years Three Years -------- ------- ------- ------------ (In thousands) 4.00% and under $19,934 $ 6,086 $ 957 $ 1,639 4.01 - 6.00 % . 9,097 6,246 4,435 9,222 6.01 - 8.00% .. 230 30 -- -- ------- ------- ------- ------- Total $29,261 $12,362 $ 5,392 $10,861 ======= ======= ======= ======= The following table indicates the amount of the Bank's certificates of deposit of greater than $100,000 by time remaining until maturity as of December 31, 2003. Maturity (In thousands) -------- -------------- Three months or less ........................ $2,794 Greater than three months through six months 1,077 Greater than six months through twelve months 2,025 Over twelve months .......................... 3,959 ------ Total .................................... $9,855 ======
The following table sets forth the dollar amount of savings in the various types of deposits programs offered by the Bank at the dates indicated, and the amount of increase or decrease in such deposits as compared to the previous period. Deposit Activity -------------------------------------------------------------------------------- Increase Increase (Decrease) (Decrease) Balance at from Balance at from December 31, % of December 31, December 31, % of December 31, 2003 Deposits 2002 2002 Deposits 2001 ------------ -------- ------------ ------------ -------- ------------ (Dollars in thousands) Withdrawable: Passbook savings accounts .... $ 4,635 4.47% $ 354 $ 4,281 4.35% $ 145 Regular money market accounts 651 .63 (222) 873 .89 (69) Hi yield money market accounts 19,536 18.83 1,643 17,893 18.20 1,076 Super NOW accounts ........... 10,717 10.33 1,418 9,299 9.46 8,337 NOW accounts ................. 6,304 6.07 (22) 6,326 6.43 269 Non-interest bearing accounts 4,038 3.89 989 3,049 3.10 (294) -------- ------ -------- -------- ------ -------- Total withdrawable .............. 45,881 44.22 4,160 41,721 42.43 9,464 Certificates (original terms): 91 days ...................... 2,725 2.62 154 2,571 2.62 1,677 6 months ..................... 3,141 3.03 (854) 3,995 4.06 256 12 months .................... 5,793 5.58 (3,263) 9,056 9.21 (4,335) 18 months .................... 2,869 2.76 (2,680) 5,549 5.64 (2,015) 24 months .................... 2,985 2.88 (484) 3,469 3.53 (1,506) 30 months .................... 16,777 16.17 (428) 17,205 17.50 5,526 More than 30 months .......... 15,555 15.00 7,745 7,810 7.94 4,440 IRAs 18 months .................... 8,031 7.74 1,082 6,949 7.07 918 -------- ------ -------- -------- ------ -------- Total certificates .............. 57,876 55.78 1,272 56,604 57.57 4,961 -------- ------ -------- -------- ------ -------- Total deposits .................. $103,757 100.00% $ 5,432 $ 98,325 100.00% $ 14,425 ======== ====== ======== ======== ====== ======== Deposit Activity --------------------------------------- Increase (Decrease) Balance at from December 31, % of December 31, 2001 Deposits 2000 ------------ -------- ------------ (Dollars in thousands) Withdrawable: Passbook savings accounts .... $ 4,136 4.93% $ 658 Regular money market accounts 942 1.12 (99) Hi yield money market accounts 16,817 20.04 2,035 Super NOW accounts ........... 962 1.15 348 NOW accounts ................. 6,057 7.22 591 Non-interest bearing accounts 3,343 3.99 66 ------- ----- ------ Total withdrawable .............. 32,257 38.45 3,599 Certificates (original terms): 91 days ...................... 894 1.06 226 6 months ..................... 3,739 4.46 (4,200) 12 months .................... 13,391 15.96 (6,439) 18 months .................... 7,564 9.01 6,301 24 months .................... 4,975 5.93 (2,280) 30 months .................... 11,679 13.92 6,254 More than 30 months .......... 3,370 4.02 144 IRAs 18 months .................... 6,031 7.19 841 ------- ----- ------ Total certificates .............. 51,643 61.55 847 ------- ----- ------ Total deposits .................. $83,900 100.00% $4,446 ======= ===== ======
Borrowings. The Bank focuses on generating high quality loans and then seeks the best source of funding from deposits, investments or borrowings. There are regulatory restrictions on advances from the FHLBs. See "Regulation -- Federal Home Loan Bank System" and "-- Qualified Thrift Lender." At December 31, 2003, the Company had $3.0 million in borrowings from the FHLB of Indianapolis which mature within one year and $31.0 million which mature in greater than one year. The weighted-average interest rate related to these borrowings was 5.47% at December 31, 2003. The Company does not anticipate any difficulty in obtaining advances appropriate to meet its requirements in the future. At December 31, 2003, notes payable consisted of borrowings secured by the Bank's investment in a real estate partnership which will mature in 2009. The interest rate on the variable rate borrowing was 1.66% at December 31, 2003. During the year ended December 31, 2003, the Corporation borrowed an additional $200,000 on a line of credit with another financial institution to finance corporation dividends. The Corporation can borrow up to $1.5 million on the line of credit, which is payable at October 3, 2004. Interest is payable quarterly at a rate of 3.50%, which represents national prime less .50%. The balance at December 31, 2003, was $900,000. Employees As of December 31, 2003, the Bank employed twenty-two persons on a full-time basis and one person on a part-time basis. None of the Bank's employees are represented by a collective bargaining group. Management considers its employee relations to be excellent. The Bank's employee benefits for full-time employees include, among other things, a defined benefit pension plan, a 401(k) plan and major medical and long-term disability insurance. Employee benefits are considered by management to be competitive with those offered by other financial institutions and major employers in the Bank's market area. See "Executive Compensation and Related Transactions." Competition The Bank operates in North Central Indiana and makes almost all of its loans to and accepts most of its deposits from residents of Cass County in Indiana. The Bank is subject to competition from various financial institutions, including state and national banks, state and federal savings institutions, credit unions, certain non-banking consumer lenders, and other companies or firms, including brokerage houses and mortgage brokers, that provide similar services in Cass County. The Bank must also compete with money market funds and with insurance companies with respect to its individual retirement accounts. See "Regulation--Acquisitions or Dispositions and Branching." The primary factors in competing for deposits are interest rates and convenience of office locations. The Bank competes for loan originations primarily through the efficiency and quality of services it provides borrowers and through interest rates and loan fees it charges. Competition is affected by, among other things, the general availability of lendable funds, general and local economic conditions, current interest rate levels, and other factors which are not readily predictable. REGULATION General The Bank, as a federally chartered savings bank, is a member of the Federal Home Loan Bank System ("FHLB System"). Its deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") and it is a member of the Savings Association Insurance Fund (the "SAIF"), which is administered by the FDIC. The Bank is subject to extensive regulation by the OTS. Federal associations may not enter into certain transactions unless certain regulatory tests are met or they obtain prior governmental approval and the associations must file reports with the OTS about their activities and their financial condition. Periodic compliance examinations of the Bank are conducted by the OTS which has, in conjunction with the FDIC in certain situations, examination and enforcement powers. This supervision and regulation are intended primarily for the protection of depositors and the federal deposit insurance fund. The Bank is also subject to certain reserve requirements under regulations of the Board of Governors of the Federal Reserve System ("FRB"). An OTS regulation establishes a schedule for the assessment of fees upon all savings associations to fund the operations of the OTS. The regulation also establishes a schedule of fees for the various types of applications and filings made by savings associations with the OTS. The general assessment, to be paid on a semiannual basis, is based upon the savings association's total assets, including consolidated subsidiaries, as reported in a recent quarterly thrift financial report. The Bank's semiannual assessment under this assessment scheme, based upon its total assets at December 31, 2003, was approximately $22,000. The Bank is also subject to federal and state regulation as to such matters as loans to officers, directors, or principal shareholders, required reserves, limitations as to the nature and amount of its loans and investments, regulatory approval of any merger or consolidation, issuances or retirements of its own securities, and limitations upon other aspects of banking operations. In addition, the activities and operations of the Bank are subject to a number of additional detailed, complex and sometimes overlapping federal and state laws and regulations. These include state usury and consumer credit laws, state laws relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Community Reinvestment Act, anti-redlining legislation and antitrust laws. Holding Company Regulation The Holding Company is regulated as a "non-diversified unitary savings and loan holding company" within the meaning of the Home Owners' Loan Act, as amended ("HOLA"), and subject to regulatory oversight of the Director of the OTS. As such, the Holding Company is registered with the OTS and thereby subject to OTS regulations, examinations, supervision and reporting requirements. As a subsidiary of a savings and loan holding company, the Bank is subject to certain restrictions in its dealings with the Holding Company and with other companies affiliated with the Holding Company. The Holding Company currently operates as a unitary savings and loan holding company. Prior to the enactment of the Gramm-Leach-Bliley Act (the "GLB Act") on November 12, 1999, there were no restrictions on the permissible business activities of a unitary savings and loan holding company. The GLB Act included a provision that prohibits any new unitary savings and loan holding company, defined as a company that acquires a thrift after May 4, 1999, from engaging in commercial activities. This provision also includes a grandfather clause, however, that permits a company that was a savings and loan holding company as of May 4, 1999, or had an application to become a savings and loan holding company on file with the OTS as of that date, to acquire and continue to control a thrift and to continue to engage in commercial activities. Because the Holding Company qualifies under this grandfather provision, the GLB Act did not affect the Holding Company's authority to engage in diversified business activities. Notwithstanding the above rules as to permissible business activities of unitary savings and loan holding companies, if the savings association subsidiary of such a holding company fails to meet the Qualified Thrift Lender ("QTL") test, then such unitary holding company would be deemed to be a bank holding company subject to all of the provisions of the Bank Holding Company Act of 1956 and other statutes applicable to bank holding companies, to the same extent as if the Holding Company were a bank holding company and the Bank were a bank. See "-Qualified Thrift Lender." At December 31, 2003, the Bank's asset composition was in excess of that required to qualify as a Qualified Thrift Lender. If the Holding Company were to acquire control of another savings institution other than through a merger or other business combination with the Bank, the Holding Company would thereupon become a multiple savings and loan holding company. Except where such acquisition is pursuant to the authority to approve emergency thrift acquisitions and where each subsidiary savings association meets the QTL test, the activities of the Holding Company and any of its subsidiaries (other than the Bank or other subsidiary savings associations) would thereafter be subject to further restrictions. The HOLA provides that, among other things, no multiple savings and loan holding company or subsidiary thereof which is not a savings association shall commence or continue for a limited period of time after becoming a multiple savings and loan holding company or subsidiary thereof, any business activity other than (i) furnishing or performing management services for a subsidiary savings association, (ii) conducting an insurance agency or escrow business, (iii) holding, managing, or liquidating assets owned by or acquired from a subsidiary savings institution, (iv) holding or managing properties used or occupied by a subsidiary savings institution, (v) acting as trustee under deeds of trust, (vi) those activities in which multiple savings and loan holding companies were authorized (by regulation) to directly engage on March 5, 1987, to be engaged in by multiple holding companies or (vii) those activities authorized by the FRB as permissible for bank holding companies, unless the Director of the OTS by regulation prohibits or limits such activities for savings and loan holding companies. Those activities described in (vii) above must also be approved by the Director of the OTS prior to being engaged in by a multiple savings and loan holding company. Federal Home Loan Bank System The Bank is a member of the FHLB system, which consists of 12 regional banks. The Federal Housing Finance Board ("FHFB"), an independent agency, controls the FHLB System, including the FHLB of Indianapolis. The FHLB System provides a central credit facility primarily for member financial institutions. At December 31, 2003, the Bank's investment in stock of the FHLB of Indianapolis was $2,080,000. For the fiscal year ended December 31, 2003, the FHLB of Indianapolis paid approximately $100,000 in dividends to the Bank. All 12 FHLB's are required to provide funds to establish affordable housing programs through direct loans or interest subsidies on advances to members to be used for lending at subsidized interest rates for low-and moderate-income, owner-occupied housing projects, affordable rental housing, and certain other community projects. These contributions and obligations could adversely affect the value of FHLB stock in the future. A reduction in the value of such stock may result in a corresponding reduction in the Bank's capital. The FHLB of Indianapolis serves as a reserve or central bank for its member institutions. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes advances to members in accordance with policies and procedures established by the FHLB and the Board of Directors of the FHLB of Indianapolis. All FHLB advances must be fully secured by sufficient collateral as determined by the FHLB. Eligible collateral includes first mortgage loans not more than 90 days delinquent or securities evidencing interests therein, securities (including mortgage-backed securities) issued, insured or guaranteed by the federal government or any agency thereof, cash or FHLB deposits, certain small business and agricultural loans of smaller institutions and real estate with readily ascertainable value in which a perfected security interest may be obtained. Other forms of collateral may be accepted as additional security or, under certain circumstances, to renew outstanding advances. All long-term advances are required to provide funds for residential home financing and the FHLB has established standards of community service that members must meet to maintain access to long-term advances. Interest rates charged for advances vary depending upon maturity, the cost of funds to the FHLB of Indianapolis and the purpose of the borrowing. Federal Reserve System Under FRB regulations, the Bank is required to maintain reserves against its transaction accounts (primarily checking and NOW accounts) and non-personal money market deposit accounts. The effect of these reserve requirements is to increase the Bank's cost of funds. The Bank is in compliance with its reserve requirements. A federal savings bank, like other depository institutions maintaining reservable accounts, may borrow from the Federal Reserve Bank "discount window," but the FRB's regulations require the savings bank to exhaust other reasonable alternative sources, including borrowing from its regional FHLB, before borrowing from the Federal Reserve Bank. Certain limitations are imposed on the ability of undercapitalized depository institutions to borrow from Federal Reserve Banks. Insurance of Deposits The FDIC administers two separate insurance funds, which are not commingled: one primarily for federally insured banks ("BIF") and one primarily for federally insured savings associations ("SAIF"). As the federal insurer of deposits of savings institutions, the FDIC determines whether to grant insurance to newly-chartered savings institutions, has authority to prohibit unsafe or unsound activities and has enforcement powers over savings institutions (usually in conjunction with the OTS or on its own if the OTS does not undertake enforcement action). Deposit accounts in the Bank are insured by the SAIF within prescribed statutory limits which generally provide a maximum of $100,000 coverage for each insured account. As a condition to such insurance, the FDIC is authorized to issue regulations and, in conjunction with the OTS, conduct examinations and generally supervise the operations of its insured members. The FDIC's deposit insurance premiums are assessed through a risk-based system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their level of capital and supervisory evaluation. Under the system, institutions classified as well-capitalized (i.e. a core capital ratio of at least 5%, a ratio of Tier 1 or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at least 6% and a total risk-based capital ratio of at least 10%) pay the lowest premium while institutions that are less than adequately capitalized (i.e. core or Tier 1 risk-based capital ratio of less than 4% or a total risk-based capital ratio of less than 8%) and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions is made by the FDIC semi-annually. In addition to the assessment for deposit insurance, savings institutions are required to pay on bonds issued in the late 1980s by the Financing Corporation to recapitalize the predecessor to the SAIF. By law, payments on Financing Corporation obligations have been shared equally between the members of both insurance funds since January 1, 2000. The Bank's annual deposit insurance premium for the year ended December 31, 2003, including the Financing Corporation payments, was approximately $15,600 based upon its current risk classification and the new assessment schedule for SAIF insured institutions. These premiums are subject to change in future periods. The FDIC is authorized to increase assessment rates, on a semiannual basis, if it determines that the reserve ratio of the SAIF will be less than the designated reserve ratio of 1.25% of SAIF insured deposits. In setting these increased assessments, the FDIC must seek to restore the reserve ratio to that designed reserve level, or such higher reserve ratio as established by the FDIC. The FDIC may also impose special assessments on SAIF members to repay amounts borrowed from the United States Treasury or for any other reason deemed necessary by the FDIC. Regulatory Capital Currently, savings associations are subject to three separate minimum capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital requirement, and (iii) a risk-based capital requirement. The OTS requires savings associations that receive the highest supervisory rating for safety and soundness to maintain "core capital" of at least 3% of total assets. All other savings associations must maintain core capital of at least 4% of total assets. Core capital is generally defined as common shareholders' equity (including retained income), noncumulative perpetual preferred stock and related surplus, certain minority equity interests in subsidiaries, qualifying supervisory goodwill, purchased mortgage servicing rights and purchased credit card relationships (subject to certain limits) less nonqualifying intangibles. Under the tangible capital requirement, a savings association must maintain tangible capital (core capital less all intangible assets except purchased mortgage servicing rights which may be included after making the above-noted adjustment in an amount up to 100% of tangible capital) of at least 1.5% of total assets. Under the risk-based capital requirements, a minimum amount of capital must be maintained by a savings association to account for the relative risks inherent in the type and amount of assets held by the savings association. The risk-based capital requirement requires a savings association to maintain capital (defined generally for these purposes as core capital plus general valuation allowances and permanent or maturing capital instruments such as preferred stock and subordinated debt less assets required to be deducted) equal to 8.0% of risk-weighted assets. Assets are ranked as to risk in one of four categories (0-100%). A credit risk-free asset, such as cash, requires no risk-based capital, while an asset with a significant credit risk, such as a non-accrual loan, requires a risk factor of 100%. Moreover, a savings association must deduct from capital, for purposes of meeting the core capital, tangible capital and risk-based capital requirements, its entire investment in and loans to a subsidiary engaged in activities not permissible for a national bank (other than exclusively agency activities for its customers or mortgage banking subsidiaries). At December 31, 2003, the Bank was in compliance with all capital requirements imposed by law. If an association is not in compliance with its capital requirements, the OTS is required to prohibit asset growth and to impose a capital directive that may restrict, among other things, the payment of dividends and officers' compensation. In addition, the OTS and the FDIC generally are authorized to take enforcement actions against a savings association that fails to meet its capital requirements. These actions may include restricting the operating activities of the association, imposing a capital directive, cease and desist order, or civil money penalties, or imposing harsher measures such as appointing a receiver or conservator or forcing the association to merge into another institution. Prompt Corrective Action The Federal Deposit Insurance Corporation Improvement Act of 1991, as amended ("FedICIA") requires, among other things, that federal bank regulatory authorities take "prompt corrective action" with respect to institutions that do not meet minimum capital requirements. For these purposes, FedICIA establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. At December 31, 2003, the Bank was categorized as "well capitalized," meaning that its total risk-based capital ratio exceeded 10%, its Tier I risk-based capital ratio exceeded 6%, its leverage ratio exceeded 5%, and it was not subject to a regulatory order, agreement or directive to meet and maintain a specific capital level for any capital measure. The FDIC may order savings associations which have insufficient capital to take corrective actions. For example, a savings association which is categorized as "undercapitalized" would be subject to growth limitations and would be required to submit a capital restoration plan, and a holding company that controls such a savings association would be required to guarantee that the savings association complies with the restoration plan. "Significantly undercapitalized" savings associations would be subject to additional restrictions. Savings associations deemed by the FDIC to be "critically undercapitalized" would be subject to the appointment of a receiver or conservator. Capital Distributions Regulation An OTS regulation imposes limitations upon all "capital distributions" by savings institutions, including cash dividends, payments by an institution to repurchase or otherwise acquire its shares, payments to shareholders of another institution in a cash-out merger and other distributions charged against capital. The OTS regulations permit a savings institution to make a capital distribution to its shareholders in a maximum amount that does not exceed the institution's undistributed net income for the prior two years plus the amount of its undistributed income for the current year. The rule requires a savings institution, such as the Bank, that is a subsidiary of a savings and loan holding company to file a notice with the OTS thirty days before making a capital distribution up to the maximum amount described above. The proposed rule would also require all savings institutions, whether a holding company or not, to file an application with the OTS prior to making any capital distribution where the association is not eligible for "expedited processing" under the OTS "Expedited Processing Regulation," where the proposed distribution, together with any other distributions made in the same year, would exceed the "maximum amount" described above, where the institution would be under capitalized following the distribution or where the distribution would otherwise be contrary to a statute, regulation or agreement with the OTS. In addition to these regulatory restrictions, the Bank's Plan of Conversion imposed additional limitations on the amount of capital distributions it may make to the Holding Company. The Plan of Conversion by which the Bank converted from the mutual to the stock form of ownership (the "Plan of Conversion") required the Bank to establish and maintain a liquidation account for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders (as those terms are defined in the Plan of Conversion) and prohibits the Bank from making capital distributions to the Holding Company if its net worth would be reduced below the amount required for the liquidation account. Limitations on Rates Paid for Deposits Regulations promulgated by the FDIC place limitations on the ability of insured depository institutions to accept, renew or roll over deposits by offering rates of interest which are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions having the same type of charter in the institution's normal market area. Under these regulations, "well-capitalized" depository institutions may accept, renew or roll such deposits over without restriction, "adequately capitalized" depository institutions may accept, renew or roll such deposits over with a waiver from the FDIC (subject to certain restrictions on payments of rates) and "undercapitalized" depository institutions may not accept, renew or roll such deposits over. The regulations contemplate that the definitions of "well capitalized," "adequately capitalized" and "undercapitalized" will be the same as the definition adopted by the agencies to implement the corrective action provisions of FedICIA. The Bank does not believe that these regulations will have a materially adverse effect on its current operations. Loans to One Borrower Under OTS regulations, the Bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. Additional amounts may be lent, not in excess of 10% of unimpaired capital and surplus, if such loans or extensions of credit are fully secured by readily marketable collateral, including certain debt and equity securities but not including real estate. In some cases, a savings association may lend up to 30 percent of unimpaired capital and surplus to one borrower for purposes of developing domestic residential housing, provided that the association meets its regulatory capital requirements and the OTS authorizes the association to use this expanded lending authority. At December 31, 2003, the Bank did not have any loans or extensions of credit to a single or related group of borrowers in excess of its lending limits. The Bank does not believe that the loans-to-one-borrower limits will have a significant impact on its business operations or earnings. Qualified Thrift Lender Savings associations must meet a QTL test that requires the association to maintain an appropriate level of qualified thrift investments ("QTIs") (primarily residential mortgages and related investments, including certain mortgage-related securities) and otherwise to qualify as a QTL. The required percentage of QTIs is 65% of portfolio assets (defined as all assets minus intangible assets, property used by the association in conducting its business and liquid assets equal to 10% of total assets). Certain assets are subject to a percentage limitation of 20% of portfolio assets. In addition, savings associations may include shares of stock of the FHLBs, FNMA, and FHLMC as QTIs. Compliance with the QTL test is determined on a monthly basis in nine out of every twelve months. A savings association which fails to meet the QTL test must either convert to a bank (but its deposit insurance assessments and payments will be those of and paid to SAIF) or be subject to the following penalties: (i) it may not enter into any new activity except for those permissible for a national bank and for a savings association; (ii) its branching activities shall be limited to those of a national bank; and (iii) it shall be bound by regulations applicable to national banks respecting payment of dividends. Three years after failing the QTL test the association must dispose of any investment or activity not permissible for a national bank and a savings association. If such a savings association is controlled by a savings and loan holding company, then such holding company must, within a prescribed time period, become registered as a bank holding company and become subject to all rules and regulations applicable to bank holding companies (including restrictions as to the scope of permissible business activities). A savings association failing to meet the QTL test may requalify as a QTL if it thereafter meets the QTL test. In the event of such requalification it shall not be subject to the penalties described above. A savings association which subsequently again fails to qualify under the QTL test shall become subject to all of the described penalties without application of any waiting period. At December 31, 2003, 81.03% of the Bank's portfolio assets (as defined on that date) were invested in qualified thrift investments (as defined on that date), and therefore the Bank's asset composition was in excess of that required to qualify the Bank as a QTL. Also, the Bank does not expect to significantly change its lending or investment activities in the near future. The Bank expects to continue to qualify as a QTL, although there can be no such assurance. Acquisitions or Dispositions and Branching The Bank Holding Company Act specifically authorizes a bank holding company, upon receipt of appropriate regulatory approvals, to acquire control of any savings association or holding company thereof wherever located. Similarly, a savings and loan holding company may acquire control of a bank. Moreover, federal savings associations may acquire or be acquired by any insured depository institution. Regulations promulgated by the FRB restrict the branching authority of savings associations acquired by bank holding companies. Savings associations acquired by bank holding companies may be converted to banks if they continue to pay SAIF premiums, but as such they become subject to branching and activity restrictions applicable to banks. Subject to certain exceptions, commonly controlled banks and savings associations must reimburse the FDIC for any losses suffered in connection with a failed bank or savings association affiliate. Institutions are commonly controlled if one is owned by another or if both are owned by the same holding company. Such claims by the FDIC under this provision are subordinate to claims of depositors, secured creditors, and holders of subordinated debt, other than affiliates. The OTS has adopted regulations which permit nationwide branching to the extent permitted by federal statute. Federal statutes permit federal savings associations to branch outside of their home state if the association meets the domestic building and loan test in Section7701(a)(19) of the Code or the asset composition test of Section7701(c) of the Code. Branching that would result in the formation of a multiple savings and loan holding company controlling savings associations in more than one state is permitted if the law of the state in which the savings association to be acquired is located specifically authorizes acquisitions of its state-chartered associations by state- chartered associations or their holding companies in the state where the acquiring association or holding company is located. Moreover, Indiana banks and savings associations are permitted to acquire other Indiana banks and savings associations and to establish branches throughout Indiana. The Director of the OTS may also approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings associations in more than one state, if the multiple savings and loan holding company involved controls a savings association which operated a home or branch office in the state of the association to be acquired as of March 1987, or if the laws of the state in which the institution to be acquired is located specifically permit institutions to be acquired by state-chartered institutions or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings institutions). Also, the Director of the OTS may approve an acquisition resulting in a multiple savings and loan holding company controlling savings associations in more than one state in the case of certain emergency thrift acquisitions. Indiana law permits federal and state savings association holding companies with their home offices located outside of Indiana to acquire savings associations whose home offices are located in Indiana and savings association holding companies with their principal place of business in Indiana ("Indiana Savings Association Holding Companies") upon receipt of approval by the Indiana Department of Financial Institutions. Moreover, Indiana Savings Association Holding Companies may acquire savings associations with their home offices located outside of Indiana and savings associations holding companies with their principal place of business located outside of Indiana upon receipt of approval by the Indiana Department of Financial Institutions. Finally, The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks in other states and, with state consent and subject to certain limitations, allows banks to acquire out-of-state branches either through merger or de novo expansion. The State of Indiana enacted legislation establishing interstate branching provisions for Indiana state-chartered banks consistent with those established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana Branching Law, which became effective in 1996, authorizes Indiana banks to branch interstate by merger or de novo expansion, provided that such transactions are not permitted to out-of-state banks unless the laws of their home states permit Indiana banks to merge or establish de novo banks on a reciprocal basis. Transactions with Affiliates The Bank and Holding Company are subject to Sections 22(h), 23A and 23B of the Federal Reserve Act, which restrict financial transactions between banks and affiliated companies. The statute limits credit transactions between a bank and its executive officers and its affiliates, prescribes terms and conditions for bank affiliate transactions deemed to be consistent with safe and sound banking practices, and restricts the types of collateral security permitted in connection with a bank's extension of credit to an affiliate. Federal Securities Law The shares of Common Stock of the Holding Company are registered with the Securities and Exchange Commission (the "Commission") under the Securities and Exchange Act of 1934, as amended (the "1934 Act"). The Holding Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the 1934 Act and the rules of the SEC thereunder. If the Holding Company has fewer than 300 shareholders of record, it may deregister the shares under the 1934 Act and cease to be subject to the foregoing requirements. Shares of Common Stock held by persons who are affiliates of the Holding Company may not be resold without registration unless sold in accordance with the resale restrictions of Rule 144 under the Securities Act of 1933 (the "1933 Act"). If the Holding Company meets the current public information requirements under Rule 144, each affiliate of the Holding Company who complies with the other conditions of Rule 144 (including conditions that require the affiliate's sale to be aggregated with those of certain other persons) would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) 1% of the outstanding shares of the Holding Company or (ii) the average weekly volume of trading in such shares during the preceding four calendar weeks. Community Reinvestment Act Matters Federal law requires that ratings of depository institutions under the Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes both a four-unit descriptive rating -- outstanding, satisfactory, unsatisfactory and needs improvement -- and a written evaluation of each institution's performance. Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLBs. The standards take into account a member's performance under the CRA and its record of lending to first-time home buyers. The OTS examiners have determined that the Bank has a satisfactory record of meeting community credit needs. Recent Legislative Developments On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 - federal legislation which modernizes the laws governing the financial services industry. The new law establishes a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other financial service providers. As a result of this legislation, bank holding companies will be permitted to engage in a wider variety of financial activities than permitted under prior law, particularly with respect to insurance and securities activities. To the extent the law permits banks, securities firms and insurance companies to affiliate, the financial services industry may experience further consolidation. This could result in a growing number of larger financial institutions that offer wider varieties of financial services than are currently offered by the Company and that could aggressively compete in the markets currently served by the Company. The statute grandfathered the Company's status as a unitary savings and loan holding company and its authority to engage in commercial activities. The legislation also provides, however, that only a company engaged in those activities that are permissible for a multiple savings and loan holding company or for a financial holding company may acquire a unitary savings and loan holding company through a merger or other business combination. This provision likely could reduce the number of potential acquirors of the Company. The law also increases commercial banks' access to loan funding by the Federal Home Loan Bank System, and includes new provisions in the privacy area, restricting the ability of financial institutions to share nonpublic personal customer information with third parties. On October 26, 2001, President Bush signed the USA Patriot Act of 2001 (the "Patriot Act"). The Patriot Act is intended to strengthen the ability of U.S. Law Enforcement to combat terrorism on a variety of fronts. The potential impact of the Patriot Act on financial institutions is significant and wide-ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and requires financial institutions to implement additional policies and procedures with respect to, or additional measures designed to address, any or all the following matters, among others: money laundering, suspicious activities and currency transaction reporting, and currency crimes. In addition, financial institutions are required under this statute to adopt reasonable procedures to verify the identity of any person seeking to open an account and maintain records to verify such person's identity. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"). The Sarbanes-Oxley Act represents a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reportings. The Sarbanes-Oxley Act is applicable to all companies with equity or debt securities registered under the Securities Exchange Act of 1934. In particular, the Sarbanes-Oxley Act establishes: (i) new requirements for audit committees, including independence, expertise, and responsibilities; (ii) additional responsibilities regarding financial statements for the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) new standards for auditors and regulation of audits; (iv) increased disclosure and reporting obligations for the reporting company and their directors and executive officers; and (v) new and increased civil and criminal penalties for violation of the securities laws. Many of the provisions became effective immediately while other provisions become effective over a period of 30 to 270 days and are subject to rulemaking by the Securities and Exchange Commission. Although we anticipate that we will incur additional expense in complying with the provisions of the Sarbanes-Oxley Act and the resulting regulations, management does not expect that such compliance will have a material impact on our results of operations or financial condition. TAXATION Federal Taxation Historically, savings associations, such as the Bank, have been permitted to compute bad debt deductions using either the bank experience method or the percentage of taxable income method. However, for years beginning after December 31, 1995, the Bank is no longer able to use the percentage of taxable income method of computing its allocable tax bad debt deduction. The Bank is required to compute its allocable deduction using the experience method. As a result of the repeal of the percentage of taxable income method, reserves taken after 1987 using the percentage of taxable income method generally must be included in future taxable income over a six-year period, although a two-year delay was permitted for institutions meeting a residential mortgage loan origination test. In addition, the pre-1988 reserve, for which no deferred taxes have been recorded, will not have to be recaptured into income unless (i) the Bank no longer qualifies as a bank under the Code, or (ii) excess dividends are paid out by the Bank. Depending on the composition of its items of income and expense, a savings institution may be subject to the alternative minimum tax. A savings institution must pay an alternative minimum tax equal to the amount (if any) by which 20% of alternative minimum taxable income ("AMTI"), as reduced by an exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular taxable income increased or decreased by certain tax preferences and adjustments, including depreciation deductions in excess of that allowable for alternative minimum tax purposes, tax-exempt interest on most private activity bonds issued after August 7, 1986 (reduced by any related interest expense disallowed for regular tax purposes), the amount of the bad debt reserve deduction claimed in excess of the deduction based on the experience method and 75% of the excess of adjusted current earnings over AMTI (before this adjustment and before any alternative tax net operating loss). AMTI may be reduced only up to 90% by net operating loss carryovers, but alternative minimum tax paid that is attributable to most preferences (although not to post-August 7, 1986, tax-exempt interest) can be credited against regular tax due in later years. State Taxation The Bank is subject to Indiana's Financial Institutions Tax ("FIT"), which is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted gross income," for purposes of FIT, begins with taxable income as defined by Section 63 of the Code and, thus, incorporates federal tax law to the extent that it affects the computation of taxable income. Federal taxable income is then adjusted by several Indiana modifications, the most notable of which is the required addback of interest that is tax-free for federal income tax purposes. Other applicable state taxes include generally applicable sales and use taxes plus real and personal property taxes. Item 2. Properties. At December 31, 2003, the Bank and the Holding Company conducted business from a single office at 723 East Broadway, Logansport, Indiana. The following table provides certain information with respect to the Company's office as of December 31, 2003:
Total Deposits Net Book Value at of Property, Owned or Year December 31, Furniture Approximate Description and Address Leased Opened 2003 and Fixtures Square Footage - ----------------------- ---------- ------ --------------- --------------- -------------- (Dollars in thousands) 723 East Broadway Owned 1962 $103,757 $1,694 11,000 Logansport, Indiana 46947
The Company owns computer and data processing equipment which is used for transaction processing and accounting. The net book value of electronic data processing equipment owned by the Company was $62,000 at December 31, 2003. The Bank also has contracted for the data processing and reporting services of the Intrieve Data Center in Cincinnati, Ohio. The cost of these data processing services is approximately $16,000 per month. Item 3. Legal Proceedings. Neither the Holding Company nor the Bank is a party to any pending legal proceedings, other than routine litigation incidental to its business. Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted to a vote of the Holding Company's shareholders during the quarter ended December 31, 2003. Item 4.5. Executive Officers of the Registrant. Presented below is certain information regarding the executive officers of the Holding Company: Name Position ---- -------- David G. Wihebrink President and Chief Executive Officer Charles J. Evans Senior Vice President Dottye Robeson Secretary/Treasurer David G. Wihebrink (age 56) has served as President and Chief Executive Officer of the Bank and the Holding Company since April 2000. Prior to that, he had 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; as a member of the Board of Directors of the North Central Indiana Workforce Investment Board and as a member of the Board of Directors of the Logansport/Cass County Chamber of Commerce. Charles J. Evans (age 57) has served as Senior Vice President of the Bank since January 2000 and as Vice President of the Holding Company since its organization. Prior to becoming Senior Vice President, Mr. Evans had served as Vice President and Senior Loan Officer of the Bank since 1980. Dottye Robeson (age 53) has served as Chief Financial Officer of the Bank since 1994 and as Secretary/Treasurer of the Holding Company since its organization. She has been a certified public accountant since 1987. Allen Schieber (age 55) has served as Senior Vice President of the Bank since January 2000. Theretofore he was Vice President of Commercial Lending since 1998. PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Page 52 of the 2003 Shareholder Annual Report (the "Shareholder Report") is herein incorporated by reference. The Holding Company has established a policy of paying regular periodic cash dividends, and the Board of Directors intends to continue this policy, subject to the Holding Company's operating results, financial condition, capital, income tax considerations, regulatory restrictions, and other relevant factors. Since the Holding Company has no independent operations other than investment-related activities or other subsidiaries to generate income, its ability to accumulate earnings for the payment of cash dividends to its shareholders will be directly dependent upon the ability of the Bank to pay dividends to the Holding Company. Under OTS regulations, a converted savings institution may not declare or pay a cash dividend if the effect would be to reduce its net worth below the amount required for the liquidation account created at the time it converted. In addition, under OTS regulations, the extent to which a savings institution may make a "capital distribution," is subject to certain limitations. See "Regulation -- Capital Distributions Regulation." Prior notice of any dividend to be paid by the Bank to the Holding Company will have to be given to the OTS. Income of the Bank appropriated to bad debt reserves and deducted for federal income tax purposes is not available for payment of cash dividends or other distributions to the Holding Company without the payment of federal income taxes by the Bank on the amount of such income deemed removed from the reserves at the then-current income tax rate. At December 31, 2003, approximately $1.7 million of the Bank's retained income represented bad debt deductions for which no federal income tax provision had been made. See "Taxation--Federal Taxation." Unlike the Bank, generally there is no regulatory restriction on the payment of dividends by the Holding Company. Indiana law, however, would prohibit the Holding Company from paying a dividend if, after giving effect to the payment of that dividend, the Holding Company would not be able to pay its debts as they become due in the usual course of business or the Holding Company's total assets would be less than the sum of its total liabilities plus preferential rights of holders of preferred stock, if any. The Company sold no equity securities during the period covered by this report that were not registered under the Securities Act of 1933. The Company repurchased no shares during the fiscal quarter ended December 31, 2003. The disclosures regarding equity compensation plans required by Reg. Section 229.201(d) is set forth in Item 12 hereof. Item 6. Selected Financial Data. The information required by this item is incorporated by reference to the material under the heading "Selected Consolidated Financial and Other Data" on pages 4 and 5 of the Holding Company's 2003 Shareholder Annual Report (the "Shareholder Annual Report"). Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. The information required by this item is incorporated by reference to pages 6 through 19 of the Shareholder Annual Report. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The information required by this item is incorporated by reference to pages 16 through 17 of the Shareholder Annual Report. Item 8. Financial Statements and Supplementary Data. The Holding Company's Consolidated Financial Statements and Notes thereto contained on pages 20 through 51 in the Shareholder Annual Report are incorporated herein by reference. The Company's unaudited quarterly results of operations contained on page 51 in the Shareholder Annual Report are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. Item 9A. Controls and Procedures. As of December 31, 2003, an evaluation was carried out under the supervision and with the participation of the Company's management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on their evaluation our Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are, to the best of their knowledge, effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Our Chief Executive Officer and Chief Financial Officer have concluded that, during the Company's fiscal quarter ended December 31, 2003, there have been no significant changes in the Company's internal controls or in other factors that could significantly affect its internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses. PART III Item 10. Directors and Executive Officers of the Registrant. The information required by this item with respect to directors and compliance with Section 16(a) of the Securities Exchange Act of 1934, members of the Company's Audit Committee, and the Company's Audit Committee Financial Expert, is incorporated by reference to pages 4, 10 and 12 of the Holding Company's Proxy Statement for its 2004 Annual Shareholder Meeting (the "2004 Proxy Statement"). Information concerning the Holding Company's executive officers is included in Item 4.5 in Part I of this report. The Company has adopted an Ethics Policy that applies to all officers, employees and directors of the Company and its subsidiaries. A copy of the Ethics Policy is attached as Exhibit 14 to this Annual Report. Item 11. Executive Compensation. The information required by this item with respect to executive compensation is incorporated by reference to pages 6 through 9 of the Holding Company's 2004 Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information required by this item is incorporated by reference to pages 1 through 3 of the 2004 Proxy Statement. The following table provides the information about the Corporation's common stock that may be issued upon the exercise of options and rights under all existing equity compensation plans as of December 31, 2003.
Equity Compensation Plan Information Number of securities Number of remaining available for securities to be future issuance under issued upon exercise Weighted-average equity compensation plans of outstanding options, exercise price of as of December 31, 2003 warrants and rights outstanding options, (excluding securities as of December 31, 2003 warrants and rights reflected in column (a)) (a) (b) (c) ----------------------- ------------------- -------------------------- Equity compensation plans approved by security holders ... 50,650 $10.63 115,000 Equity compensation plans not approved by security holders -- -- -- ------ ------ ------- Total 50,650 $10.63 115,000 ====== ====== ======= - --------------------- (1) Includes the following plans: the Company's stock option plan and 1999 stock option plan.
Item 13. Certain Relationships and Related Transactions. The information required by this item is incorporated by reference to pages 9 and 10 of the 2004 Proxy Statement. Item 14. Principal Accountant Fees and Services. The information required by this item is incorporated by reference to page 11 of the 2004 Proxy Statement.
PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) List the following documents filed as part of the report: Financial Statements -------------------- Independent Auditor's Report (Grant Thornton LLP) See Shareholder Annual Report Page 20 Consolidated Statements of Financial Condition at December 31, 2003 and 2002 See Shareholder Annual Report Page 21 Consolidated Statements of Earnings for the Years Ended December 31, 2003, 2002 and 2001 See Shareholder Annual Report Page 22 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2003, 2002 and 2001 See Shareholder Annual Report Page 23 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2003, 2002 and 2001 See Shareholder Annual Report Page 24 Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001 See Shareholder Annual Report Page 25 Notes to Consolidated Financial Statements See Shareholder Annual Report Page 27 (b) Reports on Form 8-K. The Company filed a Form 8-K dated October 20, 2003, concerning the Company's earnings release for the quarter ended September 30, 2003. (c) The exhibits filed herewith or incorporated by reference herein are set forth on the Exhibit Index on page E-1. Included in those exhibits are Executive Compensation Plans and Arrangements which are identified as Exhibits 10(1) through 10(16). (d) All schedules are omitted as the required information either is not applicable or is included in the Consolidated Financial Statements or related notes.
SIGNATURES Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on behalf of the undersigned, thereto duly authorized. LOGANSPORT FINANCIAL CORP. Date: March 29, 2004 By: /s/ David G. Wihebrink -------------------------- David G. Wihebrink, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on this 29th day of March, 2004. /s/ David G. Wihebrink - ----------------------------------------------- David G. Wihebrink, President, Chief Executive Officer and Director (Principal Executive Officer) /s/ Dottye Robeson - ----------------------------------------------- Dottye Robeson, Secretary/Treasurer (Principal Financial and Accounting Officer) /s/ Charles J. Evans - ----------------------------------------------- Charles J. Evans, Vice President and Director /s/ Susanne S. Ridlen - ----------------------------------------------- Susanne S. Ridlen, Director /s/ William Tincher, Jr. - ----------------------------------------------- William Tincher, Jr., Director /s/ Brian J. Morrill - ----------------------------------------------- Brian J. Morrill, Director /s/ Thomas G. Williams - ----------------------------------------------- Thomas G. Williams, Director /s/ Todd S. Weinstein - ----------------------------------------------- Todd S. Weinstein, Director /s/ James P. Bauer - ----------------------------------------------- James P. Bauer, Director EXHIBIT INDEX Exhibit Page ------- ---- 3(1) The Articles of Incorporation of the Registrant are incorporated by reference to Exhibit 3(1) to the Registration Statement on Form S-1 (Registration No. 33-89788). 3(2) The Code of By-Laws of the Registrant are incorporated by reference to Exhibit 3.1 to the Form 10-Q for the fiscal quarter ended June 30, 2002. 10(1) The Registrant's Stock Option Plan is incorporated by reference to Exhibit A to the Registrant's Proxy Statement for its Annual Shareholder Meeting held on April 9, 1996 and resolutions dated July 14, 1998, amending the Registrant's Stock Option Plan are incorporated by reference to Exhibit 10.1 to the Form 10-Q for the period ended September 30, 1998, filed with the Commission on November 12, 1998. 10(2) Logansport Savings Bank, FSB Recognition and Retention Plan and Trust is incorporated by reference to Exhibit B to the Registrant's Proxy Statement for its Annual Shareholder Meeting held on April 9, 1996, and resolutions dated July 14, 1998, amending the Logansport Savings Bank, FSB Recognition and Retention Plan and Trust are incorporated by reference to Exhibit 10.2 to the Form 10-Q for the period ended September 30, 1998, filed with the Commission on November 12, 1998. 10(3) Logansport Savings Bank, FSB Employee Stock Ownership Plan and Trust Agreement is incorporated by reference to Exhibit 10(4) to the Registration Statement on Form S-1 (Registration No. 33-89788). 10(4) Deferred Compensation Agreement between Logansport Savings Bank, FSB and David G. Wihebrink, dated and effective as of April 12, 2000, is incorporated by reference to Exhibit 10.4 of Registrant's Form 10-K for its fiscal year ended December 31, 2000. 10(5) Employment Agreement between Logansport Savings Bank, FSB and Charles J. Evans is incorporated by reference to Exhibit 10(6) to the Registration Statement on Form S-1 (Registration No. 33-89788). 10(6) Director Deferred Compensation Agreement between Logansport Savings Bank, FSB and Thomas G. Williams, effective April 1, 1992 is incorporated by reference to Exhibit 10(7) to the Registration Statement on Form S-1 (Registration No. 33-89788). 10(7) Director Deferred Compensation Agreement between Logansport Savings Bank, FSB and Don Pollitt, effective April 1, 1992 is incorporated by reference to Exhibit 10(8) to the Registration Statement on Form S-1 (Registration No. 33-89788). 10(8) Director Deferred Compensation Agreement between Logansport Savings Bank, FSB and Norbert Adrian, effective April 1, 1992 is incorporated by reference to Exhibit 10(9) to the Registration Statement on Form S-1 (Registration No. 33-89788). 10(9) Director Deferred Compensation Agreement between Logansport Savings Bank, FSB and Susanne Ridlen, effective April 1, 1992 is incorporated by reference to Exhibit 10(10) to the Registration Statement on Form S-1 (Registration No. 33-89788). 10(10) Director Deferred Compensation Agreement between Logansport Savings Bank, FSB and David Wihebrink, effective April 1, 1992 is incorporated by reference to Exhibit 10(11) to the Registration Statement on Form S-1 (Registration No. 33-89788). 10(11) Executive Supplemental Retirement Income Agreement between Logansport Savings Bank, FSB and Thomas G. Williams, executed May 7, 1992 is incorporated by reference to Exhibit 10(12) to the Registration Statement on Form S-1 (Registration No. 33-89788). 10(12) Executive Supplemental Retirement Income Agreement between Logansport Savings Bank, FSB and Charles J. Evans, executed May 7, 1992 is incorporated by reference to Exhibit 10(13) to the Registration Statement on Form S-1 (Registration No. 33-89788). 10(13) Employment Agreement dated as of February 11, 2002, between the Bank and Dottye Robeson is incorporated by reference to Exhibit 10(13) of Registrant's Form 10-K for the fiscal year ended December 31, 2001. 10(14) Employment Agreement dated as of February 11, 2002, between the Bank and Allen D. Schieber is incorporated by reference to Exhibit 10(14) of Registrant's Form 10-K for the fiscal year ended December 31, 2001. 10(15) Employment Agreement dated as of April 10, 2001, between the Bank and David G. Wihebrink is incorporated by reference to Exhibit 10(1) of Registrant's Form 10-Q for the fiscal quarter ended March 31, 2001. 10(16) The Registrant's 1999 Stock Option Plan is incorporated by reference to Exhibit A to Registrant' Proxy Statement for its Annual Shareholder Meeting held on April 13, 1999. 13 2003 Shareholder Annual Report 14 Code of Ethics 21 Subsidiaries of the Registrant are incorporated by reference to Exhibit 21 to the Registration Statement on Form S-1 (Registration No. 33-89788). 23 Independent Auditor's Consent (Grant Thornton LLP) 31(1) Certification of David G. Wihebrink required by 12 CFR Section 240.13a-14(a) 31(2) Certification of Dottye Robeson required by 12 CFR 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. EX-13 3 log_ar.txt EX. 13 - 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 Report of Independent Certified Public Accountants 20 Consolidated Statements of Financial Condition 21 Consolidated Statements of Earnings 22 Consolidated Statements of Comprehensive Income 23 Consolidated Statements of Changes in Shareholders' Equity 24 Consolidated Statements of Cash Flows 25 Notes to Consolidated Financial Statements 27 Shareholder Information 52 BUSINESS OF LOGANSPORT FINANCIAL CORP. Logansport Financial Corp. ("Logansport Financial" or 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. During 2002, the Company began to offer banking through the Internet at www.logansportsavings.com. The Bank 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 business activity other 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." 11 Logansport Financial Corp. DIRECTORS AND OFFICERS DIRECTORS James P. Bauer (age 58) is the Vice President of Finance and Treasurer of Material Processing, Inc., a holding company for Small Parts, Inc., ABC Metals, Inc. and H.T.I. (Logansport, Indiana). He serves on the Board of Directors of the Logansport Economic Development Foundation, Inc. and the Logansport/Cass County Industrial Park. Charles J. Evans (age 57) has served as Senior Vice President of Logansport Savings Bank, FSB since January 2000. Prior to that he served as Vice President and Senior Loan Officer of Logansport Savings Bank, FSB since 1980. Brian J. Morrill (age 46) 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 in 2000 served as Chairman of the Logansport/Cass County Chamber of Commerce. Susanne S. Ridlen, Ph.D. (age 63) is a faculty member and Director of the Project Success Program for under-prepared students at Indiana University Kokomo. Dr. Ridlen has taught at IUK since 1969. She also serves on the Lilly Scholarship Committee for the Cass County Community Foundation. In addition, she serves on the Board of Directors for the President Benjamin Harrison Foundation, Inc. of Indianapolis, Indiana. William Tincher, Jr. (age 64) has served as Plant Manager for the Modine Manufacturing Company ("Modine") since 1977. Modine is located in Logansport, Indiana, and manufactures automotive cooling systems. Dr. Todd S. Weinstein (age 42) is a member of the surgical staff at Logansport Memorial Hospital and has been a member of Logansport Surgical Associates since 1991. He serves on the Board of Trustees of Logansport Memorial Hospital and the Board of Directors of the Cass County Family YMCA. David G. Wihebrink (age 56) has served as President of Logansport Financial Corp. and Logansport Savings Bank since April 2000. Prior to that, he had served as Vice President and Chief Financial Officer of TM Morris Manufacturing Co., Inc. since 1988. 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; as a member of the Board of Directors of the North Central Indiana Workforce Investment Board and as a member of the Board of Directors of the Logansport/Cass County Chamber of Commerce. Thomas G. Williams (age 70) served as President of Logansport Savings Bank, FSB from 1971 until his retirement in April 2000. LOGANSPORT FINANCIAL CORP. LOGANSPORT SAVINGS BANK, FSB Officers Officers DAVID G. WIHEBRINK DAVID G. WIHEBRINK - President President and Chief Executive Officer CHARLES J. EVANS - Senior Vice President CHARLES J. EVANS Vice President ALLEN SCHIEBER - Senior Vice President DOTTYE ROBESON DOTTYE ROBESON - Chief Financial Officer/ Secretary/Treasurer Secretary/Treasurer MICHAEL THOMPSON - Internal Audit/ Compliance JEFFREY JONES - Vice President SHEILA WILDERMUTH - Vice President KAY GAPSKI - Vice President JONI LAMBERT - Assistant Vice President SHARON LANTZ - Assistant Vice President TO OUR SHAREHOLDERS: I am pleased to bring you the financial results for Logansport Financial Corp. for the year ended December 31, 2003. Our earnings for 2003 amounted to $1,486,000, which represented a modest 1.8% decrease from our record earnings in 2002. Our diluted earnings per share amounted to $1.68 in 2003 compared to $1.58 in 2002, which represented a 6.3% increase. Historically low interest rates continued during 2003, which created opportunities for borrowers to obtain financing or refinance at very attractive interest rate levels. To take advantage of the refinance boom, but to avoid the inherent long-term interest rate risks, we began selling loans in the secondary market and this resulted in an additional $118,000 of income. We retained the servicing on these sold loans and at year-end that portfolio amounted to approximately $6.1 million. The continuing compression of our net interest margin caused a decline in our net interest income; however, we attempted to counter the effects of that compression with a diligent effort to control expenses and to carefully monitor the quality of our loan portfolio. In addition, we were successful in managing our investment portfolio as demonstrated by sales that contributed $286,000 to our pre-tax earnings for the year. Even though we saw our one-to-four family residential mortgage loan portfolio reduced by $10.5 million due to continued refinancings and our sale of mortgage loans into the secondary market, our commercial and nonresidential loan portfolios continued to grow with an increase of over $4.0 million. Overall our assets increased by $6.7 million, representing a 4.5% increase, while deposits increased by $5.4 million, or 5.5% for the year. In a year when dividends became more important due to the reduction in tax rates, we were once again able to increase our annual dividend payments, to $.56 per share for 2003. Although the economy is recovering, we realize the road ahead is not an easy one. We are faced with many economic challenges in our community and many businesses and individuals continue to struggle. The Board, management team, and employees remain a cohesive group that is focused on "Leading The Way" in community banking and creating value for our shareholders. Sincerely, David G. Wihebrink President 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 years indicated.
At December 31, Financial Condition Data: 2003 2002 2001 2000 1999 (In thousands) Total assets $156,824 $150,099 $138,065 $132,612 $117,468 Loans receivable, net 102,353 110,386 111,696 102,418 90,900 Mortgage-backed securities 20,307 11,009 4,419 5,165 5,898 Cash and cash equivalents 14,403 13,517 8,816 9,210 5,146 Investment securities 12,242 8,060 5,788 8,322 8,539 Deposits 103,757 98,325 83,900 79,454 76,011 Borrowings 35,946 35,629 35,915 35,237 24,307 Shareholders' equity 16,356 15,373 17,402 17,013 16,146 Year ended December 31, Summary of Operating Results: 2003 2002 2001 2000 1999 (In thousands, except share data) Interest income $8,602 $9,326 $9,831 $9,524 $7,599 Interest expense 4,492 4,877 5,696 5,597 4,043 ----- ----- ----- ----- ----- Net interest income 4,110 4,449 4,135 3,927 3,556 Provision for losses on loans 360 360 392 332 162 ------ ------ ------ ------ ------ Net interest income after provision for losses on loans 3,750 4,089 3,743 3,595 3,394 Other income 661 352 222 122 175 General, administrative and other expense 2,373 2,318 2,046 1,937 1,667 ----- ----- ----- ----- ----- Earnings before income taxes 2,038 2,123 1,919 1,780 1,902 Income taxes 552 609 521 511 678 ------ ------ ------ ------ ------ Net earnings $1,486 $1,514 $1,398 $1,269 $1,224 ===== ===== ===== ===== ===== Basic earnings per share $1.72 $1.63 $1.29 $1.16 $1.03 ==== ==== ==== ==== ==== Diluted earnings per share $1.68 $1.58 $1.27 $1.16 $1.02 ==== ==== ==== ==== ==== Cash dividends per share $.56 $.52 $.48 $.44 $.44 === === === === ===
Logansport Financial Corp. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA (CONTINUED) At or for the year ended December 31, Supplemental Data: 2003 2002 2001 2000 1999 Return on average assets (1) .96% 1.03% 1.03% 1.00% 1.14% Return on average equity (2) 9.24 9.30 7.82 7.76 7.33 Interest rate spread (3) 2.43 2.76 2.55 2.57 2.86 Net yield on interest-earning assets (4) 2.81 3.21 3.23 3.27 3.54 General, administrative and other expense to average assets 1.53 1.58 1.50 1.53 1.55 Net interest income to general, administrative and other expense 173.20 191.93 202.10 202.74 213.32 Equity-to-assets (5) 10.43 10.24 12.60 12.83 13.75 Average interest-earning assets to average interest-bearing liabilities 112.53 113.04 115.21 115.39 117.20 Non-performing assets to total assets .97 .99 1.41 .25 .57 Non-performing loans to total loans 1.45 1.34 1.72 .32 .72 Loan loss allowance to total loans 1.68 1.30 1.00 .73 .47 Loan loss allowance to non-performing loans 115.58 98.25 58.11 226.19 66.07 Dividend payout ratio 32.56 31.90 37.21 37.93 42.72 Net charge-offs to average loans .06 .03 .02 * * * Less than .01%
(1) Net earnings divided by average total assets. (2) Net earnings divided by average total equity. (3) Interest rate spread is calculated by subtracting combined weighted-average interest rate cost from combined weighted-average interest rate earned. (4) Net interest income divided by average interest-earning assets. (5) Total equity divided by total assets. 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. The Company has no activity other than being the holding company for the Bank. The principal business of the Bank has historically consisted of attracting deposits from the general public and making loans secured by residential and other real estate. The Bank is 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 levels 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, borrowings, payments on loans and income provided from operations. The Bank's earnings are primarily dependent upon its net interest income, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. 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 losses on loans, 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, 2003, and the results of operations for the year ended December 31, 2003, 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 changes in interest rates on the Company's results of operations. Logansport Financial Corp. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 that 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. 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 rights to service mortgage loans for others as separate assets. 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. Capitalized mortgage servicing rights are required to 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 rights. 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. Changes in Financial Condition from December 31, 2002 to December 31, 2003 The Company's total assets were $156.8 million at December 31, 2003, an increase of $6.7 million, or 4.5%, over the $150.1 million total at December 31, 2002. The increase in assets was funded primarily through growth in deposits of $5.4 million and a $1.0 million increase in shareholders' equity. The percentage of interest-earning assets to total assets was 96.1% at both December 31, 2003 and 2002. At December 31, 2003, investment and mortgage-backed securities totaled $32.5 million, an increase of $13.5 million, or 70.7%, compared to December 31, 2002. The increase was due to purchases of $40.7 million, which were partially offset by maturities, sales and repayments totaling $26.7 million. The primary investments added to the portfolio were Federal Home Loan Bank ("FHLB") and Federal National Mortgage Association ("FNMA") fixed-rate notes and adjustable-rate GNMA mortgage-backed securities. Loans receivable totaled $102.4 million at December 31, 2003, a decrease of $8.0 million, or 7.3%, from December 31, 2002. The decrease in loans receivable was due primarily to principal repayments of $57.8 million and loan sales of $6.2 million, which were partially offset by loan disbursements totaling $56.7 million. The volume of loan disbursements in 2003 exceeded that of 2002 by $11.2 million, or 24.6%. The overall decrease in loans was due to an $11.5 million, or 17.7%, decrease in loans secured by one- to four-family and multi-family residential real estate, including construction loans, and a $400,000 or 3.4%, decrease in consumer loans, while loans secured by Logansport Financial Corp. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Changes in Financial Condition from December 31, 2002 to December 31, 2003 (continued) nonresidential real estate and commercial loans and leases increased by $4.0 million, or 11.2%. During 2003, the Company initiated a program to originate certain mortgage loans for sale in the secondary market, retaining the servicing on loans sold. These sales transactions were conducted with the Federal Home Loan Bank of Indianapolis. Sales of loans during 2003 totaled $6.2 million, which resulted in realized gains on sale of $118,000. During 1997, the Company invested $1.5 million in a limited partnership, which constructs and manages residential real estate apartments for low and moderate-income residents. This investment reflects a 49.5% participation in the partnership. The affordable housing project generates tax credits for the Bank. This investment initially resulted in an increase to total assets of $1.5 million with a corresponding increase in notes payable. During the three years ended December 31, 2003, the Bank recorded pretax losses from the housing project totaling $410,000, while realizing tax credits of $546,000. Deposits totaled $103.8 million at December 31, 2003, an increase of $5.4 million, or 5.5%, over December 31, 2002. Non-interest bearing deposits, NOW accounts, passbook savings and money market savings increased by $4.1 million, or 10.0%, while certificates of deposit increased by $1.3 million, or 2.2%. Proceeds from deposit growth were generally used to fund the purchase of investments and mortgage-backed securities. However, $2.0 million of the deposit increase was comprised of short-term local governmental deposits which are subject to bids every 60 to 90 days and, therefore, may or may not be retained. Additionally, the Bank has deposit customers who periodically place large deposits for short time periods. Such deposits totaled approximately $8.5 million at December 31, 2003. Approximately $6.0 million of these funds were withdrawn in January 2004. At December 31, 2003, borrowings consisted of $34.0 million in FHLB advances compared to $33.8 million in FHLB advances at December 31, 2002, an increase of $200,000, or .6%. Shareholders' equity totaled $16.4 million at December 31, 2003, an increase of $1.0 million, or 6.4%, over December 31, 2002. The increase was due primarily to net earnings for the year ended December 31, 2003 of $1.5 million and proceeds from the exercise of stock options of $378,000, which were partially offset by dividends totaling $485,000 and a decrease in unrealized gains on available for sale securities of $417,000. Comparison of Results of Operations for the Years Ended December 31, 2003 and 2002 Net earnings totaled $1.5 million for the year ended December 31, 2003, a decrease of $28,000, or 1.8%, compared to net earnings reported for 2002. The decrease in net earnings resulted primarily from a decrease of $339,000 in net interest income and an increase of $55,000 in general, administrative and other expense, which were partially offset by an increase of $309,000 in other income and a decrease in the provision for income taxes of $57,000. Interest Income The Company's total interest income was $8.6 million for the year ended December 31, 2003, a decrease of $724,000, or 7.8%, compared to the $9.3 million recorded during 2002. The Company's $8.3 million, or 5.9%, increase in average interest-earning assets, from $140.5 million in 2002 to $148.8 million in 2003, was more than offset by an 85 basis point decrease in the average yield on interest-earning assets, to 5.83% in 2003 compared to 6.68% in 2002. Interest income on loans decreased by $925,000, or 11.1%, due primarily to a 55 basis point decrease in the average yield year to year, to 6.75% in 2003, and a $4.4 million, or 3.8%, decrease in the average balance of loans outstanding. Interest income on investment and mortgage-backed securities and other interest-bearing deposits increased by $201,000, or 19.9%, due primarily to a $12.6 million, or 51.0%, increase in the average balance outstanding, which was partially offset by a 72 basis point decline in the average yield, to 3.17% in 2003, compared to 3.89% in 2002. 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, 2003 and 2002 (continued) Interest Expense Interest expense totaled $4.5 million for the year ended December 31, 2003, a decrease of $385,000, or 7.9%, compared to 2002. This decrease was the result of a decrease in the average cost of interest-bearing liabilities of 52 basis points, from 3.92% in 2002 to 3.40% in 2003, partially offset by a $7.9 million, or 6.4%, increase in the average balance outstanding year to year. Interest expense on deposits decreased by $405,000, or 13.7%, due primarily to a 68 basis point decline in the average cost of deposits, to 2.64% in 2003, which was partially offset by a $7.7 million, or 8.6%, increase in the average balance of deposits outstanding year to year. Interest expense on borrowings increased by $20,000, or 1.0%, due primarily to a 2 basis point increase in the average cost of borrowings year to year and a $250,000 increase in the average balance of borrowings. The decreases in the level of yields on interest-earning assets and the cost of deposits were due primarily to the overall decrease in interest rates in the economy throughout 2002 and 2003. Net Interest Income As a result of the foregoing changes in interest income and interest expense, net interest income decreased by $339,000, or 7.6%, to $4.1 million in 2003, compared to $4.4 million in 2002. The interest rate spread was 2.43% in 2003 compared to 2.76% in 2002, and the net yield on weighted-average interest-earning assets declined to 2.81% in 2003 from 3.21% in 2002. Provision for Losses on Loans The Company maintains a general 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 Company's provision for losses on loans was $360,000 for each of the years ended December 31, 2003 and 2002. The 2003 provision was predicated primarily upon the increase in the volume of commercial loans and loans secured by nonresidential real estate, an analysis of nonperforming loans and the current economic climate. At December 31, 2003 and 2002, the allowance amounted to $1.8 million and $1.5 million, respectively, for a ratio to total loans of 1.68% in 2003 and 1.30% in 2002. Non-performing loans totaled $1.5 million at both December 31, 2003 and 2002. The ratio of the allowance for loan losses to non-performing loans increased from 98.3% at December 31, 2002 to 115.6% at December 31, 2003. Based on management's review of the loan portfolio, the allowance for loan losses at December 31, 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 The Company recorded other income totaling $757,000 for the year ended December 31, 2003, excluding the loss on investment in real estate partnership, compared to $459,000 in 2002. The $298,000, or 64.9%, increase was due primarily to an increase of $185,000 in gains on sale of investment and mortgage-backed securities and a $118,000 gain on the sale of loans. The $96,000 loss on the investment in real estate partnership recorded in 2003 had a positive after-tax effect of approximately $127,000 when considering the tax benefit and the available tax credits generated by the project. 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, 2003 and 2002 (continued) General, Administrative and Other Expense General, administrative and other expense totaled $2.4 million for the year ended December 31, 2003, compared to $2.3 million in 2002, an increase of $55,000, or 2.4%. Employee compensation and benefits increased by $112,000, or 8.6%, due primarily to an $86,000 increase in pension expense and normal merit increases. Occupancy and equipment expense decreased by $22,000, or 9.2%, mainly due to a decrease in property taxes and other related occupancy expenses. Other operating expenses decreased by $33,000, or 5.6%. The majority of this decrease was related to costs associated with consulting and attorney fees. Logansport Financial Corp. is investigating the possibility of de-listing its stock and de-registering with the Securities and Exchange Commission ("SEC"). This strategy would reduce future expenses associated with SEC reporting requirements, as well as NASDAQ filing fees, but would also result in the Company's common stock no longer being quoted on the NASDAQ Small Cap Market. In order to de-register, the Company must first have fewer than 300 shareholders. The Company's shares trade infrequently and residents of Indiana hold many shares. Therefore, it is management's belief that any negative impact on the liquidity of the shares as a result of a de-registration and de-listing would be minimal. Income Tax Expense Income tax expense totaled $552,000 for the year ended December 31, 2003, a decrease of $57,000, or 9.4%, from 2002. Pretax income decreased by $85,000, or 4.0%, in 2003 compared to 2002, while approximately $182,000 of tax credits were available in both 2003 and 2002. The effective tax rates were 27.1% and 28.7% for the years ended December 31, 2003 and 2002, respectively. Comparison of Results of Operations for the Years Ended December 31, 2002 and 2001 Net earnings totaled $1.5 million for the year ended December 31, 2002, a $116,000, or 8.3%, increase over the net earnings reported for 2001. The increase in net earnings resulted primarily from an increase of $314,000 in net interest income, an increase of $130,000 in other income and a decrease of $32,000 in the provision for losses on loans, which were partially offset by an increase of $272,000 in general, administrative and other expense and an increase in the provision for income taxes of $88,000. Interest Income The Company's total interest income was $9.3 million for the year ended December 31, 2002, a decrease of $505,000, or 5.1%, compared to $9.8 million during 2001. The $10.7 million, or 8.3%, increase in average interest-earning assets, from $129.8 million in 2001 to $140.5 million in 2002, was more than offset by a 93 basis point decrease in the average yield on interest-earning assets, to 6.68% in 2002 compared to 7.61% in 2001. Interest income on loans decreased by $406,000, or 4.7%, due primarily to a 70 basis point decrease in the average yield year to year, to 7.30% in 2002, which was partially offset by a $4.8 million, or 4.4%, increase in the average balance of loans outstanding. Interest income on investment and mortgage-backed securities and other interest-bearing deposits decreased by $99,000, or 8.9%, due primarily to a 152 basis point decline in the average yield, to 3.89% in 2002, which was partially offset by a $5.9 million, or 31.5%, increase in the average balance outstanding. 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, 2002 and 2001 (continued) Interest Expense Interest expense totaled $4.9 million for the year ended December 31, 2002, a decrease of $819,000, or 14.4%, compared to 2001. This decrease was the result of a decrease in the average cost of interest-bearing liabilities of 114 basis points, from 5.06% in 2001 to 3.92% in 2002, partially offset by an increase in the average balance of $11.6 million, or 10.3%. Interest expense on deposits decreased by $715,000, or 19.4%, due primarily to a 137 basis point decline in the average cost of deposits, to 3.32% in 2002, which was partially offset by a $10.9 million, or 13.9%, increase in the average balance of deposits outstanding year to year. Interest expense on borrowings decreased by $104,000, or 5.2%, due primarily to a 43 basis point decrease in the average cost of borrowings year to year. The decreases in the level of yields on interest-earning assets and the cost of interest-bearing liabilities were due primarily to the overall decrease in interest rates in the economy throughout 2001 and 2002. Net Interest Income As a result of the foregoing changes in interest income and interest expense, net interest income increased by $314,000, or 7.6%, to $4.4 million in 2002, compared to $4.1 million in 2001. The interest rate spread was 2.76% in 2002 compared to 2.55% in 2001, and the net yield on weighted-average interest-earning assets declined to 3.21% in 2002 from 3.23% in 2001. Provision for Losses on Loans The Company maintains a general 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 Company's provision for losses on loans was $360,000 and $392,000, for the years ended December 31, 2002 and 2001, respectively. The 2002 provision was predicated primarily upon the increase in the volume of commercial loans and loans secured by nonresidential real estate, an analysis of nonperforming loans and the current economic climate. At December 31, 2002 and 2001, the allowance amounted to $1.5 million and $1.1 million, respectively, for a ratio to total loans of 1.30% in 2002 and 1.00% in 2001. Non-performing loans were $1.5 million and $1.9 million at December 31, 2002 and 2001, respectively. The ratio of the allowance for loan losses to non-performing loans increased from 58.1% at December 31, 2001 to 98.3% at December 31, 2002. Based on management's review of the loan portfolio, the allowance for loan losses at December 31, 2002 is considered adequate to cover potential losses inherent in the loan portfolio. Other Income Other income totaled $459,000 for the year ended December 31, 2002, excluding the loss on the investment in real estate partnership, compared to $429,000 in 2001. The $30,000, or 7.0%, increase was due primarily to a $101,000 gain on sale of investment and mortgage-backed securities, partially offset by a decrease of $17,000, or 7.1%, in service charges on deposit accounts and a $54,000, or 28.3%, decrease in other operating income, mainly income on Bank-owned life insurance and a $14,000 decrease in insurance commissions. The $107,000 loss on investment in real estate partnership recorded in 2002 had a positive after-tax effect of approximately $111,000 when considering the tax benefit and the available tax credits generated by the project. 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, 2002 and 2001 (continued) General, Administrative and Other Expense General, administrative and other expense totaled $2.3 million for the year ended December 31, 2002, compared to $2.0 million in 2001, an increase of $272,000, or 13.3%. Employee compensation and benefits increased by $182,000, or 16.3%, due primarily to a $40,000 increase in expense related to medical insurance and a $30,000 increase in pension expense, while the remaining $112,000 increase was primarily attributable to additional staffing, normal merit increases and an increase in officer and employee bonus expenses year to year. Occupancy and equipment expense increased by $10,000, or 4.3%, mainly due to an increase in property taxes and other related occupancy expenses. Data processing fees increased by $7,000, or 3.8%, due primarily to increased account volume and additional commercial loan software maintenance costs. Various other operating expenses increased by $73,000, or 14.5%. The majority of the increase was related to costs associated with new internet-banking services, consulting and attorney fees, costs related to being a public company and pro-rata increases in costs related to the Company's overall growth year to year. Income Tax Expense Income tax expense totaled $609,000 for the year ended December 31, 2002, an increase of $88,000, or 16.9%, over 2001. Pretax income increased by $204,000, or 10.6%, in 2002 compared to 2001, while approximately $182,000 of tax credits were available in both 2002 and 2001. The effective tax rates were 28.7% and 27.1% for the years ended December 31, 2002 and 2001, respectively. 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, 2003 2002 2001 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 $ 12,047 $ 103 0.85%$ 9,638 $ 124 1.29%$ 7,271 $ 261 3.59% Mortgage- and other asset- backed securities (1) 16,204 611 3.77 7,927 394 4.97 4,791 297 6.20 Other investment securities (1)8,987 466 5.19 7,100 441 6.21 6,694 457 6.83 Loans receivable (2) 109,517 7,390 6.75 113,870 8,315 7.30 109,075 8,721 8.00 Stock in FHLB of Indianapolis 2,037 99 4.86 1,991 120 6.02 1,973 147 7.45 --------- ------- --------- ------ --------- ------ Total interest-earning assets 148,792 8,669 5.83 140,526 9,394 6.68 129,804 9,883 7.61 Non-interest-earning assets 6,191 5,947 6,306 --------- --------- --------- Total assets $154,983 $146,473 $136,110 ======= ======= ======= Interest-bearing liabilities: Savings accounts $ 4,703 44 0.94$ 4,397 55 1.25 $ 3,993 100 2.50 NOW and money market accounts 30,466 302 0.99 28,429 492 1.73 23,023 718 3.12 Certificates of deposit 61,820 2,211 3.58 56,503 2,415 4.27 51,405 2,859 5.56 Borrowings 35,234 1,935 5.49 34,984 1,915 5.47 34,245 2,019 5.90 ------- ----- ------- ----- ------- ----- Total interest-bearing liabilities 132,223 4,492 3.40 124,313 4,877 3.92 112,666 5,696 5.06 -------- ------- ----- ----- ---- ----- ---- Other liabilities 6,684 5,879 5,562 --------- --------- --------- Total liabilities 138,907 130,192 118,228 Shareholders' equity 16,076 16,281 17,882 -------- -------- -------- Total liabilities and shareholders' equity $154,983 $146,473 $136,110 ======= ======= ======= Net interest-earning assets $ 16,569 $ 16,213 $ 17,138 ======== ======== ======== Net interest income $4,177 $4,517 $4,187 ===== ===== ===== Interest rate spread (3) 2.43% 2.76% 2.55% ======== ======== ======== Net yield on weighted-average interest-earning assets (4) 2.81% 3.21% 3.23% ======== ======== ======== Average interest-earning assets to average interest-bearing liabilities 112.53% 113.04% 115.21% ====== ====== ====== Adjustment of interest income on tax-exempt securities to a tax-equivalent basis $ 67 $ 68 $ 52 ====== ====== ======
- --------------------------- (1) Includes securities available for sale at amortized cost prior to SFAS No. 115 adjustments. (2) Comprised of total loans less undisbursed 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. 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, 2003 vs. 2002 2002 vs. 2001 Increase Increase (decrease) (decrease) due to due to Volume Rate Total Volume Rate Total (In thousands) Interest-earning assets: Interest-earning deposits $ 27 $ (48) $ (21) $ 67 $ (204) $(137) Mortgage-backed securities 331 (114) 217 165 (68) 97 Investment securities 105 (80) 25 27 (43) (16) Loans receivable (342) (583) (925) 372 (778) (406) Stock in FHLB of Indianapolis 3 (24) (21) 1 (28) (27) ------ ----- ----- ----- ------- ----- Total interest-earning assets 124 (849) (725) 632 (1,121) 489 Interest-bearing liabilities: Savings accounts 4 (15) (11) 9 (54) (45) NOW and money market accounts 33 (223) (190) 143 (369) (226) Certificates of deposit 214 (418) (204) 264 (708) (444) Borrowings 14 6 20 43 (147) (104) ----- ------ ----- ---- ------ ---- Total interest-bearing liabilities 265 (650) (385) 459 (1,278) (819) ---- ---- ---- --- ----- ---- Change in net interest income (fully taxable equivalent basis) (141) (199) (340) 173 157 330 Tax equivalent adjustment 1 - 1 (11) (5) (16) ------ --- ------ ---- -------- ----- Change in net interest income $(140) $(199) $(339) $162 $ 152 $ 314 ==== ==== ==== === ====== ====
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 as of and for the three years ended December 31, 2003. Average balances are based on month-end average balances.
At December 31, Year ended December 31, 2003 2003 2002 2001 Weighted-average interest rate earned on: Interest-earning deposits 0.50% 0.85% 1.29% 3.59% Mortgage-backed securities 3.46 3.77 4.97 6.20 Investment securities 4.89 5.19 6.21 6.83 Loans receivable 6.66 6.75 7.30 8.00 Stock in FHLB of Indianapolis 5.02 4.86 6.02 7.45 Total interest-earning assets 5.50 5.83 6.68 7.61 Weighted-average interest rate cost of: Savings accounts 1.02 0.94 1.25 2.50 NOW and money market accounts 0.95 0.99 1.73 3.12 Certificates of deposit 3.52 3.58 4.27 5.56 Borrowings 5.43 5.49 5.47 5.90 Total interest-bearing liabilities 3.22 3.40 3.92 5.06 Interest rate spread (1) 2.28 2.43 2.76 2.55 Net yield on weighted-average interest-earning assets (2) N/A 2.81 3.21 3.23
(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, 2003, because the computation of net yield is applicable only over a period rather than at a specific date. Logansport Financial Corp. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Asset/Liability Management The Bank 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") 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. Presented below, as of September 30, 2003 (the latest available date) and December 31, 2002 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 tables, 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 decline 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, 2003 Change in interest rate Net Portfolio Value NPV as % of PV of Assets (Basis Points) $ Amount $ Change % Change NPV Ratio Change (In thousands) +300 $15,299 $(1,086) (7)% 10.16% (28 bp) +200 16,162 (223) (1) 10.57 13 bp +100 16,571 186 1 10.68 24 bp - 16,385 - - 10.44 - -100 15,517 (868) (5) 9.80 (64 bp) December 31, 2002 Change in interest rate Net Portfolio Value NPV as % of PV of Assets (Basis Points) $ Amount $ Change % Change NPV Ratio Change (In thousands) +300 $15,152 $(840) (5)% 10.09% (15 bp) +200 15,921 (71) 0 10.44 20 bp +100 16,332 340 2 10.57 33 bp - 15,992 - - 10.24 - -100 15,036 (956) (6) 9.55 (69 bp)
Logansport Financial Corp. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Asset and Liability Management (continued) 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 as adjustable-rate loans, have features that 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 and borrowings, proceeds from principal and interest payments on loans, and proceeds from maturing securities. While maturities and scheduled amortization of loans are a relatively 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 loans and the purchase of investment securities. During the years ended December 31, 2003, 2002 and 2001, the Company originated mortgage loans and commercial loans totaling $51.1 million, $40.3 million and $54.3 million, respectively. The Company originated consumer loans of $5.7 million, $5.3 million and $6.8 million, in 2003, 2002 and 2001, respectively. The Company purchased loans totaling $1.8 million in 2003, $171,000 in 2002 and $499,000 in 2001. Loan repayments totaled $57.8 million, $46.7 million and $51.4 million for 2003, 2002 and 2001, respectively. During the years ended December 31, 2003, 2002 and 2001, the Company purchased investment and mortgage-backed securities in the amounts of $40.7 million, $17.8 million and $1.6 million, respectively. Sales or maturities of such securities held by the Company and repayments on mortgage-backed or other asset-backed securities totaled $26.7 million, $9.4 million and $5.1 million for 2003, 2002 and 2001, respectively. Deposits grew by $5.4 million from December 31, 2002 to December 31, 2003, and by $14.4 million from December 31, 2001 to December 31, 2002. Cash and cash equivalents increased by $886,000 over December 31, 2002 to 2003 and $4.7 million over December 31, 2001 to December 31, 2002. Logansport Financial Corp. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Liquidity and Capital Resources (continued) The following table sets forth information regarding the Company's obligations and commitments to make future payments under contract as of December 31, 2003.
Payments due by period Less More than 1-3 3-5 than 1 year years years 5 years Total (In thousands) Contractual obligations: Advances from the Federal Home Loan Bank and other borrowings $ 3,900 $ 6,450 $ 2,806 $22,790 $35,946 Certificates of deposit 29,261 17,754 10,861 - 57,876 Amount of commitments expiration per period Commitments to originate loans: One- to four-family residential loans 850 - - - 850 Home equity/commercial lines of credit 9,487 - - - 9,487 Home equity/commercial lines of credit 9,487 - - - 9,487 Letters of credit 2,670 - - - 2,670 ------- ------- ------- ------- --------- Total contractual obligations $48,819 $24,204 $13,667 $22,790 $109,480 ====== ====== ====== ====== =======
The Company anticipates that it will have sufficient funds available to meet its current loan commitments. 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 maturing certificates of deposit 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, 2003 and 2002, the Company had outstanding FHLB advances of $34.0 million and $33.8 million, respectively. Pursuant to OTS capital regulations, the Bank must currently meet a 1.5% tangible capital requirement, a 4.0% leverage ratio (or core capital) requirement, and a total risk-based capital to risk-weighted assets ratio of 8.0%. At December 31, 2003, the Bank's tangible capital and leverage ratios were both 10.9%, and its risk-based capital to risk-weighted assets ratio was 19.4%. Therefore, at December 31, 2003, 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, 2003. Logansport Financial Corp. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Liquidity and Capital Resources (continued)
OTS Requirement The Bank's Capital Level % of % of Amount Assets Amount Assets (1) Amount of excess (Dollars in thousands) Tangible capital 1.5% $2,350 10.9% $17,044 $14,694 Core capital (2) 4.0 6,266 10.9 17,044 10,778 Risk-based capital 8.0 7,526 19.4 18,225 10,699
(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) OTS regulations require at least 3% of total adjusted assets for savings associations that received the highest supervisory rating for safety and soundness, and 4% for all other savings associations. (3) The Bank's risk-based capital includes $1.5 million of general valuation allowances. As of December 31, 2003, 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. Off-Balance Sheet Arrangements As of the date of this Annual Report, the Company does not have any off-balance sheets 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. 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, 2003 and 2002, and the related consolidated statements of earnings, shareholders' equity, comprehensive income and cash flows for each of the years in the three year period ended December 31, 2003. 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 auditing standards generally accepted in the United States of America. 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, 2003 and 2002, and the consolidated results of its operations, comprehensive income and cash flows for each of the years in the three year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. Cincinnati, Ohio January 30, 2004 LOGANSPORT FINANCIAL CORP. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, 2003 and 2002 (In thousands, except share data)
ASSETS 2003 2002 Cash and due from banks $ 707 $ 778 Interest-bearing deposits in other financial institutions 13,696 12,739 -------- -------- Cash and cash equivalents 14,403 13,517 Investment securities designated as available for sale - at market 12,242 8,060 Mortgage-backed securities designated as available for sale - at market 20,307 11,009 Loans receivable - net 102,353 110,386 Office premises and equipment - at depreciated cost 1,694 1,767 Federal Home Loan Bank stock - at cost 2,080 2,003 Investment in real estate limited partnership 950 1,026 Accrued interest receivable on loans 409 410 Accrued interest receivable on mortgage-backed securities 70 49 Accrued interest receivable on investments and interest-bearing deposits 166 107 Prepaid expenses and other assets 164 80 Cash surrender value of life insurance 1,343 1,317 Deferred income tax asset 619 364 Prepaid income taxes 24 4 ----------- ------------ Total assets $156,824 $150,099 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits $103,757 $ 98,325 Advances from the Federal Home Loan Bank 34,027 33,836 Notes payable 1,919 1,793 Accrued interest and other liabilities 765 772 ---------- ---------- Total liabilities 140,468 134,726 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; 877,444 and 848,958 shares at aggregate value issued and outstanding at December 31, 2003 and 2002, respectively 1,824 1,446 Retained earnings - restricted 14,445 13,444 Less shares acquired by stock benefit plan (23) (44) Accumulated comprehensive income, unrealized gains on securities designated as available for sale, net of related tax effects 110 527 ---------- ---------- Total shareholders' equity 16,356 15,373 -------- -------- Total liabilities and shareholders' equity $156,824 $150,099 ======= ======= The accompanying notes are an integral part of these statements.
LOGANSPORT FINANCIAL CORP. CONSOLIDATED STATEMENTS OF EARNINGS For the years ended December 31, 2003, 2002 and 2001 (In thousands, except share data)
2003 2002 2001 Interest income Loans $7,390 $8,315 $8,721 Investment securities 399 373 405 Mortgage-backed securities 611 394 297 Interest-bearing deposits and other 202 244 408 ------ ------ ------ Total interest income 8,602 9,326 9,831 Interest expense Deposits 2,557 2,962 3,677 Borrowings 1,935 1,915 2,019 ----- ----- ----- Total interest expense 4,492 4,877 5,696 ----- ----- ----- Net interest income 4,110 4,449 4,135 Provision for losses on loans 360 360 392 ------ ------ ------ Net interest income after provision for losses on loans 3,750 4,089 3,743 Other income Service charges on deposit accounts 218 221 238 Gain on sale of investment and mortgage-backed securities 286 101 - Gain on sale of loans 118 - - Loss on investment in real estate partnership (96) (107) (207) Other operating 135 137 191 ------ ------ ------ Total other income 661 352 222 General, administrative and other expense Employee compensation and benefits 1,409 1,297 1,115 Occupancy and equipment 218 240 230 Data processing 188 190 183 Other operating 558 591 518 ------ ------ ------ Total general, administrative and other expense 2,373 2,318 2,046 ----- ----- ----- Earnings before income taxes 2,038 2,123 1,919 Income taxes Current 592 661 662 Deferred (40) (52) (141) ------- ------- ------ Total income taxes 552 609 521 ------ ------ ------ NET EARNINGS $1,486 $1,514 $1,398 ===== ===== ===== EARNINGS PER SHARE Basic $1.72 $1.63 $1.29 ==== ==== ==== Diluted $1.68 $1.58 $1.27 ==== ==== ==== The accompanying notes are an integral part of these statements.
LOGANSPORT FINANCIAL CORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the years ended December 31, 2003, 2002 and 2001 (In thousands) 2003 2002 2001 Net earnings $1,486 $1,514 $1,398 Other comprehensive income (loss), net of tax: Unrealized holding gains (losses) on securities during the year, net of taxes (benefits) of $(117), $175 and $93 for the years ended December 31, 2003, 2002 and 2001, respectively (228) 339 180 Reclassification adjustment for realized gains included in earnings, net of taxes of $97 and $34 for the years ended December 31, 2003 and 2002, respectively (189) (67) - ------ ------- ----- Comprehensive income $1,069 $1,786 $1,578 ===== ===== ===== Accumulated comprehensive income $ 110 $ 527 $ 255 ====== ====== ====== The accompanying notes are an integral part of these statements.
LOGANSPORT FINANCIAL CORP. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the years ended December 31, 2003, 2002 and 2001 (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, 2001 $5,515 $11,526 $(103) $ 75 $17,013 Net earnings for the year ended December 31, 2001 - 1,398 - - 1,398 Purchase of shares (921) - - - (921) Issuance of shares under stock option plan 208 - - - 208 Unrealized gains on securities designated as available for sale, net of related tax effects - - - 180 180 Amortization expense of stock benefit plan - - 40 - 40 Cash dividends of $.48 per share - (516) - - (516) ----- -------- --- -- -------- Balance at December 31, 2001 4,802 12,408 (63) 255 17,402 Net earnings for the year ended December 31, 2002 - 1,514 - - 1,514 Purchase of shares (3,725) - - - (3,725) Issuance of shares under stock option plan 369 - - - 369 Unrealized gains on securities designated as available for sale, net of related tax effects - - - 272 272 Amortization expense of stock benefit plan - - 19 - 19 Cash dividends of $.52 per share - (478) - - (478) ----- -------- --- --- -------- Balance at December 31, 2002 1,446 13,444 (44) 527 15,373 Net earnings for the year ended December 31, 2003 - 1,486 - - 1,486 Issuance of shares under stock option plan 378 - - - 378 Unrealized losses (net of realized gains) on securities designated as available for sale, net of related tax effects - - - (417) (417) Amortization expense of stock benefit plan - - 21 - 21 Cash dividends of $.56 per share - (485) - - (485) ----- -------- --- -- -------- Balance at December 31, 2003 $1,824 $14,445 $ (23) $110 $16,356 ===== ====== ===== === ====== The accompanying notes are an integral part of these statements.
LOGANSPORT FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 2003, 2002 and 2001 (In thousands) 2003 2002 2001 Cash flows from operating activities: Net earnings for the year $ 1,486 $ 1,514 $ 1,398 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 112 108 99 Amortization of premiums on investments and mortgage-backed securities 79 41 31 Amortization expense of stock benefit plan 21 19 40 Federal Home Loan Bank stock dividends (77) - - Loans originated for sale in the secondary market (6,192) - - Proceeds from the sale of loans in the secondary market 6,257 - - Gain on sale of loans (65) - - Gain on sale of investment and mortgage-backed securities (286) (101) - Provision for losses on loans 360 360 392 Gain on sale of real estate acquired through foreclosure (3) - - Loss on investment in real estate partnership 96 107 207 Increase (decrease) in cash, due to changes in: Accrued interest receivable on loans 1 35 103 Accrued interest receivable on mortgage-backed securities (21) (21) 13 Accrued interest receivable on investments (59) (15) 15 Prepaid expenses and other assets (84) 8 (24) Accrued interest and other liabilities (7) (47) (87) Federal income taxes Current (20) (33) 27 Deferred (40) (52) (141) --------- --------- -------- Net cash provided by operating activities 1,558 1,923 2,073 Cash flows provided by (used in) investing activities: Proceeds from sale of investment securities designated as available for sale 2,519 269 - Purchase of investment securities designated as available for sale (10,872) (4,711) (1,053) Proceeds from maturities of investment securities designated as available for sale 4,075 2,385 3,775 Purchase of mortgage-backed securities designated as available for sale (29,781) (13,061) (514) Proceeds from sale of mortgage-backed securities designated as available for sale 14,819 5,036 - Principal repayments on mortgage-backed securities designated as available for sale 5,335 1,692 1,313 Purchase of loans (1,771) (171) (499) Proceeds from sales of loan participations 2,000 - 416 Loan disbursements (50,555) (45,554) (61,082) Principal repayments on loans 57,846 46,675 51,430 Investment in real estate partnership (94) (96) (104) Purchases of office premises and equipment (39) (72) (59) Proceeds from sale of real estate acquired through foreclosure 156 65 - Purchase of Federal Home Loan Bank stock - (30) - Increase in cash surrender value of life insurance policy (26) (26) (57) --------- --------- --------- Net cash used in investing activities (6,388) (7,599) (6,434) ------- ------- ------- Net cash used in operating and investing activities (subtotal carried forward) (4,830) (5,676) (4,361) ------- ------- -------
LOGANSPORT FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) For the years ended December 31, 2003, 2002 and 2001 (In thousands) 2003 2002 2001 Net cash used in operating and investing activities (subtotal brought forward) $ (4,830) $ (5,676) $ (4,361) Cash flows provided by (used in) financing activities: Net increase in deposit accounts 5,432 14,425 4,446 Proceeds from Federal Home Loan Bank advances 4,445 9,950 12,750 Repayment of Federal Home Loan Bank advances (4,254) (10,864) (12,000) Proceeds from notes payable 200 700 - Proceeds from the exercise of stock options 378 369 208 Dividends on common stock (485) (478) (516) Purchase of shares - (3,725) (921) ------- ------- -------- Net cash provided by financing activities 5,716 10,377 3,967 ------- ------ ------- Net increase (decrease) in cash and cash equivalents 886 4,701 (394) Cash and cash equivalents at beginning of year 13,517 8,816 9,210 ------ ------- ------- Cash and cash equivalents at end of year $14,403 $13,517 $ 8,816 ====== ====== ======= Supplemental disclosure of cash flow information: Cash paid during the year for: Income taxes $ 540 $ 617 $ 590 ======== ======== ======== Interest on deposits and borrowings $ 4,511 $ 4,887 $ 5,719 ======= ======= ======= Supplemental disclosure of noncash investing and financing activities: Recognition of mortgage servicing rights in accordance with SFAS No. 140 $ 53 $ - $ - ========= ======= ======= Transfers from loans to real estate acquired through foreclosure $ 153 $ - $ 65 ======== ======= ========= Unrealized gains (losses) on securities designated as available for sale, net of related tax effects $ (228) $ 339 $ 180 ========= ======== ========
The accompanying notes are an integral part of these statements. LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 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 that 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 accounting principles generally accepted in the United States of America ("U.S. GAAP") and general accounting practices within the financial services industry. In preparing consolidated financial statements in accordance with U.S. 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. Securities designated as available for sale are carried at fair value with resulting unrealized gains or losses recorded to shareholders' equity. At December 31, 2003 and 2002, the Corporation had designated all investment and mortgage-backed securities as available for sale. Realized gains and losses on sales of securities are recognized using the specific identification method. LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2003, 2002 and 2001 NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued) 3. Loans Receivable Loans held in portfolio 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. During 2003, the Savings Bank initiated a program to originate and sell certain loans in the secondary market, to the Federal Home Loan Bank. Loans sold during 2003 totaled $6.2 million, which resulted in realized gains of $118,000. Loans held for sale are carried at the lower of cost or market, determined in the aggregate. In computing cost, deferred loan origination fees are deducted from the principal balances of the related loans. At December 31, 2003 and 2002, the Savings Bank had not identified any loans as held for sale. The Savings Bank accounts for mortgage servicing rights pursuant to the provisions of SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which requires that the Savings Bank 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 mortgage servicing rights. SFAS No. 140 requires that capitalized mortgage servicing rights be assessed for impairment. Impairment is measured based on fair value. The mortgage servicing rights recorded by the Savings Bank, 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 for the pool, i.e., the net realizable present value to an acquirer of the acquired servicing. The Savings Bank recorded amortization related to mortgage servicing rights totaling approximately $1,000 for the year ended December 31, 2003. At December 31, 2003, the fair value and carrying value of the Savings Bank's mortgage servicing rights totaled approximately $52,000. LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2003, 2002 and 2001 NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued) 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 Loan Losses 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 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. 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 commercial 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. LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2003, 2002 and 2001 5. Allowance for Loan Losses (continued) The Savings Bank's impaired loan information is as follows at December 31:
2003 2002 (In thousands) Impaired loans with related allowance $658 $763 Impaired loans with no related allowance - - ----- -- Total impaired loans $658 $763 === ===
2003 2002 2001 (In thousands) Allowance on impaired loans Beginning balance $352 $341 $ 228 Provision - 11 113 Transfer to general loan loss allowance (28) - - ---- -- ----- Ending balance $324 $352 $ 341 === === ====== Average balance of impaired loans $710 $871 $1,419 Interest income recognized on impaired loans $ - $ - $ 37
The allowance for impaired loans is included in the Savings Bank's overall allowance for credit losses. The provision necessary to increase this allowance is included in the Savings Bank's overall provision for losses on loans. 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 to operations 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 and five to fifteen years for furniture and equipment. An accelerated method is used for tax reporting purposes. LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2003, 2002 and 2001 NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued) 8. Investment in Real Estate Limited Partnership During 1997, the Corporation invested $1.5 million in a real estate limited partnership for the purpose of constructing and managing residential real estate apartments for low and moderate income residents. The investment reflects a 49.5% participation in the partnership and is accounted for by the Savings Bank using the equity method. The Savings Bank realized after-tax losses from the investment of approximately $55,000, $62,000 and $119,000 during the years ended December 31, 2003, 2002 and 2001, respectively, as well as federal income tax credits of approximately $182,000 for each of the years ended December 31, 2003, 2002 and 2001. This affordable housing project is expected to generate tax credits for the Savings Bank in future years. Of the Savings Bank's total letters of credit of $2.7 million at December 31, 2003, $1.5 million relate to financial guarantees of this limited partnership. Each of these letters of credit is fully collateralized by the partnership's investment in real estate properties. 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 benefit plans, the real estate partnership investment, 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 participate in a defined benefit pension plan (the "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 Plan sponsor has 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. Contributions totaling approximately $116,000 and $31,000 were required to fund the pension liability during the years ended December 31, 2003 and 2002, respectively. No contributions were necessary during the year ended December 31, 2001. The provision for pension expense was computed by the Plan's actuaries by utilizing the projected unit credit cost method and assuming a 7.5% return on Plan assets. LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2003, 2002 and 2001 NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued) 10. Benefit Plans (continued) The Savings Bank has purchased life insurance policies on certain officers and directors. The insurance policies had an approximate cash surrender value of $1.3 million at December 31, 2003 and 2002. 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 $70,000, $69,000 and $63,000 for the years ended December 31, 2003, 2002 and 2001, respectively. 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, 2003, 2002 or 2001. In April 1996, the Corporation's shareholders approved the Logansport Savings Bank, FSB Recognition and Retention Plan and Trust ("RRP"), which provided for the acquisition of up to 52,900 shares of the Corporation's common stock for awards to management. Shares awarded to management under the RRP generally vest at a rate of 20% at the end of each full twelve months of service with the Savings Bank after the date of the award. 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 $21,000, $19,000 and $40,000 for the years ended December 31, 2003, 2002 and 2001, respectively. In April 1999, the Savings Bank implemented a contributory 401(k) plan covering all employees who have attained the age of 21 and have completed one year of service. Contributions to the plan are voluntary and are subject to matching by the Savings Bank. The Savings Bank's expense related to the plan totaled approximately $26,000, $23,000 and $19,000 for the years ended December 31, 2003, 2002 and 2001, respectively. 11. Earnings Per Share Basic earnings per common share is computed based upon the weighted-average number of common shares outstanding during the year. Diluted earnings per common share is computed including the dilutive effect of additional potential common shares issuable under stock option. The computations were as follows for the years ended December 31:
2003 2002 2001 Weighted-average common shares outstanding (basic) 864,026 929,488 1,084,377 Dilutive effect of assumed exercise of stock options 21,486 28,647 19,946 -------- -------- ----------- Weighted-average common shares outstanding (diluted) 885,512 958,135 1,104,323 ======= ======= =========
LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2003, 2002 and 2001 NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued) 11. Earnings Per Share (continued) Options to purchase 2,500 shares of common stock with a weighted-average exercise price of $13.75 were outstanding at December 31, 2001, but were excluded from the computation of diluted earnings per share for 2001 because their exercise prices were greater than the average market price of the common shares. The Corporation had no anti-dilutive securities at December 31, 2003 or 2002. 12. Stock Option Plans Stockholders of the Corporation have approved two stock option plans. The 1996 Plan provided for the issuance of 132,250 shares of common stock at an exercise price equal to the fair value at the date of grant. The 1999 Plan provided for the issuance of 115,000 shares of common stock at an exercise price equal to the fair value at the date of grant. The Corporation 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 Corporation 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 Corporation'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 Corporation's net earnings and earnings per share. A summary of the status of the Corporation's stock option plans as of December 31, 2003, 2002 and 2001, and changes during the years ending on those dates is presented below:
2003 2002 2001 Weighted- Weighted- Weighted- average average average exercise exercise exercise Shares price Shares price Shares price Outstanding at beginning of year 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 year 50,650 $10.56 79,136 $10.63 106,796 $10.61 ======= ====== ======= ====== ======= ====== Options exercisable at year-end 50,650 $10.56 78,636 $10.61 105,796 $10.58 ======= ====== ======= ====== ======= ======
LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2003, 2002 and 2001 NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued) 12. Stock Option Plans (continued) The following information applies to options outstanding at December 31, 2003: Number outstanding 50,650 Range of exercise prices $10.53 - $13.75 Weighted-average exercise price $10.56 Weighted-average remaining contractual life 2.3 years 13. 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. 14. 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. The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments at December 31, 2003 and 2002: 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. 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, commercial 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. LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2003, 2002 and 2001 NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued) 14. Fair Value of Financial Instruments (continued) 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, 2003 and 2002. 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, 2003 and 2002, the difference between the fair value and notional amount of loan commitments was not material. 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:
2003 2002 Carrying Fair Carrying Fair value value value value (In thousands) Financial assets Cash and cash equivalents $ 14,403 $ 14,403 $ 13,517 $ 13,517 Investment securities 12,242 12,242 8,060 8,060 Mortgage-backed securities 20,307 20,307 11,009 11,009 Loans receivable 102,353 102,874 110,386 111,830 Federal Home Loan Bank stock 2,080 2,080 2,003 2,003 --------- --------- --------- --------- $151,385 $151,906 $144,975 $146,419 ======= ======= ======= ======= Financial liabilities Deposits $103,757 $105,333 $ 98,325 $ 99,510 Advances from the Federal Home Loan Bank 34,027 34,219 33,836 34,084 Notes payable 1,919 1,919 1,793 1,793 --------- --------- --------- --------- $139,703 $141,471 $133,954 $135,387 ======= ======= ======= =======
15. Advertising Advertising costs are expensed when incurred. The Corporation's advertising expense totaled $64,000, $68,000 and $56,000 for the years ended December 31, 2003, 2002 and 2001, respectively. LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2003, 2002 and 2001 NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued) 16. Reclassifications Certain prior year amounts have been reclassified to conform to the 2003 consolidated financial statement presentation. 17. Effects of Recent Accounting Pronouncements In June 2002, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 provides financial accounting and reporting guidance for costs associated with exit or disposal activities, including one-time termination benefits, contract termination costs other than for a capital lease, and costs to consolidate facilities or relocate employees. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. Management adopted SFAS No. 146 effective January 1, 2003, as required, without material effect on the Corporation's financial condition or results of operations. In December 2002, the FASB issued 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. Management adopted SFAS No. 148 effective January 1, 2003, as required, without material effect on the Corporation'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 Corporation has financial letters of credit which require the Corporation to make payment if the customer's financial condition deteriorates, as defined in the agreements. FIN 45 requires the Corporation 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 Corporation issues or modifies subsequent to December 31, 2002. Management adopted FIN 45 effective January 1, 2003, as required, without material effect on the Corporation's financial position or results of operations. 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 LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2003, 2002 and 2001 17. Effects of Recent Accounting Pronouncements (continued) 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. Management adopted FIN 46 effective July 1, 2003, as required, without material effect on the Corporation'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 Corporation'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 Corporation). 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 Corporation's financial position or results of operations. LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2003, 2002 and 2001 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, 2003 and 2002, are as follows:
2003 Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value (In thousands) U.S. Government agency obligations $ 8,867 $ 40 $ 95 $ 8,812 State and municipal obligations 3,074 141 3 3,212 FHLMC stock 4 214 - 218 ---------- --- -- -------- Total investment securities $11,945 $395 $ 98 $12,242 ====== === ==== ====== 2002 Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value (In thousands) U.S. Government agency obligations $3,051 $ 71 $ 2 $3,120 State and municipal obligations 3,028 204 - 3,232 Corporate debt obligations 907 76 - 983 Preferred stock 500 3 - 503 FHLMC stock 4 218 - 222 -------- --- -- ------ Total investment securities $7,490 $572 $ 2 $8,060 ===== === ===== =====
The amortized cost and estimated fair value of investment securities by term to maturity at December 31 are shown below.
2003 2002 Estimated Estimated Amortized fair Amortized fair cost value cost value (In thousands) Due in one year or less $ 3,057 $ 3,080 $ 575 $ 582 Due after one year through three years 102 110 2,068 2,149 Due after three years through five years 3,039 3,030 657 688 Due after five years through ten years 4,538 4,530 2,382 2,545 Due after ten years 1,205 1,274 1,304 1,371 ------- ------- ----- ----- 11,941 12,024 6,986 7,335 Preferred stock - - 500 503 FHLMC stock 4 218 4 222 ---------- -------- -------- ------ $11,945 $12,242 $7,490 $8,060 ====== ====== ===== =====
LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2003, 2002 and 2001 NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES (continued) Proceeds from sales of investment securities available for sale during the year ended December 31, 2003, totaled $2.5 million, resulting in gross realized gains of $165,000. Proceeds from sales of investment securities available for sale during the year ended December 31, 2002, totaled $269,000, resulting in gross realized gains of $17,000. The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of mortgage-backed securities at December 31, 2003 and 2002 are presented below.
2003 Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value (In thousands) Federal Home Loan Mortgage Corporation participation certificates $ 588 $ 7 $ 5 $ 590 Government National Mortgage Association participation certificates 15,702 24 164 15,562 Federal National Mortgage Association participation certificates 3,960 41 30 3,971 Small Business Administration participation certificates 187 - 3 184 -------- -- ----- -------- Total mortgage-backed securities $20,437 $ 72 $202 $20,307 ====== ==== === ====== 2002 Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value (In thousands) Federal Home Loan Mortgage Corporation participation certificates $ 548 $ 30 $ - $ 578 Government National Mortgage Association participation certificates 6,919 148 - 7,067 Federal National Mortgage Association participation certificates 2,357 51 - 2,408 Federal Housing Authority participation certificates 641 5 - 646 Small Business Administration participation certificates 314 - 4 310 -------- -- ------ -------- Total mortgage-backed securities $10,779 $234 $ 4 $11,009 ====== === ====== ======
LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2003, 2002 and 2001 NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES (continued) The amortized cost and estimated fair value of mortgage-backed securities at December 31, 2003 and 2002, by contractual terms to maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may generally prepay obligations without prepayment penalties.
2003 2002 Estimated Estimated Amortized fair Amortized fair cost value cost value (In thousands) Due within one year $ 3,857 $ 3,840 $ 1,962 $ 2,000 Due after one year to three years 4,806 4,772 1,748 1,790 Due after three years to five years 2,990 2,968 1,035 1,060 Due after five years to ten years 4,070 4,042 1,754 1,793 Due after ten years 4,714 4,685 4,280 4,366 ------- ------- ------- ------- Total mortgage-backed securities $20,437 $20,307 $10,779 $11,009 ====== ====== ====== ======
Proceeds from sales of mortgage-backed securities available for sale during the year ended December 31, 2003, totaled $14.8 million, resulting in gross realized gains of $121,000. Proceeds from sales of mortgage-backed securities available for sale during the year ended December 31, 2002, totaled $5.0 million, resulting in gross realized gains of $84,000. The table below indicates the length of time individual securities have been in a continuous unrealized loss position at December 31, 2003:
Less than 12 months 12 months or longer Total Description of Number of Fair Unrealized Number of Fair Unrealized Number of Fair Unrealized securities investments value losses investments value losses investments value losses (Dollars in thousands) U.S. Government agency obligations 13 $ 4,281 $ 95 - $- $- 13 $ 4,281 $ 95 State and municipal obligations 2 237 3 - - - 2 237 3 Mortgage-backed securities 9 16,986 200 2 151 2 11 17,137 202 --- ------ --- - --- ----- -- ------ --- Total temporarily impaired securities 24 $21,504 $298 2 $151 $ 2 26 $21,655 $300 == ====== === = === ===== == ====== ===
Management has the intent and ability to hold these securities for the foreseeable future and the decline in the fair value is primarily due to an increase in market interest rates. The fair values are expected to recover as securities approach maturity dates. LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2003, 2002 and 2001 NOTE C - LOANS RECEIVABLE The composition of the loan portfolio at December 31 is as follows: 2003 2002 (In thousands) Residential real estate One- to four-family residential $ 51,208 $ 61,717 Multi-family residential 1,094 1,606 Construction 870 1,317 Nonresidential real estate and land 22,910 20,557 Commercial 12,931 10,924 Commercial leases 4,000 4,352 Consumer and other 11,291 11,694 -------- -------- 104,304 112,167 Less: Undisbursed portion of loans in process 200 323 Allowance for loan losses 1,751 1,458 --------- --------- $102,353 $110,386 ======= ======= 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 $53.0 million, or 52%, of the total loan portfolio at December 31, 2003, and $64.3 million, or 58%, of the total loan portfolio at December 31, 2002. Approximately 75% of these 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. The remaining 25% of these loans have been underwritten with original loan-to-value ratios of greater than 80%. 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. The Savings Bank has sold whole loans and participating interests in loans in the secondary market, retaining servicing on the loans sold. Loans sold and serviced for others totaled approximately $6.1 million at December 31, 2003. The Savings Bank had no loans serviced for others at December 31, 2002. In the normal course of business, the Savings Bank has made loans to its directors, officers and their related business interests. In the opinion of management, such loans are consistent with sound lending practices and are within applicable regulatory lending limitations. Loans to directors, officers and their related interests totaled approximately $2.0 million and $1.7 million at December 31, 2003 and 2002, respectively. LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2003, 2002 and 2001 NOTE D - ALLOWANCE FOR LOAN LOSSES The activity in the allowance for loan losses for the year ended December 31 is as follows: 2003 2002 2001 (In thousands) Beginning balance $1,458 $1,132 $ 760 Provision for losses on loans 360 360 392 Charge-offs of loans - net (67) (34) (20) ------- ------- ------- Ending balance $1,751 $1,458 $1,132 ===== ===== ===== At December 31, 2003, the Savings Bank's allowance for loan losses included a specific allowance of $200,000, related to impaired and nonaccrual loans, and a general loan loss allowance of $1.6 million, which is includible as a component of regulatory risk-based capital. At December 31, 2003, 2002 and 2001, the Savings Bank had loans of $1.5 million, $1.5 million and $1.9 million, respectively, which had been placed on nonaccrual status due to concerns as to borrowers' ability to pay. At December 31, 2003 and 2002, nonaccrual loans include certain loans that had been identified as impaired under SFAS No. 114. Interest income that would have been recognized had nonaccrual loans performed pursuant to contractual terms totaled approximately $115,000, $126,000 and $41,000 for the years ended December 31, 2003, 2002 and 2001, respectively. NOTE E - OFFICE PREMISES AND EQUIPMENT Office premises and equipment is comprised of the following at December 31: 2003 2002 (In thousands) Land $ 203 $ 203 Buildings and improvements 1,766 1,766 Furniture and equipment 523 500 ------ ------ 2,492 2,469 Less accumulated depreciation and amortization (798) (702) ------ ------ $1,694 $1,767 LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2003, 2002 and 2001 NOTE F - DEPOSITS
Deposits consist of the following major classifications at December 31: Deposit type and weighted-average interest rate 2003 2002 (In thousands) NOW accounts 2003 - 0.77% $ 17,021 2002 - 0.80% $15,625 Passbook and club accounts 2003 - 1.02% 4,635 2002 - 1.10% 4,281 Money market deposit accounts 2003 - 1.11% 20,187 2002 - 1.23% 18,766 Non-interest bearing accounts 4,038 3,049 ------- ------- Total demand, transaction and passbook deposits 45,881 41,721 Certificates of deposit Original maturities of: Less than 12 months 2003 - 1.11% 5,866 2002 - 1.78% 6,566 12 months to 18 months 2003 - 1.78% 8,662 2002 - 3.40% 14,605 24 months to 30 months 2003 - 4.26% 19,762 2002 - 4.58% 20,674 More than 30 months 2003 - 4.48% 15,555 2002 - 5.05% 7,810 Individual retirement accounts 2003 - 3.51% 8,031 2002 - 4.76% 6,949 ------------- ------- Total certificates of deposit 57,876 56,604 -------- ------ Total deposits $103,757 $98,325 ======= ======
At December 31, 2003 and 2002, the Savings Bank had certificate of deposit accounts with balances greater than $100,000 totaling $9.9 million and $9.0 million, respectively. LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2003, 2002 and 2001
NOTE F - DEPOSITS (continued) Interest expense on deposits for the year ended December 31 is summarized as follows: 2003 2002 2001 (In thousands) Passbook accounts $ 44 $ 55 $ 100 NOW and money market deposit accounts 303 492 718 Certificates of deposit 2,210 2,415 2,859 ----- ----- ----- $2,557 $2,962 $3,677 ===== ===== =====
Maturities of outstanding certificates of deposit at December 31 are summarized as follows:
2003 2002 (In thousands) Less than one year $29,261 $27,803 One year to three years 17,754 22,211 Over three years 10,861 6,590 ------ ------- $57,876 $56,604 ====== ======
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK Advances from the Federal Home Loan Bank, collateralized at December 31, 2003 by a blanket pledge of residential mortgage loans totaling $47.2 million and pledges of certain securities totaling $7.0 million are summarized as follows:
Maturing year December 31, Interest rate range ending December 31, 2003 2002 (Dollars in thousands) 3.02% 2003 $ - $ 1,000 5.94% 2004 3,000 3,000 5.10% - 6.75% 2005 4,200 4,200 1.89% - 5.30% 2006 2,250 1,500 2.36% - 5.72% 2007 2,581 2,536 2.71% 2008 225 - 3.57% - 5.32% 2009 1,471 1,600 3.30% - 5.99% 2010 17,300 17,000 4.75% 2011 2,000 2,000 4.90% 2012 1,000 1,000 ------- ------- $34,027 $33,836 ====== ====== Weighted-average interest rate 5.47% 5.53% ==== ====
LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2003, 2002 and 2001 NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK (continued) Advances totaling approximately $26.0 million are subject to interest rate increases at the discretion of the Federal Home Loan Bank. Such advances can be repaid by the Savings Bank upon the enactment of such interest rate adjustments. NOTE H - NOTES PAYABLE At December 31, 2003 and 2002, notes payable included borrowings totaling $1.0 million and $1.1 million, respectively, which were secured by the Savings Bank's investment in a real estate limited partnership. The average interest rate on the borrowing was 1.66% and 1.88% at December 31, 2003 and 2002, respectively. The borrowings will mature in 2009. During 2002, the Corporation established a line of credit with another financial institution to partially finance share repurchases. The Corporation can borrow up to $1.5 million on the line of credit, which matures October 3, 2004. The Corporation had an outstanding balance of $900,000 and $700,000 at December 31, 2003 and 2002, respectively. Interest is payable quarterly at national prime less .50%, which amounted to 3.50% and 3.75% at December 31, 2003 and 2002, respectively. The line of credit is secured by a pledge of the Corporation's investment in the stock of the Savings Bank. 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:
2003 2002 2001 (In thousands) Federal income taxes computed at the statutory rate $693 $722 $652 Increase (decrease) in taxes resulting from: Tax exempt interest (54) (46) (42) Increase in cash surrender value of life insurance (9) (9) (19) Real estate partnership tax credits (182) (182) (182) State income tax provision 107 124 113 Other (3) - (1) ----- -- ----- Income tax provision per consolidated financial statements $552 $609 $521 === === ===
LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2003, 2002 and 2001 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 2003 2002 differences at statutory rate: (In thousands) Deferred tax assets: Other than temporary declines in investment securities $ 23 $ 23 Retirement expense 260 235 General loan loss allowance 659 535 Benefit plan expense 77 85 Deferred loan fees 30 40 ------- ---- Total deferred tax assets 1,049 918 Deferred tax liabilities: State income taxes (60) (57) Percentage of earnings bad debt deduction - (12) Unrealized gains on securities designated as available for sale (57) (273) Loss on investment in real estate partnership (199) (163) Book versus tax depreciation (53) (49) Mortgage servicing rights (22) - FHLB stock dividends (39) - ------- -- Total deferred tax liabilities (430) (554) ------ --- Net deferred tax asset $ 619 $364 ====== ===
Prior to 1997, 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, 2003. If the amounts that qualified 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 amount of unrecognized deferred tax liability relating to the cumulative bad debt deduction is approximately $580,000 at December 31, 2003. The Savings Bank was required to recapture as taxable income approximately $220,000, representing its post-1987 percentage of earnings bad debt deductions. The Savings Bank had provided deferred taxes for this amount and was permitted by such legislation to recapture such income over a six-year period, which commenced in 1998. At December 31, 2003, the amount was fully recaptured and, as a result, deferred taxes relating to this item were eliminated. 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. LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2003, 2002 and 2001 NOTE J - COMMITMENTS (continued) 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. At December 31, 2003, the Savings Bank had outstanding commitments of approximately $650,000 to originate residential one- to four-family loans and $393,000 to sell one-to-four family loans. The Savings Bank also had outstanding commitments of approximately $1.4 million to originate non-residential real estate loans and approximately $1.3 million to originate commercial loans at December 31, 2003. Additionally, the Savings Bank had unused lines of credit under home equity loans and commercial loans of approximately $1.2 million and $8.3 million, respectively, at December 31, 2003. Finally, the Savings Bank had commitments under standby letters of credit totaling $2.7 million at December 31, 2003. Standby letters of credit are conditional commitments issued by the Savings Bank to guarantee the performance of a customer to a third party. In the opinion of management, all loan commitments equaled or exceeded prevalent market interest rates as of December 31, 2003, and will be funded from normal cash flow from operations. The Corporation adopted FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"), on January 1, 2003. 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 Corporation issues financial and performance letters of credit. Financial letters of credit require the Corporation to make payment if the customer's financial condition deteriorates, as defined in the agreements. Performance letters of credit require the Corporation to make payments if the customer fails to perform certain non-financial contractual obligations. The approximate terms of these letters of credit are seven years to ten years for financial letters of credit and one year to five years for performance letters of credit. Prior to the adoption of FIN 45, the Corporation did not record a liability, other than for deferred fees received, when guaranteeing obligations unless it became probable that the Corporation would have to perform under the guarantee. The Corporation defines the fair value of these letters of credit as the fees received from the customer. The maximum potential undiscounted amount of future payments of these letters of credit as of December 31, 2003 is $2.7 million, of which approximately $716,000, $506,000, $623,000 and $835,000 expires in the years ended December 31, 2004, 2005, 2007 and 2008, respectively. The Corporation obtains collateral, such as real estate or liens on their customers' assets, for these letters of credit. The Corporation expects that the estimated proceeds obtained on liquidation of collateral would cover approximately 100 percent of the maximum potential amount of future payments under a guarantee. LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2003, 2002 and 2001 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) generally equal to 4.0% of adjusted total assets, except for those associations with the highest examination rating and acceptable levels of risk. 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%. During 2003, the OTS notified the Savings Bank that it was categorized as "well-capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well-capitalized", the Savings Bank must maintain minimum capital ratios as set forth in the following table. As of December 31, 2003 and 2002, management believes that the Savings Bank met all capital adequacy requirements to which it was subject.
2003: 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 $17,044 10.9% ->$2,350 ->1.5% ->$7,833 -> 5.0% Core capital $17,044 10.9% ->$6,266 ->4.0% ->$9,399 -> 6.0% Risk-based capital $18,225 19.4% ->$7,526 ->8.0% ->$9,408 ->10.0% 2002: 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 $15,466 10.3% ->$2,244 ->1.5% ->$7,480 -> 5.0% Core capital $15,466 10.3% ->$5,984 ->4.0% ->$8,975 -> 6.0% Risk-based capital $16,664 17.4% ->$7,664 ->8.0% ->$9,580 ->10.0%
Logansport Financial Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2003, 2002 and 2001 NOTE K - REGULATORY CAPITAL (continued) 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 its primary market area, could adversely affect future earnings and, consequently, the ability to meet future minimum regulatory capital requirements. The Savings Bank is subject to regulations imposed by the OTS regarding the amount of capital distributions payable to the Corporation. Generally, the Savings Bank's payment of dividends is limited, without prior OTS approval, to net earnings for the current calendar year plus the two preceding calendar years, less capital distributions paid over the comparable time period. Insured institutions are required to file an application with the OTS for capital distributions in excess of this limitation. During 2001, the Savings Bank received OTS approval to make up to $2.0 million in capital distributions to the Corporation. Of this amount, dividend payments of $950,000 and $1,050,000 were paid in 2002 and 2001, respectively. During 2002, the Savings Bank received OTS approval to make up to $2.25 million in capital distributions to the Corporation, all of which was paid in 2002. The Savings Bank did not request OTS approval for payment of dividends or capital distributions to the Corporation in 2003 and no dividends were paid during the year ended December 31, 2003. NOTE L - CONDENSED FINANCIAL STATEMENTS OF LOGANSPORT FINANCIAL CORP. The following condensed financial statements summarize the financial position of Logansport Financial Corp. as of December 31, 2003 and 2002, and the results of its operations and cash flows for the years ended December 31, 2003, 2002 and 2001.
LOGANSPORT FINANCIAL CORP. STATEMENTS OF FINANCIAL CONDITION December 31, 2003 and 2002 (In thousands) ASSETS 2003 2002 Cash and cash equivalents $ 111 $ 77 Investment in subsidiary 17,159 15,994 Prepaid expenses and other 122 123 -------- -------- Total assets $17,392 $16,194 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Notes payable $ 900 $ 700 Accrued expenses and other liabilities 136 121 -------- -------- Total liabilities 1,036 821 Shareholders' equity Common stock 1,824 1,446 Retained earnings 14,445 13,444 Shares acquired by stock benefit plan (23) (44) Unrealized gains on securities designated as available for sale, net 110 527 -------- -------- Total shareholders' equity 16,356 15,373 ------ ------ Total liabilities and shareholders' equity $17,392 $16,194 ====== ======
LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2003, 2002 and 2001 NOTE L - CONDENSED FINANCIAL STATEMENTS OF LOGANSPORT FINANCIAL CORP. (continued) LOGANSPORT FINANCIAL CORP. STATEMENTS OF EARNINGS Years ended December 31, 2003, 2002 and 2001 (In thousands) 2003 2002 2001 Revenue Interest income $ - $ - $ 14 Equity in earnings of subsidiary 1,562 1,589 1,436 ----- ----- ----- Total revenue 1,562 1,589 1,450 General and administrative expenses 126 115 77 ------ ------ ------- Earnings before income tax credits 1,436 1,474 1,373 Income tax credits (50) (40) (25) ------- ------- ------- NET EARNINGS $1,486 $1,514 $1,398 ===== ===== =====
LOGANSPORT FINANCIAL CORP. STATEMENTS OF CASH FLOWS Years ended December 31, 2003, 2002 and 2001 (In thousands) 2003 2002 2001 Cash flows provided by (used in) operating activities: Net earnings for the year $1,486 $1,514 $1,398 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Excess distributions from (undistributed earnings of) consolidated subsidiary (1,562) 1,610 (86) Increase (decrease) in cash due to changes in: Accrued expenses and other liabilities 16 (5) 5 Other 1 (29) (70) -------- ------- ------- Net cash provided by (used in) operating activities (59) 3,090 1,247 Cash flows provided by (used in) financing activities: Proceeds from notes payable 200 700 - Proceeds from exercise of stock options 378 369 208 Dividends on common stock (485) (478) (516) Purchase of shares - (3,725) (921) ----- ----- ------ Net cash provided by (used in) financing activities 93 (3,134) (1,229) ------- ----- ----- Net increase (decrease) in cash and cash equivalents 34 (44) 18 Cash and cash equivalents at beginning of year 77 121 103 ------- ------ ------ Cash and cash equivalents at end of year $ 111 $ 77 $ 121 ====== ======= ======
LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2003, 2002 and 2001 NOTE M - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following table summarizes the Corporation's quarterly results for the years ended December 31, 2003 and 2002. Certain amounts, as previously reported, may have been reclassified to conform to the 2003 presentation. Three Months Ended March 31, June 30, September 30, December 31, 2003: (In thousands, except per share data) Total interest income $2,195 $2,172 $2,148 $2,087 Total interest expense 1,117 1,136 1,140 1,099 ----- ----- ----- ----- Net interest income 1,078 1,036 1,008 988 Provision for losses on loans 90 90 90 90 Other income 141 272 86 162 General, administrative and other expense 620 590 572 591 ------ ------ ------ ------ Earnings before income taxes 509 628 432 469 Income taxes 145 191 112 104 ------ ------ ------ ------ Net earnings $ 364 $ 437 $ 320 $ 365 ====== ====== ====== ====== Earnings per share: Basic $.43 $.51 $.36 $.42 === === === === Diluted $.41 $.50 $.36 $.41 === === === === Three Months Ended March 31, June 30, September 30, December 31, 2002: (In thousands, except per share data) Total interest income $2,302 $2,346 $2,352 $2,326 Total interest expense 1,247 1,219 1,215 1,196 ----- ----- ----- ----- Net interest income 1,055 1,127 1,137 1,130 Provision for losses on loans 90 90 90 90 Other income 51 82 58 161 General, administrative and other expense 575 603 579 561 ------ ------ ------ ------ Earnings before income taxes 441 516 526 640 Income taxes 121 145 151 192 ------ ------ ------ ------ Net earnings $ 320 $ 371 $ 375 $ 448 ====== ====== ====== ====== Earnings per share: Basic $.32 $.39 $.41 $.51 === === === === Diluted $.31 $.38 $.39 $.50 === === === ===
MARKET PRICE OF LOGANSPORT FINANCIAL CORP. 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 11, 2004, there were 809 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 years ended December 31, 2003 and 2002. Such price information was obtained from Nasdaq. Per share Year ending December 31, High Low dividends 2003 Quarter ending: December 31, 2003 $22.45 $18.85 $0.14 September 30, 2003 20.50 17.53 0.14 June 30, 2003 18.52 17.00 0.14 March 31, 2003 18.00 15.78 0.14 2002 Quarter ending: December 31, 2002 $17.13 $14.40 $0.14 September 30, 2002 17.85 16.90 0.13 June 30, 2002 18.15 17.01 0.13 March 31, 2002 17.59 15.00 0.12 TRANSFER AGENT AND REGISTRAR. Registrar and Transfer Company is the Company's stock transfer agent and registrar and maintains the Company's shareholder records. Shareholders requiring a change of name, address or ownership of stock, as well as information about shareholder records, lost or stolen certificates, dividend checks, or dividend direct deposit should contact: Registrar and Transfer Company 10 Commerce Drive Cranford, New Jersey 07016 (800) 368-5948 http://www.rtco.com GENERAL COUNSEL. INDEPENDENT AUDITORS. 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, 2003 with the Securities and Exchange Commission. Copies of this annual report may be obtained on our website or without charge upon written request to: Dottye Robeson, Secretary/Treasurer Logansport Financial Corp. 723 East Broadway, Box 569 Logansport, Indiana 46947 (574) 722-3855 extension 313 www.logansportsavings.com OFFICE LOCATION. 723 East Broadway Logansport, Indiana 46947 (574) 722-3855 Fax - (574) 722-3857 Email - dottyer@logansportsavings.com EX-14 4 log_10kex14.txt EX. 14 - CODE OF ETHICS Exhibit 14 LOGANSPORT FINANCIAL CORP. CODE OF ETHICS GENERAL The Corporation and its wholly owned subsidiary, LOGANSPORT SAVINGS BANK is committed to conducting its business in accordance with the highest ethical standards and has adopted the principles set forth below as corporate policy. It is the Corporation's policy that no officer, employee or director should place him or herself in a position where his/her actions, personal interests or the activities or interests of those for whom he/she acts is in conflict with the interests of the Corporation or its subsidiaries. All employees and directors of the Corporation or its subsidiaries are to review this policy and agree to comply with the principles set forth herein. RELATIONSHIPS WITH OUTSIDE BUSINESS INTERESTS Employees/directors owe loyalty to the Corporation. There can be no self-dealing or self-interest in any transaction involving the Corporation or its subsidiaries. Officers/directors should be particularly cautious to avoid compromising their responsibilities to the Corporation or its subsidiaries by becoming an employee of, investing in, or accepting interests in the Corporation or its subsidiaries' customers, suppliers, or their various business interests. As a general rule, a prohibited conflict exists whenever such activity entails an account relationship in which the officer/director is responsible or influential in exercising control. Employees shall not engage in the conduct of any business outside the Corporation or have any outside employment or consulting arrangement unless such business or arrangement does not interfere with the satisfactory work performance for the Corporation and does not have any actual potential conflict with Corporation or its subsidiaries business. Employees must give prior notice to the President of the Corporation before accepting a second position of employment or a consulting arrangement. At no time shall an employee or director of the Corporation hold a position of employment with a thrift, bank, brokerage house, other financial institution that is not controlled by the Corporation, or a public utility, while in the employ of the Corporation. Each employee shall disclose to the President of the Corporation all existing employment and consulting arrangements with entities other than the Corporation and shall obtain prior approval before any such future involvements. Further disclosure must be made regarding any interest an employee/director or his/ her immediate family has in a non-public enterprise, or a material interest in a public enterprise if: (1) the enterprise is a substantial competitor of the Corporation; (2) the enterprise borrows from the Corporation; (3) the enterprise is a supplier of the Corporation; or (4) the employee/director deals directly with the enterprise in its purchase, receipt of goods, services, or securities. Whenever an employee/director finds that he or she is inadvertently placed in a potentially compromising position due to relationships with business associates, customers, suppliers, or competitors, the employee/director shall report the matter immediately to the President of the Corporation and discontinue any activities associated with the entity until the matter has been resolved. Any loan or payment made between the Corporation and any entity in which an employee/director has a material financial interest must be described in detail, with full disclosure of the conflict, to the Corporation's Board of Directors. Any employee/director involved with, or having knowledge of, such transaction involving a conflict of interest shall fully disclose his or her involvement or the transaction (if not previously disclosed) to the Corporation's President or any member of the Corporation's Board of Directors. SUPERVISOR ROLE Under no circumstances shall an employee perform any role in supervising, evaluating or influencing the job evaluation, pay or benefits of any immediate family member (spouse, parent, child, sibling or fiance). FIDUCIARY RELATIONSHIPS Employees/directors may not accept appointment as an administrator, trustee, executor, guardian or any similar fiduciary capacity without prior approval of the President, except when acting at the request of the Corporation or as a fiduciary on a family account. PURCHASE OF CORPORATION AND FIDUCIARY ASSETS No employee/director of the Corporation shall purchase any assets owned by the Corporation in which the employee/director knows the Corporation has a security interest or other lien, unless prior approval has been obtained, full value is paid for the asset, and the transaction is completely and properly documented on the books of the Corporation. No employee/director of the Corporation and no member of the immediate family of the employee/director, whether acting individually or in fiduciary capacity shall purchase or borrow any assets from or sell any assets to any estate, trust or other fiduciary account being administered by the Corporation except in accordance with laws and regulations governing such transactions. OUTSIDE DIRECTORSHIPS, PARTNERSHIPS, SOLE PROPRIETORSHIPS Prior notice to the President is required before an employee/director accepts a position as officer or director of a corporation, becomes a member of a business partnership, or becomes sole proprietor of a corporation or business. Prior notice is not necessary for acceptance of a position as an officer or director of any corporation that is for social, fraternal, professional, educational, charitable, civic or religious purposes. Participation as an individual investor in limited partnerships does not require Corporation prior notice unless the Corporation is a lender to or has another business relationship with the partnership and/or the employee/director holds a dominant position in the partnership. All such relationships, however, shall be reported on an annual basis to the Corporation. An employee/director of the Corporation or its subsidiaries should not serve as a director or officer of a non-affiliated financial institution without specific written approval of the President. When an employee/director is serving on a board of directors at the request of the Corporation, fees and other remuneration shall be turned over to the Corporation. When serving not at the request of the Corporation, remuneration may be kept. OUTSIDE NON-BUSINESS ACTIVITIES Employees/directors are encouraged and urged to participate in civic or charitable organizations in the communities they serve, provided such participation is not in conflict with the Corporation's objectives and does not unduly interfere with regular duties. Employees/directors who participate in such activities for civic or charitable organizations must abstain from making or participating in decisions of the Corporation to make contributions to any such organizations. The Corporation also encourages participation in business and professional organizations. If such activities involve inordinate amounts of time away from responsibilities, prior approval of the employee's supervisor must be obtained. Supplies, material and other property belonging to the Corporation may not be used in more than an incidental way in the performance of such activities. ILLEGAL AND UNETHICAL ACTS The following unethical or illegal acts by employees/directors are prohibited: o Theft, fraud, embezzlement, misappropriation, or any form of wrongful conversion of property belonging to the Corporation or another employee/director. o Any act of fraud or deception involving the Corporation, a customer, a supplier or any other party. o Any act of bribery, including a premise, offer or gift of money or anything of value made or offered by an employee/director to: (a) A government official or someone acting for the government. (b) A person employed by, or acting on behalf of, a customer, supplier or other organization with which the Corporation does business or has prospective business. o Any dishonest or unethical act by any employee/director against the Corporation. o The destruction or alteration of Corporation records in order to falsify, conceal or misrepresent information to: (a) Avoid criticism for errors of judgment or to conceal failure to follow a supervisor's instructions. (b) Show a performance record better than, or different from, performance actually achieved. (c) Misrepresent the employee's/director's performance, activities, or other transactions, or those of another employee/director. o Political contributions of money, services, or other property of the Corporation that are in violation of the law when the contributions are made. o Violations of securities laws rules or regulations, including failure to disclose material information that should be described in filings the Corporation makes with the Securities and Exchange Commission and banking regulators. GIFTS AND FEES Employees/directors and their families may not solicit or accept gifts, fees, bequests, services or entertainment from customers, suppliers or prospective customers. A gift is regarded as any type of gratuity, favor, loan, legacy, fee, compensation, or anything of monetary value. All such gifts are prohibited except: o Business entertainment and other courtesies such as meals, sporting events, and the like, which involve no more than ordinary amenities, and can be properly reciprocated by the employee and charged as a business expense. Lavish or extravagant entertainment, such as weekend trips, etc., should not be accepted unless reimbursement is made to the donor. o Gifts received because of kinship, marriage, or social relationships and not because of any business relationship. o Unsolicited advertising or promotional materials that are generally available. o Customer or supplier paid travel or lodging where the trip has a legitimate business purpose. Any such trips must be approved in advance in writing by the President of the Corporation. o Fees or other compensation received from an organization in which membership or an official position is held, subject to prior written approval and possible requirement to pay such compensation to the Corporation. Employees/directors who believe that acceptance of a permitted gift might make them feel obligated and therefore improperly influenced in the performance of their duties should not accept it, or turn it over to the Corporation. Employees/directors who are unsure whether a gift is violative of the law and these standards, should seek guidance from the Corporation's President. Likewise, no individual representing the Corporation or members of his or her family may extend a gift to any existing or prospective customer or supplier that will not meet these same criteria. All gifts received or extended which are in the categories above and are valued in excess of $200 should be reported to your manager or the President. All gifts which do not fit the above guidelines, no matter what the value, should be reported to your manager or the President. From time to time employees are asked to speak, testify, or consult with outside organizations and regulators. An honorarium or gift in excess of $25.00 for such outside activity shall be reported to your manager or the President for determination of the disposition of the honorarium. Employees/directors may not accept from customers or suppliers any fee or other form of remuneration which violates the law or the spirit of this statement. Employees/directors and members of their immediate families should not, except under very exceptional circumstances, accept directly or indirectly any bequest or legacy from a customer of the Corporation. If the employee/director learns of such a legacy in a customer's will, the employee/director must report all pertinent facts as soon as he or she learns of the legacy. In any event, an employee/director may not accept such a bequest or legacy that arises from relationships solely based upon the Corporation's position unless approved by the President. No employee/director may accept a personal fee for arranging a loan from the Corporation or from any other person or lending institution. BORROWING Employees/directors are not to borrow from customers or suppliers of the Corporation, except those who engage in lending in the usual course of their business and then only on terms offered to others in similar circumstances. This prohibition does not preclude borrowing from anyone related to the employee/director by blood or marriage. Borrowing from the Corporation must be in accordance with law and regulation and the policies established by the Corporation. Except as provided below, the Corporation may not directly or indirectly extend or maintain credit, arrange for the extension of credit, or renew an extension of credit, in the form of a personal loan to or for any of its directors or executive officers. Notwithstanding the foregoing, loans may be made by Logansport Savings Bank, FSB that otherwise comply with Regulation O under the Federal Reserve Act and applicable Office of Thrift Supervision regulations. Reports of borrowings will be requested from time to time from all levels of Corporation officers to meet both regulatory requirements and Corporation policy. All officers shall submit such summary reports when requested, or reports of new borrowings in a timely fashion. MISAPPROPRIATION OF BUSINESS OPPORTUNITIES The Corporation may be interested in business or investment opportunities made known to employees/directors. An employee/director is expected to advise the Corporation of such opportunities or investments before acting upon them personally. Any transaction causing a conflict may be approved by the Board of Directors after appropriate disclosure. DISCLOSURES IN PUBLIC FILINGS The Corporation's filings made under the Securities Exchange Act of 1934, such as quarterly and annual reports and proxy statements, are to contain full, fair, accurate, timely, and understandable disclosures. All press releases and shareholder communications must also contain such disclosures. The Corporation has procedures in place to achieve these goals with respect to securities reports and shareholder communications. Any employee/director who has concerns about disclosures being made in these documents should feel free to contact any member of the Corporation's Audit Committee or of the Corporation's Board of Directors including the President of the Corporation. ACCOUNTING MATTERS The Corporation's financial statements and books and records on which they are based must accurately reflect all corporate transactions. All receipts and disbursements of corporate funds shall be promptly and properly recorded on the Corporation's books, and the Corporation's records must disclose the nature and purpose of the transactions. All financial officers shall cooperate fully with the independent auditors of the Corporation and under no circumstances withhold any information from them. The Corporation's investors, creditors and other decision makers rely on its records and have a right to information which is timely and accurate. A director, officer or employee may not maintain the Corporation's accounting or other records, or cause them to be maintained, in such a way that they do not reflect the true nature of transactions, account balances or other matters with clarity and completeness. A director, officer or employee may not establish for any purpose an unauthorized, undisclosed, or unrecorded fund or asset account involving Corporation assets. A director, officer or employee may not allow transactions with a supplier, agent, or customer to be structured or recorded in a way not consistent with normal business practice or generally accepted accounting principles. No false or artificial entries shall be made on the books or records of the Corporation or its subsidiaries for any reason. No payment on behalf of the Corporation shall be made or approved with the understanding that it will or might be used for something other than the stated purposes. The shifting of charges or costs to inappropriate accounts is prohibited by Corporation policy. No false, incomplete or misleading entries or records shall be created. No undisclosed or unrecorded corporate funds shall be established for any purpose, nor shall the Corporation funds be placed in any personal or noncorporate account. "Slush funds" or similar off-book accounts, where there is no accounting for receipts or expenditures on corporate books, are prohibited. A system of internal accounting controls shall be maintained which is sufficient to provide reasonable assurances that transactions: (a) are executed in accordance with Management's authorization. (b) are recorded in a manner that permits preparation of financial statements in conformity with generally accepted accounting principles and other applicable criteria; and (c) are recorded so as to maintain accountability for the Corporation's assets. No officer, employee, or director acting on behalf of the Corporation shall engage in any activity which circumvents the Corporation's systems of internal controls. CERTIFICATIONS Employees/directors will be required annually to certify their understanding of and intent to comply with this Policy Statement. Any employee/director who violates the Policy Statement is subject to possible suspension or discharge. Any employee/director who assists in, or knowingly fails to report, a violation of these policies is also subject to suspension, discharge or other appropriate action. Any employee/director who suspects a violation of these policies (including any material transaction or relationship that gives rise to a conflict of interest which to the knowledge of such employee/director has not been disclosed to the appropriate persons) should inform his or her superior, or the Corporation's President or any member of the Corporation's Board of Directors. Any supervisor informed of a suspected violation shall notify the Corporation's President or any member of the Corporation's Board of Directors. EX-23 5 log_10kex23.txt EX. 23 - ACCOUNTANT'S CONSENT Exhibit 23 ACCOUNTANT'S CONSENT We consent to the incorporation by reference in the Registration Statements on Form S-8, File Nos. 333-88125 and 333-12897, of our report dated January 30, 2004 contained in the 2003 Annual Report to Shareholders of Logansport Financial Corporation, which is incorporated by reference in this Form 10-K. /s/ GRANT THORNTON LLP Cincinnati, Ohio March 26, 2004 EX-31 6 log_10kex311.txt EX. 31.1 - CEO CERTIFICATION Exhibit 31(1) CERTIFICATION I, David G. Wihebrink, certify that: 1. I have reviewed this annual report on Form 10-K of Logansport Financial Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 29, 2004 /s/ David G. Wihebrink --------------------------------------- David G. Wihebrink President and Chief Executive Officer EX-31 7 log_10kex312.txt EX. 31.2 - TREASURER CERTIFICATION Exhibit 31(2) CERTIFICATION I, Dottye Robeson, certify that: 1. I have reviewed this annual report on Form 10-K of Logansport Financial Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 29, 2004 /s/ Dottye Robeson ---------------------------------------- Dottye Robeson Secretary/Treasurer EX-32 8 log_10kex32.txt EX. 32 - 906 CERTIFICATION Exhibit 32 CERTIFICATION By signing below, each of the undersigned officers hereby certifies pursuant to 18 U.S.C. Section1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his or her knowledge, (i) this report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Logansport Financial Corp. Signed this 29th day of March 2004. /s/ Dottye Robeson /s/ David G. Wihebrink - --------------------------------- ---------------------------------------- (Signature of Authorized Officer) (Signature of Authorized Officer) Dottye Robeson David G. Wihebrink - --------------------------------- ---------------------------------------- (Typed Name) (Typed Name) Secretary/Treasurer President and Chief Executive Officer - --------------------------------- ---------------------------------------- (Title) (Title) A signed original of this written statement required by Section 906 has been provided to and is being retained by Logansport Financial Corporation and will be forwarded to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----