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, 1996
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
of Incorporation or Organization) Identification 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 NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405,
Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of March 1, 1997, was $14,420,497.
The number of shares of the Registrant's Common Stock, without par value,
outstanding as of March 1, 1997, was 1,256,375 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended December 31,
1996, are incorporated into Part II. Portions of the Proxy Statement for the
1997 Annual Meeting of Shareholders are incorporated in Part I and Part III.
Exhibit Index on Page 33
Page 1 of 34 Pages
LOGANSPORT FINANCIAL CORP.
Form 10-K
INDEX
Page
PART I
Item 1. Business.................................................. 1
Item 2. Properties................................................ 28
Item 3. Legal Proceedings......................................... 28
Item 4. Submission of Matters to a Vote of Security Holders....... 29
Item 4.5. Executive Officers of Registrant.......................... 29
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters..................................... 29
Item 6. Selected Financial Data................................... 30
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 30
Item 8. Financial Statements and Supplementary Data............... 30
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................... 30
PART III
Item 10. Directors and Executive Officers of Registrant............ 30
Item 11. Executive Compensation.................................... 31
Item 12. Security Ownership of Certain Beneficial Owners
and Management.......................................... 31
Item 13. Certain Relationships and Related Transactions............ 31
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K............................................. 31
Signatures................................................ 32
PART I
Item 1. Business.
General
Logansport Financial Corp. (the "Holding Company" and, together with
the Bank (as defined below), the "Company") is an Indiana corporation organized
in February, 1995, to become a unitary savings and loan holding company. The
Holding Company became a unitary savings and loan holding company upon the
conversion of Logansport Savings Bank, FSB (the "Bank") from a federal mutual
savings bank to a federal stock savings bank on June 13, 1995. The principal
asset of the Holding Company consists of 100% of the issued and outstanding
shares of common stock, $.01 par value per share, of the Bank. The Bank began
operations in Logansport, Indiana under the name Logansport Building and Loan
Association in 1925. In 1962, the Bank changed its name to Logansport Savings
and Loan Association, and in 1992, the Bank converted to a federally charted
savings bank known as Logansport Savings Bank, FSB. The Bank serves the needs of
residents of primarily Cass County, Indiana.
The Bank is the oldest financial institution headquartered in
Logansport, Indiana. Management believes the Bank has developed a solid
reputation among its loyal customer base because of its commitment to personal
service and its strong support of the local community. The Bank offers a number
of consumer and commercial financial services. These services include: (i)
residential real estate loans; (ii) home equity loans; (iii) home improvement
loans; (iv) construction loans; (v) share loans; (vi) commercial real estate
loans; (vii) multi-family loans; (viii) consumer loans; (ix) NOW accounts; (x)
passbook savings accounts; (xi) certificates of deposit; (xii) consumer and
commercial demand deposit accounts; and (xiii) individual retirement accounts.
The Holding Company and the Bank conduct business out of their main office
located in Logansport, Indiana. The Bank is and historically has been a
significant real estate mortgage lender in Cass County, Indiana, originating
approximately 17.6% of the mortgage loan volume recorded in Cass County by Cass
County institutions during the year ended December 31, 1996.
The Bank historically has concentrated its lending activities on the
origination of loans secured by first mortgage liens for the purchase,
construction or refinancing of one- to four-family residential real property.
One- to four-family residential mortgage loans continue to be the major focus of
the Bank's loan origination activities, representing 72.1% of the Company's
total loan portfolio at December 31, 1996. The Bank also offers multi-family
mortgage loans, commercial real estate loans, construction loans, and consumer
loans. Mortgage loans secured by multi-family properties and commercial real
estate totaled approximately 4.1% and 4.7%, respectively, of the Company's total
loan portfolio at December 31, 1996. Residential, multi-family and commercial
real estate construction loans constituted approximately 1.8% of the Company's
total loan portfolio at December 31, 1996. Installment, share, home equity, and
home improvement loans constituted approximately 8.1%, .5%, 1.0%, and 7.7%,
respectively, of the Company's total loan portfolio at December 31, 1996.
-1-
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,
1996 1995 1994 1993 1992
--------------- --------------- ---------------- --------------- ----------------
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................. $41,109 72.05% $36,608 73.15% $33,402 74.92% $28,942 74.39% $27,153 77.23%
Commercial real estate...... 2,701 4.73 1,620 3.24 2,718 6.10 2,667 6.85 2,204 6.27
Multi-family................ 2,370 4.15 1,915 3.83 722 1.62 549 1.41 120 .34
Construction:
Residential ................ 574 1.01 575 1.15 330 .74 1,170 3.00 209 .59
Commercial
real estate............... 194 .34 198 .39 --- --- --- --- 350 1.00
Multi-family................ 248 .43 250 .50 680 1.52 427 1.10 250 .71
Commercial paper .............. --- --- 878 1.75 500 1.12 --- --- --- ---
Consumer loans:
Installment (2)............. 4,615 8.09 3,729 7.45 2,778 6.23 2,072 5.33 2,181 6.20
Share ...................... 286 .50 219 .44 244 .55 183 .47 174 .49
Home equity................. 595 1.04 398 .79 300 .67 393 1.01 333 .95
Home improvement............ 4,368 7.66 3,656 7.31 2,911 6.53 2,505 6.44 2,186 6.22
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Gross loans receivable.... 57,060 100.00% $50,046 100.00% $44,585 100.00% $38,908 100.00% $35,160 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
TYPE OF SECURITY
Residential (1)............. $46,689 81.83% $41,407 82.74% $36,943 82.86% $33,010 84.84% $29,881 84.99%
Commercial real estate...... 2,895 5.07 1,818 3.63 2,718 6.10 2,667 6.86 2,554 7.26
Multi-family................ 2,618 4.59 2,165 4.33 1,402 3.14 976 2.51 370 1.05
Deposits.................... 286 .50 219 .44 244 .55 183 .47 174 .49
Auto........................ 2,042 3.58 1,288 2.57 1,005 2.26 799 2.05 806 2.29
Consumer residential (2).... 1,074 1.88 1,232 2.46 846 1.90 447 1.15 434 1.23
Other security.............. 1,456 2.55 1,039 2.08 917 2.05 683 1.75 848 2.42
Unsecured (3)............... --- --- 878 1.75 510 1.14 143 .37 93 .27
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Gross loans receivable.... 57,060 100.00% 50,046 100.00 44,585 100.00 38,908 100.00 35,160 100.00
Deduct:
Allowance for loan losses...... 236 .41 223 .45 206 .46 201 .52 86 .24
Loans in process............... 22 .04 116 .23 359 .81 856 2.20 273 .78
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Net loans receivable........ $56,802 99.55% $49,707 99.32% $44,020 98.73% $37,851 97.28% $34,801 98.98%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
Mortgage Loans:
Adjustable-rate............. 38,729 82.06 $34,715 84.33% $31,057 82.05% $27,760 82.24% $24,076 79.50%
Fixed-rate.................. 8,467 17.94 6,451 15.67 6,795 17.95 5,995 17.76 6,210 20.50
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total..................... $47,196 100.00% $41,166 100.00% $37,852 100.00% $33,755 100.00% $30,286 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
(1) Includes home equity, residential construction and home improvement loans.
(2) Includes "one-pay" notes due in less than one year secured by residential
real estate.
(3) Includes commercial paper and bankers' acceptances.
-2-
The following table sets forth certain information at December 31,
1996, 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 2000 2002 2007 2012
at December 31, to to to and
1996 1997 1998 1999 2001 2006 2011 following
------------------------------------------------------------------------------------
(In thousands)
Mortgage loans:
Residential .................... $41,683 $ 559 $ 38 $ 66 $ 812 $5,848 $13,003 $21,357
Multi-family.................... 2,618 --- --- --- --- 727 1,648 243
Commercial real estate.......... 2,895 --- 2 5 53 932 1,467 436
Commercial paper................... --- --- --- --- --- --- --- ---
Consumer loans:
Home improvement................ 4,368 134 163 249 1,184 1,679 638 321
Home equity..................... 595 --- --- --- --- --- 595 ---
Installment..................... 4,615 1,782 302 759 1,306 239 227 ---
Share........................... 286 286 --- --- --- --- --- ---
------- ------ ---- ------ ------ ------ ------- -------
Total......................... $57,060 $2,761 $505 $1,079 $3,355 $9,425 $17,578 $22,357
======= ====== ==== ====== ====== ====== ======= =======
The following table sets forth, as of December 31, 1996, the dollar
amount of all loans due after one year which have fixed interest rates and
floating or adjustable rates.
Due After December 31, 1997
Fixed Rates Variable Rates Total
----------- -------------- -----
(In thousands)
Mortgage loans:
Residential .................... $ 6,748 $34,376 $41,124
Multi-family.................... --- 2,618 2,618
Commercial real estate.......... 1,183 1,712 2,895
Consumer loans:
Home improvement................ 4,234 --- 4,234
Home equity..................... --- 595 595
Installment..................... 2,833 --- 2,833
------- ------- -------
Total......................... $14,998 $39,301 $54,299
======= ======= =======
Residential Loans. Residential loans consist primarily of one- to
four-family loans. Approximately $41.1 million, or 72.1% of the Company's
portfolio of loans at December 31, 1996, consisted of one- to four-family
residential mortgage loans, of which approximately 82.1% had adjustable rates.
Pursuant to federal regulations, such loans must require at least semi-annual
payments and be for a term of not more than 40 years, and, if the interest rate
is adjustable, they must be correlated with changes in a readily verifiable
index.
The Bank currently offers adjustable-rate one- to four-family
residential mortgage loans ("ARMs") which adjust annually and are indexed to the
one-year U.S. Treasury securities yields adjusted to a constant maturity. These
ARMs have a current margin above such index of 2.75%, or 3.00% if interest is
amortized and payments are due bi-weekly, and interest rate minimums equal to
the rate at the time of origination. Many of the residential ARMs in the
Company's portfolio at December 31, 1996 provided for a maximum rate adjustment
per year of 1%, although the Bank began originating residential ARMs which
provide for a maximum rate adjustment of 2% per year in 1995. The Bank's
residential ARMs provide for a maximum rate adjustment of 5% over the life of
the loan. These ARMs generally bear terms of between 15 and 25 years.
The Bank also currently offers fixed-rate loans which provide for the
payment of principal and interest over a period not to exceed 15 years. At
December 31, 1996, 17.9% of the Company's residential mortgage loans had fixed
rates of interest.
-3-
The Bank does not currently originate residential mortgage loans if the
ratio of the loan amount to the lesser of current cost or appraised value of the
property (i.e., the "loan-to-value ratio") exceeds 90% and does not currently
require private mortgage insurance on its residential single-family mortgage
loans.
Substantially all of the residential mortgage loans that the Bank
originates include "due-on-sale" clauses, which give the Bank the right to
declare a loan immediately due and payable in the event that, among other
things, the borrower sells or otherwise disposes of the real property subject to
the mortgage and the loan is not repaid.
The Bank's residential mortgage loans are not originated on terms and
conditions and using documentation that conform with the standard underwriting
criteria required to sell such loans on the secondary market. The Bank generally
retains its loans in its portfolio and does not anticipate the need to sell its
non-conforming loans. See "-- Origination, Purchase and Sale of Loans."
At December 31, 1996, residential loans amounting to $399,000, or .70%
of total loans, were included in non-performing assets. See "-- Non-Performing
and Problem Assets."
Commercial Real Estate Loans. At December 31, 1996, $2.7 million, or
4.7% of the Company's total loan portfolio, consisted of commercial real estate
loans. Of these loans, $254,000 constituted participations in loans secured by
commercial real estate which were purchased from other financial institutions.
The commercial real estate loans included in the Company's portfolio are
primarily secured by non-residential real estate such as small office buildings,
nursing homes and churches. The Bank currently originates commercial real estate
loans as adjustable-rate loans indexed to the one-year U.S. Treasury securities
yields adjusted to a constant maturity with a margin of 4.75% above such index.
Many of the commercial real estate loans in the Company's portfolio at December
31, 1996 provided for a maximum rate adjustment per year of 1%, although the
Bank began originating commercial real estate ARMs which provide for a maximum
rate adjustment of 2% per year in 1995. In addition, the maximum rate adjustment
over the life of the loan is 5%, and these loans have a maximum loan-to-value
ratio of 80%. The Bank underwrites these loans on a case-by-case basis and, in
addition to its normal underwriting criteria, the Bank evaluates the borrower's
ability to service the debt from the net operating income of the property. No
single commercial real estate loan at December 31, 1996 exceeded $330,000. 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 $2.4 million, or 4.1% of the
Company's portfolio of loans at December 31, 1996, 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, 1996, none of the multi-family loans included in the Company's portfolio was
included in non-performing assets.
Construction Loans. The Bank offers construction loans with respect to
owner-occupied residential real estate and, in limited cases, to builders or
developers constructing such properties on a speculative investment basis (i.e.,
before the builder/developer obtains a commitment from a buyer). The Bank may
also purchase participations.
At December 31, 1996, $1.0 million, or 1.8%, of the Company's total
loan portfolio consisted of construction loans. Included in such loans were
participations in multi-family and commercial real estate construction loans
amounting to $442,000 at December 31, 1996. The largest construction loan on
December 31, 1996, was approximately $250,000. No construction loans were
included in non-performing assets on that date.
-4-
Construction loans originated by the Bank are written such that
interest only is payable during the construction phase, which is typically
limited to six (6) months, and following the construction phase, a permanent
loan is made. Inspections are made prior to any disbursement under a
construction loan.
Consumer Loans. Federal laws and regulations permit federally chartered
savings associations to make secured and unsecured consumer loans in an
aggregate amount up to 35% of the association's total assets. In addition, a
federally chartered savings association has lending authority above the 35%
limit for certain consumer loans, such as property improvement loans and deposit
account secured loans. However, the Qualified Thrift Lender test places
additional limitations on a savings association's ability to make consumer
loans. See "Regulation -- Qualified Thrift Lender."
The Company's consumer loans, consisting primarily of installment,
share, home improvement, and home equity loans, aggregated $9.9 million as of
December 31, 1996, or 17.3% 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 $4.6 million, or 8.1% of total loans at
December 31, 1996, 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 $286,000, or .5% of total loans at December 31,
1996, are made up to 80% of the original account balance and accrue at a rate of
2-3% over the underlying certificate of deposit rate. Interest on share loans is
paid quarterly. Home improvement loans totaled $4.4 million, or 7.7% of the
Company's total loan portfolio at December 31, 1996, and are close-ended
fixed-rate loans made for maximum terms up to 15 years. The Bank's home
improvement loans are generally made only to those borrowers for whom the Bank
holds the primary mortgage on the property, if any.
The Bank also offers open-ended lines of credit secured by a lien on
the equity in the borrower's home in amounts up to 90% of the appraised value of
the real estate (taking into account any other mortgages on the property). The
Bank's home equity loans are adjustable-rate loans with interest rates equal to
the national prime rate plus 2%, and payments equal to the greater of 2% of the
outstanding loan balance or $50. The Bank's home equity loans are generally made
only to those borrowers for whom the Bank holds the primary mortgage on the
property, if any, and generally have a maximum term of 15 years. At December 31,
1996, the Bank had approved $1,033,000 of home equity loans, of which $595,000
were outstanding.
The Bank also offers credit cards to its customers, but does not
underwrite the credit cards or have any other credit risk with respect to the
cards. The Company earns a fee upon the origination of the credit card accounts.
To date, the income earned by the Company from offering these credit cards has
not been significant.
As a general rule, consumer loans involve a higher level of risk than
one- to four-family residential mortgage loans because consumer loans are
generally made based upon the borrower's ability to repay the loan, which is
subject to change, rather than the value of the underlying collateral, if any.
However, the relatively higher yields and shorter terms to maturity of consumer
loans are believed to be helpful in reducing interest-rate risk. The Bank has
thus far been successful in managing consumer loan risk. As of December 31,
1996, consumer loans totaling $7,000 were included in non-performing assets.
Letters of Credit Securing Tax-Exempt Bonds. The Bank currently
maintains three letters of credit, each in the amount of $253,000, to secure
payments required under tax-exempt bonds issued to raise funds for low-income
housing projects in Franklin, Kokomo and Michigan City, Indiana. The issuer of
the tax-exempt bonds is permitted to draw against these letters of credit only
in the event it defaults in making payments required under the bonds, and any
such draws made against the letters of credit would be secured by a mortgage on
the subject housing project. No draws against any letters of credit had been
made as of December 31, 1996.
-5-
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, does not require escrow accounts for taxes and
insurance and does not permit the conversion of those loans to fixed rate loans
in the first three years of their term.
The Bank confines its loan origination activities primarily to Cass
County. At December 31, 1996, no loans were secured by property located outside
of Indiana. The Bank's loan originations are generated from referrals from real
estate dealers and existing customers, and newspaper and periodical advertising.
All loan applications are processed and underwritten at the Bank's main office.
Under Financial Institutions Reform, Recovery, and Enforcement Act
("FIRREA"), a savings association generally may not make any loan to a borrower
or its related entities if the total of all such loans by the savings
association exceeds 15% of its capital (plus up to an additional 10% of capital
in the case of loans fully collateralized by readily marketable collateral);
provided, however, that loans up to $500,000 regardless of the percentage
limitations may be made and certain housing development loans of up to $30
million or 30% of capital, whichever is less, are permitted. The maximum amount
which the Bank could have loaned to one borrower and the borrower's related
entities under the 15% of capital limitation was $2.5 million at December 31,
1996. The Company's portfolio of loans currently contains no loans that exceed
the 15% of capital limitation.
The Bank's loan approval process is intended to assess the borrower's
ability to repay the loan, the viability of the loan and the adequacy of the
value of the property that will secure the loan. To assess the borrower's
ability to repay, the Bank studies the employment and credit history and
information on the historical and projected income and expenses of its
mortgagors. Secured loans up to $75,000 may be approved by the Senior Loan
Officer, and secured loans up to $150,000 may be approved by the President or
the Executive Committee. Loans up to $250,000 may be approved by the Loan
Committee. All loans for more than $250,000 must be approved in advance by the
Board of Directors.
The Bank generally requires appraisals on all property securing its
loans and requires title insurance or an abstract and a valid lien on its
mortgaged real estate. Appraisals for residential real property are generally
performed by an in-house appraiser who is a state-licensed residential
appraiser. From time to time, the Bank also uses the services of certified
residential appraisers who are not in-house, including for loans in excess of
$250,000. The Bank requires fire and extended coverage insurance in amounts at
least equal to the principal amount of the loan. It also requires flood
insurance to protect the property securing its interest if the property is in a
flood plane.
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.
-6-
The following table shows loan origination, purchase and repayment
activity for the Bank during the periods indicated.
Year Ended December 31,
----------------------------------------------------------
1996 1995 1994
------ ------- -------
(In thousands)
Gross loans receivable
at beginning of period........................ $50,046 $44,585 $38,908
Originations:
Mortgage loans:
Residential................................. 11,277 8,323 9,139
Commercial real estate and
multi-family.............................. 1,885 318 105
------ ------- -------
Total mortgage loans........................ 13,162 8,641 9,244
Consumer loans:
Installment................................. 3,757 3,129 2,840
Share....................................... 259 88 190
Home improvement............................ 1,774 1,435 1,663
Home equity................................. 319 104 80
------ ------- -------
Total consumer loans...................... 6,109 4,756 4,773
------ ------- -------
Total originations................... 19,271 13,397 14,017
Purchases:
Commercial real estate and multi-family..... 1,046 1,010 256
Commercial paper............................ --- 3,842 988
------ ------- -------
Total originations and purchases.......... 20,317 18,249 15,261
Repayments:
Commercial paper............................ 878 3,464 488
Other loans and deductions.................. 12,425 9,324 9,096
------ ------- -------
Gross loans receivable at end of period....... 57,060 $50,046 $44,585
====== ======= =======
Origination and Other Fees. The Company realizes income from
origination fees, late charges, checking account service charges, credit card
fees, and fees for other miscellaneous services. The Bank currently charges $200
plus closing costs on its adjustable-rate mortgage loans. Points may be charged
on fixed-rate loans. Late charges are generally assessed if payment is not
received within a specified number of days after it is due. The grace period
depends on the individual loan documents.
Non-Performing and Problem Assets
Mortgage loans are reviewed by the Bank on a regular basis and are
placed on a non-accrual status when the loans become contractually past due
ninety days or more. At the end of each month, delinquency notices are sent with
respect to all mortgage loans for which payments have not been received. Contact
by phone or in person is made, if feasible, with respect to all such loans. When
loans are sixty days in default, an additional delinquency notice is sent and
personal contact is made with the borrower to establish an acceptable repayment
schedule. When loans are ninety days in default, contact is made with the
borrower by the Senior Loan Officer who attempts to establish an acceptable
repayment schedule. Management is authorized to commence foreclosure proceedings
for any loan upon making a determination that it is prudent to do so. All loans
for which foreclosure proceedings have been commenced are placed on non-accrual
status.
Consumer loans are reviewed by the Bank on a daily basis. Notices are
sent to borrowers when any consumer loan is 5, 10 and 15 days past due. After
consumer loans are 15 days delinquent, a late fee in the amount of 10% of the
payment is imposed until the loan is brought current.
Non-Performing Assets. At December 31, 1996, $406,000, or .52% 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 $624,000, or 1.3%, of
the Company's total assets at December 31, 1992. At December 31, 1996,
residential loans, multi-family loans, commercial real estate loans, consumer
loans and REO accounted for 98.3%, 0%, 0%, 1.7% and 0%, respectively, of
non-performing assets. There were no non-accruing investments at December 31,
1996.
-7-
The table below sets forth the amounts and categories of the Company's
non-performing assets (non-accruing investments, non-accruing loans, and real
estate owned). It is the policy of the Company that all earned but uncollected
interest on all loans be reviewed monthly to determine if any portion thereof
should be classified as uncollectible for any loan past due in excess of 90
days.
At December 31,
1996 1995 1994 1993 1992
---------------------------------------------------------
(Dollars in thousands)
Non-accruing investments (1)......................... $ --- $ --- $ 150 $ 181 $ 180
Non-accruing loans (2)............................... 406 311 337 597 424
Real estate owned, net............................... --- --- --- --- 20
---- ---- ----- ----- -----
Total non-performing assets....................... $406 $311 $ 487 $ 778 $ 624
==== ==== ===== ===== =====
Non-performing loans to total loans, net (3)......... .71% .63% .76% 1.57% 1.22%
Non-performing assets to total assets................ .52 .42 .82 1.38 1.27
- ---------------
(1) Non-accruing investments consist of certain corporate obligations at market
value for 1994 since included in securities available for sale and at book
value prior to 1994 since included in securities held to maturity. The book
value at December 31, 1994 corporate obligations was $90,000. Income
collected and recorded on these securities during 1996 was $4,700.
(2) The Company generally places loans on a non-accruing status when the loans
become contractually past due 90 days or more. At December 31, 1996,
$399,000 of non-accruing loans were residential loans and $7,000 were
consumer loans. For the year ended December 31, 1996, the income that would
have been recorded had the non-accruing loans not been in a non-performing
status totaled $33,000 compared to actual income recorded of $11,000.
(3) Total loans less loans in process.
Classified Assets. Federal regulations and the Bank's Internal Loan
Review policy provide for the classification of loans and other assets such as
debt and equity securities considered by the OTS to be of lesser quality as
"substandard," "doubtful" or "loss" assets. An asset is considered "substandard"
if it is inadequately protected by the current net worth and paying capacity of
the obligor or of the collateral pledged, if any. "Substandard" assets include
those characterized by the "distinct possibility" that the association will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
"doubtful" have all of the weaknesses inherent in those classified
"substandard," with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions, and values, "highly questionable and improbable." Assets classified
as "loss" are those considered "uncollectible" and of such little value that
their continuance as assets without the establishment of a specific loss reserve
is not warranted. Assets which do not currently expose the insured institution
to sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are required to be designated "special
mention" by management.
An insured institution is required to establish general allowances for
loan losses in an amount deemed prudent by management for loans classified
substandard or doubtful, as well as for other problem loans. General allowances
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies problem assets as "loss," it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount. An institution's determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the OTS which can order the establishment of
additional general or specific loss allowances.
-8-
At December 31, 1996, the aggregate amount of the Company's classified
assets, and of the Company's general and specific loss allowances were as
follows:
At December 31, 1996
(In thousands)
Substandard loans......................................... $406
Doubtful loans............................................ ---
Loss loans................................................ ---
----
Total classified loans................................. $406
====
General loss allowances................................... $236
Specific loss allowances.................................. ---
----
Total allowances....................................... $236
====
The Company regularly reviews its loan portfolio to determine whether
any loans require classification in accordance with applicable regulations.
Allowance for Loan Losses
The allowance for loan losses is maintained through the provision for
loan losses, which is charged to earnings. The provision for loan losses is
determined in conjunction with management's review and evaluation of current
economic conditions (including those of the Bank's lending area), changes in the
character and size of the loan portfolio, loan delinquencies (current status as
well as past and anticipated trends) and adequacy of collateral securing loan
delinquencies, historical and estimated net charge-offs, and other pertinent
information derived from a review of the loan portfolio. In management's
opinion, the Company's allowance for loan losses is adequate to absorb
anticipated future losses from loans at December 31, 1996. However, there can be
no assurance that regulators, when reviewing the Company's loan portfolio in the
future, will not require increases in its allowances for loan losses or that
changes in economic conditions will not adversely affect the Company's loan
portfolio.
Summary of Loan Loss Experience. The following table analyzes changes
in the allowance for loan losses during the past five (5) one-year periods ended
December 31, 1996.
Year Ended December 31,
1996 1995 1994 1993 1992
----- ---- ----- ----- ------
(Dollars in thousands)
Balance of allowance at beginning
of period................................ $ 223 $ 206 $ 201 $ 86 $ 11
Recoveries.................................. 1 --- --- --- ---
Less charge offs:
Residential real estate loans............ --- --- --- --- ---
Consumer loans........................... --- 3 1 46 23
---- ---- ----- ----- ------
Net charge-offs............................. --- 3 1 46 23
Provisions for losses on loans.............. 12 20 6 161 98
---- ---- ----- ----- ------
Balance of allowance at end of period....... $236 $223 $ 206 $ 201 $ 86
==== ==== ===== ===== ======
Net charge-offs to total average
loans receivable for period............ --- (*) (*) .13% .07%
Allowance at end of period to
net loans receivable at end
of period (1).......................... .41 .45 .47 .53 .25
Allowance to total non-performing
loans at end of period................. 58.12 71.61 61.13 33.67 20.28
- -------------------
(1) Total loans less loans in process.
(*) Less than .01%.
-9-
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,
1996 1995 1994 1993 1992
---------------- --------------- --------------- --------------- ---------------
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
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(In thousands)
Balance at end of period
applicable to:
Residential.................. $158 72.05% $122 73.15% $103 74.92% $108 74.39% $52 77.23%
Commercial real estate....... 6 4.73 6 3.24 6 6.10 7 6.85 --- 6.27
Multi-family................. 1 4.15 1 3.83 2 1.62 1 1.41 --- .34
Construction loans........... --- 1.78 --- 2.04 --- 2.26 --- 4.10 --- 2.30
Commercial paper and
bankers' acceptances...... --- --- --- 1.75 --- 1.12 --- --- --- ---
Consumer loans............... 71 17.29 86 15.99 80 13.98 72 13.25 34 13.86
Unallocated.................. --- --- 8 --- 15 --- 13 --- --- ---
---- ------ ---- ------ ---- ------ ---- ------ --- ------
Total..................... $236 100.00% $223 100.00% $206 100.00% $201 100.00% $86 100.00%
==== ====== ==== ====== ==== ====== ==== ====== === ======
Investments and Mortgage- and Other Asset-Backed Securities
Federally chartered savings associations have the authority to invest
in various types of liquid assets, including U.S. Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, repurchase agreements and federal funds
sold. Subject to various restrictions, federally chartered savings associations
may also invest a portion of their assets in corporate debt securities and
asset-backed securities. The investment policy of the Bank, which is established
and implemented by the Bank's Investment Committee, is designed primarily to
maximize the yield on the investment portfolio subject to minimal liquidity
risk, default risk, interest rate risk, and prudent asset/liability management.
The Company's investments consist of U.S. government and other agency
securities, mortgage- and other asset-backed securities, state and municipal
bonds, corporate obligations, marketable equity securities, certificates of
deposit, and FHLB stock. At December 31, 1996, approximately $14.8 million, or
19.0% of the Company's total assets, consisted of such investments.
At December 31, 1996, the Company had $6.7 million of mortgage- and
other asset-backed securities outstanding, all of which were classified as
available for sale. Other-asset backed securities include securities backed by
automobile receivables. These fixed-rate mortgage- and other asset-backed
securities may be used as collateral for borrowings and through repayments, as a
source of liquidity. Mortgage- and other asset-backed securities offer yields
above those available for investments of comparable credit quality and duration.
Mortgage-backed securities are qualifying thrift investments under the Qualified
Thrift Lender test. See "Regulation--Qualified Thrift Lender."
-10-
The following table sets forth the carrying value and market value of
the Company's investments and mortgage- and other asset-backed securities at the
dates indicated.
At December 31,
--------------------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- ----------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
----- ----- ----- ----- ----- -----
(In thousands)
Securities available for sale (1):
Federal agencies................... $ 5,245 $ 4,880 $ 7,424 $ 7,175 $ 4,666 $ 4,255
State and municipal................ 2,194 2,242 2,229 2,294 236 216
Mortgage- and other asset-backed
securities....................... 6,768 6,674 7,422 7,468 1,229 1,203
Corporate obligations.............. 350 348 1,655 1,696 387 426
Marketable equity securities....... 6 159 6 120 6 73
------- ------- ------- ------- ------- -------
Total securities
available for sale............... 14,563 14,303 18,736 18,753 5,295 4,970
------- ------- ------- ------- ------- -------
Securities held to maturity:
Federal agencies................... --- --- --- --- 2,228 2,167
State and municipal................ --- --- --- --- 1,695 1,649
Corporate obligations.............. --- --- --- --- 1,116 1,085
Total securities
held to maturity................. --- --- --- --- 5,039 4,901
------- ------- ------- ------- ------- -------
Certificate of deposit (2)............ 100 100 100 100 --- ---
FHLB stock (2)........................ 387 387 348 348 307 307
------- ------- ------- ------- ------- -------
Total investments................ $15,050 $14,790 $19,184 $19,201 $10,641 $10,178
======= ======= ======= ======= ======= =======
- ----------------
(1) Upon adoption of SFAS No. 115 as of January 1, 1994, securities
available for sale are recorded at market value in the financial
statements. Prior to the adoption of SFAS No. 115, the marketable
equity securities currently classified as available for sale were
carried at the lower of cost or market. See Notes to the Company's
Financial Statements.
(2) Market value approximates carrying values.
Included in the Company's investment portfolio at December 31, 1996
were approximately $3.1 million (amortized cost) in derivative securities, of
which approximately $2.7 million were structured notes issued by the FHLBs. An
additional $.4 million are structured notes issued by government agencies
including the FNMA and FHLMC. The fair value of these investments was
approximately $2.7 million at December 31, 1996. These structured notes, which
are not obligations of, or guaranteed by, the United States, represent
obligations to repay principal with interest that is either fixed or fluctuates
in accordance with an interest formula tied to various indices. The interest on
the Company's structured notes generally adjusts quarterly or semi-annually
based on certain indices such as the LIBOR and the CMT.
Approximately $2.8 million (amortized cost) of these structured notes
with approximate fair value of $2.4 million had fluctuating interest rates that
adjust in the opposite direction of changes in the index to which it is tied or
that adjust on the basis of a formula tied to two different indices, such as the
CMT and an inverse LIBOR rate. All of these inversely or dually indexed
securities were classified as available for sale at December 31, 1996.
The average yield at December 31, 1996, of these derivative securities,
was 3.77%. In a rising interest rate environment, it is anticipated that the
yield on and market value of these securities will decline, and may decline
substantially.
-11-
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, 1996.
Amount at December 31, 1996, which matures in
One One to Five to Over
Year or Less Five Years Ten Years Ten Years
------------------- ------------------ ------------------ -------------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
Securities available for sale (1)(3) :
Federal agencies.............. $ 950 5.12% $1,748 3.82% $2,347 5.97% $ 200 7.29%
State and municipal (2)....... 513 9.02 353 8.28 964 7.46 364 8.86
Mortgage- and other
asset-backed securities.... 1,556 5.40 2,299 6.48 1,331 7.29 1,582 7.66
Corporate obligations......... --- --- 250 6.03 100 7.25 --- ---
Marketable equity securities.. --- --- --- --- --- --- 6 34.47
------ ---- ------ ---- ------ ---- ------ ----
Total securities
available for sale....... 3,019 5.93 4,650 5.59 4,742 6.67 2,152 7.90
------ ---- ------ ---- ------ ---- ------ ----
Securities held to maturity (3):
Certificate of deposit........ 100 7.05
FHLB stock....................... 387 7.71
------ ---- ------ ---- ------ ---- ------ ----
Total securities
held to maturity.......... 487 7.57
------ ---- ------ ---- ------ ---- ------ ----
Total investments........... $3,019 5.93% $4,650 5.59% $4,742 6.67% $2,639 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.
In 1988 and 1989, the Bank purchased three investments in revenue bonds
with an aggregate par value of $370,000 for an approximate purchase price of
$359,000. The proceeds of the bonds were to be invested in low income housing
projects. Pending investment in the housing projects, the proceeds were invested
in municipal guaranteed investment contracts backed by the former Executive Life
Insurance Company ("ELIC"). ELIC was placed into conservatorship by the
California Commissioner of Insurance on April 11, 1991. Liquidation and
rehabilitation of ELIC has proceeded in an orderly manner which has resulted in
substantial payment of these bonds to date. As of December 31, 1996, the Company
had received principal and interest payments of $342,000 on these bonds, had
recognized losses to date of $78,000 and had ceased carrying the bonds on its
books. The Company anticipates receiving further payments on these bonds,
although the timing of such payments is not known.
Sources of Funds
General. Deposits have traditionally been the Bank's primary source of
funds for use in lending and investment activities. In addition to deposits, the
Company derives funds from scheduled loan payments, loan prepayments, retained
earnings and income on earning assets. While scheduled loan payments and income
on earning assets are relatively stable sources of funds, deposit inflows and
outflows can vary widely and are influenced by prevailing interest rates, market
conditions and levels of competition. Borrowings from the FHLB of Indianapolis
may be used in the short-term to compensate for reductions in deposits or
deposit inflows at less than projected levels. The Bank rarely borrows on a
longer-term basis, for example, to support expanded activities or to assist in
its asset/liability management.
-12-
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.
At December 31, 1992, the Bank's deposits totaled $43.3 million.
Deposits totaled $57.4 million at December 31, 1996.
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, 1996, is as follows:
Minimum Balance at Weighted
Opening December 31, % of Average
Type of Account Balance 1996 Deposits Rate
- --------------- ----------------------------------------------------------
(Dollars in thousands)
Withdrawable:
Passbook savings accounts......................... $ 10 $ 3,119 5.43% 3.00%
Regular money market accounts..................... 2,500 1,158 2.02 3.24
Hi yield money market accounts.................... 10,000 14,488 25.24 4.70
Super NOW accounts................................ 2,500 686 1.20 2.47
NOW and
other transaction accounts........................... 200 3,331 5.80 2.07
Other transaction accounts........................ 100 631 1.10 0
------ -----
Total withdrawable................................... 23,413 40.79 3.83
------ -----
Certificates (original terms):
91 days........................................... 1,000 319 .56 4.41
6 months.......................................... 1,000 4,564 7.95 5.11
12 months......................................... 1,000 4,962 8.65 5.27
18 months......................................... 500 944 1.64 5.53
24 months......................................... 500 11,460 19.97 5.55
30 months......................................... 500 3,330 5.80 5.48
60 months......................................... 1,000 3,757 6.54 5.55
IRA's
18 months......................................... 100 4,647 8.10 5.61
------ -----
Total certificates................................... 33,983 59.21 5.44
------ -----
Total deposits ...................................... $57,396 100.00% 4.78%
======= ====== ====
-13-
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,
---------------------------------------------
1996 1995 1994
------- ------- -------
(In thousands)
4.00% and under.......... $ 199 $ 125 $ 7,228
4.01 - 6.00 %............ 32,499 27,648 21,301
6.01 - 8.00%............. 1,285 3,202 2,773
8.01 - 10.00%............ --- --- ---
------- ------- -------
Total .................. $33,983 $30,975 $31,302
======= ======= =======
The following table represents, by various interest rate categories,
the amounts of time deposits maturing during each of the three years following
December 31, 1996, and the total amount maturing thereafter. Matured
certificates which have not been renewed as of December 31, 1996, have been
allocated based upon certain rollover assumptions:
Amounts At
December 31, 1996, Maturing in
---------------------------------------------------------
One Year Two Three Greater Than
or Less Years Years Three Years
---------------------------------------------------------
(In thousands)
4.00% and under...... $ 199 $ --- $ --- $ ---
4.01 - 6.00 %........ 18,664 11,606 1,083 1,146
6.01-8.00%........... 1,076 100 --- 109
------- ------- ------ ------
Total .............. $19,939 $11,706 $1,083 $1,255
======= ======= ====== ======
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
1996.
Maturity (In thousands)
Three months or less....................................... $ 209
Greater than three months
through six months.................................... 1,751
Greater than six months
through twelve months................................. 1,344
Over twelve months......................................... 1,054
-----
Total................................................. $4,358
======
-14-
The following table sets forth the dollar amount of savings in the
various types of deposits programs offered by the Bank at the dates indicated,
and the amount of increase or decrease in such deposits as compared to the
previous period.
Deposit Activity
-----------------------------------------------------------------------------
Increase Increase
(Decrease) (Decrease)
Balance at from Balance at from
December 31, % of December 31, December 31, % of December 31,
1996 Deposits 1995 1995 Deposits 1994
------------ --------- ------------ ------------- --------- ------------
(Dollars in thousands)
Withdrawable:
Passbook savings accounts............$ 3,119 5.43% (77) $ 3,196 6.09% $ (50)
Regular money market accounts........ 1,158 2.02 (179) 1,337 2.55 13
Hi yield money market accounts....... 14,488 25.24 1,796 12,692 24.19 1,101
Super NOW accounts................... 686 1.20 124 562 1.07 (213)
NOW accounts......................... 3,331 5.80 101 3,230 6.16 732
Other transaction accounts........... 631 1.10 162 469 .90 3
------- ------ ----- ------- ------ ------
Total withdrawable...................... 23,413 40.79 1,927 21,486 40.96 1,586
------- ------ ----- ------- ------ ------
Certificates (original terms):
91 days.............................. 319 .56 (621) 940 1.79 (126)
6 months............................. 4,564 7.95 1,056 3,508 6.69 (312)
12 months............................ 4,962 8.65 (310) 5,272 10.05 2,657
18 months............................ 944 1.64 (149) 1,093 2.08 461
24 months............................ 11,460 19.97 4,236 7,224 13.77 (1,131)
30 months............................ 3,330 5.80 (1,231) 4,561 8.69 (1,807)
60 months............................ 3,757 6.54 (401) 4,158 7.93 (19)
IRA's
18 months............................ 4,647 8.10 428 4,219 8.04 (50)
------- ------ ----- ------- ------ ------
Total certificates...................... 33,983 59.21 3,008 30,975 59.04 (327)
------- ------ ----- ------- ------ ------
Total deposits.......................... $57,396 100.00% 4,935 $52,461 100.00% $1,259
======= ====== ===== ======= ====== ======
Deposit Activity
Balance at
December 31, % of
1994 Deposits
(Dollars in thousands)
Withdrawable:
Passbook savings accounts.......... $ 3,246 6.34%
Regular money market accounts...... 1,324 2.59
Hi yield money market accounts..... 11,591 22.64
Super NOW accounts................. 775 1.51
NOW accounts....................... 2,498 4.88
Other transaction.................. 466 .91
------ -----
Total withdrawable.................... 19,900 38.87
------ -----
Certificates (original terms):
91 days............................ 1,066 2.08
6 months........................... 3,820 7.46
12 months.......................... 2,615 5.11
18 months.......................... 632 1.23
24 months.......................... 8,355 16.32
30 months.......................... 6,368 12.44
60 months.......................... 4,177 8.16
IRA's
18 months.......................... 4,269 8.33
------ -----
Total certificates.................... 31,302 61.13
------ -----
Total deposits ....................... $51,202 100.00%
======= ======
-15-
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,
1996, the Company had $2.0 million in borrowings from the FHLB of Indianapolis
which mature within one year and had a weighted average interest rate of 5.38%.
The Company does not anticipate any difficulty in obtaining advances appropriate
to meet its requirements in the future. The Company also had a $1.4 million note
payable to another bank due on March 5, 1997. It was secured by 100% of the
Bank's common stock, and the interest was at the prime rate. This note was
repaid on January 16, 1997.
Employees
As of December 31, 1996, the Bank employed 10 persons on a full-time
basis and 3 persons on a part-time basis. None of the Bank's employees are
represented by a collective bargaining group. Management considers its employee
relations to be excellent.
The Bank's employee benefits for full-time employees include, among
other things, a Financial Institutions Retirement Fund ("FIRF" or the "Pension
Plan") defined benefit pension plan and major medical and long-term disability
insurance.
Employee benefits are considered by management to be competitive with
those offered by other financial institutions and major employers in the Bank's
market area. See "Executive Compensation and Related Transactions."
Competition
The Bank operates in North Central Indiana and makes almost all of its
loans to and accepts most of its deposits from residents of Cass County in
Indiana.
The Bank is subject to competition from various financial institutions,
including state and national banks, state and federal savings institutions,
credit unions, certain non-banking consumer lenders, and other companies or
firms, including brokerage houses and mortgage brokers, that provide similar
services in Cass County. The Bank must also compete with money market funds and
with insurance companies with respect to its individual retirement accounts.
Under current law, bank holding companies may acquire savings
associations. Savings associations may also acquire banks under federal law. To
date, several bank holding company acquisitions of savings associations in
Indiana have been completed. Affiliations between banks and healthy savings
associations based in Indiana may also increase the competition faced by the
Company.
In addition, 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 to certain limitations,
allows banks to acquire out-of-state branches either through merger or de novo
expansion. The State of Indiana recently passed a law establishing interstate
branching provisions for Indiana state chartered banks consistent with those
established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana
Branching Law authorizes Indiana banks to branch interstate by merger or de novo
expansion and authorizes out-of-state banks meeting certain requirements to
branch into Indiana by merger or de novo expansion. The Indiana Branching Law
became effective March 15, 1996, provided that interstate mergers and de novo
branches are not permitted to out of state banks unless the laws of their home
states permit Indiana banks to merge or establish de novo branches on a
reciprocal basis. This new legislation may also result in increased competition
for the Company.
Because of recent changes in federal law, interstate acquisitions of
banks are less restricted than they were under prior law. Savings associations
have certain powers to acquire savings associations based in other states, and
Indiana law expressly permits reciprocal acquisition of Indiana savings
associations. In addition, Federal savings associations are permitted to branch
on an interstate basis. 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.
-16-
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 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 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 assessment rates range from .0172761% of
assets for associations with assets of $67 million or less to .0045864% for
associations with assets in excess of $35 billion. The Bank's semiannual
assessment for the first six months of 1997 under this assessment scheme, based
upon consolidated assets at December 31, 1996, is approximately $13,000.
The Bank is also subject to federal and state regulation as to such
matters as loans to officers, directors, or principal shareholders, required
reserves, limitations as to the nature and amount of its loans and investments,
regulatory approval of any merger or consolidation, issuance or retirements of
its own securities, and limitations upon other aspects of banking operations. In
addition, the activities and operations of the Bank are subject to a number of
additional detailed, complex and sometimes overlapping federal and state laws
and regulations. These include state usury and consumer credit laws, state laws
relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Community Reinvestment Act, anti-redlining legislation and anti-trust
laws.
The United States Congress is considering legislation that would
require all federal savings associations, such as the Bank, to either convert to
a national bank or a state-chartered financial institution by a specified date
to be determined. In addition, under the legislation, the Holding Company likely
would not be regulated as a savings and loan holding company, but rather as a
bank holding company. The OTS would also be abolished and its functions
transferred among the other federal banking regulators. Certain aspects of the
legislation remain to be resolved and therefore no assurance can be given as to
whether or in what form the legislation will be enacted or its effect on the
Holding Company and the Bank.
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 savings and loan
associations and savings banks and other member financial institutions. The Bank
is required to hold shares of capital stock in the FHLB of Indianapolis in an
amount at least equal to the greater of 1% of the aggregate principal amount of
its unpaid residential mortgage loans, home purchase contracts and similar
obligations at the end of each calendar year, .3% of its assets or 1/20 (or such
greater fraction established by the FHLB) of outstanding FHLB advances,
commitments, lines of credit and letters of credit. The Bank is currently in
compliance with this requirement. At December 31, 1996, the Company's investment
in stock of the FHLB of Indianapolis was $386,500.
In past years, the Bank received substantial dividends on its FHLB
stock. All 12 FHLBs are required to provide funds for the resolution of troubled
savings associations and 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
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projects, affordable rental housing, and certain other community projects. These
contributions and obligations could adversely affect the FHLBs' ability to pay
dividends and the value of FHLB stock in the future. For the year ending
December 31, 1996, dividends paid to the Company by the FHLB of Indianapolis
totaled $29,000, for an annual rate of 7.71%.
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 FHFB 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. Current law prescribes eligible collateral as first
mortgage loans less 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, FHLB deposits and,
to a limited extent, real estate with readily ascertainable value in which a
perfected security interest may be obtained. Other forms of collateral may be
accepted as over collateralization or, under certain circumstances, to renew
advances outstanding. 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.
Under current law, savings associations which cease to be Qualified Thrift
Lenders are ineligible to receive advances from their FHLB.
Liquidity
For each calendar month, the Bank is required to maintain an average
daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances, specified United States Government, state or federal agency
obligations, shares of certain mutual funds and certain corporate debt
securities and commercial paper) equal to an amount not less than a specified
percentage of its net withdrawable deposit accounts plus short-term borrowings
during the preceding calendar month. This liquidity requirement may be changed
from time to time by the OTS to any amount within the range of 4% to 10%
depending upon economic conditions and the savings flows of member institutions,
and is currently 5%. OTS regulations also require each member savings
institution to maintain an average daily balance of short-term liquid assets at
a specified percentage (currently 1%) of the total of its net withdrawable
deposit accounts and short-term borrowings during the preceding calendar month.
Monetary penalties may be imposed for failure to meet these liquidity
requirements. The daily average liquidity of the Bank for December, 1996, was
14.2% which exceeded the then applicable 5% liquidity requirement. Its average
short-term liquidity ratio for December, 1996, was 8.02%. The Bank has never
been subject to monetary penalties for failure to meet its liquidity
requirements.
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 BIF for commercial banks and state savings banks
and the SAIF for savings associations and banks that have acquired deposits from
savings associations. The FDIC is required to maintain designated levels of
reserves in each fund. Currently, thrifts may convert from one insurance fund to
the other upon payment of certain exit and entrance fees. Such fees need not be
paid if a SAIF member converts to a bank charter or merges with a bank, as long
as the resulting bank continues to pay the applicable insurance assessments to
the SAIF during such period and as long as certain other conditions are met.
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 such rates if such 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. Such risk level is determined based on the institution's
capital level and the FDIC's level of supervisory concern about the institution.
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For the first six months of 1995, the assessment schedule for BIF
members and SAIF members ranged from .23% to .31% of deposits. As is the case
with the SAIF, the FDIC is authorized to adjust the insurance premium rates for
banks that are insured by the BIF of the FDIC in order to maintain the reserve
ratio of the BIF at 1.25% of BIF-insured deposits. As a result of the BIF
reaching its statutory reserve ratio, the FDIC in 1995 revised the premium
schedule for BIF insured institutions to provide a range of .04% to .31% of
deposits. The revisions became effective in the third quarter of 1995. At that
time, healthy BIF-insured banks paid premiums of approximately $.04 per $100 in
deposits compared to $.23 per $100 in deposits paid by healthy SAIF-insured
institutions. The BIF rates were further revised, effective January 1996, to
provide a range of 0% to .27%, eliminating insurance premiums for healthy
BIF-insured banks. The SAIF rates, however, were not adjusted. At the time the
FDIC revised the BIF premium schedule, it noted that, absent legislative action
(as discussed below), the SAIF would not attain its designated reserve ratio
until the year 2002. As a result, SAIF-insured members would continue to be
generally subject to higher deposit insurance premiums than BIF-insured
institutions until, all things being equal, the SAIF attained its required
reserve ratio of 1.25% of BIF-insured deposits.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September 1996.
The legislation provided for a one time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the
SAIF. It also provided for the merger of the BIF and the SAIF on January 1,
1999, if no savings associations then exist. The special assessment rate was
established by the FDIC at .657% of deposits, and the resulting assessment of
$335,000 on the Bank was paid in November, 1996. This special assessment
significantly increased noninterest expense and adversely affected the Holding
Company's results of operations for the three months ended September 30, 1996.
As a result of the special assessment, the Bank's deposit insurance premiums
were reduced to .065 basis points based upon its current risk classification and
the new assessment schedule for SAIF-insured institutions. These premiums are
subject to change in future periods.
Prior to the enactment of the legislation, a portion of the SAIF
assessment imposed on savings associations was used to repay obligations issued
by a federally chartered corporation to provide financing ("FICO") for resolving
the thrift crisis in the 1980's. Although the FDIC has equalized the SAIF
assessment schedule with the BIF assessment schedule, SAIF-insured institutions
remain subject to a FICO assessment as a result of this continuing obligation.
Although the legislation also now requires assessments to be made on
BIF-assessable deposits for this purpose, effective January 1, 1997, that
assessment will be limited to 20% of the rate imposed on SAIF assessable
deposits until the earlier of September 30, 1999, or when no savings association
continues to exist, thereby imposing a greater burden on SAIF member
institutions such as the Bank. Thereafter, however, assessments on BIF-member
institutions are expected to be made on the same basis as SAIF-member
institutions.
Regulatory Capital
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. Core capital is generally defined as common stockholders' equity
(including retained income), noncumulative perpetual preferred stock and related
surplus, certain minority equity interests in subsidiaries, qualifying
supervisory goodwill (on a declining basis until 1995), purchased mortgage
servicing rights (which may be included in an amount up to 50% of core capital,
but which are to be reported on an association's balance sheet at the lesser of
90% of their fair market value, 90% of their original purchase price, or 100% of
their unamortized book value), and purchased credit card relationships (which
may be included in an amount up to 25% of core capital) 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
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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%) with a credit risk-free asset such as cash requiring no
risk-based capital and an asset with a significant credit risk such as a
non-accrual loan being assigned a factor of 100%. At December 31, 1996, the Bank
was in compliance with all capital requirements.
The OTS has delayed implementation of a rule which sets forth the
methodology for calculating an interest rate risk component to be incorporated
into the OTS regulatory capital rule. Under the rule, only 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) will be required to maintain additional
capital for interest rate risk under the risk-based capital framework. An
institution with an "above normal" level of exposure will have to maintain
additional capital equal to one-half the difference between its measured
interest rate risk (the most adverse change in the market value of its portfolio
resulting from a 200-basis point move in interest rates divided by the estimated
market value of its assets) and 2%, multiplied by the market value of its
assets. That dollar amount of capital is in addition to an institution's
existing risk-based capital requirement. Although the OTS has decided to delay
implementation of this rule, it will continue to closely monitor the level of
interest rate risk at individual institutions and it retains the authority, on a
case-by-case basis, to impose additional capital requirements for individual
institutions with significant interest rate risk.
The following is a summary of the Bank's regulatory capital and capital
requirements at December 31, 1996:
Tangible Core Risk-based
capital capital capital
--------- ---------- ----------
(Dollars in thousands)
Regulatory capital $17,018 $17,018 $17,254
Minimum capital requirement 1,166 2,332 3,356
------- ------- -------
Excess capital $15,852 $14,686 $13,898
======= ======= =======
Regulatory capital ratio 21.9% 21.9% 41.1%
Fully phased-in requirement 1.5% 3.0% 8.0%
======= ======= =======
If an association is not in compliance with its capital requirements,
the OTS is required to prohibit asset growth and to impose a capital directive
that may restrict, among other things, the payment of dividends and officers'
compensation. In addition to the specific sanctions provided in FIRREA for
failing to meet captial requirements, the OTS and the FDIC generally are
authorized to take enforcement actions against a savings association that fails
to meet its capital requirements, which actions may include restrictions on
operations and banking activities, the imposition of a capital directive, a
cease and desist order, civil money penalties or harsher measures such as the
appointment of a receiver or conservator or a forced merger into another
institution.
Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FedICIA") requires, among other things, federal bank regulatory authorities to
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,
1996, the Bank was categorized as "well capitalized."
An institution is deemed to be "well capitalized" if it has a total
risk-based capital ratio of 10% or greater, a Tier I risk-based capital ratio of
6% or greater, and a leverage ratio of 5% or greater, and is not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure. An institution is deemed to be "adequately
capitalized" if it has a total risk-based capital ratio of 8% or greater, a Tier
I risk-based capital of 4% or greater, and generally a leverage ratio of 4%
greater. An institution is deemed to be "undercapitalized" if it has a total
risk-based capital ratio of less than 8%, a Tier I risk-based capital ratio of
less than 4%, or generally a leverage ratio of less than 4%; and (d)
"significantly undercapitalized" if it has a total risk-based capital ratio of
-20-
less than 6%, a Tier I risk-based capital ratio of less than 3%, or a leverage
ratio of less than 3%. An institution is deemed to be "critically
undercapitalized" if it has a ratio of tangible equity (as defined in the
regulations) to total assets that is equal to or less than 2%.
"Undercapitalized" institutions are subject to growth limitations and
are required to submit a capital restoration plan. If an "undercapitalized"
institution fails to submit, or fails to implement in a material respect, an
acceptable plan, it is treated as if it is "significantly undercapitalized."
"Significantly undercapitalized" institutions are subject to one or more of a
number of requirements and restrictions, including an order by the FDIC to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets and cease receipt of deposits from correspondent banks, and
restrictions on compensation of executive officers. "Critically
undercapitalized" institutions may not, beginning 60 days after becoming
"critically undercapitalized," make any payment of principal or interest on
certain subordinated debt or extend credit for a highly leveraged transaction or
enter into any transaction outside the ordinary course of business. In addition,
"critically undercapitalized" institutions are subject to appointment of a
receiver or conservator.
Capital Distributions Regulation
An OTS regulation imposes restrictions upon all "capital distributions"
by savings associations, including cash dividends, payments by an institution to
repurchase or otherwise acquire its shares, payments to shareholders of another
institution in a cash-out merger and other distributions charged against
capital. The regulation establishes a three-tiered system of regulation, with
the greatest flexibility being afforded to well-capitalized institutions. A
savings association which has total capital (immediately prior to and after
giving effect to the capital distribution) that is at least equal to its fully
phased-in capital requirements would be a Tier 1 institution ("Tier 1
Institution"). An institution that has total capital at least equal to its
minimum capital requirements, but less than its fully phased-in capital
requirements, would be a Tier 2 institution ("Tier 2 Institution"). An
institution having total capital that is less than its minimum capital
requirements would be a Tier 3 institution ("Tier 3 Institution"). However, an
institution which otherwise qualifies as a Tier 1 Institution may be designated
by the OTS as a Tier 2 or Tier 3 institution if the OTS determines that the
institution is "in need of more than normal supervision." The Bank is currently
a Tier 1 Institution.
A Tier 1 Institution could, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year equal to the
greater of (a) 100% of its net income to date during the calendar year plus an
amount that would reduce by one-half its "surplus capital ratio" (the excess
over its capital requirements) at the beginning of the calendar year, or (b) 75%
of its net income for the most recent four quarter period. Any additional amount
of capital distributions would require prior regulatory approval.
The OTS has proposed revisions to these regulations which would permit
savings associations to declare dividends in amounts which would assure that
they remain adequately capitalized following the dividend declaration. Savings
associations in a holding company system which are rated Camel 1 or 2 and which
are not in troubled condition would simply file a prior notice with the OTS
concerning such dividend declaration.
Safety and Soundness Standards
On February 2, 1995, the federal banking agencies adopted final safety
and soundness standards for all insured depository institutions. The standards,
which were issued in the form of guidelines rather than regulations, relate to
internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan may result in enforcement
proceedings. Additional standards on earnings and classified assets are expected
to be issued in the near future.
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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.
Federal Reserve System
Under FRB regulations, the Bank is required to maintain reserves
against its transaction accounts (primarily checking and NOW accounts) and
non-personal money market deposit accounts. The effect of these reserve
requirements is to increase the Bank's cost of funds. The Bank is in compliance
with its reserve requirements. A federal savings association, like other
depository institutions maintaining reservable accounts, may borrow from the
Federal Reserve Bank "discount window," but the FRB's regulations require the
savings association to exhaust other reasonable alternative sources, including
borrowing from its regional FHLB, before borrowing from the Federal Reserve
Bank. Current law imposes certain limitations on the ability of undercapitalized
depository institutions to borrow from Federal Reserve Banks.
Transactions with Affiliates
The Bank and the Holding Company are subject to Sections 22(h), 23A and
23B of the Federal Reserve Act, which restrict financial transactions between
banks and affiliated companies. The statute limits credit transactions between a
bank 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.
Holding Company Regulation
The Holding Company is regulated as a "non-diversified savings and loan
holding company" within the meaning of the Home Owners' Loan Act, as amended
("HOLA") and subject to regulatory oversight 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.
HOLA generally prohibits a savings and loan company, without 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. Additionally, under certain circumstances a savings and loan holding
company is permitted to acquire, with the approval of the Director of the OTS,
up to 15% of previously unissued voting shares of an under-capitalized savings
association for cash without that savings association being deemed controlled by
the holding company. 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 operate
the Holding Company as a unitary savings and loan holding company. There are
generally no restrictions on the permissible business activities of a unitary
-22-
savings and loan holding company. However, if the Director of the OTS determines
that there is reasonable cause to believe that the continuation by a savings and
loan holding company of an activity constitutes a serious risk to the financial
safety, soundness, or stability of its subsidiary savings association, the
Director of the OTS may impose such restrictions as deemed necessary to address
such risk and limiting (i) payment of dividends by the savings association, (ii)
transactions between the savings association and its affiliates, and (iii) any
activities of the savings association that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings association.
Notwithstanding the above rules as to permissible business activities
of unitary savings and loan holding companies, if the savings association
subsidiary of such a holding company fails to meet the Qualified Thrift Lender
("QTL") test, then such unitary holding company would become subject to the
activities restrictions applicable to multiple holding companies. (Additional
restrictions on securing advances from the FHLB also apply). See "-- Qualified
Thrift Lender." At December 31, 1996, the Bank's asset composition was in excess
of that required to qualify the Bank 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. 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
previously directly authorized by the FSLIC by regulation as of March 5, 1987,
to be engaged in by multiple holding companies or (vii) those activities
authorized by the 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 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 5, 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.
No subsidiary savings association of a savings and loan holding company
may declare or pay a dividend on its permanent or nonwithdrawable stock unless
it first gives the Director of the OTS 30 days advance notice of such
declaration and payment. Any dividend declared during such period, or without
the giving of such notice, shall be invalid.
-23-
Federal Securities Law
The shares of Common Stock of the Holding Company are registered with
the SEC under the Securities Exchange Act of 1934 (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
under the 1934 Act and the rules of the SEC thereunder.
Shares of Common Stock held by persons who are affiliates of the
Holding Company may not be resold without registration unless sold in accordance
with the resale restrictions of Rule 144 under the 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) will be able to sell in the public market,
without registration, a number of shares not to exceed, in any three-month
period, the greater of (i) 1% of the outstanding shares of the Holding Company
or (ii) the average weekly volume of trading in such shares during the preceding
four calendar weeks.
Qualified Thrift Lender
Under current OTS regulations, the QTL test requires that a savings
association have at least 65% of its portfolio assets invested in "qualified
thrift investments" on a monthly average basis in 9 out of every 12 months.
Qualified thrift investments under the QTL test consist primarily of housing
related loans and investments.
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; (iii) it shall not be eligible for any new FHLB
advances; and (iv) it shall be bound by regulations applicable to national banks
respecting payment of dividends. Three years after failing the QTL test the
association must (i) dispose of any investment or activity not permissible for a
national bank and a savings association and (ii) repay all outstanding FHLB
advances. If such a savings association is controlled by a savings and loan
holding company, then such holding company must, within a prescribed time
period, become registered as a bank holding company and become subject to all
rules and regulations applicable to bank holding companies (including
restrictions as to the scope of permissible business activities).
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, 1996, 85.98% 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. 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
Bank holding companies, upon receipt of appropriate approvals from the
FRB and the Director of the OTS, may acquire control of any savings association
or holding company thereof wherever located. Similarly, a savings and loan
holding company may now acquire control of a bank. Moreover, federal savings
associations may acquire or be acquired by any insured depository institution.
Pursuant to rules promulgated by the FRB, a savings association acquired by a
bank holding company (i) may, so long as the savings association continues to
meet the QTL test, continue to branch to the same extent as permitted to other
non-affiliated savings associations similarly chartered in the state, and (ii)
cannot continue any non-banking activities not authorized for bank holding
companies. Saving associations acquired by a bank holding company may, if
located in a state where the bank holding company is legally authorized to
acquire a bank, be converted to the status of a bank but deposit insurance
assessments and payments continue to be paid by the association to the SAIF. A
-24-
savings association so converted to a bank becomes subject to the branching
restrictions applicable to banks. Also any insured depository institution may
merge with, acquire the assets of, or assume the liabilities of any other
insured depository institution with the appropriate regularity approvals if (i)
continued payments of deposit insurance are made on the acquired depository
institution's deposits (including an assumed rate of growth in such deposits) to
SAIF (if the acquired institution was a SAIF member) or to BIF (if the acquired
institution was a BIF member), and (ii) the acquiring institution and any
holding company in control thereof meet all applicable capital requirements at
the time of the transaction.
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.
In addition, 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 recently passed a law establishing
interstate branching provisions for Indiana state-chartered banks consistent
with those established by the Riegle-Neal Act (the "Indiana Branching Law"). The
Indiana Branching Law authorizes Indiana banks to branch interstate by merger or
de novo expansion. The Indiana Branching Law became effective March 15, 1996,
provided that interstate mergers and de novo branches are not permitted to
out-of-state banks unless the laws of their home states permit Indiana banks to
merge or establish de novo branches on a reciprocal basis.
Limitations on Repurchase of Common Stock of Holding Company
OTS regulations currently provide that the Holding Company is
prohibited from repurchasing any of its shares within one year of the
Conversion, which occured on June 13, 1995. So long as the Bank continues to
meet certain capitalization requirements, the Holding Company may repurchase
shares in an open-market repurchase program (which cannot exceed 5% of its
outstanding shares in a twelve-month period) during the second and third years
following its Conversion by giving appropriate prior notice to the OTS. The OTS
has the authority to waive these restrictions under certain circumstances.
Unless repurchases are permitted under the foregoing regulations, the Holding
Company may not, for a period of three years from the date of the Conversion,
repurchase any of its capital stock from any person, except in the event of an
offer to purchase by the Holding Company on a pro rata basis from all of its
shareholders which is approved in advance by the OTS or except in exceptional
circumstances established to the satisfaction of the OTS.
Under Indiana law, the Holding Company will be precluded from
repurchasing its equity securities if, after giving effect to such repurchase,
the Holding Company would be unable to pay its debts as they become due or the
Holding Company's assets would be less than its liabilities and obligations to
preferential shareholders.
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
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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 Community Reinvestment Act and its record of lending to
first-time home buyers. The FHLBs have established an "Affordable Housing
Program" to subsidize the interest rate of advances to member associations
engaged in lending for long-term, low- and moderate-income, owner-occupied and
affordable rental housing at subsidized rates. The Bank is participating in this
program. The 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 will no longer be able to use the percentage of
taxable income method of computing its allocable tax bad debt deduction. The
Bank will be required to compute its allocable deduction using the experience
method. As a result of the repeal of the percentage of taxable income method,
reserves taken after 1987 using the percentage of taxable income method
generally must be included in future taxable income over a six-year period,
although a two-year delay may be permitted for institutions meeting a
residential mortgage loan origination test. In addition, the pre-1988 reserve,
in which no deferred taxes have been recorded, will not have to be recaptured
into income unless (i) the Bank no longer qualifies as a bank under the Code, or
(ii) excess dividends are paid out by the Bank.
Depending on the composition of its items of income and expense, a
savings institution may be subject to the alternative minimum tax. A savings
institution must pay an alternative minimum tax equal to the amount (if any) by
which 20% of alternative minimum taxable income ("AMTI"), as reduced by an
exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular
taxable income increased or decreased by certain tax preferences and
adjustments, including depreciation deductions in excess of that allowable for
alternative minimum tax purposes, tax-exempt interest on most private activity
bonds issued after August 7, 1986 (reduced by any related interest expense
disallowed for regular tax purposes), the amount of the bad debt reserve
deduction claimed in excess of the deduction based on the experience method and
75% of the excess of adjusted current earnings over AMTI (before this adjustment
and before any alternative tax net operating loss). AMTI may be reduced only up
to 90% by net operating loss carryovers, but alternative minimum tax paid that
is attributable to most preferences (although not to post-August 7, 1986
tax-exempt interest) can be credited against regular tax due in later years.
State Taxation
The Bank is subject to Indiana's Financial Institutions Tax ("FIT"),
which is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted
gross income," for purposes of FIT, begins with taxable income as defined by
Section 63 of the Code and, thus, incorporates federal tax law to the extent
that it affects the computation of taxable income. Federal taxable income is
then adjusted by several Indiana modifications, the most notable of which is the
required addback of interest that is tax-free for federal income tax purposes.
Other applicable state taxes include generally applicable sales and use taxes
plus real and personal property taxes.
Current Accounting Issues
Mortgage Servicing Rights. During 1995, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 122, Accounting for Mortgage Servicing
Rights. SFAS No. 122 pertains to mortgage banking enterprises and financial
institutions that conduct operations that are substantially similar to the
primary operations of mortgage banking enterprises. SFAS No. 122 eliminates the
accounting distinction between mortgage servicing rights that are acquired
through loan origination activities and those acquired through purchase
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transactions. Under SFAS No. 122, if a mortgage banking enterprise sells or
securitizes loans and retains the mortgage servicing rights, the enterprise must
allocate the total cost of the mortgage loans to the mortgage servicing rights
and the loans (without the rights) based on their relative fair values if it is
practicable to estimate those fair values. If it is not practicable, the entire
cost should be allocated to the mortgage loans and no cost should be allocated
to the mortgage service rights. An entity would measure impairment of mortgage
servicing rights and loans based on the excess of the carrying amount of the
mortgage servicing rights portfolio over the fair value of that portfolio.
SFAS No. 122 is to be applied prospectively in fiscal years beginning
after December 15, 1995, to transactions in which an entity acquires mortgage
servicing rights and to impairment evaluations of all capitalized mortgage
servicing rights. The adoption of SFAS No. 122 had no impact in 1996 on the
Company's financial condition and results of operations.
Stock-Based Compensation. The FASB has issued No. SFAS 123, Accounting
for Stock-based Compensation. SFAS No. 123 establishes a fair value based method
of accounting for stock-based compensation plans. The FASB encourages all
entities to adopt this method for accounting for all arrangements under which
employees receive shares of stock or other equity instruments of the employer,
or the employer incurs liabilities to employees in amounts based on the price of
its stock.
Due the extremely controversial nature of this project, SFAS No. 123
permits a company to continue the accounting for stock-based compensation
prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. If a company elects that option, pro forma disclosures of
net income (and EPS, if presented) are required in the notes to the financial
statements as if the provisions of SFAS No. 123 had been used to measure
stock-based compensation. The disclosure requirements of Opinion No. 25 have
been superseded by the disclosure requirements of this Statement. Once an entity
adopts the fair value based method for accounting for these transactions, that
election cannot be reversed.
Equity instruments granted or otherwise transferred directly to an
employee by a principal stockholder are stock-based employee compensation to be
accounted for in accordance with either Opinion 25 or SFAS No. 123 unless the
transfer clearly is for a purpose other than compensation. The accounting
requirements of SFAS No. 123 became effective for transactions entered into in
fiscal years beginning after December 15, 1995, and the disclosure requirements
became effective for financial statements for fiscal years beginning after
December 15, 1995. Pro forma disclosures required for entities that elect to
continue to measure compensation cost using Opinion 25 must include the effects
of all awards granted in fiscal years beginning after December 15, 1994. During
the initial phase-in period, the effects of applying this Statement are not
likely to be representative of the effects on reported net income for future
years because options vest over several years and additional awards generally
are made each year.
The Company adopted SFAS No. 123 for 1996, and elected to report the
pro forma disclosures of net income and earnings per share in the notes to
financial statements.
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, breaks new ground in resolving
long-standing questions about whether transactions should be accounted for as
secured borrowings or as sales. The Statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are considered secured borrowings.
A transfer of financial assets in which the transferor surrenders
control over those assets is accounted for as a sale to the extent that
consideration other than beneficial interests in the transferred assets is
received in exchange. The transferor has surrendered control over transferred
assets only if all of the following conditions are met:
o The transferred assets have been isolated from the
transferor--put presumptively beyond the reach of the
transferor and its creditors, even in bankruptcy or other
receivership.
o Each transferee obtains the right--free of conditions that
constrain it from taking advantage of that right--to pledge or
exchange the transferred assets, or the transferee is a
qualifying special-purpose entity and the holders of
beneficial interest in that entity have the right--free of
conditions that constrain them from taking advantage of that
right--to pledge or exchange those interests.
o The transferor does not maintain effective control over the
transferred assets through an agreement that both entitles and
obligates the transferor to repurchase or redeem them before
their maturity, or an agreement that entitles the transferor
to repurchase or redeem transferred assets are not readily
obtainable.
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This Statement provides detailed measurement standards for assets and
liabilities included in these transactions. It also includes implementation
guidance for assessing isolation of transferred assets and for accounting for
transfers of partial interest, servicing of financial assets, securitization,
transfers or sales type and direct financing lease receivables, securities
lending transactions, repurchase agreements, "wash sales," loan syndications and
participation, risk participation in banker's acceptances, factoring
arrangements, transfers of receivables with recourse and extinguishment of
liabilities.
The Statement supersedes FASB Statements No. 76, Extinguishment of
Debt, and No. 77, Reporting by Transferors for Transfers of Receivables with
Recourse, and No. 122, Accounting for Mortgage Servicing Rights, and amends FASB
Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities, in addition to clarifying or amending a number of other statements
and technical bulletins.
Except as amended by Statement No. 127, this Statement is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996 and is to be applied prospectively. Earlier or
retroactive application is not permitted.
The FASB was made aware that the volume of certain transactions and the
related changes to information systems and accounting processes that are
necessary to comply with the requirements of Statement No. 125 would make it
extremely difficult, if not impossible, for some affected enterprises to apply
the transfer and collateral provisions of Statement No. 125 to those
transactions as soon as January 1, 1997. As a result, Statement No. 127 defers
for one year the effective date (a) of paragraph 15 of Statement No. 125 and (b)
for repurchase agreement, dollar-roll, securities lending, and similar
transactions, of paragraphs 9-12 and 237(b) of Statement No. 125.
Statement No. 127 provides additional guidance on the types of
transactions for which the effective date of Statement No. 125 has been
deferred. It also requires that if it is not possible to determine whether a
transfer occurring during calendar-year 1997 is part of a repurchase agreement,
dollar-roll, securities lending, or similar transaction, then paragraphs 9-12 of
Statement No. 125 should be applied to that transfer.
All provisions of Statement No. 125 should continue to be applied
prospectively, and earlier or retroactive application is not permitted.
Item 2. Properties.
At December 31, 1996, 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, 1996:
Total Deposits Net Book Value
at of Property,
Owned or Year December 31, Furniture & Approximate
Description and Address Leased Opened 1996 Fixtures Square Footage
---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
723 East Broadway Owned 1962 $57,396 $476 4,200
Logansport, Indiana 46947
The Company owns computer and data processing equipment which is used for
transaction processing and accounting. The net book value of electronic data
processing equipment owned by the Company was $17,250 at December 31, 1996.
The Bank also has contracted for the data processing and reporting
services of the Intrieve Data Center in Cincinnati, Ohio. The cost of these data
processing services is approximately $8,500 per month.
Item 3. Legal Proceedings.
Neither the Holding Company nor the Bank is a party to any pending
legal proceedings, other than routine litigation incidental to its business.
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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, 1996.
Item 4.5. Executive Officers of the Registrant.
Presented below is certain information regarding the executive officers
of the Holding Company:
Name Position
Thomas G. Williams President and Chief Executive Officer
Charles J. Evans Vice President
Dottye Robeson Secretary/Treasurer
Thomas G. Williams (age 64) has served as President of the Bank since
1971 and as President and Chief Executive Officer of the Holding Company since
its organization.
Charles J. Evans (age 51) has served as Vice President and Senior Loan
Officer of the Bank since 1980 and as Vice President of the Holding Company
since its organization.
Dottye Robeson (age 47) has served as Chief Financial Officer of the
Bank since 1994 and as Secretary/Treasurer of the Holding Company since its
organization. From 1990 to 1994, she served as Cashier, Vice President and Chief
Financial Officer of Bright National Bank in Flora, Indiana. From 1984 to 1990
she was employed by Smith, Thompson & Wihebrink (Logansport). She has been a
certified public accountant since 1987.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
Logansport Savings Bank, FSB converted from a mutual savings bank to a
stock form federal savings bank effective June 13, 1995 (the "Conversion") and
simultaneously formed a savings and loan holding company, Logansport Financial
Corp. The Holding Company's common stock, without par value ("Common Stock"), is
quoted on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ"), Small Cap Market, under the symbol "LOGN." The following
table sets forth the high and low bid prices and dividends paid per share of
Common Stock for the quarters indicated. Such over-the-counter quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission,
and may not necessarily represent actual transactions.
Quarter Ended High Bid Low Bid Dividends Declared
---------------------------------------------------------------------------
September 30, 1995 12 1/2 11 1/4 $.10
December 31,1995 13 1/4 12 .10
March 31, 1996 13 1/4 12 3/8 .10
June 30, 1996 13 3/4 12 3/8 .10
September 30, 1996 14 3/4 12 1/2 .10
December 31, 1996 14 3/4 11 1/4 3.10
As of February 14, 1997, there were 893 recordholders 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
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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, 1996, approximately $1.5
million of the Bank's retained income represented bad debt deductions for which
no federal income tax provision had been made.
See "Taxation--Federal Taxation."
Unlike the Bank, generally there is no regulatory restriction on the
payment of dividends by the Holding Company. Indiana law, however, would
prohibit the Holding Company from paying a dividend if, after giving effect to
the payment of that dividend, the Holding Company would not be able to pay its
debts as they become due in the usual course of business or the Holding
Company's total assets would be less than the sum of its total liabilities plus
preferential rights of holders of preferred stock, if any.
Item 6. Selected Financial Data.
The information required by this item is incorporated by reference to
the material under the heading "Selected Consolidated Financial Data of
Logansport Financial Corp. and Subsidiary" on page 3 of the Holding Company's
1996 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 4 through 14 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 15 through 34 in the Shareholder Annual Report are
incorporated herein by reference. The Company's unaudited quarterly results of
operations contained on page 35 in the Shareholder Annual Report are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
There were no such changes and disagreements during the applicable
period.
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 8 of the Holding Company's Proxy
Statement for its 1997 Annual Shareholder Meeting (the "1997 Proxy Statement").
Information concerning the Holding Company's executive officers is included in
Item 4.5 in Part I of this report.
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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 1997 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated by reference to
page 3 of the 1997 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to
page 8 of the 1997 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:
Annual Report
Financial Statements Page No.
Independent Auditor's Report 15
Consolidated Statement of
Financial Condition at
December 31, 1996, and 1995 16
Consolidated Statement of Income for
the Years Ended
December 31, 1996, 1995, and 1994 17
Consolidated Statement of Change
in Shareholders' Equity
for the Years Ended December 31, 1996,
1995 and 1994 18
Consolidated Statement of
Cash Flows for the Years Ended
December 31, 1996, 1995, and 1994 19
Notes to Consolidated Financial Statements 20
(b) Reports on Form 8-K.
The Holding Company filed one report on Form 8-K on October
22, 1996, reporting the Holding Company's stock repurchase
program.
(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.
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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 15, 1997 By: /s/ Thomas G. Williams
----------------------------------
Thomas G. Williams, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 15th day of March, 1997.
/s/ Thomas G. Williams
- ----------------------------------
Thomas G. Williams
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Dottye Robeson
- ----------------------------------
Dottye Robeson,
Secretary/Treasurer (Principal Financial and
Accounting Officer)
/s/ Norbert E. Adrian
- ----------------------------------
Norbert E. Adrian, Director
/s/ Charles J. Evans
- ----------------------------------
Charles J. Evans, Vice President and Director
/s/ Donald G. Pollitt
- ----------------------------------
Donald G. Pollitt, Director
/s/ Susanne S. Ridlen
- ----------------------------------
Susanne S. Ridlen, Director
/s/ William Tincher, Jr.
- ----------------------------------
William Tincher, Jr., Director
/s/ David Wihebrink
- ----------------------------------
David Wihebrink, Director
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EXHIBIT INDEX
Exhibit Page
3(1) The Articles of Incorporation of the Registrant are
incorporated by reference to Exhibit 3(1) to the
Registration Statement on Form S-1 (Registration No.
33-89788).
3(2) The Code of By-Laws of the Registrant are
incorporated by reference to Exhibit 3(2) to the
Registration Statement on Form S-1 (Registration No.
33-89788).
10(1) The Registrant's Stock Option Plan is incorporated
by reference to Exhibit A to the Registrant's Proxy
Statement for its Annual Shareholder Meeting held on
April 9, 1996.
10(2) Logansport Savings Bank, FSB Recognition and
Retention Plan and Trust is incorporated by
reference to Exhibit B to the Registrant's Proxy
Statement for its Annual Shareholder Meeting held on
April 9, 1996.
10(3) Logansport Savings Bank, FSB Employee Stock
Ownership Plan and Trust Agreement is incorporated
by reference to Exhibit 10(4) to the Registration
Statement on Form S-1 (Registration No. 33-89788).
10(4) Employment Agreement between Logansport Savings
Bank, FSB and Thomas G. Williams is incorporated by
reference to Exhibit 10(5) to the Registration
Statement on Form S-1 (Registration No. 33-89788).
10(5) Employment Agreement between Logansport Savings
Bank, FSB and Charles J. Evans is incorporated by
reference to Exhibit 10(6) to the Registration
Statement on Form S-1 (Registration No. 33-89788).
10(6) Director Deferred Compensation Agreement between
Logansport Savings Bank, FSB and Thomas G. Williams,
effective 4/1/92 is incorporated by reference to
Exhibit 10(7) to the Registration Statement on Form
S-1 (Registration No. 33-89788).
10(7) Director Deferred Compensation Agreement between
Logansport Savings Bank, FSB and Don Pollitt,
effective 4/1/92 is incorporated by reference to
Exhibit 10(8) to the Registration Statement on Form
S-1 (Registration No. 33-89788).
10(8) Director Deferred Compensation Agreement between
Logansport Savings Bank, FSB and Norbert Adrian,
effective 4/1/92 is incorporated by reference to
Exhibit 10(9) to the Registration Statement on Form
S-1 (Registration No. 33-89788).
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10(9) Director Deferred Compensation Agreement between
Logansport Savings Bank, FSB and Susanne Ridlen,
effective 4/1/92 is incorporated by reference to
Exhibit 10(10) to the Registration Statement on Form
S-1 (Registration No. 33-89788).
10(10) Director Deferred Compensation Agreement between
Logansport Savings Bank, FSB and David Wihebrink,
effective 4/1/92 is incorporated by reference to
Exhibit 10(11) to the Registration Statement on Form
S-1 (Registration No. 33-89788).
10(11) Executive Supplemental Retirement Income Agreement
between Logansport Savings Bank, FSB and Thomas G.
Williams, executed May 7, 1992 is incorporated by
reference to Exhibit 10(12) to the Registration
Statement on Form S-1 (Registration No. 33-89788).
10(12) Executive Supplemental Retirement Income Agreement
between Logansport Savings Bank, FSB and Charles J.
Evans, executed May 7, 1992 is incorporated by
reference to Exhibit 10(13) to the Registration
Statement on Form S-1 (Registration No. 33-89788).
11 Statement of Computation of Per Share Earnings ______
13 1996 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 ______
27 Financial Data Schedule
______
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