-----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, WncYplMrsqjKxE0IwCZyjqisoeKBIUc+q5y8Uc/Ml2ZitHDvw3+U4pNVV/MZ7sOy 9yUfbCjGvcE4TOfL2e0GMg== 0000908834-98-000083.txt : 19980331 0000908834-98-000083.hdr.sgml : 19980331 ACCESSION NUMBER: 0000908834-98-000083 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NASD 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: SEC FILE NUMBER: 000-25910 FILM NUMBER: 98578798 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 LOGONSPORT FINANCIAL CORPORATION'S 10-K 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, 1997 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____________ to _______________ Commission File Number 0-25910 LOGANSPORT FINANCIAL CORP. (Exact name of registrant as specified in its charter) INDIANA 35-1945736 (State or other Jurisdiction (I.R.S. Employer Identification of Incorporation or Organization) Number) 723 East Broadway, Logansport, Indiana 46947 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number including area code: (219) 722-3855 Securities Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, without par value (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405, Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of the issuer's voting stock held by non-affiliates, as of March 25, 1998, was $20,678,436. The number of shares of the Registrant's Common Stock, without par value, outstanding as of March 25, 1998, was 1,261,100 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the year ended December 31, 1997, are incorporated into Part II. Portions of the Proxy Statement for the 1998 Annual Meeting of Shareholders are incorporated in Part I and Part III. Exhibit Index on Page 32 Page 1 of 31 Pages LOGANSPORT FINANCIAL CORP. Form 10-K INDEX Page Forward Looking Statements................................................. 1 PART I Item 1. Business...................................................... 1 Item 2. Properties.................................................... 25 Item 3. Legal Proceedings............................................. 25 Item 4. Submission of Matters to a Vote of Security Holders........... 25 Item 4.5. Executive Officers of Registrant.............................. 25 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 26 Item 6. Selected Financial Data....................................... 27 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 27 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 27 Item 8. Financial Statements and Supplementary Data................... 27 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................... 27 PART III Item 10. Directors and Executive Officers of Registrant................ 28 Item 11. Executive Compensation........................................ 28 Item 12. Security Ownership of Certain Beneficial Owners and Management.............................................. 28 Item 13. Certain Relationships and Related Transactions................ 28 PART IV Item 14. 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 changes in interest rates; loss of deposits and loan demand to other savings and financial institutions; substantial changes in financial markets; changes in real estate values and the real estate market; regulatory changes; or unanticipated results in pending legal proceedings. PART I Item 1. Business. General Logansport Financial Corp. (the "Holding Company" and, together with the Bank (as defined below), the "Company") is an Indiana corporation organized in February, 1995, to become a unitary savings and loan holding company. The Holding Company became a unitary savings and loan holding company upon the conversion of Logansport Savings Bank, FSB (the "Bank") from a federal mutual savings bank to a federal stock savings bank on June 13, 1995. The principal asset of the Holding Company consists of 100% of the issued and outstanding shares of common stock, $.01 par value per share, of the Bank. The Bank began operations in Logansport, Indiana under the name Logansport Building and Loan Association in 1925. In 1962, the Bank changed its name to Logansport Savings and Loan Association, and in 1992, the Bank converted to a federally charted savings bank known as Logansport Savings Bank, FSB. The Bank serves the needs of residents of primarily Cass County, Indiana. The Bank is the oldest financial institution headquartered in Logansport, Indiana. Management believes the Bank has developed a solid reputation among its loyal customer base because of its commitment to personal service and its strong support of the local community. The Bank offers a number of consumer and commercial financial services. These services include: (i) residential real estate loans; (ii) home equity loans; (iii) home improvement loans; (iv) construction loans; (v) share loans; (vi) commercial real estate loans; (vii) multi-family loans; (viii) consumer loans; (ix) NOW accounts; (x) passbook savings accounts; (xi) certificates of deposit; (xii) consumer and commercial demand deposit accounts; and (xiii) individual retirement accounts. The Holding Company and the Bank conduct business out of their main office located in Logansport, Indiana. The Bank is and historically has been a significant real estate mortgage lender in Cass County, Indiana, originating approximately 27.8% of the mortgage loan volume recorded in Cass County by Cass County institutions during the year ended December 31, 1997. 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 72.5% of the Company's total loan portfolio at December 31, 1997. The Bank also offers multi-family mortgage loans, commercial real estate loans, construction loans, and consumer loans. Mortgage loans secured by multi-family properties and commercial real estate totaled approximately 2.9% and 5.0%, respectively, of the Company's total loan portfolio at December 31, 1997. Residential, multi-family and commercial real estate construction loans constituted approximately 2.1% of the Company's total loan portfolio at December 31, 1997. Installment, share, home equity, and home improvement loans constituted approximately 8.4%, .5%, 1.1%, and 7.8%, respectively, of the Company's total loan portfolio at December 31, 1997. 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, 1997 1996 1995 1994 1993 --------------- --------------- ---------------- ---------------- ---------------- Percent Percent Percent Percent Percent Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- (Dollars in thousands) TYPE OF LOAN Mortgage loans: Residential................. $46,419 72.48% $41,109 72.05% $36,608 73.15% $33,402 74.92% $28,942 74.39% Commercial real estate...... 3,072 4.80 2,701 4.73 1,620 3.24 2,718 6.10 2,667 6.85 Multi-family................ 1,844 2.88 2,370 4.15 1,915 3.83 722 1.62 549 1.41 Construction: Residential ................ 1,333 2.08 574 1.01 575 1.15 330 .74 1,170 3.00 Commercial real estate............... --- --- 194 .34 198 .39 --- --- --- --- Multi-family................ --- --- 248 .43 250 .50 680 1.52 427 1.10 Commercial paper .............. --- --- --- --- 878 1.75 500 1.12 --- --- Consumer loans: Installment (2)............. 5,409 8.44 4,615 8.09 3,729 7.45 2,778 6.23 2,072 5.33 Share ...................... 313 .49 286 .50 219 .44 244 .55 183 .47 Home equity................. 685 1.07 595 1.04 398 .79 300 .67 393 1.01 Home improvement............ 4,972 7.76 4,368 7.66 3,656 7.31 2,911 6.53 2,505 6.44 ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Gross loans receivable.... $64,047 100.00% $57,060 100.00% $50,046 100.00% $44,585 100.00% $38,908 100.00% ======= ====== ======= ====== ======= ====== ======= ====== ======= ====== TYPE OF SECURITY Residential (1)............. 53,409 83.39% $46,689 81.83% $41,407 82.74% $36,943 82.86% $33,010 84.84% Commercial real estate...... 3,212 5.02 2,895 5.07 1,818 3.63 2,718 6.10 2,667 6.86 Multi-family................ 1,844 2.88 2,618 4.59 2,165 4.33 1,402 3.14 976 2.51 Deposits.................... 313 .49 286 .50 219 .44 244 .55 183 .47 Auto........................ 2,148 3.35 2,042 3.58 1,288 2.57 1,005 2.26 799 2.05 Consumer residential (2).... 1,617 2.52 1,074 1.88 1,232 2.46 846 1.90 447 1.15 Other security.............. 1,504 2.35 1,456 2.55 1,039 2.08 917 2.05 683 1.75 Unsecured (3)............... --- --- --- --- 878 1.75 510 1.14 143 .37 ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Gross loans receivable.... 64,047 100.00% 57,060 100.00% 50,046 100.00 44,585 100.00 38,908 100.00 Deduct: Allowance for loan losses...... 245 .38 236 .41 223 .45 206 .46 201 .52 Loans in process............... 167 .26 22 .04 116 .23 359 .81 856 2.20 Net loans receivable........ $63,635 99.36% $56,802 99.55% $49,707 99.32% $44,020 98.73% $37,851 97.28% Mortgage Loans: Adjustable-rate............. 42,984 81.61 38,729 82.06 $34,715 84.33% $31,057 82.05% $27,760 82.24% Fixed-rate.................. 9,684 18.39 8,467 17.94 6,451 15.67 6,795 17.95 5,995 17.76 ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Total..................... $52,668 100.00% $47,196 100.00% $41,166 100.00% $37,852 100.00% $33,755 100.00% ======= ====== ======= ====== ======= ====== ======= ====== ======= ======
(1) Includes home equity, residential construction and home improvement loans. (2) Includes "one-pay" notes due in less than one year secured by residential real estate. (3) Includes commercial paper and bankers' acceptances. The following table sets forth certain information at December 31, 1997, 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 2001 2003 2008 2013 at December 31, to to to and 1997 1998 1999 2000 2002 2007 2012 following ------- ------ ----- ------ ------ ------- ------- --------- (In thousands) Mortgage loans: Residential .................... $47,752 $1,395 $ 29 $ 137 $ 857 $7,269 $13,084 $24,981 Multi-family.................... 1,844 --- --- --- --- 854 990 --- Commercial real estate.......... 3,072 1 4 1 76 1,028 1,421 541 Commercial paper................... --- --- --- --- --- --- --- --- Consumer loans: Home improvement................ 4,972 32 170 582 806 2,082 1,150 150 Home equity..................... 685 --- --- --- --- --- 685 --- Installment..................... 5,409 2,633 495 720 1,174 134 253 --- Share........................... 313 313 --- --- --- --- --- --- ------- ------ ---- ------ ------ ------- ------- ------- Total ............................ $64,047 $4,374 $698 $1,440 $2,913 $11,367 $17,583 $25,672 ======= ====== ==== ====== ====== ======= ======= =======
The following table sets forth, as of December 31, 1997, the dollar amount of all loans due after one year which have fixed interest rates and floating or adjustable rates. Due After December 31, 1998 ---------------------------------------- Fixed Rates Variable Rates Total ----------- -------------- ----- (In thousands) Mortgage loans: Residential ................... $ 8,387 $37,970 $46,357 Multi-family................... --- 1,844 1,844 Commercial real estate......... 1,274 1,797 3,071 Consumer loans: Home improvement............... 4,940 --- 4,940 Home equity.................... --- 685 685 Installment.................... 2,776 --- 2,776 ------- ------- ------- Total........................ $17,377 $42,296 $59,673 ======= ======= ======= Residential Loans. Residential loans consist primarily of one- to four-family loans. Approximately $46.4 million, or 72.5% of the Company's portfolio of loans at December 31, 1997, consisted of one- to four-family residential mortgage loans, of which approximately 81.6% had adjustable rates. The Bank currently offers adjustable-rate one- to four-family residential mortgage loans ("ARMs") which adjust annually and are indexed to the one-year U.S. Treasury securities yields adjusted to a constant maturity. These ARMs have a current margin above such index of 2.75%, or 3.00% if interest is amortized and payments are due bi-weekly, and interest rate minimums equal to the rate at the time of origination. Many of the residential ARMs in the Company's portfolio at December 31, 1997 provided for a maximum rate adjustment per year of 1%, although the Bank began originating residential ARMs which provide for a maximum rate adjustment of 2% per year in 1995. The Bank's residential ARMs provide for a maximum rate adjustment of 5% over the life of the loan. These ARMs generally bear terms of between 15 and 25 years. The Bank also currently offers fixed-rate loans which provide for the payment of principal and interest over a period not to exceed 15 years. At December 31, 1997, 18.4% of the Company's residential mortgage loans had fixed rates of interest. The Bank does not currently originate residential mortgage loans if the ratio of the loan amount to the lesser of current cost or appraised value of the property (i.e., the "loan-to-value ratio") exceeds 90% and does not currently require private mortgage insurance on its residential single-family mortgage loans. Substantially all of the residential mortgage loans that the Bank originates include "due-on-sale" clauses, which give the Bank the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the real property subject to the mortgage and the loan is not repaid. The Bank's residential mortgage loans are not originated on terms and conditions and using documentation that conform with the standard underwriting criteria required to sell such loans on the secondary market. The Bank generally retains its loans in its portfolio and does not anticipate the need to sell its non-conforming loans. See "-- Origination, Purchase and Sale of Loans." At December 31, 1997, residential loans amounting to $350,000, or .55% of total loans, were included in non-performing assets. See "-- Non-Performing and Problem Assets." Commercial Real Estate Loans. At December 31, 1997, $3.1 million, or 4.8% of the Company's total loan portfolio, consisted of commercial real estate loans. Of these loans, $439,000 constituted participations in loans secured by commercial real estate which were purchased from other financial institutions. The commercial real estate loans included in the Company's portfolio are primarily secured by non-residential real estate such as small office buildings, nursing homes and churches. The Bank currently originates commercial real estate loans as adjustable-rate loans indexed to the one-year U.S. Treasury securities yields adjusted to a constant maturity with a margin of 4.75% above such index or as fixed rate loans. Many of the commercial real estate loans in the Company's portfolio at December 31, 1997 provided for a maximum rate adjustment per year of 1%, although the Bank began originating commercial real estate ARMs which provide for a maximum rate adjustment of 2% per year in 1995. In addition, the maximum rate adjustment over the life of the loan is 5%, and these loans have a maximum loan-to-value ratio of 80%. The Bank underwrites these loans on a case-by-case basis and, in addition to its normal underwriting criteria, the Bank evaluates the borrower's ability to service the debt from the net operating income of the property. No single commercial real estate loan at December 31, 1997 exceeded $307,000. No commercial real estate loans were included in non-performing assets at that date. Loans secured by commercial real estate generally are larger than one- to four-family residential loans and involve a greater degree of risk. Commercial real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Payments on these loans depend to a large degree on results of operations and management of the properties and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. Accordingly, the nature of the loans makes them more difficult for management to monitor and evaluate. Multi-Family Loans. Approximately $1.8 million, or 2.9% of the Company's portfolio of loans at December 31, 1997, 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, 1997, none of the multi-family loans included in the Company's portfolio was included in non-performing assets. Construction Loans. The Bank offers construction loans with respect to owner-occupied residential real estate and, in limited cases, to builders or developers constructing such properties on a speculative investment basis (i.e., before the builder/developer obtains a commitment from a buyer). The Bank may also purchase participations. At December 31, 1997, $1.3 million, or 2.1%, of the Company's total loan portfolio consisted of construction loans. All construction loans at December 31, 1997 were residential loans. The largest construction loan at December 31, 1997, was approximately $273,000 which included the construction of residential home and the purchase of land acreage. No construction loans were included in non-performing assets on that date. Construction loans originated by the Bank are written such that interest only is payable during the construction phase, which is typically limited to six (6) months, and following the construction phase, a permanent loan is made. Inspections are made prior to any disbursement under a construction loan. 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 $11.4 million as of December 31, 1997, or 17.8% 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 Bank's consumer loans originated by the Bank, except home equity loans, are fixed-rate loans, and substantially all are secured loans. Installment loans, totaling $5.4 million, or 8.4% of total loans at December 31, 1997, are fixed-rate loans generally secured by collateral, including automobiles, and are made for maximum terms of up to 10 years (depending on the collateral). The Bank's installment loans also include "one-pay" notes, some of which are secured by residential real estate and all of which amortize at rates similar to those for home improvement loans and have maximum terms of 6 months to one year. Share loans, totaling $313,000, or .5% of total loans at December 31, 1997, are made up to 80% of the original account balance and accrue at a rate of 2-3% over the underlying certificate of deposit rate. Interest on share loans is paid quarterly. Home improvement loans totaled $5.0 million, or 7.8% of the Company's total loan portfolio at December 31, 1997, and are close-ended fixed-rate loans made for maximum terms up to 15 years. The Bank's home improvement loans are generally made only to those borrowers for whom the Bank holds the primary mortgage on the property, if any. The Bank also offers open-ended lines of credit secured by a lien on the equity in the borrower's home in amounts up to 90% of the appraised value of the real estate (taking into account any other mortgages on the property). The Bank's home equity loans are adjustable-rate loans with interest rates equal to the national prime rate plus 2%, and payments equal to the greater of 2% of the outstanding loan balance or $50. The Bank's home equity loans are generally made only to those borrowers for whom the Bank holds the primary mortgage on the property, if any, and generally have a maximum term of 15 years. At December 31, 1997, the Bank had approved $1,245,000 of home equity loans, of which $685,000 were outstanding. The Bank also offers credit cards to its customers, but does not underwrite the credit cards or have any other credit risk with respect to the cards. The Company earns a fee upon the origination of the credit card accounts. To date, the income earned by the Company from offering these credit cards has not been significant. As a general rule, consumer loans involve a higher level of risk than one- to four-family residential mortgage loans because consumer loans are generally made based upon the borrower's ability to repay the loan, which is subject to change, rather than the value of the underlying collateral, if any. However, the relatively higher yields and shorter terms to maturity of consumer loans are believed to be helpful in reducing interest-rate risk. The Bank has thus far been successful in managing consumer loan risk. As of December 31, 1997, consumer loans totaling $81,000 were included in non-performing assets. Letters of Credit Securing Tax-Exempt Bonds. The Bank currently maintains three 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. The issuer of the tax-exempt bonds is permitted to draw against these letters of credit only in the event it defaults in making payments required under the bonds, and any such draws made against the letters of credit would be secured by a mortgage on the subject housing project. No draws against any letters of credit had been made as of December 31, 1997. Origination, Purchase and Sale of Loans. In an effort to control costs incurred by its mortgage customers, the Bank currently originates its mortgage loans pursuant to its own underwriting standards which are not in conformity with the standard criteria of the Federal Home Loan Mortgage Corporation ("FHLMC") or Federal National Mortgage Association ("FNMA"). If it desired to sell its mortgage loans, the Bank might therefore experience some difficulty selling such loans quickly in the secondary market. The Bank has no intention, however, of attempting to sell such loans. The Bank's ARMs vary from secondary market criteria because, among other things, the Bank does not require current property surveys in most cases and does not require escrow accounts for taxes and insurance. The Bank confines its loan origination activities primarily to Cass County, Indiana. At December 31, 1997, no loans were secured by property located outside of Indiana. The Bank's loan originations are generated from referrals from real estate dealers and existing customers, and newspaper and periodical advertising. All loan applications are processed and underwritten at the Bank's main office. Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), a savings association generally may not make any loan to a borrower or its related entities if the total of all such loans by the savings association exceeds 15% of its capital (plus up to an additional 10% of capital in the case of loans fully collateralized by readily marketable collateral); provided, however, that loans up to $500,000 regardless of the percentage limitations may be made and certain housing development loans of up to $30 million or 30% of capital, whichever is less, are permitted. The maximum amount which the Bank could have loaned to one borrower and the borrower's related entities under the 15% of capital limitation was $2.5 million at December 31, 1997. 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. Secured loans up to $75,000 may be approved by the Senior Loan Officer, and secured loans up to $150,000 may be approved by the President or the Executive Committee. Loans up to $250,000 may be approved by the Loan Committee. All loans for more than $250,000 must be approved in advance by the Board of Directors. The Bank generally requires appraisals on all property securing its loans and requires title insurance or an abstract and a valid lien on its mortgaged real estate. Appraisals for residential real property are generally performed by an in-house appraiser who is a state-licensed residential appraiser. From time to time, the Bank also uses the services of certified residential appraisers who are not in-house, including for loans in excess of $250,000. The Bank requires fire and extended coverage insurance in amounts at least equal to the principal amount of the loan. It also requires flood insurance to protect the property securing its interest if the property is in a flood plain. The Bank's underwriting standards for consumer loans are intended to protect against some of the risks inherent in making consumer loans. Borrower character, paying habits and financial strengths are important considerations. The Bank historically has not participated in the secondary market as a seller of its mortgage loans, but does occasionally purchase participations in commercial real estate and multi-family loans from other financial institutions. The following table shows loan origination, purchase and repayment activity for the Bank during the periods indicated.
Year Ended December 31, 1997 1996 1995 ------- --------- --------- (In thousands) Gross loans receivable at beginning of period..................... $57,060 $50,046 $44,585 Originations: Mortgage loans: Residential.............................. 13,102 11,277 8,323 Commercial real estate and multi-family........................... 417 1,885 318 ------- ------- ------- Total mortgage loans..................... 13,519 13,162 8,641 Consumer loans: Installment.............................. 3,476 3,757 3,129 Share.................................... 101 259 88 Home improvement......................... 2,510 1,774 1,435 Home equity.............................. 163 319 104 ------- ------- ------- Total consumer loans................... 6,250 6,109 4,756 ------- ------- ------- Total originations................ 19,769 19,271 13,397 Purchases: Commercial real estate and multi-family.. --- 1,046 1,010 Commercial paper......................... --- --- 3,842 ------- ------- ------- Total originations and purchases....... 19,769 20,317 18,249 Repayments: Commercial paper......................... --- 878 3,464 Other loans and deductions............... 12,782 12,425 9,324 ------- ------- ------- Gross loans receivable at end of period.... $64,047 $57,060 $50,046 ======= ======= =======
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 $200 plus closing costs on its adjustable-rate mortgage loans. Points may be charged on fixed-rate loans. Late charges are generally assessed if payment is not received within a specified number of days after it is due. The grace period depends on the individual loan documents. Non-Performing and Problem Assets Mortgage loans are reviewed by the Bank on a regular basis and are placed on a non-accrual status when the loans become contractually past due ninety days or more. At the end of each month, delinquency notices are sent with respect to all mortgage loans for which payments have not been received. Contact by phone or in person is made, if feasible, with respect to all such loans. When loans are sixty days in default, an additional delinquency notice is sent and personal contact is made with the borrower to establish an acceptable repayment schedule. When loans are ninety days in default, contact is made with the borrower by the Senior Loan Officer who attempts to establish an acceptable repayment schedule. Management is authorized to commence foreclosure proceedings for any loan upon making a determination that it is prudent to do so. All loans for which foreclosure proceedings have been commenced are placed on non-accrual status. Consumer loans are reviewed by the Bank on a daily basis. Notices are sent to borrowers when any consumer loan is 5, 10 and 15 days past due. After consumer loans are 15 days delinquent, a late fee in the amount of 10% of the payment is imposed until the loan is brought current. Non-Performing Assets. At December 31, 1997, $537,000, or .62% 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 $406,000, or .52%, of the Company's total assets at December 31, 1996. At December 31, 1997, residential loans, multi-family loans, commercial real estate loans, consumer loans and REO accounted for 65.2%, 0%, 0%, 15.1% and 19.7%, respectively, of non-performing assets. There were no non-accruing investments at December 31, 1997. The table below sets forth the amounts and categories of the Company's non-performing assets (non-accruing investments, non-accruing loans, and real estate owned). It is the policy of the Company that all earned but uncollected interest on all loans be reviewed monthly to determine if any portion thereof should be classified as uncollectible for any loan past due in excess of 90 days.
At December 31, 1997 1996 1995 1994 1993 ---- ---- ---- ----- ----- (Dollars in thousands) Non-accruing investments (1).................. $ --- $ --- $ --- $ 150 $ 181 Non-accruing loans (2)........................ 431 406 311 337 597 Real estate owned, net........................ 106 --- --- --- --- ---- ---- ---- ----- ----- Total non-performing assets................ $537 $406 $311 $ 487 $ 778 ==== ==== ==== ===== ===== Non-performing loans to total loans, net (3).. .67% .71% .63% .76% 1.57% Non-performing assets to total assets......... .62 .52 .42 .82 1.38
- --------------- (1) Non-accruing investments consist of certain corporate obligations at market value for 1994 since included in securities available for sale and at book value prior to 1994 since included in securities held to maturity. The book value at December 31, 1994 of corporate obligations was $90,000. Income collected and recorded on these securities during 1996 was $4,700. (2) The Company generally places loans on a non-accruing status when the loans become contractually past due 90 days or more. At December 31, 1997, $350,000 of non-accruing loans were residential loans and $81,000 were consumer loans. For the year ended December 31, 1997, the income that would have been recorded had the non-accruing loans not been in a non-performing status totaled $36,000 compared to actual income recorded of $12,000. (3) Total loans less loans in process. Classified Assets. Federal regulations and the Bank's Internal Loan Review policy provide for the classification of loans and other assets such as debt and equity securities considered by the OTS to be of lesser quality as "substandard," "doubtful" or "loss" assets. An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the association will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated "special mention" by management. An insured institution is required to establish general allowances for loan losses in an amount deemed prudent by management for loans classified substandard or doubtful, as well as for other problem loans. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as "loss," it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount. An institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS which can order the establishment of additional general or specific loss allowances. At December 31, 1997, the aggregate amount of the Company's classified assets, and of the Company's general and specific loss allowances were as follows: At December 31, 1997 -------------------- (In thousands) Substandard loans......................................... $431 Doubtful loans............................................ --- Loss loans................................................ --- ---- Total classified loans................................. $431 General loss allowances................................... $245 ==== Specific loss allowances.................................. --- ---- Total allowances....................................... $245 ==== The Company regularly reviews its loan portfolio to determine whether any loans require classification in accordance with applicable regulations. Allowance for Loan Losses The allowance for loan losses is maintained through the provision for loan losses, which is charged to earnings. The provision for loan losses is determined in conjunction with management's review and evaluation of current economic conditions (including those of the Bank's lending area), changes in the character and size of the loan portfolio, loan delinquencies (current status as well as past and anticipated trends) and adequacy of collateral securing loan delinquencies, historical and estimated net charge-offs, and other pertinent information derived from a review of the loan portfolio. In management's opinion, the Company's allowance for loan losses is adequate to absorb anticipated future losses from loans at December 31, 1997. However, there can be no assurance that regulators, when reviewing the Company's loan portfolio in the future, will not require increases in its allowances for loan losses or that changes in economic conditions will not adversely affect the Company's loan portfolio. Summary of Loan Loss Experience. The following table analyzes changes in the allowance for loan losses during the past five (5) one-year periods ended December 31, 1997.
Year Ended December 31, 1997 1996 1995 1994 1993 ----- ----- ----- ----- ----- (Dollars in thousands) Balance of allowance at beginning of period................................ $ 236 $ 223 $ 206 $ 201 $ 86 Recoveries.................................. 1 1 --- --- --- Less charge-offs: Residential real estate loans............ 10 --- --- --- --- Consumer loans........................... 8 --- 3 1 46 ----- ----- ----- ----- ----- Net charge-offs............................. 18 --- 3 1 46 Provisions for losses on loans.............. 26 12 20 6 161 ----- ----- ----- ----- ----- Balance of allowance at end of period....... $245 $236 $223 $ 206 $ 201 ===== ===== ===== ===== ===== Net charge-offs to total average loans receivable for period............ .03 --- (*) (*) .13% Allowance at end of period to net loans receivable at end of period (1).......................... .38 .41 .45 .47 .53 Allowance to total non-performing loans at end of period................. 56.84 58.12 71.61 61.13 33.67
- ------------------- (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, 1997 1996 1995 1994 1993 ---------------- ---------------- ---------------- --------------- --------------- 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.................. $193 72.48% $158 72.05% $122 73.15% $103 74.92% $108 74.39% Commercial real estate....... 6 4.80 6 4.73 6 3.24 6 6.10 7 6.85 Multi-family................. 1 2.88 1 4.15 1 3.83 2 1.62 1 1.41 Construction loans........... --- 2.08 --- 1.78 --- 2.04 --- 2.26 --- 4.10 Commercial paper and bankers' acceptances...... --- --- --- --- --- 1.75 --- 1.12 --- --- Consumer loans............... 45 17.76 71 17.29 86 15.99 80 13.98 72 13.25 Unallocated.................. --- --- --- --- 8 --- 15 --- 13 --- ---- ------ ---- ------ ---- ------ ---- ------ ---- ------ Total..................... $245 100.00% $236 100.00% $223 100.00% $206 100.00% $201 100.00% ==== ====== ==== ====== ==== ====== ==== ====== ==== ======
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, interest rate risk, and prudent asset/liability management. The Company's investments consist of U.S. government and other agency securities, mortgage- and other asset-backed securities, state and municipal bonds, corporate obligations, marketable equity securities, certificates of deposit, and FHLB stock. At December 31, 1997, approximately $16.3 million, or 18.9% of the Company's total assets, consisted of such investments. At December 31, 1997, the Company had $9.9 million of mortgage- and other asset-backed securities outstanding, all of which were classified as available for sale. Other-asset backed securities include securities backed by automobile receivables. These fixed-rate mortgage- and other asset-backed securities may be used as collateral for borrowings and through repayments, as a source of liquidity. Mortgage- and other asset-backed securities offer yields above those available for investments of comparable credit quality and duration. Mortgage-backed securities are qualifying thrift investments under the Qualified Thrift Lender test. See "Regulation--Qualified Thrift Lender." The following table sets forth the carrying value and market value of the Company's investments and mortgage- and other asset-backed securities at the dates indicated.
At December 31, 1997 1996 1995 -------------------- ---------------------- ----------------------- Carrying Market Carrying Market Carrying Market Value Value Value Value Value Value ----- ----- ----- ----- ----- ----- (In thousands) Securities available for sale: Federal agencies................... $3,598 $3,451 $ 5,245 $ 4,880 $ 7,424 $ 7,175 State and municipal................ 1,780 1,847 2,194 2,242 2,229 2,294 Mortgage- and other asset-backed securities....................... 9,998 9,932 6,768 6,674 7,422 7,468 Corporate obligations.............. 200 209 350 348 1,655 1,696 Marketable equity securities....... 6 243 6 159 6 120 ------- ------- ------- ------- ------- ------- Total securities available for sale............... 15,582 15,682 14,563 14,303 18,736 18,753 ------- ------- ------- ------- ------- ------- Certificate of deposit (1)............ 100 100 100 100 100 100 FHLB stock (1)........................ 494 494 387 387 348 348 ------- ------- ------- ------- ------- ------- Total investments................ $16,176 $16,276 $15,050 $14,790 $19,184 $19,201 ======= ======= ======= ======= ======= =======
(1) Market value approximates carrying values. Included in the Company's investment portfolio at December 31, 1997 were approximately $1.1 million (amortized cost) in derivative securities, which were structured notes issued by the FHLBs. The fair value of these investments was approximately $948,000 at December 31, 1997. These structured notes, which are not obligations of, or guaranteed by, the United States, represent obligations to repay principal with interest that is either fixed or fluctuates in accordance with an interest formula tied to various indices. The interest on the Company's structured notes generally adjusts quarterly or semi-annually based on certain indices such as the LIBOR and the CMT. Approximately $1.1 million (amortized cost) of these structured notes with approximate fair value of $948,000 had fluctuating interest rates that adjust in the opposite direction of changes in the index to which it is tied or that adjust on the basis of a formula tied to two different indices, such as the CMT and an inverse LIBOR rate. All of these inversely or dually indexed securities were classified as available for sale at December 31, 1997. The average yield at December 31, 1997, of these derivative securities, was 3.43%. In a rising interest rate environment, it is anticipated that the yield on and market value of these securities will decline, and may decline substantially. 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, 1997.
Amount at December 31, 1997, which matures in One One to Five to Over Year or Less Five Years Ten Years Ten Years ------------------- ------------------ ------------------ -------------------- Weighted Weighted Weighted Weighted Carrying Average Carrying Average Carrying Average Carrying Average Value Yield Value Yield Value Yield Value Yield ----- ----- ----- ----- ----- ----- ----- ----- (Dollars in thousands) Securities available for sale (1)(3) : Federal agencies.............. $ --- ---% $ 300 3.31% $3,098 6.21% $ 200 7.29% State and municipal (2)....... 356 6.38 175 5.04 1,239 5.36 10 7.25 Mortgage- and other asset-backed securities.... 1,927 5.84 3,634 6.40 1,825 7.20 2,612 7.70 Corporate obligations......... --- --- --- --- 100 7.29 100 7.41 Marketable equity securities.. --- --- --- --- --- --- 6 41.35 ------ ---- ------ ---- ------ ---- ------ ---- Total securities available for sale....... 2,283 5.92 4,109 6.12 6,262 6.35 2,928 7.73 ------ ---- ------ ---- ------ ---- ------ ---- Certificate of deposit........... --- --- --- --- --- --- 100 7.10 FHLB stock....................... --- --- --- --- --- --- 494 8.00 ------ ---- ------ ---- ------ ---- ------ ---- Total investments........... $2,283 5.92% $4,109 6.12% $6,262 6.35% $3,522 7.75% ====== ==== ====== ==== ====== ==== ====== ====
- -------------- (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. In 1988 and 1989, the Bank purchased three investments in revenue bonds with an aggregate par value of $370,000 for an approximate purchase price of $359,000. The proceeds of the bonds were to be invested in low income housing projects. Pending investment in the housing projects, the proceeds were invested in municipal guaranteed investment contracts backed by the former Executive Life Insurance Company ("ELIC"). ELIC was placed into conservatorship by the California Commissioner of Insurance on April 11, 1991. Liquidation and rehabilitation of ELIC has proceeded in an orderly manner which has resulted in substantial payment of these bonds to date. As of December 31, 1997, the Company had received principal and interest payments of $366,000 on these bonds, had recognized losses to date of $54,000 and had ceased carrying the bonds on its books. The Company anticipates receiving further payments on these bonds, although the timing of such payments is not known. Sources of Funds General. Deposits have traditionally been the Bank's primary source of funds for use in lending and investment activities. In addition to deposits, the Company derives funds from scheduled loan payments, loan prepayments, retained earnings and income on earning assets. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition. Borrowings from the FHLB of Indianapolis may be used in the short-term to compensate for reductions in deposits or deposit inflows at less than projected levels. The Bank rarely borrows on a longer-term basis, for example, to support expanded activities or to assist in its asset/liability management. Deposits. Deposits are attracted, principally from within Cass County, through the offering of a broad selection of deposit instruments including NOW and other transaction accounts, fixed-rate certificates of deposit, individual retirement accounts, and savings accounts. The Bank does not actively solicit or advertise for deposits outside of Cass County. Substantially all of the Bank's depositors are residents of that county. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds remain on deposit and the interest rate. The Bank does not pay a fee for any deposits it receives. Deposits totaled $60.6 million at December 31, 1997. 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, 1997, is as follows:
Minimum Balance at Weighted Opening December 31, % of Average Type of Account Balance 1997 Deposits Rate - --------------- ------- ------------ -------- ---------- (Dollars in thousands) Withdrawable: Passbook savings accounts......................... $ 10 $ 3,070 5.07% 3.00% Regular money market accounts..................... 2,500 1,050 1.73 3.23 Hi yield money market accounts.................... 10,000 15,686 25.89 4.70 Super NOW accounts................................ 2,500 464 .76 2.48 NOW and other transaction accounts................ 200 3,732 6.16 1.93 Other transaction accounts........................ 100 862 1.42 --- ------- ------ Total withdrawable................................... 24,864 41.03 3.80 ------- ------ Certificates (original terms): 91 days........................................... 1,000 362 .60 4.75 6 months.......................................... 1,000 3,541 5.84 5.04 12 months......................................... 1,000 5,751 9.49 5.38 18 months......................................... 500 1,019 1.68 5.65 24 months......................................... 500 10,530 17.38 5.55 30 months......................................... 500 6,282 10.37 5.82 60 months......................................... 1,000 3,552 5.86 5.53 IRAs 18 months......................................... 100 4,694 7.75 5.63 ------- ------ Total certificates................................... 35,731 58.97 5.52 ------- ------ Total deposits ...................................... $60,595 100.00% 4.82% ======= ====== ====
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, 1997 1996 1995 --------- --------------- --------- (In thousands) 4.00% and under..... $ 136 $ 199 $ 125 4.01 - 6.00 %....... 35,087 32,499 27,648 6.01 - 8.00%........ 508 1,285 3,202 ------- ------- ------- Total ............. $35,731 $33,983 $30,975 ======= ======= ======= The following table represents, by various interest rate categories, the amounts of time deposits maturing during each of the three years following December 31, 1997, and the total amount maturing thereafter. Matured certificates which have not been renewed as of December 31, 1997, have been allocated based upon certain rollover assumptions:
Amounts At December 31, 1997, Maturing in One Year Two Three Greater Than or Less Years Years Three Years ------- ----- ----- ----------- (In thousands) 4.00% and under.... $ 136 $ --- $ --- $ --- 4.01 - 6.00 %...... 22,287 7,665 3,947 1,188 6.01-8.00%......... 100 154 223 31 ------- ------ ------ ------ Total ............ $22,523 $7,819 $4,170 $1,219 ======= ====== ====== ======
The following table indicates the amount of the Bank's certificates of deposit of $100,000 or more by time remaining until maturity as of December 31, 1997. Maturity (In thousands) -------- -------------- Three months or less.............................. $ 711 Greater than three months through six months........................... 1,056 Greater than six months through twelve months........................ 1,489 Over twelve months................................ 539 ------ Total........................................ $3,795 ====== 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, 1997 Deposits 1996 1996 Deposits 1995 ------- ------ ------ ------- ------ ------ (Dollars in thousands) Withdrawable: Passbook savings accounts............ $3,070 5.07% $ (49) $ 3,119 5.43% $ (77) Regular money market accounts........ 1,050 1.73 (108) 1,158 2.02 (179) Hi yield money market accounts....... 15,686 25.89 1,198 14,488 25.24 1,796 Super NOW accounts................... 464 .76 (222) 686 1.20 124 NOW accounts......................... 3,732 6.16 401 3,331 5.80 101 Other transaction accounts........... 862 1.42 231 631 1.10 162 ------- ------ ------ ------- ------ ------ Total withdrawable...................... 24,864 41.03 1,451 23,413 40.79 1,927 ------- ------ ------ ------- ------ ------ Certificates (original terms): 91 days.............................. 362 .60 43 319 .56 (621) 6 months............................. 3,541 5.84 (1,023) 4,564 7.95 1,056 12 months............................ 5,751 9.49 789 4,962 8.65 (310) 18 months............................ 1,019 1.68 75 944 1.64 (149) 24 months............................ 10,530 17.38 (930) 11,460 19.97 4,236 30 months............................ 6,282 10.37 2,952 3,330 5.80 (1,231) 60 months............................ 3,552 5.86 (205) 3,757 6.54 (401) IRAs 18 months............................ 4,694 7.75 47 4,647 8.10 428 ------- ------ ------ ------- ------ ------ Total certificates...................... 35,731 58.97 1,748 33,983 59.21 3,008 ------- ------ ------ ------- ------ ------ Total deposits.......................... $60,595 100.00% $3,199 $57,396 100.00% $4,935 ======= ====== ====== ======= ====== ======
Deposit Activity Increase (Decrease) Balance at from December 31, % of December 31, 1995 Deposits 1994 -------------------------------- (Dollars in thousands) Withdrawable: Passbook savings accounts......... $ 3,196 6.09% $ (50) Regular money market accounts..... 1,337 2.55 13 Hi yield money market accounts.... 12,692 24.19 1,101 Super NOW accounts................ 562 1.07 (213) NOW accounts...................... 3,230 6.16 732 Other transaction................. 469 .90 3 ------- ------ ------ Total withdrawable................... 21,486 40.96 1,586 Certificates (original terms): 91 days........................... 940 1.79 (126) 6 months.......................... 3,508 6.69 (312) 12 months......................... 5,272 10.05 2,657 18 months......................... 1,093 2.08 461 24 months......................... 7,224 13.77 (1,131) 30 months......................... 4,561 8.69 (1,807) 60 months......................... 4,158 7.93 (19) IRAs 18 months......................... 4,219 8.04 (50) ------- ------ ------ Total certificates................... 30,975 59.04 (327) ------- ------ ------ Total deposits ...................... $52,461 100.00% $1,259 ======= ====== ====== 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, 1997, the Company had $4.0 million in borrowings from the FHLB of Indianapolis which mature within one year and $2.5 million which mature in one to two years and had a weighted average interest rate of 5.79%. The Company does not anticipate any difficulty in obtaining advances appropriate to meet its requirements in the future. The Company also had a $1.5 million note payable to another bank due on March 5, 1997. It was secured by 100% of the Bank's common stock, and the interest was at the prime rate. This note was repaid on January 16, 1997. Employees As of December 31, 1997, the Bank employed 11 persons on a full-time basis and four persons on a part-time basis. None of the Bank's employees are represented by a collective bargaining group. Management considers its employee relations to be excellent. The Bank's employee benefits for full-time employees include, among other things, a Financial Institutions Retirement Fund ("FIRF" or the "Pension Plan") defined benefit pension plan and major medical and long-term disability insurance. Employee benefits are considered by management to be competitive with those offered by other financial institutions and major employers in the Bank's market area. See "Executive Compensation and Related Transactions." Competition The Bank operates in North Central Indiana and makes almost all of its loans to and accepts most of its deposits from residents of Cass County in Indiana. The Bank is subject to competition from various financial institutions, including state and national banks, state and federal savings institutions, credit unions, certain non-banking consumer lenders, and other companies or firms, including brokerage houses and mortgage brokers, that provide similar services in Cass County. The Bank must also compete with money market funds and with insurance companies with respect to its individual retirement accounts. See "Regulation--Acquisitions or Dispositions and Branching." The primary factors in competing for deposits are interest rates and convenience of office locations. The Bank competes for loan originations primarily through the efficiency and quality of services it provides borrowers and through interest rates and loan fees it charges. Competition is affected by, among other things, the general availability of lendable funds, general and local economic conditions, current interest rate levels, and other factors which are not readily predictable. REGULATION General As a federally chartered, SAIF-insured savings association, the Bank is subject to extensive regulation by the OTS and the FDIC. For example, the Bank must obtain OTS approval before it may engage in certain activities and must file reports with the OTS regarding its activities and financial condition. The OTS periodically examines the Bank's books and records and, in conjunction with the FDIC in certain situations, has examination and enforcement powers. This supervision and regulation are intended primarily for the protection of depositors and the federal deposit insurance funds. The Bank's semi- annual assessment owed to the OTS, which is based upon a specified percentage of assets, is approximately $14,000. The Bank is also subject to federal and state regulation as to such matters as loans to officers, directors, or principal shareholders, required reserves, limitations as to the nature and amount of its loans and investments, regulatory approval of any merger or consolidation, issuance or retirements of securities, and limitations upon other aspects of banking operations. In addition, the Bank's activities and operations are subject to a number of additional detailed, complex and sometimes overlapping federal and state laws and regulations. These include state usury and consumer credit laws, state laws relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Community Reinvestment Act, anti-redlining legislation and antitrust laws. The United States Congress is considering legislation that would require all federal savings associations, such as the Bank, to either convert to a national bank or a state-chartered bank by a specified date to be determined. In addition, under the legislation, the Holding Company likely would not be regulated as a savings and loan holding company but rather as a bank holding company. This proposed legislation would abolish the OTS and transfer its functions among the other federal banking regulators. Certain aspects of the legislation remain to be resolved and, therefore, no assurance can be given as to whether or in what form the legislation will be enacted or its effect on the Holding Company and the Bank. Savings and Loan Holding Company Regulation As the holding company for the Bank, the Holding Company is regulated as a "non-diversified savings and loan holding company" within the meaning of the Home Owners' Loan Act, as amended ("HOLA"), and subject to regulatory oversight by the Director of the OTS. As such, the Holding Company is registered with the OTS and thereby subject to OTS regulations, examinations, supervision and reporting requirements. As a subsidiary of a savings and loan holding company, the Bank is subject to certain restrictions in its dealings with the Holding Company and with other companies affiliated with the Holding Company. In general, the HOLA prohibits a savings and loan holding company, without prior approval of the Director of the OTS, from acquiring control of another savings association or savings and loan holding company or retaining more than 5% of the voting shares of a savings association or of another holding company which is not a subsidiary. The HOLA also restricts the ability of a director or officer of the Holding Company, or any person who owns more than 25% of the Holding Company's stock, from acquiring control of another savings association or savings and loan holding company without obtaining the prior approval of the Director of the OTS. The Holding Company's Board of Directors presently intends to continue to operate the Holding Company as a unitary savings and loan holding company. OTS regulations generally do not restrict the permissible business activities of a unitary savings and loan holding company. Notwithstanding the above rules as to permissible business activities of unitary savings and loan holding companies, if the savings association subsidiary of such a holding company fails to meet the Qualified Thrift Lender ("QTL") test, then such unitary holding company would become subject to the activities restrictions applicable to multiple holding companies. (Additional restrictions on securing advances from the FHLB also apply.) At December 31, 1997, the Bank's asset composition was in excess of that required to qualify as a Qualified Thrift Lender. If the Holding Company were to acquire control of another savings association other than through a merger or other business combination with the Bank, the Holding Company would thereupon become a multiple savings and loan holding company. Except where such acquisition is pursuant to the authority to approve emergency thrift acquisitions and where each subsidiary savings association meets the QTL test, the activities of the Holding Company and any of its subsidiaries (other than the Bank or other subsidiary savings associations) would thereafter be subject to further restrictions. The HOLA provides that, among other things, no multiple savings and loan holding company or subsidiary thereof which is not a savings association shall commence or continue for a limited period of time after becoming a multiple savings and loan holding company or subsidiary thereof, any business activity other than (i) furnishing or performing management services for a subsidiary savings association, (ii) conducting an insurance agency or escrow business, (iii) holding, managing, or liquidating assets owned by or acquired from a subsidiary savings association, (iv) holding or managing properties used or occupied by a subsidiary savings association, (v) acting as trustee under deeds of trust, (vi) those activities previously directly authorized by the FSLIC by regulation as of March 5, 1987, to be engaged in by multiple holding companies, or (vii) those activities authorized by the Federal Reserve Board (the "FRB") as permissible for bank holding companies, unless the Director of the OTS by regulation prohibits or limits such activities for savings and loan holding companies. Those activities described in (vii) above must also be approved by the Director of the OTS before a multiple holding company may engage in such activities. The Director of the OTS may also approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings associations in more than one state, if the multiple savings and loan holding company involved controls a savings association which operated a home or branch office in the state of the association to be acquired as of March 5, 1987, or if the laws of the state in which the association to be acquired is located specifically permit associations to be acquired by state-chartered associations or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings associations). Also, the Director of the OTS may approve an acquisition resulting in a multiple savings and loan holding company controlling savings associations in more than one state in the case of certain emergency thrift acquisitions. Indiana law permits federal and state savings association holding companies with their home offices located outside of Indiana to acquire savings associations whose home offices are located in Indiana and savings association holding companies with their principal place of business in Indiana ("Indiana Savings Association Holding Companies") upon receipt of approval by the Indiana Department of Financial Institutions. Moreover, Indiana Savings Association Holding Companies may acquire savings associations with their home offices located outside of Indiana and savings association holding companies with their principal place of business located outside of Indiana upon receipt of approval by the Indiana Department of Financial Institutions. No subsidiary savings association of a savings and loan holding company may declare or pay a dividend on its permanent or nonwithdrawable stock unless it first gives the Director of the OTS 30 days advance notice of such declaration and payment. Any dividend declared during such period or without giving notice shall be invalid. Federal Home Loan Bank System The Bank is a member of the FHLB of Indianapolis, which is one of 12 regional FHLBs. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from funds deposited by savings associations and proceeds derived from the sale of consolidated obligations of the FHLB system. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the FHLB. All FHLB advances must be fully secured by sufficient collateral as determined by the FHLB. The Federal Housing Finance Board ("FHFB"), an independent agency, controls the FHLB System, including the FHLB of Indianapolis. As a member, the Bank is required to purchase and maintain stock in the FHLB of Indianapolis in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans, home purchase contracts, or similar obligations at the beginning of each year. At December 31, 1997, the Bank's investment in stock of the FHLB of Indianapolis was $494,000. The FHLB imposes various limitations on advances such as limiting the amount of certain types of real estate-related collateral to 30% of a member's capital and limiting total advances to a member. Interest rates charged for advances vary depending upon maturity, the cost of funds to the FHLB of Indianapolis and the purpose of the borrowing. The FHLBs are required to provide funds for the resolution of troubled savings associations and to contribute to affordable housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have adversely affected the level of FHLB dividends paid and could continue to do so in the future. For the fiscal year ended December 31, 1997, dividends paid by the FHLB of Indianapolis to the Bank totaled approximately $37,000, for an annual rate of 8.00%. Insurance of Deposits Deposit Insurance. The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of banks and thrifts and safeguards the safety and soundness of the banking and thrift industries. The FDIC administers two separate insurance funds, the Bank Insurance Fund (the "BIF") for commercial banks and state savings banks and the SAIF for savings associations such as the Bank and banks that have acquired deposits from savings associations. The FDIC is required to maintain designated levels of reserves in each fund. As of September 30, 1996, the reserves of the SAIF were below the level required by law, primarily because a significant portion of the assessments paid into the SAIF have been used to pay the cost of prior thrift failures, while the reserves of the BIF met the level required by law in May, 1996. However, on September 30, 1996, provisions designed to recapitalize the SAIF and eliminate the premium disparity between the BIF and SAIF were signed into law. See "-- Assessments" below. Assessments. The FDIC is authorized to establish separate annual assessment rates for deposit insurance for members of the BIF and members of the SAIF. The FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to the target level within a reasonable time and may decrease these rates if the target level has been met. The FDIC has established a risk-based assessment system for both SAIF and BIF members. Under this system, assessments vary depending on the risk the institution poses to its deposit insurance fund. An institution's risk level is determined based on its capital level and the FDIC's level of supervisory concern about the institution. On September 30, 1996, President Clinton signed into law legislation which included provisions designed to recapitalize the SAIF and eliminate the significant premium disparity between the BIF and the SAIF. Under the new law, the Bank was charged a one-time special assessment equal to $.657 per $100 in assessable deposits at March 31, 1996. The Bank paid this one-time assessment of $335,000 in November 1996. This special assessment significantly increased noninterest expense and adversely affected the Holding Company's results of Operations for the three months ended September 30, 1996. The assessment was fully deductible for both federal and state income tax purposes. Beginning January 1, 1997, the Bank's annual deposit insurance premium was reduced from .23% to .0644% of total assessable deposits. BIF institutions pay lower assessments than comparable SAIF institutions because BIF institutions pay only 20% of the rate being paid by SAIF institutions on their deposits with respect to obligations issued by the federally-chartered corporation which provided some of the financing to resolve the thrift crisis in the 1980s ("FICO"). The 1996 law also provides for the merger of the SAIF and the BIF by 1999, but not until such time as bank and thrift charters are combined. Until the charters are combined, savings associations with SAIF deposits may not transfer deposits into the BIF system without paying various exit and entrance fees, and SAIF institutions will continue to pay higher FICO assessments. Such exit and entrance fees need not be paid if a SAIF institution converts to a bank charter or merges with a bank, as long as the resulting bank continues to pay applicable insurance assessments to the SAIF, and as long as certain other conditions are met. Savings Association Regulatory Capital Currently, savings associations are subject to three separate minimum capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital requirement, and (iii) a risk-based capital requirement. The leverage limit requires that savings associations maintain "core capital" of at least 3% of total assets. Core capital is generally defined as common shareholders' equity (including retained income), noncumulative perpetual preferred stock and related surplus, certain minority equity interests in subsidiaries, qualifying supervisory goodwill, purchased mortgage servicing rights and purchased credit card relationships (subject to certain limits) less nonqualifying intangibles. Under the tangible capital requirement, a savings association must maintain tangible capital (core capital less all intangible assets except purchased mortgage servicing rights which may be included after making the above-noted adjustment in an amount up to 100% of tangible capital) of at least 1.5% of 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, 1997, the Bank was in compliance with all capital requirements imposed by law. The OTS has promulgated a rule which sets forth the methodology for calculating an interest rate risk component to be used by savings associations in calculating regulatory capital. The OTS has delayed the implementation of this rule, however. The rule requires savings associations with "above normal" interest rate risk (institutions whose portfolio equity would decline in value by more than 2% of assets in the event of a hypothetical 200-basis-point move in interest rates) to maintain additional capital for interest rate risk under the risk-based capital framework. If the OTS were to implement this regulation, the Bank would not be required to maintain additional capital at December 31, 1997 under the terms of the OTS proposed interest rate risk rule. Prompt Corrective Regulatory Action The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FedICIA") requires, among other things, that federal bank regulatory authorities take "prompt corrective action" with respect to institutions that do not meet minimum capital requirements. For these purposes, FedICIA establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. At December 31, 1997, the Bank was categorized as "adequately capitalized," meaning that its total risk-based capital ratio exceeded 8%, its Tier I risk-based capital ratio exceeded 4%, its leverage ratio exceeded 4%, and it was not subject to a regulatory order, agreement or directive to meet and maintain a specific capital level for any capital measure. The FDIC may order savings associations which have insufficient capital to take corrective actions. For example, a savings association which is categorized as "undercapitalized" would be subject to growth limitations and would be required to submit a capital restoration plan, and a holding company that controls such a savings association would be required to guarantee that the savings association complies with the restoration plan. "Significantly undercapitalized" savings associations would be subject to additional restrictions. Savings associations deemed by the FDIC to be "critically undercapitalized" would be subject to the appointment of a receiver or conservator. Dividend Limitations An OTS regulation imposes limitations upon all "capital distributions" by savings associations, including cash dividends, payments by an association 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 regulation establishes a three-tiered system of regulation, with the greatest flexibility being afforded to well-capitalized associations. A savings association which has total capital (immediately prior to and after giving effect to the capital distribution) that is at least equal to its fully phased-in capital requirements would be a Tier 1 institution ("Tier 1 Institution"). An association that has total capital at least equal to its minimum capital requirements, but less than its fully phased-in capital requirements, would be a Tier 2 institution ("Tier 2 Institution"). An institution having total capital that is less than its minimum capital requirements would be a Tier 3 institution ("Tier 3 Institution"). However, an institution which otherwise qualifies as a Tier 1 Institution may be designated by the OTS as a Tier 2 Institution or Tier 3 Institution if the OTS determines that the institution is "in need of more than normal supervision." The Bank is currently a Tier 1 Institution. A Tier 1 Institution may, after prior notice but without the approval of the OTS, make capital distributions during a calendar year up to the greater of (a) 100% of its net income to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" at the beginning of the calendar year (the smallest excess over its capital requirements), or (b) 75% of its net income over the most recent four-quarter period. Any additional amount of capital distributions would require prior regulatory approval. The OTS has proposed revisions to these regulations which would permit a savings association, without filing a prior notice or application with the OTS, to make a capital distribution to its shareholders in an amount that does not exceed the association's undistributed net income for the prior two years plus the amount of its undistributed income from the current year. This proposed rule would require a savings association, such as the Bank, that is a subsidiary of a savings and loan holding company to file a notice with the OTS before making a capital distribution up to the "maximum amount" described above. The proposed rule would also require all savings associations, whether under 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," or where the proposed distribution, together with any other distributions made in the same year, would exceed the "maximum amount" described above. Liquidity Federal law requires that savings associations maintain an average daily balance of liquid assets in an amount not less than 4% or more than 10% of their withdrawable accounts plus short-term borrowings. Liquid assets include cash, certain time deposits, certain bankers' acceptances, specified U.S. government, state or federal agency obligations, certain corporate debt securities, commercial paper, certain mutual funds, certain mortgage-related securities, and certain first-lien residential mortgage loans. The OTS recently amended its regulation that implements this statutory liquidity requirement to reduce the amount of liquid assets a savings association must hold from 5% of net withdrawable accounts and short-term borrowings to 4%. The OTS also eliminated the requirement that savings associations maintain short-term liquid assets constituting at least 1% of their average daily balance of net withdrawable deposit accounts and current borrowings. The revised OTS rule also permits savings associations to calculate compliance with the liquidity requirement based upon their average daily balance of liquid assets during each quarter rather than during each month, as was required under the prior rule. The OTS may impose monetary penalties on savings associations that fail to meet these liquidity requirements. As of December 31, 1997, the Bank had liquid assets of $16.0 million, and a regulatory liquidity ratio of 37.4%. Limitations on Rates Paid for Deposits Regulations promulgated by the FDIC pursuant to FedICIA limit the ability of insured depository institutions to accept, renew or roll over deposits by offering rates of interest which are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions having the same type of charter in the institution's normal market area. Under these regulations, "well-capitalized" depository institutions may accept, renew or roll such deposits over without restriction, "adequately capitalized" depository institutions may accept, renew or roll such deposits over with a waiver from the FDIC (subject to certain restrictions on payments of rates) and "undercapitalized" depository institutions may not accept, renew or roll such deposits over. The regulations contemplate that the definitions of "well capitalized," "adequately capitalized" and "undercapitalized" will be the same as the definition adopted by the agencies to implement the corrective action provisions of FedICIA. The Bank does not believe that these regulations will have a materially adverse effect on its current operations. Safety and Soundness Standards On February 2, 1995, the federal banking agencies adopted final safety and soundness standards for all insured depository institutions. The standards, which were issued in the form of guidelines rather than regulations, relate to internal controls, information systems, internal audit systems, loan underwriting and documentation, compensation and interest rate exposure. In general, the standards are designed to assist the federal banking agencies in identifying and addressing problems at insured depository institutions before capital becomes impaired. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan. Failure to submit a compliance plan may result in enforcement proceedings. On August 27, 1996, the federal banking agencies added asset quality and earning standards to the safety and soundness guidelines. Real Estate Lending Standards OTS regulations require savings associations to establish and maintain written internal real estate lending policies. Each association's lending policies must be consistent with safe and sound banking practices and appropriate to the size of the association and the nature and scope of its operations. The policies must establish loan portfolio diversification standards; establish prudent underwriting standards, including loan-to-value limits, that are clear and measurable; establish loan administration procedures for the association's real estate portfolio; and establish documentation, approval, and reporting requirements to monitor compliance with the association's real estate lending policies. The association's written real estate lending policies must be reviewed and approved by the association's Board of Directors at least annually. Further, each association is expected to monitor conditions in its real estate market to ensure that its lending policies continue to be appropriate for current market conditions. Loans to One Borrower Under OTS regulations, the Bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. Additional amounts may be lent, not in excess of 10% of unimpaired capital and surplus, if such loans or extensions of credit are fully secured by readily marketable collateral, including certain debt and equity securities but not including real estate. In some cases, a savings association may lend up to 30 percent of unimpaired capital and surplus to one borrower for purposes of developing domestic residential housing, provided that the association meets its regulatory capital requirements and the OTS authorizes the association to use this expanded lending authority. At December 31, 1997, the Bank did not have any loans or extensions of credit to a single or related group of borrowers in excess of its lending limits. Qualified Thrift Lender Savings associations must meet a QTL test. If the Bank maintains an appropriate level of qualified thrift investments ("QTIs") (primarily residential mortgages and related investments, including certain mortgage-related securities) and otherwise qualify as a QTL, the Bank will continue to enjoy full borrowing privileges from the FHLB of Indianapolis. The required percentage of QTIs is 65% of portfolio assets (defined as all assets minus intangible assets, property used by the association in conducting its business and liquid assets equal to 10% of total assets). Certain assets are subject to a percentage limitation of 20% of portfolio assets. In addition, savings associations may include shares of stock of the FHLBs, FNMA, and FHLMC as QTIs. Compliance with the QTL test is determined on a monthly basis in nine out of every twelve months. As of December 31, 1997, the Bank was in compliance with its QTL requirement, with approximately 88.5% of its assets invested in QTIs. A savings association which fails to meet the QTL test must either convert to a bank (but its deposit insurance assessments and payments will be those of and paid to the SAIF) or be subject to the following penalties: (i) it may not enter into any new activity except for those permissible for a national bank and for a savings association; (ii) its branching activities shall be limited to those of a national bank; (iii) it shall not be eligible for any new FHLB advances; and (iv) it shall be bound by regulations applicable to national banks respecting payment of dividends. Three years after failing the QTL test the association must (i) dispose of any investment or activity not permissible for a national bank and a savings association and (ii) repay all outstanding FHLB advances. If such a savings association is controlled by a savings and loan holding company, then such holding company must, within a prescribed time period, become registered as a bank holding company and become subject to all rules and regulations applicable to bank holding companies (including restrictions as to the scope of permissible business activities). Acquisitions or Dispositions and Branching The Bank Holding Company Act specifically authorizes a bank holding company, upon receipt of appropriate regulatory approvals, to acquire control of any savings association or holding company thereof wherever located. Similarly, a savings and loan holding company may acquire control of a bank. Moreover, federal savings associations may acquire or be acquired by any insured depository institution. Regulations promulgated by the FRB restrict the branching authority of savings associations acquired by bank holding companies. Savings associations acquired by bank holding companies may be converted to banks if they continue to pay SAIF premiums, but as such they become subject to branching and activity restrictions applicable to banks. Subject to certain exceptions, commonly-controlled banks and savings associations must reimburse the FDIC for any losses suffered in connection with a failed bank or savings association affiliate. Institutions are commonly controlled if one is owned by another or if both are owned by the same holding company. Such claims by the FDIC under this provision are subordinate to claims of depositors, secured creditors, and holders of subordinated debt, other than affiliates. The OTS has adopted regulations which permit nationwide branching to the extent permitted by federal statute. Federal statutes permit federal savings associations to branch outside of their home state if the association meets the domestic building and loan test in ss.7701(a)(19) of the Code or the asset composition test of ss.7701(c) of the Code. Branching that would result in the formation of a multiple savings and loan holding company controlling savings associations in more than one state is permitted if the law of the state in which the savings association to be acquired is located specifically authorizes acquisitions of its state-chartered associations by state-chartered associations or their holding companies in the state where the acquiring association or holding company is located. Moreover, Indiana banks and savings associations are permitted to acquire other Indiana banks and savings associations and to establish branches throughout Indiana. Finally, The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks in other states and, with state consent and subject to certain limitations, allows banks to acquire out-of-state branches either through merger or de novo expansion. The State of Indiana enacted legislation establishing interstate branching provisions for Indiana state-chartered banks consistent with those established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana Branching Law authorizes Indiana banks to branch interstate by merger or de novo expansion, provided that such transactions are not permitted to out-of-state banks unless the laws of their home states permit Indiana banks to merge or establish de novo banks on a reciprocial basis. The Indiana Branching Law became effective March 15, 1996. Federal Reserve System Under FRB regulations, the Bank is required to maintain reserves against its transaction accounts (primarily checking and NOW accounts) and non-personal money market deposit accounts. The effect of these reserve requirements is to increase the Bank's cost of funds. The Bank is in compliance with its reserve requirements. A federal savings association, like other depository institutions maintaining reservable accounts, may borrow from the Federal Reserve Bank "discount window," but the FRB's regulations require the savings association to exhaust other reasonable alternative sources, including borrowing from its regional FHLB, before borrowing from the Federal Reserve Bank. Current law imposes certain limitations on the ability of undercapitalized depository institutions to borrow from Federal Reserve Banks. Limitations on Repurchase of Common Stock of Holding Company OTS regulations currently provide that the Holding Company is prohibited from repurchasing any of its shares within one year of the Conversion, which occured on June 13, 1995. So long as the Bank continues to meet certain capitalization requirements, the Holding Company may repurchase shares in an open-market repurchase program (which cannot exceed 5% of its outstanding shares in a twelve-month period) during the second and third years following its Conversion by giving appropriate prior notice to the OTS. The OTS has the authority to waive these restrictions under certain circumstances. Unless repurchases are permitted under the foregoing regulations, the Holding Company may not, for a period of three years from the date of the Conversion, repurchase any of its capital stock from any person, except in the event of an offer to purchase by the Holding Company on a pro rata basis from all of its shareholders which is approved in advance by the OTS or except in exceptional circumstances established to the satisfaction of the OTS. Under Indiana law, the Holding Company will be precluded from repurchasing its equity securities if, after giving effect to such repurchase, the Holding Company would be unable to pay its debts as they become due or the Holding Company's assets would be less than its liabilities and obligations to preferential shareholders. Transactions with Affiliates The Bank and the Holding Company are subject to Sections 22(h), 23A and 23B of the Federal Reserve Act, which restrict financial transactions between banks and affiliated companies. The statute limits credit transactions between a bank or savings association and its executive officers and its affiliates, prescribes terms and conditions for bank affiliate transactions deemed to be consistent with safe and sound banking practices, and restricts the types of collateral security permitted in connection with a bank's extension of credit to an affiliate. Federal Securities Law The shares of Common Stock of the Holding Company are registered with the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934, as amended (the "1934 Act"). The Holding Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the 1934 Act and the rules of the Commission thereunder. Shares of Common Stock held by persons who are affiliates of the Holding Company may not be resold without registration unless sold in accordance with the resale restrictions of Rule 144 under the Securities Act of 1933, as amended (the "1933 Act"). If the Holding Company meets the current public information requirements under Rule 144, each affiliate of the Holding Company who complies with the other conditions of Rule 144 (including those that require the affiliate's sale to be aggregated with those of certain other persons) will be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) 1% of the outstanding shares of the Holding Company or (ii) the average weekly volume of trading in such shares during the preceding four calendar weeks. Community Reinvestment Act Matters Federal law requires that ratings of depository institutions under the Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes both a four-unit descriptive rating -- outstanding, satisfactory, needs to improve, and substantial noncompliance -- and a written evaluation of an institution's performance. Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLBs. The standards take into account a member's performance under the CRA and its record of lending to first-time home buyers. The OTS has designated the Bank's record of meeting community credit needs as satisfactory. TAXATION Federal Taxation Historically, savings associations, such as the Bank, have been permitted to compute bad debt deductions using either the bank experience method or the percentage of taxable income method. However, for years beginning after December 31, 1995, the Bank will no longer be able to use the percentage of taxable income method of computing its allocable tax bad debt deduction. The Bank will be required to compute its allocable deduction using the experience method. As a result of the repeal of the percentage of taxable income method, reserves taken after 1987 using the percentage of taxable income method generally must be included in future taxable income over a six-year period, although a two-year delay may be permitted for institutions meeting a residential mortgage loan origination test. In addition, the pre-1988 reserve, in which no deferred taxes have been recorded, will not have to be recaptured into income unless (i) the Bank no longer qualifies as a bank under the Code, or (ii) excess dividends are paid out by the Bank. Depending on the composition of its items of income and expense, a savings institution may be subject to the alternative minimum tax. A savings institution must pay an alternative minimum tax equal to the amount (if any) by 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, 1997, 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, 1997:
Total Deposits Net Book Value at of Property, Owned or Year December 31, Furniture & Approximate Description and Address Leased Opened 1997 Fixtures Square Footage --------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 723 East Broadway Owned 1962 $60,595 $465 4,200 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 $8,400 at December 31, 1997. 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 $8,500 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, 1997. Item 4.5. Executive Officers of the Registrant. Presented below is certain information regarding the executive officers of the Holding Company: Name Position Thomas G. Williams President and Chief Executive Officer Charles J. Evans Vice President Dottye Robeson Secretary/Treasurer Thomas G. Williams (age 65) has served as President of the Bank since 1971 and as President and Chief Executive Officer of the Holding Company since its organization. Charles J. Evans (age 52) has served as Vice President and Senior Loan Officer of the Bank since 1980 and as Vice President of the Holding Company since its organization. Dottye Robeson (age 48) has served as Chief Financial Officer of the Bank since 1994 and as Secretary/Treasurer of the Holding Company since its organization. From 1990 to 1994, she served as Cashier, Vice President and Chief Financial Officer of Bright National Bank in Flora, Indiana. From 1984 to 1990 she was employed by Smith, Thompson & Wihebrink (Logansport). She has been a certified public accountant since 1987. PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters. Logansport Savings Bank, FSB converted from a mutual savings bank to a stock form federal savings bank effective June 13, 1995 (the "Conversion") and simultaneously formed a savings and loan holding company, Logansport Financial Corp. The Holding Company's common stock, without par value ("Common Stock"), is quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), Small Cap Market, under the symbol "LOGN." The following table sets forth the high and low bid prices and dividends paid per share of Common Stock for the quarters indicated. Such over-the-counter quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. Quarter Ended High Bid Low Bid Dividends Declared -------------------------------------------------------------------- March 31, 1996 $ 13 1/4 $ 12 3/8 $ .10 June 30, 1996 13 3/4 12 3/8 .10 September 30, 1996 14 3/4 12 1/2 .10 December 31, 1996 14 3/4 11 1/4 3.10 March 31, 1997 15 11 1/8 .10 June 30, 1997 14 12 1/2 .10 September 30, 1997 16 13 1/4 .10 December 31, 1997 18 15 .10 As of February 17, 1998, there were 848 record holders of the Holding Company's Common Stock. The Holding Company has established a policy of paying regular periodic cash dividends, and the Board of Directors intends to continue this policy, subject to the Holding Company's operating results, financial condition, capital, income tax considerations, regulatory restrictions, and other relevant factors. Since the Holding Company has no independent operations other than investment-related activities or other subsidiaries to generate income, its ability to accumulate earnings for the payment of cash dividends to its shareholders will be directly dependent upon the ability of the Bank to pay dividends to the Holding Company. Under OTS regulations, a converted savings institution may not declare or pay a cash dividend if the effect would be to reduce its net worth below the amount required for the liquidation account created at the time it converted. In addition, under OTS regulations, the extent to which a savings institution may make a "capital distribution," which includes, among other things, cash dividends, will depend upon in which one of three categories, based upon levels of capital, that savings institution is classified. The Bank is now and expects to continue to be a "tier one institution" and therefore would be able to pay cash dividends to the Holding Company during any calendar year up to 100% of its net income during that calendar year plus the amount that would reduce by one half its "surplus capital ratio" (the excess over its fully phased-in capital requirements) at the beginning of the calendar year. See "Regulation -- Capital Distributions Regulation." Prior notice of any dividend to be paid by the Bank to the Holding Company will have to be given to the OTS. 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, 1997, approximately $1.7 million of the Bank's retained income represented bad debt deductions for which no federal income tax provision had been made. See "Taxation--Federal Taxation." Unlike the Bank, generally there is no regulatory restriction on the payment of dividends by the Holding Company. Indiana law, however, would prohibit the Holding Company from paying a dividend if, after giving effect to the payment of that dividend, the Holding Company would not be able to pay its debts as they become due in the usual course of business or the Holding Company's total assets would be less than the sum of its total liabilities plus preferential rights of holders of preferred stock, if any. Item 6. Selected Financial Data. The information required by this item is incorporated by reference to the material under the heading "Selected Consolidated Financial Data of Logansport Financial Corp. and Subsidiary" on page 4 of the Holding Company's 1997 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 5 through 14 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 5 through 6 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 17 through 44 in the Shareholder Annual Report are incorporated herein by reference. The Company's unaudited quarterly results of operations contained on page 44 in the Shareholder Annual Report are incorporated herein by reference. Independent Auditor's Report To the Board of Directors Logansport Financial Corp. Logansport, Indiana We have audited the consolidated statement of financial condition of Logansport Financial Corp. and subsidiary as of December 31, 1996, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the two years in the period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements described above present fairly, in all material respects, the consolidated financial position of Logansport Financial Corp. and subsidiary as of December 31, 1996, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Geo. S. Olive & Co. LLC Indianapolis, Indiana January 23, 1997 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. On August 12, 1997, the Board of Directors of the Holding Company selected the accounting firm of Grant Thornton LLP to examine the consolidated financial statements of the Company for the fiscal year ending December 31, 1997. The audit reports issued by Geo. S. Olive & Co. LLC with respect to the Company's consolidated financial statements for 1995 and 1996 did not contain an adverse opinion or disclaimer of opinion, and were not qualified as to uncertainty, audit scope or accounting principles. During 1995 and 1996 (and any subsequent interim period), there have been no disagreements between the Company and Geo. S. Olive & Co. LLC on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Geo. S. Olive & Co. LLC, would have caused it to make a reference to the subject matter of the disagreement in connection with its audit report. Moreover, none of the events listed in Item 304(a)(1)(v) of Regulation S-K occurred during 1995 or 1996 or any subsequent interim period. In 1996, the Company consulted Grant Thornton LLP for financial accounting and tax advice regarding a tax-free return of capital which was paid in 1996. Grant Thornton LLP provided a letter to the Company stating its views with respect to accounting for the exercise price of stock options following such return of capital distribution. Their written views are incorporated by reference to Exhibit A to the Company's Current Report on Form 8-K, filed with the Commission on August 19, 1997. Geo. S. Olive & Co. LLC was consulted during its completion of the 1996 audit of the consolidated financial statements in 1997 for concurrence with Grant Thornton LLP on their written views, and Geo. S. Olive & Co. LLC concurred. Pursuant to Item 304 of Regulation S-K, the Holding Company provided a copy of its Current Report on Form 8-K announcing the change in the Company's Certifying Accountant, which was filed with the Commission on August 19, 1997, to Geo. S. Olive & Co. LLC for review. A letter from Geo. S. Olive & Co. LLC indicating that it agrees with the statements made by the Holding Company therein is incorporated by reference to Exhibit 16 to the Company's Current Report on Form 8-K, filed with the Commission on August 19, 1997. PART III Item 10. Directors and Executive Officers of the Registrant. The information required by this item with respect to directors is incorporated by reference to pages 2 through 4 of the Holding Company's Proxy Statement for its 1998 Annual Shareholder Meeting (the "1998 Proxy Statement"). Information concerning the Holding Company's executive officers is included in Item 4.5 in Part I of this report. Item 11. Executive Compensation. The information required by this item with respect to executive compensation is incorporated by reference to pages 2 to 4 of the Holding Company's 1998 Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this item is incorporated by reference to pages 2 and 3 of the 1998 Proxy Statement. Item 13. Certain Relationships and Related Transactions. The information required by this item is incorporated by reference to page 8 of the 1998 Proxy Statement. PART IV Item 14. 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 (Geo. S. Olive & Co. LLC)............... See Item 8 Independent Auditor's Report (Grant Thornton LLP).................... See Shareholder Annual Report Page 16 Consolidated Statements of Financial Condition at December 31, 1997, and 1996................................... See Shareholder Annual Report Page 17 Consolidated Statements of Earnings for the Years Ended December 31, 1997, 1996, and 1995................................ See Shareholder Annual Report Page 18 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1997, 1996 and 1995............. See Shareholder Annual Report Page 19 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996, and 1995................................ See Shareholder Annual Report Page 20-21 Notes to Consolidated Financial Statements........................... See Shareholder Annual Report Page 22
(b) Reports on Form 8-K. The Holding Company filed no reports on Form 8-K during the fourth quarter of its 1997 fiscal year. (c) The exhibits filed herewith or incorporated by reference herein are set forth on the Exhibit Index on page E-1. Included in those exhibits are Executive Compensation Plans and Arrangements which are identified as Exhibits 10(1) through 10(12). (d) All schedules are omitted as the required information either is not applicable or is included in the Consolidated Financial Statements or related notes. 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 25, 1998 By: /s/ Thomas G. Williams ---------------------------------- Thomas G. Williams, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on this 25th day of March, 1998. /s/ Thomas G. Williams - ------------------------ Thomas G. Williams President, Chief Executive Officer and Director (Principal Executive Officer) /s/ Dottye Robeson - ------------------------ Dottye Robeson, Secretary/Treasurer (Principal Financial and Accounting Officer) /s/ Norbert E. Adrian - ------------------------ Norbert E. Adrian, Director /s/ Charles J. Evans - ------------------------ Charles J. Evans, Vice President and Director /s/ Donald G. Pollitt - ------------------------ Donald G. Pollitt, Director /s/ Susanne S. Ridlen - ------------------------ Susanne S. Ridlen, Director /s/ William Tincher, Jr. - ------------------------ William Tincher, Jr., Director /s/ David Wihebrink - ------------------------ David Wihebrink, Director EXHIBIT INDEX Exhibit Page 3(1) The Articles of Incorporation of the Registrant are incorporated by reference to Exhibit 3(1) to the Registration Statement on Form S-1 (Registration No. 33-89788). 3(2) The Code of By-Laws of the Registrant are incorporated by reference to Exhibit 3(2) to the Registration Statement on Form S-1 (Registration No. 33-89788). 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. 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. 10(3) Logansport Savings Bank, FSB Employee Stock Ownership Plan and Trust Agreement is incorporated by reference to Exhibit 10(4) to the Registration Statement on Form S-1 (Registration No. 33-89788). 10(4) Employment Agreement between Logansport Savings Bank, FSB and Thomas G. Williams is incorporated by reference to Exhibit 10(5) to the Registration Statement on Form S-1 (Registration No. 33-89788). 10(5) Employment Agreement between Logansport Savings Bank, FSB and Charles J. Evans is incorporated by reference to Exhibit 10(6) to the Registration Statement on Form S-1 (Registration No. 33-89788). 10(6) Director Deferred Compensation Agreement between Logansport Savings Bank, FSB and Thomas G. Williams, effective 4/1/92 is incorporated by reference to Exhibit 10(7) to the Registration Statement on Form S-1 (Registration No. 33-89788). 10(7) Director Deferred Compensation Agreement between Logansport Savings Bank, FSB and Don Pollitt, effective 4/1/92 is incorporated by reference to Exhibit 10(8) to the Registration Statement on Form S-1 (Registration No. 33-89788). 10(8) Director Deferred Compensation Agreement between Logansport Savings Bank, FSB and Norbert Adrian, effective 4/1/92 is incorporated by reference to Exhibit 10(9) to the Registration Statement on Form S-1 (Registration No. 33-89788). 10(9) Director Deferred Compensation Agreement between Logansport Savings Bank, FSB and Susanne Ridlen, effective 4/1/92 is incorporated by reference to Exhibit 10(10) to the Registration Statement on Form S-1 (Registration No. 33-89788). 10(10) Director Deferred Compensation Agreement between Logansport Savings Bank, FSB and David Wihebrink, effective 4/1/92 is incorporated by reference to Exhibit 10(11) to the Registration Statement on Form S-1 (Registration No. 33-89788). 10(11) Executive Supplemental Retirement Income Agreement between Logansport Savings Bank, FSB and Thomas G. Williams, executed May 7, 1992 is incorporated by reference to Exhibit 10(12) to the Registration Statement on Form S-1 (Registration No. 33-89788). 10(12) Executive Supplemental Retirement Income Agreement between Logansport Savings Bank, FSB and Charles J. Evans, executed May 7, 1992 is incorporated by reference to Exhibit 10(13) to the Registration Statement on Form S-1 (Registration No. 33-89788). 13 1997 Shareholder Annual Report ______ 21 Subsidiaries of the Registrant are incorporated by reference to Exhibit 21 to the Registration Statement on Form S-1 (Registration No. 33-89788). 23(1) Independent Auditor's Consent (Geo. S. Olive & Co. LLC) ______ 23(2) Independent Auditor's Consent (Grant Thornton LLP) ______ 27 Financial Data Schedule ______ EX-13 2 1997 SHAREHOLDER ANNUAL REPORT [FRONT COVER] [PHOTO OF BRIEFCASE] LOGANSPORT FINANCIAL CORP. 1997 SHAREHOLDER ANNUAL REPORT SHAREHOLDER INFORMATION Market Information The common stock of the Company is traded on the National Association of Securities Dealers Automated Quotation System, Small Cap Market, under the symbol "LOGN." As of February 17, 1998, there were 848 shareholders of record of the Company's Common Stock. Stock Price Per Share Quarter Ended High Low Dividends March 31, 1996 13 1/4 12 3/8 $0.10 June 30, 1996 13 3/4 12 3/8 $0.10 September 30, 1996 14 3/4 12 1/2 $0.10 December 31, 1996 14 3/4 11 1/4 $3.10* March 31, 1997 15 11 1/8 $0.10 June 30, 1997 14 12 1/2 $0.10 September 30, 1997 16 13 1/4 $0.10 December 31, 1997 18 15 $0.10 * This includes a $3.00 per share one-time special cash distribution which qualified as a non-taxable return of capital pursuant to an IRS Private Letter Ruling. Transfer Agent and Registrar The Fifth Third Bank of Cincinnati, Ohio ("Fifth Third") is the Company's stock transfer agent and registrar. Fifth Third maintains the Company's shareholder records. To change name, address or ownership of stock, to report lost certificates, or to consolidate accounts, contact: Fifth Third Bank Corporate Trust Operations Mail Drop 1090D2 38 Fountain Square Cincinnati, Ohio 45263 (800) 837-2755 General Counsel Independent Auditor Barnes & Thornburg Grant Thornton LLP 11 South Meridian Street 625 Eden Park Drive, Suite 900 Indianapolis, Indiana 46204 Cincinnati, Ohio 45202 Shareholder & General Inquiries The Company is required to file an Annual Report on Form 10-K for its fiscal year ended December 31, 1997 with the Securities and Exchange Commission. Copies of this annual report may be obtained without charge upon written request to: Dottye Robeson Logansport Financial Corp. 723 East Broadway, Box 569 Logansport, Indiana 46947 (219) 722-3855 Office Location 723 East Broadway Logansport, Indiana 46947 (219) 722-3855 TABLE OF CONTENTS Page President's Message to Shareholders.............................. 2 Selected Consolidated Financial Data............................. 4 Management's Discussion and Analysis............................. 5 Change in Accountants............................................ 15 Independent Auditor's Report..................................... 16 Consolidated Statements of Financial Condition................... 17 Consolidated Statements of Earnings.............................. 18 Consolidated Statements of Changes in Shareholders' Equity....... 19 Consolidated Statements of Cash Flows............................ 20 Notes to Consolidated Financial Statements....................... 22 DESCRIPTION OF BUSINESS Logansport Financial Corp. (the "Company"), an Indiana corporation, became a unitary savings and loan holding company upon the conversion of Logansport Savings Bank, FSB (the "Bank") from a federal mutual savings bank to a federal stock savings bank in June, 1995. The Company and the Bank conduct business from a single office in Logansport, Cass County, Indiana. The Bank is and historically has been among the top real estate mortgage lenders in Cass County and is the oldest financial institution headquartered in Cass County. The Bank offers a variety of retail deposit and lending services. The Company has no other business activity than being the holding company for the Bank. The Company is the sole shareholder of the Bank. Dear Shareholder: We are pleased to report that Logansport Financial Corp. and its subsidiary, Logansport Savings Bank, had another excellent year. Among our accomplishments this year is a 1.50% return on average assets, well above the industry average. Another important ratio of significance to shareholders is return on average equity which increased substantially to 7.69% in 1997 from 4.76% in 1996. This is a result of our excellent earning performance and our $3.00 return of capital distribution to shareholders in December 1996. In addition, the performance of the Company has resulted in substantial increases in the market value of the stock during the year. The Board of Directors has paid a $.10 per share quarterly dividend since our conversion to a stock institution and remains committed to regular, quarterly dividends for our shareholders. We are pleased with these improvements but continue to explore additional ways to increase shareholder value. Another indicator of our financial soundness is reflected in our growth. Total assets for the year ended December 31, 1997 were $86.1 million compared to $77.7 million at December 31, 1996. Total loans increased by $6.8 million during the year. The loan department is headed by Charles Evans, Vice President, who has been with the Bank for 25 years. He is an important part of our management team and instrumental in the excellent performance of the loan portfolio. In addition to serving on the Board of Directors of Logansport Financial Corp., he was added to the Bank's Board of Directors in 1997. The increase in the loan portfolio is a significant contributing factor to our strong earnings. We continue to be a community leader in providing both excellent loan service and products. Net earnings for the year ended December 31, 1997 totaled $1.2 million compared to $913,000 for the year ended December 31, 1996. Earnings per share increased to $.98 in 1997 compared to $.69 in 1996. The benefit of lower FDIC insurance premiums is reflected in the increased earnings for 1997. In looking ahead to 1998, the current interest rate environment could offer many challenges for financial institutions. Earnings have been very strong in the last two years but declining rates could impact earnings in the coming year. However, we remain optimistic regarding our prospects for additional growth and consistent profitability in 1998. Logansport Financial Corp. has grown substantially in the last few years and for this reason the Directors are currently planning for a facilities expansion to better meet the needs of our customers. Tentative plans have been approved with the hope of proceeding in the early spring. I would like to thank our Directors, officers, employees, customers and shareholders for their part in making 1997 an excellent year. We are proud of the performance of Logansport Financial Corp. and we are grateful for your support. We look forward to a long and mutually beneficial relationship. Sincerely, /s/ Thomas G. Williams Thomas G. Williams President Officers of Logansport Financial Corp. [PHOTO] (left to right) Charles J. Evans, Vice President; Dottye Robeson, Secretary/Treasurer; Thomas G. Williams, President Board of Directors of Logansport Financial Corp. [PHOTO] Front (left to right) Thomas G. Williams, Susanne S. Ridlen, Charles J. Evans Back (left to right) Norbert E. Adrian, William Tincher, Jr., Donald G. Pollitt, David G. Wihebrink SELECTED CONSOLIDATED FINANCIAL DATA OF LOGANSPORT FINANCIAL CORP. AND SUBSIDIARY
AT DECEMBER 31, 1997 1996 1995 1994 1993 -------------------------------------------------------------------------- (Dollars in thousands) Statement of Financial Condition Data: Total assets ........................... $86,115 $77,668 $74,647 $59,351 $56,229 Loans receivable, net .................. 63,635 56,802 49,707 44,020 37,851 Mortgage-backed securities - at market.. 9,932 6,674 7,468 1,229 2,784 Cash and cash equivalents............... 2,269 3,759 3,243 1,645 2,700 Investment securities - at market....... 5,750 7,629 11,285 10,009 10,718 Certificates of deposit in other financial institutions............... 100 100 100 --- --- Deposits................................ 60,595 57,396 52,461 51,202 49,558 Borrowings.............................. 8,025 3,400 1,000 1,000 --- Shareholders' equity, net............... 16,542 15,427 20,454 6,833 6,397
YEAR ENDED DECEMBER 31, 1997 1996 1995 1994 1993 ----------------------------------------------------------------- (Dollars in thousands) Summary of Operating Results: Interest income ........................... $ 6,101 $ 5,653 $ 4,775 $ 4,031 $ 4,033 Interest expense .......................... 3,115 2,719 2,468 2,043 1,984 ------- ------- ------- ------- ------- Net interest income .................... 2,986 2,934 2,307 1,988 2,049 Provision for loan losses ................. 26 12 20 6 161 ------- ------- ------- ------- ------- Net interest income after provision for loan losses ......................... 2,960 2,922 2,287 1,982 1,888 Other income: Service charges on deposit accounts .... 88 67 47 35 26 Investment securities gains (losses) .. (50) (47) 3 -- 22 Other .................................. 132 62 129 44 37 ------- ------- ------- ------- ------- Total other income .................. 170 82 179 79 85 Other expense: Employee compensation and benefits ..... 649 661 531 493 440 Occupancy and equipment ................ 78 81 81 84 69 Deposit insurance premiums ............. 37 449 116 114 83 Other .................................. 406 393 304 266 226 ------- ------- ------- ------- ------- Total other expense ............... 1,170 1,584 1,032 957 818 ------- ------- ------- ------- ------- Earnings before income taxes and cumulative effect of change in accounting principle 1,960 1,420 1,434 1,104 1,155 Income taxes .............................. 728 507 526 370 422 Cumulative effect of change in accounting principle ................ --- --- --- --- 44 ------- ------- ------- ------- ------- Net earnings ........................... $ 1,232 $ 913 $ 908 $ 734 $ 777 ======= ======= ======= ======= ======= Basic earnings per share .................. $ .98 $ .69 $ --- $ --- $ --- ======= ======= ======= ======= ======= Cash dividends per share Regular ................................ .40 .40 .20 --- --- Special (2) ............................ --- 3.00 --- --- --- Supplemental Data: Return on assets (3) ...................... 1.50% 1.18% 1.34% 1.27% 1.45% Return on equity (4) ...................... 7.69 4.76 6.33 10.78 12.92 Interest rate spread (5) .................. 2.94 2.80 2.77 3.32 3.75 Net yield on interest-earning assets (6) .. 3.86 3.99 3.64 3.67 4.07 General, administrative and other expense to average assets ...................... 1.42 2.04 1.53 1.65 1.52 Net interest income to general, administrative and other expense .......................... 2.55x 1.85x 2.24x 2.08x 2.50x Equity-to-assets (7) ...................... 19.21 19.86 27.40 11.51 11.38 Average interest-earning assets to average interest-bearing liabilities ........... 123.36 132.80 122.90 109.64 108.48 Non-performing assets to total assets ..... .62 .52 .42 .82 1.38 Non-performing loans to total loans ....... .67 .71 .63 .76 1.57 Loan loss allowance to total loans, net ... .38 .41 .45 .47 .53 Loan loss allowance to non-performing loans .................. 56.84 58.12 71.61 61.13 33.67 Dividend payout ratio ..................... 40.82 57.97(8) --- ---(1) ---(1) Net charge-offs to average loans .......... .03 (*) (*) (*) .13
(1) Information prior to 1996 is not meaningful. (2) Special one-time cash distribution which qualified as a non-taxable return of capital pursuant to an IRS Private Letter Ruling. (3) Net earnings divided by average total assets. (4) Net earnings divided by average total equity. (5) Interest rate spread is calculated by subtracting combined weighted average interest rate cost from combined weighted average interest rate earned for the period indicated. (6) Net interest income divided by average interest-earning assets. (7) Total equity divided by assets. (8) Excludes special one-time $3.00 per share cash distribution. (*) Less than .01% MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The Company was formed as part of the conversion of the Bank from a federal mutual savings bank to a federal stock savings bank which was completed June 13, 1995. Since the Company only recently began operations, certain of the financial information presented herein prior to June 13, 1995 relates primarily to the Bank, a wholly owned subsidiary of the Company. All references to the Company at or before June 13, 1995 refer to the Bank only. The Company has no activity other than being the holding company for the Bank. The principal business of savings associations, including the Bank, has historically consisted of attracting deposits from the general public and making loans secured by residential and other real estate. The Bank and all other savings associations are significantly affected by prevailing economic conditions, as well as government policies and regulations concerning, among other things, monetary and fiscal affairs, housing and financial institutions. Deposit flows are influenced by a number of factors, including interest rates paid on competing investments, account maturities and level of personal income and savings. In addition, deposit growth is affected by how customers perceive the stability of the financial services industry amid various current events such as regulatory changes, failures of other financial institutions and financing of the deposit insurance fund. Lending activities are influenced by the demand for and supply of housing lenders, the availability and cost of funds and various other items. Sources of funds for lending activities of the Bank include deposits, payments on loans, borrowings and income provided from operations. The Bank's earnings are primarily dependent upon its net interest income, the difference between interest income and interest expense. Interest income is a function of the balances of loans and investments outstanding during a given period and the yield earned on such loans and investments. Interest expense is a function of the amount of deposits and borrowings outstanding during the same period and interest rates paid on such deposits and borrowings. The Bank's earnings are also affected by provisions for loan losses, service charges, operating expenses and income taxes. Forward-Looking Statements In the following pages, management presents an analysis of the Company's financial condition as of December 31, 1997, and the results of operations for the year ended December 31, 1997 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: Management's establishment of an allowance for loan losses and its statements regarding the adequacy of such allowance for loan losses. Management's opinions as to the financial statement effect of recent accounting pronouncements. Asset/Liability Management The Bank, like other savings associations, is subject to interest rate risk to the degree that its interest-bearing liabilities, primarily deposits with short- and medium-term maturities, mature or reprice at different rates than its interest-earning assets. Management of the Bank believes it is critical to manage the relationship between interest rates and the effect on the Bank's net portfolio value ("NPV"). Generally, NPV is the discounted present value of the difference between incoming cash flows on interest-earning and other assets and outgoing cash flows on interest-bearing liabilities. Management of the Bank's assets and liabilities is done within the context of the marketplace, regulatory limitations and within limits established by the Board of Directors on the amount of change in NPV which is acceptable given certain interest rate changes. The Office of Thrift Supervision ("OTS") issued a regulation, effective January 1, 1994, which uses a net market value methodology to measure the interest rate risk exposure of thrift institutions. Under OTS regulations, an institution's "normal" level of interest rate risk in the event of an assumed change in interest rates is a decrease in the institution's NPV in an amount not exceeding 2% of the present value of its assets. Thrift institutions with over $300 million in assets or less than a 12% risk-based capital ratio are required to file OTS Schedule CMR. Data from Schedule CMR is used by the OTS to calculate changes in NPV (and the related "normal" level of interest rate risk) based upon certain interest rate changes (discussed below). Institutions which do not meet either of the filing requirements are not required to file OTS Schedule CMR, but may do so voluntarily. The Bank does not currently meet either of these requirements, but it does voluntarily file Schedule CMR. Presented below, as of September 30, 1997, (the latest available date), is an analysis performed by the OTS of the Bank's interest rate risk as measured by changes in NPV for instantaneous and sustained parallel shifts in the yield curve, in 100 basis point increments, up and down 400 basis points and in accordance with OTS regulations. As illustrated in the table, the Bank's NPV is more sensitive to rising rates than declining rates. This occurs principally because, as rates rise, the market value of the Bank's investments, adjustable-rate mortgage loans (many of which have maximum per year adjustments of 1%), fixed-rate loans and mortgage-backed securities declines due to the rate increase. The value of the Bank's deposits and borrowings change in approximately the same proportion in rising or falling rate scenarios.
Change Net Portfolio Value NPV as % of PV of Assets In Rates $ Amount $ Change % Change NPV Ratio Change - -------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) + 400 bp * $12,081 $(5,855) (33%) 15.05% (549 bp) + 300 bp $13,854 $(4,082) (23%) 16.83% (371 bp) + 200 bp $15,525 $(2,410) (13%) 18.42% (212 bp) + 100 bp $16,923 $(1,013) (6%) 19.68% (86 bp) 0 bp $17,936 $ --- ---% 20.54% --- bp - 100 bp $18,579 $ 644 4% 21.04% 50 bp - 200 bp $19,130 $ 1,195 7% 21.44% 89 bp - 300 bp $19,907 $ 1,971 11% 22.02% 147 bp - 400 bp $20,963 $ 3,027 17% 22.82% 227 bp
Interest Rate Risk Measures: 200 Basis Point (bp) Rate Shock Pre-Shock NPV Ratio: NPV as % of PV of Assets............. 20.54% Exposure Measure: Post-Shock NPV Ratio.................... 18.42% Sensitivity Measure: Change in NPV Ratio.................. (212 bp) * Basis points As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could likely deviate significantly from those assumed in calculating the table. Average Balances and Interest Rates and Yields 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, -------------------------------------------------------------------------------------- 1997 1996 1995 Average Yield/ Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost Balance Interest Cost ------- -------- ---- ------- -------- ---- ------- -------- ---- (Dollars in thousands) Assets: Interest-earning assets: Interest-earning deposits..............$ 3,398 $ 179 5.27% $ 3,192 $ 160 5.01% $ 2,542 $ 146 5.74% Mortgage- and other asset-backed securities(1)........................ 8,380 559 6.67 7,916 510 6.44 3,566 227 6.37 Other investment securities (1)........ 6,715 444 6.61 9,965 587 5.89 11,490 701 6.10 Loans receivable (2)................... 59,606 4,932 8.27 53,409 4,421 8.28 46,746 3,724 7.97 Stock in FHLB of Indianapolis.......... 466 37 7.94 376 29 7.71 338 27 7.99 ------ ----- ------ ----- ------ ----- Total interest-earning assets........ 78,565 6,151 7.83 74,858 5,707 7.62 64,682 4,825 7.46 Non-interest earning assets, net of allowance for loan losses and unrealized gain (loss) on securities available for sale..................... 3,650 2,709 2,822 ------- ------- ------- Total assets......................... $82,215 $77,567 $67,504 ======= ======= ======= Liabilities and stockholders' equity: Interest-bearing liabilities: Savings accounts....................... $3,347 101 3.02 $ 3,298 100 3.03 $ 3,986 121 3.04 NOW and money market accounts...................... 20,169 823 4.08 18,751 769 4.10 16,791 698 4.16 Certificates of deposit................ 35,636 1,940 5.44 32,432 1,744 5.38 31,352 1,617 5.16 Borrowings ........................... 4,535 251 5.53 1,889 106 5.61 501 32 6.39 ------ ----- ------ ----- ------ ----- Total interest-bearing liabilities... 63,687 3,115 4.89 56,370 2,719 4.82 52,630 2,468 4.69 Other liabilities......................... 2,506 2,016 529 ------- ------- ------- Total liabilities.................... 66,193 58,386 53,159 Shareholders' equity Total shareholders' equity........... 16,022 19,181 14,345 ------- ------- ------- Total liabilities and shareholders' equity ............................ $82,215 $77,567 $67,504 ======= ------ ======= ------ ======= ------ Net interest-earning assets............... $14,878 $18,488 $12,052 Net interest income....................... $3,036 $2,988 $2,357 ====== ====== ====== Interest rate spread (3) ................. 2.94% 2.80% 2.77% ==== ==== ==== Net yield on weighted average interest-earning assets (4)............ 3.86% 3.99% 3.64% ==== ==== ==== Average interest-earning assets to average interest-bearing liabilities... 123.36% 132.80% 122.90% Adjustment of interest on tax-exempt securities to a tax-equivalent basis... $ 50 $ 54 $ 50
(1) Includes securities available for sale at amortized cost prior to SFAS No. 115 adjustments. (2) Total loans less loans in process. (3) Interest rate spread is calculated by subtracting weighted average interest rate cost from weighted average interest rate yield for the period indicated. (4) The net yield on weighted average interest-earning assets is calculated by dividing net interest income by weighted average interest-earning assets for the period indicated. Interest Rate Spread 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 portfolios, the weighted average effective cost of the Company's deposits and borrowings, the interest rate spread of the Company, and the net yield on weighted average interest-earning assets for the periods and as of the date shown. Average balances are based on month-end average balances.
At December 31, Year Ended December 31, 1997 1997 1996 1995 -------------------------------------------------------------------- Weighted average interest rate earned on: Interest-earning deposits................... 5.32% 5.27% 5.01% 5.74% Mortgage-backed securities.................. 6.71 6.67 6.44 6.37 Investment securities....................... 6.53 6.61 5.89 6.10 Loans receivable............................ 8.33 8.27 8.28 7.97 Stock in FHLB of Indianapolis............... 8.01 7.94 7.71 7.99 Total interest-earning assets............. 7.95 7.83 7.62 7.46 Weighted average interest rate cost of: Savings accounts............................ 3.00 3.02 3.03 3.04 NOW and money market accounts............... 4.08 4.08 4.10 4.16 Certificates of deposit..................... 5.52 5.44 5.38 5.16 Borrowings.................................. 5.82 5.53 5.61 6.39 Total interest-bearing liabilities........ 4.98 4.89 4.82 4.69 Interest rate spread (1)....................... 2.97 2.94 2.80 2.77 Net yield on weighted average interest-earning assets (2)................. N/A 3.86 3.99 3.64
(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, 1997, because the computation of net yield is applicable only over a period rather than at a specific date. The following table describes the extent to which changes in interest rates and changes in volume of interest-related assets and 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 (1) changes in rate (i.e., changes in rate multiplied by old volume) and (2) changes in volume (i.e., changes in volume multiplied by old rate). Changes attributable to both rate and volume have been allocated proportionally to the change due to volume and the change due to rate.
Increase (Decrease) in Net Interest Income Total Net Due to Due to Change Rate Volume ------ ---- ------ (In thousands) Year ended December 31, 1997 compared to Year ended December 31, 1996 Interest-earning assets: Interest-earning deposits.............................. $ 19 $ 11 $ 8 Mortgage-backed securities............................. 49 22 27 Investment securities.................................. (143) 81 (224) Loans receivable....................................... 511 8 503 Stock in FHLB of Indianapolis.......................... 8 1 7 ------- ------- ------- Total................................................ 444 123 321 ------- ------- ------- Interest-bearing liabilities: Savings accounts....................................... 1 --- 1 NOW and money market accounts.......................... 54 (4) 58 Certificates of deposit................................... 196 24 172 Borrowings............................................. 145 1 144 ------- ------- ------- Total................................................ 396 21 375 ------- ------- ------- Change in net interest income (fully taxable equivalent basis)....................... 48 102 (54) Tax equivalent adjustment................................. 4 1 3 ------- ------- ------- Change in net interest income............................. $ 52 $ 103 $ (51) ======= ======= ======= Year ended December 31, 1996 compared to Year ended December 31, 1995 Interest-earning assets: Interest-earning deposits.............................. $ 14 $ (20) $ 34 Mortgage-backed securities............................. 283 3 280 Investment securities.................................. (114) (24) (90) Loans receivable....................................... 697 150 547 Stock in FHLB of Indianapolis.......................... 2 (1) 3 ------- ------- ------- Total................................................ 882 108 774 ------- ------- ------- Interest-bearing liabilities: Savings accounts....................................... (21) --- (21) NOW and money market accounts.......................... 71 (9) 80 Certificates of deposit................................... 127 70 57 Borrowings............................................. 74 (4) 78 ------- ------- ------- Total................................................ 251 57 194 ------- ------- ------- Change in net interest income (fully taxable equivalent basis)....................... 631 51 580 Tax equivalent adjustment................................. (4) 1 (5) ------- ------- ------- Change in net interest income............................. $ 627 $ 52 $ 575 ======= ======= =======
Comparison of Years Ended December 31, 1997 and 1996 General. The Company's total assets were $86.1 million at December 31, 1997, an increase of $8.4 million or 10.9% over the $77.7 million total at December 31, 1996. The increase in assets was funded primarily through growth in deposits of $3.2 million, increases in borrowings of $4.6 million and an increase in shareholders' equity of $1.1 million. The percentage of interest-earning assets to total assets was 96.0% at December 31, 1997 and 96.0% at December 31, 1996. At December 31, 1997, the total of securities was $15.7 million compared to $14.3 million at December 31, 1996, an increase of $1.4 million, or 9.6%. The primary investments added to the portfolio were asset-backed securities, with the exception of a $1.0 million FHLB callable fixed rate note which was funded with a matching advance from the Federal Home Loan Bank. At December 31, 1997 the Company held $200,000 of corporate obligations all of which was debt of domestic corporations rated AA or better by Moody's Investors Service, Inc. The Company had $1.1 million of structured FHLB notes in its investment portfolio at December 31, 1997. Total loans increased by $6.8 million from December 31, 1996 to December 31, 1997, an increase of 12.0%. Most of the increase occurred in the one-to-four family mortgages and consumer loans. One-to-four family mortgage loans increased by $5.3 million, and consumer loans, by $1.5 million. The increase was funded primarily by the increase in deposits and advances. During the 1997 year the Company invested $1.5 million in a limited partnership which will construct and manage residential real estate apartments for low and moderate income residents. This investment reflects a 49.5% participation in the partnership. The affordable housing project is expected to generate significant tax credits for the Bank in future years, beginning in 1999. This investment resulted in an increase to total assets of $1.5 million with a corresponding increase in other liabilities. At December 31, 1997, the project was still in construction; therefore, there was no income or loss to allocate to the Company. Deposits increased by $3.2 million to $60.6 million at December 31, 1997 from $57.4 million at December 31, 1996. Non-interest bearing deposits, NOW accounts, passbook savings and money market savings increased by $1.5 million while certificates of deposits increased by $1.7 million. Borrowings also increased by $4.6 million during the year. At December 31,1996, borrowings consisted of $2.0 million in FHLB advances and $1.4 million borrowed from another bank. The $1.4 million borrowed from another bank was repaid in early 1997 and at December 31, 1997 all borrowings were FHLB advances. Shareholders' equity increased by $1.1 million during 1997. Equity was used to fund regular quarterly dividends and was increased by the amortization of the Company's RRP, and a recovery of unrealized losses on available for sale securities. Net earnings for the year ended December 31, 1997 was $1.2 million. This compares to net earnings of $913,000 for the year ended December 31, 1996. Net earnings for the fiscal year ended December 31, 1997, totaled $1.2 million, an increase of $319,000, or 34.9%, from the $913,000 in net earnings recorded in 1996. The increase was primarily attributable to an increase in net interest income of $52,000 and a decrease in general, administrative, and other expense of $414,000, including the effects of the $335,000 charge in fiscal 1996 related to the Savings Association Insurance Fund ("SAIF") recapitalization assessment, which was partially offset by an increase of $221,000 in the provision for income taxes. Interest Income (fully taxable equivalent basis). The Company's total interest income was $6.1 million for the year ended December 31, 1997 compared to $5.7 million during 1996, an increase of $448,000. The increase in average interest earning assets from $74.9 million in 1996 to $78.6 million in 1997, combined with stable loan rates, contributed to 21 basis points increase in the average yield on interest earning assets to 7.83% in 1997 compared to 7.62% in 1996. While average loan yield remained constant, yield on mortgage-backed securities, investment securities and interest-earning deposits all improved during the year. Interest Expense. Interest expense increased by $396,000 for the year ended December 31, 1997 compared to 1996. This increase was the result of an increase in the average balance of interest-bearing liabilities by $7.3 million and the increase in the average cost of these liabilities by 7 basis points, from 4.82% during 1996 to 4.89% in 1997. Local competition resulted in pressure to maintain competitive rates; however, the interest rate spread improved in 1997. Net Interest Income (fully taxable equivalent basis). Net interest income increased by $52,000 for 1997 to approximately $3.0 million as compared with $2.9 million in 1996. Net yield on weighted average interest-earning assets declined in 1997 to 3.86% from 3.99% in 1996. Provision for losses on loans. The Company's provision for losses on loans for the year ended December 31, 1997 and 1996 was $26,000 and $12,000 respectively. This provision and the related increase in the allowance for loan losses were considered adequate based on the degree of delinquencies in the loan portfolio and the Company's loan loss history. There were recoveries of $1,100 in 1997 and $1,270 in 1996, and chargeoffs of $18,256 in 1997; there were no chargeoffs in 1996. The Bank also recorded as a charitable donation an $8,000 property held in real estate acquired through foreclosure during 1997 which it donated to Habitat for Humanity of Cass County, Indiana, Inc. The Company provides a general allowance that reflects an estimate of inherent losses based upon the types and categories of outstanding loans as well as problem loans. At December 31, 1997 and 1996 the allowance was $245,000 and $236,000, respectively, a ratio of 0.38% and 0.41% of total loans at each date. Non-performing loans at these dates were $431,000 and $406,000, respectively. The ratio of allowance for loan losses to non-performing loans decreased from 58.1% at December 31, 1996 to 56.8% at December 31, 1997. Based on management's review of the loan portfolio during these years, the allowance for loan losses at December 31, 1997 and 1996 is considered to be adequate to cover potential losses inherent in the loan portfolio. Other Income. The Company's other income for the years ended December 31, 1997 and 1996 was $170,000 and $82,000, respectively. The year ended December 31, 1996 included a $17,000 recovery on investments previously written off while 1997 included $24,000 of additional recovery. During 1997, the Company recorded $50,000 of net losses on sales of securities. Structured notes of $2.0 million were sold at a net loss and the proceeds were reinvested in higher yielding securities, primarily mortgage and other asset-backed securities. This strategy resulted in a higher yield in mortgage and other asset-backed securities for the year and a corresponding increase in interest income. Service charges on deposit accounts increased by $21,000 in 1997 compared to 1996. General, Administrative and Other Expense. General, administrative and other expense totaled $1.2 million in 1997 compared to $1.6 million in 1996, a decrease of $414,000 or 26.1%. Employee compensation and benefits decreased by $12,000 due primarily to a general increase in deferred loan origination costs year-to-year. Deposit insurance costs decreased by $412,000 due to the absence of the one-time SAIF recapitalization assessment in 1997 and the new FDIC premium rates. Data processing fees increased $5,000 for the year. Various other operating expenses increased by $8,000. The majority of the increase was related to additional operating costs associated with increased account volume, new services, and advertising. Income Tax Expense. Income tax expense for the years ended December 31, 1997 and 1996 was $728,000 and $507,000. Pretax income increased significantly in 1997 over 1996, mainly due to the SAIF assessment in 1996. This resulted in a corresponding increase in income tax expense. Comparison of Years Ended December 31, 1996 and 1995 General. Net earnings for the year ended December 31, 1996 was $913,000. This compares to net earnings of $908,000 for the year ended December 31, 1995. An increase in net interest income was offset primarily by an increase in other expenses, including the one-time special SAIF Assessment. Interest Income (fully taxable equivalent basis). The Company's total interest income was $5.7 million for the year ended December 31, 1996 compared to $4.8 million during 1995, an increase of $882,000. Interest income for 1996 compared to 1995 increased $108,000 due to higher rates earned on assets, primarily loans. However, the largest percentage of the increase, or $774,000, was due to an increase in the volume of average interest earnings assets, which grew by $10.2 million. The increase in average interest earnings assets from $64.7 million in 1995 to $74.9 million in 1996, combined with improved loan rates, contributed to an increase in the average yield on interest earning assets of 7.62% in 1996 compared to 7.46% in 1995. Average loan yield and yield on asset-backed securities improved while yield on other investment securities and interest-earning deposits declined. Interest Expense. Interest expense increased by $251,000 for the year ended December 31, 1996 compared to 1995. This increase was the result of an increase in the average balance of the interest-bearing liabilities by $3.7 million and the increase in the average cost of these liabilities by 13 basis points, from 4.69% during 1995 to 4.82% in 1996. Local competition resulted in pressure to maintain competitive rates; however, the interest rate spread improved slightly in 1996. Net Interest Income (fully taxable equivalent basis). Net interest income increased by $631,000 for 1996 to approximately $3.0 million as compared with $2.4 million in 1995. Net yield on weighted average interest-earning assets increased to 3.99% in 1996 from 3.64% in 1995.The Company increased its yield on earning assets more than its cost of funds in 1996 and this coupled with the increase in total average earning assets caused the significant improvement. Provision for losses on loans. The Company's provision for losses on loans for the year ended December 31, 1996 and 1995 was $12,000 and $20,000 respectively. This provision and the related increase in the allowance for loan losses were considered adequate based on the condition of the loan portfolio and the Company's loan loss history. There were recoveries of $1,270 in 1996, no chargeoffs in 1996 and chargeoffs of $3,622 in 1995. The Company provides a general allowance that reflects an estimate of inherent losses based upon the types and categories of outstanding loans as well as problem loans. At December 31, 1996 and 1995, the allowance was $236,000 and $223,000, respectively, a ratio of 0.41% and 0.45% of total loans at each date. Non-performing loans at these dates were $406,000 and $311,000, respectively. The ratio of allowance for loan losses to non-performing loans decreased from 71.7% at December 31, 1995 to 58.1% at December 31, 1996. Based on management's review of the loan portfolio during these years, the allowance for loan losses at December 31, 1996 and 1995 was considered to be adequate to cover losses inherent in the loan portfolio. Other Income. The Company's other income for the year ended December 31, 1996 and 1995 was $82,000 and $179,000, respectively. The year ended December 31, 1995 included a $90,000 recovery on investments previously written off while 1996 included only $17,000 of additional recovery. During 1996, the Company recorded $47,000 of net losses on sales of securities. Structured notes of $3.0 million were sold at a net loss and the proceeds were reinvested in higher yielding securities, primarily mortgage and other asset-backed securities. This strategy resulted in a higher yield in mortgage and other asset-backed securities for the year and a corresponding increase in interest income. Service charges on deposit accounts increased by $20,000 in 1996 compared to 1995. Income on the cash surrender value of life insurance was $34,000 in 1996 and $25,000 in 1995. General, Administraive and Other Expense. General, administrative and other expense totaled $1.6 million in 1996 compared to $1.0 million in 1995, an increase of $552,000 or 53.5%. Salaries and payroll taxes increased by $162,000 as a result of additional personnel, merit pay increases, implementation of the RRP, and higher costs of other fringe benefits. Pension plan expense decreased by $36,000 resulting in a net increase in employee compensation and benefits of $130,000. Deposit insurance costs increased $333,000 due to the one-time SAIF recapitalization assessment. Data processing fees decreased $2,000 for the year. Various other operating expenses increased by $93,000. Expenses related to being a public company such as accounting fees, legal fees, filing fees, annual report and meeting costs and transfer agent costs accounted for $57,000 of the increase. The balance of the increase was related to additional operating costs associated with increased account volume, new services, and advertising. Income Tax Expense. Income tax expense for the years ended December 31, 1996 and 1995 was $507,000 and $526,000. Pretax income declined slightly in 1996 over 1995 and this resulted in a corresponding decrease in income tax expense. Liquidity and Capital Resources The Company's primary sources of funds are deposits, proceeds from principal and interest payments of loans, and proceeds from maturing securities. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are generally influenced by general interest rates, economic conditions, and competition. The primary investing activity of the Company is the origination of mortgage loans and the purchase of investment securities. During the years ended December 31, 1997, 1996, and 1995, the Company originated mortgage loans in the amounts of $13.5 million, $13.2 million and $8.6 million, respectively. The Company originated consumer loans of $6.2 million, $6.1 million and $4.8 million, respectively. The Company purchased no loans, excluding commercial paper, in 1997, and purchased loans, excluding commercial paper, of $1.0 million in 1996 and 1995. Loan repayments, excluding commercial paper, totaled $12.9 million, $12.4 million, and $9.3 million for 1997, 1996, and 1995, respectively. During the years ended December 31, 1997, 1996, and 1995, the Company purchased investment securities in the amounts of $7.5 million, $8.7 million, and $13.6 million, respectively. Sales or maturities of such securities held by the Company and payments on mortgage-backed or other asset-backed securities were $5.7 million, $12.8 million, and $6.6 million for 1997, 1996, and 1995, respectively. Deposits grew by $4.9 million from December 31, 1995 to December 31, 1996, and by $3.2 million from December 31, 1996 to December 31, 1997. The Company experienced an increase in cash and cash equivalents to $3.8 million at December 31, 1996 from $3.2 million at December 31, 1995. From December 31, 1996 to December 31, 1997, cash and cash equivalents decreased by $1.5 million. At December 31, 1997 and 1996, the Company had outstanding loan commitments and standby letters of credit totaling $3.1 million and $2.3 million, respectively. The Company anticipates that it will have sufficient funds available to meet its current loan commitments. Certificates of deposit which are scheduled to mature in one year or less from December 31, 1997 and 1996 totaled $22.5 million and $19.9 million, respectively. Based upon historical deposit flow data, the Company's competitive pricing in its market and management's experience, management believes that a significant portion of such deposits will remain with the Company. Liquidity management is both a daily and long-term function of the Company's management strategy. In the event that the Company should require funds beyond its ability to generate them internally, additional funds are available through the use of FHLB advances, and also may be available through sales of securities, although no sales of securities are planned. At December 31, 1997 and 1996, the Company had outstanding FHLB advances of $6.5 million and $2.0 million, respectively. For each calendar month, the Bank is required to maintain an average daily balance of liquid assets (cash, certain time deposits, bankers' acceptances, specified United States Government, state or federal agency obligations, shares of certain mutual funds and certain corporate debt securities and commercial paper) equal to an amount not less than a specified percentage of its net withdrawable deposit accounts plus short-term borrowings. This liquidity requirement may be changed from time to time by the OTS to any amount within the range of 4% to 10% depending upon economic conditions and the savings flows of member institutions. The OTS recently reduced the level of liquid assets that must be held by a savings association from 5% to 4% of the association's net withdrawable accounts plus short-term borrowings based upon the average daily balance of such liquid assets for each quarter of the associations's fiscal year. The OTS may impose monetary penalties upon savings associations that fail to comply with those liquidity requirements. As of December 31, 1997, the Bank had liquid assets of $16.0 million, and a regulatory liquidity ratio of 37.4%. Pursuant to OTS capital regulations, savings associations must currently meet a 1.5% tangible capital requirement, a 3% leverage ratio (or core capital) requirement, and a total risk-based capital to risk-weighted assets ratio of 8%. At December 31, 1997, the Bank's tangible capital ratio was 19.1%, its leverage ratio was 19.1%, and its risk-based capital to risk-weighted assets ratio was 35.2%. Therefore, at December 31, 1997, 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, 1997:
At December 31, 1997 OTS Requirement The Bank's Capital Level % of % of Amount Capital Standard Assets Amount Assets(1) Amount of Excess (Dollars in thousands) Tangible capital............................ 1.5% $1,289 19.1% $16,412 $15,123 Core capital (2)............................ 3.0 2,578 19.1 16,412 13,834 Risk-based capital.......................... 8.0 3,781 35.2 16,657 (3) 12,876
(1) Tangible and core capital levels are shown as a percentage of total assets; risk-based capital levels are shown as a percentage of risk-weighted assets. (2) The OTS has proposed and is expected to adopt a core capital requirement for savings associations comparable to that recently adopted by the Comptroller of the Currency for national banks. The new regulation, as proposed, would require at least 3% of total adjusted assets for savings associations that received the highest supervisory rating for safety and soundness, and 4% to 5% for all other savings associations. The final form of such new OTS core capital requirement may differ from that which has been proposed. The Bank expects to be in compliance with such new requirements. (3) The Bank's risk-based capital includes $245,000 of general valuation allowances. As of December 31, 1997, management is not aware of any current recommendations by regulatory authorities which, if they were to be implemented, would have, or are reasonably likely to have, a material adverse effect on the Bank's liquidity, capital resources or results of operations. Impact of Inflation The audited consolidated financial statements presented elsewhere herein have been prepared in accordance with generally accepted accounting principles. These principles require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Year 2000 Compliance Because computer memory was so expensive on early mainframe computers, some computer programs used only the final two digits for the year in the date field while maintaining the first two digits of each year constant. As a result, some computer applications may be unable to interpret the change from year 1999 to the year 2000. The Company is actively monitoring its year 2000 computer compliance issues. The bulk of the Company's computer processing is provided under contract by Intrieve Corporation in Cincinnati, Ohio ("Intrieve"). Intrieve expects to be year 2000 compliant by December, 1998. Intrieve will assist the Company with other phases of year 2000 compliance throughout the remainder of 1998 and 1999. The Bank's loan documentation system is provided by Banker's Systems and is also expected to be year 2000 compliant within the next year. The Company has also appointed one of its executive officers to address all aspects of year 2000 compliance. Effects of Recent Accounting Pronouncements In June 1996, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets, and Extinguishments of Liabilities," that provides accounting guidance on transfers of financial assets, servicing of financial assets, and extinguishment of liabilities. SFAS No. 125 introduces an approach to accounting for transfers of financial assets that provides a means of dealing with more complex transactions in which the seller disposes of only a partial interest in the assets, retains rights or obligations, makes use of special purpose entities in the transaction, or otherwise has continuing involvement with the transferred assets. The new accounting method, the financial components approach, provides that the carrying amount of the financial assets transferred be allocated to components of the transaction based on their relative fair values. SFAS No. 125 provides criteria for determining whether control of assets has been relinquished and whether a sale has occurred. If the transfer does not qualify as a sale, it is accounted for as a secured borrowing. Transactions subject to the provisions of SFAS No. 125 include, among others, transfers involving repurchase agreements, securitizations of financial assets, loan participations, factoring arrangements, and transfers of receivables with recourse. An entity that undertakes an obligation to service financial assets recognizes either a servicing asset or liability for the servicing contract (unless related to a securitization of assets, and all the securitized assets are retained and classified as held-to-maturity). A servicing asset or liability that is purchased or assumed is initially recognized at its fair value. Servicing assets and liabilities are amortized in proportion to and over the period of estimated net servicing income or net servicing loss and are subject to subsequent assessments for impairment based on fair value. SFAS No. 125 provides that a liability is removed from the balance sheet only if the debtor either pays the creditor and is relieved of its obligation for the liability or is legally released from being the primary obligor. SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1997, and is to be applied prospectively. Earlier or retroactive application is not permitted. Management adopted SFAS No. 125 effective January 1, 1998, as required, without material effect on the Company's consolidated financial position or results of operations. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. SFAS No. 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. It does not require a specific format for that financial statement but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. SFAS No. 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. SFAS No. 130 is not expected to have a material impact on the Company's financial statements. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 significantly changes the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about reportable segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 uses a "management approach" to disclose financial and descriptive information about the way that management organizes the segments within the enterprise for making operating decisions and assessing performance. For many enterprises, the management approach will likely result in more segments being reported. In addition, SFAS No. 131 requires significantly more information to be disclosed for each reportable segment than is presently being reported in annual financial statements and also requires that selected information be reported in interim financial statements. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. SFAS No. 131 is not expected to have a material impact on the Company's financial statements. CHANGE IN ACCOUNTANTS On August 12, 1997, the Board of Directors of the Holding Company selected the accounting firm of Grant Thornton LLP to examine the consolidated financial statements of the Company for the fiscal year ending December 31, 1997. The audit reports issued by Geo. S. Olive & Co. LLC with respect to the Company's consolidated financial statements for 1995 and 1996 did not contain an adverse opinion or disclaimer of opinion, and were not qualified as to uncertainty, audit scope or accounting principles. During 1995 and 1996 (and any subsequent interim period), there have been no disagreements between the Company and Geo. S. Olive & Co. LLC on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Geo. S. Olive & Co. LLC, would have caused it to make a reference to the subject matter of the disagreement in connection with its audit report. Moreover, none of the events listed in Item 304(a)(1)(v) of Regulation S-K occurred during 1995 or 1996 or any subsequent interim period. In 1996, the Company consulted Grant Thornton LLP for financial accounting and tax advice regarding a tax-free return of capital which was paid in 1996. Grant Thornton LLP provided a letter to the Company stating its views with respect to accounting for the exercise price of stock options following such return of capital distribution. Their written views are incorporated by reference to Exhibit A to the Company's Current Report on Form 8-K, filed with the Commission on August 19, 1997. Geo. S. Olive & Co. LLC was consulted during its completion of the 1996 audit of the consolidated financial statements in 1997 for concurrence with Grant Thornton LLP on their written views, and Geo. S. Olive & Co. LLC concurred. Suite 900 625 Eden Park Drive Cincinnati, OH 45202-4181 513 762-5000 FAX 513 241-6125 GRANT THORNTON Grant Thornton LLP Accountants and Management Consultants The U.S. Member Firm of Grant Thornton International Report of Independent Certified Public Accountants Board of Directors Logansport Financial Corp. We have audited the accompanying consolidated statement of financial condition of Logansport Financial Corp. as of December 31, 1997, and the related consolidated statements of earnings, shareholders' equity, and cash flows for the year then ended. 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 audit. The consolidated financial statements as of December 31, 1996, and for the years ended December 31, 1996 and 1995 were audited by other auditors, whose report thereon dated January 23, 1997, expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 1997 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Logansport Financial Corp. as of December 31, 1997, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. /s/ Grant Thornton LLP Cincinnati, Ohio February 24, 1998 LOGANSPORT FINANCIAL CORP. Consolidated Statements of Financial Condition December 31, (In thousands, except share data)
ASSETS 1997 1996 Cash and due from banks $ 589 $ 998 Interest-bearing deposits in other financial institutions 1,680 2,761 ------- ------- Cash and cash equivalents 2,269 3,759 Certificates of deposit in other financial institutions 100 100 Investment securities available for sale - at market 5,750 7,629 Mortgage-backed securities available for sale - at market 9,932 6,674 Loans receivable - net 63,635 56,802 Real estate acquired through foreclosure - net 106 - Office premises and equipment - at depreciated cost 465 476 Federal Home Loan Bank stock - at cost 494 387 Investment in real estate partnership 1,540 - Accrued interest receivable on loans 299 266 Accrued interest receivable on mortgage-backed securities 83 54 Accrued interest receivable on investments and interest-bearing deposits 121 127 Prepaid expenses and other assets 33 42 Cash surrender value of life insurance 1,085 1,040 Deferred income tax asset 203 312 ------- ------- Total assets $86,115 $77,668 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits $60,595 $57,396 Advances from the Federal Home Loan Bank 6,500 2,000 Notes payable 1,525 1,400 Accrued interest and other liabilities 861 1,391 Accrued income taxes 92 54 ------- ------- Total liabilities 69,573 62,241 Commitments - - Shareholders' equity Preferred stock - no par value, 2,000,000 shares authorized; none issued - - Common stock - no par value, 5,000,000 shares authorized; 1,260,920 and 1,256,375 shares at aggregate value issued and outstanding at December 31, 1997 and 1996 7,566 7,518 Retained earnings - restricted 9,316 8,588 Less shares acquired by stock benefit plan (400) (522) Unrealized gains (losses) on securities designated as available for sale, net of related tax effects 60 (157) ------- ------- Total shareholders' equity 16,542 15,427 ------- ------- Total liabilities and shareholders' equity $86,115 $77,668 ======= =======
The accompanying notes are an integral part of these statements. LOGANSPORT FINANCIAL CORP. Consolidated Statements of Earnings For the Year Ended December 31, (In thousands, except share data)
1997 1996 1995 Interest income Loans $4,932 $4,421 $3,724 Mortgage-backed securities 559 510 227 Investment securities 394 533 651 Interest-bearing deposits and other 216 189 173 -------- -------- ------- Total interest income 6,101 5,653 4,775 Interest expense Deposits 2,864 2,613 2,436 Borrowings 251 106 32 -------- -------- ------- Total interest expense 3,115 2,719 2,468 -------- -------- ------- Net interest income 2,986 2,934 2,307 Provision for losses on loans 26 12 20 -------- -------- ------- Net interest income after provision for losses on loans 2,960 2,922 2,287 Other income Service charges on deposit accounts 88 67 47 Gain (loss) on sale of investment and mortgage-backed securities (50) (47) 3 Gain on sale of real estate acquired through foreclosure 1 1 12 Other operating 131 61 117 -------- -------- ------- Total other income 170 82 179 General, administrative and other expense Employee compensation and benefits 649 661 531 Occupancy and equipment 78 81 81 Federal deposit insurance premiums 37 449 116 Data processing 96 91 93 Other operating 310 302 211 -------- -------- ------- Total general, administrative and other expense 1,170 1,584 1,032 -------- -------- ------- Earnings before income taxes 1,960 1,420 1,434 Income taxes Current 761 593 519 Deferred (33) (86) 7 -------- -------- ------- Total income taxes 728 507 526 -------- -------- ------- NET EARNINGS $1,232 $ 913 $ 908 ======== ======== ======= EARNINGS PER SHARE Basic $ .98 $ .69 N/A ======== ======== ======= Diluted $ .95 $ .69 N/A ======== ======== =======
The accompanying notes are an integral part of these statements. LOGANSPORT FINANCIAL CORP. Consolidated Statements of Shareholders' Equity For the years ended December 31, 1997, 1996 and 1995 (In thousands, except share data)
Shares Unrealized acquired gains (losses) on by stock securities Common Retained benefit available stock earnings plan for sale Total ------------------------------------------------------------------ Balance at January 1, 1995 $ - $7,131 $ - $(297) $ 6,834 Net earnings for the year ended December 31, 1995 - 908 - - 908 Proceeds from issuance of common stock - net 12,670 - - - 12,670 Unrealized gains on securities designated as available for sale, net of related tax effects - - - 307 307 Cash dividends of $.20 per share - (265) - - (265) -------- ------ ----- ------ ------- Balance at December 31, 1995 12,670 7,774 - 10 20,454 Net earnings for the year ended December 31, 1996 - 913 - - 913 Return of capital distribution to shareholders (3,930) - - - (3,930) Purchase of shares for stock benefit plan - - (615) - (615) Purchase of shares (799) - - - (799) Unrealized losses on securities designated as available for sale, net of related tax effects - - - (167) (167) Amortization of stock benefit plan - - 93 - 93 Cash dividends of $.40 per share (423) (99) - - (522) -------- ------ ----- ------ ------- Balance at December 31, 1996 7,518 8,588 (522) (157) 15,427 Net earnings for the year ended December 31, 1997 - 1,232 - - 1,232 Issuance of shares under stock option plan 48 - - - 48 Unrealized gains on securities designated as available for sale, net of related tax effects - - - 217 217 Amortization of stock benefit plan - - 122 - 122 Cash dividends of $.40 per share - (504) - - (504) -------- ------ ----- ------ ------- Balance at December 31, 1997 $ 7,566 $9,316 $(400) $ 60 $16,542 ======== ====== ===== ====== =======
The accompanying notes are an integral part of these statements. LOGANSPORT FINANCIAL CORP. Consolidated Statements of Cash Flows For the year ended December 31, (In thousands)
1997 1996 1995 Cash flows from operating activities: Net earnings for the year $ 1,232 $ 913 $ 908 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 37 38 46 Amortization of premiums on investments and mortgage-backed securities 104 36 (21) Amortization expense of stock benefit plan 122 93 - (Gain) loss on sale of investment and mortgage-backed securities 50 47 (3) Provision for losses on loans 26 12 20 Gain on sale of real estate acquired through foreclosure (1) (1) (12) Increase (decrease) in cash, due to changes in: Accrued interest receivable on loans (33) (37) (56) Accrued interest receivable on mortgage-backed securities (29) (2) (48) Accrued interest receivable on investments 6 58 (6) Prepaid expenses and other assets 9 25 (95) Accrued interest and other liabilities (530) (89) 302 Federal income taxes Current 38 (32) 149 Deferred (33) (86) 7 -------- --------- --------- Net cash provided by operating activities 998 975 1,191 Cash flows provided by (used in) investing activities: Increase in certificates of deposit in other financial institutions - - (100) Proceeds from sale of investment securities designated as available for sale 2,495 3,835 708 Purchase of investment securities designated as available for sale (2,100) (2,834) (8,057) Purchase of investment securities designated as held to maturity - - (356) Maturities of investment securities designated as available for sale 1,471 2,877 3,939 Maturities of investment securities designated as held to maturity - - 450 Purchase of Federal Home Loan Bank stock (107) (38) (41) Proceeds from sale of mortgage-backed securities designated as available for sale 421 3,503 - Purchase of mortgage-backed securities designated as available for sale (5,126) (5,178) - Purchase of mortgage-backed securities designated as held to maturity - - (5,175) Principal repayments on mortgage-backed securities designated as available for sale 1,665 2,971 1,109 Purchase of loans - (1,046) (4,852) Loan disbursements (19,769) (19,211) (13,397) Investment in real estate partnership (15) - - Principal repayments on loans 12,791 13,303 12,461 Purchases and additions to office premises and equipment (26) (83) (63) Proceeds from sale of real estate acquired through foreclosure 14 15 9 Increase in cash surrender value of life insurance policy (45) (35) (25) -------- --------- --------- Net cash used in investing activities (8,331) (1,921) (13,390) -------- --------- --------- Net cash used in operating and investing activities (subtotal carried forward) (7,333) (946) (12,199) -------- --------- ---------
LOGANSPORT FINANCIAL CORP. Consolidated Statements of Cash Flows For the year ended December 31, (In thousands)
1997 1996 1995 Net cash used in operating and investing activities (subtotal brought forward) $ (7,333) $ (946) $(12,199) Cash provided by (used in) financing activities: Net increase in deposit accounts 3,199 4,935 1,259 Proceeds from Federal Home Loan Bank advances 10,500 6,000 1,000 Proceeds from note payable 100 1,400 - Repayment of Federal Home Loan Bank advances (6,000) (5,000) (1,000) Repayment of note payable (1,500) - - Proceeds from the exercise of stock options 48 - - Proceeds from issuance of common stock - net - - 12,670 Return of capital distribution - (3,930) - Purchase of shares for stock benefit plan - (615) - Dividends on common stock (504) (529) (132) Purchase of shares - (799) - -------- --------- --------- Net cash provided by financing activities 5,843 1,462 13,797 -------- --------- --------- Net increase (decrease) in cash and cash equivalents (1,490) 516 1,598 Cash and cash equivalents at beginning of year 3,759 3,243 1,645 -------- --------- --------- Cash and cash equivalents at end of year $ 2,269 $3,759 $ 3,243 ======== ====== ========= Supplemental disclosure of cash flow information: Cash paid during the year for: Income taxes $ 680 $ 629 $ 412 ======== ====== ========= Interest on deposits and borrowings $ 3,129 $2,699 $ 2,450 ======== ====== ========= Supplemental disclosure of noncash investing and financing activities: Foreclosed mortgage loans transferred to real estate acquired through foreclosure $ 136 $ 18 $ 84 ======== ====== ========= Transfer of investment and mortgage-backed securities to an available for sale classification $ --- $ --- $ 10,016 ======== ====== ========= Investment in real estate partnership via financing from notes payable $ 1,525 $ --- $ --- ======== ====== ========= Unrealized gains (losses) on securities designated as available for sale, net of related tax effects $ 217 $ (167) $ 307 ======== ====== ========= Due from broker for called securities $ --- $ --- $ 400 ======== ====== ========= Due to broker for purchased securities $ --- $ 706 $ --- ======== ====== ========= Dividends payable at end of year $ 126 $ 126 $ 132 ======== ====== =========
The accompanying notes are an integral part of these statements. LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES During 1995, the Board of Directors of Logansport Savings Bank, FSB (the "Savings Bank") adopted an overall plan of conversion and reorganization (the "Plan") whereby the Savings Bank would convert to the stock form of ownership (the "Conversion"), followed by the issuance of all of the Savings Bank's outstanding stock to a newly formed holding company, Logansport Financial Corp. (the "Corporation"), and the issuance of common shares of the Corporation to subscribing members of the Savings Bank. The conversion to the stock form of ownership was completed in June 1995, culminating in the Corporation's issuance of 1,322,500 common shares. Condensed financial statements of the Corporation are presented in Note O. Future references are made to either the Corporation or the Savings Bank as applicable. The Corporation is a savings and loan holding company whose activities are primarily limited to holding the common stock of the Savings Bank. The Savings Bank conducts a general banking business in north-central Indiana which consists of attracting deposits from the general public and applying those funds to the origination of loans for residential, consumer and nonresidential purposes. The Savings Bank's profitability is significantly dependent on its net interest income, which is the difference between interest income generated from interest-earning assets (i.e. loans and investments) and the interest expense paid on interest-bearing liabilities (i.e. customer deposits and borrowed funds). Net interest income is affected by the relative amount of interest-earning assets and interest-bearing liabilities and the interest received or paid on these balances. The level of interest rates paid or received by the Savings Bank can be significantly influenced by a number of environmental factors, such as governmental monetary policy, that are outside of management's control. The financial information presented herein has been prepared in accordance with generally accepted accounting principles ("GAAP") and general accounting practices within the financial services industry. In preparing consolidated financial statements in accordance with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the reporting period. Actual results could differ from such estimates. The following is a summary of the Corporation's significant accounting policies which have been consistently applied in the preparation of the accompanying consolidated financial statements. 1. Principles of Consolidation The consolidated financial statements include the accounts of the Corporation and its subsidiary, the Savings Bank. All significant intercompany balances and transactions have been eliminated. 2. Investment and Mortgage-backed Securities The Corporation accounts for investments and mortgage-backed securities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity Securities". SFAS No. 115 requires that investments be categorized as held-to-maturity, trading, or available for sale. Securities classified as held to maturity are carried at cost only if the Corporation has the positive intent and ability to hold these securities to maturity. Trading securities and securities available for sale are carried at fair value with resulting unrealized gains or losses charged to operations or shareholders' equity, respectively. At December 31, 1997 and 1996, the Corporation's shareholders' equity accounts reflected a net unrealized gain and a net unrealized loss on available for sale securities of $60,000 and $157,000, respectively. 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, 1997, 1996 and 1995 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3. Loans Receivable Loans receivable are stated at the principal amount outstanding, adjusted for the allowance for loan losses. Interest is accrued as earned, unless the collectibility of the loan is in doubt. Uncollectible interest on loans that are contractually past due is charged off, or an allowance is established based on management's periodic evaluation. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received until, in management's judgment, the borrower's ability to make periodic interest and principal payments has returned to normal, in which case the loan is returned to accrual status. If the ultimate collectibility of the loan is in doubt, in whole or in part, all payments received on nonaccrual loans are applied to reduce principal until such doubt is eliminated. 4. Loan Origination Fees The Savings Bank accounts for loan origination fees in accordance with SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases". Pursuant to the provisions of SFAS No. 91, origination fees received from loans, net of certain direct origination costs, are deferred and amortized to interest income using the interest method, giving effect to actual loan prepayments. Additionally, SFAS No. 91 generally limits the definition of loan origination costs to the direct costs attributable to originating a loan, i.e. principally actual personnel costs. Fees received for loan commitments that are expected to be drawn upon, based on the Savings Bank's experience with similar commitments, are deferred and amortized over the life of the loan using the level-yield method. Fees for other loan commitments are deferred and amortized over the loan commitment period on a straight-line basis. 5. Allowance for Losses on Loans It is the Savings Bank's policy to provide valuation allowances for estimated losses on loans based on past loss experience, trends in the level of delinquent and problem loans, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral and current and anticipated economic conditions in the primary lending area. When the collection of a loan becomes doubtful, or otherwise troubled, the Savings Bank records a loan loss provision equal to the difference between the fair value of the property securing the loan and the loan's carrying value. Major loans and major lending areas are reviewed periodically to determine potential problems at an early date. The allowance for loan losses is increased by charges to earnings and decreased by charge-offs (net of recoveries). The Savings Bank accounts for impaired loans in accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan". SFAS No. 114 requires that impaired loans be measured based upon the present value of expected future cash flows discounted at the loan's effective interest rate or, as an alternative, at the loan's observable market price or fair value of the collateral. The Savings Bank's current procedures for evaluating impaired loans result in carrying such loans at the lower of cost or fair value. LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995 NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued) 5. Allowance for Losses on Loans (continued) A loan is defined under SFAS No. 114 as impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. In applying the provisions of SFAS No. 114, the Savings Bank considers its investment in one- to four-family residential loans and consumer installment loans to be homogeneous and therefore excluded from separate identification for evaluation of impairment. With respect to the Savings Bank's investment in nonresidential and multi-family residential real estate loans, and its evaluation of impairment thereof, such loans are generally collateral dependent and, as a result, are carried as a practical expedient at the lower of cost or fair value. Collateral dependent loans which are more than ninety days delinquent are considered to constitute more than a minimum delay in repayment and are evaluated for impairment under SFAS No. 114 at that time. At December 31, 1997 and 1996, the Savings Bank had no loans that would be defined as impaired under SFAS No. 114. 6. Real Estate Acquired Through Foreclosure Real estate acquired through foreclosure is carried at the lower of the loan's unpaid principal balance (cost) or fair value less estimated selling expenses at the date of acquisition. Real estate loss provisions are recorded if the properties' fair value subsequently declines below the value determined at the recording date. In determining the lower of cost or fair value at acquisition, costs relating to development and improvement of property are capitalized. Costs relating to holding real estate acquired through foreclosure, net of rental income, are charged against earnings as incurred. 7. Office Premises and Equipment Office premises and equipment are carried at cost and include expenditures which extend the useful lives of existing assets. Maintenance, repairs and minor renewals are expensed as incurred. For financial reporting, depreciation and amortization are provided on the straight-line and accelerated methods over the useful lives of the assets, estimated to be thirty to forty years for buildings, five to twenty years for building improvements, five to fifteen years for furniture and equipment and five years for automobiles. An accelerated method is used for tax reporting purposes. 8. Investment in Real Estate Partnership During 1997, the Corporation invested $1.5 million in a real estate partnership which will construct and manage residential real estate apartments for low and moderate income residents. The investment reflects a 49.5% participation in the partnership. This affordable housing project is expected to generate significant tax credits for the Savings Bank in future years. 9. Income Taxes The Corporation accounts for income taxes pursuant to SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109 established financial accounting and reporting standards for the effects of income taxes that result from the Corporation's activities within the current and previous years. 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 LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995 NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued) 9. Income Taxes (continued) amount in the consolidated financial statements that will result in net taxable or deductible amounts in future periods. Deferred tax assets are recorded only to the extent that the amount of net deductible temporary differences or carryforward attributes may be utilized against current period earnings, carried back against prior years' earnings, offset against taxable temporary differences reversing in future periods, or utilized to the extent of management's estimate of future taxable income. A valuation allowance is provided for deferred tax assets to the extent that the value of net deductible temporary differences and carryforward attributes exceeds management's estimates of taxes payable on future taxable income. Deferred tax liabilities are provided on the total amount of net temporary differences taxable in the future. Deferral of income taxes results primarily from the different methods of accounting for certain retirement plans, general loan loss allowances and percentage of earnings bad debt deductions. Additional temporary differences result from depreciation computed using accelerated methods for tax purposes. 10. Benefit Plans Employees of the Savings Bank are covered by the Pentegra Group, previously the Financial Institutions Retirement Fund (the "Fund"), which is a defined benefit pension plan to which contributions are made for the benefit of the employees. Contributions are determined to cover the normal cost of pension benefits, the one-year cost of the pre-retirement death and disability benefits and the amortization of any unfunded accrued liabilities. The Fund had previously advised the Savings Bank that the pension plan meets the criteria of a multi-employer pension plan as defined in SFAS No. 87, "Employers' Accounting for Pensions". In accordance with SFAS No. 87, net pension cost is recognized for any required contribution for the period. A liability is recognized for any contributions due and unpaid. During 1993, the Savings Bank acquired additional benefits for all qualified employees covered by the Fund which were paid for by reducing the overfunded amount. Due to a continuation of the funds overfunded status, no contributions were made to the pension plan during the years ended December 31, 1997 and 1996. Pension expense was $36,000 for the year ended December 31, 1995. The provision for pension expense was computed by the Fund's actuaries utilizing the projected unit credit cost method and assuming a 7.5% return on Fund assets. The Savings Bank has purchased life insurance policies on certain officers and directors. The insurance policies had an approximate cash surrender value of $1.1 million and $1.0 million at December 31, 1997 and 1996. 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 $99,000, $87,000 and $76,000 for the years ended December 31, 1997, 1996 and 1995, 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, 1997, 1996 or 1995. LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995 NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued) 10. Benefit Plans (continued) In April 1996, the Corporation's shareholders approved the Logansport Savings Bank, FSB Recognition and Retention Plan and Trust ("RRP"). The RRP may acquire up to 52,900 shares of the Corporation's common stock, an amount equal to 4.0% of the number of shares issued in the Conversion, for awards to management. Shares awarded to management under the RRP vest at a rate of 20% at the end of each full twelve months of service with the Bank after the date of grant. During 1996, the Savings Bank contributed $615,000 to the RRP for the purchase of 46,675 shares of the Corporation's common stock awarded to management and recorded the amount as unearned compensation. Amortization expense under the RRP totaled $123,000 and $92,000 for the years ended December 31, 1997 and 1996, respectively. 11. Earnings Per Share and Cash Distributions Per Share Basic earnings per share is computed based upon the weighted-average shares outstanding during the year. Weighted-average common shares outstanding totaled 1,259,162 and 1,316,372 for the years ended December 31, 1997 and 1996, respectively. Diluted earnings per share is computed taking into consideration common shares outstanding and dilutive potential common shares to be issued under the Corporation's stock option plan. Weighted-average common shares deemed outstanding for purposes of computing diluted earnings per share, which gives effect to 32,384 and 8,600 incremental shares from assumed exercise of stock options, totaled 1,291,546 and 1,324,972 for the years ended December 31, 1997 and 1996, respectively. The provisions of SFAS No. 128, "Earnings Per Share," are not applicable for the year ended December 31, 1995, as the Corporation was not a stock company for the entire year. During 1996, the Corporation paid capital distributions of $3.32 with respect to its common stock and dividends of $.08 per share. Effective December 31, 1997, the Corporation began presenting earnings per share pursuant to the provisions of SFAS No. 128. In accordance with the Statement, the 1996 earnings per share presentation has been revised to conform to SFAS No. 128. 12. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents includes cash and due from banks and interest-bearing deposits in other financial institutions with original maturities of less than 90 days. 13. Fair Value of Financial Instruments SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires disclosure of fair value of financial instruments, both assets and liabilities, whether or not recognized in the consolidated statement of financial condition, for which it is practicable to estimate that value. For financial instruments where quoted market prices are not available, fair values are based on estimates using present value and other valuation methods. The methods used are greatly affected by the assumptions applied, including the discount rate and estimates of future cash flows. Therefore, the fair values presented may not represent amounts that could be realized in an exchange for certain financial instruments. LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995 NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued) 13. Fair Value of Financial Instruments (continued) The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments at December 31, 1997 and 1996: Cash and cash equivalents: The carrying amounts presented in the consolidated statements of financial condition for cash and cash equivalents are deemed to approximate fair value. Certificates of deposit: The carrying amount presented in the consolidated statements of financial condition is deemed to approximate fair value. Investment and mortgage-backed securities: For investment and mortgage-backed securities, fair value is deemed to equal the quoted market price. Loans receivable: The loan portfolio has been segregated into categories with similar characteristics, such as one- to four-family residential, multi-family residential, nonresidential real estate and consumer. These loan categories were further delineated into fixed-rate and adjustable-rate loans. The fair values for the resultant loan categories were computed via discounted cash flow analysis, using current interest rates offered for loans with similar terms to borrowers of similar credit quality. Federal Home Loan Bank stock: The carrying amount presented in the consolidated statements of financial condition is deemed to approximate fair value. Deposits: The fair value of NOW accounts, passbook and club accounts, and money market deposits is deemed to approximate the amount payable on demand at December 31, 1997 and 1996. 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, 1997 and 1996, the difference between the fair value and notional amount of loan commitments was not material. LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995 NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued) 13. Fair Value of Financial Instruments (continued) Based on the foregoing methods and assumptions, the carrying value and fair value of the Corporation's financial instruments are as follows at December 31:
1997 1996 Carrying Fair Carrying Fair value value value value (In thousands) Financial assets Cash and cash equivalents $ 2,269 $ 2,269 $ 3,759 $ 3,759 Certificates of deposit 100 100 100 100 Investment securities 5,750 5,750 7,629 7,629 Mortgage-backed securities 9,932 9,932 6,674 6,674 Loans receivable 63,635 66,286 56,802 57,310 Federal Home Loan Bank stock 494 494 387 387 ------- ------- ------- ------- $82,180 $84,831 $75,351 $75,859 ======= ======= ======= ======= Financial liabilities Deposits $60,595 $60,554 $57,396 $57,257 Advances from Federal Home Loan Bank 6,500 6,499 2,000 1,998 Notes payable 1,525 1,525 1,400 1,400 Due to broker --- --- 706 706 ------- ------- ------- ------- $68,620 $68,578 $61,502 $61,361 ======= ======= ======= =======
14. Advertising Advertising costs are expensed when incurred. 15. Reclassifications Certain prior year amounts have been reclassified to conform to the 1997 consolidated financial statement presentation. LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995 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, 1997 and 1996, are as follows:
1997 Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value (In thousands) U.S. Government agency obligations $3,598 $ 6 $153 $3,451 State and municipal obligations 1,780 67 - 1,847 FHLMC stock 6 237 - 243 Corporate debt obligations 200 9 - 209 ------ ---- ---- ------ Total investment securities $5,584 $319 $153 $5,750 ====== ==== ==== ======
1996 Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value (In thousands) U.S. Government agency obligations $5,245 $ 1 $366 $4,880 State and municipal obligations 2,194 48 - 2,242 FHLMC stock 6 153 - 159 Corporate debt obligations 350 - 2 348 ------ ---- ---- ------ Total investment securities $7,795 $202 $368 $7,629 ====== ==== ==== ======
The amortized cost and estimated fair value of investment securities by term to maturity at December 31, 1997, are shown below. Estimated Amortized fair cost value (In thousands) Due in one year or less $ 356 $ 359 Due after one year through five years 475 452 Due after five through ten years 4,437 4,375 Due after ten years 310 321 ------ ------ 5,578 5,507 FHLMC stock 6 243 ------ ------ $5,584 $5,750 ====== ====== LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995 NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES (continued) The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of mortgage-backed securities at December 31, 1997 and 1996.
1997 Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value (In thousands) Federal Home Loan Mortgage Corporation participation certificates $ 949 $ 1 $ 14 $ 936 Government National Mortgage Association participation certificates 3,880 5 51 3,834 Federal National Mortgage Association participation certificates 2,849 6 16 2,839 Federal Housing Authority participation certificates 884 6 - 890 Small Business Administration participation certificates 1,298 1 5 1,294 Other 138 1 - 139 ------ --- ----- ------ Total mortgage-backed securities $9,998 $20 $ 86 $9,932 ====== === ===== ======
1996 Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value (In thousands) Federal Home Loan Mortgage Corporation participation certificates $1,112 $ 2 $ 11 $1,103 Government National Mortgage Association participation certificates 1,758 - 47 1,711 Federal National Mortgage Association participation certificates 2,202 5 32 2,175 Federal Housing Authority participation certificates 703 - - 703 Small Business Administration participation certificates 729 - 10 719 Other 264 1 2 263 ------ --- ----- ------ Total mortgage-backed securities $6,768 $ 8 $102 $6,674 ====== ====== ==== ======
The amortized cost and estimated fair value of mortgage-backed securities at December 31, 1997 and 1996, by contractual terms to maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may generally prepay obligations without prepayment penalties. LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995 NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES (continued)
1997 1996 Estimated Estimated Amortized fair Amortized fair cost value cost value (In thousands) Due within one year $1,927 $1,915 $1,556 $1,539 Due after one year to three years 2,285 2,266 1,483 1,464 Due after three years to five years 1,349 1,337 816 803 Due after five years to ten years 1,825 1,806 1,331 1,307 Due after ten years 2,612 2,608 1,582 1,561 ------ ------ ------ ------ Total mortgage-backed securities $9,998 $9,932 $6,768 $6,674 ====== ====== ====== ======
NOTE C - LOANS RECEIVABLE The composition of the loan portfolio at December 31 is as follows:
1997 1996 (In thousands) Residential real estate One- to four-family residential $46,419 $41,109 Multi-family residential 1,844 2,370 Construction 1,333 1,016 Commercial 3,072 2,701 Consumer and other 11,379 9,864 ------- ------- 64,047 57,060 Less: Undisbursed portion of loans in process 167 22 Allowance for loan losses 245 236 ------- ------- $63,635 $56,802 ======= =======
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 $49.6 million, or 77%, of the total loan portfolio at December 31, 1997, and $44.5 million, or 78% of the total portfolio at December 31, 1996. Generally, such loans have been underwritten on the basis of no more than an 80% loan-to-value ratio, which has historically provided the Savings Bank with adequate collateral coverage in the event of default. Nevertheless, the Savings Bank, as with any lending institution, is subject to the risk that real estate values could deteriorate in its primary lending area of north-central Indiana, thereby impairing collateral values. However, management is of the belief that real estate values in the Savings Bank's primary lending area are presently stable. In the normal course of business, the Savings Bank has made loans to its directors, officers and their related business interests. Related party loans are made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectibility. Loans to officers and directors totaled approximately $431,000 and $492,000, at December 31, 1997 and 1996, respectively. LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995 NOTE D - ALLOWANCE FOR LOAN LOSSES The activity in the allowance for loan losses for the year ended December 31 is as follows: 1997 1996 1995 (In thousands) Beginning balance $236 $223 $206 Provision for loan losses 26 12 20 Recoveries (charge-offs) of loans - net (17) 1 (3) ---- ---- ---- Ending balance $245 $236 $223 ==== ==== ==== At December 31, 1997, the Savings Bank's allowance for loan losses was comprised entirely of a general loan loss allowance which is includible as a component of regulatory risk-based capital. At December 31, 1997, 1996 and 1995, the Savings Bank had loans of $431,000, $406,000 and $311,000, respectively, which had been placed on nonaccrual status due to concerns as to borrowers' ability to pay. Interest income that would have been recognized had nonaccrual loans performed pursuant to contractual terms totaled approximately $24,000, $22,000 and $15,000 for the years ended December 31, 1997, 1996 and 1995, respectively. NOTE E - OFFICE PREMISES AND EQUIPMENT Office premises and equipment is comprised of the following at December 31: 1997 1996 (In thousands) Land $203 $203 Buildings and improvements 460 443 Furniture and equipment 264 264 ---- ---- 927 910 Less accumulated depreciation and amortization (462) (434) ---- ---- $465 $476 ==== ==== The Corporation intends to commence with expansion of its main office facility in 1998. As of December 31, 1997, the Corporation has committed approximately $1.5 million to such expansion and renovation which is expected to be completed during fiscal 1999. LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995 NOTE F - DEPOSITS Deposits consist of the following major classifications at December 31:
Deposit type and weighted average interest rate 1997 1996 (In thousands) NOW accounts December 31, 1997 - 1.99% $ 4,196 December 31, 1996 - 2.14% $ 4,017 Passbook and club accounts December 31, 1997 - 3.00% 3,070 December 31, 1996 - 3.00% 3,119 Money market deposit accounts December 31, 1997 - 4.61% 16,736 December 31, 1996 - 4.59% 15,646 Non-interest bearing accounts 862 631 ------ ------ Total demand, transaction and passbook deposits 24,864 23,413 Certificates of deposit Original maturities of: Less than 12 months December 31, 1997 - 5.01% 3,903 December 31, 1996 - 5.07% 4,883 12 months to 18 months December 31, 1997 - 5.42% 6,770 December 31, 1996 - 5.31% 5,906 24 months to 30 months December 31, 1997 - 5.65% 16,812 December 31, 1996 - 5.53% 14,790 More than 30 months December 31, 1997 - 5.53% 3,552 December 31, 1996 - 5.55% 3,757 Individual retirement accounts December 31, 1997 - 5.63% 4,694 December 31, 1996 - 5.61% 4,647 ------- ------- Total certificates of deposit 35,731 33,983 ------- ------- Total deposits $60,595 $57,396 ======= =======
At December 31, 1997 and 1996, the Savings Bank had certificate of deposit accounts with balances greater than $100,000 totaling $3.8 million and $4.4 million, respectively. LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995 NOTE F - DEPOSITS (continued) Interest expense on deposits for the year ended December 31 is summarized as follows:
1997 1996 1995 (In thousands) Passbook and money market deposit accounts $ 837 $ 763 $ 715 NOW accounts 87 106 104 Certificates of deposit 1,940 1,744 1,617 ------ ------ ------ $2,864 $2,613 $2,436 ====== ====== ======
Maturities of outstanding certificates of deposit at December 31 are summarized as follows: 1997 1996 (In thousands) Less than one year $22,523 $19,939 One to three years 11,989 12,789 Over three years 1,219 1,255 ------- ------- $35,731 $33,983 ======= ======= NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK Advances from the Federal Home Loan Bank, collateralized at December 31, 1997 by a blanket pledge of residential mortgage loans, and the Savings Bank's investment in certain U.S. Government agency securities and mortgage-backed securities totaling $13.3 million, are summarized as follows: Maturing year December 31, Interest rate ending December 31, 1997 1996 (In thousands) 5.38% 1997 $ - $2,000 5.70% - 5.89% 1998 4,000 - 5.65% - 6.09% 1999 2,500 - ------ ------ $6,500 $2,000 ====== ====== Weighted-average interest rate 5.79% 5.38% ====== ====== NOTE H - NOTES PAYABLE At December 31, 1997, notes payable consists of construction borrowings secured by the Savings Bank's investment in a real estate partnership. The Savings Bank pays only interest until completion of the project at which time repayment terms will convert to a ten year amortization. At December 31, 1997, the interest rate on the variable rate borrowing was 4.35%. At December 31, 1996, notes payable consisted of short-term borrowings secured by 100% of the Bank's common stock, with interest at the prime rate, from a commercial bank. The note was repaid in January 1997. LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995 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:
1997 1996 1995 (In thousands) Federal income taxes computed at the statutory rate $666 $483 $488 Increase (decrease) in taxes resulting from: Tax exempt interest (34) (37) (35) Increase in cash surrender value of life insurance (15) (12) (9) State income taxes 112 79 82 Other (1) (6) - ---- ---- ---- Income tax provision per consolidated financial statements $728 $507 $526 ==== ==== ====
The composition of the Corporation's net deferred tax asset at December 31 is as follows:
Taxes (payable) refundable on temporary 1997 1996 differences at statutory rate: (In thousands) Deferred tax assets: Other than temporary declines in investment securities $ 23 $ 33 Retirement expense 132 101 General loan loss allowance 104 100 Unrealized losses on securities designated as available for sale - 103 Stock benefit plan expense 83 72 Other 7 7 ---- ---- Total deferred tax assets 349 416 Deferred tax liabilities: State income taxes (23) (21) Percentage of earnings bad debt deduction (74) (74) Unrealized gains on securities designated as available for sale (40) - Book vs. tax depreciation (9) (9) ---- ---- Total deferred tax liabilities (146) (104) ---- ---- Net deferred tax asset $203 $312 ==== ====
LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995 NOTE I - INCOME TAXES (continued) 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, 1997. If the amounts that qualify as deductions for federal income taxes are later used for purposes other than bad debt losses, including distributions in liquidation, such distributions will be subject to federal income taxes at the then current corporate income tax rate. The approximate amount of unrecognized deferred tax liability relating to the cumulative bad debt deduction is approximately $500,000 at December 31, 1997. See Note L for additional information regarding future percentage of earnings bad debt deductions. NOTE J - COMMITMENTS The Savings Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers including commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the consolidated statement of financial condition. The contract or notional amounts of the commitments reflect the extent of the Savings Bank's involvement in such financial instruments. The Savings Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Savings Bank uses the same credit policies in making commitments and conditional obligations as those utilized for on-balance-sheet instruments. At December 31, 1997, the Savings Bank had outstanding commitments of approximately $1.5 million to originate loans. Additionally, the Savings Bank had unused lines of credit totaling $560,000 at December 31, 1997. In the opinion of management, all loan commitments equaled or exceeded prevalent market interest rates as of December 31, 1997, and will be funded from normal cash flow from operations. Finally, the Savings Bank had a commitment under a standby letter of credit totaling $759,000 at December 31, 1997. Standby letters of credit are conditional commitments issued by the Savings Bank to guarantee the performance of a customer to a third party. LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995 NOTE K - REGULATORY CAPITAL The Savings Bank is subject to minimum capital requirements promulgated by the Office of Thrift Supervision ("OTS"). Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary -- actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Savings Bank must meet specific capital guidelines that involve quantitative measures of the Savings Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Savings Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Such minimum capital standards generally require the maintenance of regulatory capital sufficient to meet each of three tests, hereinafter described as the tangible capital requirement, the core capital requirement and the risk-based capital requirement. The tangible capital requirement provides for minimum tangible capital (defined as shareholders' equity less all intangible assets) equal to 1.5% of adjusted total assets. The core capital requirement provides for minimum core capital (tangible capital plus certain forms of supervisory goodwill and other qualifying intangible assets) equal to 3.0% of adjusted total assets. An OTS proposal, if adopted in present form, would increase the core capital requirement to a range of 4.0% - 5.0% of adjusted total assets for substantially all savings institutions. Management anticipates no material change to the Savings Bank's present excess regulatory capital position as a result of this proposed change to the regulatory capital requirement. The risk-based capital requirement currently provides for the maintenance of core capital plus general loan loss allowances equal to 8.0% of risk-weighted assets. In computing risk-weighted assets, the Savings Bank multiplies the value of each asset on its statement of financial condition by a defined risk-weighting factor, e.g., one- to four-family residential loans carry a risk-weighted factor of 50%. As of December 31, 1997 and 1996, management believes that the Savings Bank met all capital adequacy requirements to which it is subject.
1997: To be "well- capitalized" under For capital prompt corrective Actual adequacy purposes action provisions --------------------- --------------------------- ------------------------ Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) Tangible capital $16,412 19.1% (1) $1,289 (1) 1.5% (1) $4,297 (1) 5.0% Core capital $16,412 19.1% (1) $2,578 (1) 3.0% (1) $5,156 (1) 6.0% Risk-based capital $16,657 35.2% (1) $3,781 (1) 8.0% (1) $4,726 (1) 10.0% 1996: 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 $17,018 21.9% (1) $1,166 (1) 1.5% (1) $3,886 (1) 5.0% Core capital $17,018 21.9% (1) $2,332 (1) 3.0% (1) $4,664 (1) 6.0% Risk-based capital $17,254 41.1% (1) $3,356 (1) 8.0% (1) $4,195 (1) 10.0% - --------- (1) Equal to or greater than sign omitted for EDGAR.
At December 31, 1997 and 1996, the Savings Bank met all regulatory requirements for classification as a "well-capitalized" institution. A "well-capitalized" institution must have risk-based capital of 10.0%, and core capital of 5.0%. The Savings Bank's regulatory capital exceeded the minimum required amounts for classification as a "well-capitalized" institution at December 31, 1997 by $11.9 million and $12.1 million, respectively. LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995 NOTE K - REGULATORY CAPITAL (continued) Regulations of the Office of Thrift Supervision ("OTS") impose limitations on the payment of dividends and other capital distributions by savings associations. Under such regulations, a savings association that, immediately prior to, and on a pro forma basis after giving effect to, a proposed capital distribution, has total capital (as defined by OTS regulation) that is equal to or greater than the amount of its fully phased-in capital requirement is generally permitted without OTS approval (but subsequent to 30 days prior notice to the OTS of the planned dividend) to make capital distributions during a calendar year in the amount of (i) up to 100% of its net earnings to date during the year plus an amount equal to one-half of the amount by which its total capital to assets ratio exceeded its fully phased-in capital to assets ratio at the beginning of the year (ii) or 75% of its net earnings for the most recent four quarters. Pursuant to such OTS dividend regulations, the Savings Bank had the ability to pay dividends of approximately $6.9 million to the Corporation at December 31, 1997. NOTE L - LEGISLATIVE DEVELOPMENTS The deposit accounts of the Savings Bank and of other savings associations are insured by the Federal Deposit Insurance Corporation ("FDIC") through the SAIF. The reserves of the SAIF were below the level required by law, because a significant portion of the assessments paid into the fund had been used to pay the cost of prior thrift failures. The deposit accounts of commercial banks are insured by the FDIC in the Bank Insurance Fund ("BIF"), except to the extent such banks have acquired SAIF deposits. The reserves of the BIF met the level required by law in 1995. As a result of the respective reserve levels of the funds, deposit insurance assessments paid by healthy savings associations exceeded those paid by healthy commercial banks by approximately $.19 per $100 in deposits in 1995. In 1996, no BIF assessments were required for healthy commercial banks except for a $2,000 minimum fee. On September 30, 1996, the President enacted legislation to recapitalize the SAIF which provided for a special assessment of $.657 per $100 of deposits held at March 31, 1995. The Savings Bank had $50.9 million in SAIF deposits at March 31, 1995, resulting in an assessment of approximately $335,000, or $221,000 after-tax, which was recorded as a charge in 1996. The legislation also provided for a reduction of future annual deposit insurance premiums from $.235 per $100 of SAIF deposits to $.064 per $100 of SAIF deposits beginning in 1997. Congress is considering legislation to eliminate the federal savings and loan charter and the separate federal regulation of savings and loan associations. Pursuant to such legislation, Congress may eliminate the OTS, and the Savings Bank may be regulated under federal law as a bank holding company. Such change in regulation would likely change the range of activities in which the Savings Bank may engage and would probably subject the Savings Bank to more regulation by the FDIC. In addition, the Corporation might become subject to a different form of holding company regulation, which may limit the activities in which the Corporation may engage, and subject the Corporation to other additional regulatory requirements, including separate capital requirements. At this time, the Corporation cannot predict when or whether Congress may actually pass legislation regarding the Corporation's or the Savings Bank's regulatory requirements. Although such legislation may change the activities in which either the Corporation and the Savings Bank may engage, it is not anticipated that the current activities of both the Corporation and the Savings Bank will be materially affected by those activity limits. LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995 NOTE L - LEGISLATIVE DEVELOPMENTS (continued) Under separate legislation related to the recapitalization plan, the Savings Bank is required to recapture as taxable income approximately $220,000, representing its post-1987 percentage of earnings bad debt deduction. The Savings Bank has provided deferred taxes for this amount and is permitted by such legislation to recapture such income over a six year period. NOTE M - STOCK OPTION PLAN During fiscal 1996, the Board of Directors adopted a Stock Option Plan that provided for the issuance of 132,250 shares of authorized, but unissued shares of common stock at the fair market value at the date of grant. In April 1996, the Corporation granted options to purchase 108,691 shares at an exercise price of $12.50 per share. As a result of the return of capital distribution of $3.00 per share during fiscal 1996, the number of shares awarded and exercise price were adjusted to ensure equivalent economic consequences to option holders following the distribution. In accordance with SFAS No. 123, the Corporation continues to apply Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for its stock option plan. Accordingly, no compensation cost has been recognized for the plan. Had compensation cost for the Corporation's stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the accounting method utilized in SFAS No. 123, the Corporation's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below: 1997 1996 Net earnings As reported $1,232 $913 ====== ==== Pro-forma $1,232 $883 ====== ==== Basic earnings per share As reported $ .98 $.69 ====== ==== Pro-forma $ .98 $.67 ====== ==== Diluted earnings per share As reported $ .95 $.69 ====== ==== Pro-forma $ .95 $.67 ====== ==== The fair value of each option grant is estimated on the date of grant using the modified Black-Scholes options-pricing model with the following weighted-average assumptions used for grants in 1996; dividend yield of 3.67% and expected volatility of 11.5%; risk-free interest rate of 6.5% and expected lives of seven years. LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995 NOTE M - STOCK OPTION PLAN (continued) A summary of the status of the Corporation's fixed stock option plans as of December 31, 1997 and 1996, and changes during the periods ending on those dates is presented below:
1997 1996 Weighted- Weighted- average average exercise exercise Shares price Shares price Outstanding at beginning of year 129,340 $ 10.53 - $ - Granted - $ - 108,691 $ 12.50 Adjustment for return of capital distribution - $ - 20,649 $ (1.97) Exercised 4,545 $ 10.53 - $ - Forfeited - $ - - $ - ------- -------- ------- ------- Outstanding at end of year 124,795 $ 10.53 129,340 $ 10.53 ======= ======== ======= ======= Options exercisable at year-end 21,323 $ 10.53 - $ - ======= ======== ======= ======= Weighted-average fair value of options granted during the year N/A $ 1.81 ======== ======= The following information applies to options outstanding at December 31, 1997: Number outstanding 124,795 Exercise price $10.53 Weighted-average exercise price $10.53 Weighted-average remaining contractual life 8.25 years
NOTE N - CORPORATE REORGANIZATION AND CONVERSION TO STOCK FORM In October 1994, the Savings Bank's Board of Directors adopted a Plan of Conversion whereby the Savings Bank would convert to the stock form of ownership, followed by the issuance of all of the Savings Bank's outstanding common stock to a newly formed holding company, Logansport Financial Corp. In June 1995, the Savings Bank completed its conversion to the stock form of ownership, and issued all of the Association's outstanding common shares to the Corporation. In connection with the conversion, the Corporation sold 1,322,500 shares at a price of $10.00 per share which, after consideration of offering expenses totaling approximately $555,000 resulted in net equity proceeds of approximately $12.7 million. LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995 NOTE N - CORPORATE REORGANIZATION AND CONVERSION TO STOCK FORM (continued) At the date of the conversion, the Savings Bank established a liquidation account in an amount equal to retained earnings reflected in the statement of financial condition used in the conversion offering circular. The liquidation account will be maintained for the benefit of eligible savings account holders who maintained deposit accounts in the Savings Bank after conversion. In the event of a complete liquidation (and only in such event), each eligible savings account holder will be entitled to receive a liquidation distribution from the liquidation account in the amount of the then current adjusted balance of deposit accounts held, before any liquidation distribution may be made with respect to common stock. Except for the repurchase of stock and payment of dividends by the Savings Bank, the existence of the liquidation account will not restrict the use or application of such retained earnings. The Savings Bank may not declare, pay a cash dividend on, or repurchase any of its common stock, if the effect thereof would cause retained earnings to be reduced below either the amount required for the liquidation account or the regulatory capital requirements for SAIF insured institutions. NOTE O - CONDENSED FINANCIAL STATEMENTS OF LOGANSPORT FINANCIAL CORP. The following condensed financial statements summarize the financial position of Logansport Financial Corp. as of December 31, 1997 and 1996, and the results of its operations and cash flows for the periods ended December 31, 1997, 1996 and 1995. Logansport Financial Corp. STATEMENTS OF FINANCIAL CONDITION December 31, (In thousands)
ASSETS 1997 1996 Cash and cash equivalents $ 160 $ 89 Investment in subsidiary 16,471 16,861 Prepaid expenses and other 5 5 ------- ------- Total assets $16,636 $16,955 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Borrowings $ - $ 1,400 Other liabilities 94 128 ------- ------- Total liabilities 94 1,528 Shareholders' equity Common stock 7,566 7,518 Retained earnings 9,316 8,588 Shares acquired by stock benefit plan (400) (522) Unrealized gains (losses) on securities designated as available for sale, net 60 (157) Total shareholders' equity 16,542 15,427 ------- ------- Total liabilities and shareholders' equity $16,636 $16,955 ======= =======
LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995 NOTE O - CONDENSED FINANCIAL STATEMENTS OF LOGANSPORT FINANCIAL CORP. (continued) Logansport Financial Corp. STATEMENTS OF EARNINGS Period ended December 31, (In thousands)
1997 1996 1995 Revenue Interest income $ 12 $ 174 $120 Equity in earnings of subsidiary 1,270 869 852 ------ ------- ---- 1,282 1,043 972 Interest expense 5 - - General and administrative expenses 70 100 28 ------ ------- ---- Earnings before income taxes 1,207 943 944 Income taxes (credits) (25) 30 36 ------ ------- ---- NET EARNINGS $1,232 $ 913 $908 ====== ======= ====
LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995 NOTE O - CONDENSED FINANCIAL STATEMENTS OF LOGANSPORT FINANCIAL CORP. (continued) Logansport Financial Corp. STATEMENTS OF CASH FLOWS Period ended December 31, (In thousands)
1997 1996 1995 Cash flows provided by (used in) operating activities: Net earnings for the period $1,232 $ 913 $ 908 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: (Undistributed earnings of ) excess distributions from consolidated subsidiary 730 (869) (852) Increases (decreases) in cash due to changes in: Other liabilities (34) - - Other (1) 3 - ------- -------- --------- Cash provided by operating activities 1,927 47 56 Cash flows provided by (used in) investing activities: Purchase of securities available for sale - (1,638) (2,431) Maturities of investment securities available for sale - 2,245 246 Proceeds from sale of securities designated as available for sale - 1,824 - Purchase of securities held to maturity - - (253) Investment in subsidiary - - (8,687) Loan disbursements - - (878) Loan repayments - 878 - ------- -------- --------- Net cash provided by (used in) investment activities - 3,309 (12,003) Cash flows provided by (used in) financing activities: Proceeds from issuance of common stock 48 - 12,670 Proceeds from note payable 100 1,400 - Return of capital distribution - (3,930) - Repayment of note payable (1,500) - - Dividends on common stock (504) (529) (132) Purchase of shares - (799) - ------- -------- --------- Net cash provided by (used in) financing activities (1,856) (3,858) 12,538 ------- -------- --------- Net increase (decrease) in cash and cash equivalents 71 (502) 591 Cash and cash equivalents at beginning of period 89 591 - ------- -------- --------- Cash and cash equivalents at end of period $ 160 $ 89 $ 591 ======= ======== =========
LOGANSPORT FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997, 1996 and 1995 NOTE P - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following table summarizes the Corporation's quarterly results for the years ended December 31, 1997 and 1996. Certain amounts, as previously reported, have been reclassified to conform to the 1997 presentation.
Three Months Ended March 31, June 30, September 30, December 31, 1997: (In thousands, except per share data) Total interest income $1,452 $1,504 $1,570 $1,620 Total interest expense 729 761 804 821 ------ ------ ------ ------ Net interest income 723 743 766 799 Provision for losses on loans 3 5 9 9 Other income 4 41 19 38 General, administrative and other expense 282 286 292 287 ------ ------ ------ ------ Earnings before income taxes 442 493 484 541 Income taxes 159 179 176 214 ------ ------ ------ ------ Net earnings $ 283 $ 314 $ 308 $ 327 ====== ====== ====== ====== Basic earnings per share $ .22 $ .24 $ .23 $ .29 ====== ====== ====== ======
Three Months Ended March 31, June 30, September 30, December 31, 1996: (In thousands, except per share data) Total interest income $1,339 $1,403 $1,453 $1,458 Total interest expense 641 653 684 741 ------ ------ ------ ------ Net interest income 698 750 769 717 Provision for losses on loans 3 3 3 3 Other income 36 41 (2) 29 General, administrative and other expense 297 335 658 316 ------ ------ ------ ------ Earnings before income taxes 434 453 106 427 Income taxes 160 170 25 152 ------ ------ ------ ------ Net earnings $ 274 $ 283 $ 81 $ 275 ====== ====== ====== ====== Basic earnings per share $ .21 $ .21 $ .06 $ .21 ====== ====== ====== ======
DIRECTORS AND OFFICERS Directors Norbert E. Adrian (age 68) retired as the General Manager of Rockwell International ("Rockwell") in 1984 after 12 years of service. Rockwell is located in Logansport, Indiana, and manufactures custom automotive parts. Prior to his employment with Rockwell, Mr. Adrian was employed by the accounting firm of Bailey, Cord and Williams. Donald G. Pollitt (age 70) is the former Business and Promotion Manager of the Logansport Pharos-Tribune and a former President of the Rolling Hills Golf Course in Logansport, Indiana. Susanne S. Ridlen (age 58) has served as an adjunct faculty member of Indiana University Kokomo ("IUK") since 1969. Ms. Ridlen also currently serves as a member of the Boards of Directors of the Logansport Art Association and the Cass County Children's Home in Logansport, Indiana. William Tincher, Jr. (age 58) has served as Plant Manager for the Modine Manufacturing Company ("Modine") since 1977. Modine is located in Logansport, Indiana, and manufactures automotive cooling systems. David G. Wihebrink (age 50) has served as Vice President and Chief Financial Officer of TM Morris Manufacturing Co., Inc. ("Morris") since 1988. Morris is located in Logansport, Indiana, and manufactures lead wire assemblies and wiring harnesses and stampings. Prior to his employment with Morris, Mr. Wihebrink was a member of the accounting firm Smith, Thompson & Wihebrink (Logansport) for 15 years. Mr. Wihebrink also currently serves as a member of the Board of Directors of the Neal House retirement home in Logansport, Indiana. Thomas G. Williams (age 65) has served as President of Logansport Savings Bank, FSB since 1971. Charles J. Evans (age 52) has served as Vice President and Senior Loan Officer of Logansport Savings Bank, FSB since 1980. LOGANSPORT FINANCIAL CORP. LOGANSPORT SAVINGS BANK, FSB Officers Officers THOMAS G. WILLIAMS THOMAS G. WILLIAMS President and Chief President Executive Officer CHARLES J. EVANS CHARLES J. EVANS Vice President Vice President DOTTYE ROBESON DIANNE HOFFMAN Secretary/Treasurer Secretary/Treasurer DOTTYE ROBESON Chief Financial Officer [BACK COVER] [LOGO] LOGANSPORT SAVINGS BANK FSB "Bank on our Strength" 725 EAST BROADWAY, LOGANSPORT, INDIANA 46947 PHONE 219.722.3855 FAX 219.722.3857 EX-23.1 3 CONSENT OF GEO. S. OLIVE & CO. LLC We consent to the incorporation by reference in the Registration Statement on Form S-8, File No. 33-89788, of our report dated January 23, 1997 contained in this 1997 Annual Report on Form 10-K. /s/ Geo. S. Olive & Co. LLC Indianapolis, Indiana March 25, 1998 EX-23.2 4 CONSENT OF GRANT THORNTON LLP We consent to the incorporation by reference in the Registration Statements on Form S-8, File No. 33-89788, of our report dated February 24, 1998 contained in the 1997 Annual Report to Shareholders of Logansport Financial Corp., which is incorporated by reference in this Form 10-K. /s/ Grant Thornton LLP Cincinnati, Ohio March 25, 1998 EX-27 5 FDS FOR LOGANSPORT FINANCIAL CORP
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000939928 Logansport Financial Corporation 1,000 U.S. Dollars 12-MOS DEC-31-1997 JAN-1-1997 DEC-31-1997 1.000 2,269 100 0 0 15,682 15,682 15,682 63,880 (245) 86,115 60,595 6,500 953 1,525 7,566 0 0 8,856 86,115 4,932 953 216 6,101 2,864 3,115 2,986 (26) (50) 1,170 1,960 0 0 0 1,232 .98 .95 3.86 431 431 0 0 236 18 1 245 0 0 245
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