FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _______________
Commission File Number 0-25910
LOGANSPORT FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
INDIANA 35-1945736
(State or other Jurisdiction (I.R.S. Employer Identification
of Incorporation or Organization) Number)
723 East Broadway, Logansport, Indiana 46947
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code:
(219) 722-3855
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405,
Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of March 25, 1998, was $20,678,436.
The number of shares of the Registrant's Common Stock, without par value,
outstanding as of March 25, 1998, was 1,261,100 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended December 31,
1997, are incorporated into Part II. Portions of the Proxy Statement for the
1998 Annual Meeting of Shareholders are incorporated in Part I and Part III.
Exhibit Index on Page 32
Page 1 of 31 Pages
LOGANSPORT FINANCIAL CORP.
Form 10-K
INDEX
Page
Forward Looking Statements................................................. 1
PART I
Item 1. Business...................................................... 1
Item 2. Properties.................................................... 25
Item 3. Legal Proceedings............................................. 25
Item 4. Submission of Matters to a Vote of Security Holders........... 25
Item 4.5. Executive Officers of Registrant.............................. 25
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 26
Item 6. Selected Financial Data....................................... 27
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 27
Item 8. Financial Statements and Supplementary Data................... 27
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... 27
PART III
Item 10. Directors and Executive Officers of Registrant................ 28
Item 11. Executive Compensation........................................ 28
Item 12. Security Ownership of Certain Beneficial Owners
and Management.............................................. 28
Item 13. Certain Relationships and Related Transactions................ 28
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................................. 29
Signatures.................................................... 30
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K ("Form 10-K") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-K and include statements regarding the intent, belief,
outlook, estimate or expectations of the Company (as defined below), its
directors or its officers primarily with respect to future events and the future
financial performance of the Company. Readers of this Form 10-K are cautioned
that any such forward looking statements are not guarantees of future events or
performance and involve risks and uncertainties, and that actual results may
differ materially from those in the forward looking statements as a result of
various factors. The accompanying information contained in this Form 10-K
identifies important factors that could cause such differences. These factors
include changes in interest rates; loss of deposits and loan demand to other
savings and financial institutions; substantial changes in financial markets;
changes in real estate values and the real estate market; regulatory changes; or
unanticipated results in pending legal proceedings.
PART I
Item 1. Business.
General
Logansport Financial Corp. (the "Holding Company" and, together with
the Bank (as defined below), the "Company") is an Indiana corporation organized
in February, 1995, to become a unitary savings and loan holding company. The
Holding Company became a unitary savings and loan holding company upon the
conversion of Logansport Savings Bank, FSB (the "Bank") from a federal mutual
savings bank to a federal stock savings bank on June 13, 1995. The principal
asset of the Holding Company consists of 100% of the issued and outstanding
shares of common stock, $.01 par value per share, of the Bank. The Bank began
operations in Logansport, Indiana under the name Logansport Building and Loan
Association in 1925. In 1962, the Bank changed its name to Logansport Savings
and Loan Association, and in 1992, the Bank converted to a federally charted
savings bank known as Logansport Savings Bank, FSB. The Bank serves the needs of
residents of primarily Cass County, Indiana.
The Bank is the oldest financial institution headquartered in
Logansport, Indiana. Management believes the Bank has developed a solid
reputation among its loyal customer base because of its commitment to personal
service and its strong support of the local community. The Bank offers a number
of consumer and commercial financial services. These services include: (i)
residential real estate loans; (ii) home equity loans; (iii) home improvement
loans; (iv) construction loans; (v) share loans; (vi) commercial real estate
loans; (vii) multi-family loans; (viii) consumer loans; (ix) NOW accounts; (x)
passbook savings accounts; (xi) certificates of deposit; (xii) consumer and
commercial demand deposit accounts; and (xiii) individual retirement accounts.
The Holding Company and the Bank conduct business out of their main office
located in Logansport, Indiana. The Bank is and historically has been a
significant real estate mortgage lender in Cass County, Indiana, originating
approximately 27.8% of the mortgage loan volume recorded in Cass County by Cass
County institutions during the year ended December 31, 1997.
The Bank historically has concentrated its lending activities on the
origination of loans secured by first mortgage liens for the purchase,
construction or refinancing of one- to four-family residential real property.
One- to four-family residential mortgage loans continue to be the major focus of
the Bank's loan origination activities, representing 72.5% of the Company's
total loan portfolio at December 31, 1997. The Bank also offers multi-family
mortgage loans, commercial real estate loans, construction loans, and consumer
loans. Mortgage loans secured by multi-family properties and commercial real
estate totaled approximately 2.9% and 5.0%, respectively, of the Company's total
loan portfolio at December 31, 1997. Residential, multi-family and commercial
real estate construction loans constituted approximately 2.1% of the Company's
total loan portfolio at December 31, 1997. Installment, share, home equity, and
home improvement loans constituted approximately 8.4%, .5%, 1.1%, and 7.8%,
respectively, of the Company's total loan portfolio at December 31, 1997.
Lending Activities
Loan Portfolio Data. The following table sets forth the composition of
the Company's loan portfolio by loan type and security type as of the dates
indicated, including a reconciliation of gross loans receivable after
consideration of the allowance for loan losses and loans in process.
At December 31,
1997 1996 1995 1994 1993
--------------- --------------- ---------------- ---------------- ----------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
TYPE OF LOAN
Mortgage loans:
Residential................. $46,419 72.48% $41,109 72.05% $36,608 73.15% $33,402 74.92% $28,942 74.39%
Commercial real estate...... 3,072 4.80 2,701 4.73 1,620 3.24 2,718 6.10 2,667 6.85
Multi-family................ 1,844 2.88 2,370 4.15 1,915 3.83 722 1.62 549 1.41
Construction:
Residential ................ 1,333 2.08 574 1.01 575 1.15 330 .74 1,170 3.00
Commercial
real estate............... --- --- 194 .34 198 .39 --- --- --- ---
Multi-family................ --- --- 248 .43 250 .50 680 1.52 427 1.10
Commercial paper .............. --- --- --- --- 878 1.75 500 1.12 --- ---
Consumer loans:
Installment (2)............. 5,409 8.44 4,615 8.09 3,729 7.45 2,778 6.23 2,072 5.33
Share ...................... 313 .49 286 .50 219 .44 244 .55 183 .47
Home equity................. 685 1.07 595 1.04 398 .79 300 .67 393 1.01
Home improvement............ 4,972 7.76 4,368 7.66 3,656 7.31 2,911 6.53 2,505 6.44
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Gross loans receivable.... $64,047 100.00% $57,060 100.00% $50,046 100.00% $44,585 100.00% $38,908 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
TYPE OF SECURITY
Residential (1)............. 53,409 83.39% $46,689 81.83% $41,407 82.74% $36,943 82.86% $33,010 84.84%
Commercial real estate...... 3,212 5.02 2,895 5.07 1,818 3.63 2,718 6.10 2,667 6.86
Multi-family................ 1,844 2.88 2,618 4.59 2,165 4.33 1,402 3.14 976 2.51
Deposits.................... 313 .49 286 .50 219 .44 244 .55 183 .47
Auto........................ 2,148 3.35 2,042 3.58 1,288 2.57 1,005 2.26 799 2.05
Consumer residential (2).... 1,617 2.52 1,074 1.88 1,232 2.46 846 1.90 447 1.15
Other security.............. 1,504 2.35 1,456 2.55 1,039 2.08 917 2.05 683 1.75
Unsecured (3)............... --- --- --- --- 878 1.75 510 1.14 143 .37
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Gross loans receivable.... 64,047 100.00% 57,060 100.00% 50,046 100.00 44,585 100.00 38,908 100.00
Deduct:
Allowance for loan losses...... 245 .38 236 .41 223 .45 206 .46 201 .52
Loans in process............... 167 .26 22 .04 116 .23 359 .81 856 2.20
Net loans receivable........ $63,635 99.36% $56,802 99.55% $49,707 99.32% $44,020 98.73% $37,851 97.28%
Mortgage Loans:
Adjustable-rate............. 42,984 81.61 38,729 82.06 $34,715 84.33% $31,057 82.05% $27,760 82.24%
Fixed-rate.................. 9,684 18.39 8,467 17.94 6,451 15.67 6,795 17.95 5,995 17.76
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total..................... $52,668 100.00% $47,196 100.00% $41,166 100.00% $37,852 100.00% $33,755 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
(1) Includes home equity, residential construction and home improvement loans.
(2) Includes "one-pay" notes due in less than one year secured by residential
real estate.
(3) Includes commercial paper and bankers' acceptances.
The following table sets forth certain information at December 31,
1997, regarding the dollar amount of loans maturing in the Company's loan
portfolio based on the date that final payment is due under the terms of the
loan. Demand loans having no stated schedule of repayments and no stated
maturity and overdrafts are reported as due in one year or less. This schedule
does not reflect the effects of possible prepayments or enforcement of
due-on-sale clauses. Management expects prepayments will cause actual maturities
to be shorter.
Balance Due during years ending December 31,
Outstanding 2001 2003 2008 2013
at December 31, to to to and
1997 1998 1999 2000 2002 2007 2012 following
------- ------ ----- ------ ------ ------- ------- ---------
(In thousands)
Mortgage loans:
Residential .................... $47,752 $1,395 $ 29 $ 137 $ 857 $7,269 $13,084 $24,981
Multi-family.................... 1,844 --- --- --- --- 854 990 ---
Commercial real estate.......... 3,072 1 4 1 76 1,028 1,421 541
Commercial paper................... --- --- --- --- --- --- --- ---
Consumer loans:
Home improvement................ 4,972 32 170 582 806 2,082 1,150 150
Home equity..................... 685 --- --- --- --- --- 685 ---
Installment..................... 5,409 2,633 495 720 1,174 134 253 ---
Share........................... 313 313 --- --- --- --- --- ---
------- ------ ---- ------ ------ ------- ------- -------
Total ............................ $64,047 $4,374 $698 $1,440 $2,913 $11,367 $17,583 $25,672
======= ====== ==== ====== ====== ======= ======= =======
The following table sets forth, as of December 31, 1997, the dollar
amount of all loans due after one year which have fixed interest rates and
floating or adjustable rates.
Due After December 31, 1998
----------------------------------------
Fixed Rates Variable Rates Total
----------- -------------- -----
(In thousands)
Mortgage loans:
Residential ................... $ 8,387 $37,970 $46,357
Multi-family................... --- 1,844 1,844
Commercial real estate......... 1,274 1,797 3,071
Consumer loans:
Home improvement............... 4,940 --- 4,940
Home equity.................... --- 685 685
Installment.................... 2,776 --- 2,776
------- ------- -------
Total........................ $17,377 $42,296 $59,673
======= ======= =======
Residential Loans. Residential loans consist primarily of one- to
four-family loans. Approximately $46.4 million, or 72.5% of the Company's
portfolio of loans at December 31, 1997, consisted of one- to four-family
residential mortgage loans, of which approximately 81.6% had adjustable rates.
The Bank currently offers adjustable-rate one- to four-family
residential mortgage loans ("ARMs") which adjust annually and are indexed to the
one-year U.S. Treasury securities yields adjusted to a constant maturity. These
ARMs have a current margin above such index of 2.75%, or 3.00% if interest is
amortized and payments are due bi-weekly, and interest rate minimums equal to
the rate at the time of origination. Many of the residential ARMs in the
Company's portfolio at December 31, 1997 provided for a maximum rate adjustment
per year of 1%, although the Bank began originating residential ARMs which
provide for a maximum rate adjustment of 2% per year in 1995. The Bank's
residential ARMs provide for a maximum rate adjustment of 5% over the life of
the loan. These ARMs generally bear terms of between 15 and 25 years.
The Bank also currently offers fixed-rate loans which provide for the
payment of principal and interest over a period not to exceed 15 years. At
December 31, 1997, 18.4% of the Company's residential mortgage loans had fixed
rates of interest.
The Bank does not currently originate residential mortgage loans if the
ratio of the loan amount to the lesser of current cost or appraised value of the
property (i.e., the "loan-to-value ratio") exceeds 90% and does not currently
require private mortgage insurance on its residential single-family mortgage
loans.
Substantially all of the residential mortgage loans that the Bank
originates include "due-on-sale" clauses, which give the Bank the right to
declare a loan immediately due and payable in the event that, among other
things, the borrower sells or otherwise disposes of the real property subject to
the mortgage and the loan is not repaid.
The Bank's residential mortgage loans are not originated on terms and
conditions and using documentation that conform with the standard underwriting
criteria required to sell such loans on the secondary market. The Bank generally
retains its loans in its portfolio and does not anticipate the need to sell its
non-conforming loans. See "-- Origination, Purchase and Sale of Loans."
At December 31, 1997, residential loans amounting to $350,000, or .55%
of total loans, were included in non-performing assets. See "-- Non-Performing
and Problem Assets."
Commercial Real Estate Loans. At December 31, 1997, $3.1 million, or
4.8% of the Company's total loan portfolio, consisted of commercial real estate
loans. Of these loans, $439,000 constituted participations in loans secured by
commercial real estate which were purchased from other financial institutions.
The commercial real estate loans included in the Company's portfolio are
primarily secured by non-residential real estate such as small office buildings,
nursing homes and churches. The Bank currently originates commercial real estate
loans as adjustable-rate loans indexed to the one-year U.S. Treasury securities
yields adjusted to a constant maturity with a margin of 4.75% above such index
or as fixed rate loans. Many of the commercial real estate loans in the
Company's portfolio at December 31, 1997 provided for a maximum rate adjustment
per year of 1%, although the Bank began originating commercial real estate ARMs
which provide for a maximum rate adjustment of 2% per year in 1995. In addition,
the maximum rate adjustment over the life of the loan is 5%, and these loans
have a maximum loan-to-value ratio of 80%. The Bank underwrites these loans on a
case-by-case basis and, in addition to its normal underwriting criteria, the
Bank evaluates the borrower's ability to service the debt from the net operating
income of the property. No single commercial real estate loan at December 31,
1997 exceeded $307,000. No commercial real estate loans were included in
non-performing assets at that date.
Loans secured by commercial real estate generally are larger than one-
to four-family residential loans and involve a greater degree of risk.
Commercial real estate loans often involve large loan balances to single
borrowers or groups of related borrowers. Payments on these loans depend to a
large degree on results of operations and management of the properties and may
be affected to a greater extent by adverse conditions in the real estate market
or the economy in general. Accordingly, the nature of the loans makes them more
difficult for management to monitor and evaluate.
Multi-Family Loans. Approximately $1.8 million, or 2.9% of the
Company's portfolio of loans at December 31, 1997, consisted of multi-family
loans. These loans are generally purchased participations and secured by
apartment complexes and other multi-family residential properties. At December
31, 1997, none of the multi-family loans included in the Company's portfolio was
included in non-performing assets.
Construction Loans. The Bank offers construction loans with respect to
owner-occupied residential real estate and, in limited cases, to builders or
developers constructing such properties on a speculative investment basis (i.e.,
before the builder/developer obtains a commitment from a buyer). The Bank may
also purchase participations.
At December 31, 1997, $1.3 million, or 2.1%, of the Company's total
loan portfolio consisted of construction loans. All construction loans at
December 31, 1997 were residential loans. The largest construction loan at
December 31, 1997, was approximately $273,000 which included the construction of
residential home and the purchase of land acreage. No construction loans were
included in non-performing assets on that date.
Construction loans originated by the Bank are written such that
interest only is payable during the construction phase, which is typically
limited to six (6) months, and following the construction phase, a permanent
loan is made. Inspections are made prior to any disbursement under a
construction loan.
Consumer Loans. Federal laws and regulations permit federally chartered
savings associations to make secured and unsecured consumer loans in an
aggregate amount up to 35% of the association's total assets. In addition, a
federally chartered savings association has lending authority above the 35%
limit for certain consumer loans, such as property improvement loans and deposit
account secured loans. However, the Qualified Thrift Lender test places
additional limitations on a savings association's ability to make consumer
loans. See "Regulation -- Qualified Thrift Lender."
The Company's consumer loans, consisting primarily of installment,
share, home improvement, and home equity loans, aggregated $11.4 million as of
December 31, 1997, or 17.8% of the Company's total loan portfolio. The Bank
consistently originates consumer loans to meet the needs of its customers and to
assist in meeting its asset/liability management goals. All of the Bank's
consumer loans originated by the Bank, except home equity loans, are fixed-rate
loans, and substantially all are secured loans.
Installment loans, totaling $5.4 million, or 8.4% of total loans at
December 31, 1997, are fixed-rate loans generally secured by collateral,
including automobiles, and are made for maximum terms of up to 10 years
(depending on the collateral). The Bank's installment loans also include
"one-pay" notes, some of which are secured by residential real estate and all of
which amortize at rates similar to those for home improvement loans and have
maximum terms of 6 months to one year.
Share loans, totaling $313,000, or .5% of total loans at December 31,
1997, are made up to 80% of the original account balance and accrue at a rate of
2-3% over the underlying certificate of deposit rate. Interest on share loans is
paid quarterly. Home improvement loans totaled $5.0 million, or 7.8% of the
Company's total loan portfolio at December 31, 1997, and are close-ended
fixed-rate loans made for maximum terms up to 15 years. The Bank's home
improvement loans are generally made only to those borrowers for whom the Bank
holds the primary mortgage on the property, if any.
The Bank also offers open-ended lines of credit secured by a lien on
the equity in the borrower's home in amounts up to 90% of the appraised value of
the real estate (taking into account any other mortgages on the property). The
Bank's home equity loans are adjustable-rate loans with interest rates equal to
the national prime rate plus 2%, and payments equal to the greater of 2% of the
outstanding loan balance or $50. The Bank's home equity loans are generally made
only to those borrowers for whom the Bank holds the primary mortgage on the
property, if any, and generally have a maximum term of 15 years. At December 31,
1997, the Bank had approved $1,245,000 of home equity loans, of which $685,000
were outstanding.
The Bank also offers credit cards to its customers, but does not
underwrite the credit cards or have any other credit risk with respect to the
cards. The Company earns a fee upon the origination of the credit card accounts.
To date, the income earned by the Company from offering these credit cards has
not been significant.
As a general rule, consumer loans involve a higher level of risk than
one- to four-family residential mortgage loans because consumer loans are
generally made based upon the borrower's ability to repay the loan, which is
subject to change, rather than the value of the underlying collateral, if any.
However, the relatively higher yields and shorter terms to maturity of consumer
loans are believed to be helpful in reducing interest-rate risk. The Bank has
thus far been successful in managing consumer loan risk. As of December 31,
1997, consumer loans totaling $81,000 were included in non-performing assets.
Letters of Credit Securing Tax-Exempt Bonds. The Bank currently
maintains three letters of credit, each in the amount of $253,000, to secure
payments required under tax-exempt bonds issued to raise funds for low-income
housing projects in Franklin, Kokomo and Michigan City, Indiana. The issuer of
the tax-exempt bonds is permitted to draw against these letters of credit only
in the event it defaults in making payments required under the bonds, and any
such draws made against the letters of credit would be secured by a mortgage on
the subject housing project. No draws against any letters of credit had been
made as of December 31, 1997.
Origination, Purchase and Sale of Loans. In an effort to control costs
incurred by its mortgage customers, the Bank currently originates its mortgage
loans pursuant to its own underwriting standards which are not in conformity
with the standard criteria of the Federal Home Loan Mortgage Corporation
("FHLMC") or Federal National Mortgage Association ("FNMA"). If it desired to
sell its mortgage loans, the Bank might therefore experience some difficulty
selling such loans quickly in the secondary market. The Bank has no intention,
however, of attempting to sell such loans. The Bank's ARMs vary from secondary
market criteria because, among other things, the Bank does not require current
property surveys in most cases and does not require escrow accounts for taxes
and insurance.
The Bank confines its loan origination activities primarily to Cass
County, Indiana. At December 31, 1997, no loans were secured by property located
outside of Indiana. The Bank's loan originations are generated from referrals
from real estate dealers and existing customers, and newspaper and periodical
advertising. All loan applications are processed and underwritten at the Bank's
main office.
Under the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 ("FIRREA"), a savings association generally may not make any loan to a
borrower or its related entities if the total of all such loans by the savings
association exceeds 15% of its capital (plus up to an additional 10% of capital
in the case of loans fully collateralized by readily marketable collateral);
provided, however, that loans up to $500,000 regardless of the percentage
limitations may be made and certain housing development loans of up to $30
million or 30% of capital, whichever is less, are permitted. The maximum amount
which the Bank could have loaned to one borrower and the borrower's related
entities under the 15% of capital limitation was $2.5 million at December 31,
1997. The Company's portfolio of loans currently contains no loans that exceed
the 15% of capital limitation.
The Bank's loan approval process is intended to assess the borrower's
ability to repay the loan, the viability of the loan and the adequacy of the
value of the property that will secure the loan. To assess the borrower's
ability to repay, the Bank studies the employment and credit history and
information on the historical and projected income and expenses of its
mortgagors. Secured loans up to $75,000 may be approved by the Senior Loan
Officer, and secured loans up to $150,000 may be approved by the President or
the Executive Committee. Loans up to $250,000 may be approved by the Loan
Committee. All loans for more than $250,000 must be approved in advance by the
Board of Directors.
The Bank generally requires appraisals on all property securing its
loans and requires title insurance or an abstract and a valid lien on its
mortgaged real estate. Appraisals for residential real property are generally
performed by an in-house appraiser who is a state-licensed residential
appraiser. From time to time, the Bank also uses the services of certified
residential appraisers who are not in-house, including for loans in excess of
$250,000. The Bank requires fire and extended coverage insurance in amounts at
least equal to the principal amount of the loan. It also requires flood
insurance to protect the property securing its interest if the property is in a
flood plain.
The Bank's underwriting standards for consumer loans are intended to
protect against some of the risks inherent in making consumer loans. Borrower
character, paying habits and financial strengths are important considerations.
The Bank historically has not participated in the secondary market as a
seller of its mortgage loans, but does occasionally purchase participations in
commercial real estate and multi-family loans from other financial institutions.
The following table shows loan origination, purchase and repayment
activity for the Bank during the periods indicated.
Year Ended December 31,
1997 1996 1995
------- --------- ---------
(In thousands)
Gross loans receivable
at beginning of period..................... $57,060 $50,046 $44,585
Originations:
Mortgage loans:
Residential.............................. 13,102 11,277 8,323
Commercial real estate and
multi-family........................... 417 1,885 318
------- ------- -------
Total mortgage loans..................... 13,519 13,162 8,641
Consumer loans:
Installment.............................. 3,476 3,757 3,129
Share.................................... 101 259 88
Home improvement......................... 2,510 1,774 1,435
Home equity.............................. 163 319 104
------- ------- -------
Total consumer loans................... 6,250 6,109 4,756
------- ------- -------
Total originations................ 19,769 19,271 13,397
Purchases:
Commercial real estate and multi-family.. --- 1,046 1,010
Commercial paper......................... --- --- 3,842
------- ------- -------
Total originations and purchases....... 19,769 20,317 18,249
Repayments:
Commercial paper......................... --- 878 3,464
Other loans and deductions............... 12,782 12,425 9,324
------- ------- -------
Gross loans receivable at end of period.... $64,047 $57,060 $50,046
======= ======= =======
Origination and Other Fees. The Company realizes income from
origination fees, late charges, checking account service charges, credit card
fees, and fees for other miscellaneous services. The Bank currently charges $200
plus closing costs on its adjustable-rate mortgage loans. Points may be charged
on fixed-rate loans. Late charges are generally assessed if payment is not
received within a specified number of days after it is due. The grace period
depends on the individual loan documents.
Non-Performing and Problem Assets
Mortgage loans are reviewed by the Bank on a regular basis and are
placed on a non-accrual status when the loans become contractually past due
ninety days or more. At the end of each month, delinquency notices are sent with
respect to all mortgage loans for which payments have not been received. Contact
by phone or in person is made, if feasible, with respect to all such loans. When
loans are sixty days in default, an additional delinquency notice is sent and
personal contact is made with the borrower to establish an acceptable repayment
schedule. When loans are ninety days in default, contact is made with the
borrower by the Senior Loan Officer who attempts to establish an acceptable
repayment schedule. Management is authorized to commence foreclosure proceedings
for any loan upon making a determination that it is prudent to do so. All loans
for which foreclosure proceedings have been commenced are placed on non-accrual
status.
Consumer loans are reviewed by the Bank on a daily basis. Notices are
sent to borrowers when any consumer loan is 5, 10 and 15 days past due. After
consumer loans are 15 days delinquent, a late fee in the amount of 10% of the
payment is imposed until the loan is brought current.
Non-Performing Assets. At December 31, 1997, $537,000, or .62% of the
Company's total assets, were non-performing assets (loans delinquent more than
90 days, non-accruing loans, real estate owned ("REO"), troubled debt
restructurings and non-accruing investments), compared to $406,000, or .52%, of
the Company's total assets at December 31, 1996. At December 31, 1997,
residential loans, multi-family loans, commercial real estate loans, consumer
loans and REO accounted for 65.2%, 0%, 0%, 15.1% and 19.7%, respectively, of
non-performing assets. There were no non-accruing investments at December 31,
1997.
The table below sets forth the amounts and categories of the Company's
non-performing assets (non-accruing investments, non-accruing loans, and real
estate owned). It is the policy of the Company that all earned but uncollected
interest on all loans be reviewed monthly to determine if any portion thereof
should be classified as uncollectible for any loan past due in excess of 90
days.
At December 31,
1997 1996 1995 1994 1993
---- ---- ---- ----- -----
(Dollars in thousands)
Non-accruing investments (1).................. $ --- $ --- $ --- $ 150 $ 181
Non-accruing loans (2)........................ 431 406 311 337 597
Real estate owned, net........................ 106 --- --- --- ---
---- ---- ---- ----- -----
Total non-performing assets................ $537 $406 $311 $ 487 $ 778
==== ==== ==== ===== =====
Non-performing loans to total loans, net (3).. .67% .71% .63% .76% 1.57%
Non-performing assets to total assets......... .62 .52 .42 .82 1.38
- ---------------
(1) Non-accruing investments consist of certain corporate obligations at market
value for 1994 since included in securities available for sale and at book
value prior to 1994 since included in securities held to maturity. The book
value at December 31, 1994 of corporate obligations was $90,000. Income
collected and recorded on these securities during 1996 was $4,700.
(2) The Company generally places loans on a non-accruing status when the loans
become contractually past due 90 days or more. At December 31, 1997,
$350,000 of non-accruing loans were residential loans and $81,000 were
consumer loans. For the year ended December 31, 1997, the income that would
have been recorded had the non-accruing loans not been in a non-performing
status totaled $36,000 compared to actual income recorded of $12,000.
(3) Total loans less loans in process.
Classified Assets. Federal regulations and the Bank's Internal Loan
Review policy provide for the classification of loans and other assets such as
debt and equity securities considered by the OTS to be of lesser quality as
"substandard," "doubtful" or "loss" assets. An asset is considered "substandard"
if it is inadequately protected by the current net worth and paying capacity of
the obligor or of the collateral pledged, if any. "Substandard" assets include
those characterized by the "distinct possibility" that the association will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
"doubtful" have all of the weaknesses inherent in those classified
"substandard," with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions, and values, "highly questionable and improbable." Assets classified
as "loss" are those considered "uncollectible" and of such little value that
their continuance as assets without the establishment of a specific loss reserve
is not warranted. Assets which do not currently expose the insured institution
to sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are required to be designated "special
mention" by management.
An insured institution is required to establish general allowances for
loan losses in an amount deemed prudent by management for loans classified
substandard or doubtful, as well as for other problem loans. General allowances
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies problem assets as "loss," it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount. An institution's determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the OTS which can order the establishment of
additional general or specific loss allowances.
At December 31, 1997, the aggregate amount of the Company's classified
assets, and of the Company's general and specific loss allowances were as
follows:
At December 31, 1997
--------------------
(In thousands)
Substandard loans......................................... $431
Doubtful loans............................................ ---
Loss loans................................................ ---
----
Total classified loans................................. $431
General loss allowances................................... $245
====
Specific loss allowances.................................. ---
----
Total allowances....................................... $245
====
The Company regularly reviews its loan portfolio to determine whether
any loans require classification in accordance with applicable regulations.
Allowance for Loan Losses
The allowance for loan losses is maintained through the provision for
loan losses, which is charged to earnings. The provision for loan losses is
determined in conjunction with management's review and evaluation of current
economic conditions (including those of the Bank's lending area), changes in the
character and size of the loan portfolio, loan delinquencies (current status as
well as past and anticipated trends) and adequacy of collateral securing loan
delinquencies, historical and estimated net charge-offs, and other pertinent
information derived from a review of the loan portfolio. In management's
opinion, the Company's allowance for loan losses is adequate to absorb
anticipated future losses from loans at December 31, 1997. However, there can be
no assurance that regulators, when reviewing the Company's loan portfolio in the
future, will not require increases in its allowances for loan losses or that
changes in economic conditions will not adversely affect the Company's loan
portfolio.
Summary of Loan Loss Experience. The following table analyzes changes
in the allowance for loan losses during the past five (5) one-year periods ended
December 31, 1997.
Year Ended December 31,
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
(Dollars in thousands)
Balance of allowance at beginning
of period................................ $ 236 $ 223 $ 206 $ 201 $ 86
Recoveries.................................. 1 1 --- --- ---
Less charge-offs:
Residential real estate loans............ 10 --- --- --- ---
Consumer loans........................... 8 --- 3 1 46
----- ----- ----- ----- -----
Net charge-offs............................. 18 --- 3 1 46
Provisions for losses on loans.............. 26 12 20 6 161
----- ----- ----- ----- -----
Balance of allowance at end of period....... $245 $236 $223 $ 206 $ 201
===== ===== ===== ===== =====
Net charge-offs to total average
loans receivable for period............ .03 --- (*) (*) .13%
Allowance at end of period to
net loans receivable at end
of period (1).......................... .38 .41 .45 .47 .53
Allowance to total non-performing
loans at end of period................. 56.84 58.12 71.61 61.13 33.67
- -------------------
(1) Total loans less loans in process.
(*) Less than .01%.
Allocation of Allowance for Loan Losses. The following table presents
an analysis of the allocation of the Company's allowance for loan losses at the
dates indicated.
At December 31,
1997 1996 1995 1994 1993
---------------- ---------------- ---------------- --------------- ---------------
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in each
category category category category category
of total of total of total of total of total
Amount loans Amount loans Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Balance at end of period
applicable to:
Residential.................. $193 72.48% $158 72.05% $122 73.15% $103 74.92% $108 74.39%
Commercial real estate....... 6 4.80 6 4.73 6 3.24 6 6.10 7 6.85
Multi-family................. 1 2.88 1 4.15 1 3.83 2 1.62 1 1.41
Construction loans........... --- 2.08 --- 1.78 --- 2.04 --- 2.26 --- 4.10
Commercial paper and
bankers' acceptances...... --- --- --- --- --- 1.75 --- 1.12 --- ---
Consumer loans............... 45 17.76 71 17.29 86 15.99 80 13.98 72 13.25
Unallocated.................. --- --- --- --- 8 --- 15 --- 13 ---
---- ------ ---- ------ ---- ------ ---- ------ ---- ------
Total..................... $245 100.00% $236 100.00% $223 100.00% $206 100.00% $201 100.00%
==== ====== ==== ====== ==== ====== ==== ====== ==== ======
Investments and Mortgage- and Other Asset-Backed Securities
Federally chartered savings associations have the authority to invest
in various types of liquid assets, including U.S. Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, repurchase agreements and federal funds
sold. Subject to various restrictions, federally chartered savings associations
may also invest a portion of their assets in corporate debt securities and
asset-backed securities. The investment policy of the Bank, which is established
and implemented by the Bank's Investment Committee, is designed primarily to
maximize the yield on the investment portfolio subject to minimal liquidity
risk, default risk, interest rate risk, and prudent asset/liability management.
The Company's investments consist of U.S. government and other agency
securities, mortgage- and other asset-backed securities, state and municipal
bonds, corporate obligations, marketable equity securities, certificates of
deposit, and FHLB stock. At December 31, 1997, approximately $16.3 million, or
18.9% of the Company's total assets, consisted of such investments.
At December 31, 1997, the Company had $9.9 million of mortgage- and
other asset-backed securities outstanding, all of which were classified as
available for sale. Other-asset backed securities include securities backed by
automobile receivables. These fixed-rate mortgage- and other asset-backed
securities may be used as collateral for borrowings and through repayments, as a
source of liquidity. Mortgage- and other asset-backed securities offer yields
above those available for investments of comparable credit quality and duration.
Mortgage-backed securities are qualifying thrift investments under the Qualified
Thrift Lender test. See "Regulation--Qualified Thrift Lender."
The following table sets forth the carrying value and market value of
the Company's investments and mortgage- and other asset-backed securities at the
dates indicated.
At December 31,
1997 1996 1995
-------------------- ---------------------- -----------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
----- ----- ----- ----- ----- -----
(In thousands)
Securities available for sale:
Federal agencies................... $3,598 $3,451 $ 5,245 $ 4,880 $ 7,424 $ 7,175
State and municipal................ 1,780 1,847 2,194 2,242 2,229 2,294
Mortgage- and other asset-backed
securities....................... 9,998 9,932 6,768 6,674 7,422 7,468
Corporate obligations.............. 200 209 350 348 1,655 1,696
Marketable equity securities....... 6 243 6 159 6 120
------- ------- ------- ------- ------- -------
Total securities
available for sale............... 15,582 15,682 14,563 14,303 18,736 18,753
------- ------- ------- ------- ------- -------
Certificate of deposit (1)............ 100 100 100 100 100 100
FHLB stock (1)........................ 494 494 387 387 348 348
------- ------- ------- ------- ------- -------
Total investments................ $16,176 $16,276 $15,050 $14,790 $19,184 $19,201
======= ======= ======= ======= ======= =======
(1) Market value approximates carrying values.
Included in the Company's investment portfolio at December 31, 1997
were approximately $1.1 million (amortized cost) in derivative securities, which
were structured notes issued by the FHLBs. The fair value of these investments
was approximately $948,000 at December 31, 1997. These structured notes, which
are not obligations of, or guaranteed by, the United States, represent
obligations to repay principal with interest that is either fixed or fluctuates
in accordance with an interest formula tied to various indices. The interest on
the Company's structured notes generally adjusts quarterly or semi-annually
based on certain indices such as the LIBOR and the CMT.
Approximately $1.1 million (amortized cost) of these structured notes
with approximate fair value of $948,000 had fluctuating interest rates that
adjust in the opposite direction of changes in the index to which it is tied or
that adjust on the basis of a formula tied to two different indices, such as the
CMT and an inverse LIBOR rate. All of these inversely or dually indexed
securities were classified as available for sale at December 31, 1997.
The average yield at December 31, 1997, of these derivative securities,
was 3.43%. In a rising interest rate environment, it is anticipated that the
yield on and market value of these securities will decline, and may decline
substantially.
The following table sets forth investment securities, mortgage- and
other asset-backed securities and FHLB stock which mature during each of the
periods indicated and the weighted average yields for each range of maturities
at December 31, 1997.
Amount at December 31, 1997, which matures in
One One to Five to Over
Year or Less Five Years Ten Years Ten Years
------------------- ------------------ ------------------ --------------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
Securities available for sale (1)(3) :
Federal agencies.............. $ --- ---% $ 300 3.31% $3,098 6.21% $ 200 7.29%
State and municipal (2)....... 356 6.38 175 5.04 1,239 5.36 10 7.25
Mortgage- and other
asset-backed securities.... 1,927 5.84 3,634 6.40 1,825 7.20 2,612 7.70
Corporate obligations......... --- --- --- --- 100 7.29 100 7.41
Marketable equity securities.. --- --- --- --- --- --- 6 41.35
------ ---- ------ ---- ------ ---- ------ ----
Total securities
available for sale....... 2,283 5.92 4,109 6.12 6,262 6.35 2,928 7.73
------ ---- ------ ---- ------ ---- ------ ----
Certificate of deposit........... --- --- --- --- --- --- 100 7.10
FHLB stock....................... --- --- --- --- --- --- 494 8.00
------ ---- ------ ---- ------ ---- ------ ----
Total investments........... $2,283 5.92% $4,109 6.12% $6,262 6.35% $3,522 7.75%
====== ==== ====== ==== ====== ==== ====== ====
- --------------
(1) Securities available for sale are set forth at amortized cost for
purposes of this table.
(2) Fully taxable equivalent basis.
(3) No effect is given for possible prepayments.
In 1988 and 1989, the Bank purchased three investments in revenue bonds
with an aggregate par value of $370,000 for an approximate purchase price of
$359,000. The proceeds of the bonds were to be invested in low income housing
projects. Pending investment in the housing projects, the proceeds were invested
in municipal guaranteed investment contracts backed by the former Executive Life
Insurance Company ("ELIC"). ELIC was placed into conservatorship by the
California Commissioner of Insurance on April 11, 1991. Liquidation and
rehabilitation of ELIC has proceeded in an orderly manner which has resulted in
substantial payment of these bonds to date. As of December 31, 1997, the Company
had received principal and interest payments of $366,000 on these bonds, had
recognized losses to date of $54,000 and had ceased carrying the bonds on its
books. The Company anticipates receiving further payments on these bonds,
although the timing of such payments is not known.
Sources of Funds
General. Deposits have traditionally been the Bank's primary source of
funds for use in lending and investment activities. In addition to deposits, the
Company derives funds from scheduled loan payments, loan prepayments, retained
earnings and income on earning assets. While scheduled loan payments and income
on earning assets are relatively stable sources of funds, deposit inflows and
outflows can vary widely and are influenced by prevailing interest rates, market
conditions and levels of competition. Borrowings from the FHLB of Indianapolis
may be used in the short-term to compensate for reductions in deposits or
deposit inflows at less than projected levels. The Bank rarely borrows on a
longer-term basis, for example, to support expanded activities or to assist in
its asset/liability management.
Deposits. Deposits are attracted, principally from within Cass County,
through the offering of a broad selection of deposit instruments including NOW
and other transaction accounts, fixed-rate certificates of deposit, individual
retirement accounts, and savings accounts. The Bank does not actively solicit or
advertise for deposits outside of Cass County. Substantially all of the Bank's
depositors are residents of that county. Deposit account terms vary, with the
principal differences being the minimum balance required, the amount of time the
funds remain on deposit and the interest rate. The Bank does not pay a fee for
any deposits it receives.
Deposits totaled $60.6 million at December 31, 1997.
Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by the Bank on a periodic basis. Determination of
rates and terms are predicated on funds acquisition and liquidity requirements,
rates paid by competitors, growth goals, and federal regulations. The Bank
relies, in part, on customer service and long-standing relationships with
customers to attract and retain its deposits, but also closely prices its
deposits in relation to rates offered by its competitors.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition. The variety of deposit accounts offered by the Bank has allowed it
to be competitive in obtaining funds and to respond with flexibility to changes
in consumer demand. The Bank has become more susceptible to short-term
fluctuations in deposit flows as customers have become more interest rate
conscious. The Bank manages the pricing of its deposits in keeping with its
asset/liability management and profitability objectives. Based on its
experience, the Bank believes that its passbook, NOW and non-interest-bearing
checking accounts are relatively stable sources of deposits. However, the
ability of the Bank to attract and maintain certificates of deposit, and the
rates paid on these deposits, has been and will continue to be significantly
affected by market conditions.
An analysis of the Bank's deposit accounts by type, maturity, and rate
at December 31, 1997, is as follows:
Minimum Balance at Weighted
Opening December 31, % of Average
Type of Account Balance 1997 Deposits Rate
- --------------- ------- ------------ -------- ----------
(Dollars in thousands)
Withdrawable:
Passbook savings accounts......................... $ 10 $ 3,070 5.07% 3.00%
Regular money market accounts..................... 2,500 1,050 1.73 3.23
Hi yield money market accounts.................... 10,000 15,686 25.89 4.70
Super NOW accounts................................ 2,500 464 .76 2.48
NOW and other transaction accounts................ 200 3,732 6.16 1.93
Other transaction accounts........................ 100 862 1.42 ---
------- ------
Total withdrawable................................... 24,864 41.03 3.80
------- ------
Certificates (original terms):
91 days........................................... 1,000 362 .60 4.75
6 months.......................................... 1,000 3,541 5.84 5.04
12 months......................................... 1,000 5,751 9.49 5.38
18 months......................................... 500 1,019 1.68 5.65
24 months......................................... 500 10,530 17.38 5.55
30 months......................................... 500 6,282 10.37 5.82
60 months......................................... 1,000 3,552 5.86 5.53
IRAs
18 months......................................... 100 4,694 7.75 5.63
------- ------
Total certificates................................... 35,731 58.97 5.52
------- ------
Total deposits ...................................... $60,595 100.00% 4.82%
======= ====== ====
The following table sets forth by various interest rate categories the
composition of time deposits of the Bank at the dates indicated:
At December 31,
1997 1996 1995
--------- --------------- ---------
(In thousands)
4.00% and under..... $ 136 $ 199 $ 125
4.01 - 6.00 %....... 35,087 32,499 27,648
6.01 - 8.00%........ 508 1,285 3,202
------- ------- -------
Total ............. $35,731 $33,983 $30,975
======= ======= =======
The following table represents, by various interest rate categories,
the amounts of time deposits maturing during each of the three years following
December 31, 1997, and the total amount maturing thereafter. Matured
certificates which have not been renewed as of December 31, 1997, have been
allocated based upon certain rollover assumptions:
Amounts At
December 31, 1997, Maturing in
One Year Two Three Greater Than
or Less Years Years Three Years
------- ----- ----- -----------
(In thousands)
4.00% and under.... $ 136 $ --- $ --- $ ---
4.01 - 6.00 %...... 22,287 7,665 3,947 1,188
6.01-8.00%......... 100 154 223 31
------- ------ ------ ------
Total ............ $22,523 $7,819 $4,170 $1,219
======= ====== ====== ======
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
1997.
Maturity (In thousands)
-------- --------------
Three months or less.............................. $ 711
Greater than three months
through six months........................... 1,056
Greater than six months
through twelve months........................ 1,489
Over twelve months................................ 539
------
Total........................................ $3,795
======
The following table sets forth the dollar amount of savings in the
various types of deposits programs offered by the Bank at the dates indicated,
and the amount of increase or decrease in such deposits as compared to the
previous period.
Deposit Activity
Increase Increase
(Decrease) (Decrease)
Balance at from Balance at from
December 31, % of December 31, December 31, % of December 31,
1997 Deposits 1996 1996 Deposits 1995
------- ------ ------ ------- ------ ------
(Dollars in thousands)
Withdrawable:
Passbook savings accounts............ $3,070 5.07% $ (49) $ 3,119 5.43% $ (77)
Regular money market accounts........ 1,050 1.73 (108) 1,158 2.02 (179)
Hi yield money market accounts....... 15,686 25.89 1,198 14,488 25.24 1,796
Super NOW accounts................... 464 .76 (222) 686 1.20 124
NOW accounts......................... 3,732 6.16 401 3,331 5.80 101
Other transaction accounts........... 862 1.42 231 631 1.10 162
------- ------ ------ ------- ------ ------
Total withdrawable...................... 24,864 41.03 1,451 23,413 40.79 1,927
------- ------ ------ ------- ------ ------
Certificates (original terms):
91 days.............................. 362 .60 43 319 .56 (621)
6 months............................. 3,541 5.84 (1,023) 4,564 7.95 1,056
12 months............................ 5,751 9.49 789 4,962 8.65 (310)
18 months............................ 1,019 1.68 75 944 1.64 (149)
24 months............................ 10,530 17.38 (930) 11,460 19.97 4,236
30 months............................ 6,282 10.37 2,952 3,330 5.80 (1,231)
60 months............................ 3,552 5.86 (205) 3,757 6.54 (401)
IRAs
18 months............................ 4,694 7.75 47 4,647 8.10 428
------- ------ ------ ------- ------ ------
Total certificates...................... 35,731 58.97 1,748 33,983 59.21 3,008
------- ------ ------ ------- ------ ------
Total deposits.......................... $60,595 100.00% $3,199 $57,396 100.00% $4,935
======= ====== ====== ======= ====== ======
Deposit Activity
Increase
(Decrease)
Balance at from
December 31, % of December 31,
1995 Deposits 1994
--------------------------------
(Dollars in thousands)
Withdrawable:
Passbook savings accounts......... $ 3,196 6.09% $ (50)
Regular money market accounts..... 1,337 2.55 13
Hi yield money market accounts.... 12,692 24.19 1,101
Super NOW accounts................ 562 1.07 (213)
NOW accounts...................... 3,230 6.16 732
Other transaction................. 469 .90 3
------- ------ ------
Total withdrawable................... 21,486 40.96 1,586
Certificates (original terms):
91 days........................... 940 1.79 (126)
6 months.......................... 3,508 6.69 (312)
12 months......................... 5,272 10.05 2,657
18 months......................... 1,093 2.08 461
24 months......................... 7,224 13.77 (1,131)
30 months......................... 4,561 8.69 (1,807)
60 months......................... 4,158 7.93 (19)
IRAs
18 months......................... 4,219 8.04 (50)
------- ------ ------
Total certificates................... 30,975 59.04 (327)
------- ------ ------
Total deposits ...................... $52,461 100.00% $1,259
======= ====== ======
Borrowings. The Bank focuses on generating high quality loans and then
seeks the best source of funding from deposits, investments or borrowings. There
are regulatory restrictions on advances from the FHLBs. See "Regulation --
Federal Home Loan Bank System" and "-- Qualified Thrift Lender." At December 31,
1997, the Company had $4.0 million in borrowings from the FHLB of Indianapolis
which mature within one year and $2.5 million which mature in one to two years
and had a weighted average interest rate of 5.79%. The Company does not
anticipate any difficulty in obtaining advances appropriate to meet its
requirements in the future. The Company also had a $1.5 million note payable to
another bank due on March 5, 1997. It was secured by 100% of the Bank's common
stock, and the interest was at the prime rate. This note was repaid on January
16, 1997.
Employees
As of December 31, 1997, the Bank employed 11 persons on a full-time
basis and four persons on a part-time basis. None of the Bank's employees are
represented by a collective bargaining group. Management considers its employee
relations to be excellent.
The Bank's employee benefits for full-time employees include, among
other things, a Financial Institutions Retirement Fund ("FIRF" or the "Pension
Plan") defined benefit pension plan and major medical and long-term disability
insurance.
Employee benefits are considered by management to be competitive with
those offered by other financial institutions and major employers in the Bank's
market area. See "Executive Compensation and Related Transactions." Competition
The Bank operates in North Central Indiana and makes almost all of its
loans to and accepts most of its deposits from residents of Cass County in
Indiana.
The Bank is subject to competition from various financial institutions,
including state and national banks, state and federal savings institutions,
credit unions, certain non-banking consumer lenders, and other companies or
firms, including brokerage houses and mortgage brokers, that provide similar
services in Cass County. The Bank must also compete with money market funds and
with insurance companies with respect to its individual retirement accounts. See
"Regulation--Acquisitions or Dispositions and Branching."
The primary factors in competing for deposits are interest rates and
convenience of office locations. The Bank competes for loan originations
primarily through the efficiency and quality of services it provides borrowers
and through interest rates and loan fees it charges. Competition is affected by,
among other things, the general availability of lendable funds, general and
local economic conditions, current interest rate levels, and other factors which
are not readily predictable.
REGULATION
General
As a federally chartered, SAIF-insured savings association, the Bank is
subject to extensive regulation by the OTS and the FDIC. For example, the Bank
must obtain OTS approval before it may engage in certain activities and must
file reports with the OTS regarding its activities and financial condition. The
OTS periodically examines the Bank's books and records and, in conjunction with
the FDIC in certain situations, has examination and enforcement powers. This
supervision and regulation are intended primarily for the protection of
depositors and the federal deposit insurance funds. The Bank's semi- annual
assessment owed to the OTS, which is based upon a specified percentage of
assets, is approximately $14,000.
The Bank is also subject to federal and state regulation as to such
matters as loans to officers, directors, or principal shareholders, required
reserves, limitations as to the nature and amount of its loans and investments,
regulatory approval of any merger or consolidation, issuance or retirements of
securities, and limitations upon other aspects of banking operations. In
addition, the Bank's activities and operations are subject to a number of
additional detailed, complex and sometimes overlapping federal and state laws
and regulations. These include state usury and consumer credit laws, state laws
relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Community Reinvestment Act, anti-redlining legislation and antitrust
laws.
The United States Congress is considering legislation that would require
all federal savings associations, such as the Bank, to either convert to a
national bank or a state-chartered bank by a specified date to be determined. In
addition, under the legislation, the Holding Company likely would not be
regulated as a savings and loan holding company but rather as a bank holding
company. This proposed legislation would abolish the OTS and transfer its
functions among the other federal banking regulators. Certain aspects of the
legislation remain to be resolved and, therefore, no assurance can be given as
to whether or in what form the legislation will be enacted or its effect on the
Holding Company and the Bank.
Savings and Loan Holding Company Regulation
As the holding company for the Bank, the Holding Company is regulated as a
"non-diversified savings and loan holding company" within the meaning of the
Home Owners' Loan Act, as amended ("HOLA"), and subject to regulatory oversight
by the Director of the OTS. As such, the Holding Company is registered with the
OTS and thereby subject to OTS regulations, examinations, supervision and
reporting requirements. As a subsidiary of a savings and loan holding company,
the Bank is subject to certain restrictions in its dealings with the Holding
Company and with other companies affiliated with the Holding Company.
In general, the HOLA prohibits a savings and loan holding company, without
prior approval of the Director of the OTS, from acquiring control of another
savings association or savings and loan holding company or retaining more than
5% of the voting shares of a savings association or of another holding company
which is not a subsidiary. The HOLA also restricts the ability of a director or
officer of the Holding Company, or any person who owns more than 25% of the
Holding Company's stock, from acquiring control of another savings association
or savings and loan holding company without obtaining the prior approval of the
Director of the OTS.
The Holding Company's Board of Directors presently intends to continue to
operate the Holding Company as a unitary savings and loan holding company. OTS
regulations generally do not restrict the permissible business activities of a
unitary savings and loan holding company.
Notwithstanding the above rules as to permissible business activities of
unitary savings and loan holding companies, if the savings association
subsidiary of such a holding company fails to meet the Qualified Thrift Lender
("QTL") test, then such unitary holding company would become subject to the
activities restrictions applicable to multiple holding companies. (Additional
restrictions on securing advances from the FHLB also apply.) At December 31,
1997, the Bank's asset composition was in excess of that required to qualify as
a Qualified Thrift Lender.
If the Holding Company were to acquire control of another savings
association other than through a merger or other business combination with the
Bank, the Holding Company would thereupon become a multiple savings and loan
holding company. Except where such acquisition is pursuant to the authority to
approve emergency thrift acquisitions and where each subsidiary savings
association meets the QTL test, the activities of the Holding Company and any of
its subsidiaries (other than the Bank or other subsidiary savings associations)
would thereafter be subject to further restrictions. The HOLA provides that,
among other things, no multiple savings and loan holding company or subsidiary
thereof which is not a savings association shall commence or continue for a
limited period of time after becoming a multiple savings and loan holding
company or subsidiary thereof, any business activity other than (i) furnishing
or performing management services for a subsidiary savings association, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary savings association,
(iv) holding or managing properties used or occupied by a subsidiary savings
association, (v) acting as trustee under deeds of trust, (vi) those activities
previously directly authorized by the FSLIC by regulation as of March 5, 1987,
to be engaged in by multiple holding companies, or (vii) those activities
authorized by the Federal Reserve Board (the "FRB") as permissible for bank
holding companies, unless the Director of the OTS by regulation prohibits or
limits such activities for savings and loan holding companies. Those activities
described in (vii) above must also be approved by the Director of the OTS before
a multiple holding company may engage in such activities.
The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 5, 1987, or if
the laws of the state in which the association to be acquired is located
specifically permit associations to be acquired by state-chartered associations
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings associations). Also, the Director of the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
Indiana law permits federal and state savings association holding
companies with their home offices located outside of Indiana to acquire savings
associations whose home offices are located in Indiana and savings association
holding companies with their principal place of business in Indiana ("Indiana
Savings Association Holding Companies") upon receipt of approval by the Indiana
Department of Financial Institutions. Moreover, Indiana Savings Association
Holding Companies may acquire savings associations with their home offices
located outside of Indiana and savings association holding companies with their
principal place of business located outside of Indiana upon receipt of approval
by the Indiana Department of Financial Institutions.
No subsidiary savings association of a savings and loan holding company
may declare or pay a dividend on its permanent or nonwithdrawable stock unless
it first gives the Director of the OTS 30 days advance notice of such
declaration and payment. Any dividend declared during such period or without
giving notice shall be invalid.
Federal Home Loan Bank System
The Bank is a member of the FHLB of Indianapolis, which is one of 12
regional FHLBs. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from funds deposited by
savings associations and proceeds derived from the sale of consolidated
obligations of the FHLB system. It makes loans to members (i.e., advances) in
accordance with policies and procedures established by the Board of Directors of
the FHLB. All FHLB advances must be fully secured by sufficient collateral as
determined by the FHLB. The Federal Housing Finance Board ("FHFB"), an
independent agency, controls the FHLB System, including the FHLB of
Indianapolis.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Indianapolis in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts, or similar obligations at
the beginning of each year. At December 31, 1997, the Bank's investment in stock
of the FHLB of Indianapolis was $494,000. The FHLB imposes various limitations
on advances such as limiting the amount of certain types of real estate-related
collateral to 30% of a member's capital and limiting total advances to a member.
Interest rates charged for advances vary depending upon maturity, the cost of
funds to the FHLB of Indianapolis and the purpose of the borrowing.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. For the fiscal year ended December 31, 1997, dividends paid by
the FHLB of Indianapolis to the Bank totaled approximately $37,000, for an
annual rate of 8.00%.
Insurance of Deposits
Deposit Insurance. The FDIC is an independent federal agency that insures
the deposits, up to prescribed statutory limits, of banks and thrifts and
safeguards the safety and soundness of the banking and thrift industries. The
FDIC administers two separate insurance funds, the Bank Insurance Fund (the
"BIF") for commercial banks and state savings banks and the SAIF for savings
associations such as the Bank and banks that have acquired deposits from savings
associations. The FDIC is required to maintain designated levels of reserves in
each fund. As of September 30, 1996, the reserves of the SAIF were below the
level required by law, primarily because a significant portion of the
assessments paid into the SAIF have been used to pay the cost of prior thrift
failures, while the reserves of the BIF met the level required by law in May,
1996. However, on September 30, 1996, provisions designed to recapitalize the
SAIF and eliminate the premium disparity between the BIF and SAIF were signed
into law. See "-- Assessments" below.
Assessments. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance for members of the BIF and members of the
SAIF. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to the target level
within a reasonable time and may decrease these rates if the target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary depending on the risk the
institution poses to its deposit insurance fund. An institution's risk level is
determined based on its capital level and the FDIC's level of supervisory
concern about the institution.
On September 30, 1996, President Clinton signed into law legislation which
included provisions designed to recapitalize the SAIF and eliminate the
significant premium disparity between the BIF and the SAIF. Under the new law,
the Bank was charged a one-time special assessment equal to $.657 per $100 in
assessable deposits at March 31, 1996. The Bank paid this one-time assessment of
$335,000 in November 1996. This special assessment significantly increased
noninterest expense and adversely affected the Holding Company's results of
Operations for the three months ended September 30, 1996. The assessment was
fully deductible for both federal and state income tax purposes. Beginning
January 1, 1997, the Bank's annual deposit insurance premium was reduced from
.23% to .0644% of total assessable deposits. BIF institutions pay lower
assessments than comparable SAIF institutions because BIF institutions pay only
20% of the rate being paid by SAIF institutions on their deposits with respect
to obligations issued by the federally-chartered corporation which provided some
of the financing to resolve the thrift crisis in the 1980s ("FICO"). The 1996
law also provides for the merger of the SAIF and the BIF by 1999, but not until
such time as bank and thrift charters are combined. Until the charters are
combined, savings associations with SAIF deposits may not transfer deposits into
the BIF system without paying various exit and entrance fees, and SAIF
institutions will continue to pay higher FICO assessments. Such exit and
entrance fees need not be paid if a SAIF institution converts to a bank charter
or merges with a bank, as long as the resulting bank continues to pay applicable
insurance assessments to the SAIF, and as long as certain other conditions are
met.
Savings Association Regulatory Capital
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. Core capital is generally defined as common shareholders' equity
(including retained income), noncumulative perpetual preferred stock and related
surplus, certain minority equity interests in subsidiaries, qualifying
supervisory goodwill, purchased mortgage servicing rights and purchased credit
card relationships (subject to certain limits) less nonqualifying intangibles.
Under the tangible capital requirement, a savings association must maintain
tangible capital (core capital less all intangible assets except purchased
mortgage servicing rights which may be included after making the above-noted
adjustment in an amount up to 100% of tangible capital) of at least 1.5% of
total assets. Under the risk-based capital requirements, a minimum amount of
capital must be maintained by a savings association to account for the relative
risks inherent in the type and amount of assets held by the savings association.
The risk-based capital requirement requires a savings association to maintain
capital (defined generally for these purposes as core capital plus general
valuation allowances and permanent or maturing capital instruments such as
preferred stock and subordinated debt less assets required to be deducted) equal
to 8.0% of risk-weighted assets. Assets are ranked as to risk in one of four
categories (0-100%). A credit risk-free asset, such as cash, requires no
risk-based capital, while an asset with a significant credit risk, such as a
non-accrual loan, requires a risk factor of 100%. Moreover, a savings
association must deduct from capital, for purposes of meeting the core capital,
tangible capital and risk-based capital requirements, its entire investment in
and loans to a subsidiary engaged in activities not permissible for a national
bank (other than exclusively agency activities for its customers or mortgage
banking subsidiaries). At December 31, 1997, the Bank was in compliance with all
capital requirements imposed by law.
The OTS has promulgated a rule which sets forth the methodology for
calculating an interest rate risk component to be used by savings associations
in calculating regulatory capital. The OTS has delayed the implementation of
this rule, however. The rule requires savings associations with "above normal"
interest rate risk (institutions whose portfolio equity would decline in value
by more than 2% of assets in the event of a hypothetical 200-basis-point move in
interest rates) to maintain additional capital for interest rate risk under the
risk-based capital framework. If the OTS were to implement this regulation, the
Bank would not be required to maintain additional capital at December 31, 1997
under the terms of the OTS proposed interest rate risk rule.
Prompt Corrective Regulatory Action
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FedICIA") requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to institutions that do
not meet minimum capital requirements. For these purposes, FedICIA establishes
five capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. At December 31,
1997, the Bank was categorized as "adequately capitalized," meaning that its
total risk-based capital ratio exceeded 8%, its Tier I risk-based capital ratio
exceeded 4%, its leverage ratio exceeded 4%, and it was not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure.
The FDIC may order savings associations which have insufficient capital to
take corrective actions. For example, a savings association which is categorized
as "undercapitalized" would be subject to growth limitations and would be
required to submit a capital restoration plan, and a holding company that
controls such a savings association would be required to guarantee that the
savings association complies with the restoration plan. "Significantly
undercapitalized" savings associations would be subject to additional
restrictions. Savings associations deemed by the FDIC to be "critically
undercapitalized" would be subject to the appointment of a receiver or
conservator.
Dividend Limitations
An OTS regulation imposes limitations upon all "capital distributions" by
savings associations, including cash dividends, payments by an association to
repurchase or otherwise acquire its shares, payments to shareholders of another
institution in a cash-out merger and other distributions charged against
capital. The regulation establishes a three-tiered system of regulation, with
the greatest flexibility being afforded to well-capitalized associations. A
savings association which has total capital (immediately prior to and after
giving effect to the capital distribution) that is at least equal to its fully
phased-in capital requirements would be a Tier 1 institution ("Tier 1
Institution"). An association that has total capital at least equal to its
minimum capital requirements, but less than its fully phased-in capital
requirements, would be a Tier 2 institution ("Tier 2 Institution"). An
institution having total capital that is less than its minimum capital
requirements would be a Tier 3 institution ("Tier 3 Institution"). However, an
institution which otherwise qualifies as a Tier 1 Institution may be designated
by the OTS as a Tier 2 Institution or Tier 3 Institution if the OTS determines
that the institution is "in need of more than normal supervision." The Bank is
currently a Tier 1 Institution.
A Tier 1 Institution may, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year up to the greater of
(a) 100% of its net income to date during the calendar year plus the amount that
would reduce by one-half its "surplus capital ratio" at the beginning of the
calendar year (the smallest excess over its capital requirements), or (b) 75% of
its net income over the most recent four-quarter period. Any additional amount
of capital distributions would require prior regulatory approval.
The OTS has proposed revisions to these regulations which would permit a
savings association, without filing a prior notice or application with the OTS,
to make a capital distribution to its shareholders in an amount that does not
exceed the association's undistributed net income for the prior two years plus
the amount of its undistributed income from the current year. This proposed rule
would require a savings association, such as the Bank, that is a subsidiary of a
savings and loan holding company to file a notice with the OTS before making a
capital distribution up to the "maximum amount" described above. The proposed
rule would also require all savings associations, whether under a holding
company or not, to file an application with the OTS prior to making any capital
distribution where the association is not eligible for expedited processing
under the OTS "Expedited Processing Regulation," or where the proposed
distribution, together with any other distributions made in the same year, would
exceed the "maximum amount" described above.
Liquidity
Federal law requires that savings associations maintain an average daily
balance of liquid assets in an amount not less than 4% or more than 10% of their
withdrawable accounts plus short-term borrowings. Liquid assets include cash,
certain time deposits, certain bankers' acceptances, specified U.S. government,
state or federal agency obligations, certain corporate debt securities,
commercial paper, certain mutual funds, certain mortgage-related securities, and
certain first-lien residential mortgage loans. The OTS recently amended its
regulation that implements this statutory liquidity requirement to reduce the
amount of liquid assets a savings association must hold from 5% of net
withdrawable accounts and short-term borrowings to 4%. The OTS also eliminated
the requirement that savings associations maintain short-term liquid assets
constituting at least 1% of their average daily balance of net withdrawable
deposit accounts and current borrowings. The revised OTS rule also permits
savings associations to calculate compliance with the liquidity requirement
based upon their average daily balance of liquid assets during each quarter
rather than during each month, as was required under the prior rule. The OTS may
impose monetary penalties on savings associations that fail to meet these
liquidity requirements. As of December 31, 1997, the Bank had liquid assets of
$16.0 million, and a regulatory liquidity ratio of 37.4%.
Limitations on Rates Paid for Deposits
Regulations promulgated by the FDIC pursuant to FedICIA limit the ability
of insured depository institutions to accept, renew or roll over deposits by
offering rates of interest which are significantly higher than the prevailing
rates of interest on deposits offered by other insured depository institutions
having the same type of charter in the institution's normal market area. Under
these regulations, "well-capitalized" depository institutions may accept, renew
or roll such deposits over without restriction, "adequately capitalized"
depository institutions may accept, renew or roll such deposits over with a
waiver from the FDIC (subject to certain restrictions on payments of rates) and
"undercapitalized" depository institutions may not accept, renew or roll such
deposits over. The regulations contemplate that the definitions of "well
capitalized," "adequately capitalized" and "undercapitalized" will be the same
as the definition adopted by the agencies to implement the corrective action
provisions of FedICIA. The Bank does not believe that these regulations will
have a materially adverse effect on its current operations.
Safety and Soundness Standards
On February 2, 1995, the federal banking agencies adopted final safety and
soundness standards for all insured depository institutions. The standards,
which were issued in the form of guidelines rather than regulations, relate to
internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan may result in enforcement
proceedings. On August 27, 1996, the federal banking agencies added asset
quality and earning standards to the safety and soundness guidelines.
Real Estate Lending Standards
OTS regulations require savings associations to establish and maintain
written internal real estate lending policies. Each association's lending
policies must be consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its
operations. The policies must establish loan portfolio diversification
standards; establish prudent underwriting standards, including loan-to-value
limits, that are clear and measurable; establish loan administration procedures
for the association's real estate portfolio; and establish documentation,
approval, and reporting requirements to monitor compliance with the
association's real estate lending policies. The association's written real
estate lending policies must be reviewed and approved by the association's Board
of Directors at least annually. Further, each association is expected to monitor
conditions in its real estate market to ensure that its lending policies
continue to be appropriate for current market conditions.
Loans to One Borrower
Under OTS regulations, the Bank may not make a loan or extend credit to a
single or related group of borrowers in excess of 15% of its unimpaired capital
and surplus. Additional amounts may be lent, not in excess of 10% of unimpaired
capital and surplus, if such loans or extensions of credit are fully secured by
readily marketable collateral, including certain debt and equity securities but
not including real estate. In some cases, a savings association may lend up to
30 percent of unimpaired capital and surplus to one borrower for purposes of
developing domestic residential housing, provided that the association meets its
regulatory capital requirements and the OTS authorizes the association to use
this expanded lending authority. At December 31, 1997, the Bank did not have any
loans or extensions of credit to a single or related group of borrowers in
excess of its lending limits.
Qualified Thrift Lender
Savings associations must meet a QTL test. If the Bank maintains an
appropriate level of qualified thrift investments ("QTIs") (primarily
residential mortgages and related investments, including certain
mortgage-related securities) and otherwise qualify as a QTL, the Bank will
continue to enjoy full borrowing privileges from the FHLB of Indianapolis. The
required percentage of QTIs is 65% of portfolio assets (defined as all assets
minus intangible assets, property used by the association in conducting its
business and liquid assets equal to 10% of total assets). Certain assets are
subject to a percentage limitation of 20% of portfolio assets. In addition,
savings associations may include shares of stock of the FHLBs, FNMA, and FHLMC
as QTIs. Compliance with the QTL test is determined on a monthly basis in nine
out of every twelve months. As of December 31, 1997, the Bank was in compliance
with its QTL requirement, with approximately 88.5% of its assets invested in
QTIs.
A savings association which fails to meet the QTL test must either convert
to a bank (but its deposit insurance assessments and payments will be those of
and paid to the SAIF) or be subject to the following penalties: (i) it may not
enter into any new activity except for those permissible for a national bank and
for a savings association; (ii) its branching activities shall be limited to
those of a national bank; (iii) it shall not be eligible for any new FHLB
advances; and (iv) it shall be bound by regulations applicable to national banks
respecting payment of dividends. Three years after failing the QTL test the
association must (i) dispose of any investment or activity not permissible for a
national bank and a savings association and (ii) repay all outstanding FHLB
advances. If such a savings association is controlled by a savings and loan
holding company, then such holding company must, within a prescribed time
period, become registered as a bank holding company and become subject to all
rules and regulations applicable to bank holding companies (including
restrictions as to the scope of permissible business activities).
Acquisitions or Dispositions and Branching
The Bank Holding Company Act specifically authorizes a bank holding
company, upon receipt of appropriate regulatory approvals, to acquire control of
any savings association or holding company thereof wherever located. Similarly,
a savings and loan holding company may acquire control of a bank. Moreover,
federal savings associations may acquire or be acquired by any insured
depository institution. Regulations promulgated by the FRB restrict the
branching authority of savings associations acquired by bank holding companies.
Savings associations acquired by bank holding companies may be converted to
banks if they continue to pay SAIF premiums, but as such they become subject to
branching and activity restrictions applicable to banks.
Subject to certain exceptions, commonly-controlled banks and savings
associations must reimburse the FDIC for any losses suffered in connection with
a failed bank or savings association affiliate. Institutions are commonly
controlled if one is owned by another or if both are owned by the same holding
company. Such claims by the FDIC under this provision are subordinate to claims
of depositors, secured creditors, and holders of subordinated debt, other than
affiliates.
The OTS has adopted regulations which permit nationwide branching to the
extent permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets the
domestic building and loan test in ss.7701(a)(19) of the Code or the asset
composition test of ss.7701(c) of the Code. Branching that would result in the
formation of a multiple savings and loan holding company controlling savings
associations in more than one state is permitted if the law of the state in
which the savings association to be acquired is located specifically authorizes
acquisitions of its state-chartered associations by state-chartered associations
or their holding companies in the state where the acquiring association or
holding company is located. Moreover, Indiana banks and savings associations are
permitted to acquire other Indiana banks and savings associations and to
establish branches throughout Indiana.
Finally, The Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks
in other states and, with state consent and subject to certain limitations,
allows banks to acquire out-of-state branches either through merger or de novo
expansion. The State of Indiana enacted legislation establishing interstate
branching provisions for Indiana state-chartered banks consistent with those
established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana
Branching Law authorizes Indiana banks to branch interstate by merger or de novo
expansion, provided that such transactions are not permitted to out-of-state
banks unless the laws of their home states permit Indiana banks to merge or
establish de novo banks on a reciprocial basis. The Indiana Branching Law became
effective March 15, 1996.
Federal Reserve System
Under FRB regulations, the Bank is required to maintain reserves
against its transaction accounts (primarily checking and NOW accounts) and
non-personal money market deposit accounts. The effect of these reserve
requirements is to increase the Bank's cost of funds. The Bank is in compliance
with its reserve requirements. A federal savings association, like other
depository institutions maintaining reservable accounts, may borrow from the
Federal Reserve Bank "discount window," but the FRB's regulations require the
savings association to exhaust other reasonable alternative sources, including
borrowing from its regional FHLB, before borrowing from the Federal Reserve
Bank. Current law imposes certain limitations on the ability of undercapitalized
depository institutions to borrow from Federal Reserve Banks.
Limitations on Repurchase of Common Stock of Holding Company
OTS regulations currently provide that the Holding Company is
prohibited from repurchasing any of its shares within one year of the
Conversion, which occured on June 13, 1995. So long as the Bank continues to
meet certain capitalization requirements, the Holding Company may repurchase
shares in an open-market repurchase program (which cannot exceed 5% of its
outstanding shares in a twelve-month period) during the second and third years
following its Conversion by giving appropriate prior notice to the OTS. The OTS
has the authority to waive these restrictions under certain circumstances.
Unless repurchases are permitted under the foregoing regulations, the Holding
Company may not, for a period of three years from the date of the Conversion,
repurchase any of its capital stock from any person, except in the event of an
offer to purchase by the Holding Company on a pro rata basis from all of its
shareholders which is approved in advance by the OTS or except in exceptional
circumstances established to the satisfaction of the OTS.
Under Indiana law, the Holding Company will be precluded from
repurchasing its equity securities if, after giving effect to such repurchase,
the Holding Company would be unable to pay its debts as they become due or the
Holding Company's assets would be less than its liabilities and obligations to
preferential shareholders.
Transactions with Affiliates
The Bank and the Holding Company are subject to Sections 22(h), 23A and
23B of the Federal Reserve Act, which restrict financial transactions between
banks and affiliated companies. The statute limits credit transactions between a
bank or savings association and its executive officers and its affiliates,
prescribes terms and conditions for bank affiliate transactions deemed to be
consistent with safe and sound banking practices, and restricts the types of
collateral security permitted in connection with a bank's extension of credit to
an affiliate.
Federal Securities Law
The shares of Common Stock of the Holding Company are registered with the
Securities and Exchange Commission (the "Commission") under the Securities
Exchange Act of 1934, as amended (the "1934 Act"). The Holding Company is
subject to the information, proxy solicitation, insider trading restrictions and
other requirements of the 1934 Act and the rules of the Commission thereunder.
Shares of Common Stock held by persons who are affiliates of the Holding
Company may not be resold without registration unless sold in accordance with
the resale restrictions of Rule 144 under the Securities Act of 1933, as amended
(the "1933 Act"). If the Holding Company meets the current public information
requirements under Rule 144, each affiliate of the Holding Company who complies
with the other conditions of Rule 144 (including those that require the
affiliate's sale to be aggregated with those of certain other persons) will be
able to sell in the public market, without registration, a number of shares not
to exceed, in any three-month period, the greater of (i) 1% of the outstanding
shares of the Holding Company or (ii) the average weekly volume of trading in
such shares during the preceding four calendar weeks.
Community Reinvestment Act Matters
Federal law requires that ratings of depository institutions under the
Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes
both a four-unit descriptive rating -- outstanding, satisfactory, needs to
improve, and substantial noncompliance -- and a written evaluation of an
institution's performance. Each FHLB is required to establish standards of
community investment or service that its members must maintain for continued
access to long-term advances from the FHLBs. The standards take into account a
member's performance under the CRA and its record of lending to first-time home
buyers. The OTS has designated the Bank's record of meeting community credit
needs as satisfactory.
TAXATION
Federal Taxation
Historically, savings associations, such as the Bank, have been
permitted to compute bad debt deductions using either the bank experience method
or the percentage of taxable income method. However, for years beginning after
December 31, 1995, the Bank will no longer be able to use the percentage of
taxable income method of computing its allocable tax bad debt deduction. The
Bank will be required to compute its allocable deduction using the experience
method. As a result of the repeal of the percentage of taxable income method,
reserves taken after 1987 using the percentage of taxable income method
generally must be included in future taxable income over a six-year period,
although a two-year delay may be permitted for institutions meeting a
residential mortgage loan origination test. In addition, the pre-1988 reserve,
in which no deferred taxes have been recorded, will not have to be recaptured
into income unless (i) the Bank no longer qualifies as a bank under the Code, or
(ii) excess dividends are paid out by the Bank.
Depending on the composition of its items of income and expense, a
savings institution may be subject to the alternative minimum tax. A savings
institution must pay an alternative minimum tax equal to the amount (if any) by
which 20% of alternative minimum taxable income ("AMTI"), as reduced by an
exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular
taxable income increased or decreased by certain tax preferences and
adjustments, including depreciation deductions in excess of that allowable for
alternative minimum tax purposes, tax-exempt interest on most private activity
bonds issued after August 7, 1986 (reduced by any related interest expense
disallowed for regular tax purposes), the amount of the bad debt reserve
deduction claimed in excess of the deduction based on the experience method and
75% of the excess of adjusted current earnings over AMTI (before this adjustment
and before any alternative tax net operating loss). AMTI may be reduced only up
to 90% by net operating loss carryovers, but alternative minimum tax paid that
is attributable to most preferences (although not to post-August 7, 1986
tax-exempt interest) can be credited against regular tax due in later years.
State Taxation
The Bank is subject to Indiana's Financial Institutions Tax ("FIT"),
which is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted
gross income," for purposes of FIT, begins with taxable income as defined by
Section 63 of the Code and, thus, incorporates federal tax law to the extent
that it affects the computation of taxable income. Federal taxable income is
then adjusted by several Indiana modifications, the most notable of which is the
required addback of interest that is tax-free for federal income tax purposes.
Other applicable state taxes include generally applicable sales and use taxes
plus real and personal property taxes.
Item 2. Properties.
At December 31, 1997, the Bank and the Holding Company conducted
business from a single office at 723 East Broadway, Logansport, Indiana. The
following table provides certain information with respect to the Company's
office as of December 31, 1997:
Total Deposits Net Book Value
at of Property,
Owned or Year December 31, Furniture & Approximate
Description and Address Leased Opened 1997 Fixtures Square Footage
---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
723 East Broadway Owned 1962 $60,595 $465 4,200
Logansport, Indiana 46947
The Company owns computer and data processing equipment which is used for
transaction processing and accounting. The net book value of electronic data
processing equipment owned by the Company was $8,400 at December 31, 1997.
The Bank also has contracted for the data processing and reporting
services of the Intrieve Data Center in Cincinnati, Ohio. The cost of these data
processing services is approximately $8,500 per month.
Item 3. Legal Proceedings.
Neither the Holding Company nor the Bank is a party to any pending
legal proceedings, other than routine litigation incidental to its business.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the Holding Company's shareholders
during the quarter ended December 31, 1997.
Item 4.5. Executive Officers of the Registrant.
Presented below is certain information regarding the executive officers
of the Holding Company:
Name Position
Thomas G. Williams President and Chief Executive Officer
Charles J. Evans Vice President
Dottye Robeson Secretary/Treasurer
Thomas G. Williams (age 65) has served as President of the Bank since
1971 and as President and Chief Executive Officer of the Holding Company since
its organization.
Charles J. Evans (age 52) has served as Vice President and Senior Loan
Officer of the Bank since 1980 and as Vice President of the Holding Company
since its organization.
Dottye Robeson (age 48) has served as Chief Financial Officer of the
Bank since 1994 and as Secretary/Treasurer of the Holding Company since its
organization. From 1990 to 1994, she served as Cashier, Vice President and Chief
Financial Officer of Bright National Bank in Flora, Indiana. From 1984 to 1990
she was employed by Smith, Thompson & Wihebrink (Logansport). She has been a
certified public accountant since 1987.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
Logansport Savings Bank, FSB converted from a mutual savings bank to a
stock form federal savings bank effective June 13, 1995 (the "Conversion") and
simultaneously formed a savings and loan holding company, Logansport Financial
Corp. The Holding Company's common stock, without par value ("Common Stock"), is
quoted on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ"), Small Cap Market, under the symbol "LOGN." The following
table sets forth the high and low bid prices and dividends paid per share of
Common Stock for the quarters indicated. Such over-the-counter quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission,
and may not necessarily represent actual transactions.
Quarter Ended High Bid Low Bid Dividends Declared
--------------------------------------------------------------------
March 31, 1996 $ 13 1/4 $ 12 3/8 $ .10
June 30, 1996 13 3/4 12 3/8 .10
September 30, 1996 14 3/4 12 1/2 .10
December 31, 1996 14 3/4 11 1/4 3.10
March 31, 1997 15 11 1/8 .10
June 30, 1997 14 12 1/2 .10
September 30, 1997 16 13 1/4 .10
December 31, 1997 18 15 .10
As of February 17, 1998, there were 848 record holders of the Holding
Company's Common Stock. The Holding Company has established a policy of paying
regular periodic cash dividends, and the Board of Directors intends to continue
this policy, subject to the Holding Company's operating results, financial
condition, capital, income tax considerations, regulatory restrictions, and
other relevant factors.
Since the Holding Company has no independent operations other than
investment-related activities or other subsidiaries to generate income, its
ability to accumulate earnings for the payment of cash dividends to its
shareholders will be directly dependent upon the ability of the Bank to pay
dividends to the Holding Company.
Under OTS regulations, a converted savings institution may not declare
or pay a cash dividend if the effect would be to reduce its net worth below the
amount required for the liquidation account created at the time it converted. In
addition, under OTS regulations, the extent to which a savings institution may
make a "capital distribution," which includes, among other things, cash
dividends, will depend upon in which one of three categories, based upon levels
of capital, that savings institution is classified. The Bank is now and expects
to continue to be a "tier one institution" and therefore would be able to pay
cash dividends to the Holding Company during any calendar year up to 100% of its
net income during that calendar year plus the amount that would reduce by one
half its "surplus capital ratio" (the excess over its fully phased-in capital
requirements) at the beginning of the calendar year. See "Regulation -- Capital
Distributions Regulation." Prior notice of any dividend to be paid by the Bank
to the Holding Company will have to be given to the OTS.
Income of the Bank appropriated to bad debt reserves and deducted for
federal income tax purposes is not available for payment of cash dividends or
other distributions to the Holding Company without the payment of federal income
taxes by the Bank on the amount of such income deemed removed from the reserves
at the then-current income tax rate. At December 31, 1997, approximately $1.7
million of the Bank's retained income represented bad debt deductions for which
no federal income tax provision had been made.
See "Taxation--Federal Taxation."
Unlike the Bank, generally there is no regulatory restriction on the
payment of dividends by the Holding Company. Indiana law, however, would
prohibit the Holding Company from paying a dividend if, after giving effect to
the payment of that dividend, the Holding Company would not be able to pay its
debts as they become due in the usual course of business or the Holding
Company's total assets would be less than the sum of its total liabilities plus
preferential rights of holders of preferred stock, if any.
Item 6. Selected Financial Data.
The information required by this item is incorporated by reference to
the material under the heading "Selected Consolidated Financial Data of
Logansport Financial Corp. and Subsidiary" on page 4 of the Holding Company's
1997 Shareholder Annual Report (the "Shareholder Annual Report").
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation.
The information required by this item is incorporated by reference to
pages 5 through 14 of the Shareholder Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is incorporated by reference to
pages 5 through 6 of the Shareholder Annual Report.
Item 8. Financial Statements and Supplementary Data.
The Holding Company's Consolidated Financial Statements and Notes
thereto contained on pages 17 through 44 in the Shareholder Annual Report are
incorporated herein by reference. The Company's unaudited quarterly results of
operations contained on page 44 in the Shareholder Annual Report are
incorporated herein by reference.
Independent Auditor's Report
To the Board of Directors
Logansport Financial Corp.
Logansport, Indiana
We have audited the consolidated statement of financial condition of Logansport
Financial Corp. and subsidiary as of December 31, 1996, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the two years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above present
fairly, in all material respects, the consolidated financial position of
Logansport Financial Corp. and subsidiary as of December 31, 1996, and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ Geo. S. Olive & Co. LLC
Indianapolis, Indiana
January 23, 1997
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
On August 12, 1997, the Board of Directors of the Holding Company
selected the accounting firm of Grant Thornton LLP to examine the consolidated
financial statements of the Company for the fiscal year ending December 31,
1997.
The audit reports issued by Geo. S. Olive & Co. LLC with respect to the
Company's consolidated financial statements for 1995 and 1996 did not contain an
adverse opinion or disclaimer of opinion, and were not qualified as to
uncertainty, audit scope or accounting principles. During 1995 and 1996 (and any
subsequent interim period), there have been no disagreements between the Company
and Geo. S. Olive & Co. LLC on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Geo. S. Olive & Co. LLC,
would have caused it to make a reference to the subject matter of the
disagreement in connection with its audit report. Moreover, none of the events
listed in Item 304(a)(1)(v) of Regulation S-K occurred during 1995 or 1996 or
any subsequent interim period.
In 1996, the Company consulted Grant Thornton LLP for financial
accounting and tax advice regarding a tax-free return of capital which was paid
in 1996. Grant Thornton LLP provided a letter to the Company stating its views
with respect to accounting for the exercise price of stock options following
such return of capital distribution. Their written views are incorporated by
reference to Exhibit A to the Company's Current Report on Form 8-K, filed with
the Commission on August 19, 1997. Geo. S. Olive & Co. LLC was consulted during
its completion of the 1996 audit of the consolidated financial statements in
1997 for concurrence with Grant Thornton LLP on their written views, and Geo. S.
Olive & Co. LLC concurred.
Pursuant to Item 304 of Regulation S-K, the Holding Company provided a
copy of its Current Report on Form 8-K announcing the change in the Company's
Certifying Accountant, which was filed with the Commission on August 19, 1997,
to Geo. S. Olive & Co. LLC for review. A letter from Geo. S. Olive & Co. LLC
indicating that it agrees with the statements made by the Holding Company
therein is incorporated by reference to Exhibit 16 to the Company's Current
Report on Form 8-K, filed with the Commission on August 19, 1997.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item with respect to directors is
incorporated by reference to pages 2 through 4 of the Holding Company's Proxy
Statement for its 1998 Annual Shareholder Meeting (the "1998 Proxy Statement").
Information concerning the Holding Company's executive officers is included in
Item 4.5 in Part I of this report.
Item 11. Executive Compensation.
The information required by this item with respect to executive
compensation is incorporated by reference to pages 2 to 4 of the Holding
Company's 1998 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated by reference to
pages 2 and 3 of the 1998 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to
page 8 of the 1998 Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) List the following documents filed as part of the report:
Financial Statements
Independent Auditor's Report (Geo. S. Olive & Co. LLC)............... See Item 8
Independent Auditor's Report (Grant Thornton LLP).................... See Shareholder Annual Report
Page 16
Consolidated Statements of Financial Condition
at December 31, 1997, and 1996................................... See Shareholder Annual Report
Page 17
Consolidated Statements of Earnings for the Years Ended
December 31, 1997, 1996, and 1995................................ See Shareholder Annual Report
Page 18
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995............. See Shareholder Annual Report
Page 19
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996, and 1995................................ See Shareholder Annual Report
Page 20-21
Notes to Consolidated Financial Statements........................... See Shareholder Annual Report
Page 22
(b) Reports on Form 8-K.
The Holding Company filed no reports on Form 8-K during the
fourth quarter of its 1997 fiscal year.
(c) The exhibits filed herewith or incorporated by reference
herein are set forth on the Exhibit Index on page E-1.
Included in those exhibits are Executive Compensation Plans
and Arrangements which are identified as Exhibits 10(1)
through 10(12).
(d) All schedules are omitted as the required information either
is not applicable or is included in the Consolidated Financial
Statements or related notes.
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on behalf of the undersigned, thereto duly authorized.
LOGANSPORT FINANCIAL CORP.
Date: March 25, 1998 By: /s/ Thomas G. Williams
----------------------------------
Thomas G. Williams, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 25th day of March, 1998.
/s/ Thomas G. Williams
- ------------------------
Thomas G. Williams
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Dottye Robeson
- ------------------------
Dottye Robeson,
Secretary/Treasurer (Principal Financial and
Accounting Officer)
/s/ Norbert E. Adrian
- ------------------------
Norbert E. Adrian, Director
/s/ Charles J. Evans
- ------------------------
Charles J. Evans, Vice President and Director
/s/ Donald G. Pollitt
- ------------------------
Donald G. Pollitt, Director
/s/ Susanne S. Ridlen
- ------------------------
Susanne S. Ridlen, Director
/s/ William Tincher, Jr.
- ------------------------
William Tincher, Jr., Director
/s/ David Wihebrink
- ------------------------
David Wihebrink, Director
EXHIBIT INDEX
Exhibit Page
3(1) The Articles of Incorporation of the Registrant are
incorporated by reference to Exhibit 3(1) to the
Registration Statement on Form S-1 (Registration No.
33-89788).
3(2) The Code of By-Laws of the Registrant are
incorporated by reference to Exhibit 3(2) to the
Registration Statement on Form S-1 (Registration No.
33-89788).
10(1) The Registrant's Stock Option Plan is incorporated
by reference to Exhibit A to the Registrant's Proxy
Statement for its Annual Shareholder Meeting held on
April 9, 1996.
10(2) Logansport Savings Bank, FSB Recognition and
Retention Plan and Trust is incorporated by
reference to Exhibit B to the Registrant's Proxy
Statement for its Annual Shareholder Meeting held on
April 9, 1996.
10(3) Logansport Savings Bank, FSB Employee Stock
Ownership Plan and Trust Agreement is incorporated
by reference to Exhibit 10(4) to the Registration
Statement on Form S-1 (Registration No. 33-89788).
10(4) Employment Agreement between Logansport Savings
Bank, FSB and Thomas G. Williams is incorporated by
reference to Exhibit 10(5) to the Registration
Statement on Form S-1 (Registration No. 33-89788).
10(5) Employment Agreement between Logansport Savings
Bank, FSB and Charles J. Evans is incorporated by
reference to Exhibit 10(6) to the Registration
Statement on Form S-1 (Registration No. 33-89788).
10(6) Director Deferred Compensation Agreement between
Logansport Savings Bank, FSB and Thomas G. Williams,
effective 4/1/92 is incorporated by reference to
Exhibit 10(7) to the Registration Statement on Form
S-1 (Registration No. 33-89788).
10(7) Director Deferred Compensation Agreement between
Logansport Savings Bank, FSB and Don Pollitt,
effective 4/1/92 is incorporated by reference to
Exhibit 10(8) to the Registration Statement on Form
S-1 (Registration No. 33-89788).
10(8) Director Deferred Compensation Agreement between
Logansport Savings Bank, FSB and Norbert Adrian,
effective 4/1/92 is incorporated by reference to
Exhibit 10(9) to the Registration Statement on Form
S-1 (Registration No. 33-89788).
10(9) Director Deferred Compensation Agreement between
Logansport Savings Bank, FSB and Susanne Ridlen,
effective 4/1/92 is incorporated by reference to
Exhibit 10(10) to the Registration Statement on Form
S-1 (Registration No. 33-89788).
10(10) Director Deferred Compensation Agreement between
Logansport Savings Bank, FSB and David Wihebrink,
effective 4/1/92 is incorporated by reference to
Exhibit 10(11) to the Registration Statement on Form
S-1 (Registration No. 33-89788).
10(11) Executive Supplemental Retirement Income Agreement
between Logansport Savings Bank, FSB and Thomas G.
Williams, executed May 7, 1992 is incorporated by
reference to Exhibit 10(12) to the Registration
Statement on Form S-1 (Registration No. 33-89788).
10(12) Executive Supplemental Retirement Income Agreement
between Logansport Savings Bank, FSB and Charles J.
Evans, executed May 7, 1992 is incorporated by
reference to Exhibit 10(13) to the Registration
Statement on Form S-1 (Registration No. 33-89788).
13 1997 Shareholder Annual Report ______
21 Subsidiaries of the Registrant are incorporated by
reference to Exhibit 21 to the Registration
Statement on Form S-1 (Registration No. 33-89788).
23(1) Independent Auditor's Consent (Geo. S. Olive & Co.
LLC) ______
23(2) Independent Auditor's Consent (Grant Thornton LLP) ______
27 Financial Data Schedule ______