[FRONT COVER]
LOGANSPORT FINANCIAL CORP.
[ARTWORK OF LOGANSPORT SAVINGS BANK BRANCH]
1998
SHAREHOLDER ANNUAL REPORT
[ARTWORK APPEARS ON OUTSIDE MARGIN OF EVERY
PAGE OF THE 1998 SHAREHOLDER ANNUAL REPORT]
TABLE OF CONTENTS
Page
Directors and Officers 2
President's Message to Shareholders 3
Selected Consolidated Financial Data 4
Management's Discussion and Analysis 6
Independent Auditor's Report 22
Consolidated Statements of Financial Condition 23
Consolidated Statements of Earnings 24
Consolidated Statements of Comprehensive Income 25
Consolidated Statements of Changes in Stockholders' Equity 26
Consolidated Statements of Cash Flows 27
Notes to Consolidated Financial Statements 29
BUSINESS OF LOGANSPORT FINANCIAL
Logansport Financial Corp. (the "Company"), an Indiana corporation, became a
unitary savings and loan holding company upon the conversion of Logansport
Savings Bank, FSB (the "Bank") from a federal mutual savings bank to a federal
stock savings bank in June, 1995. The Company and the Bank conduct business from
a single office in Logansport, Cass County, Indiana. The Bank is and
historically has been among the top real estate mortgage lenders in Cass County
and is the oldest financial institution headquartered in Cass County. The Bank
offers a variety of retail deposit and lending services. The Company has no
other business activity than being the holding company for the Bank. The Company
is the sole shareholder of the Bank.
MISSION STATEMENT
"The Board of Directors, management and staff of Logansport Savings Bank are
dedicated to serving the needs of our customers, providing them with the best
possible service in an efficient, friendly, caring atmosphere. As a vital part
of this community, Logansport Savings Bank seeks to continue partnering with
local business and individuals. The customers, employees, and shareholders are
an integral part of Logansport Savings Bank and are best served if the Bank
remains an independent, locally controlled and operated, profitable financial
institution."
1
Logansport Financial Corp.
DIRECTORS AND OFFICERS
DIRECTORS
Norbert E. Adrian (age 69) retired as the General Manager of Rockwell
International ("Rockwell") in 1984 after 12 years of service. Rockwell is
located in Logansport, Indiana, and manufactures custom automotive parts. Prior
to his employment with Rockwell, Mr. Adrian was employed by the accounting firm
of Bailey, Cord and Williams.
Donald G. Pollit (age 71) is the former Business and Promotion Manager of
the Logansport Pharos-Tribune and a former President of the Rolling Hills Golf
Course in Logansport, Indiana.
Susanne S. Ridlen (age 59) has served as an adjunct faculty member of
Indiana University Kokomo ("IUK") since 1969. Ms. Ridlen also currently serves
as a member of the Board of Directors of the Logansport Art Association and the
Cass County Children's Home in Logansport, Indiana.
William Tincher, Jr. (age 59) has served as Plant Manager for the Modine
Manufacturing Company ("Modine") since 1977. Modine is located in Logansport,
Indiana, and manufactures automotive cooling systems.
David G. Wihebrink (age 51) has served as Vice President and Chief
Financial Officer of TM Morris Manufacturing Co., Inc. ("Morris") since 1988.
Morris is located in Logansport, Indiana, and manufactures lead wire assemblies
and wiring harnesses and stampings. Prior to his employment with Morris, Mr.
Wihebrink was a member of the accounting firm Smith, Thompson & Wihebrink
(Logansport) for 15 years. Mr. Wihebrink also currently serves as a member of
the Board of Directors of the Neal House retirement home in Logansport, Indiana.
Thomas G. Williams (age 66) has served as President of Logansport Savings
Bank, FSB since 1971.
Charles J. Evans (age 53) has served as Vice President and Senior Loan
Officer of Logansport Savings Bank, FSB since 1980.
Brian J. Morrill (age 41) is the founder and President of Cass County Title
Company, Inc. The firm provides title insurance policies and real estate
searches for lenders, realtors, attorneys, and the general public. Prior to
founding Cass County Title Company, Morrill served for ten years as the
Executive Director of the Cass County Family YMCA in Logansport, Indiana.
Morrill has served on several community boards and is currently President-elect
of the Logansport/Cass County Chamber of Commerce.
LOGANSPORT FINANCIAL CORP. LOGANSPORT SAVINGS BANK, FSB
Officers Officers
THOMAS G. WILLIAMS THOMAS G. WILLIAMS
President and Chief President
Executive Officer
CHARLES J. EVANS
CHARLES J. EVANS Vice President
Vice President
DIANNE HOFFMAN
DOTTYE ROBESON Secretary/Treasurer
Secretary/Treasurer
DOTTYE ROBESON
Chief Financial Officer
2
Dear Shareholder:
We are extremely pleased to share with you the achievements experienced by
Logansport Financial Corp. and its subsidiary, Logansport Savings Bank, during
1998. This was the most profitable year in our history and our total assets also
reached a record high, ending the year at just over $96 million. Our growth is
an important factor in our success. Total assets for the year ended December 31,
1997 were $86.1 million compared to $96.1 million at December 31, 1998. Total
loans increased by $9.4 million during the year and deposits also increased by
$9.4 million. Earnings for 1998 were $1,247,000 compared to $1,232,000 in 1997.
Basic earnings per share were $1.00 in 1998 compared to $.98 in 1997.
We are proud to report a 1.37% return on average assets and a 7.45% return on
average equity. Our excellent earnings performance and an additional repurchase
of 5% of our stock combined to improve the value of our stock to shareholders.
Since our conversion in 1995 we have repurchased 10% of our stock and each
repurchase enhances shareholder value. The Board of Directors also increased the
per share quarterly dividend to $.11 per share from $.10 during 1998. We have
paid quarterly dividends since our conversion to a stock institution and realize
that dividends are important to our shareholders.
We have been working hard for a couple of years to address all the concerns
related to the Y2K issue and we will continue to monitor the issue throughout
the year. We have upgraded all our computer equipment to be Y2K compliant and it
is currently installed and in use. Testing has been performed and additional
tests will be performed throughout the year to ensure that all systems perform
correctly.
During 1998 we initiated a new commercial loan department and now have on board
Mr. Allen Schieber, a local, well-known commercial loan officer. Allen has been
named a vice president of the Bank and is doing an excellent job in loan
production for the Bank. We expect this division to enhance the earnings of the
Bank as well as provide a much needed service to the community. We welcome Allen
to the Bank.
We have also named a new member to our Board of Directors, Mr. Brian Morrill.
Brian is well known in the community for his past work as director of the Cass
County YMCA. He is currently the owner of Cass County Title Company, Inc. He is
very active in the community and will be a great asset to the Company. Two of
our longtime directors will be retiring from the Board during 1999. Mr. Donald
Pollitt was elected to the Board of the Bank in 1961 and Mr. Norbert Adrian was
elected in 1979. Both have served for many years and have made valuable
contributions to the growth and strength of the Company as it is today. They
will be missed.
The expansion of our facility is progressing nicely. It is anticipated that we
will be moving into the new portion of the Bank by late February 1999. The
entire project, which includes remodeling the old portion of the facility and
additional outside work, will probably not be completed until late April. It is
going to be a beautiful building and one that we can be extremely proud of. We
are adding an additional 7,000 square feet and when completed the facility will
total 11,000 square feet. Three drive-up windows and an ATM machine are also
being added. This is a much needed improvement that will allow us to better
serve our customers. We invite you to visit us when the facility is complete.
Our thanks to you all for your continued support and also to our Directors,
Officers and employees for a very successful year.
Sincerely,
/s/ Thomas G. Williams
Thomas G. Williams
3
Logansport Financial Corp.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth certain information concerning Logansport
Financial's consolidated financial position, results of operations and other
data at the dates and for the periods indicated.
At December 31,
Statement of Financial Condition Data: 1998 1997 1996 1995 1994
------- ------- ------- ------- --------
(In thousands)
Total assets $96,085 $86,115 $77,668 $74,647 $59,351
Loans receivable, net 73,073 63,635 56,802 49,707 44,020
Mortgage-backed securities 8,129 9,932 6,674 7,468 1,229
Cash and cash equivalents 4,328 2,269 3,759 3,243 1,645
Investment securities 5,033 5,750 7,629 11,285 10,009
Certificates of deposit in other financial
institutions - 100 100 100 -
Deposits 70,011 60,595 57,396 52,461 51,202
Borrowings 8,375 8,025 3,400 1,000 1,000
Shareholders' equity - net 16,488 16,542 15,427 20,454 6,833
Year ended December 31,
Summary of Operating Results: 1998 1997 1996 1995 1994
------- ------- ------- ------- --------
(In thousands, except share data)
Interest income $6,579 $6,101 $5,653 $4,775 $4,031
Interest expense 3,476 3,115 2,719 2,468 2,043
------- ------- ------- ------- --------
Net interest income 3,103 2,986 2,934 2,307 1,988
Provision for loan losses 63 26 12 20 6
------- ------- ------- ------- --------
Net interest income after provision for
loan losses 3,040 2,960 2,922 2,287 1,982
Other income 285 170 82 179 79
General, administrative and other expense 1,322 1,170 1,584 1,032 957
------- ------- ------- ------- --------
Earnings before income taxes 2,003 1,960 1,420 1,434 1,104
Income taxes 756 728 507 526 370
------- ------- ------- ------- --------
Net earnings $1,247 $1,232 $ 913 $ 908 $ 734
====== ======= ======= ======= ========
Basic earnings per share $ 1.00 $ .98 $.69 N/A (1) N/A (1)
====== ======= ======= ======= ========
Diluted earnings per share $ .97 $ .95 $.69 N/A (1) N/A (1)
====== ======= ======= ======= ========
Cash dividends per share
Regular $ .43 $ .40 $.40 $ .20 N/A (1)
====== ======= ======= ======= ========
Special (2) N/A N/A $3.00 N/A N/A
====== ======= ======= ======= ========
Footnotes on following page.
4
Logansport Financial Corp.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA (CONTINUED)
Year ended December 31,
Supplemental Data: 1998 1997 1996 1995 1994
------- ------- ------- ------- --------
Return on assets (3) 1.37% 1.50% 1.18% 1.34% 1.27%
Return on equity (4) 7.45 7.69 4.76 6.33 10.78
Interest rate spread (5) 2.70 2.94 2.80 2.77 3.32
Net yield on interest earning assets (6) 3.61 3.86 3.99 3.64 3.67
General, administrative and other
expense to average assets 1.45 1.42 2.04 1.53 1.65
Net interest income to general,
administrative and other expense 234.72 255.21 185.23 223.55 207.73
Equity-to-assets (7) 17.16 19.21 19.86 27.40 11.51
Average interest-earning assets to
average interest-bearing liabilities 122.72 123.36 132.80 122.90 109.64
Non-performing assets to total assets .33 .62 .52 .42 .82
Non-performing loans to total loans .42 .67 .71 .63 .76
Loan loss allowance to total loans, net .38 .38 .41 .45 .47
Loan loss allowance to non-performing
loans 90.48 56.84 58.12 71.61 61.13
Dividend payout ratio 43.00 40.82 57.97(8) - (1) - (1)
Net charge-offs to average loans .03 .03 * * *
* Less than .01%
(1) Information prior to 1996 is not meaningful.
(2) Special one-time cash distribution which qualified as a non-taxable return
of capital pursuant to an IRS Private Letter Ruling.
(3) Net earnings divided by average total assets.
(4) Net earnings divided by average total equity.
(5) Interest rate spread is calculated by subtracting combined weighted average
interest rate cost from combined weighted average interest rate earned for
the period indicated.
(6) Net interest income divided by average interest-earning assets.
(7) Total equity divided by assets.
(8) Excludes special one-time $3.00 per share cash distribution.
5
Logansport Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company was formed as part of the conversion of the Bank from a federal
mutual savings bank to a federal stock savings bank which was completed June 13,
1995. Since the Company only recently began operations, certain of the financial
information presented herein prior to June 13, 1995 relates primarily to the
Bank, a wholly-owned subsidiary of the Company. All references to the Company at
or before June 13, 1995 refer to the Bank only. The Company has no activity
other than being the holding company for the Bank.
The principal business of savings associations, including the Bank, has
historically consisted of attracting deposits from the general public and making
loans secured by residential and other real estate. The Bank and all other
savings associations are significantly affected by prevailing economic
conditions, as well as government policies and regulations concerning, among
other things, monetary and fiscal affairs, housing and financial institutions.
Deposit flows are influenced by a number of factors, including interest rates
paid on competing investments, account maturities and level of personal income
and savings. In addition, deposit growth is affected by how customers perceive
the stability of the financial services industry amid various current events
such as regulatory changes, failures of other financial institutions and
financing of the deposit insurance fund. Lending activities are influenced by
the demand for and supply of housing lenders, the availability and cost of funds
and various other items. Sources of funds for lending activities of the Bank
include deposits, payments on loans, borrowings and income provided from
operations. The Bank's earnings are primarily dependent upon its net interest
income, the difference between interest income and interest expense.
Interest income is a function of the balances of loans and investments
outstanding during a given period and the yield earned on such loans and
investments. Interest expense is a function of the amount of deposits and
borrowings outstanding during the same period and interest rates paid on such
deposits and borrowings. The Bank's earnings are also affected by provisions for
loan losses, service charges, operating expenses and income taxes.
Forward-Looking Statements
In the following pages, management presents an analysis of the Company's
financial condition as of December 31, 1998, and the results of operations for
the year ended December 31, 1998, as compared to prior periods. In addition to
this historical information, the following discussion contains forward-looking
statements that involve risks and uncertainties. Economic circumstances, the
Company's operations and the Company's actual results could differ significantly
from those discussed in the forward-looking statements. Some of the factors that
could cause or contribute to such differences are discussed herein but also
include changes in the economy and interest rates in the nation and in the
Company's general market area.
Without limiting the foregoing, some of the forward-looking statements include
the following:
1. Management's establishment of an allowance for loan losses and its
statements regarding the adequacy of such allowance for loan losses.
2. Management's opinion as to the financial statement effect of recent
accounting pronouncements.
3. Management's opinion as to the effect of the Year 2000 on the Company's
information technology system.
6
Logansport Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Changes in Financial Condition from December 31, 1997 to December 31, 1998
General
The Company's total assets were $96.1 million at December 31, 1998, an increase
of $10.0 million, or 11.6%, over the $86.1 million total at December 31, 1997.
The increase in assets was funded primarily through growth in deposits of $9.4
million and increases in borrowings of $500,000. The percentage of
interest-earning assets to total assets was 96.0% at December 31, 1998 and 1997.
At December 31, 1998, the total of securities was $13.2 million compared to
$15.7 million at December 31, 1997, a decrease of $2.5 million, or 16.1%. The
primary investments added to the portfolio were asset-backed securities and FHLB
callable fixed rate notes. At December 31, 1998, the Company held $571,000 of
corporate obligations all of which was debt of domestic corporations rated AA or
better by Moody's Investors Service, Inc. The Company had $300,000 of structured
FHLB notes in its investment portfolio at December 31, 1998.
Total loans increased by $9.4 million from December 31, 1997 to December 31,
1998, an increase of 14.8%. Most of the increase occurred in the one- to
four-family mortgages and consumer loans. One- to four-family mortgage loans
increased by $5.8 million, and consumer loans, by $3.1 million. The increase was
funded primarily by the increase in deposits and advances.
During 1997, the Company invested $1.5 million in a limited partnership which
will construct and manage residential real estate apartments for low and
moderate income residents. This investment reflects a 49.5% participation in the
partnership. The affordable housing project is expected to generate significant
tax credits for the Bank in future years, beginning in 1999. This investment
resulted in an increase to total assets of $1.5 million with a corresponding
increase in other liabilities. At December 31, 1998, the project was just
beginning to rent apartments; therefore, there was no material income or loss to
allocate to the Company.
Deposits increased by $9.4 million to $70.0 million at December 31, 1998 from
$60.6 million at December 31, 1997. Non-interest bearing deposits, NOW accounts,
passbook savings and money market savings increased by $5.5 million while
certificates of deposit increased by $3.9 million. Borrowings increased by
$500,000 during the year. At December 31, 1998, borrowings consisted of $7.0
million in FHLB advances and at December 31, 1997 borrowings consisted of $6.5
million in FHLB advances.
Shareholders' equity remained steady during 1998. Equity was used to fund
regular quarterly dividends and a 5% common stock buy back. Equity was increased
by the amortization of the Company's RRP, a recovery of unrealized losses on
available for sale securities and net earnings for the year ended December 31,
1998 of $1.2 million.
Comparison of Results of Operations for the Years Ended December 31, 1998 and
1997
Net earnings totaled $1.2 million for the year ended December 31, 1998, a
$15,000, or 1.2%, increase over the net earnings reported for 1997. The increase
in net earnings resulted primarily from a $117,000 increase in net interest
income and a $115,000 increase in other income, which were partially offset by a
$37,000 increase in the provision for losses on loans, a $152,000 increase in
general, administrative and other expense and a $28,000 increase in the
provision for federal income taxes.
7
Logansport Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Years Ended December 31, 1998 and
1997 (continued)
Interest Income
The Company's total interest income was $6.6 million for the year ended December
31, 1998, compared to $6.1 million during 1997, an increase of $478,000, or
7.8%. The increase in average interest earning assets from $78.6 million in 1997
to $86.7 million in 1998 helped contribute to the increase. However, falling
loan rates contributed to a 21 basis point decrease in the average yield on
interest earning assets to 7.62% in 1998 compared to 7.83% in 1997. Average loan
yield, yield on mortgage-backed securities, investment securities and
interest-earning deposits all declined during the year.
Interest Expense
Interest expense increased by $361,000, or 11.6%, for the year ended December
31, 1998 compared to 1997. This increase was the result of an increase in the
average balance of interest-bearing liabilities by $7.0 million and the increase
in the average cost of these liabilities by 3 basis points, from 4.89% during
1997 to 4.92% in 1998. Local competition resulted in pressure to maintain
competitive rates, resulting in a continued decline in the interest rate spread.
Net Interest Income
Net interest income increased by $117,000 for 1998 to approximately $3.1 million
as compared with $3.0 million in 1997. The net yield on weighted average
interest-earning assets declined in 1998 to 3.61% from 3.86% in 1997.
Provision for Losses on Loans
The Company's provision for losses on loans for the year ended December 31, 1998
and 1997 was $63,000 and $26,000, respectively. A larger provision was made in
1998 due to the development of a commercial loan department. This provision and
the related increase in the allowance for loan losses were considered adequate
based on the degree of delinquencies in the loan portfolio and the Company's
loan loss history. There were no recoveries in 1998 and recoveries of $1,100 in
1997, and charge-offs of $23,000 in 1998 and $18,256 in 1997. The Bank also
recorded as a charitable donation an $8,000 property held in real estate
acquired through foreclosure during 1997 which the Bank donated to Habitat for
Humanity of Cass County, Indiana, Inc. The Company provides a general allowance
that reflects an estimate of inherent losses based upon the types and categories
of outstanding loans as well as problem loans. At December 31, 1998 and 1997,
the allowance was $285,000 and $245,000, respectively, a ratio of .38% of total
loans at each date. Non-performing loans at these dates were $315,000 and
$431,000, respectively. The ratio of allowance for loan losses to non-performing
loans increased from 56.8% at December 31, 1997 to 90.5% at December 31, 1998.
Based on management's review of the loan portfolio during these years, the
allowance for loan losses at December 31, 1998 and 1997 is considered adequate
to cover potential losses inherent in the loan portfolio.
Other Income
The Company's other income for the years ended December 31, 1998 and 1997 was
$285,000 and $170,000, respectively. The year ended December 31, 1997 included a
$24,000 recovery on investments previously written off. During 1997, the Company
recorded $50,000 of net losses on sales of securities. Structured notes of $2.0
million were sold at a net loss and the proceeds were reinvested in higher
yielding securities, primarily mortgage and other asset-backed securities.
During 1998, the Company had net gains of $4,000 on security sales. Service
charges on deposit accounts increased by $18,000 in 1998 compared to 1997.
8
Logansport Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Years Ended December 31, 1998 and
1997 (continued)
General, Administrative and Other Expense
General, administrative and other expense totaled $1.3 million in 1998 compared
to $1.2 million in 1997, an increase of $152,000, or 13.0%. Employee
compensation and benefits increased by $95,000, or 14.6%, due primarily to a
general compensation increase and additional personnel. Data processing fees
increased $14,000, or 14.6%, for the year. Various other operating expenses
increased by $30,000. The majority of the increase was related to additional
operating costs associated with increased account volume, new services and
advertising.
Income Tax Expense
Income tax expense for the years ended December 31, 1998 and 1997 was $756,000
and $728,000, respectively. Pretax income increased only slightly in 1998 over
1997. This resulted in a corresponding increase in income tax expense. The
effective tax rates amounted to 37.7% and 37.1% for the years ended December 31,
1998 and 1997, respectively.
Comparison of Results of Operations for the Years Ended December 31, 1997 and
1996
Net earnings for the fiscal year ended December 31, 1997 totaled $1.2 million,
an increase of $319,000, or 34.9%, from the $913,000 in net earnings recorded in
1996. The increase was primarily attributable to an increase in net interest
income of $52,000 and a decrease in general, administrative and other expense of
$414,000, including the effects of the $335,000 charge in fiscal 1996 related to
the Savings Association Insurance Fund ("SAIF") recapitalization assessment,
which was partially offset by an increase of $221,000 in the provision for
income taxes.
Interest Income
The Company's total interest income was $6.1 million for the year ended December
31, 1997, compared to $5.7 million during 1996, an increase of $448,000, or
7.9%. The increase in average interest earning assets from $74.9 million in 1996
to $78.6 million in 1997, combined with stable loan rates, contributed to a 21
basis point increase in the average yield on interest earning assets to 7.83% in
1997 compared to 7.62% in 1996. While average loan yield remained constant,
yield on mortgage-backed securities, investment securities and interest-earning
deposits all improved during the year.
Interest Expense
Interest expense increased by $396,000, or 14.6%, for the year ended December
31, 1997 compared to 1996. This increase was the result of an increase in the
average balance of interest-bearing liabilities of $7.3 million, or 13.0%, and
the increase in the average cost of these liabilities by 7 basis points, from
4.82% during 1996 to 4.89% in 1997. Local competition resulted in pressure to
maintain competitive rates, however, the interest rate spread improved in 1997.
Net Interest Income
Net interest income increased by $52,000 for 1997 to approximately $3.0 million
as compared with $2.9 million in 1996. Net yield on weighted average
interest-earning assets declined in 1997 to 3.86% from 3.99% in 1996.
9
Logansport Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Fiscal Years Ended December 31, 1997
and 1996 (continued)
Provision for Losses on Loans
The Company's provision for losses on loans for the year ended December 31, 1997
and 1996 was $26,000 and $12,000, respectively. This provision and the related
increase in the allowance for loan losses were considered adequate based on the
degree of delinquencies in the loan portfolio and the Company's loan loss
history. There were recoveries of $1,100 in 1997 and $1,270 in 1996, and
charge-offs of $18,256 in 1997; there were no charge-offs in 1996. The Bank also
recorded as a charitable donation an $8,000 property held in real estate
acquired through foreclosure during 1997 which the Bank donated to Habitat for
Humanity of Cass County, Indiana, Inc. The Company provides a general allowance
that reflects an estimate of inherent losses based upon the types and categories
of outstanding loans as well as problem loans. At December 31, 1997 and 1996,
the allowance was $245,000 and $236,000, respectively, a ratio of 0.38% and
0.41% of total loans at each date. Non-performing loans at these dates were
$431,000 and $406,000, respectively. The ratio of allowance for loan losses to
non-performing loans decreased from 58.1% at December 31, 1996 to 56.8% at
December 31, 1997. Based on management's review of the loan portfolio during
these years, the allowance for loan losses at December 31, 1997 and 1996 is
considered to be adequate to cover potential losses inherent in the loan
portfolio.
Other Income
The Company's other income for the years ended December 31, 1997 and 1996 was
$170,000 and $82,000, respectively. The year ended December 31, 1996 included a
$17,000 recovery on investments previously written off while 1997 included
$24,000 of additional recovery. During 1997, the Company recorded $50,000 of net
losses on sales of securities. Structured notes of $2.0 million were sold at a
net loss and the proceeds were reinvested in higher yielding securities,
primarily mortgage and other asset-backed securities. This strategy resulted in
a higher yield in mortgage and other asset-backed securities for the year and a
corresponding increase in interest income. Service charges on deposit accounts
increased by $21,000 in 1997 compared to 1996.
General, Administrative and Other Expense
General, administrative and other expense totaled $1.2 million in 1997 compared
to $1.6 million in 1996, a decrease of $414,000, or 26.1%. Employee compensation
and benefits decreased by $12,000, or 1.8%, due primarily to a general increase
in deferred loan origination costs year-to-year. Deposit insurance costs
decreased by $412,000 due to the absence of the one-time SAIF recapitalization
assessment in 1997 and the new FDIC premium rates. Data processing fees
increased $5,000, or 5.5%, for the year. Various other operating expenses
increased by $8,000. The majority of the increase was related to additional
operating costs associated with increased account volume, new services and
advertising.
Income Tax Expense
Income tax expense for the years ended December 31, 1997 and 1996 was $728,000
and $507,000, respectively. Pretax income increased significantly in 1997 over
1996, mainly due to the SAIF assessment in 1996. This resulted in a
corresponding increase in income tax expense. The effective tax rates amounted
to 37.1% and 35.7% for the years ended December 31, 1997 and 1996, respectively.
10
AVERAGE BALANCE, YIELD, RATE AND VOLUME DATA
The following table presents for the periods indicated the month-end average
balances of each category of the Company's interest-earning assets and
interest-bearing liabilities, and the average yields earned and interest rates
paid on such balances. Such yields and costs are determined by dividing income
or expense by the average balance of assets or liabilities, respectively, for
the periods presented.
Year ended December 31,
1998 1997 1996
---------------------------------- ---------------------------- --------------------------------
Average Interest Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate balance paid rate
------- ---- ----- ----------- ---- ---- ------- ------- ------
(Dollars in thousands)
Interest-earning assets:
Interest-earning deposits $ 4,699 $ 232 4.93% $ 3,398 $ 179 5.27% $ 3,192 $ 160 5.01%
Mortgage- and other asset-
backed securities (1) 9,327 522 5.60 8,380 559 6.67 7,916 510 6.44
Other investment securities (1) 4,337 277 6.39 6,715 444 6.61 9,965 587 5.89
Loans receivable (2) 67,793 5,535 8.16 59,606 4,932 8.27 53,409 4,421 8.28
Stock in FHLB of Indianapolis 549 44 8.01 466 37 7.94 376 29 7.71
-------- ------- -------- ------- -------- -------
Total interest-earning assets 86,705 6,610 7.62 78,565 6,151 7.83 74,858 5,707 7.62
Non-interest-earning assets 4,562 3,650 2,709
------- ------- -------
Total assets $91,267 $82,215 $77,567
====== ====== ======
Interest-bearing liabilities:
Savings accounts $ 3,258 98 3.01 $ 3,347 101 3.02 $ 3,298 100 3.03
NOW and money market accounts 23,185 930 4.01 20,169 823 4.08 18,751 769 4.10
Certificates of deposit 37,581 2,069 5.50 35,636 1,940 5.44 32,432 1,744 5.38
Borrowings 6,628 379 5.72 4,535 251 5.53 1,889 106 5.61
------- ------ ------- ------ ------- ------
Total interest-bearing
liabilities 70,652 3,476 4.92 63,687 3,115 4.89 56,370 2,719 4.82
----- -------- ----- -------- ----- --------
Other liabilities 3,862 2,506 2,016
------- ------- -------
Total liabilities 74,514 66,193 58,386
Shareholders' equity 16,753 16,022 19,181
------ ------ ------
Total liabilities and
shareholders' equity $91,267 $82,215 $77,567
====== ====== ======
Net interest-earning assets $16,053 $14,878 $18,488
====== ====== ======
Net interest income $3,134 $3,036 $2,988
===== ===== =====
Interest rate spread (3) 2.70% 2.94% 2.80%
======== ==== ====
Net yield on weighted average
interest-earning assets (4) 3.61% 3.86% 3.99%
======== ==== ====
Average interest-earning assets
to average interest-bearing liabilities 122.72% 123.36% 132.80%
======== ====== ======
Adjustment of interest on tax-exempt
securities to a tax-equivalent basis $ 31 $ 50 $ 54
- --------------------------
(1) Includes securities available for sale at amortized cost prior to SFAS No.
115 adjustments.
(2) Total loans less loans in process.
(3) Interest rate spread is calculated by subtracting weighted average interest
rate cost from weighted average interest rate yield for the period
indicated.
(4) The net yield on weighted average interest-earning assets is calculated by
dividing net interest income by weighted average interest-earning assets
for the period indicated.
11
Logansport Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Rate/Volume Table
The table below describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected the Company's interest income and expense during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (change in volume multiplied by prior year rate), (ii) changes in rate
(change in rate multiplied by prior year volume) and (iii) total changes in rate
and volume. The combined effects of changes in both volume and rate, which
cannot be separately identified, have been allocated proportionately to the
change due to volume and the change due to rate.
Year ended December 31,
1998 vs. 1997 1997 vs. 1996
Increase Increase
(decrease) (decrease)
due to due to
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In thousands)
Interest-earning assets:
Interest-earning deposits $ 65 $ (12) $ 53 $ 8 $ 11 $ 19
Mortgage-backed securities 59 (96) (37) 27 22 49
Investment securities (152) (15) (167) (224) 81 (143)
Loans receivable 670 (67) 603 503 8 511
Stock in FHLB of Indianapolis 7 - 7 7 1 8
---- ------ ---- ----- ----- -----
Total interest-earning assets 649 (190) 459 321 123 444
Interest-bearing liabilities:
Savings accounts (2) (1) (3) 1 - 1
NOW and money market accounts 121 (14) 107 58 (4) 54
Certificates of deposit 108 21 129 172 24 196
Borrowings 119 9 128 144 1 145
---- ------ ---- ----- ----- -----
Total interest-bearing liabilities 346 15 361 375 21 396
---- ------ ---- ----- ----- -----
Change in net interest income
(fully taxable equivalent basis) 303 (205) 98 (54) 102 48
Tax equivalent adjustment 16 3 19 3 1 4
---- ------ ---- ----- ----- -----
Change in net interest income $319 $(202) $117 $ (51) $103 $ 52
=== ==== === ==== === ====
12
Logansport Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Rate/Volume Table (continued)
The Company's results of operations have been determined primarily by net
interest income and, to a lesser extent, fee income, miscellaneous income and
general and administrative expenses. Net interest income is determined by the
interest rate spread between the yields earned on interest-earning assets and
the rates paid on interest-bearing liabilities and by the relative amounts of
interest-earning assets and interest-bearing liabilities.
The following table sets forth the weighted average effective interest rate
earned by the Company on its loan and investment portfolio, the weighted average
effective costs of the Company's deposits and borrowings, the interest rate
spread of the Company, and the net yield on weighted average interest-earning
assets for the periods and as of the date shown. Average balances are based on
month-end average balances.
At December 31, Year Ended December 31,
1998 1998 1997 1996
Weighted average interest rate earned on:
Interest-earning deposits 4.43% 4.93% 5.27% 5.01%
Mortgage-backed securities 5.91 5.60 6.67 6.44
Investment securities 6.13 6.39 6.61 5.89
Loans receivable 7.99 8.16 8.27 8.28
Stock in FHLB of Indianapolis 8.06 8.01 7.94 7.71
Total interest-earning assets 7.55 7.62 7.83 7.62
Weighted average interest rate cost of:
Savings accounts 2.98 3.01 3.02 3.03
NOW and money market accounts 3.62 4.01 4.08 4.10
Certificates of deposit 5.40 5.50 5.44 5.38
Borrowings 5.24 5.72 5.53 5.61
Total interest-bearing liabilities 4.68 4.92 4.89 4.82
Interest rate spread (1) 2.87 2.70 2.94 2.80
Net yield on weighted average
interest-earning assets (2) N/A 3.61 3.86 3.99
(1) Interest rate spread is calculated by subtracting weighted average
interest rate cost from weighted average interest rate earned for the
period indicated. Interest rate spread figures must be considered in
light of the relationship between the amounts of interest-earning assets
and interest-bearing liabilities. Since the Company's interest-earning
assets exceeded its interest-bearing liabilities for each of the three
years shown above, a positive interest rate spread resulted in net
interest income.
(2) The net yield on weighted average interest-earning assets is calculated
by dividing net interest income by weighted average interest-earning
assets for the period indicated. No net yield percentage is presented at
December 31, 1998, because the computation of net yield is applicable
only over a period rather than at a specific date.
13
Logansport Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Asset/Liability Management
The Bank, like other savings associations, is subject to interest rate risk to
the degree that its interest-bearing liabilities, primarily deposits with short-
and medium-term maturities, mature or reprice at different rates than its
interest-earning assets. Management of the Bank believes it is critical to
manage the relationship between interest rates and the effect on the Bank's net
portfolio value ("NPV"). Generally, NPV is the discounted present value of the
difference between incoming cash flows on interest-earning and other assets and
outgoing cash flows on interest-bearing liabilities. Management of the Bank's
assets and liabilities is done within the context of the marketplace, regulatory
limitations and within limits established by the Board of Directors on the
amount of change in NPV which is acceptable given certain interest rate changes.
The Office of Thrift Supervision ("OTS") issued a regulation, effective January
1, 1994, which uses a net market value methodology to measure the interest rate
risk exposure of thrift institutions. Under OTS regulations, an institution's
"normal" level of interest rate risk in the event of an assumed change in
interest rates is a decrease in the institution's NPV in an amount not exceeding
2% of the present value of its assets. Thrift institutions with over $300
million in assets or less than a 12% risk-based capital ratio are required to
file OTS Schedule CMR. Data from Schedule CMR is used by the OTS to calculate
changes in NPV (and the related "normal" level of interest rate risk) based upon
certain interest rate changes (discussed below). Institutions which do not meet
either of the filing requirements are not required to file OTS Schedule CMR, but
may do so voluntarily. The Bank does not currently meet either of these
requirements, but it does voluntarily file Schedule CMR. Presented below, as of
September 30, 1998 (the latest available date) and December 31, 1997, is an
analysis performed by the OTS of the Bank's interest rate risk as measured by
changes in NPV for instantaneous and sustained parallel shifts in the yield
curve, in 100 basis point increments, up and down 400 basis points and in
accordance with OTS regulations. As illustrated in the table, the Bank's NPV is
more sensitive to rising rates than declining rates. This occurs principally
because, as rates rise, the market value of the Bank's investments,
adjustable-rate mortgage loans (many of which have maximum per year adjustments
of 1%), fixed-rate loans and mortgage-backed securities declines due to the rate
increases. The value of the Bank's deposits and borrowings change in
approximately the same proportion in rising or falling rate scenarios.
September 30, 1998
Change in
interest rate Net Portfolio Value NPV as % of PV of Assets
(Basis Points) $ Amount $ Change % Change NPV Ratio Change
- -------------- -------- -------- -------- --------- ------
(In thousands)
+400 $12,526 $(4,582) (27)% 14.33% (394 bp)
+300 14,099 (3,009) (18) 15.77 (250 bp)
+200 15,429 (1,679) (10) 16.93 (134 bp)
+100 16,394 (714) (4) 17.72 (55 bp)
- 17,108 - - 18.27 -
-100 17,721 613 4 18.70 43 bp
-200 18,527 1,419 8 19.29 102 bp
-300 19,610 2,502 15 20.09 182 bp
-400 20,852 3,744 22 20.99 272 bp
14
Logansport Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Asset and Liability Management (continued)
December 31, 1997
Change in
interest rate Net Portfolio Value NPV as % of PV of Assets
(Basis Points) $ Amount $ Change % Change NPV Ratio Change
- -------------- -------- -------- -------- --------- ------
(In thousands)
+400 $11,904 $(6,160) (34)% 14.85% (579 bp)
+300 13,766 (4,298) (24) 16.73 (391 bp)
+200 15,512 (2,552) (14) 18.40 (224 bp)
+100 16,991 (1,073) (6) 19.73 (91 bp)
- 18,064 - - 20.64 -
-100 18,830 766 4 21.25 61 bp
-200 19,514 1,450 8 21.76 112 bp
-300 20,468 2,404 13 22.49 185 bp
-400 21,701 3,637 20 23.43 279 bp
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods of repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such a adjustable-rate loans, have features which
restrict changes in interest rates on a short-term basis and over the life of
the assets. Further, in the event of a change in interest rates, expected rates
of prepayment on loans and early withdrawal from certificates could likely
deviate significantly from those assumed in calculating the table.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, proceeds from principal and
interest payments of loans, and proceeds from maturing securities. While
maturities and scheduled amortization of loans are a predictable source of
funds, deposit flows and mortgage prepayments are generally influenced by
general interest rates, economic conditions and competition.
The primary investing activity of the Company is the origination of mortgage
loans and the purchase of investment securities. During the years ended December
31, 1998, 1997 and 1996, the Company originated mortgage loans in the amounts of
$16.3 million, $13.5 million and $13.2 million, respectively. The Company
originated consumer loans of $10.5 million, $6.2 million and $6.1 million,
respectively. The Company purchased loans in the amount of $350,000 in 1998. The
Company purchased no loans, excluding commercial paper, in 1997, and purchased
loans, excluding commercial paper of $1.0 million in 1996. Loan repayments,
excluding commercial paper, totaled $17.6 million, $12.8 million and $11.4
million for 1998, 1997 and 1996, respectively.
15
Logansport Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (continued)
During the years ended December 31, 1998, 1997 and 1996, the Company purchased
investment securities in the amounts of $6.1 million, $7.2 million and $8.0
million, respectively. Sales or maturities of such securities held by the
Company and payments on mortgage-backed or other asset-backed securities were
$8.6 million, $6.1 million and $13.2 million for 1998, 1997 and 1996,
respectively.
Deposits grew by $3.2 million from December 31, 1996 to December 31, 1997, and
by $9.4 million from December 31, 1997 to December 31, 1998.
Cash and cash equivalents increased by $2.1 million from December 31, 1997 to
December 31, 1998.
The Company had outstanding loan commitments including undisbursed loans in
process and standby letters of credit totaling $5.8 million and $3.1 million, at
December 31, 1998 and 1997, respectively. The Company anticipates that it will
have sufficient funds available to meet its current loan commitments.
Certificates of deposit which are scheduled to mature in one year or less from
December 31, 1998 and 1997 totaled $22.3 million and $22.5 million,
respectively. Based upon historical deposit flow data, the Company's competitive
pricing in its market and management's experience, management believes that a
significant portion of such deposits will remain with the Company.
Liquidity management is both a daily and long-term function of the Company's
management strategy. In the event that the Company should require funds beyond
its ability to generate them internally, additional funds are available through
the use of FHLB advances, and also may be available through sales of securities,
although no sales of securities are planned. At December 31, 1998 and 1997, the
Company had outstanding FHLB advances of $7.0 million and $6.5 million,
respectively.
For each calendar month, the Bank is required to maintain an average daily
balance of liquid assets (cash, certain time deposits, bankers' acceptances,
specified United States Government, state or federal agency obligations, shares
of certain mutual funds and certain corporate debt securities and commercial
paper) equal to an amount not less than a specified percentage of its net
withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4% to 10% depending upon economic conditions and the savings flows of
member institutions. The OTS recently reduced the level of liquid assets that
must be held by a savings association from 5% to 4% of the association's net
withdrawable accounts plus short-term borrowings based upon the average daily
balance of such liquid assets for each quarter of the association's fiscal year.
The OTS may impose monetary penalties upon savings associations that fail to
comply with those liquidity requirements. As of December 31, 1998, the Bank had
liquid assets of $16.3 million, and a regulatory liquidity ratio of 33.42%.
16
Logansport Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (continued)
Pursuant to OTS capital regulations, savings associations must currently meet a
1.5% tangible capital requirement, a 3% leverage ratio (or core capital)
requirement, and a total risk-based capital to risk-weighted assets ratio of 8%.
At December 31, 1998, the Bank's tangible capital ratio as 16.9%, its leverage
ratio was 16.9%, and its risk-based capital to risk-weighted assets ratio was
30.1%. Therefore, at December 31, 1998, the Bank's capital significantly
exceeded all of the capital requirements currently in effect. The following
table provides the minimum regulatory capital requirements and the Bank's
capital ratios as of December 31, 1998.
OTS Requirement The Bank's Capital Level
% of % of Amount
Assets Amount Assets (1) Amount of excess
(Dollars in thousands)
Tangible capital 1.5% $1,436 16.9% $16,263 $14,827
Core capital (2) 3.0 2,873 16.9 16,263 13,390
Risk-based capital 8.0 4,398 30.1 16,548 (3) 12,150
(1) Tangible and core capital levels are shown as a percentage of total assets;
risk-based capital levels are shown as a percentage of risk-weighted
assets.
(2) The OTS has proposed and is expected to adopt a core capital requirement
for savings associations comparable to that recently adopted by the
Comptroller of the Currency for national banks. The new regulation, as
proposed, would require at least 3% of total adjusted assets for savings
associations that received the highest supervisory rating for safety and
soundness, and 4% to 5% for all other savings associations. The final form
of such new OTS core capital requirement may differ from that which has
been proposed. The Bank expects to be in compliance with such new
requirements.
(3) The Bank's risk-based capital includes $285,000 of general valuation
allowances.
As of December 31, 1998, management is not aware of any current recommendations
by regulatory authorities which, if they were to be implemented, would have, or
are reasonably likely to have, a material adverse effect on the Bank's
liquidity, capital resources or results of operations.
Impact of Inflation
The audited consolidated financial statements presented elsewhere herein have
been prepared in accordance with generally accepted accounting principles. These
principles require the measurement of financial position and operating results
in terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation.
17
Logansport Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Effects of Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
that provides accounting guidance on transfers of financial assets, servicing of
financial assets, and extinguishment of liabilities. SFAS No. 125 introduces an
approach to accounting for transfers of financial assets that provides a means
of dealing with more complex transactions in which the seller disposes of only a
partial interest in the assets, retains rights or obligations, makes use of
special purpose entities in the transaction, or otherwise has continuing
involvement with the transferred assets. The new accounting method, the
financial components approach, provides that the carrying amount of the
financial assets transferred be allocated to components of the transaction based
on their relative fair values. SFAS No. 125 provides criteria for determining
whether control of assets has been relinquished and whether a sale has occurred.
If the transfer does not qualify as a sale, it is accounted for as a secured
borrowing. Transactions subject to the provisions of SFAS No. 125 include, among
others, transfers involving repurchase agreements, securitizations of financial
assets, loan participations, factoring arrangements, and transfers of
receivables with recourse.
An entity that undertakes an obligation to service financial assets recognizes
either a servicing asset or liability for the servicing contract (unless related
to a securitization of assets, and all the securitized assets are retained and
classified as held-to-maturity). A servicing asset or liability that is
purchased or assumed is initially recognized at its fair value. Servicing assets
and liabilities are amortized in proportion to and over the period of estimated
net servicing income or net servicing loss and are subject to subsequent
assessments for impairment based on fair value.
SFAS No. 125 provides that a liability is removed from the balance sheet only if
the debtor either pays the creditor and is relieved of its obligation for the
liability or is legally released from being the primary obligor.
SFAS No. 125 is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1997, and is to be
applied prospectively. Earlier or retroactive application is not permitted.
Management adopted SFAS No. 125 during 1998, as required, without material
effect on the Company's consolidated financial position or results of
operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. It does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in that
financial statement.
18
Logansport Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Effects of Recent Accounting Pronouncements (continued)
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. Management adopted SFAS No. 130
effective January 1, 1998, as required, without material effect on the Company's
financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 significantly changes the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about reportable segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 uses a
"management approach" to disclose financial and descriptive information about an
enterprise's reportable operating segments which is based on reporting
information the way that management organizes the segments within the enterprise
for making operating decisions and assessing performance. For many enterprises,
the management approach will likely result in more segments being reported. In
addition, SFAS No. 131 requires significantly more information to be disclosed
for each reportable segment than is presently being reported in annual financial
statements and requires that selected information be reported in interim
financial statements. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997. Management adopted SFAS No. 131
effective January 1, 1998, as required, without material effect on the Company's
financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires entities to recognize all
derivatives in their financial statements as either assets or liabilities
measured at fair value. SFAS No. 133 also specifies new methods of accounting
for hedging transactions, prescribes the items and transactions that may be
hedged, and specifies detailed criteria to be met to qualify for hedge
accounting.
The definition of a derivative financial instrument is complex, but in general,
it is an instrument with one or more underlyings, such as an interest rate or
foreign exchange rate, that is applied to a notional amount, such as an amount
of currency, to determine the settlement amount(s). It generally requires no
significant initial investment and can be settled net or by delivery of an asset
that is readily convertible to cash. SFAS No. 133 applies to derivatives
embedded in other contracts, unless the underlying of the embedded derivative is
clearly and closely related to the host contract.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. On
adoption, entities are permitted to transfer held-to-maturity debt securities to
the available-for-sale or trading category without calling into question their
intent to hold other debt securities to maturity in the future. SFAS No. 133 is
not expected to have a material impact on the Company's financial position or
results of operations.
19
Logansport Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Effects of Recent Accounting Pronouncements (continued)
The foregoing discussion of the effects of recent accounting pronouncements
contains forward-looking statements that involve risks and uncertainties.
Changes in economic circumstances, interest rates or the balance of loan
servicing rights sold and retained by the Company could cause the effects of the
accounting pronouncements to differ from management's foregoing assessment.
Year 2000 Compliance Issues
As with all providers of financial services, the Company's operations are
heavily dependent on information technology systems. The Bank is addressing the
potential problems associated with the possibility that the computers that
control or operate the Bank's information technology systems and infrastructure
may not be programmed to read four-digit date codes and, upon arrival of the
year 2000, may recognize the two-digit code "00" as the year 1900, causing
systems to fail to function or to generate erroneous data. The Bank is working
with the companies that supply or service its information technology systems to
identify and remedy any year 2000 related problems.
Management and the Board of Directors recognize and understand Year 2000 ("Y2K")
risks, are active in overseeing corrective efforts, and are ensuring that all
necessary resources are available to address the problem. The awareness and
assessment phases of the Company's Year 2000 plan have been completed and the
testing phase will begin soon. The Company's data processing is performed
primarily by a third party servicer. The Company also uses software and hardware
which are covered under maintenance agreements with third party vendors.
Consequently the Company is dependent on these vendors to conduct its business.
The Company has contacted each vendor to request time tables for Year 2000
compliance and the expected costs, if any, to be passed along to the Company.
The Company has been informed that its primary service provider is on schedule
and testing was conducted in the fourth calendar quarter of 1998.
During 1998 the Company has replaced or upgraded all equipment to be Year 2000
compliant at a cost of less than $40,000. As of December 31, 1998, management
has developed an estimate of expenses that are reasonably likely to be incurred
by the Bank in connection with this issue; however, the Company does not expect
to incur significant expenses to implement the necessary corrective measures,
and additional costs related to the Y2K issues are not expected to have a
material impact on the Company's 1999 financial statements.
Should the Company's data center become unable to provide the necessary services
upon arrival of the Year 2000, the Company will have the capability to account
for transactions on a manual basis until the data center returns to normal
operations, or the Company will consider the need to contract with an alternate
service provider.
In addition to possible expense related to its own systems, the Bank could incur
losses if loan payments are delayed due to year 2000 problems affecting any
major borrowers in the Bank's primary market area. Because the Bank's loan
portfolio is highly diversified with regard to individual borrowers and types of
businesses, and the Bank's primary market areas are not significantly dependent
upon any one employer or industry, the Bank does not expect any significant or
prolonged difficulties that will affect net earnings or cash flow.
20
MARKET PRICE OF LOGANSPORT FINANCIAL'S
COMMON SHARES AND RELATED SECURITY HOLDER MATTERS
The common stock of the Company is traded on the National Association of
Securities Dealers Automated Quotation System ("Nasdaq") Small Cap Market, under
the symbol "LOGN." As of February 12, 1999, there were 832 shareholders of
record of the Company's common stock. The table below presents the high and low
trade prices for the common shares of the Company, together with dividends
declared per share, for each quarter of the fiscal years ended December 31,
1998, 1997 and 1996. Such price information was obtained from Nasdaq.
Per Share
Fiscal Year Ending December 31, High Low dividends
1998
Quarter ending March 31, 1998 $18.125 $16.000 $0.10
Quarter ending June 30, 1998 19.625 16.500 0.11
Quarter ending September 30, 1998 17.250 13.000 0.11
Quarter ending December 31, 1998 16.375 13.375 0.11
1997
Quarter ending March 31, 1997 $15.000 $11.125 $0.10
Quarter ending June 30, 1997 14.000 12.500 0.10
Quarter ending September 30, 1997 16.000 13.250 0.10
Quarter ending December 31, 1997 18.000 15.000 0.10
1996
Quarter ending March 31, 1996 $13.250 $12.375 $0.10
Quarter ending June 30, 1996 13.750 12.375 0.10
Quarter ending September 30, 1996 14.750 12.500 0.10
Quarter ending December 31, 1996 14.750 11.250 3.10 (1)
(1) This includes a $3.00 per share one-time special cash distribution which
qualified as a non-taxable return of capital pursuant to an IRS Private
Letter Ruling.
TRANSFER AGENT AND REGISTRAR. The Fifth Third Bank of Cincinnati, Ohio ("Fifth
Third") is the Company's stock transfer agent and registrar. Fifth Third
maintains the Company's shareholder records. To change name, address or
ownership of stock, to report lost certificates, or to consolidate accounts,
contact:
Fifth Third Bank
Corporate Trust Operations
Mail Drop 1090D2
38 Fountain Square
Cincinnati, Ohio 45263
(800) 837-2755
GENERAL COUNSEL. INDEPENDENT AUDITOR.
Barnes & Thornburg Grant Thornton LLP
11 South Meridian Street 625 Eden Park Drive, Suite 900
Indianapolis, Indiana 46204 Cincinnati, Ohio 45202
SHAREHOLDER & GENERAL INQUIRIES. The Company is required to file an Annual
Report on Form 10-K for its year ended December 31, 1998 with the Securities and
Exchange Commission. Copies of this annual report may be obtained without charge
upon written request to:
Dottye Robeson
Logansport Financial Corp.
723 East Broadway, Box 569
Logansport, Indiana 46947
(219) 722-3855
OFFICE LOCATION.
723 East Broadway
Logansport, Indiana 46947
(219) 722-3855
Fax - (219) 722-3857
Email - logansavings@cqc.com
21
[GRANT THORNTON LETTERHEAD]
Report of Independent Certified Public Accountants
Board of Directors
Logansport Financial Corp.
We have audited the accompanying consolidated statements of financial condition
of Logansport Financial Corp. as of December 31, 1998 and 1997, and the related
consolidated statements of earnings, shareholders' equity, comprehensive income
and cash flows for each of the years ended December 31, 1998, 1997 and 1996.
These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Logansport
Financial Corp. as of December 31, 1998 and 1997, and the consolidated results
of its operations, comprehensive income and its cash flows for each of the years
ended December 31, 1998, 1997 and 1996, in conformity with generally accepted
accounting principles.
/s/ Grant Thornton LLP
Cincinnati, Ohio
February 19, 1999
22
Logansport Financial Corp.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands, except share data)
ASSETS 1998 1997
Cash and due from banks $ 363 $ 589
Interest-bearing deposits in other financial institutions 3,965 1,680
------- -------
Cash and cash equivalents 4,328 2,269
Certificates of deposit in other financial institutions - 100
Investment securities designated as available for sale - at market 5,033 5,750
Mortgage-backed securities designated as available for sale - at market 8,129 9,932
Loans receivable - net 73,073 63,635
Real estate acquired through foreclosure - net - 106
Office premises and equipment - at depreciated cost 1,528 465
Federal Home Loan Bank stock - at cost 568 494
Investment in real estate partnership 1,566 1,540
Accrued interest receivable on loans 337 299
Accrued interest receivable on mortgage-backed securities 66 83
Accrued interest receivable on investments and interest-bearing deposits 62 121
Prepaid expenses and other assets 36 33
Cash surrender value of life insurance 1,135 1,085
Deferred income tax asset 195 203
Prepaid income taxes 29 -
------- -------
Total assets $96,085 $86,115
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $70,011 $60,595
Advances from the Federal Home Loan Bank 7,000 6,500
Notes payable 1,375 1,525
Accrued interest and other liabilities 1,211 861
Accrued income taxes - 92
------- -------
Total liabilities 79,597 69,573
Commitments - -
Shareholders' equity
Preferred stock - no par value, 2,000,000 shares authorized; none issued - -
Common stock - no par value, 5,000,000 shares authorized; 1,198,710
and 1,260,920 shares at aggregate value issued and outstanding at
December 31, 1998 and 1997 6,670 7,566
Retained earnings - restricted 10,031 9,316
Less shares acquired by stock benefit plan (368) (400)
Unrealized gains on securities designated as available for sale,
net of related tax effects 155 60
------- -------
Total shareholders' equity 16,488 16,542
------- -------
Total liabilities and shareholders' equity $96,085 $86,115
======= =======
The accompanying notes are an integral part of these statements.
23
Logansport Financial Corp.
CONSOLIDATED STATEMENTS OF EARNINGS
For the year ended December 31,
(In thousands, except share data)
1998 1997 1996
Interest income
Loans $ 5,538 $ 4,932 $ 4,421
Mortgage-backed securities 522 559 510
Investment securities 243 394 533
Interest-bearing deposits and other 276 216 189
------- ------- -------
Total interest income 6,579 6,101 5,653
Interest expense
Deposits 3,097 2,864 2,613
Borrowings 379 251 106
------- ------- -------
Total interest expense 3,476 3,115 2,719
------- ------- -------
Net interest income 3,103 2,986 2,934
Provision for losses on loans 63 26 12
------- ------- -------
Net interest income after provision for losses on loans 3,040 2,960 2,922
Other income
Service charges on deposit accounts 106 88 67
Gain (loss) on sale of investment and mortgage-backed securities 4 (50) (47)
Gain on sale of real estate acquired through foreclosure 6 1 1
Other operating 169 131 61
------- ------- -------
Total other income 285 170 82
General, administrative and other expense
Employee compensation and benefits 744 649 661
Occupancy and equipment 90 78 81
Federal deposit insurance premiums 38 37 449
Data processing 110 96 91
Other operating 340 310 302
------- ------- -------
Total general, administrative and other expense 1,322 1,170 1,584
------- ------- -------
Earnings before income taxes 2,003 1,960 1,420
Income taxes
Current 789 761 580
Deferred (33) (33) (73)
------- ------- -------
Total income taxes 756 728 507
------- ------- -------
NET EARNINGS $ 1,247 $ 1,232 $ 913
======= ======= =======
EARNINGS PER SHARE
Basic $ 1.00 $ .98 $ .69
======= ======= =======
Diluted $ .97 $ .95 $ .69
======= ======= =======
The accompanying notes are an integral part of these statements.
24
Logansport Financial Corp.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the year ended December 31,
(In thousands)
1998 1997 1996
Net earnings $ 1,247 $ 1,232 $ 913
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities
during the period 98 186 (196)
Reclassification adjustment for realized (gains)
losses included in earnings (3) 31 29
------- ------- -------
Comprehensive income $ 1,342 $ 1,449 $ 746
======= ======= =======
The accompanying notes are an integral part of these statements.
25
Logansport Financial Corp.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended December 31,
1998, 1997 and 1996
(In thousands, except share data)
Unrealized
Shares gains (losses)
acquired on securities
by stock designated as
Common Retained benefit available
stock earnings plan for sale Total
Balance at January 1, 1996 $12,670 $7,774 $- $ 10 $20,454
Net earnings for the year ended
December 31, 1996 - 913 - - 913
Return of capital distribution to
shareholders (3,930) - - - (3,930)
Purchase of shares for stock benefit plan - - (615) - (615)
Purchase of shares (799) - - - (799)
Unrealized losses on securities
designated as available for sale, net of
related tax effects - - - (167) (167)
Amortization of stock benefit plan - - 93 - 93
Cash dividends of $.40 per share (423) (99) - - (522)
------ ------- ----- ---- -------
Balance at December 31, 1996 7,518 8,588 (522) (157) 15,427
Net earnings for the year ended
December 31, 1997 - 1,232 - - 1,232
Issuance of shares under stock option plan 48 - - - 48
Unrealized gains on securities designated
as available for sale, net of related
tax effects - - - 217 217
Amortization of stock benefit plan - - 122 - 122
Cash dividends of $.40 per share - (504) - - (504)
------ ------- ----- ---- -------
Balance at December 31, 1997 7,566 9,316 (400) 60 16,542
Net earnings for the year ended
December 31, 1998 - 1,247 - - 1,247
Purchase of shares for stock benefit plan - - (93) - (93)
Purchase of shares (945) - - - (945)
Issuance of shares under stock option plan 9 - - - 9
Unrealized gains on securities designated
as available for sale, net of related
tax effects - - - 95 95
Amortization of stock benefit plan 40 - 125 - 165
Cash dividends of $.43 per share - (532) - - (532)
------ ------- ----- ---- -------
Balance at December 31, 1998 $6,670 $10,031 $(368) $155 $16,488
====== ======= ===== ==== =======
The accompanying notes are an integral part of these statements.
26
Logansport Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31,
(In thousands)
1998 1997 1996
Cash flows from operating activities:
Net earnings for the year $ 1,247 $ 1,232 $ 913
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization 39 37 38
Amortization of premiums on investments and mortgage-backed securities 200 104 36
Amortization expense of stock benefit plan 165 122 93
(Gain) loss on sale of investment and mortgage-backed securities (4) 50 47
Provision for losses on loans 63 26 12
Gain on sale of real estate acquired through foreclosure (6) (1) (1)
Increase (decrease) in cash, due to changes in:
Accrued interest receivable on loans (38) (33) (37)
Accrued interest receivable on mortgage-backed securities 17 (29) (2)
Accrued interest receivable on investments 59 6 58
Prepaid expenses and other assets (3) 9 425
Accrued interest and other liabilities 350 (530) 617
Federal income taxes
Current (121) 38 (32)
Deferred (33) (33) (73)
-------- -------- --------
Net cash provided by operating activities 1,935 998 2,094
Cash flows provided by (used in) investing activities:
Decrease in certificates of deposit in other financial institutions 100 -- --
Proceeds from sale of investment securities designated as available for sale 806 2,495 3,835
Purchase of investment securities designated as available for sale (3,057) (2,100) (2,834)
Maturities of investment securities designated as available for sale 3,104 1,471 2,877
Purchase of Federal Home Loan Bank stock (74) (107) (38)
Proceeds from sale of mortgage-backed securities designated as
available for sale 1,174 421 3,503
Purchase of mortgage-backed securities designated as available for sale (3,039) (5,126) (5,178)
Principal repayments on mortgage-backed securities designated as
available for sale 3,472 1,665 2,971
Purchase of loans (350) -- (1,046)
Loan disbursements (26,775) (19,769) (19,286)
Investment in real estate partnership (176) (15) --
Principal repayments on loans 17,585 12,791 12,252
Purchases and additions to office premises and equipment (1,102) (26) (83)
Proceeds from sale of real estate acquired through foreclosure 151 14 15
Increase in cash surrender value of life insurance policy (50) (45) (35)
-------- -------- --------
Net cash used in investing activities (8,231) (8,331) (3,047)
-------- -------- --------
Net cash used in operating and investing activities
(subtotal carried forward) (6,296) (7,333) (953)
-------- -------- --------
27
Logansport Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31,
(In thousands)
1998 1997 1996
Net cash used in operating and investing activities
(subtotal brought forward) $ (6,296) $ (7,333) $ (953)
Cash provided by (used in) financing activities:
Net increase in deposit accounts 9,416 3,199 4,935
Proceeds from Federal Home Loan Bank advances 8,000 10,500 4,600
Proceeds from note payable -- 100 1,400
Repayment of Federal Home Loan Bank advances (7,500) (6,000) (5,000)
Repayment of note payable -- (1,500) --
Proceeds from the exercise of stock options 9 48 --
Return of capital distribution -- -- (3,930)
Purchase of shares for stock benefit plan (93) -- (615)
Dividends on common stock (532) (504) (522)
Purchase of shares (945) -- (799)
-------- -------- --------
Net cash provided by financing activities 8,355 5,843 1,469
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 2,059 (1,490) 516
Cash and cash equivalents at beginning of year 2,269 3,759 3,243
-------- -------- --------
Cash and cash equivalents at end of year $ 4,328 $ 2,269 $ 3,759
======== ======== ========
Supplemental disclosure of cash flow information: Cash paid during the year for:
Income taxes $ 689 $ 680 $ 629
======== ======== ========
Interest on deposits and borrowings $ 3,465 $ 3,129 $ 2,699
======== ======== ========
Supplemental disclosure of noncash investing and financing activities:
Foreclosed mortgage loans transferred to real estate acquired
through foreclosure $ 40 $ 136 $ 18
======== ======== ========
Investment in real estate partnership via financing from notes payable $ -- $ 1,525 $ --
======== ======== ========
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects $ 95 $ 217 $ (167)
======== ======== ========
The accompanying notes are an integral part of these statements.
28
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES
Logansport Financial Corp. (the "Corporation") is a savings and loan holding
company whose activities are primarily limited to holding the common stock
of Logansport Savings Bank, FSB (the "Savings Bank"). The Savings Bank
conducts a general banking business in north-central Indiana which consists
of attracting deposits from the general public and applying those funds to
the origination of loans for residential, consumer and nonresidential
purposes. The Savings Bank's profitability is significantly dependent on its
net interest income, which is the difference between interest income
generated from interest-earning assets (i.e. loans and investments) and the
interest expense paid on interest-bearing liabilities (i.e. customer
deposits and borrowed funds). Net interest income is affected by the
relative amount of interest-earning assets and interest-bearing liabilities
and the interest received or paid on these balances. The level of interest
rates paid or received by the Savings Bank can be significantly influenced
by a number of environmental factors, such as governmental monetary policy,
that are outside of management's control.
The financial information presented herein has been prepared in accordance
with generally accepted accounting principles ("GAAP") and general
accounting practices within the financial services industry. In preparing
consolidated financial statements in accordance with GAAP, management is
required to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and
revenues and expenses during the reporting period. Actual results could
differ from such estimates.
The following is a summary of the Corporation's significant accounting
policies which have been consistently applied in the preparation of the
accompanying consolidated financial statements.
1. Principles of Consolidation
The consolidated financial statements include the accounts of the
Corporation and its subsidiary, the Savings Bank. All significant
intercompany balances and transactions have been eliminated.
2. Investment and Mortgage-backed Securities
The Corporation accounts for investments and mortgage-backed securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities". SFAS No.
115 requires that investments be categorized as held-to-maturity, trading,
or available for sale. Securities classified as held to maturity are carried
at cost only if the Corporation has the positive intent and ability to hold
these securities to maturity. Trading securities and securities available
for sale are carried at fair value with resulting unrealized gains or losses
charged to operations or shareholders' equity, respectively.
At December 31, 1998 and 1997, the Corporation's shareholders' equity
accounts reflected a net unrealized gain on available for sale securities of
$155,000 and $60,000, respectively.
Realized gains and losses on sales of securities are recognized using the
specific identification method.
29
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
3. Loans Receivable
Loans receivable are stated at the principal amount outstanding, adjusted
for the allowance for loan losses. Interest is accrued as earned, unless the
collectibility of the loan is in doubt. Uncollectible interest on loans that
are contractually past due is charged off, or an allowance is established
based on management's periodic evaluation. The allowance is established by a
charge to interest income equal to all interest previously accrued, and
income is subsequently recognized only to the extent that cash payments are
received until, in management's judgment, the borrower's ability to make
periodic interest and principal payments has returned to normal, in which
case the loan is returned to accrual status. If the ultimate collectibility
of the loan is in doubt, in whole or in part, all payments received on
nonaccrual loans are applied to reduce principal until such doubt is
eliminated.
4. Loan Origination Fees
The Savings Bank accounts for loan origination fees in accordance with SFAS
No. 91, "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases". Pursuant
to the provisions of SFAS No. 91, origination fees received from loans, net
of certain direct origination costs, are deferred and amortized to interest
income using the interest method, giving effect to actual loan prepayments.
Additionally, SFAS No. 91 generally limits the definition of loan
origination costs to the direct costs attributable to originating a loan,
i.e. principally actual personnel costs. Fees received for loan commitments
that are expected to be drawn upon, based on the Savings Bank's experience
with similar commitments, are deferred and amortized over the life of the
loan using the level-yield method. Fees for other loan commitments are
deferred and amortized over the loan commitment period on a straight-line
basis.
5. Allowance for Losses on Loans
It is the Savings Bank's policy to provide valuation allowances for
estimated losses on loans based on past loss experience, trends in the level
of delinquent and problem loans, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying
collateral and current and anticipated economic conditions in the primary
lending area. When the collection of a loan becomes doubtful, or otherwise
troubled, the Savings Bank records a loan loss provision equal to the
difference between the fair value of the property securing the loan and the
loan's carrying value. Major loans and major lending areas are reviewed
periodically to determine potential problems at an early date. The allowance
for loan losses is increased by charges to earnings and decreased by
charge-offs (net of recoveries).
The Savings Bank accounts for impaired loans in accordance with SFAS No.
114, "Accounting by Creditors for Impairment of a Loan". SFAS No. 114
requires that impaired loans be measured based upon the present value of
expected future cash flows discounted at the loan's effective interest rate
or, as an alternative, at the loan's observable market price or fair value
of the collateral. The Savings Bank's current procedures for evaluating
impaired loans result in carrying such loans at the lower of cost or fair
value.
30
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
5. Allowance for Losses on Loans (continued)
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In applying the provisions of SFAS No. 114, the Savings Bank
considers its investment in one- to four-family residential loans and
consumer installment loans to be homogeneous and therefore excluded from
separate identification for evaluation of impairment. With respect to the
Savings Bank's investment in nonresidential and multi-family residential
real estate loans, and its evaluation of impairment thereof, such loans are
generally collateral dependent and, as a result, are carried as a practical
expedient at the lower of cost or fair value.
Collateral dependent loans which are more than ninety days delinquent are
considered to constitute more than a minimum delay in repayment and are
evaluated for impairment under SFAS No. 114 at that time.
At December 31, 1998 and 1997, the Savings Bank had no loans that would be
defined as impaired under SFAS No. 114.
6. Real Estate Acquired Through Foreclosure
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost) or fair value less estimated selling
expenses at the date of acquisition. Real estate loss provisions are
recorded if the properties' fair value subsequently declines below the value
determined at the recording date. In determining the lower of cost or fair
value at acquisition, costs relating to development and improvement of
property are capitalized. Costs relating to holding real estate acquired
through foreclosure, net of rental income, are charged against earnings as
incurred.
7. Office Premises and Equipment
Office premises and equipment are carried at cost and include expenditures
which extend the useful lives of existing assets. Maintenance, repairs and
minor renewals are expensed as incurred. For financial reporting,
depreciation and amortization are provided on the straight-line and
accelerated methods over the useful lives of the assets, estimated to be
thirty to forty years for buildings, five to twenty years for building
improvements, five to fifteen years for furniture and equipment and five
years for automobiles. An accelerated method is used for tax reporting
purposes.
8. Investment in Real Estate Partnership
During 1997, the Corporation invested $1.5 million in a real estate
partnership which will construct and manage residential real estate
apartments for low and moderate income residents. The investment reflects a
49.5% participation in the partnership. This affordable housing project is
expected to generate significant tax credits for the Savings Bank in future
years.
31
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
9. Income Taxes
The Corporation accounts for income taxes pursuant to SFAS No. 109,
"Accounting for Income Taxes". In accordance with SFAS No. 109, a deferred
tax liability or deferred tax asset is computed by applying the current
statutory tax rates to net taxable or deductible temporary differences
between the tax basis of an asset or liability and its reported amount in
the consolidated financial statements that will result in net taxable or
deductible amounts in future periods. Deferred tax assets are recorded only
to the extent that the amount of net deductible temporary differences or
carryforward attributes may be utilized against current period earnings,
carried back against prior years' earnings, offset against taxable temporary
differences reversing in future periods, or utilized to the extent of
management's estimate of future taxable income. A valuation allowance is
provided for deferred tax assets to the extent that the value of net
deductible temporary differences and carryforward attributes exceeds
management's estimates of taxes payable on future taxable income. Deferred
tax liabilities are provided on the total amount of net temporary
differences taxable in the future.
Deferral of income taxes results primarily from the different methods of
accounting for certain retirement plans, general loan loss allowances and
percentage of earnings bad debt deductions. Additional temporary differences
result from depreciation computed using accelerated methods for tax
purposes.
10. Benefit Plans
Employees of the Savings Bank are covered by the Pentegra Group, previously
the Financial Institutions Retirement Fund (the "Fund"), which is a defined
benefit pension plan to which contributions are made for the benefit of the
employees. Contributions are determined to cover the normal cost of pension
benefits, the one-year cost of the pre-retirement death and disability
benefits and the amortization of any unfunded accrued liabilities.
The Fund had previously advised the Savings Bank that the pension plan meets
the criteria of a multi-employer pension plan as defined in SFAS No. 87,
"Employers' Accounting for Pensions". In accordance with SFAS No. 87, net
pension cost is recognized for any required contribution for the period. A
liability is recognized for any contributions due and unpaid. During 1993,
the Savings Bank acquired additional benefits for all qualified employees
covered by the Fund which were paid for by reducing the overfunded amount.
Due to a continuation of the funds overfunded status, no contributions were
made to the pension plan during the years ended December 31, 1998, 1997 and
1996. The provision for pension expense was computed by the Fund's actuaries
utilizing the projected unit credit cost method and assuming a 7.5% return
on Fund assets.
The Savings Bank has purchased life insurance policies on certain officers
and directors. The insurance policies had an approximate cash surrender
value of $1.1 million at December 31, 1998 and 1997. The Savings Bank has
approved compensation arrangements that provide retirement benefits to
certain officers and deferral of fees for directors covered by the policies.
The benefit arrangement for one individual requires that the individual
provide consulting services to the Savings Bank during the five-year period
following retirement. The benefits to be paid, excluding amounts
attributable to consulting, are being accrued from the date of approval of
the arrangements to the date that full eligibility is attained. Expense
related to the above described plans totaled $81,000, $99,000 and $87,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
32
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
10. Benefit Plans (continued)
The Savings Bank adopted the Logansport Savings Bank, FSB Employee Stock
Ownership Plan and Trust Agreement ("ESOP") in 1995, for eligible employees
of the Savings Bank. The ESOP will be funded by discretionary employer
contributions made in cash, which will be invested in shares of the
Corporation's common stock. No contributions were made to the ESOP during
the years ended December 31, 1998, 1997 or 1996.
In April 1996, the Corporation's shareholders approved the Logansport
Savings Bank, FSB Recognition and Retention Plan and Trust ("RRP"). The RRP
may acquire up to 52,900 shares of the Corporation's common stock, an amount
equal to 4.0% of the number of shares issued in the Conversion, for awards
to management. Shares awarded to management under the RRP vest at a rate of
20% at the end of each full twelve months of service with the Savings Bank
after the date of grant. During 1996, the Savings Bank contributed $615,000
to the RRP for the purchase of 46,675 shares of the Corporation's common
stock awarded to management and recorded the amount as unearned
compensation. During 1998, the Savings Bank contributed $93,000 for the
purchase of the 6,225 remaining allowable shares. Amortization expense under
the RRP totaled $125,000, $123,000 and $92,000 for the years ended December
31, 1998, 1997 and 1996, respectively.
11. Earnings Per Share and Cash Distributions Per Share
Basic earnings per share is computed based upon the weighted-average shares
outstanding during the year. Weighted-average common shares outstanding
totaled 1,243,972, 1,259,162 and 1,316,372 for the years ended December 31,
1998, 1997 and 1996, respectively. Diluted earnings per share is computed
taking into consideration common shares outstanding and dilutive potential
common shares to be issued under the Corporation's stock option plan.
Weighted-average common shares deemed outstanding for purposes of computing
diluted earnings per share, which gives effect to 43,879, 32,384 and 8,600
incremental shares from assumed exercise of stock options, totaled
1,287,851, 1,291,546 and 1,324,972 for the years ended December 31, 1998,
1997 and 1996, respectively.
12. Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents includes
cash and due from banks and interest-bearing deposits in other financial
institutions with original maturities of less than 90 days.
13. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of fair value of financial instruments, both assets and
liabilities, whether or not recognized in the consolidated statement of
financial condition, for which it is practicable to estimate that value. For
financial instruments where quoted market prices are not available, fair
values are based on estimates using present value and other valuation
methods.
The methods used are greatly affected by the assumptions applied, including
the discount rate and estimates of future cash flows. Therefore, the fair
values presented may not represent amounts that could be realized in an
exchange for certain financial instruments.
33
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
13. Fair Value of Financial Instruments (continued)
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments at December
31, 1998 and 1997:
Cash and cash equivalents: The carrying amounts presented in
the consolidated statements of financial condition for cash
and cash equivalents are deemed to approximate fair value.
Certificates of deposit: The carrying amount presented in the
consolidated statements of financial condition is deemed to
approximate fair value.
Investment and mortgage-backed securities: For investment and
mortgage-backed securities, fair value is deemed to equal the
quoted market price.
Loans receivable: The loan portfolio has been segregated into
categories with similar characteristics, such as one- to
four-family residential, multi-family residential,
nonresidential real estate and consumer. These loan categories
were further delineated into fixed-rate and adjustable-rate
loans. The fair values for the resultant loan categories were
computed via discounted cash flow analysis, using current
interest rates offered for loans with similar terms to
borrowers of similar credit quality.
Federal Home Loan Bank stock: The carrying amount presented in
the consolidated statements of financial condition is deemed
to approximate fair value.
Deposits: The fair value of NOW accounts, passbook and club
accounts, and money market deposits is deemed to approximate
the amount payable on demand at December 31, 1998 and 1997.
Fair values for fixed-rate certificates of deposit have been
estimated using a discounted cash flow calculation using the
interest rates currently offered for deposits of similar
remaining maturities.
Federal Home Loan Bank advances: The fair value of Federal
Home Loan Bank advances has been estimated using discounted
cash flow analysis, based on the interest rates currently
offered for advances of similar remaining maturities.
Notes Payable: The fair value of notes payable is deemed to
approximate the carrying value.
Commitments to extend credit: For fixed-rate and
adjustable-rate loan commitments, the fair value estimate
considers the difference between current levels of interest
rates and committed rates. At December 31, 1998 and 1997, the
difference between the fair value and notional amount of loan
commitments was not material.
34
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
13. Fair Value of Financial Instruments (continued)
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Corporation's financial instruments are as follows at December
31:
1998 1997
Carrying Fair Carrying Fair
value value value value
(In thousands)
Financial assets
Cash and cash equivalents $ 4,328 $ 4,328 $ 2,269 $ 2,269
Certificates of deposit -- -- 100 100
Investment securities 5,033 5,033 5,750 5,750
Mortgage-backed securities 8,129 8,129 9,932 9,932
Loans receivable 73,073 74,668 63,635 66,286
Federal Home Loan Bank stock 568 568 494 494
------- ------- ------- -------
$91,131 $92,726 $82,180 $84,831
======= ======= ======= =======
Financial liabilities
Deposits $70,011 $70,406 $60,595 $60,554
Advances from Federal Home Loan Bank 7,000 6,999 6,500 6,499
Notes payable 1,375 1,375 1,525 1,525
------- ------- ------- -------
$78,386 $78,780 $68,620 $68,578
======= ======= ======= =======
14. Advertising
Advertising costs are expensed when incurred.
15. Reclassifications
Certain prior year amounts have been reclassified to conform to the 1998
consolidated financial statement presentation.
35
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses, and
estimated fair value of investment securities designated as available for
sale at December 31, 1998 and 1997, are as follows:
1998
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
U.S. Government agency obligations $2,845 $ 3 $ 23 $2,825
State and municipal obligations 1,323 70 - 1,393
FHLMC stock 4 240 - 244
Corporate debt obligations 561 10 - 571
------ ---- -- ------
Total investment securities $4,733 $323 $ 23 $5,033
===== === ==== =====
1997
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
U.S. Government agency obligations $3,598 $ 6 $153 $3,451
State and municipal obligations 1,780 67 - 1,847
FHLMC stock 6 237 - 243
Corporate debt obligations 200 9 - 209
------ ----- -- ------
Total investment securities $5,584 $319 $153 $5,750
===== === === =====
36
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost and estimated fair value of investment securities by term
to maturity at December 31, 1998, are shown below.
Estimated
Amortized fair
cost value
(In thousands)
Due in one year or less $ 25 $ 25
Due after one year through five years 975 969
Due after five through ten years 3,419 3,482
Due after ten years 310 313
------ ------
4,729 4,789
FHLMC stock 4 244
------ ------
$4,733 $5,033
===== =====
Proceeds from sales and calls of investment securities available for sale
during the year ended December 31, 1998, totaled $3.7 million, resulting in
gross realized gains of $96,000 and gross realized losses of $92,000.
Proceeds from sales and calls of investment securities available for sale
during the year ended December 31, 1997, totaled $3.7 million, resulting in
gross realized gains of $2,000 and gross realized losses of $54,000.
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of mortgage-backed securities at December 31, 1998 and
1997 are presented below.
1998
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Federal Home Loan Mortgage
Corporation participation certificates $ 994 $ 1 $ 4 $ 991
Government National Mortgage
Association participation certificates 3,701 1 60 3,642
Federal National Mortgage
Association participation certificates 1,584 7 10 1,581
Federal Housing Authority participation
certificates 874 10 - 884
Small Business Administration
participation certificates 1,040 1 10 1,031
----- ----- ---- -----
Total mortgage-backed securities $8,193 $ 20 $ 84 $8,129
===== ==== ==== =====
37
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES (continued)
1997
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Federal Home Loan Mortgage
Corporation participation certificates $ 949 $ 1 $ 14 $ 936
Government National Mortgage
Association participation certificates 3,880 5 51 3,834
Federal National Mortgage
Association participation certificates 2,849 6 16 2,839
Federal Housing Authority participation
certificates 884 6 -- 890
Small Business Administration
participation certificates 1,298 1 5 1,294
Other 138 1 -- 139
------ ------ ------ ------
Total mortgage-backed securities $9,998 $ 20 $ 86 $9,932
====== ====== ====== ======
The amortized cost and estimated fair value of mortgage-backed securities at
December 31, 1998 and 1997, by contractual terms to maturity, are shown
below. Expected maturities will differ from contractual maturities because
borrowers may generally prepay obligations without prepayment penalties.
1998 1997
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
(In thousands)
Due within one year $2,337 $2,309 $1,927 $1,915
Due after one year to three years 1,859 1,838 2,285 2,266
Due after three years to five years 864 861 1,349 1,337
Due after five years to ten years 875 868 1,825 1,806
Due after ten years 2,258 2,253 2,612 2,608
----- ----- ----- -----
Total mortgage-backed securities $8,193 $8,129 $9,998 $9,932
===== ===== ===== =====
Proceeds from sales of mortgage-backed securities during the year ended
December 31, 1998, totaled $1.2 million, resulting in gross realized gains
of $3,000 and gross realized losses of $3,000.
Proceeds from sales of mortgage-backed securities during the year ended
December 31, 1997, totaled $421,000, resulting in gross realized gains of
$2,000 and no gross realized losses.
38
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at December 31 is as follows:
1998 1997
(In thousands)
Residential real estate
One- to four-family residential $52,205 $46,419
Multi-family residential 1,584 1,844
Construction 3,492 1,333
Nonresidential real estate and land 3,492 3,072
Consumer and other 14,500 11,379
------- -------
75,273 64,047
Less:
Undisbursed portion of loans in process 1,915 167
Allowance for loan losses 285 245
------- -------
$73,073 $63,635
======= =======
The Savings Bank's lending efforts have historically focused on one- to
four-family residential and multi-family residential real estate loans,
which comprised approximately $55.4 million, or 76%, of the total loan
portfolio at December 31, 1998, and $49.4 million, or 78% of the total
portfolio at December 31, 1997. Generally, such loans have been underwritten
on the basis of no more than an 80% loan-to-value ratio, which has
historically provided the Savings Bank with adequate collateral coverage in
the event of default. Nevertheless, the Savings Bank, as with any lending
institution, is subject to the risk that real estate values could
deteriorate in its primary lending area of north-central Indiana, thereby
impairing collateral values. However, management is of the belief that real
estate values in the Savings Bank's primary lending area are presently
stable.
In the normal course of business, the Savings Bank has made loans to its
directors, officers and their related business interests. Related party
loans are made on the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with unrelated
persons and do not involve more than the normal risk of collectibility.
Loans to officers and directors totaled approximately $721,000 and $431,000,
at December 31, 1998 and 1997, respectively.
39
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE D - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses for the year ended December 31
is as follows:
1998 1997 1996
(In thousands)
Beginning balance $ 245 $ 236 $ 223
Provision for loan losses 63 26 12
Recoveries (charge-offs) of loans - net (23) (17) 1
----- ----- -----
Ending balance $ 285 $ 245 $ 236
===== ===== =====
At December 31, 1998, the Savings Bank's allowance for loan losses was
comprised entirely of a general loan loss allowance which is includible as a
component of regulatory risk-based capital.
At December 31, 1998, 1997 and 1996, the Savings Bank had loans of $315,000,
$431,000 and $406,000, respectively, which had been placed on nonaccrual
status due to concerns as to borrowers' ability to pay. Interest income that
would have been recognized had nonaccrual loans performed pursuant to
contractual terms totaled approximately $26,000, $24,000 and $22,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment is comprised of the following at December 31:
1998 1997
(In thousands)
Land $ 203 $203
Buildings and improvements 1,459 460
Furniture and equipment 367 264
------ ---
2,029 927
Less accumulated depreciation and amortization (501) (462)
------ ---
$1,528 $465
===== ===
The Corporation commenced an expansion of its main office facility in 1998.
As of December 31, 1998, the Corporation had outstanding commitments of
approximately $352,000 for such expansion and renovation which is expected
to be completed during 1999.
40
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE F - DEPOSITS
Deposits consist of the following major classifications at December 31:
Deposit type and weighted average
interest rate 1998 1997
(In thousands)
NOW accounts
December 31, 1998 - 2.04% $ 5,156
December 31, 1997 - 1.99% $ 4,196
Passbook and club accounts
December 31, 1998 - 2.98% 3,171
December 31, 1997 - 3.00% 3,070
Money market deposit accounts
December 31, 1998 - 4.02% 20,515
December 31, 1997 - 4.61% 16,736
Non-interest bearing accounts 1,492 862
------- --------
Total demand, transaction and passbook deposits 30,334 24,864
Certificates of deposit
Original maturities of:
Less than 12 months
December 31, 1998 - 4.69% 4,818
December 31, 1997 - 5.01% 3,903
12 months to 18 months
December 31, 1998 - 5.33% 7,803
December 31, 1997 - 5.42% 6,770
24 months to 30 months
December 31, 1998 - 5.62% 18,702
December 31, 1997 - 5.65% 16,812
More than 30 months
December 31, 1998 - 5.65% 3,619
December 31, 1997 - 5.53% 3,552
Individual retirement accounts
December 31, 1998 - 5.11% 4,735
December 31, 1997 - 5.63% 4,694
------- -------
Total certificates of deposit 39,677 35,731
------ ------
Total deposits $70,011 $60,595
====== ======
At December 31, 1998 and 1997, the Savings Bank had certificate of deposit
accounts with balances greater than $100,000 totaling $3.5 million and $3.8
million, respectively.
41
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE F - DEPOSITS (continued)
Interest expense on deposits for the year ended December 31 is summarized as
follows:
1998 1997 1996
(In thousands)
Passbook and money market deposit accounts $ 923 $ 837 $ 763
NOW accounts 105 87 106
Certificates of deposit 2,069 1,940 1,744
----- ----- -----
$3,097 $2,864 $2,613
===== ===== =====
Maturities of outstanding certificates of deposit at December 31 are
summarized as follows:
1998 1997
(In thousands)
Less than one year $22,342 $22,523
One to three years 15,368 11,989
Over three years 1,967 1,219
------- -------
$39,677 $35,731
====== ======
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at December 31,
1998 by a blanket pledge of residential mortgage loans totaling $50.2
million, and the Savings Bank's investment in certain U.S. Government agency
securities and mortgage-backed securities totaling $11.0 million, are
summarized as follows:
Maturing year December 31,
Interest rate ending December 31, 1998 1997
(In thousands)
5.70% - 5.89% 1998 $ - $4,000
5.19% - 6.09% 1999 5,000 -
4.87% - 6.09% 2000 2,000 2,500
----- -----
$7,000 $6,500
===== =====
Weighted-average interest rate 5.24% 5.79%
==== ====
42
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE H - NOTES PAYABLE
At December 31, 1998 and 1997, notes payable consists of construction
borrowings secured by the Savings Bank's investment in a real estate
partnership. The Savings Bank pays only interest until completion of the
project at which time repayment terms will convert to a ten year
amortization. The interest rate on the variable rate borrowing was 3.02% and
4.35% at December 31, 1998 and 1997, respectively.
NOTE I - INCOME TAXES
The provision for income taxes differs from that computed at the statutory
corporate tax rate for the year ended December 31 as follows:
1998 1997 1996
(In thousands)
Federal income taxes computed at the statutory rate $681 $666 $483
Increase (decrease) in taxes resulting from:
Tax exempt interest (23) (34) (37)
Increase in cash surrender value of life insurance (17) (15) (12)
State income taxes 116 112 79
Other (1) (1) (6)
---- ----- -----
Income tax provision per consolidated
financial statements $756 $728 $507
=== === ===
43
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE I - INCOME TAXES (continued)
The composition of the Corporation's net deferred tax asset at December 31
is as follows:
Taxes (payable) refundable on temporary 1998 1997
differences at statutory rate: (In thousands)
Deferred tax assets:
Other than temporary declines in investment securities $ 23 $ 23
Retirement expense 134 132
General loan loss allowance 115 104
Stock benefit plan expense 91 83
Other 10 7
---- -----
Total deferred tax assets 373 349
Deferred tax liabilities:
State income taxes (27) (23)
Percentage of earnings bad debt deduction (61) (74)
Unrealized gains on securities designated as available for sale (81) (40)
Book vs. tax depreciation (9) (9)
----- -----
Total deferred tax liabilities (178) (146)
--- ---
Net deferred tax asset $195 $203
=== ===
The Savings Bank was allowed a special bad debt deduction based on a
percentage of earnings, generally limited to 8% of otherwise taxable income,
or the amount of qualifying and nonqualifying loans outstanding and subject
to certain limitations based on aggregate loans and savings account balances
at the end of the year. This percentage of earnings bad debt deduction had
accumulated to approximately $1.7 million as of December 31, 1998. If the
amounts that qualify as deductions for federal income taxes are later used
for purposes other than bad debt losses, including distributions in
liquidation, such distributions will be subject to federal income taxes at
the then current corporate income tax rate. The approximate amount of
unrecognized deferred tax liability relating to the cumulative bad debt
deduction is approximately $500,000 at December 31, 1998. See Note L for
additional information regarding future percentage of earnings bad debt
deductions.
NOTE J - COMMITMENTS
The Savings Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers including commitments to extend credit. Such commitments involve,
to varying degrees, elements of credit and interest-rate risk in excess of
the amount recognized in the consolidated statement of financial condition.
The contract or notional amounts of the commitments reflect the extent of
the Savings Bank's involvement in such financial instruments.
The Savings Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit
is represented by the contractual notional amount of those instruments. The
Savings Bank uses the same credit policies in making commitments and
conditional obligations as those utilized for on-balance-sheet instruments.
44
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE J - COMMITMENTS (continued)
At December 31, 1998, the Savings Bank had outstanding commitments of
approximately $1.2 million to originate loans. Additionally, the Savings
Bank had unused lines of credit totaling $1.6 million at December 31, 1998.
In the opinion of management, all loan commitments equaled or exceeded
prevalent market interest rates as of December 31, 1998, and will be funded
from normal cash flow from operations. Finally, the Savings Bank had a
commitment under a standby letter of credit totaling $1.0 million at
December 31, 1998. Standby letters of credit are conditional commitments
issued by the Savings Bank to guarantee the performance of a customer to a
third party.
NOTE K - REGULATORY CAPITAL
The Savings Bank is subject to minimum capital requirements promulgated by
the Office of Thrift Supervision ("OTS"). Failure to meet minimum capital
requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a
direct material effect on the Corporation's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Savings Bank must meet specific capital guidelines
that involve quantitative measures of the Savings Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Savings Bank's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. Such minimum capital
standards generally require the maintenance of regulatory capital sufficient
to meet each of three tests, hereinafter described as the tangible capital
requirement, the core capital requirement and the risk-based capital
requirement. The tangible capital requirement provides for minimum tangible
capital (defined as shareholders' equity less all intangible assets) equal
to 1.5% of adjusted total assets. The core capital requirement provides for
minimum core capital (tangible capital plus certain forms of supervisory
goodwill and other qualifying intangible assets) equal to 3.0% of adjusted
total assets. An OTS proposal, if adopted in present form, would increase
the core capital requirement to a range of 4.0% - 5.0% of adjusted total
assets for substantially all savings institutions. Management anticipates no
material change to the Savings Bank's present excess regulatory capital
position as a result of this proposed change to the regulatory capital
requirement. The risk-based capital requirement currently provides for the
maintenance of core capital plus general loan loss allowances equal to 8.0%
of risk-weighted assets. In computing risk-weighted assets, the Savings Bank
multiplies the value of each asset on its statement of financial condition
by a defined risk-weighting factor, e.g., one- to four-family residential
loans carry a risk-weighted factor of 50%.
As of December 31, 1998 and 1997, management believes that the Savings Bank
met all capital adequacy requirements to which it is subject.
1998: To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Tangible capital $16,263 17.0% *$1,436 *1.5% *$4,787 * 5.0%
Core capital $16,263 17.0% *$2,873 *3.0% *$5,745 * 6.0%
Risk-based capital $16,548 30.1% *$4,398 *8.0% *$5,498 *10.0%
* Greater than or equal to
45
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE K - REGULATORY CAPITAL (continued)
1997: To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Tangible capital $16,412 19.1% *$1,289 *1.5% *$4,297 * 5.0%
Core capital $16,412 19.1% *$2,578 *3.0% *$5,156 * 6.0%
Risk-based capital $16,657 35.2% *$3,781 *8.0% *$4,726 * 10.0%
* Greater than or equal to
The Savings Bank's management believes that, under the current regulatory
capital regulations, the Savings Bank will continue to meet its minimum
capital requirements in the foreseeable future. However, events beyond the
control of the Savings Bank, such as increased interest rates or a downturn
in the economy in the primary market areas, could adversely affect future
earnings and, consequently, the ability to meet future minimum regulatory
capital requirements.
Regulations of the OTS impose limitations on the payment of dividends and
other capital distributions by savings associations. The OTS recently
amended its capital distribution regulation in a final rule which takes
effect on April 1, 1999. Because the Savings Bank is a subsidiary of a
savings and loan holding company, it is required to file a notice with the
OTS 30 days before making any capital distributions to the Holding Company.
It may also have to file an application for approval of a proposed capital
distribution with the OTS if the association is not eligible for expedited
treatment under the OTS's application processing rules, or the total amount
of all capital distributions, including the proposed capital distribution,
for the applicable calendar year would exceed an amount equal to the savings
association's net income for that year to date plus the savings
association's retained net income for the preceding two years. A savings
association must also file an application for approval of a proposed capital
distribution if, following the proposed distribution, the association would
not be at least adequately capitalized under the OTS prompt corrective
action regulations, or if the proposed distribution would violate a
prohibition contained in any applicable statute, regulation, or agreement
between the OTS or the FDIC.
NOTE L - LEGISLATIVE DEVELOPMENTS
The deposit accounts of the Savings Bank and of other savings associations
are insured by the Federal Deposit Insurance Corporation ("FDIC") through
the SAIF. The reserves of the SAIF were below the level required by law,
because a significant portion of the assessments paid into the fund had been
used to pay the cost of prior thrift failures. The deposit accounts of
commercial banks are insured by the FDIC in the Bank Insurance Fund ("BIF"),
except to the extent such banks have acquired SAIF deposits. The reserves of
the BIF met the level required by law in 1995. As a result of the respective
reserve levels of the funds, deposit insurance assessments paid by healthy
savings associations exceeded those paid by healthy commercial banks by
approximately $.19 per $100 in deposits in 1995. In 1996, no BIF assessments
were required for healthy commercial banks except for a $2,000 minimum fee.
On September 30, 1996, the President enacted legislation to recapitalize the
SAIF which provided for a special assessment of $.657 per $100 of deposits
held at March 31, 1995. The Savings Bank had $50.9 million in SAIF deposits
at March 31, 1995, resulting in an assessment of approximately $335,000, or
$221,000 after-tax, which was recorded as a charge in 1996.
46
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE L - LEGISLATIVE DEVELOPMENTS (continued)
Congress is considering legislation to eliminate the federal savings and
loan charter and the separate federal regulation of savings and loan
associations. Pursuant to such legislation, Congress may eliminate the OTS,
and the Savings Bank may be regulated under federal law as a bank holding
company. Such change in regulation would likely change the range of
activities in which the Savings Bank may engage and would probably subject
the Savings Bank to more regulation by the FDIC. In addition, the
Corporation might become subject to a different form of holding company
regulation, which may limit the activities in which the Corporation may
engage, and subject the Corporation to other additional regulatory
requirements, including separate capital requirements. At this time, the
Corporation cannot predict when or whether Congress may actually pass
legislation regarding the Corporation's or the Savings Bank's regulatory
requirements. Although such legislation may change the activities in which
either the Corporation and the Savings Bank may engage, it is not
anticipated that the current activities of both the Corporation and the
Savings Bank will be materially affected by those activity limits.
Under separate legislation related to the recapitalization plan, the Savings
Bank is required to recapture as taxable income approximately $220,000,
representing its post-1987 percentage of earnings bad debt deduction. The
Savings Bank has provided deferred taxes for this amount and is permitted by
such legislation to recapture such income over a six year period commencing
in 1998.
NOTE M - STOCK OPTION PLAN
During 1996, the Board of Directors adopted a Stock Option Plan that
provided for the issuance of 132,250 shares of authorized, but unissued
shares of common stock at the fair market value at the date of grant. In
April 1996, the Corporation granted options to purchase 108,691 shares at an
exercise price of $12.50 per share. As a result of the return of capital
distribution of $3.00 per share during fiscal 1996, the number of shares
awarded and exercise price were adjusted to ensure equivalent economic
consequences to option holders following the distribution.
In 1996, the Corporation adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which contains a fair value-based method for valuing
stock-based compensation that entities may use, which measures compensation
cost at the grant date based on the fair value of the award. Compensation is
then recognized over the service period, which is usually the vesting
period. Alternatively, SFAS No. 123 permits entities to continue to account
for stock options and similar equity instruments under Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees."
Entities that continue to account for stock options using APB Opinion No. 25
are required to make pro forma disclosures of net earnings and earnings per
share, as if the fair value-based method of accounting defined in SFAS No.
123 had been applied.
The Corporation applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plan. Accordingly, no compensation cost has
been recognized for the plan. Had compensation cost for the Corporation's
stock option plan been determined based on the fair value at the grant dates
for awards under the plan consistent with the accounting method utilized in
SFAS No. 123, the Corporation's net earnings and earnings per share would
have been reduced to the pro forma amounts indicated below:
47
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE M - STOCK OPTION PLAN (continued)
1998 1997 1996
Net earnings (In thousands) As reported $ 1,247 $ 1,232 $ 913
======= ========= ========
Pro-forma $ 1,246 $ 1,232 $ 883
======= ========= ========
Basic earnings per share As reported $ 1.00 $ .98 $ .69
======= ========= ========
Pro-forma $ 1.00 $ .98 $ .67
======= ========= ========
Diluted earnings per share As reported $ .97 $ .95 $ .69
======= ========= ========
Pro-forma $ .97 $ .95 $ .67
======= ========= ========
The fair value of each option grant is estimated on the date of grant using
the modified Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in 1998 and 1996; dividend
yield of 3.14% and 3.67% and expected volatility of 11.5%; risk-free
interest rate of 6.5% and expected lives of seven years.
A summary of the status of the Corporation's stock option plan as of
December 31, 1998, 1997 and 1996, and changes during the periods ending on
those dates is presented below:
1998 1997 1996
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
Outstanding at beginning of year 124,795 $10.53 129,340 $10.53 - $ -
Granted 2,500 $13.75 - $ - 108,691 $12.50
Adjustment for return of capital
distribution - $ - - $ - 20,649 $ (1.97)
Exercised 880 $10.53 4,545 $10.53 - $ -
Forfeited - $ - - $ - - $ -
------- --------- --------- --------- --------- -----
Outstanding at end of year 126,415 $10.59 124,795 $10.53 129,340 $10.53
======= ===== ======= ===== ======= =====
Options exercisable at year-end 46,311 $10.53 21,323 $10.53 - $ -
====== ===== ======== ===== ========= =====
Weighted-average fair value of
options granted during the year $2.77 N/A $ 1.81
===== ===== ======
The following information applies to options outstanding at December 31,
1998:
Number outstanding 126,415
Range of exercise prices $10.53 - $13.75
Weighted-average exercise price $10.59
Weighted-average remaining contractual life 7.33 years
48
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE N - CONDENSED FINANCIAL STATEMENTS OF LOGANSPORT FINANCIAL CORP.
The following condensed financial statements summarize the financial
position of Logansport Financial Corp. as of December 31, 1998 and 1997, and
the results of its operations and cash flows for the years ended December
31, 1998, 1997 and 1996.
Logansport Financial Corp.
STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands)
ASSETS 1998 1997
Cash and cash equivalents $ 152 $ 160
Investment in subsidiary 16,418 16,471
Prepaid expenses and other 5 5
-------- --------
Total assets $ 16,575 $ 16,636
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expenses and other liabilities $ 87 $ 94
Shareholders' equity
Common stock 6,670 7,566
Retained earnings 10,031 9,316
Shares acquired by stock benefit plan (368) (400)
Unrealized gains on securities designated
as available for sale, net 155 60
-------- --------
Total shareholders' equity 16,488 16,542
-------- --------
Total liabilities and shareholders' equity $ 16,575 $ 16,636
======== ========
49
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE N - CONDENSED FINANCIAL STATEMENTS OF LOGANSPORT FINANCIAL CORP.
(continued)
Logansport Financial Corp.
STATEMENTS OF EARNINGS
Year ended December 31,
(In thousands)
1998 1997 1996
Revenue
Interest income $ 13 $ 12 $ 174
Equity in earnings of subsidiary 1,279 1,270 869
------- ------- -------
1,292 1,282 1,043
Interest expense -- 5 --
General and administrative expenses 66 70 100
------- ------- -------
Earnings before income taxes (credits) 1,226 1,207 943
Income taxes (credits) (21) (25) 30
------- ------- -------
NET EARNINGS $ 1,247 $ 1,232 $ 913
======= ======= =======
50
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE N - CONDENSED FINANCIAL STATEMENTS OF LOGANSPORT FINANCIAL CORP.
(continued)
Logansport Financial Corp.
STATEMENTS OF CASH FLOWS
Year ended December 31,
(In thousands)
1998 1997 1996
Cash flows provided by (used in) operating activities:
Net earnings for the year $ 1,247 $ 1,232 $ 913
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
(Undistributed earnings of ) excess distributions from
consolidated subsidiary 221 730 (869)
Decreases in cash due to changes in:
Other liabilities (7) (34) --
Other (1) (1) (4)
------- ------- -------
Net cash provided by operating activities 1,460 1,927 40
Cash flows provided by (used in) investing activities:
Purchase of securities available for sale -- -- (1,638)
Maturities of investment securities available for sale -- -- 2,245
Proceeds from sale of securities designated as available
for sale -- -- 1,824
Loan repayments -- -- 878
------- ------- -------
Net cash provided by (used in) investment activities -- -- 3,309
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock 9 48 --
Proceeds from note payable -- 100 1,400
Return of capital distribution -- -- (3,930)
Repayment of note payable -- (1,500) --
Dividends on common stock (532) (504) (522)
Purchase of shares (945) -- (799)
------- ------- -------
Net cash used in financing activities (1,468) (1,856) (3,851)
------- ------- -------
Net increase (decrease) in cash and cash equivalents (8) 71 (502)
Cash and cash equivalents at beginning of year 160 89 591
------- ------- -------
Cash and cash equivalents at end of year $ 152 $ 160 $ 89
======= ======= =======
51
Logansport Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE O - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes the Corporation's quarterly results for
the years ended December 31, 1998 and 1997. Certain amounts, as previously
reported, have been reclassified to conform to the 1998 presentation.
Three Months Ended
March 31, June 30, September 30, December 31,
1998: (In thousands, except per share data)
Total interest income $1,588 $1,639 $1,664 $1,688
Total interest expense 826 857 894 899
------ ------ ------ ------
Net interest income 762 782 770 789
Provision for losses on loans 9 9 13 32
Other income 52 70 60 103
General, administrative and other expense 317 320 320 365
------ ------ ------ ------
Earnings before income taxes 488 523 497 495
Income taxes 184 198 189 185
------ ------ ------ ------
Net earnings $ 304 $ 325 $ 308 $ 310
====== ====== ====== ======
Earnings per share:
Basic $ .24 $ .26 $ .24 $ .26
====== ====== ====== ======
Diluted $ .23 $ .25 $ .24 $ .25
====== ====== ====== ======
Three Months Ended
March 31, June 30, September 30, December 31,
1997: (In thousands, except per share data)
Total interest income $1,452 $1,504 $1,570 $1,620
Total interest expense 729 761 804 821
------ ------ ------ ------
Net interest income 723 743 766 799
Provision for losses on loans 3 5 9 9
Other income 4 41 19 38
General, administrative and other expense 282 286 292 287
------ ------ ------ ------
Earnings before income taxes 442 493 484 541
Income taxes 159 179 176 214
------ ------ ------ ------
Net earnings $ 283 $ 314 $ 308 $ 327
====== ====== ====== ======
Earnings per share:
Basic $ .22 $ .24 $ .23 $ .29
====== ====== ====== ======
Diluted $ .21 $ .24 $ .23 $ .27
====== ====== ====== ======
52