Item 1. Business.
General
Logansport Financial Corp. (the "Holding Company" and, together with the Bank (as defined below), the "Company") is an Indiana corporation organized in February, 1995, to become a unitary savings and loan holding company. The Holding Company became a unitary savings and loan holding company upon the conversion of Logansport Savings Bank, FSB (the "Bank") from a federal mutual savings bank to a federal stock savings bank on June 13, 1995. The principal asset of the Holding Company consists of 100% of the issued and outstanding shares of common stock, $.01 par value per share, of the Bank. The Bank began operations in Logansport, Indiana under the name Logansport Building and Loan Association in 1925. In 1962, the Bank changed its name to Logansport Savings and Loan Association, and in 1992, the Bank converted to a federally charted savings bank known as Logansport Savings Bank, FSB. The Bank serves the needs of primarily residents of Cass County, Indiana.
The Bank is the oldest financial institution headquartered in Logansport, Indiana. Management believes the Bank has developed a solid reputation among its loyal customer base because of its commitment to personal service and its strong support of the local community. The Bank offers a number of consumer and commercial financial services. These services include: (i) residential real estate loans; (ii) home equity loans; (iii) home improvement loans; (iv) construction loans; (v) share loans; (vi) commercial real estate loans; (vii) multi-family loans; (viii) consumer loans; (ix) NOW accounts; (x) passbook savings accounts; (xi) certificates of deposit; (xii) consumer and commercial demand deposit accounts; and (xiii) individual retirement accounts. In the fourth quarter of 1998 the Bank decided to offer a complete line of commercial lending to include operating lines of credit secured by receivables and inventory and term financing for equipment purchases. The Holding Company and the Bank conduct business out of their main office located in Logansport, Indiana. The Bank is and historically has been a significant real estate mortgage lender in Cass County, Indiana, originating approximately 28.3% of the mortgage loan volume recorded in Cass County by Cass County institutions during the year ended December 31, 1998.
The Bank historically has concentrated its lending activities on the origination of loans secured by first mortgage liens for the purchase, construction or refinancing of one- to four-family residential real property. One- to four-family residential mortgage loans continue to be the major focus of the Bank's loan origination activities, representing 69.4% of the Company's total loan portfolio at December 31, 1998. The Bank also offers multi-family mortgage loans, commercial real estate loans, construction loans, and consumer loans. Mortgage loans secured by multi-family properties and commercial real estate totaled approximately 2.1% and 4.6%, respectively, of the Company's total loan portfolio at December 31, 1998. Residential, multi-family and commercial real estate construction loans constituted approximately 4.6% of the Company's total loan portfolio at December 31, 1998. Installment, share, home equity, and home improvement loans constituted approximately 10.0%, .4%, 1.5%, and 7.4%, respectively, of the Company's total loan portfolio at December 31, 1998.
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Lending Activities
Loan Portfolio Data. The following table sets forth the composition of the Company's loan portfolio by loan type and security type as of the dates indicated, including a reconciliation of gross loans receivable after consideration of the allowance for loan losses and loans in process.
(1) Includes home equity, residential construction and home improvement loans. (2) Includes "one-pay" notes due in less than one year secured by residential real estate. (3) Includes commercial paper and bankers' acceptances.
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The following table sets forth certain information at December 31, 1998, regarding the dollar amount of loans maturing in the Company's loan portfolio based on the date that final payment is due under the terms of the loan. Demand loans having no stated schedule of repayments and no stated maturity and overdrafts are reported as due in one year or less. This schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses. Management expects prepayments will cause actual maturities to be shorter.
The following table sets forth, as of December 31, 1998, the dollar amount of all loans due after one year which have fixed interest rates and floating or adjustable rates.
Residential Loans. Residential loans consist primarily of one- to four-family loans. Approximately $52.2 million, or 69.4% of the Company's portfolio of loans at December 31, 1998, consisted of one- to four-family residential mortgage loans, of which approximately 75.0% had adjustable rates.
The Bank currently offers adjustable-rate one- to four-family residential mortgage loans ("ARMs") which adjust annually and are indexed to the one-year U.S. Treasury securities yields adjusted to a constant maturity. These ARMs have a current margin above such index of 2.75%, or 3.00% if interest is amortized and payments are due bi-weekly. Interest rates cannot adjust lower than the rate at the time of origination. Many of the residential ARMs in the Company's portfolio at December 31, 1998 provided for a maximum rate adjustment per year of 1%, although the Bank began originating residential ARMs which provide for a maximum rate adjustment of 2% per year in 1995. The Bank's residential ARMs provide for a maximum rate adjustment of 5% over the life of the loan. These ARMs generally bear terms of between 15 and 25 years.
The Bank also currently offers fixed-rate loans which provide for the payment of principal and interest over a period that generally does not exceed 15 years. At December 31, 1998, 25.0% of the Company's residential mortgage loans had fixed rates of interest.
The Bank does not currently originate residential mortgage loans if the ratio of the loan amount to the lesser of current cost or appraised value of the property (i.e., the "loan-to-value ratio") exceeds 95% and does not currently require private mortgage insurance on its residential single-family mortgage loans.
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Substantially all of the residential mortgage loans that the Bank originates include "due-on-sale" clauses, which give the Bank the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the real property subject to the mortgage and the loan is not repaid.
The Bank's residential mortgage loans are not originated on terms and conditions and using documentation that conform with the standard underwriting criteria required to sell such loans on the secondary market. The Bank generally retains its loans in its portfolio and does not anticipate the need to sell its non-conforming loans. See "-- Origination, Purchase and Sale of Loans."
At December 31, 1998, residential loans amounting to $269, or .36% of total loans, were included in non-performing assets. See "-- Non-Performing and Problem Assets."
Commercial Real Estate Loans. At December 31, 1998, $3.5 million, or 4.6% of the Company's total loan portfolio, consisted of commercial real estate loans. Of these loans, $427,000 constituted participations in loans secured by commercial real estate which were purchased from other financial institutions. The commercial real estate loans included in the Company's portfolio are primarily secured by non-residential real estate such as small office buildings, nursing homes and churches. The Bank currently originates commercial real estate loans as adjustable-rate loans indexed to the one-year U.S. Treasury securities yields adjusted to a constant maturity with a margin of 4.75% above such index or as fixed rate loans. Many of the commercial real estate loans in the Company's portfolio at December 31, 1998 provided for a maximum rate adjustment per year of 1%, although the Bank began originating commercial real estate ARMs which provide for a maximum rate adjustment of 2% per year in 1995. In addition, the maximum rate adjustment over the life of the loan is 5%, and these loans have a maximum loan-to-value ratio of 80%. The Bank underwrites these loans on a case-by-case basis and, in addition to its normal underwriting criteria, the Bank evaluates the borrower's ability to service the debt from the net operating income of the property. No single commercial real estate loan at December 31, 1998 exceeded $363,000. No commercial real estate loans were included in non-performing assets at that date.
Loans secured by commercial real estate generally are larger than one- to four-family residential loans and involve a greater degree of risk. Commercial real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Payments on these loans depend to a large degree on results of operations and management of the properties and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. Accordingly, the nature of the loans makes them more difficult for management to monitor and evaluate.
Multi-Family Loans. Approximately $1.6 million, or 2.1% of the Company's portfolio of loans at December 31, 1998, consisted of multi-family loans. These loans are generally purchased participations and secured by apartment complexes and other multi-family residential properties. At December 31, 1998, none of the multi-family loans included in the Company's portfolio was included in non-performing assets.
Construction Loans. The Bank offers construction loans with respect to owner-occupied residential real estate and, in limited cases, to builders or developers constructing such properties on a speculative investment basis (i.e., before the builder/developer obtains a commitment from a buyer). The Bank may also purchase participations.
At December 31, 1998, $3.5 million, or 4.6%, of the Company's total loan portfolio consisted of construction loans. Construction loans at December 31, 1998 consisted of $1.7 million in residential loans, $1.4 million in commercial loans and $350,000 of multi-family purchased participations. The largest construction loan at December 31, 1998 was approximately $800,000 which included the construction of a commercial business facility. No construction loans were included in non-performing assets on that date.
Construction loans originated by the Bank are written such that interest only is payable during the construction phase, which is typically limited to six (6) months, and following the construction phase, a permanent loan is made. Inspections are made prior to any disbursement under a construction loan.
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Consumer Loans. Federal laws and regulations permit federally chartered savings associations to make secured and unsecured consumer loans in an aggregate amount up to 35% of the association's total assets. In addition, a federally chartered savings association has lending authority above the 35% limit for certain consumer loans, such as property improvement loans and deposit account secured loans. However, the Qualified Thrift Lender test places additional limitations on a savings association's ability to make consumer loans. See "Regulation -- Qualified Thrift Lender."
The Company's consumer loans, consisting primarily of installment, share, home improvement, and home equity loans, aggregated $14.5 million as of December 31, 1998, or 19.3% of the Company's total loan portfolio. The Bank consistently originates consumer loans to meet the needs of its customers and to assist in meeting its asset/liability management goals. All of the Bank's consumer loans originated by the Bank, except home equity loans, are fixed-rate loans, and substantially all are secured loans.
Installment loans, totaling $7.5 million, or 10.0% of total loans at December 31, 1998, are fixed-rate loans generally secured by collateral, including automobiles, and are made for maximum terms of up to 10 years (depending on the collateral). The Bank's installment loans also include "one-pay" notes, some of which are secured by residential real estate and all of which amortize at rates similar to those for home improvement loans and have maximum terms of 6 months to one year.
Share loans, totaling $314,000, or .4% of total loans at December 31, 1998, are made up to 80% of the original account balance and accrue at a rate of 2-3% over the underlying certificate of deposit rate. Interest on share loans is paid quarterly. Home improvement loans totaled $5.6 million, or 7.4% of the Company's total loan portfolio at December 31, 1998, and are close-ended fixed-rate loans made for maximum terms up to 15 years. The Bank's home improvement loans are generally made only to those borrowers for whom the Bank holds the primary mortgage on the property, if any.
The Bank also offers open-ended lines of credit secured by a lien on the equity in the borrower's home in amounts up to 90% of the appraised value of the real estate (taking into account any other mortgages on the property). The Bank's home equity loans are adjustable-rate loans with interest rates equal to the national prime rate plus 2%, and payments equal to the greater of 2% of the outstanding loan balance or $50. The Bank's home equity loans are generally made only to those borrowers for whom the Bank holds the primary mortgage on the property, if any, and generally have a maximum term of 15 years. At December 31, 1998, the Bank had approved $1,691,000 of home equity loans, of which $1,090,000 were outstanding.
As a general rule, consumer loans involve a higher level of risk than one- to four-family residential mortgage loans because consumer loans are generally made based upon the borrower's ability to repay the loan, which is subject to change, rather than the value of the underlying collateral, if any. However, the relatively higher yields and shorter terms to maturity of consumer loans are believed to be helpful in reducing interest-rate risk. The Bank has thus far been successful in managing consumer loan risk. As of December 31, 1998, consumer loans totaling $46,000 were included in non-performing assets.
Letters of Credit Securing Tax-Exempt Bonds. The Bank currently maintains four letters of credit, each in the amount of $253,000, to secure payments required under tax-exempt bonds issued to raise funds for low-income housing projects in Franklin, Kokomo, Michigan City, Indiana and Hamilton, Ohio. The issuer of the tax-exempt bonds is permitted to draw against these letters of credit only in the event it defaults in making payments required under the bonds, and any such draws made against the letters of credit would be secured by a mortgage on the subject housing project. No draws against any letters of credit had been made as of December 31, 1998.
Origination, Purchase and Sale of Loans. In an effort to control costs incurred by its mortgage customers, the Bank currently originates its mortgage loans pursuant to its own underwriting standards which are not in conformity with the standard criteria of the Federal Home Loan Mortgage Corporation ("FHLMC") or Federal National Mortgage Association ("FNMA"). If it desired to sell its mortgage loans, the Bank might therefore experience some difficulty selling such loans quickly in the secondary market. The Bank has no intention, however, of attempting to sell such loans. The Bank's ARMs vary from secondary market criteria because, among other things, the Bank does not require current property surveys in most cases and does not require escrow accounts for taxes and insurance.
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The Bank confines its loan origination activities primarily to Cass County, Indiana. At December 31, 1998, no loans were secured by property located outside of Indiana. The Bank's loan originations are generated from referrals from real estate dealers and existing customers, and newspaper and periodical advertising. All loan applications are processed and underwritten at the Bank's main office.
Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), a savings association generally may not make any loan to a borrower or its related entities if the total of all such loans by the savings association exceeds 15% of its capital (plus up to an additional 10% of capital in the case of loans fully collateralized by readily marketable collateral); provided, however, that loans up to $500,000 regardless of the percentage limitations may be made and certain housing development loans of up to $30 million or 30% of capital, whichever is less, are permitted. The maximum amount which the Bank could have loaned to one borrower and the borrower's related entities under the 15% of capital limitation was $2.5 million at December 31, 1998. The Company's portfolio of loans currently contains no loans that exceed the 15% of capital limitation.
The Bank's loan approval process is intended to assess the borrower's ability to repay the loan, the viability of the loan and the adequacy of the value of the property that will secure the loan. To assess the borrower's ability to repay, the Bank studies the employment and credit history and information on the historical and projected income and expenses of its mortgagors.
The Bank generally requires appraisals or loan officer evaluations on all property securing its loans and requires title insurance or an abstract and a valid lien on its mortgaged real estate. Appraisals for residential real property are performed either by an in-house appraiser who is a state-licensed residential appraiser or an independent state-licensed residential appraiser. From time to time, the Bank also uses the services of certified residential appraisers, who are not in-house, for performance of appraisals related to loans in excess of $250,000. The Bank requires fire and extended coverage insurance in amounts at least equal to the principal amount of the loan. It also requires flood insurance to protect the property securing its interest if the property is in a flood plain.
The Bank's underwriting standards for consumer loans are intended to protect against some of the risks inherent in making consumer loans. Borrower character, paying habits and financial strengths are important considerations.
The Bank historically has not participated in the secondary market as a seller of its mortgage loans, but does occasionally purchase participations in commercial real estate and multi-family loans from other financial institutions.
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The following table shows loan origination, purchase and repayment activity for the Bank during the periods indicated.
Origination and Other Fees. The Company realizes income from origination fees, late charges, checking account service charges, credit card fees, and fees for other miscellaneous services. The Bank currently charges $300 plus closing costs on its adjustable-rate mortgage loans. Points may be charged on fixed-rate loans. Late charges are generally assessed if payment is not received within a specified number of days after it is due. The grace period depends on the individual loan documents.
Non-Performing and Problem Assets
Mortgage loans are reviewed by the Bank on a regular basis and are placed on a non-accrual status when the loans become contractually past due ninety days or more. At the end of each month, delinquency notices are sent with respect to all mortgage loans for which payments have not been received. Contact by phone or in person is made, if feasible, with respect to all such loans. When loans are sixty days in default, an additional delinquency notice is sent and personal contact is made with the borrower to establish an acceptable repayment schedule. When loans are ninety days in default, contact is made with the borrower by the Senior Loan Officer who attempts to establish an acceptable repayment schedule. Management is authorized to commence foreclosure proceedings for any loan upon making a determination that it is prudent to do so. All loans for which foreclosure proceedings have been commenced are placed on non-accrual status.
Consumer loans are reviewed by the Bank on a daily basis. Notices are sent to borrowers when any consumer loan is 5, 10 and 15 days past due. After consumer loans are 15 days delinquent, a late fee in the amount of 10% of the payment is imposed until the loan is brought current.
Non-Performing Assets. At December 31, 1998, $315,000, or .33% of the Company's total assets, were non-performing assets (loans delinquent more than 90 days, non-accruing loans, real estate owned ("REO"), troubled debt restructurings and non-accruing investments), compared to $537,000, or .62%, of the Company's total assets at December 31, 1997. At December 31, 1998, residential loans, multi-family loans, commercial real estate loans, consumer loans and REO accounted for 85.4%, 0%, 0%, 14.6% and 0%, respectively, of non-performing assets. There were no non-accruing investments at December 31, 1998.
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The table below sets forth the amounts and categories of the Company's non-performing assets (non-accruing investments, non-accruing loans, and real estate owned). It is the policy of the Company that all earned but uncollected interest on all loans be reviewed monthly to determine if any portion thereof should be classified as uncollectible for any loan past due in excess of 90 days.
- --------------- (1) Non-accruing investments consist of certain corporate obligations at market value. (2) The Company generally places loans on a non-accruing status when the loans become contractually past due 90 days or more. At December 31, 1998, $269,000 of non-accruing loans were residential loans and $46,000 were consumer loans. For the year ended December 31, 1998, the income that would have been recorded had the non-accruing loans not been in a non-performing status totaled $26,000 compared to actual income recorded of $5,200. (3) Total loans less loans in process.
Classified Assets. Federal regulations and the Bank's Internal Loan Review policy provide for the classification of loans and other assets such as debt and equity securities considered by the OTS to be of lesser quality as "substandard," "doubtful" or "loss" assets. An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the association will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated "special mention" by management.
An insured institution is required to establish general allowances for loan losses in an amount deemed prudent by management for loans classified substandard or doubtful, as well as for other problem loans. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as "loss," it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount. An institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS which can order the establishment of additional general or specific loss allowances.
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At December 31, 1998, the aggregate amount of the Company's classified assets, and of the Company's general and specific loss allowances were as follows:
At December 31, 1998 -------------------- (In thousands) Substandard loans......................................... $315 Doubtful loans............................................ --- Loss loans................................................ --- ---- Total classified loans................................. $315 ==== General loss allowances................................... $285 Specific loss allowances.................................. --- ---- Total allowances....................................... $285 ====
The Company regularly reviews its loan portfolio to determine whether any loans require classification in accordance with applicable regulations.
Allowance for Loan Losses
The allowance for loan losses is maintained through the provision for loan losses, which is charged to earnings. The provision for loan losses is determined in conjunction with management's review and evaluation of current economic conditions (including those of the Bank's lending area), changes in the character and size of the loan portfolio, loan delinquencies (current status as well as past and anticipated trends) and adequacy of collateral securing loan delinquencies, historical and estimated net charge-offs, and other pertinent information derived from a review of the loan portfolio. In management's opinion, the Company's allowance for loan losses is adequate to absorb anticipated future losses from loans at December 31, 1998. However, there can be no assurance that regulators, when reviewing the Company's loan portfolio in the future, will not require increases in its allowances for loan losses or that changes in economic conditions will not adversely affect the Company's loan portfolio.
Summary of Loan Loss Experience. The following table analyzes changes in the allowance for loan losses during the past five (5) one-year periods ended December 31, 1998.
(1) Total loans less loans in process. (*) Less than .01%.
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Allocation of Allowance for Loan Losses. The following table presents an analysis of the allocation of the Company's allowance for loan losses at the dates indicated.
Investments and Mortgage- and Other Asset-Backed Securities
Federally chartered savings associations have the authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, repurchase agreements and federal funds sold. Subject to various restrictions, federally chartered savings associations may also invest a portion of their assets in corporate debt securities and asset-backed securities. The investment policy of the Bank, which is established and implemented by the Bank's Investment Committee, is designed primarily to maximize the yield on the investment portfolio subject to minimal liquidity risk, default risk, interest rate risk, and prudent asset/liability management.
The Company's investments consist of U.S. government and other agency securities, mortgage- and other asset-backed securities, state and municipal bonds, corporate obligations, marketable equity securities, certificates of deposit, and FHLB stock. At December 31, 1998, approximately $13.2 million, or 13.7% of the Company's total assets, consisted of such investments.
At December 31, 1998, the Company had $8.1 million of mortgage- and other asset-backed securities outstanding, all of which were classified as available for sale. These fixed-rate mortgage- and other asset-backed securities may be used as collateral for borrowings and through repayments, as a source of liquidity. Mortgage- and other asset-backed securities offer yields above those available for investments of comparable credit quality and duration. Mortgage-backed securities are qualifying thrift investments under the Qualified Thrift Lender test. See "Regulation--Qualified Thrift Lender."
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The following table sets forth the carrying value and market value of the Company's investments and mortgage- and other asset-backed securities at the dates indicated.
(1) Market value approximates carrying values.
Included in the Company's investment portfolio at December 31, 1998 were approximately $300,000 (amortized cost) in derivative securities, which were structured notes issued by the FHLBs. The fair value of these security investments was approximately $289,000 at December 31, 1998. These structured notes, which are not obligations of, or guaranteed by, the United States, represent obligations to repay principal with interest that is either fixed or fluctuates in accordance with an interest formula tied to various indices. The interest on the Company's structured notes generally adjusts quarterly or semi-annually based on certain indices such as the LIBOR and the CMT. This structured note had fluctuating interest rates that adjust on the basis of a formula tied to two different indices, such as the CMT and an inverse LIBOR rate. This dually indexed security was classified as available for sale at December 31, 1998.
The average yield at December 31, 1998, of these derivative securities, was 2.64%. In a rising interest rate environment, it is anticipated that the yield on and market value of these securities will decline, and may decline substantially.
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The following table sets forth investment securities, mortgage- and other asset-backed securities and FHLB stock which mature during each of the periods indicated and the weighted average yields for each range of maturities at December 31, 1998.
(1) Securities available for sale are set forth at amortized cost for purposes of this table. (2) Fully taxable equivalent basis. (3) No effect is given for possible prepayments. (4) Includes perpetual marketable equity securities.
Sources of Funds
General. Deposits have traditionally been the Bank's primary source of funds for use in lending and investment activities. In addition to deposits, the Company derives funds from scheduled loan payments, loan prepayments, retained earnings and income on earning assets. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition. Borrowings from the FHLB of Indianapolis may be used in the short-term to compensate for reductions in deposits or deposit inflows at less than projected levels. The Bank rarely borrows on a longer-term basis, for example, to support expanded activities or to assist in its asset/liability management.
Deposits. Deposits are attracted, principally from within Cass County, through the offering of a broad selection of deposit instruments including NOW and other transaction accounts, fixed-rate certificates of deposit, individual retirement accounts, and savings accounts. The Bank does not actively solicit or advertise for deposits outside of Cass County. Substantially all of the Bank's depositors are residents of that county. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds remain on deposit and the interest rate. The Bank does not pay a fee for any deposits it receives.
Deposits totaled $70.0 million at December 31, 1998.
Interest rates paid, maturity terms, service fees and withdrawal penalties are established by the Bank on a periodic basis. Determination of rates and terms are predicated on funds acquisition and liquidity requirements, rates paid by competitors, growth goals, and federal regulations. The Bank relies, in part, on customer service and long-standing relationships with customers to attract and retain its deposits, but also closely prices its deposits in relation to rates offered by its competitors.
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The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates and competition. The variety of deposit accounts offered by the Bank has allowed it to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. The Bank has become more susceptible to short-term fluctuations in deposit flows as customers have become more interest rate conscious. The Bank manages the pricing of its deposits in keeping with its asset/liability management and profitability objectives. Based on its experience, the Bank believes that its passbook, NOW and non-interest-bearing checking accounts are relatively stable sources of deposits. However, the ability of the Bank to attract and maintain certificates of deposit, and the rates paid on these deposits, has been and will continue to be significantly affected by market conditions.
An analysis of the Bank's deposit accounts by type, maturity, and rate at December 31, 1998, is as follows:
The following table sets forth by various interest rate categories the composition of time deposits of the Bank at the dates indicated:
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The following table represents, by various interest rate categories, the amounts of time deposits maturing during each of the three years following December 31, 1998, and the total amount maturing thereafter. Matured certificates which have not been renewed as of December 31, 1998, have been allocated based upon certain rollover assumptions:
Amounts At December 31, 1998, Maturing in ---------------------------------------------------------- One Year Two Three Greater Than or Less Years Years Three Years ------- ----- ----- ----------- (In thousands) 4.00% and under... $ 234 $ --- $ --- $ --- 4.01 - 6.00 %..... 21,930 13,784 1,366 1,947 6.01-8.00%........ 178 218 --- 20 ------- ------- ------ ------ Total ........... $22,342 $14,002 $1,366 $1,967 ======= ======= ====== ======
The following table indicates the amount of the Bank's certificates of deposit of greater than $100,000 by time remaining until maturity as of December 31, 1998.
Maturity (In thousands) -------- -------------- Three months or less................................... $ 475 Greater than three months through six months................................ 1,141 Greater than six months through twelve months............................. 1,044 Over twelve months..................................... 817 ------ Total............................................. $3,477 ======
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The following table sets forth the dollar amount of savings in the various types of deposits programs offered by the Bank at the dates indicated, and the amount of increase or decrease in such deposits as compared to the previous period.
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Borrowings. The Bank focuses on generating high quality loans and then seeks the best source of funding from deposits, investments or borrowings. There are regulatory restrictions on advances from the FHLBs. See "Regulation -- Federal Home Loan Bank System" and "-- Qualified Thrift Lender." At December 31, 1998, the Company had $5.0 million in borrowings from the FHLB of Indianapolis which mature within one year and $2.0 million which mature in one to two years. The weighted average interest rate related to these borrowings was 5.24% at December 31, 1998. The Company does not anticipate any difficulty in obtaining advances appropriate to meet its requirements in the future. At December 31, 1998 and 1997, notes payable consisted of construction borrowings secured by the Bank's investment in a real estate partnership. The 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.
Employees
As of December 31, 1998, the Bank employed 14 persons on a full-time basis and four persons on a part-time basis. None of the Bank's employees are represented by a collective bargaining group. Management considers its employee relations to be excellent.
The Bank's employee benefits for full-time employees include, among other things, a Financial Institutions Retirement Fund ("FIRF" or the "Pension Plan") defined benefit pension plan and major medical and long-term disability insurance.
Employee benefits are considered by management to be competitive with those offered by other financial institutions and major employers in the Bank's market area. See "Executive Compensation and Related Transactions."
Competition
The Bank operates in North Central Indiana and makes almost all of its loans to and accepts most of its deposits from residents of Cass County in Indiana.
The Bank is subject to competition from various financial institutions, including state and national banks, state and federal savings institutions, credit unions, certain non-banking consumer lenders, and other companies or firms, including brokerage houses and mortgage brokers, that provide similar services in Cass County. The Bank must also compete with money market funds and with insurance companies with respect to its individual retirement accounts. See "Regulation--Acquisitions or Dispositions and Branching."
The primary factors in competing for deposits are interest rates and convenience of office locations. The Bank competes for loan originations primarily through the efficiency and quality of services it provides borrowers and through interest rates and loan fees it charges. Competition is affected by, among other things, the general availability of lendable funds, general and local economic conditions, current interest rate levels, and other factors which are not readily predictable.
REGULATION General
As a federally chartered, SAIF-insured savings association, the Bank is subject to extensive regulation by the OTS and the FDIC. For example, the Bank must obtain OTS approval before it may engage in certain activities and must file reports with the OTS regarding its activities and financial condition. The OTS periodically examines the Bank's books and records and, in conjunction with the FDIC in certain situations, has examination and enforcement powers. This supervision and regulation are intended primarily for the protection of depositors and the federal deposit insurance funds. The Bank's semi- annual assessment owed to the OTS, which is based upon a specified percentage of assets, is approximately $14,000.
The Bank is also subject to federal and state regulation as to such matters as loans to officers, directors, or principal shareholders, required reserves, limitations as to the nature and amount of its loans and investments, regulatory approval of any merger or consolidation, issuance or retirements of securities, and limitations upon other aspects of banking operations. In addition, the Bank's activities and operations are subject to a number of additional detailed, complex and sometimes overlapping federal and state laws
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and regulations. These include state usury and consumer credit laws, state laws relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Community Reinvestment Act, anti-redlining legislation and antitrust laws.
The United States Congress is considering legislation that would require all federal savings associations, such as the Bank, to either convert to a national bank or a state-chartered financial institution by a specified date to be determined. In addition, under the legislation, the Holding Company likely would not be regulated as a savings and loan holding company but rather as a bank holding company. This proposed legislation would abolish the OTS and transfer its functions among the other federal banking regulators. Certain aspects of the legislation remain to be resolved and, therefore, no assurance can be given as to whether or in what form the legislation will be enacted or its effect on the Holding Company and the Bank.
Savings and Loan Holding Company Regulation
As the holding company for the Bank, the Holding Company is regulated as a "non-diversified savings and loan holding company" within the meaning of the Home Owners' Loan Act, as amended ("HOLA"), and subject to regulatory oversight by the Director of the OTS. As such, the Holding Company is registered with the OTS and thereby subject to OTS regulations, examinations, supervision and reporting requirements. As a subsidiary of a savings and loan holding company, the Bank is subject to certain restrictions in its dealings with the Holding Company and with other companies affiliated with the Holding Company.
In general, the HOLA prohibits a savings and loan holding company, without prior approval of the Director of the OTS, from acquiring control of another savings association or savings and loan holding company or retaining more than 5% of the voting shares of a savings association or of another holding company which is not a subsidiary. The HOLA also restricts the ability of a director or officer of the Holding Company, or any person who owns more than 25% of the Holding Company's stock, from acquiring control of another savings association or savings and loan holding company without obtaining the prior approval of the Director of the OTS.
The Holding Company's Board of Directors presently intends to continue to operate the Holding Company as a unitary savings and loan holding company. OTS regulations generally do not restrict the permissible business activities of a unitary savings and loan holding company.
Notwithstanding the above rules as to permissible business activities of unitary savings and loan holding companies, if the savings association subsidiary of such a holding company fails to meet the Qualified Thrift Lender ("QTL") test, then such unitary holding company would become subject to the activities restrictions applicable to multiple holding companies. (Additional restrictions on securing advances from the FHLB also apply.) At December 31, 1998, the Bank's asset composition was in excess of that required to qualify as a Qualified Thrift Lender.
If the Holding Company were to acquire control of another savings association other than through a merger or other business combination with the Bank, the Holding Company would thereupon become a multiple savings and loan holding company. Except where such acquisition is pursuant to the authority to approve emergency thrift acquisitions and where each subsidiary savings association meets the QTL test, the activities of the Holding Company and any of its subsidiaries (other than the Bank or other subsidiary savings associations) would thereafter be subject to further restrictions. The HOLA provides that, among other things, no multiple savings and loan holding company or subsidiary thereof which is not a savings association shall commence or continue for a limited period of time after becoming a multiple savings and loan holding company or subsidiary thereof, any business activity other than (i) furnishing or performing management services for a subsidiary savings association, (ii) conducting an insurance agency or escrow business, (iii) holding, managing, or liquidating assets owned by or acquired from a subsidiary savings association, (iv) holding or managing properties used or occupied by a subsidiary savings association, (v) acting as trustee under deeds of trust, (vi) those activities previously directly authorized by the FSLIC by regulation as of March 5, 1987, to be engaged in by multiple holding companies, or (vii) those activities authorized by the Federal Reserve Board (the "FRB") as permissible for bank holding companies, unless the Director of the OTS by regulation prohibits or limits such activities for savings and loan holding companies. Those activities described in (vii) above must also be approved by the Director of the OTS before a multiple holding company may engage in such activities.
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The Director of the OTS may also approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings associations in more than one state, if the multiple savings and loan holding company involved controls a savings association which operated a home or branch office in the state of the association to be acquired as of March 5, 1987, or if the laws of the state in which the association to be acquired is located specifically permit associations to be acquired by state-chartered associations or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings associations). Also, the Director of the OTS may approve an acquisition resulting in a multiple savings and loan holding company controlling savings associations in more than one state in the case of certain emergency thrift acquisitions.
Indiana law permits federal and state savings association holding companies with their home offices located outside of Indiana to acquire savings associations whose home offices are located in Indiana and savings association holding companies with their principal place of business in Indiana ("Indiana Savings Association Holding Companies") upon receipt of approval by the Indiana Department of Financial Institutions. Moreover, Indiana Savings Association Holding Companies may acquire savings associations with their home offices located outside of Indiana and savings association holding companies with their principal place of business located outside of Indiana upon receipt of approval by the Indiana Department of Financial Institutions.
No subsidiary savings association of a savings and loan holding company may declare or pay a dividend on its permanent or nonwithdrawable stock unless it first gives the Director of the OTS 30 days advance notice of such declaration and payment. Any dividend declared during such period or without giving notice shall be invalid.
Federal Home Loan Bank System
The Bank is a member of the FHLB of Indianapolis, which is one of 12 regional FHLBs. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from funds deposited by savings associations and proceeds derived from the sale of consolidated obligations of the FHLB system. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the FHLB. All FHLB advances must be fully secured by sufficient collateral as determined by the FHLB. The Federal Housing Finance Board ("FHFB"), an independent agency, controls the FHLB System, including the FHLB of Indianapolis.
As a member, the Bank is required to purchase and maintain stock in the FHLB of Indianapolis in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans, home purchase contracts, or similar obligations at the beginning of each year. At December 31, 1998, the Bank's investment in stock of the FHLB of Indianapolis was $568,000. The FHLB imposes various limitations on advances such as limiting the amount of certain types of real estate-related collateral to 30% of a member's capital and limiting total advances to a member. Interest rates charged for advances vary depending upon maturity, the cost of funds to the FHLB of Indianapolis and the purpose of the borrowing.
The FHLBs are required to provide funds for the resolution of troubled savings associations and to contribute to affordable housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have adversely affected the level of FHLB dividends paid and could continue to do so in the future. For the fiscal year ended December 31, 1998, dividends paid by the FHLB of Indianapolis to the Bank totaled approximately $44,000, for an annual rate of 8.01%.
Insurance of Deposits
Deposit Insurance. The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of banks and thrifts and safeguards the safety and soundness of the banking and thrift industries. The FDIC administers two separate insurance funds, the Bank Insurance Fund (the "BIF") for commercial banks and state savings banks and the SAIF for savings associations such as the Bank and banks that have acquired deposits from savings associations. The FDIC is required to maintain designated levels of reserves in
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each fund. As of September 30, 1996, the reserves of the SAIF were below the level required by law, primarily because a significant portion of the assessments paid into the SAIF have been used to pay the cost of prior thrift failures, while the reserves of the BIF met the level required by law in May, 1996. However, on September 30, 1996, provisions designed to recapitalize the SAIF and eliminate the premium disparity between the BIF and SAIF were signed into law. See "-- Assessments" below.
Assessments. The FDIC is authorized to establish separate annual assessment rates for deposit insurance for members of the BIF and members of the SAIF. The FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to the target level within a reasonable time and may decrease these rates if the target level has been met. The FDIC has established a risk-based assessment system for both SAIF and BIF members. Under this system, assessments vary depending on the risk the institution poses to its deposit insurance fund. An institution's risk level is determined based on its capital level and the FDIC's level of supervisory concern about the institution.
On September 30, 1996, President Clinton signed into law legislation which included provisions designed to recapitalize the SAIF and eliminate the significant premium disparity between the BIF and the SAIF. Under the new law, the Bank was charged a one-time special assessment equal to $.657 per $100 in assessable deposits at March 31, 1996. The Bank paid this one-time assessment of $335,000 in November 1996. This special assessment significantly increased noninterest expense and adversely affected the Holding Company's results of Operations for the three months ended September 30, 1996. The assessment was fully deductible for both federal and state income tax purposes. Beginning January 1, 1997, the Bank's annual deposit insurance premium was reduced from .23% to .0644% of total assessable deposits. BIF institutions pay lower assessments than comparable SAIF institutions because BIF institutions pay only 20% of the rate being paid by SAIF institutions on their deposits with respect to obligations issued by the federally-chartered corporation which provided some of the financing to resolve the thrift crisis in the 1980s ("FICO"). The 1996 law also provides for the merger of the SAIF and the BIF by 1999, but not until such time as bank and thrift charters are combined. Until the charters are combined, savings associations with SAIF deposits may not transfer deposits into the BIF system without paying various exit and entrance fees, and SAIF institutions will continue to pay higher FICO assessments. Such exit and entrance fees need not be paid if a SAIF institution converts to a bank charter or merges with a bank, as long as the resulting bank continues to pay applicable insurance assessments to the SAIF, and as long as certain other conditions are met.
Savings Association Regulatory Capital
Currently, savings associations are subject to three separate minimum capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital requirement, and (iii) a risk-based capital requirement. The leverage limit requires that savings associations maintain "core capital" of at least 3% of total assets. Core capital is generally defined as common shareholders' equity (including retained income), noncumulative perpetual preferred stock and related surplus, certain minority equity interests in subsidiaries, qualifying supervisory goodwill, purchased mortgage servicing rights and purchased credit card relationships (subject to certain limits) less nonqualifying intangibles. Under the tangible capital requirement, a savings association must maintain tangible capital (core capital less all intangible assets except purchased mortgage servicing rights which may be included after making the above-noted adjustment in an amount up to 100% of tangible capital) of at least 1.5% of
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total assets. Under the risk-based capital requirements, a minimum amount of capital must be maintained by a savings association to account for the relative risks inherent in the type and amount of assets held by the savings association. The risk-based capital requirement requires a savings association to maintain capital (defined generally for these purposes as core capital plus general valuation allowances and permanent or maturing capital instruments such as preferred stock and subordinated debt less assets required to be deducted) equal to 8.0% of risk-weighted assets. Assets are ranked as to risk in one of four categories (0-100%). A credit risk-free asset, such as cash, requires no risk-based capital, while an asset with a significant credit risk, such as a non-accrual loan, requires a risk factor of 100%. Moreover, a savings association must deduct from capital, for purposes of meeting the core capital, tangible capital and risk-based capital requirements, its entire investment in and loans to a subsidiary engaged in activities not permissible for a national bank (other than exclusively agency activities for its customers or mortgage banking subsidiaries). At December 31, 1998, the Bank was in compliance with all capital requirements imposed by law.
The OTS has promulgated a rule which sets forth the methodology for calculating an interest rate risk component to be used by savings associations in calculating regulatory capital. The OTS has delayed the implementation of this rule, however. The rule requires savings associations with "above normal" interest rate risk (institutions whose portfolio equity would decline in value by more than 2% of assets in the event of a hypothetical 200-basis-point move in interest rates) to maintain additional capital for interest rate risk under the risk-based capital framework. If the OTS were to implement this regulation, the Bank would not be required to maintain additional capital at December 31, 1998 under the terms of the OTS proposed interest rate risk rule. The OTS recently updated its standards regarding management of interest rate risk to include summary guidelines to assist savings associations in determining their exposures to interest rate risk.
Prompt Corrective Regulatory Action
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FedICIA") requires, among other things, that federal bank regulatory authorities take "prompt corrective action" with respect to institutions that do not meet minimum capital requirements. For these purposes, FedICIA establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. At December 31, 1998, the Bank was categorized as "adequately capitalized," meaning that its total risk-based capital ratio exceeded 8%, its Tier I risk-based capital ratio exceeded 4%, its leverage ratio exceeded 4%, and it was not subject to a regulatory order, agreement or directive to meet and maintain a specific capital level for any capital measure.
The FDIC may order savings associations which have insufficient capital to take corrective actions. For example, a savings association which is categorized as "undercapitalized" would be subject to growth limitations and would be required to submit a capital restoration plan, and a holding company that controls such a savings association would be required to guarantee that the savings association complies with the restoration plan. "Significantly undercapitalized" savings associations would be subject to additional restrictions. Savings associations deemed by the FDIC to be "critically undercapitalized" would be subject to the appointment of a receiver or conservator.
Dividend Limitations
The OTS recently adopted a regulation, which becomes effective on April 1, 1999, that revises the current restrictions that apply to "capital distributions" by savings associations. The amended regulation defines a capital distribution as a distribution of cash or other property to a savings association's owners, made on account of their ownership. This definition includes a savings association's payment of cash dividends to shareholders, or any payment by a savings association to repurchase, redeem, retire, or otherwise acquire any of its shares or debt instruments that are included in total capital, and any extension of credit to finance an affiliate's acquisition of those shares or interests. The amended regulation does not apply to dividends consisting only of a savings association's shares or rights to purchase such shares.
The amended regulation exempts certain savings associations from the current requirement that all savings associations file either a notice or an application with the OTS before making any capital distribution. As revised, the regulation requires a savings association to file an application for approval of a proposed capital distribution with the OTS if the association is not eligible for expedited treatment under OTS's application processing rules, or the total amount of all capital distributions, including the proposed capital distribution, for the applicable calendar year would exceed an amount equal to the savings association's net income for that year to date plus the savings association's retained net income for the preceding two years (the "retained net income standard"). Based on the Bank's retained net income standard, the Bank would be required to file a notice or application with the OTS before making any capital distribution. A savings association must also file an application for approval of a proposed capital distribution if, following the proposed distribution, the association would not be at least adequately capitalized under the OTS prompt corrective action regulations, or if the proposed distribution would violate a prohibition contained in any applicable statute, regulation, or agreement between the association and the OTS or the FDIC.
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The amended regulation requires a savings association to file a notice of a proposed capital distribution in lieu of an application if the association or the proposed capital distribution do not meet the conditions described above, and: (1) the savings association will not be at least well capitalized (as defined under the OTS prompt corrective action regulations) following the capital distribution; (2) the capital distribution would reduce the amount of, or retire any part of the savings association's common or preferred stock, or retire any part of debt instruments such as notes or debentures included in the association's capital under the OTS capital regulation; or (3) the savings association is a subsidiary of a savings and loan holding company. Because the Bank is a subsidiary of a savings and loan holding company, this latter provision will require, at a minimum, that the Bank file a notice with the OTS 30 days before making any capital distributions to the Holding Company.
In addition to these regulatory restrictions, the Bank's plan of conversion imposes additional limitations on the amount of capital distributions it may make to the Holding Company. The plan of conversion by which the Bank converted from the mutual to the stock form of ownership (the "Plan of Conversion") requires the Bank to establish and maintain a liquidation account for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders (as those terms are defined in the Plan of Conversion) and prohibits the Bank from making capital distributions to the Holding Company if its net worth would be reduced below the amount required for the liquidation account.
Liquidity
Federal law requires that savings associations maintain an average daily balance of liquid assets in an amount not less than 4% or more than 10% of their withdrawable accounts plus short-term borrowings. Liquid assets include cash, certain time deposits, certain bankers' acceptances, specified U.S. government, state or federal agency obligations, certain corporate debt securities, commercial paper, certain mutual funds, certain mortgage-related securities, and certain first-lien residential mortgage loans. The OTS recently amended its regulation that implements this statutory liquidity requirement to reduce the amount of liquid assets a savings association must hold from 5% of net withdrawable accounts and short-term borrowings to 4%. The OTS also eliminated the requirement that savings associations maintain short-term liquid assets constituting at least 1% of their average daily balance of net withdrawable deposit accounts and current borrowings. The revised OTS rule also permits savings associations to calculate compliance with the liquidity requirement based upon their average daily balance of liquid assets during each quarter rather than during each month, as was required under the prior rule. The OTS may impose monetary penalties on savings associations that fail to meet these liquidity requirements. As of December 31, 1998, the Bank had liquid assets of $16.3 million, and a regulatory liquidity ratio of 33.42%.
Limitations on Rates Paid for Deposits
Regulations promulgated by the FDIC pursuant to FedICIA limit the ability of insured depository institutions to accept, renew or roll over deposits by offering rates of interest which are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions having the same type of charter in the institution's normal market area. Under these regulations, "well-capitalized" depository institutions may accept, renew or roll such deposits over without restriction, "adequately capitalized" depository institutions may accept, renew or roll such deposits over with a waiver from the FDIC (subject to certain restrictions on payments of rates) and "undercapitalized" depository institutions may not accept, renew or roll such deposits over. The regulations contemplate that the definitions of "well capitalized," "adequately capitalized" and "undercapitalized" will be the same as the definition adopted by the agencies to implement the corrective action provisions of FedICIA. The Bank does not believe that these regulations will have a materially adverse effect on its current operations.
Safety and Soundness Standards
On February 2, 1995, the federal banking agencies adopted final safety and soundness standards for all insured depository institutions. The standards, which were issued in the form of guidelines rather than regulations, relate to internal controls, information systems, internal audit systems, loan underwriting and documentation, compensation and interest rate exposure. In general, the standards are designed to assist the federal banking agencies in identifying and addressing problems at insured depository institutions before
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capital becomes impaired. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan. Failure to submit a compliance plan may result in enforcement proceedings. On August 27, 1996, the federal banking agencies added asset quality and earning standards to the safety and soundness guidelines.
Real Estate Lending Standards
OTS regulations require savings associations to establish and maintain written internal real estate lending policies. Each association's lending policies must be consistent with safe and sound banking practices and appropriate to the size of the association and the nature and scope of its operations. The policies must establish loan portfolio diversification standards; establish prudent underwriting standards, including loan-to-value limits, that are clear and measurable; establish loan administration procedures for the association's real estate portfolio; and establish documentation, approval, and reporting requirements to monitor compliance with the association's real estate lending policies. The association's written real estate lending policies must be reviewed and approved by the association's Board of Directors at least annually. Further, each association is expected to monitor conditions in its real estate market to ensure that its lending policies continue to be appropriate for current market conditions.
Loans to One Borrower
Under OTS regulations, the Bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. Additional amounts may be lent, not in excess of 10% of unimpaired capital and surplus, if such loans or extensions of credit are fully secured by readily marketable collateral, including certain debt and equity securities but not including real estate. In some cases, a savings association may lend up to 30 percent of unimpaired capital and surplus to one borrower for purposes of developing domestic residential housing, provided that the association meets its regulatory capital requirements and the OTS authorizes the association to use this expanded lending authority. At December 31, 1998, the Bank did not have any loans or extensions of credit to a single or related group of borrowers in excess of its lending limits.
Qualified Thrift Lender
Savings associations must meet a QTL test. If the Bank maintains an appropriate level of qualified thrift investments ("QTIs") (primarily residential mortgages and related investments, including certain mortgage-related securities) and otherwise qualify as a QTL, the Bank will continue to enjoy full borrowing privileges from the FHLB of Indianapolis. The required percentage of QTIs is 65% of portfolio assets (defined as all assets minus intangible assets, property used by the association in conducting its business and liquid assets equal to 10% of total assets). Certain assets are subject to a percentage limitation of 20% of portfolio assets. In addition, savings associations may include shares of stock of the FHLBs, FNMA, and FHLMC as QTIs. Compliance with the QTL test is determined on a monthly basis in nine out of every twelve months. As of December 31, 1998, the Bank was in compliance with its QTL requirement, with approximately 90.23% of its assets invested in QTIs.
A savings association which fails to meet the QTL test must either convert to a bank (but its deposit insurance assessments and payments will be those of and paid to the SAIF) or be subject to the following penalties: (i) it may not enter into any new activity except for those permissible for a national bank and for a savings association; (ii) its branching activities shall be limited to those of a national bank; (iii) it shall not be eligible for any new FHLB advances; and (iv) it shall be bound by regulations applicable to national banks respecting payment of dividends. Three years after failing the QTL test the association must (i) dispose of any investment or activity not permissible for a national bank and a savings association and (ii) repay all outstanding FHLB advances. If such a savings association is controlled by a savings and loan holding company, then such holding company must, within a prescribed time period, become registered as a bank holding company and become subject to all rules and regulations applicable to bank holding companies (including restrictions as to the scope of permissible business activities).
Acquisitions or Dispositions and Branching
The Bank Holding Company Act specifically authorizes a bank holding company, upon receipt of appropriate regulatory approvals, to acquire control of any savings association or holding company thereof wherever located. Similarly, a savings and loan holding company may acquire control of a bank. Moreover, federal savings associations may acquire or be acquired by any insured depository institution. Regulations promulgated by the FRB restrict the
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branching authority of savings associations acquired by bank holding companies. Savings associations acquired by bank holding companies may be converted to banks if they continue to pay SAIF premiums, but as such they become subject to branching and activity restrictions applicable to banks.
Subject to certain exceptions, commonly-controlled banks and savings associations must reimburse the FDIC for any losses suffered in connection with a failed bank or savings association affiliate. Institutions are commonly controlled if one is owned by another or if both are owned by the same holding company. Such claims by the FDIC under this provision are subordinate to claims of depositors, secured creditors, and holders of subordinated debt, other than affiliates.
The OTS has adopted regulations which permit nationwide branching to the extent permitted by federal statute. Federal statutes permit federal savings associations to branch outside of their home state if the association meets the domestic building and loan test in ss.7701(a)(19) of the Code or the asset composition test of ss.7701(c) of the Code. Branching that would result in the formation of a multiple savings and loan holding company controlling savings associations in more than one state is permitted if the law of the state in which the savings association to be acquired is located specifically authorizes acquisitions of its state-chartered associations by state-chartered associations or their holding companies in the state where the acquiring association or holding company is located. Moreover, Indiana banks and savings associations are permitted to acquire other Indiana banks and savings associations and to establish branches throughout Indiana.
Finally, The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks in other states and, with state consent and subject to certain limitations, allows banks to acquire out-of-state branches either through merger or de novo expansion. The State of Indiana enacted legislation establishing interstate branching provisions for Indiana state-chartered banks consistent with those established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana Branching Law authorizes Indiana banks to branch interstate by merger or de novo expansion, provided that such transactions are not permitted to out-of-state banks unless the laws of their home states permit Indiana banks to merge or establish de novo banks on a reciprocial basis. The Indiana Branching Law became effective March 15, 1996.
Federal Reserve System
Under FRB regulations, the Bank is required to maintain reserves against its transaction accounts (primarily checking and NOW accounts) and non-personal money market deposit accounts. The effect of these reserve requirements is to increase the Bank's cost of funds. The Bank is in compliance with its reserve requirements. A federal savings association, like other depository institutions maintaining reservable accounts, may borrow from the Federal Reserve Bank "discount window," but the FRB's regulations require the savings association to exhaust other reasonable alternative sources, including borrowing from its regional FHLB, before borrowing from the Federal Reserve Bank. Current law imposes certain limitations on the ability of undercapitalized depository institutions to borrow from Federal Reserve Banks.
Limitations on Repurchase of Common Stock of Holding Company
OTS regulations currently provide that the Holding Company is prohibited from repurchasing any of its shares within one year of the Conversion, which occured on June 13, 1995. So long as the Bank continues to meet certain capitalization requirements, the Holding Company may repurchase shares in an open-market repurchase program (which cannot exceed 5% of its outstanding shares in a twelve-month period) during the second and third years following its Conversion by giving appropriate prior notice to the OTS. The OTS has the authority to waive these restrictions under certain circumstances. Unless repurchases are permitted under the foregoing regulations, the Holding Company may not, for a period of three years from the date of the Conversion, repurchase any of its capital stock from any person, except in the event of an offer to purchase by the Holding Company on a pro rata basis from all of its shareholders which is approved in advance by the OTS or except in exceptional circumstances established to the satisfaction of the OTS.
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Under Indiana law, the Holding Company will be precluded from repurchasing its equity securities if, after giving effect to such repurchase, the Holding Company would be unable to pay its debts as they become due or the Holding Company's assets would be less than its liabilities and obligations to preferential shareholders.
Transactions with Affiliates
The Bank and the Holding Company are subject to Sections 22(h), 23A and 23B of the Federal Reserve Act, which restrict financial transactions between banks and affiliated companies. The statute limits credit transactions between a bank or savings association and its executive officers and its affiliates, prescribes terms and conditions for bank affiliate transactions deemed to be consistent with safe and sound banking practices, and restricts the types of collateral security permitted in connection with a bank's extension of credit to an affiliate.
Federal Securities Law
The shares of Common Stock of the Holding Company are registered with the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934, as amended (the "1934 Act"). The Holding Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the 1934 Act and the rules of the Commission thereunder.
Shares of Common Stock held by persons who are affiliates of the Holding Company may not be resold without registration unless sold in accordance with the resale restrictions of Rule 144 under the Securities Act of 1933, as amended (the "1933 Act"). If the Holding Company meets the current public information requirements under Rule 144, each affiliate of the Holding Company who complies with the other conditions of Rule 144 (including those that require the affiliate's sale to be aggregated with those of certain other persons) will be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) 1% of the outstanding shares of the Holding Company or (ii) the average weekly volume of trading in such shares during the preceding four calendar weeks.
Community Reinvestment Act Matters
Federal law requires that ratings of depository institutions under the Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes both a four-unit descriptive rating -- outstanding, satisfactory, needs to improve, and substantial noncompliance -- and a written evaluation of an institution's performance. Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLBs. The standards take into account a member's performance under the CRA and its record of lending to first-time home buyers. The OTS has designated the Bank's record of meeting community credit needs as satisfactory.
TAXATION
Federal Taxation
Historically, savings associations, such as the Bank, have been permitted to compute bad debt deductions using either the bank experience method or the percentage of taxable income method. However, for years beginning after December 31, 1995, the Bank is no longer able to use the percentage of taxable income method of computing its allocable tax bad debt deduction. The Bank is required to compute its allocable deduction using the experience method. As a result of the repeal of the percentage of taxable income method, reserves taken after 1987 using the percentage of taxable income method generally must be included in future taxable income over a six-year period, although a two-year delay may be permitted for institutions meeting a residential mortgage loan origination test. In addition, the pre-1988 reserve, in which no deferred taxes have been recorded, will not have to be recaptured into income unless (i) the Bank no longer qualifies as a bank under the Code, or (ii) excess dividends are paid out by the Bank.
Depending on the composition of its items of income and expense, a savings institution may be subject to the alternative minimum tax. A savings institution must pay an alternative minimum tax equal to the amount (if any) by
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which 20% of alternative minimum taxable income ("AMTI"), as reduced by an exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular taxable income increased or decreased by certain tax preferences and adjustments, including depreciation deductions in excess of that allowable for alternative minimum tax purposes, tax-exempt interest on most private activity bonds issued after August 7, 1986 (reduced by any related interest expense disallowed for regular tax purposes), the amount of the bad debt reserve deduction claimed in excess of the deduction based on the experience method and 75% of the excess of adjusted current earnings over AMTI (before this adjustment and before any alternative tax net operating loss). AMTI may be reduced only up to 90% by net operating loss carryovers, but alternative minimum tax paid that is attributable to most preferences (although not to post-August 7, 1986 tax-exempt interest) can be credited against regular tax due in later years.
State Taxation
The Bank is subject to Indiana's Financial Institutions Tax ("FIT"), which is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted gross income," for purposes of FIT, begins with taxable income as defined by Section 63 of the Code and, thus, incorporates federal tax law to the extent that it affects the computation of taxable income. Federal taxable income is then adjusted by several Indiana modifications, the most notable of which is the required addback of interest that is tax-free for federal income tax purposes. Other applicable state taxes include generally applicable sales and use taxes plus real and personal property taxes.
Item 2.
Item 2. Properties.
At December 31, 1998, the Bank and the Holding Company conducted business from a single office at 723 East Broadway, Logansport, Indiana. The following table provides certain information with respect to the Company's office as of December 31, 1998:
Logansport, Indiana 46947
The Company owns computer and data processing equipment which is used for transaction processing and accounting. The net book value of electronic data processing equipment owned by the Company was $16,500 at December 31, 1998.
The Bank also has contracted for the data processing and reporting services of the Intrieve Data Center in Cincinnati, Ohio. The cost of these data processing services is approximately $10,000 per month.
Item 3.
Item 3. Legal Proceedings.
Neither the Holding Company nor the Bank is a party to any pending legal proceedings, other than routine litigation incidental to its business.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the Holding Company's shareholders during the quarter ended December 31, 1998.
Item 4.5. Executive Officers of the Registrant.
Presented below is certain information regarding the executive officers of the Holding Company:
Name Position ------------------ ------------------------------------- Thomas G. Williams President and Chief Executive Officer Charles J. Evans Vice President Dottye Robeson Secretary/Treasurer
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Thomas G. Williams (age 66) has served as President of the Bank since 1971 and as President and Chief Executive Officer of the Holding Company since its organization.
Charles J. Evans (age 53) has served as Vice President and Senior Loan Officer of the Bank since 1980 and as Vice President of the Holding Company since its organization.
Dottye Robeson (age 49) has served as Chief Financial Officer of the Bank since 1994 and as Secretary/Treasurer of the Holding Company since its organization. From 1990 to 1994, she served as Cashier, Vice President and Chief Financial Officer of Bright National Bank in Flora, Indiana. From 1984 to 1990 she was employed by Smith, Thompson & Wihebrink (Logansport). She has been a certified public accountant since 1987.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
Logansport Savings Bank, FSB converted from a mutual savings bank to a stock form federal savings bank effective June 13, 1995 (the "Conversion") and simultaneously formed a savings and loan holding company, Logansport Financial Corp. The Holding Company's common stock, without par value ("Common Stock"), is quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), Small Cap Market, under the symbol "LOGN." The following table sets forth the high and low bid prices and dividends paid per share of Common Stock for the quarters indicated. Such over-the-counter quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.
Quarter Ended High Bid Low Bid Dividends Declared --------------------------------------------------------------------- March 31, 1997 $ 15 $ 11 1/8 $ .10 June 30, 1997 14 12 1/2 .10 September 30, 1997 16 13 1/4 .10 December 31, 1997 18 15 .10 March 31, 1998 18 1/8 16 .10 June 30, 1998 19 5/8 16 1/2 .11 September 30, 1998 17 1/4 13 .11 December 31, 1998 16 3/8 13 3/8 .11
As of February 12, 1999, there were 832 record holders of the Holding Company's Common Stock. The Holding Company has established a policy of paying regular periodic cash dividends, and the Board of Directors intends to continue this policy, subject to the Holding Company's operating results, financial condition, capital, income tax considerations, regulatory restrictions, and other relevant factors.
Since the Holding Company has no independent operations other than investment-related activities or other subsidiaries to generate income, its ability to accumulate earnings for the payment of cash dividends to its shareholders will be directly dependent upon the ability of the Bank to pay dividends to the Holding Company.
Under OTS regulations, a converted savings institution may not declare or pay a cash dividend if the effect would be to reduce its net worth below the amount required for the liquidation account created at the time it converted. In addition, under OTS regulations, the extent to which a savings institution may make a "capital distribution," which includes, among other things, cash dividends, will depend upon in which one of three categories, based upon levels of capital, that savings institution is classified. The Bank is now and expects to continue to be a "tier one institution" and therefore would be able to pay cash dividends to the Holding Company during any calendar year up to 100% of its net income during that calendar year plus the amount that would reduce by one half its "surplus capital ratio" (the excess over its fully phased-in capital requirements) at the beginning of the calendar year. See "Regulation -- Capital Distributions Regulation." Prior notice of any dividend to be paid by the Bank to the Holding Company will have to be given to the OTS.
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Income of the Bank appropriated to bad debt reserves and deducted for federal income tax purposes is not available for payment of cash dividends or other distributions to the Holding Company without the payment of federal income taxes by the Bank on the amount of such income deemed removed from the reserves at the then-current income tax rate. At December 31, 1998, approximately $1.7 million of the Bank's retained income represented bad debt deductions for which no federal income tax provision had been made. See "Taxation--Federal Taxation."
Unlike the Bank, generally there is no regulatory restriction on the payment of dividends by the Holding Company. Indiana law, however, would prohibit the Holding Company from paying a dividend if, after giving effect to the payment of that dividend, the Holding Company would not be able to pay its debts as they become due in the usual course of business or the Holding Company's total assets would be less than the sum of its total liabilities plus preferential rights of holders of preferred stock, if any.
Item 6.
Item 6. Selected Financial Data.
The information required by this item is incorporated by reference to the material under the heading "Selected Consolidated Financial Data of Logansport Financial Corp. and Subsidiary" on pages 4 and 5 of the Holding Company's 1998 Shareholder Annual Report (the "Shareholder Annual Report").
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.
The information required by this item is incorporated by reference to pages 6 through 20 of the Shareholder Annual Report.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is incorporated by reference to pages 14 through 15 of the Shareholder Annual Report.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The Holding Company's Consolidated Financial Statements and Notes thereto contained on pages 23 through 52 in the Shareholder Annual Report are incorporated herein by reference. The Company's unaudited quarterly results of operations contained on page 52 in the Shareholder Annual Report are incorporated herein by reference.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item with respect to directors is incorporated by reference to pages 2 through 4 of the Holding Company's Proxy Statement for its 1999 Annual Shareholder Meeting (the "1999 Proxy Statement"). Information concerning the Holding Company's executive officers is included in Item 4.5 in Part I of this report.
Item 11.
Item 11. Executive Compensation.
The information required by this item with respect to executive compensation is incorporated by reference to pages 5 to 8 of the Holding Company's 1999 Proxy Statement.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated by reference to pages 2 and 3 of the 1999 Proxy Statement.
Item 13.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to page 8 of the 1999 Proxy Statement.
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PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(b) Reports on Form 8-K.
The Holding Company filed no reports on Form 8-K during the fourth quarter of its 1998 fiscal year.
(c) The exhibits filed herewith or incorporated by reference herein are set forth on the Exhibit Index on page E-1. Included in those exhibits are Executive Compensation Plans and Arrangements which are identified as Exhibits 10(1) through 10(12).
(d) All schedules are omitted as the required information either is not applicable or is included in the Consolidated Financial Statements or related notes.
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SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on behalf of the undersigned, thereto duly authorized.
LOGANSPORT FINANCIAL CORP.
Date: March 15, 1999 By: /s/ Thomas G. Williams ----------------------------------- Thomas G. Williams, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on this 15th day of March, 1999.
/s/ Thomas G. Williams - -------------------------------------- Thomas G. Williams President, Chief Executive Officer and Director (Principal Executive Officer)
/s/ Dottye Robeson - -------------------------------------- Dottye Robeson, Secretary/Treasurer (Principal Financial and Accounting Officer)
/s/ Norbert E. Adrian - -------------------------------------- Norbert E. Adrian, Director
/s/ Charles J. Evans - -------------------------------------- Charles J. Evans, Vice President and Director
/s/ Donald G. Pollitt - -------------------------------------- Donald G. Pollitt, Director
/s/ Susanne S. Ridlen - -------------------------------------- Susanne S. Ridlen, Director
/s/ William Tincher, Jr. - -------------------------------------- William Tincher, Jr., Director
/s/ David Wihebrink - -------------------------------------- David Wihebrink, Director
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EXHIBIT INDEX
Exhibit Page
3(1) The Articles of Incorporation of the Registrant are incorporated by reference to Exhibit 3(1) to the Registration Statement on Form S-1 (Registration No. 33-89788).
3(2) The Code of By-Laws of the Registrant are incorporated by reference to Exhibit 3.2 to the Form 10-Q for the period ended June 30, 1997, filed with the Commission on August 13, 1997 and resolutions dated October 13, 1998, filed herewith.
10(1) The Registrant's Stock Option Plan is incorporated by reference to Exhibit A to the Registrant's Proxy Statement for its Annual Shareholder Meeting held on April 9, 1996 and resolutions dated July 14, 1998, amending the Registrant's Stock Option Plan are incorporated by reference to Exhibit 10.1 to the Form 10-Q for the period ended September 30, 1998, filed with the Commission on November 12, 1998.
10(2) Logansport Savings Bank, FSB Recognition and Retention Plan and Trust is incorporated by reference to Exhibit B to the Registrant's Proxy Statement for its Annual Shareholder Meeting held on April 9, 1996, and resolutions dated July 14, 1998, amending the Logansport Savings Bank, FSB Recognition and Retention Plan and Trust are incorporated by reference to Exhibit 10.2 to the Form 10-Q for the period ended September 30, 1998, filed with the Commission on November 12, 1998.
10(3) Logansport Savings Bank, FSB Employee Stock Ownership Plan and Trust Agreement is incorporated by reference to Exhibit 10(4) to the Registration Statement on Form S-1 (Registration No. 33-89788).
10(4) Employment Agreement between Logansport Savings Bank, FSB and Thomas G. Williams is incorporated by reference to Exhibit 10(5) to the Registration Statement on Form S-1 (Registration No. 33-89788).
10(5) Employment Agreement between Logansport Savings Bank, FSB and Charles J. Evans is incorporated by reference to Exhibit 10(6) to the Registration Statement on Form S-1 (Registration No. 33-89788).
10(6) Director Deferred Compensation Agreement between Logansport Savings Bank, FSB and Thomas G. Williams, effective 4/1/92 is incorporated by reference to Exhibit 10(7) to the Registration Statement on Form S-1 (Registration No. 33-89788).
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10(7) Director Deferred Compensation Agreement between Logansport Savings Bank, FSB and Don Pollitt, effective 4/1/92 is incorporated by reference to Exhibit 10(8) to the Registration Statement on Form S-1 (Registration No. 33-89788).
10(8) Director Deferred Compensation Agreement between Logansport Savings Bank, FSB and Norbert Adrian, effective 4/1/92 is incorporated by reference to Exhibit 10(9) to the Registration Statement on Form S-1 (Registration No. 33-89788).
10(9) Director Deferred Compensation Agreement between Logansport Savings Bank, FSB and Susanne Ridlen, effective 4/1/92 is incorporated by reference to Exhibit 10(10) to the Registration Statement on Form S-1 (Registration No. 33-89788).
10(10)Director Deferred Compensation Agreement between Logansport Savings Bank, FSB and David Wihebrink, effective 4/1/92 is incorporated by reference to Exhibit 10(11) to the Registration Statement on Form S-1 (Registration No. 33-89788).
10(11) Executive Supplemental Retirement Income Agreement between Logansport Savings Bank, FSB and Thomas G. Williams, executed May 7, 1992 is incorporated by reference to Exhibit 10(12) to the Registration Statement on Form S-1 (Registration No. 33-89788).
10(12) Executive Supplemental Retirement Income Agreement between Logansport Savings Bank, FSB and Charles J. Evans, executed May 7, 1992 is incorporated by reference to Exhibit 10(13) to the Registration Statement on Form S-1 (Registration No. 33-89788).
13 1998 Shareholder Annual Report ______
21 Subsidiaries of the Registrant are incorporated by reference to Exhibit 21 to the Registration Statement on Form S-1 (Registration No. 33-89788).
23 Independent Auditor's Consent (Grant Thornton LLP) ______
27 Financial Data Schedule for the twelve month period ended December 31, 1998 ______