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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, 2000
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. [X]
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of March 26, 2001, was $11,318,577.
The number of shares of the Registrant's Common Stock, without par value,
outstanding as of March 26, 2001, was 1,083,510 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended December 31,
2000, are incorporated into Part II. Portions of the Proxy Statement for the
2001 Annual Meeting of Shareholders are incorporated in Part I and Part III.
Exhibit Index on Page E-1
Page 1 of 31 Pages
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LOGANSPORT FINANCIAL CORP.
Form 10-K
INDEX
Page
----
Forward Looking Statements.................................................. 1
PART I
Item 1. Business.................................................. 1
Item 2. Properties................................................ 26
Item 3. Legal Proceedings......................................... 26
Item 4. Submission of Matters to a Vote of Security Holders....... 26
Item 4.5. Executive Officers of Registrant.......................... 26
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters..................................... 27
Item 6. Selected Financial Data................................... 28
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 28
Item 8. Financial Statements and Supplementary Data............... 28
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................... 28
PART III
Item 10. Directors and Executive Officers of Registrant............ 28
Item 11. Executive Compensation.................................... 29
Item 12. Security Ownership of Certain Beneficial Owners
and Management.......................................... 29
Item 13. Certain Relationships and Related Transactions............ 29
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K............................................. 30
Signatures................................................ 31
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K ("Form 10-K") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-K and include statements regarding the intent, belief,
outlook, estimate or expectations of the Company (as defined below), its
directors or its officers primarily with respect to future events and the future
financial performance of the Company. Readers of this Form 10-K are cautioned
that any such forward looking statements are not guarantees of future events or
performance and involve risks and uncertainties, and that actual results may
differ materially from those in the forward looking statements as a result of
various factors. The accompanying information contained in this Form 10-K
identifies important factors that could cause such differences. These factors
include but are not limited to changes in interest rates; loss of deposits and
loan demand to other savings and financial institutions; substantial changes in
financial markets; changes in real estate values and the real estate market;
regulatory changes; or unanticipated results in pending legal proceedings.
PART I
Item 1. Business.
General
Logansport Financial Corp. (the "Holding Company" and, together with the
Bank (as defined below), the "Company") is an Indiana corporation organized in
February, 1995, to become a unitary savings and loan holding company. The
Holding Company became a unitary savings and loan holding company upon the
conversion of Logansport Savings Bank, FSB (the "Bank") from a federal mutual
savings bank to a federal stock savings bank on June 13, 1995. The principal
asset of the Holding Company consists of 100% of the issued and outstanding
shares of common stock, $.01 par value per share, of the Bank. The Bank began
operations in Logansport, Indiana under the name Logansport Building and Loan
Association in 1925. In 1962, the Bank changed its name to Logansport Savings
and Loan Association, and in 1992, the Bank converted to a federally chartered
savings bank known as Logansport Savings Bank, FSB. The Bank serves the needs of
primarily residents of Cass County, Indiana.
The Bank is the oldest financial institution headquartered in Logansport,
Indiana. Management believes the Bank has developed a solid reputation among its
loyal customer base because of its commitment to personal service and its strong
support of the local community. The Bank offers a number of consumer and
commercial financial services. These services include: (i) residential real
estate loans; (ii) home equity loans; (iii) home improvement loans; (iv)
construction loans; (v) share loans; (vi) commercial real estate loans and other
commercial loans; (vii) multi-family loans; (viii) consumer loans; (ix) NOW
accounts; (x) passbook savings accounts; (xi) certificates of deposit; (xii)
consumer and commercial demand deposit accounts; and (xiii) individual
retirement accounts. In the fourth quarter of 1998, the Bank decided to offer a
complete line of commercial lending to include operating lines of credit secured
by receivables and inventory and term financing for equipment purchases. In
1999, the Bank began offering agricultural loans and equipment leases. 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 33.5%
of the mortgage loan volume recorded in Cass County by Cass County institutions
during the year ended December 31, 2000.
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 59.7% of the Company's
total loan portfolio at December 31, 2000. The Bank also offers multi-family
mortgage loans, commercial real estate loans, construction loans, commercial
loans and leases and consumer loans. Mortgage loans secured by multi-family
properties and commercial real estate totaled approximately 2.0% and 12.7%,
respectively, of the Company's total loan portfolio at December 31, 2000.
Commercial loans constituted 6.8% and commercial leases 2.1% of the total loan
portfolio at December 31, 2000. Residential, multi-family and commercial real
estate construction loans constituted approximately 2.7% of the Company's total
loan portfolio at December 31, 2000. Installment, share, home equity, and home
improvement loans constituted approximately 6.8%, .3%, 1.1%, and 5.8%,
respectively, of the Company's total loan portfolio at December 31, 2000.
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,
------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------- ----------------- ----------------- ----------------- -----------------
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............. $62,277 59.73% $57,889 62.23% $52,205 69.35% $46,419 72.48% $41,109 72.05%
Commercial real estate.. 13,230 12.69 11,825 12.71 3,492 4.64 3,072 4.80 2,701 4.73
Multi-family............ 2,050 1.96 2,111 2.27 1,584 2.10 1,844 2.88 2,370 4.15
Construction:
Residential ............ 2,814 2.70 2,575 2.77 1,742 2.31 1,333 2.08 574 1.01
Commercial
real estate........... --- --- --- --- 1,400 1.86 --- --- 194 .34
Multi-family............ --- --- --- --- 350 .47 --- --- 248 .43
Commercial loans........... 7,088 6.80 4,102 4.41 1,486 1.97 --- --- --- ---
Commercial leases.......... 2,228 2.14 1,609 1.73 --- --- --- --- --- ---
Consumer loans:
Installment (2)......... 7,045 6.75 6,107 6.56 6,021 8.00 5,409 8.44 4,615 8.09
Share .................. 290 .28 289 .31 314 .42 313 .49 286 .50
Home equity............. 1,164 1.12 974 1.05 1,090 1.45 685 1.07 595 1.04
Home improvement........ 6,076 5.83 5,544 5.96 5,589 7.43 4,972 7.76 4,368 7.66
-------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Gross loans receivable $104,262 100.00% $93,025 100.00% $75,273 100.00% $64,047 100.00% $57,060 100.00%
======== ====== ======= ====== ======= ====== ======= ====== ======= ======
TYPE OF SECURITY
Residential (1)......... $73,056 70.07% $66,150 71.11% $61,291 81.42% $53,409 83.39% $46,689 81.83%
Commercial real estate.. 13,606 13.05 12,334 13.26 4,108 5.46 3,212 5.02 2,895 5.07
Multi-family............ 2,050 1.96 2,088 2.25 1,934 2.57 1,844 2.88 2,618 4.59
Deposits................ 290 .28 289 .31 314 .42 313 .49 286 .50
Auto.................... 3,223 3.09 2,477 2.66 2,210 2.94 2,148 3.35 2,042 3.58
Consumer residential (2) 2,722 2.61 1,599 1.72 1,918 2.55 1,617 2.52 1,074 1.88
Other security.......... 9,315 8.94 8,088 8.69 3,498 4.64 1,504 2.35 1,456 2.55
-------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Gross loans receivable 104,262 100.00% 93,025 100.00% 75,273 100.00% 64,047 100.00% 57,060 100.00%
Deduct:
Allowance for loan losses.. 760 .73 440 .47 285 .38 245 .38 236 .41
Loans in process........... 1,084 1.04 1,685 1.81 1,915 2.54 167 .26 22 .04
-------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Net loans receivable.... $102,418 98.23% $90,900 97.72% $73,073 97.08% $63,635 99.36% $56,802 99.55%
======== ====== ======= ====== ======= ====== ======= ====== ======= ======
Mortgage Loans:
Adjustable-rate......... $51,664 64.28% $48,119 64.68% $45,552 74.95% $42,984 81.61% $38,729 82.06%
Fixed-rate.............. 28,707 35.72 26,281 35.32 15,221 25.05 9,684 18.39 8,467 17.94
-------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total................. $80,371 100.00% $74,400 100.00% $60,773 100.00% $52,668 100.00% $47,196 100.00%
======== ====== ======= ====== ======= ====== ======= ====== ======= ======
(1) Includes home equity, residential construction and home improvement loans.
(2) Includes "one-pay" notes due in less than one year.
The following table sets forth certain information at December 31, 2000,
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 2004 2006 2011 2016
at December 31, to to to and
2000 2001 2002 2003 2005 2010 2015 following
--------------- ---- ---- ---- ---- ---- ---- ---------
(In thousands)
Mortgage loans:
Residential .................. $ 65,091 $ 1,303 $ 63 $ 170 $ 831 $ 7,394 $13,810 $41,520
Multi-family.................. 2,050 --- --- 184 651 1,215 --- ---
Commercial real estate........ 13,230 617 230 --- 1,035 3,532 4,078 3,738
Commercial loans................ 7,088 5,127 362 490 703 406 --- ---
Commercial leases............... 2,228 635 608 532 453 --- --- ---
Consumer loans:
Home improvement.............. 6,076 39 109 372 989 2,259 1,922 386
Home equity................... 1,164 --- --- --- --- --- 1,164 ---
Installment................... 7,045 2,693 534 802 2,190 386 440 ---
Share......................... 290 290 --- --- --- --- --- ---
-------- ------- ------ ------ ------ ------- ------- -------
Total...................... $104,262 $10,704 $1,906 $2,550 $6,852 $15,192 $21,414 $45,644
======== ======= ====== ====== ====== ======= ======= =======
The following table sets forth, as of December 31, 2000, the dollar amount
of all loans due after one year which have fixed interest rates and floating or
adjustable rates.
Due After December 31, 2001
----------------------------------------------------
Fixed Rates Variable Rates Total
----------- -------------- -----
(In thousands)
Mortgage loans:
Residential ............................. $19,090 $44,698 $63,788
Multi-family............................. 184 1,866 2,050
Commercial real estate................... 5,802 6,811 12,613
Commercial loans............................ 1,468 493 1,961
Commercial leases........................... 1,593 --- 1,593
Consumer loans:
Home improvement......................... 6,037 --- 6,037
Home equity.............................. --- 1,164 1,164
Installment.............................. 4,352 --- 4,352
------- ------- -------
Total.................................. $38,526 $55,032 $93,558
======= ======= =======
Residential Loans. Residential loans consist primarily of one- to
four-family loans. Approximately $62.3 million, or 59.7% of the Company's
portfolio of loans at December 31, 2000, consisted of one- to four-family
residential mortgage loans, of which approximately 65.3% 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% for loans in which interest
is amortized and payments are due bi-weekly. Interest rates cannot adjust lower
than the rate at the time of origination. Many of the residential ARMs in the
Company's portfolio at December 31, 2000 provided for a maximum rate adjustment
per year of 1%, although the Bank began originating residential ARMs which
provide for a maximum rate adjustment of 2% per year in 1995. The Bank's
residential ARMs provide for a maximum rate adjustment of 5% over the life of
the loan. These ARMs generally bear terms of between 15 and 30 years.
The Bank also currently offers fixed-rate loans which provide for the
payment of principal and interest over a period that generally does not exceed
15 years. At December 31, 2000, 34.7% of the Company's residential mortgage
loans had fixed rates of interest.
The Bank does not currently originate residential mortgage loans if the
ratio of the loan amount to the lesser of current cost or appraised value of the
property (i.e., the "loan-to-value ratio") exceeds 95% and does not currently
require private mortgage insurance on its residential single-family mortgage
loans.
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 to 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, 2000, residential loans amounting to $240,000, or .2% of
total loans, were included in non-performing assets. See "Non-Performing and
Problem Assets."
Commercial Real Estate Loans. At December 31, 2000, $13.2 million, or 12.7%
of the Company's total loan portfolio, consisted of commercial real estate
loans. Of these loans, $1.1 million 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, churches, light manufacturing facilities,
retail and service outlets, warehouses, professional buildings and farm real
estate. The Bank currently originates commercial real estate loans as
adjustable-rate loans indexed to the one-year U.S. Treasury or the prime with
various margins, or as fixed rate loans. The Bank underwrites these loans on a
case-by-case basis and, in addition to its normal underwriting criteria, the
Bank evaluates the borrower's ability to service the debt from the net operating
income of the property. No single commercial real estate loan at December 31,
2000 exceeded $934,000. 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 $2.1 million, or 2.0% of the Company's
portfolio of loans at December 31, 2000, 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, 2000, no
multi-family loan was included in non-performing assets.
Construction Loans. The Bank offers construction loans with respect to
owner-occupied residential real estate and, in limited cases, to builders or
developers constructing such properties on a speculative investment basis (i.e.,
before the builder/developer obtains a commitment from a buyer). The Bank may
also purchase participations.
At December 31, 2000, $2.8 million, or 2.7%, of the Company's total loan
portfolio consisted of construction loans. All construction loans at December
31, 2000 were one- to four-family residential loans. The largest construction
loan at December 31, 2000 was approximately $450,000. No construction loans were
included in non-performing assets on that date.
Construction loans originated by the Bank are written such that interest
only is payable during the construction phase, which is typically limited to
nine months, and following the construction phase, a permanent loan is made.
Inspections are made prior to any disbursement under a construction loan.
Commercial Loans. At December 31, 2000, $7.1 million, or 6.8% of the
Company's total loan portfolio consisted of commercial loans provided to finance
receivables, inventory or equipment. These loans were originated by the Bank and
provided to existing businesses located in Cass County and its contiguous
counties. Loans are underwritten on a case-by-case basis with emphasis placed on
cash flow analysis and the borrower's debt service capacity. The majority of the
loans are written on a variable rate using the national prime rate as the
primary index rate. The weighted average maturity of the variable rate portion
of the portfolio was 7 months and the weighted average maturity of the fixed
rate portion of the portfolio was 33 months at December 31, 2000.
Commercial Leases. At December 31, 2000, $2.2 million, or 2.1% of the
Company's total loan portfolio consisted of commercial leases provided to
finance equipment. The Bank's lease portfolio consists of a joint marketing
effort between the Bank and SCI Leasing Group, a Carmel, Indiana based concern,
with all credit decisions made solely by the Bank and following the same
underwriting standards as are applied to traditional commercial loan requests.
Commercial leases are a fixed rate financing tool with the weighted average
maturity of the Bank's lease portfolio at 58 months as of December 31, 2000.
Consumer Loans. Federal laws and regulations permit federally chartered
savings associations to make secured and unsecured consumer loans in an
aggregate amount up to 35% of the association's total assets. In addition, a
federally chartered savings association has lending authority above the 35%
limit for certain consumer loans, such as property improvement loans and deposit
account secured loans. However, the Qualified Thrift Lender test places
additional limitations on a savings association's ability to make consumer
loans. See "Regulation -- Qualified Thrift Lender."
The Company's consumer loans, consisting primarily of installment, share,
home improvement, and home equity loans, aggregated $14.6 million as of December
31, 2000, or 14.0% of the Company's total loan portfolio. The Bank consistently
originates consumer loans to meet the needs of its customers and to assist in
meeting its asset/liability management goals. All of the Bank's consumer loans
originated by the Bank, except home equity loans, are fixed-rate loans, and
substantially all are secured loans.
Installment loans, totaling $7.0 million, or 6.8% of total loans at
December 31, 2000, 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 $290,000, or .3% of total loans at December 31, 2000,
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 $6.1 million, or 5.8% of the Company's
total loan portfolio at December 31, 2000, 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 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,
2000, the Bank had approved $1.8 million of home equity loans, of which $1.2
million were outstanding.
As a general rule, consumer loans involve a higher level of risk than one-
to four-family residential mortgage loans because consumer loans are generally
made based upon the borrower's ability to repay the loan, which is subject to
change, rather than the value of the underlying collateral, if any. However, the
relatively higher yields and shorter terms to maturity of consumer loans are
believed to be helpful in reducing interest-rate and credit risks. As of
December 31, 2000, consumer loans totaling $96,000 were included in
non-performing assets, which indicates the Bank's success in managing consumer
loan risk.
Letters of Credit Securing Tax-Exempt Bonds. The Bank currently maintains
four letters of credit, each in the amount of $253,000, to secure payments
required under tax-exempt bonds issued to raise funds for low-income housing
projects in Franklin, Kokomo and Michigan City, Indiana and Hamilton, Ohio. The
issuer of the tax-exempt bonds is permitted to draw against these letters of
credit only in the event it defaults in making payments required under the
bonds, and any such draws made against the letters of credit would be secured by
a mortgage on the subject housing project. The Bank also has two letters of
credit totaling $1.5 million associated with the equity investment owned by the
Bank; these also secure payments required for tax-exempt bonds. No draws against
any letters of credit had been made as of December 31, 2000. In addition to the
above, the Bank held $195,000 in standby letters of credit for two commercial
loan customers.
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. The Bank's loan originations are generated from referrals from real
estate dealers and existing customers, and newspaper and periodical advertising.
Business loans originations also arise from an active business development
calling program. All loan applications are processed and underwritten at the
Bank's main office.
Under the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA"), a savings association generally may not make any loan to a
borrower or its related entities if the total of all such loans by the savings
association exceeds 15% of its capital (plus up to an additional 10% of capital
in the case of loans fully collateralized by readily marketable collateral);
provided, however, that loans up to $500,000 regardless of the percentage
limitations may be made and certain housing development loans of up to $30
million or 30% of capital, whichever is less, are permitted. The maximum amount
which the Bank could have loaned to one borrower and the borrower's related
entities under the 15% of capital limitation was $2.6 million at December 31,
2000. The Company's portfolio of loans currently contains no loans that exceed
the 15% of capital limitation.
The Bank's loan approval process is intended to assess the borrower's
ability to repay the loan, the viability of the loan and the adequacy of the
value of the property that will secure the loan. To assess the borrower's
ability to repay, the Bank studies the employment and credit history and
information on the historical and projected income and expenses of its
mortgagors.
The Bank generally requires appraisals or loan officer evaluations on all
property securing its loans and requires title insurance or an abstract and a
valid lien on its mortgaged real estate. Appraisals for residential real
property are performed either by an in-house appraiser who is a state-licensed
residential appraiser or an independent state-licensed residential appraiser.
From time to time, the Bank also uses the services of certified residential
appraisers, who are not in-house, for performance of appraisals related to loans
in excess of $250,000. The Bank requires fire and extended coverage insurance in
amounts at least equal to the principal amount of the loan. It also requires
flood insurance to protect the property securing its interest if the property is
in a flood plain.
The Bank's underwriting standards for consumer loans are intended to
protect against some of the risks inherent in making consumer loans. Borrower
character, paying habits and financial strengths are important considerations.
The Bank historically has not participated in the secondary market as a
seller of its mortgage loans, but does occasionally purchase participations in
commercial real estate and multi-family loans from other financial institutions.
The following table shows loan origination, purchase and repayment activity
for the Bank during the periods indicated.
Year Ended December 31,
------------------------------------------------
2000 1999 1998
---- ---- ----
(In thousands)
Gross loans receivable
at beginning of period............................ $93,025 $75,273 $64,047
Originations:
Mortgage loans:
Residential..................................... 17,598 17,229 14,691
Commercial real estate and lines of credit
and multi-family.............................. 25,586 19,368 1,400
------- ------- -------
Total mortgage loans and commercial loans....... 43,184 36,597 16,091
Consumer loans:
Installment..................................... 5,692 5,597 7,321
Share........................................... 146 169 294
Home improvement................................ 2,447 1,944 2,333
Home equity..................................... 224 103 736
------- ------- -------
Total consumer loans.......................... 8,509 7,813 10,684
------- ------- -------
Total originations........................ 51,693 44,410 26,775
Purchases:
Commercial real estate and multi-family........... --- 981 350
------- ------- -------
Total purchases........................... --- 981 350
Total originations and purchases...... 51,693 45,391 27,125
Repayments and deductions............................ 40,456 27,639 15,899
-------- ------- -------
Gross loans receivable at end of period.............. $104,262 $93,025 $75,273
======== ======= =======
Origination and Other Fees. The Company realizes income from origination
fees, late charges, checking account service charges, credit card fees, and fees
for other miscellaneous services. The Bank currently charges $300 plus closing
costs on its adjustable-rate mortgage loans. Points may be charged on fixed-rate
loans. Late charges are generally assessed if payment is not received within a
specified number of days after it is due. The grace period depends on the
individual loan documents.
Non-Performing and Problem Assets
Mortgage loans are reviewed by the Bank on a regular basis and are placed
on a non-accrual status when the loans become contractually past due ninety days
or more. At the end of each month, delinquency notices are sent with respect to
all mortgage loans for which payments have not been received. Contact by phone
or in person is made, if feasible, with respect to all such loans. When loans
are sixty days in default, an additional delinquency notice is sent and personal
contact is made with the borrower to establish an acceptable repayment schedule.
When loans are ninety days in default, contact is made with the borrower by the
Senior Loan Officer who attempts to establish an acceptable repayment schedule.
Management is authorized to commence foreclosure proceedings for any loan upon
making a determination that it is prudent to do so. All loans for which
foreclosure proceedings have been commenced are placed on non-accrual status.
Late notices are sent to commercial loan borrowers at five and fifteen days
after which personal contact by the Account Officer is made.
Consumer loans are reviewed by the Bank on a daily basis. Notices are sent
to borrowers when any consumer loan is 5, 10 and 15 days past due. After
consumer loans are 15 days delinquent, a late fee in the amount of 10% of the
payment is imposed until the loan is brought current.
Non-Performing Assets. At December 31, 2000, $336,000, or .25% 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 $666,000, or .57%, of
the Company's total assets at December 31, 1999. At December 31, 2000,
residential loans and consumer loans accounted for 71.4% and 28.6%,
respectively, of non-performing assets. There were no non-accruing investments
at December 31, 2000.
The table below sets forth the amounts and categories of the Company's
non-performing assets (non-accruing loans and real estate owned) as of the date
indicated. It is the policy of the Company that all earned but uncollected
interest on all loans be reviewed monthly to determine if any portion thereof
should be classified as uncollectible for any loan past due in excess of 90
days.
At December 31,
----------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands)
Non-accruing loans (1)..................... $336 $666 $315 $431 $406
Real estate owned, net..................... --- --- --- 106 ---
---- ---- ---- ---- ----
Total non-performing assets............. $336 $666 $315 $537 $406
==== ==== ==== ==== ====
Non-performing loans to total loans, net (2) .32% .72% .42% .67% .71%
Non-performing assets to total assets...... .25 .57 .33 .62 .52
- ---------------
(1) The Company generally places loans on a non-accruing status when the loans
become contractually past due 90 days or more. At December 31, 2000,
$240,000 of non-accruing loans were residential loans and $96,000 were
consumer loans. For the year ended December 31, 2000, the income that would
have been recorded had the non-accruing loans not been in a non-performing
status totaled $12,000.
(2) Total loans less loans in process.
Classified Assets. Federal regulations and the Bank's Internal Loan Review
policy provide for the classification of loans and other assets such as debt and
equity securities considered by the OTS to be of lesser quality as
"substandard," "doubtful" or "loss" assets. An asset is considered "substandard"
if it is inadequately protected by the current net worth and paying capacity of
the obligor or of the collateral pledged, if any. "Substandard" assets include
those characterized by the "distinct possibility" that the association will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
"doubtful" have all of the weaknesses inherent in those classified
"substandard," with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions, and values, "highly questionable and improbable." Assets classified
as "loss" are those considered "uncollectible" and of such little value that
their continuance as assets without the establishment of a specific loss reserve
is not warranted. Assets which do not currently expose the insured institution
to sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are required to be designated "special
mention" by management.
An insured institution 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, 2000, the aggregate amount of the Company's classified
assets and the Company's general and specific loss allowances were as follows:
At December 31, 2000
--------------------
(In thousands)
Substandard loans........................... $2,866
Doubtful loans.............................. ---
Loss loans.................................. ---
------
Total classified loans................... $2,866
======
General loss allowances..................... $760
Specific loss allowances.................... ---
------
Total allowances......................... $760
======
The Company regularly reviews its loan portfolio to determine whether any
loans require classification in accordance with applicable regulations. The
substandard loans consist of all nonaccrual loans, three additional purchased
participation loans secured by multi-family real estate of $744,000, which are
current on payments but considered substandard because of cash flow, one letter
of credit for $253,000 related to one of the substandard purchased
participtions, and one commercial relationship for $1.5 million which is current
but classified substandard because of cash flow.
Allowance for Loan Losses
The allowance for loan losses is maintained through the provision for
losses on loans, which is charged to earnings. The provision for losses on loans
is determined in conjunction with management's review and evaluation of current
economic conditions (including those of the Bank's lending area), changes in the
character and size of the loan portfolio, loan delinquencies (current status as
well as past and anticipated trends) and adequacy of collateral securing loan
delinquencies, historical and estimated net charge-offs, and other pertinent
information derived from a review of the loan portfolio. In management's
opinion, the Company's allowance for loan losses is adequate to absorb
anticipated future losses from loans at December 31, 2000. However, there can be
no assurance that regulators, when reviewing the Company's loan portfolio in the
future, will not require increases in its allowance for loan losses or that
changes in economic conditions will not adversely affect the Company's loan
portfolio.
Summary of Loan Loss Experience. The following table analyzes changes in
the allowance for loan losses during the past five (5) one-year periods ended
December 31, 2000.
Year Ended December 31,
----------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands)
Balance of allowance at beginning
of period................................. $440 $285 $245 $236 $223
Recoveries................................... 1 --- --- 1 1
Less charge-offs:
Residential real estate loans............. --- --- 13 10 ---
Consumer loans............................ 13 7 10 8 ---
---- ---- ---- ---- ----
Net charge-offs.............................. 12 7 23 17 (1)
Provisions for losses on loans............... 332 162 63 26 12
---- ---- ---- ---- ----
Balance of allowance at end of period........ $760 $440 $285 $245 $236
==== ==== ==== ==== ====
Net charge-offs to total average
loans receivable for period............. (*) (*) .03 .03 (*)
Allowance at end of period to
net loans receivable at end
of period (1)........................... .73 .47 .38 .38 .41
Allowance to total non-performing
loans at end of period.................. 226.19 66.07 90.48 56.84 58.12
- -------------------
(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,
------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------ --------------- --------------- ----------------- ---------------
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................ $ 12 59.73% $270 62.23% $232 69.35% $193 72.48% $158 72.05%
Commercial real estate..... 126 12.69 8 12.71 6 4.64 6 4.80 6 4.73
Multi-family............... 100 1.96 117 2.27 1 2.10 1 2.88 1 4.15
Construction loans......... --- 2.70 --- 2.77 --- 4.64 --- 2.08 --- 1.78
Commercial paper and
bankers' acceptances.... --- --- --- --- --- --- --- --- --- ---
Commercial loans........... 180 6.80 --- 4.41 --- 1.97 --- --- --- ---
Commercial leases.......... --- 2.14 --- 1.73 --- --- --- --- --- ---
Consumer loans............. 15 13.98 45 13.88 46 17.30 45 17.76 71 17.29
Unallocated................ 327 --- --- --- --- --- --- --- --- ---
----- ------ ---- ------ ---- ------ ---- ------ ---- ------
Total................... $760 100.00% $440 100.00% $285 100.00% $245 100.00% $236 100.00%
===== ====== ==== ====== ==== ====== ==== ====== ==== ======
Investments and Mortgage- and Other Asset-Backed Securities
Federally chartered savings associations have the authority to invest in
various types of liquid assets, including U.S. Treasury obligations, securities
of various federal agencies, certain certificates of deposit of insured banks
and savings institutions, repurchase agreements and federal funds sold. Subject
to various restrictions, federally chartered savings associations may also
invest a portion of their assets in corporate debt securities and asset-backed
securities. The investment policy of the Bank, which is established and
implemented by the Bank's Investment Committee, is designed primarily to
maximize the yield on the investment portfolio subject to minimal liquidity
risk, default risk and interest rate risk, and prudent asset/liability
management.
The Company's investments consist of U.S. government and other agency
securities which are primarily callable fixed rate notes, mortgage- and other
asset-backed securities, state and municipal bonds, corporate obligations,
marketable equity securities, and FHLB stock. At December 31, 2000,
approximately $15.5 million, or 11.7% of the Company's total assets, consisted
of such investments.
At December 31, 2000, the Company had $5.2 million of mortgage- and other
asset-backed securities outstanding, all of which were classified as available
for sale. These fixed-rate mortgage- and other asset-backed securities may be
used as collateral for borrowings and through repayments, as a source of
liquidity. Mortgage- and other asset-backed securities offer yields above those
available for investments of comparable credit quality and duration.
Mortgage-backed securities are qualifying thrift investments under the Qualified
Thrift Lender test. See "Regulation--Qualified Thrift Lender."
The following table sets forth the amortized cost and market value of the
Company's investments and mortgage- and other asset-backed securities at the
dates indicated.
At December 31,
--------------------------------------------------------------
2000 1999 1998
------------------- ------------------ -------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- ------ --------- ------ --------- ------
(In thousands)
Securities available for sale:
Federal agencies........................ $4,746 $4,625 $ 6,295 $5,901 $ 2,845 $ 2,825
State and municipal..................... 2,800 2,899 1,931 1,939 1,323 1,393
Mortgage- and other asset-backed
securities............................ 5,264 5,165 6,145 5,898 8,193 8,129
Corporate obligations................... 560 539 560 523 561 571
Marketable equity securities............ 4 259 4 176 4 244
------- ------- ------- ------- ------- -------
Total securities available for sale... 13,374 13,487 14,935 14,437 12,926 13,162
FHLB stock (1)............................. 1,973 1,973 1,273 1,273 568 568
------- ------- ------- ------- ------- -------
Total investments..................... $15,347 $15,460 $16,208 $15,710 $13,494 $13,730
======= ======= ======= ======= ======= =======
- ---------------
(1) Market value approximates carrying values.
The following table sets forth investment securities, mortgage- and other
asset-backed securities and FHLB stock which mature during each of the periods
indicated and the weighted average yields for each range of maturities at
December 31, 2000.
Amount at December 31, 2000, which matures in
-----------------------------------------------------------------------------
One One to Five to Over
Year or Less Five Years Ten Years Ten Years(4)
------------------- ------------------ ------------------ -------------------
Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
--------- -------- --------- -------- -------- -------- --------- --------
(Dollars in thousands)
Securities available for sale (1)(3) :
Federal agencies.................. $ --- ---% $ 500 6.02% $ 2,796 6.31% $ 1,450 7.11%
State and municipal (2)........... 125 7.15 1,164 7.99 574 7.94 938 8.41
Mortgage- and other
asset-backed securities........ 702 6.58 1,803 6.80 1,148 7.21 1,611 7.49
Corporate obligations............. 459 6.12 100 7.41
Marketable equity securities...... --- --- --- --- --- --- 4 67.43
------ ---- ------- ---- ------- ---- ------- -----
Total securities
available for sale........... 827 6.72 3,467 7.09 4,977 6.69 4,103 7.62
FHLB stock........................... --- 1,973 8.28
------ ---- ------- ---- ------- ---- ------- -----
Total investments............... $ 827 6.72% $ 3,467 7.09% $ 4,977 6.69% $ 6,076 7.84%
====== ==== ======= ==== ======= ==== ======= ====
(1) Securities available for sale are set forth at amortized cost for purposes
of this table.
(2) Fully taxable equivalent basis.
(3) No effect is given for possible prepayments or securities which are
callable.
Sources of Funds
General. Deposits have traditionally been the Bank's primary source of
funds for use in lending and investment activities. In addition to deposits, the
Company derives funds from scheduled loan payments, loan prepayments, and income
on earning assets. While scheduled loan payments and income on earning assets
are relatively stable sources of funds, deposit inflows and outflows can vary
widely and are influenced by prevailing interest rates, market conditions and
levels of competition. Borrowings from the FHLB of Indianapolis are also used to
compensate for reductions in deposits or deposit inflows at less than projected
levels.
Deposits. Deposits are attracted, principally from within Cass County,
through the offering of a broad selection of deposit instruments including NOW
and other transaction accounts, fixed-rate certificates of deposit, individual
retirement accounts, and savings accounts. The Bank does not actively solicit or
advertise for deposits outside of Cass County. Substantially all of the Bank's
depositors are residents of that county. Deposit account terms vary, with the
principal differences being the minimum balance required, the amount of time the
funds remain on deposit and the interest rate. The Bank does not pay a fee for
any deposits it receives.
Deposits totaled $79.5 million at December 31, 2000.
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, 2000, is as follows:
Minimum Balance at Weighted
Opening December 31, % of Average
Type of Account Balance 2000 Deposits Rate
- --------------- --------- ------------ -------- --------
(Dollars in thousands)
Withdrawable:
Passbook savings accounts................ $ 25 $ 3,478 4.38% 3.57%
Regular money market accounts............ 2,500 1,041 1.31 3.32
Hi yield money market accounts........... 10,000 14,782 18.61 4.30
Super NOW accounts....................... 2,500 614 .77 2.39
NOW and other transaction accounts....... 200 5,466 6.88 2.02
Non-interest bearing accounts............ 100 3,277 4.12 ---
------- -----
Total withdrawable.......................... 28,658 36.07 3.20
Certificates (original terms):
91 days.................................. 1,000 668 .84 6.33
6 months................................. 1,000 7,939 9.99 6.88
12 months................................ 1,000 19,830 24.96 6.44
18 months................................ 500 1,263 1.59 5.74
24 months................................ 500 7,255 9.13 5.49
30 months................................ 500 5,425 6.83 5.67
60 months................................ 1,000 3,226 4.06 5.72
IRAs
18 months................................ 100 5,190 6.53 5.90
------- ------
Total certificates.......................... 50,796 63.93 6.17
------- ------
Total deposits ............................. $79,454 100.00% 5.10%
======= ====== ====
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,
-----------------------------------------------
2000 1999 1998
---- ---- ----
(In thousands)
4.00% and under.......... $ 746 $ 175 $ 234
4.01 - 6.00 %............ 25,112 44,496 39,027
6.01 - 8.00%............. 24,938 826 416
------- ------- -------
Total.................... $50,796 $45,497 $39,677
======= ======= =======
The following table represents, by various interest rate categories, the
amounts of time deposits maturing during each of the three years following
December 31, 2000, and the total amount maturing thereafter. Matured
certificates which have not been renewed as of December 31, 2000, have been
allocated based upon certain rollover assumptions:
Amounts At
December 31, 2000, Maturing in
--------------------------------------------------------------
One Year Two Three Greater Than
or Less Years Years Three Years
-------- ----- ----- ------------
(In thousands)
4.00% and under............................. $ 746 $ --- $ --- $ ---
4.01 - 6.00 %............................... 14,314 8,139 1,850 809
6.01-8.00%.................................. 24,275 402 20 241
------- ------ ------ ------
Total....................................... $39,335 $8,541 $1,870 $1,050
======= ====== ====== ======
The following table indicates the amount of the Bank's certificates of
deposit of greater than $100,000 by time remaining until maturity as of December
31, 2000.
Maturity (In thousands)
-------- --------------
Three months or less......................................... $1,513
Greater than three months through six months................. 2,229
Greater than six months through twelve months................ 1,557
Over twelve months .......................................... 754
Total................................................... $6,053
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
2000 Deposits 1999 1999 Deposits 31, 1998
------------ -------- ------------ ------------ -------- ---------
(Dollars in thousands)
Withdrawable:
Passbook savings accounts............... $ 3,478 4.38% $ 609 $2,869 3.77% $ (302)
Regular money market accounts........... 1,041 1.31 (125) 1,166 1.53 13
Hi yield money market accounts.......... 14,782 18.61 (3,339) 18,121 23.84 (1,241)
Super NOW accounts...................... 614 .77 287 327 .43 (39)
NOW accounts............................ 5,466 6.88 116 5,350 7.04 560
Non-interest bearing accounts........... 3,277 4.12 596 2,681 3.53 1,189
------- ----- ------- ------ ----- -----
Total withdrawable......................... 28,658 36.07 (1,856) 30,514 40.14 180
Certificates (original terms):
91 days................................. 668 .84 146 522 .69 (705)
6 months................................ 7,939 9.99 4,701 3,238 4.26 (353)
12 months............................... 19,830 24.96 7,661 12,169 16.01 6,198
18 months............................... 1,263 1.59 131 1,132 1.49 (700)
24 months............................... 7,255 9.13 (4,514) 11,769 15.48 636
30 months............................... 5,425 6.83 (2,718) 8,143 10.71 574
60 months............................... 3,226 4.06 (169) 3,395 4.47 (224)
IRAs
18 months............................... 5,190 6.53 61 5,129 6.75 394
------- ------ ------ ------- ------ -----
Total certificates......................... 50,796 63.93 5,299 45,497 59.86 5,820
------- ------ ------ ------- ------ -----
Total deposits............................. $79,454 100.00% $3,443 $76,011 100.00% $6,000
======= ====== ====== ======= ====== ======
Deposit Activity
------------------------------------
Increase
(Decrease)
Balance at from
December 31, % of December 31,
1998 Deposits 1997
------------ -------- ------------
(Dollars in thousands)
Withdrawable:
Passbook savings accounts............... $3,171 4.53% $ 101
Regular money market accounts........... 1,153 1.65 103
Hi yield money market accounts.......... 19,362 27.66 3,676
Super NOW accounts...................... 366 .52 (98)
NOW accounts............................ 4,790 6.84 1,058
Non-interest bearing accounts........... 1,492 2.13 630
------ ----- -----
Total withdrawable......................... 30,334 43.33 5,470
Certificates (original terms):
91 days................................. 1,227 1.75 865
6 months................................ 3,591 5.13 50
12 months............................... 5,971 8.53 220
18 months............................... 1,832 2.62 813
24 months............................... 11,133 15.90 603
30 months............................... 7,569 10.81 1,287
60 months............................... 3,619 5.17 67
IRAs
18 months............................... 4,735 6.76 41
------ ----- -----
Total certificates......................... 39,677 56.67 3,946
------- ------ ------
Total deposits ............................ $70,011 100.00% $9,416
======= ====== ======
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,
2000, the Company had $10.0 million in borrowings from the FHLB of Indianapolis
which mature within one year and $24.0 million which mature in greater than one
year. The weighted average interest rate related to these borrowings was 6.11%
at December 31, 2000. The Company does not anticipate any difficulty in
obtaining advances appropriate to meet its requirements in the future. At
December 31, 2000, notes payable consisted of borrowings secured by the Bank's
investment in a real estate partnership which will mature in 2009. The interest
rate on the variable rate borrowing was 3.61% at December 31, 2000.
Employees
As of December 31, 2000, the Bank employed 20 persons on a full-time basis
and five 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, which is a defined benefit
pension plan ("FIRF" or the "Pension Plan"), a 401(k) plan and major medical and
long-term disability insurance.
Employee benefits are considered by management to be competitive with those
offered by other financial institutions and major employers in the Bank's market
area. See "Executive Compensation and Related Transactions."
Competition
The Bank operates in North Central Indiana and makes almost all of its
loans to and accepts most of its deposits from residents of Cass County in
Indiana.
The Bank is subject to competition from various financial institutions,
including state and national banks, state and federal savings institutions,
credit unions, certain non-banking consumer lenders, and other companies or
firms, including brokerage houses and mortgage brokers, that provide similar
services in Cass County. The Bank must also compete with money market funds and
with insurance companies with respect to its individual retirement accounts. See
"Regulation--Acquisitions or Dispositions and Branching."
The primary factors in competing for deposits are interest rates and
convenience of office locations. The Bank competes for loan originations
primarily through the efficiency and quality of services it provides borrowers
and through interest rates and loan fees it charges. Competition is affected by,
among other things, the general availability of lendable funds, general and
local economic conditions, current interest rate levels, and other factors which
are not readily predictable.
REGULATION
General
The Bank, as a federally chartered savings bank, is a member of the Federal
Home Loan Bank System ("FHLB System") and its deposits are insured by the
Federal Deposit Insurance Corporation ("FDIC") and it is a member of the Savings
Association Insurance Fund (the "SAIF"), which is administered by the FDIC. The
Bank is subject to extensive regulation by the OTS. Federal associations may not
enter into certain transactions unless certain regulatory tests are met or they
obtain prior governmental approval and the associations must file reports with
the OTS about their activities and their financial condition. Periodic
compliance examinations of the Bank are conducted by the OTS which has, in
conjunction with the FDIC in certain situations, examination and enforcement
powers. This supervision and regulation are intended primarily for the
protection of depositors and federal deposit insurance funds. The Bank is also
subject to certain reserve requirements under regulations of the Board of
Governors of the Federal Reserve System ("FRB").
An OTS regulation establishes a schedule for the assessment of fees upon
all savings associations to fund the operations of the OTS. The regulation also
establishes a schedule of fees for the various types of applications and filings
made by savings associations with the OTS. The general assessment, to be paid on
a semiannual basis, is based upon the savings association's total assets,
including consolidated subsidiaries, as reported in a recent quarterly thrift
financial report. Currently, the quarterly assessment rates range from .01164%
of assets for associations with assets of $67 million or less to .00308% for
associations with assets in excess of $35 billion. The Bank's semiannual
assessment under this assessment scheme, based upon its total assets at December
31, 2000, was approximately $18,500.
The Bank is also subject to federal and state regulation as to such matters
as loans to officers, directors, or principal shareholders, required reserves,
limitations as to the nature and amount of its loans and investments, regulatory
approval of any merger or consolidation, issuances or retirements of their own
securities, and limitations upon other aspects of banking operations. In
addition, the activities and operations of the Bank are subject to a number of
additional detailed, complex and sometimes overlapping federal and state laws
and regulations. These include state usury and consumer credit laws, state laws
relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Community Reinvestment Act, anti-redlining legislation and antitrust
laws.
Holding Company Regulation
The Holding Company is regulated as a "non-diversified unitary savings and
loan holding company" within the meaning of the Home Owners' Loan Act, as
amended ("HOLA"), and subject to regulatory oversight of the Director of the
OTS. As such, the Holding Company is registered with the OTS and thereby subject
to OTS regulations, examinations, supervision and reporting requirements. As a
subsidiary of a savings and loan holding company, the Bank is subject to certain
restrictions in its dealings with the Holding Company and with other companies
affiliated with the Holding Company.
The HOLA generally prohibits a savings and loan holding company, without
obtaining the prior approval of the Director of the OTS, from (i) acquiring
control of any other savings association or savings and loan holding company or
controlling the assets thereof or (ii) acquiring or retaining more than 5
percent of the voting shares of a savings association or holding company thereof
which is not a subsidiary. Except with the prior approval of the Director of the
OTS, no director or officer of a savings and loan holding company or person
owning or controlling by proxy or otherwise more than 25% of such company's
stock may also acquire control of any savings institution, other than a
subsidiary institution, or any other savings and loan holding company.
The Holding Company's Board of Directors presently intends to continue to
operate the Holding Company as a unitary savings and loan holding company. Under
current OTS regulations, there are generally no restrictions on the permissible
business activities of a unitary savings and loan holding company.
The Holding Company currently operates as a unitary savings and loan
holding company. Prior to the enactment of the Gramm-Leach-Bliley Act (the "GLB
Act") on November 12, 1999, there were no restrictions on the permissible
business activities of a unitary savings and loan holding company. The GLB Act
included a provision that prohibits any new unitary savings and loan holding
company, defined as a company that acquires a thrift after May 4, 1999, from
engaging in commercial activities. This provision also includes a grandfather
clause, however, that permits a company that was a savings and loan holding
company as of May 4, 1999, or had an application to become a savings and loan
holding company on file with the OTS as of that date, to acquire and continue to
control a thrift and to continue to engage in commercial activities. Because the
Holding Company qualifies under this grandfather provision, the GLB Act did not
affect the Holding Company's authority to engage in diversified business
activities.
Notwithstanding the above rules as to permissible business activities of
unitary savings and loan holding companies, if the savings association
subsidiary of such a holding company fails to meet the Qualified Thrift Lender
("QTL") test, then such unitary holding company would be deemed to be a bank
holding company subject to all of the provisions of the Bank Holding Company Act
of 1956 and other statutes applicable to bank holding companies, to the same
extent as if the Holding Company were a bank holding company and the Bank were a
bank. See "-Qualified Thrift Lender." At December 31, 2000, the Bank's asset
composition was in excess of that required to qualify as a Qualified Thrift
Lender.
If the Holding Company were to acquire control of another savings
institution other than through a merger or other business combination with the
Bank, the Holding Company would thereupon become a multiple savings and loan
holding company. Except where such acquisition is pursuant to the authority to
approve emergency thrift acquisitions and where each subsidiary savings
association meets the QTL test, the activities of the Holding Company and any of
its subsidiaries (other than the Bank or other subsidiary savings associations)
would thereafter be subject to further restrictions. The HOLA provides that,
among other things, no multiple savings and loan holding company or subsidiary
thereof which is not a savings association shall commence or continue for a
limited period of time after becoming a multiple savings and loan holding
company or subsidiary thereof, any business activity other than (i) furnishing
or performing management services for a subsidiary savings association, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary savings institution,
(iv) holding or managing properties used or occupied by a subsidiary savings
institution, (v) acting as trustee under deeds of trust, (vi) those activities
in which multiple savings and loan holding companies were authorized (by
regulation) to directly engage on March 5, 1987, to be engaged in by multiple
holding companies or (vii) those activities authorized by the FRB as permissible
for bank holding companies, unless the Director of the OTS by regulation
prohibits or limits such activities for savings and loan holding companies.
Those activities described in (vii) above must also be approved by the Director
of the OTS prior to being engaged in by a multiple savings and loan holding
company.
The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 1987, or if
the laws of the state in which the institution to be acquired is located
specifically permit institutions to be acquired by state-chartered institutions
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings institutions). Also, the Director of the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
Indiana law permits federal and state savings association holding companies
with their home offices located outside of Indiana to acquire savings
associations whose home offices are located in Indiana and savings association
holding companies with their principal place of business in Indiana ("Indiana
Savings Association Holding Companies") upon receipt of approval by the Indiana
Department of Financial Institutions. Moreover, Indiana Savings Association
Holding Companies may acquire savings associations with their home offices
located outside of Indiana and savings associations holding companies with their
principal place of business located outside of Indiana upon receipt of approval
by the Indiana Department of Financial Institutions.
Federal Home Loan Bank System
The Bank is a member of the FHLB system, which consists of 12 regional
banks. The Federal Housing Finance Board ("FHFB"), an independent agency,
controls the FHLB System, including the FHLB of Indianapolis. The FHLB System
provides a central credit facility primarily for member financial institutions.
At December 31, 2000, the Bank's investment in stock of the FHLB of Indianapolis
was $1,973,000. For the fiscal year ended December 31, 2000, the FHLB of
Indianapolis paid approximately $130,000 in dividends to the Bank.
All 12 FHLB's are required to provide funds to establish affordable
housing programs through direct loans or interest subsidies on advances to
members to be used for lending at subsidized interest rates for low-and
moderate-income, owner-occupied housing projects, affordable rental housing, and
certain other community projects. These contributions and obligations could
adversely affect the value of FHLB stock in the future. A reduction in the value
of such stock may result in a corresponding reduction in the Bank's capital.
The FHLB of Indianapolis serves as a reserve or central bank for member
institutions within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
advances to members in accordance with policies and procedures established by
the FHLB and the Board of Directors of the FHLB of Indianapolis.
All FHLB advances must be fully secured by sufficient collateral as
determined by the FHLB. Eligible collateral includes first mortgage loans not
more than 90 days delinquent or securities evidencing interests therein,
securities (including mortgage-backed securities) issued, insured or guaranteed
by the federal government or any agency thereof, cash or FHLB deposits, certain
small business and agricultural loans of smaller institutions and real estate
with readily ascertainable value in which a perfected security interest may be
obtained. Other forms of collateral may be accepted as additional security or,
under certain circumstances, to renew outstanding advances. All long-term
advances are required to provide funds for residential home financing and the
FHLB has established standards of community service that members must meet to
maintain access to long-term advances.
Interest rates charged for advances vary depending upon maturity, the
cost of funds to the FHLB of Indianapolis and the purpose of the borrowing.
Insurance of Deposits
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. During 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 1996, however, legislation was enacted to recapitalize
the SAIF and eliminate the premium disparity between the BIF and SAIF, as
further described below.
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.
In 1996, legislation was enacted that 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 recognized this one-time assessment as a non-recurring operating expense of
$335,000 during the three-month period 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 .06% of total assessable deposits. In addition to the assessment for
deposit insurance, savings institutions are required to pay on bonds issued in
the late 1980s by the Financing Corporation ("FICO"), which is a
federally-chartered corporation that was organized to provide some of the
financing to resolve the thrift crisis in the 1980s. During 1998, FICO payments
for SAIF members approximated 6.10 basis points, while BIF members paid 1.22
basis points. By law, payments on Financing Corporation obligations have been
shared equally between BIF members and SAIF members since January 1, 2000.
Although Congress has considered merging the SAIF and the BIF, until then,
savings associations with SAIF deposits may not transfer deposits into the BIF
system without paying various exit and entrance fees. 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.
Regulatory Capital
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The OTS requires
savings associations that receive the highest supervisory rating for safety and
soundness to maintain "core capital" of at least 3% of total assets. All other
savings associations must maintain core capital of at least 4% of total assets.
Core capital is generally defined as common shareholders' equity (including
retained income), noncumulative perpetual preferred stock and related surplus,
certain minority equity interests in subsidiaries, qualifying supervisory
goodwill, purchased mortgage servicing rights and purchased credit card
relationships (subject to certain limits) less nonqualifying intangibles. Under
the tangible capital requirement, a savings association must maintain tangible
capital (core capital less all intangible assets except purchased mortgage
servicing rights which may be included after making the above-noted adjustment
in an amount up to 100% of tangible capital) of at least 1.5% of total assets.
Under the risk-based capital requirements, a minimum amount of capital must be
maintained by a savings association to account for the relative risks inherent
in the type and amount of assets held by the savings association. The risk-based
capital requirement requires a savings association to maintain capital (defined
generally for these purposes as core capital plus general valuation allowances
and permanent or maturing capital instruments such as preferred stock and
subordinated debt less assets required to be deducted) equal to 8.0% of
risk-weighted assets. Assets are ranked as to risk in one of four categories
(0-100%). A credit risk-free asset, such as cash, requires no risk-based
capital, while an asset with a significant credit risk, such as a non-accrual
loan, requires a risk factor of 100%. Moreover, a savings association must
deduct from capital, for purposes of meeting the core capital, tangible capital
and risk-based capital requirements, its entire investment in and loans to a
subsidiary engaged in activities not permissible for a national bank (other than
exclusively agency activities for its customers or mortgage banking
subsidiaries). At December 31, 2000, 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, 2000
under the terms of the OTS proposed interest rate risk rule. The OTS recently
proposed an amendment to the interes rate risk rule that would delete the
requirement that a savings association with excess exposure to interest rate
risk maintain additional capital.
The OTS has also revised its standards regarding the management of interest
rate risk to include summary guidelines to assist savings associations in
determining their exposures to interest rate risk. If an association is not in
compliance with the capital requirements, the OTS is required to prohibit asset
growth and to impose a capital directive that may restrict, among other things,
the payment of dividends and officers' compensation. In addition, the OTS and
the FDIC generally are authorized to take enforcement actions against a savings
association that fails to meet its capital requirements. These actions may
include restricting the operating activities of the association, imposing a
capital directive, cease and desist order, or civil money penalties, or imposing
harsher measures such as appointing a receiver or conservator or forcing the
association to merge into another institution.
Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991, as
amended ("FedICIA") requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to institutions that do
not meet minimum capital requirements. For these purposes, FedICIA establishes
five capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. At December 31,
2000, the Bank was categorized as "well capitalized," meaning that its total
risk-based capital ratio exceeded 10%, its Tier I risk-based capital ratio
exceeded 6%, its leverage ratio exceeded 5%, and it was not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure.
The FDIC may order savings associations which have insufficient capital to
take corrective actions. For example, a savings association which is categorized
as "undercapitalized" would be subject to growth limitations and would be
required to submit a capital restoration plan, and a holding company that
controls such a savings association would be required to guarantee that the
savings association complies with the restoration plan. "Significantly
undercapitalized" savings associations would be subject to additional
restrictions. Savings associations deemed by the FDIC to be "critically
undercapitalized" would be subject to the appointment of a receiver or
conservator.
Capital Distributions Regulation
The OTS also restricts the amount of "capital distributions" that may be
made by savings associations. The regulation defines a capital distribution as a
distribution of cash or other property to a savings association's owners, made
on account of their ownership. This definition includes a savings association's
payment of cash dividends to shareholders, or any payment by a savings
association to repurchase, redeem, retire, or otherwise acquire any of its
shares or debt instruments that are included in total capital, and any extension
of credit to finance an affiliate's acquisition of those shares or interests.
The amended regulation does not apply to dividends consisting only of a savings
association's shares or rights to purchase such shares.
The regulation exempts certain savings associations from filing either a
notice or an application with the OTS before making any capital distribution and
requires a savings association to file an application for approval of a proposed
capital distribution with the OTS if the association is not eligible for
expedited treatment under OTS's application processing rules, or the total
amount of all capital distributions, including the proposed capital
distribution, for the applicable calendar year would exceed an amount equal to
the savings association's net income for that year to date plus the savings
association's retained net income for the preceding two years (the "retained net
income standard"). Based on the Bank's retained net income standard, the Bank
would be required to file a notice or application with the OTS before making any
capital distribution. A savings association must also file an application for
approval of a proposed capital distribution if, following the proposed
distribution, the association would not be at least adequately capitalized under
the OTS prompt corrective action regulations, or if the proposed distribution
would violate a prohibition contained in any applicable statute, regulation, or
agreement between the association and the OTS or the FDIC.
The regulation requires a savings association to file a notice of a
proposed capital distribution in lieu of an application if the association or
the proposed capital distribution do not meet the conditions described above,
and: (1) the savings association will not be at least well capitalized (as
defined under the OTS prompt corrective action regulations) following the
capital distribution; (2) the capital distribution would reduce the amount of,
or retire any part of the savings association's common or preferred stock, or
retire any part of debt instruments such as notes or debentures included in the
association's capital under the OTS capital regulation; or (3) the savings
association is a subsidiary of a savings and loan holding company. Because the
Bank is a subsidiary of a savings and loan holding company, this latter
provision requires that, at a minimum, the Bank must file a notice with the OTS
thirty days before making any capital distributions to the Holding Company.
In addition to these regulatory restrictions, the Bank's Plan of Conversion
imposes additional limitations on the amount of capital distributions it may
make to the Holding Company. The Plan of Conversion by which the Bank converted
from the mutual to the stock form of ownership (the "Plan of Conversion")
requires the Bank to establish and maintain a liquidation account for the
benefit of Eligible Account Holders and Supplemental Eligible Account Holders
(as those terms are defined in the Plan of Conversion) and prohibits the Bank
from making capital distributions to the Holding Company if its net worth would
be reduced below the amount required for the liquidation account.
Limitations on Rates Paid for Deposits
Regulations promulgated by the FDIC pursuant to FedICIA place limitations
on the ability of insured depository institutions to accept, renew or roll over
deposits by offering rates of interest which are significantly higher than the
prevailing rates of interest on deposits offered by other insured depository
institutions having the same type of charter in the institution's normal market
area. Under these regulations, "well-capitalized" depository institutions may
accept, renew or roll such deposits over without restriction, "adequately
capitalized" depository institutions may accept, renew or roll such deposits
over with a waiver from the FDIC (subject to certain restrictions on payments of
rates) and "undercapitalized" depository institutions may not accept, renew or
roll such deposits over. The regulations contemplate that the definitions of
"well capitalized," "adequately capitalized" and "undercapitalized" will be the
same as the definition adopted by the agencies to implement the corrective
action provisions of FedICIA. The Bank does not believe that these regulations
will have a materially adverse effect on its current operations.
Liquidity
The Financial Regulatory Relief and Economic Efficiency Act of 2000, which
was signed into law on December 27, 2000, repealed the former statutory
requirement that all savings associations maintain an average daily balance of
liquid assets in a minimum amount of not less than 4% or more than 10% of their
withdrawable accounts plus short-term borrowings. The OTS adopted an interim
final rule in March 2001 that implemented this revised statutory requirement,
although savings associations remain subject to the OTS regulation that requires
them to maintain sufficient liquidity to ensure their safe and sound operation.
Safety and Soundness Standards
In 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.
During 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, 2000, the Bank did not have any
loans or extensions of credit to a single or related group of borrowers in
excess of its lending limits. The Bank does not believe that the
loans-to-one-borrower limits will have a significant impact on its business
operations or earnings.
Qualified Thrift Lender
Savings associations must meet a QTL test that requires the association to
maintain an appropriate level of qualified thrift investments ("QTIs")
(primarily residential mortgages and related investments, including certain
mortgage-related securities) and otherwise to qualify as a QTL. The required
percentage of QTIs is 65% of portfolio assets (defined as all assets minus
intangible assets, property used by the association in conducting its business
and liquid assets equal to 10% of total assets). Certain assets are subject to a
percentage limitation of 20% of portfolio assets. In addition, savings
associations may include shares of stock of the FHLBs, FNMA, and FHLMC as QTIs.
Compliance with the QTL test is determined on a monthly basis in nine out of
every twelve months.
A savings association which fails to meet the QTL test must either convert
to a bank (but its deposit insurance assessments and payments will be those of
and paid to SAIF) or be subject to the following penalties: (i) it may not enter
into any new activity except for those permissible for a national bank and for a
savings association; (ii) its branching activities shall be limited to those of
a national bank; and (iii) it shall be bound by regulations applicable to
national banks respecting payment of dividends. Three years after failing the
QTL test the association must dispose of any investment or activity not
permissible for a national bank and a savings association. If such a savings
association is controlled by a savings and loan holding company, then such
holding company must, within a prescribed time period, become registered as a
bank holding company and become subject to all rules and regulations applicable
to bank holding companies (including restrictions as to the scope of permissible
business activities).
A savings association failing to meet the QTL test may requalify as a QTL
if it thereafter meets the QTL test. In the event of such requalification it
shall not be subject to the penalties described above. A savings association
which subsequently again fails to qualify under the QTL test shall become
subject to all of the described penalties without application of any waiting
period.
At December 31, 2000, 82.91% of the Bank's portfolio assets (as defined on
that date) were invested in qualified thrift investments (as defined on that
date), and therefore the Bank's asset composition was in excess of that required
to qualify the Bank as a QTL. Also, the Bank does not expect to significantly
change its lending or investment activities in the near future. The Bank expects
to continue to qualify as a QTL, although there can be no such assurance.
Acquisitions or Dispositions and Branching
The Bank Holding Company Act specifically authorizes a bank holding
company, upon receipt of appropriate regulatory approvals, to acquire control of
any savings association or holding company thereof wherever located. Similarly,
a savings and loan holding company may acquire control of a bank. Moreover,
federal savings associations may acquire or be acquired by any insured
depository institution. Regulations promulgated by the FRB restrict the
branching authority of savings associations acquired by bank holding companies.
Savings associations acquired by bank holding companies may be converted to
banks if they continue to pay SAIF premiums, but as such they become subject to
branching and activity restrictions applicable to banks.
Subject to certain exceptions, commonly controlled banks and savings
associations must reimburse the FDIC for any losses suffered in connection with
a failed bank or savings association affiliate. Institutions are commonly
controlled if one is owned by another or if both are owned by the same holding
company. Such claims by the FDIC under this provision are subordinate to claims
of depositors, secured creditors, and holders of subordinated debt, other than
affiliates.
The OTS has adopted regulations which permit nationwide branching to the
extent permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets the
domestic building and loan test in 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, which became effective in 1996, authorizes Indiana banks to
branch interstate by merger or de novo expansion, provided that such
transactions are not permitted to out-of-state banks unless the laws of their
home states permit Indiana banks to merge or establish de novo banks on a
reciprocal basis.
Transactions with Affiliates
The Bank and Holding Company are subject to Sections 22(h), 23A and 23B of
the Federal Reserve Act, which restrict financial transactions between banks and
affiliated companies. The statute limits credit transactions between a bank and
its executive officers and its affiliates, prescribes terms and conditions for
bank affiliate transactions deemed to be consistent with safe and sound banking
practices, and restricts the types of collateral security permitted in
connection with a bank's extension of credit to an affiliate.
Federal Securities Law
The shares of Common Stock of the Holding Company are registered with the
Securities and Exchange Commission (the "Commission") under the Securities and
Exchange Act of 1934, as amended (the "1934 Act"). The Holding Company is
subject to the information, proxy solicitation, insider trading restrictions and
other requirements of the 1934 Act and the rules of the SEC thereunder. If the
Holding Company has fewer than 300 shareholders, it may deregister the shares
under the 1934 Act and cease to be subject to the foregoing requirements.
Shares of Common Stock held by persons who are affiliates of the Holding
Company may not be resold without registration or unless sold in accordance with
the resale restrictions of Rule 144 under the Securities and Exchange Act of
1933 (the "1933 Act"). If the Holding Company meets the current public
information requirements under Rule 144, each affiliate of the Holding Company
who complies with the other conditions of Rule 144 (including conditions that
require the affiliate's sale to be aggregated with those of certain other
persons) would be able to sell in the public market, without registration, a
number of shares not to exceed, in any three-month period, the greater of (i) 1%
of the outstanding shares of the Holding Company or (ii) the average weekly
volume of trading in such shares during the preceding four calendar weeks.
Community Reinvestment Act Matters
Federal law requires that ratings of depository institutions under the
Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes
both a four-unit descriptive rating -- outstanding, satisfactory, unsatisfactory
and needs improvement -- and a written evaluation of each institution's
performance. Each FHLB is required to establish standards of community
investment or service that its members must maintain for continued access to
long-term advances from the FHLBs. The standards take into account a member's
performance under the CRA and its record of lending to first-time home buyers.
The OTS examiners have determined that the Bank has a satisfactory record of
meeting community credit needs.
Taxation
Federal Taxation
Historically, savings associations, such as the Bank, have been permitted
to compute bad debt deductions using either the bank experience method or the
percentage of taxable income method. However, for years beginning after December
31, 1995, the Bank is no longer able to use the percentage of taxable income
method of computing its allocable tax bad debt deduction. The Bank is required
to compute its allocable deduction using the experience method. As a result of
the repeal of the percentage of taxable income method, reserves taken after 1987
using the percentage of taxable income method generally must be included in
future taxable income over a six-year period, although a two-year delay may be
permitted for institutions meeting a residential mortgage loan origination test.
In addition, the pre-1988 reserve, for which no deferred taxes have been
recorded, will not have to be recaptured into income unless (i) the Bank no
longer qualifies as a bank under the Code, or (ii) excess dividends are paid out
by the Bank.
Depending on the composition of its items of income and expense, a savings
institution may be subject to the alternative minimum tax. A savings institution
must pay an alternative minimum tax equal to the amount (if any) by which 20% of
alternative minimum taxable income ("AMTI"), as reduced by an exemption varying
with AMTI, exceeds the regular tax due. AMTI equals regular taxable income
increased or decreased by certain tax preferences and adjustments, including
depreciation deductions in excess of that allowable for alternative minimum tax
purposes, tax-exempt interest on most private activity bonds issued after August
7, 1986 (reduced by any related interest expense disallowed for regular tax
purposes), the amount of the bad debt reserve deduction claimed in excess of the
deduction based on the experience method and 75% of the excess of adjusted
current earnings over AMTI (before this adjustment and before any alternative
tax net operating loss). AMTI may be reduced only up to 90% by net operating
loss carryovers, but alternative minimum tax paid that is attributable to most
preferences (although not to post-August 7, 1986 tax-exempt interest) can be
credited against regular tax due in later years.
State Taxation
The Bank is subject to Indiana's Financial Institutions Tax ("FIT"), which
is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted gross
income," for purposes of FIT, begins with taxable income as defined by Section
63 of the Code and, thus, incorporates federal tax law to the extent that it
affects the computation of taxable income. Federal taxable income is then
adjusted by several Indiana modifications, the most notable of which is the
required addback of interest that is tax-free for federal income tax purposes.
Other applicable state taxes include generally applicable sales and use taxes
plus real and personal property taxes.
Item 2. Properties.
At December 31, 2000, 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, 2000:
Total Deposits Net Book Value
at of Property,
Owned or Year December 31, Furniture & Approximate
Description and Address Leased Opened 2000 Fixtures Square Footage
- ----------------------- -------- ------ ------------ -------------- --------------
(Dollars in thousands)
723 East Broadway Owned 1962 $79,454 $1,843 11,000
Logansport, Indiana 46947
The Company owns computer and data processing equipment which is used for
transaction processing and accounting. The net book value of electronic data
processing equipment owned by the Company was $114,000 at December 31, 2000.
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 $14,000 per month.
Item 3. Legal Proceedings.
Neither the Holding Company nor the Bank is a party to any pending legal
proceedings, other than routine litigation incidental to its business.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the Holding Company's shareholders
during the quarter ended December 31, 2000.
Item 4.5. Executive Officers of the Registrant.
Presented below is certain information regarding the executive officers of
the Holding Company:
Name Position
---- --------
David G. Wihebrink President and Chief Executive Officer
Charles J. Evans Senior Vice President
Dottye Robeson Secretary/Treasurer
David G. Wihebrink (age 53) has served as President and Chief Executive
Officer of the Bank and the Holding Company since April 2000. Before that, Mr.
Wihebrink had served as Vice President and Chief Financial Officer of TM Morris
Manufacturing Co., Inc. ("Morris") since 1988. Morris is located in Logansport,
Indiana, and manufactures lead wire assemblies and wiring harnesses and
stampings. Prior to his employment with Morris, Mr. Wihebrink was a member of
the accounting firm Smith, Thompson & Wihebrink (Logansport) for 15 years. Mr.
Wihebrink also currently serves as a member of the Board of Directors of the
Neal Home retirement home in Logansport, Indiana.
Charles J. Evans (age 55) has served as Senior Vice President of the Bank
since January 2000 and as Vice President of the Holding Company since its
organization. Prior to becoming Senior Vice President, Mr. Evans had served as
Vice President and Senior Loan Officer of the Bank since 1980.
Dottye Robeson (age 51) has served as Chief Financial Officer of the Bank
since 1994 and as Secretary/Treasurer of the Holding Company since its
organization. She has been a certified public accountant since 1987.
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 trade prices and dividends paid per share of
Common Stock for the quarters indicated. Such price information was obtained
from Nasdaq.
Quarter Ended High Low Dividends Declared
------------- ---- --- ------------------
March 31, 2000 $10.313 $9.063 $ .11
June 30, 2000 9.875 7.625 .11
September 30, 2000 11.875 9.813 .11
December 31, 2000 11.813 10.875 .11
March 31, 1999 $14.000 $12.000 $ .11
June 30, 1999 12.500 11.130 .11
September 30, 1999 11.560 9.630 .11
December 31, 1999 10.500 9.030 .11
As of February 8, 2001, there were 800 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, 2000, approximately $1.7
million of the Bank's retained income represented bad debt deductions for which
no federal income tax provision had been made. See "Taxation--Federal Taxation."
Unlike the Bank, generally there is no regulatory restriction on the
payment of dividends by the Holding Company. Indiana law, however, would
prohibit the Holding Company from paying a dividend if, after giving effect to
the payment of that dividend, the Holding Company would not be able to pay its
debts as they become due in the usual course of business or the Holding
Company's total assets would be less than the sum of its total liabilities plus
preferential rights of holders of preferred stock, if any.
Item 6. Selected Financial Data.
The information required by this item is incorporated by reference to the
material under the heading "Selected Consolidated Financial Data of Logansport
Financial Corp. and Subsidiary" on pages 6 and 7 of the Holding Company's 2000
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
8 through 20 of the Shareholder Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is incorporated by reference to pages
17 through 19 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 21 through 51 in the Shareholder Annual Report are
incorporated herein by reference. The Company's unaudited quarterly results of
operations contained on page 51 in the Shareholder Annual Report are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
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 and page 8 of the Holding
Company's Proxy Statement for its 2001 Annual Shareholder Meeting (the "2001
Proxy Statement"). Information concerning the Holding Company's executive
officers is included in Item 4.5 in Part I of this report.
Item 11. Executive Compensation.
The information required by this item with respect to executive
compensation is incorporated by reference to pages 5 to 8 of the Holding
Company's 2001 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 2001 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to page
8 of the 2001 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 (Grant Thornton LLP)....See Shareholder Annual
Report Page 21
Consolidated Statements of Financial Condition
at December 31, 2000, and 1999...................See Shareholder Annual
Report Page 22
Consolidated Statements of Earnings for the Years
Ended December 31, 2000, 1999, and 1998..........See Shareholder Annual
Report Page 23
Consolidated Statements of Comprehensive Income
for the Years Ended December 31, 2000, 1999
and 1998.........................................See Shareholder Annual
Report Page 24
Consolidated Statements of Changes in Shareholders'
Equity for the Years Ended December 31, 2000,
1999 and 1998....................................See Shareholder Annual
Report Page 25
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2000, 1999, and 1998..........See Shareholder Annual
Report Page 26
Notes to Consolidated Financial Statements...........See Shareholder Annual
Report Page 28
(b) Reports on Form 8-K.
The Holding Company did not file any reports on Form 8-K during the fourth
quarter of its 2000 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 29, 2001 By: /s/ David G. Wihebrink
--------------------------------------
David G. Wihebrink, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 29th day of March, 2001.
/s/ David G. Wihebrink
- ----------------------
David G. Wihebrink
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Dottye Robeson
- ------------------
Dottye Robeson,
Secretary/Treasurer (Principal Financial and
Accounting Officer)
/s/ Charles J. Evans
- --------------------
Charles J. Evans, Vice President and Director
/s/ Susanne S. Ridlen
- ---------------------
Susanne S. Ridlen, Director
/s/ William Tincher, Jr.
- ------------------------
William Tincher, Jr., Director
/s/ Brian J. Morrill
- --------------------
Brian J. Morrill, Director
/s/ Thomas G. Williams
- ----------------------
Thomas G. Williams, Director
EXHIBIT INDEX
Exhibit Page
- ------- ----
3(1) The Articles of Incorporation of the Registrant
are incorporated by reference to Exhibit 3(1) to
the Registration Statement on Form S-1
(Registration No. 33-89788).
3(2) The Code of By-Laws of the Registrant are
incorporated by reference to Exhibit 3.2 to the
Form 10-Q for the period ended June 30, 1997,
filed with the Commission on August 13, 1997 and
resolutions dated October 13, 1998, filed
herewith.
10(1) The Registrant's Stock Option Plan is incorporated
by reference to Exhibit A to the Registrant's
Proxy Statement for its Annual Shareholder Meeting
held on April 9, 1996 and resolutions dated July
14, 1998, amending the Registrant's Stock Option
Plan are incorporated by reference to Exhibit 10.1
to the Form 10-Q for the period ended September
30, 1998, filed with the Commission on November
12, 1998.
10(2) Logansport Savings Bank, FSB Recognition and
Retention Plan and Trust is incorporated by
reference to Exhibit B to the Registrant's Proxy
Statement for its Annual Shareholder Meeting held
on April 9, 1996, and resolutions dated July 14,
1998, amending the Logansport Savings Bank, FSB
Recognition and Retention Plan and Trust are
incorporated by reference to Exhibit 10.2 to the
Form 10-Q for the period ended September 30, 1998,
filed with the Commission on November 12, 1998.
10(3) Logansport Savings Bank, FSB Employee Stock
Ownership Plan and Trust Agreement is incorporated
by reference to Exhibit 10(4) to the Registration
Statement on Form S-1 (Registration No. 33-89788).
10(4) Deferred Compensation Agreement between Logansport
Savings Bank, FSB and David G. Wihebrink, dated
and effective as of April 12, 2000.
10(5) Employment Agreement between Logansport Savings
Bank, FSB and Charles J. Evans is incorporated by
reference to Exhibit 10(6) to the Registration
Statement on Form S-1 (Registration No. 33-89788).
10(6) Director Deferred Compensation Agreement between
Logansport Savings Bank, FSB and Thomas G.
Williams, effective April 1, 1992 is incorporated
by reference to Exhibit 10(7) to the Registration
Statement on Form S-1 (Registration No. 33-89788).
10(7) Director Deferred Compensation Agreement between
Logansport Savings Bank, FSB and Don Pollitt,
effective April 1, 1992 is incorporated by
reference to Exhibit 10(8) to the Registration
Statement on Form S-1 (Registration No. 33-89788).
10(8) Director Deferred Compensation Agreement between
Logansport Savings Bank, FSB and Norbert Adrian,
effective April 1, 1992 is incorporated by
reference to Exhibit 10(9) to the Registration
Statement on Form S-1 (Registration No. 33-89788).
10(9) Director Deferred Compensation Agreement between
Logansport Savings Bank, FSB and Susanne Ridlen,
effective April 1, 1992 is incorporated by
reference to Exhibit 10(10) to the Registration
Statement on Form S-1 (Registration No. 33-89788).
10(10) Director Deferred Compensation Agreement between
Logansport Savings Bank, FSB and David Wihebrink,
effective April 1, 1992 is incorporated by
reference to Exhibit 10(11) to the Registration
Statement on Form S-1 (Registration No. 33-89788).
10(11) Executive Supplemental Retirement Income Agreement
between Logansport Savings Bank, FSB and Thomas G.
Williams, executed May 7, 1992 is incorporated by
reference to Exhibit 10(12) to the Registration
Statement on Form S-1 (Registration No. 33-89788).
10(12) Executive Supplemental Retirement Income Agreement
between Logansport Savings Bank, FSB and Charles
J. Evans, executed May 7, 1992 is incorporated by
reference to Exhibit 10(13) to the Registration
Statement on Form S-1 (Registration No. 33-89788).
13 2000 Shareholder Annual Report
21 Subsidiaries of the Registrant are incorporated by
reference to Exhibit 21 to the Registration
Statement on Form S-1 (Registration No. 33-89788).
23 Independent Auditor's Consent (Grant Thornton LLP)