-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Lb/UTkhRuqNnIkwyZMEmWRrU0+K9a4VfT6IQdIC4XUZOSyd6qmZx50NPLfOJLliP yHZomNLE/CHvD2vvRl+PsQ== 0000950116-97-000601.txt : 19970329 0000950116-97-000601.hdr.sgml : 19970329 ACCESSION NUMBER: 0000950116-97-000601 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LSB FINANCIAL CORP CENTRAL INDEX KEY: 0000930405 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 351934975 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-25070 FILM NUMBER: 97567236 BUSINESS ADDRESS: STREET 1: 101 MAIN ST CITY: LAFAYETTE STATE: IN ZIP: 47902 BUSINESS PHONE: 3177421064 MAIL ADDRESS: STREET 1: PO BOX 1628 CITY: LAFAYETTE STATE: IN ZIP: 47902-1628 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] For the fiscal year ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from _______ to _______ Commission file number 0-25070. LSB FINANCIAL CORP. (Exact Name of Small Business Issuer as Specified in its Charter) Indiana 35-1934975 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 101 Main Street, Lafayette, Indiana 47902 (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code: (765) 742-1064 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share (Title of Class) Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past twelve months (or for such shorter period that the Issuer was required to file such reports), and (2) has been subject to such requirements for the past 90 days. YES [X] NO [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of Issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] The Issuer had $13.9 million in gross income for the year ended December 31, 1996. As of March 24, 1997, there were issued and outstanding 900,166 shares of the Issuer's Common Stock. The aggregate market value of the voting stock held by non-affiliates of the Issuer, computed by reference to the average of the closing bid and asked price of such stock as of March 24, 1997, was approximately $15.7 million. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the Issuer that such person is an affiliate of the Issuer.) DOCUMENTS INCORPORATED BY REFERENCE PARTS II and IV of Form 10-KSB--1996 Annual Report to Stockholders. PART III of Form 10-KSB--Proxy Statement for the 1996 Annual Meeting of Stockholders. - ------------------------------------------------------------------------------- PART I Item 1. Description of Business General LSB Financial Corp. ("LSB" or the "Company") is an Indiana corporation which was organized in 1994 by Lafayette Savings Bank, FSB ("Lafayette" or the "Bank") for the purpose of becoming a thrift institution holding company. Lafayette is a federally chartered stock savings bank headquartered in Lafayette, Indiana. Originally organized in 1869, the Bank converted to a federal savings bank in 1984. Its deposits are insured up to the applicable limits by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation ("FDIC"). In February 1995, the Bank converted to the stock form of organization through the sale and issuance of 1,029,576 shares of its common stock to the Company. The principal asset of the Company is the outstanding stock of the Bank, its wholly owned subsidiary. The Company presently has no separate operations and its business consists only of the business of the Bank. All references to the Company, unless otherwise indicated, at or before February 3, 1995 refer to the Bank. LSB has been, and intends to continue to be, a community-oriented financial institution. The principal business of the Company consists of attracting retail deposits from the general public and investing those funds primarily in permanent first mortgage loans secured by owner-occupied, one- to four-family residences, and to a lesser extent, non-owner occupied one- to four-family residential, commercial real estate, multi-family, construction and development, consumer and commercial business loans. The Company currently serves Tippecanoe County, Indiana (the "primary market area") through its three retail banking offices. At December 31, 1996, LSB had total assets of $184.6 million, deposits of $116.9 million and shareholders' equity of $16.8 million. The Company's revenues are derived principally from interest on mortgage and other loans and interest on securities. Since the Bank, unlike most savings associations, is insured by the BIF, it benefitted from a reduction in the deposit insurance rate charged by the FDIC effective June 1, 1995. In addition, the Bank was not subject to the federal legislation passed on September 30, 1996, requiring virtually all SAIF-insured institutions to pay a one-time special assessment. See "Regulation - - Insurance of Accounts and Regulation by the FDIC." The executive offices of the Company are located at 101 Main Street, Lafayette, Indiana 47902. Its telephone number at that address is (765) 742-1064. Lending Activities General. The principal lending activity of the Company is the origination of conventional mortgage loans for the purpose of purchasing, constructing, or refinancing owner-occupied one- to four-family residential real estate located in the Company's primary market area. The Company also originates non-owner occupied one- to four-family residential, commercial real estate, multi-family, consumer and commercial business loans. 2 In the mid 1980's, the Company began originating adjustable rate mortgages ("ARMs") for retention in its portfolio in an effort to increase the percentage of loans with more frequent repricing than traditional long term, fixed-rate loans. As a result of continued consumer demand for long-term, fixed rate loans, the Company has continued to originate such loans. LSB underwrites these mortgage loans utilizing secondary market guidelines allowing them to be saleable, without recourse, primarily to the Federal Home Loan Mortgage Corporation ("FHLMC"). The sale of such loans results in additional short-term income and improves the Company's interest rate risk position. The Company generally retains servicing rights on loans sold in the secondary market. Furthermore, in order to limit its potential exposure to increasing interest rates caused by its traditional emphasis on originating single family mortgage loans, the Company has diversified its portfolio by increasing its emphasis on the origination of short-term commercial real estate, business and consumer loans. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset/Liability Management" in the Annual Report to Stockholders filed as Exhibit 13 hereto ("Annual Report"). Loan officers and certain executive officers of the Company have approval authority on loans depending on the type and amount of the loan. All owner-occupied residential loans greater than $200,000 and all non-owner occupied residential loans and commercial business loans of $250,000 or more must be approved by the loan committee of the Board of Directors. Any loan or aggregate of loans to one borrower of $600,000 or more must be approved by a majority of the full Board of Directors. At December 31, 1996, the maximum amount which the Bank could have loaned to any one borrower and the borrower's related entities was $2.3 million. At that date, the Bank had a group of loans to a single borrower with outstanding balances totaling approximately $2.4 million. The Bank inadvertently made these loans to the Bennett Funding Group in 1995 in violation of its loans- to-one-borrower limitation. See "Non-Performing Assets - Non-Accruing Loans." The Bank's next largest lending relationship to a single borrower or a group of related borrowers totaled $2.3 million at December 31, 1996, consisting of multiple loans to a single borrower secured by multi-family dwellings used as student housing and by land intended to be developed for additional multi-family dwellings. These loans were performing in accordance with their terms at December 31, 1996. The third largest lending relationship to a single borrower or a group of related borrowers totaled $2.2 million, consisting of multiple loans to a single borrower secured by one- to four-family and multi-family rental properties and a commercial property. These loans were also performing in accordance with their terms at December 31, 1996. At December 31, 1996, the Company had 19 other loans or lending relationships to a single borrower or group of related borrowers with a principal balance in excess of $1.0 million, all of which were performing in accordance with their repayment terms. 3 Loan Portfolio Composition. The following table sets forth information concerning the composition of the Company's loan portfolio (including loans held for sale) in dollar amounts and in percentages of the total loan portfolio (before deductions for loans in process, deferred fees and discounts and allowances for losses) as of the dates indicated.
December 31, ----------------------------------------------------------------------------- 1994 1995 1996 ----------------------- --------------------- --------------------- Amount Percent Amount Percent Amount Percent ---------- ------- --------- ------- --------- ------- (Dollars in Thousands) Real Estate Loans: One- to four-family................ $ 69,139 68.53% $ 86,231 62.40% $ 96,987 57.72% Multi-family....................... 7,643 7.57 12,044 8.72 19,610 11.67 Commercial......................... 10,712 10.62 15,034 10.88 19,032 11.33 Construction....................... 3,251 3.22 10,379 7.51 14,447 8.60 Land and land development.......... 2,915 2.89 3,880 2.81 3,334 1.98 ---------- ------- --------- ------- --------- ------- Total real estate loans........ 93,660 92.83 127,568 92.32 153,410 91.30 ---------- ------- --------- ------- --------- ------ Other Loans: Consumer Loans: Home equity....................... 3,393 3.36 4,124 2.98 7,415 4.41 Home improvement.................. 184 0.18 53 0.04 212 0.13 Automobile........................ 380 0.38 794 0.57 792 0.47 Deposit account................... 330 0.33 144 0.10 238 0.14 Other............................. 333 0.33 933 0.68 1,151 0.68 --------- -------- --------- ------- --------- -------- Total consumer loans........... 4,620 4.58 6,048 4.37 9,808 5.83 Commercial business loans.......... 2,614 2.59 4,570 3.31 4,825 2.87 --------- -------- --------- ------- --------- -------- Total other loans................. 7,234 7.17 10,618 7.68 14,633 8.70 --------- -------- --------- ------- --------- -------- Total loans.................... 100,894 100.00% 138,186 100.00% 168,043 100.00% --------- ====== --------- ====== --------- ====== Less: Loans in process................... 1,095 4,516 6,755 Deferred fees and discounts........ 271 315 357 Allowance for losses............... 926 922 1,715 --------- --------- --------- Total loans receivable, net........ $ 98,602 $132,433 $159,216 ========= ======== ========
4 The following table shows the composition of the Company's loan portfolio (including loans held for sale) by fixed- and adjustable-rate at the dates indicated.
December 31, ----------------------------------------------------------------------------- 1994 1995 1996 ----------------------- --------------------- --------------------- Amount Percent Amount Percent Amount Percent ---------- ------- --------- ------- --------- ------- (Dollars in Thousands) Fixed-Rate Loans: Real estate: One- to four-family(1)............ $ 32,212 31.93% $ 41,222 29.83% $ 48,204 28.69% Multi-family...................... 56 0.06 457 0.33 401 0.24 Commercial........................ 2,532 2.51 2,096 1.52 2,791 1.66 Construction...................... 3,251 3.22 10,379 7.51 14,447 8.60 Land and land development......... --- --- --- --- 762 0.45 Total real estate loans........ 38,051 37.72 54,154 39.19 66,605 39.64 Consumer........................... 1,063 1.05 1,619 1.17 2,393 1.42 Commercial business................ 2,012 1.99 4,570 3.31 4,103 2.44 ---------- ------- --------- ------- --------- ------- Total fixed-rate loans......... 41,126 40.76 60,343 43.67 73,101 43.50 ---------- ------- --------- ------- --------- ------- Adjustable-Rate Loans: Real estate: One- to four-family............... 36,927 36.60 45,009 32.57 48,783 29.03 Multi-family...................... 7,587 7.52 11,587 8.39 19,209 11.43 Commercial........................ 8,180 8.11 12,938 9.36 16,241 9.66 Construction...................... --- --- --- --- --- --- Land and land development......... 2,915 2.89 3,880 2.81 2,572 1.53 ---------- ------- --------- ------- --------- ------- Total real estate loans........ 55,609 55.12 73,414 53.13 86,805 51.66 Consumer loans..................... 3,557 3.52 4,429 3.21 7,415 4.41 Commercial business................ 2,915 .60 --- --- 722 0.43 ---------- ------- --------- ------- --------- ------- Total adjustable-rate loans.... 59,768 59.24 77,843 56.33 94,942 56.50 --------- ------- -------- ------ - --------- ------ Total loans.................... 100,894 100.00% 138,186 100.00% 168,043 100.00% ---------- ------- --------- ------- --------- ------- Less: Loans in process................... 1,125 4,516 6,755 Deferred fees and discounts........ 221 315 357 Allowance for loan losses.......... 922 922 1,715 ---------- --------- --------- Total loans receivable, net..... $ 78,158 $132,433 $159,216 ========== ========= =========
- ------------- (1) Includes $0, $7.0 million and $14.7 million of loans at December 31, 1994, 1995 and 1996, respectively, which carry a fixed rate of interest for the initial five or seven years and then convert to an adjustable rate of interest for the remaining term of the loan. 5 The following schedule illustrates the maturities of the Company's loan portfolio at December 31, 1996. Loans which have adjustable or renegotiable interest rates are shown as maturing in the period during which the contract is due. The schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses.
Real Estate ---------------------------------------------------------------------- Multi-family and Construction, Land One-to Four-Family Commercial and Land Developmen -------------------- ------------------- -------------------- Weighted Weighted Weighted Average Average Average Amount Rate Amount Rate Amount Rate ------ -------- ------ -------- ------ -------- (Dollars in Thousands) Due During Years Ending December 31, ------------ 1997(1)................ $ 2,007 9.37% $ 807 9.46% $15,962 8.57% 1998................... 616 7.38 1 8.75 1,754 9.01 1999................... 567 8.95 697 8.60 46 8.65 2000 and 2001.......... 3,256 8.03 1,116 8.72 9 9.25 2002 to 2006........... 5,641 8.33 1,738 8.59 10 10.94 2007 to 2016........... 23,981 8.04 25,552 8.65 --- --- 2017 and following..... 60,919 7.81 8,731 6.69 --- --- ------- ------- ------- TOTAL................. $96,987 7.94% $38,642 8.67% $17,781 8.62% ======= ======= =======
Commercial Consumer Business Total ------------------ ------------------ ------------------ Weighted Weighted Weighted Average Average Average Amount Rate Amount Rate Amount Rate ------ -------- ------ -------- ------ -------- Due During Years Ending December 31, ------------ 1997(1)................ $ 577 9.26% $1,987 9.69% $ 21,340 8.80% 1998................... 210 10.71 43 8.27 2,624 8.75 1999................... 236 9.87 315 9.03 1,861 8.94 2000 and 2001.......... 7,089 8.85 2,480 9.59 13,950 8.78 2002 to 2006........... 1,696 9.75 --- --- 9,085 8.67 2007 to 2016........... --- --- --- --- 49,533 8.35 2017 and following..... --- --- --- --- 69,650 7.92 ------ ------ -------- TOTAL................. $9,808 9.09% $4,825 9.58% $168,043 8.29% ====== ====== ========
- ---------- (1) Includes demand loans, loans having no stated maturity and overdraft loans. The total amount of loans due to mature after December 31, 1997 which have predetermined interest rates is $57.2 million, and which have adjustable or renegotiable interest rates is $89.5 million. 6 One- to Four-Family Residential Real Estate Lending The Company focuses its lending program on the origination of permanent loans secured by mortgages on owner-occupied, one- to four-family residences. The Company also originates loans secured by nonowner-occupied, one- to four-family residences. At December 31, 1996, $97.0 million, or 57.72% of the Company's total loan portfolio consisted of permanent loans secured by one- to four-family residences. Substantially all of these loans were secured by properties located in the Company's primary market area. The Company originates a variety of residential loans, including conventional 15 and 30 year fixed-rate loans, ARMs and balloon loans. The Company's one- to four-family residential ARMs are fully amortizing loans with contractual maturities of up to 30 years. The interest rates on substantially all of the ARMs originated by the Company are subject to adjustment at one or three year intervals. The Company's ARM products generally carry interest rates which are reset to a stated margin over the weekly average of the one or three year U.S. Treasury rates. Increases or decreases in the interest rate of the Company's one-year ARMs are generally limited to 2% annually with a lifetime interest rate cap of 6% over the initial rate. Increases or decreases in the interest rate of three-year ARMs are limited to a 3% adjustment cap with a 5% lifetime interest rate cap over the initial rate. The Company's one-year ARMs may be convertible into fixed-rate loans after the first year and before the sixth year upon payment of a fee, do not contain prepayment penalties and do not produce negative amortization. Initial interest rates offered on the Company's ARMs may be below the fully indexed rate. Borrowers are qualified at 2% over the initial interest rate for the Company's one-year ARMS and at the initial interest rate for the Company's three-year ARMs. At December 31, 1996, the total balance of one- to four- family ARMs was $48.7 million, or 29.03% of the Company's gross loan portfolio. The Company generally retains ARMs in its portfolio pursuant to its asset/liability management strategy. Three-year ARMs represented $39.6 million and one-year ARMs represented $9.1 million of the Company's total ARMs at December 31, 1996. The Company also offers fixed-rate mortgage loans to owner occupants with maturities up to 30 years and which conform to FHLMC standards. LSB currently sells in the secondary market the majority of long-term, conforming, fixed-rate loans with terms over 15 years it originates. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset/Liability Management" in the Annual Report. Interest rates charged on these fixed-rate loans are priced on a daily basis in accordance with FHLMC pricing standards. These loans do not include prepayment penalties. In 1995, the Company expanded its product line to better compete for residential mortgage loan customers by offering 30 year, fixed-rate mortgage loans which, after five or seven years convert to the Company's standard one-year ARM for the remainder of the term. The Company had $14.7 million in five-year and seven-year convertible residential mortgage loans at December 31, 1996 (currently categorized by the Company as fixed-rate loans). The Company had $26.6 million in nonowner-occupied one- to four-family residential loans at December 31, 1996. These loans are underwritten using the same criteria as owner-occupied, one- to four-family residential loans, but are provided at higher rates than owner-occupied loans. The Company offers fixed-rate, adjustable-rate and convertible rate loans, with terms of up to 30 years. 7 The Company originates residential mortgage loans with loan-to-value ratios of up to 95% for owner-occupied residential loans and up to 80% for nonowner-occupied residential loans. LSB requires private mortgage insurance in an amount intended to reduce the Company's exposure to 80% or less of the lesser of the purchase price or appraised value of the underlying collateral. In underwriting one- to four-family residential real estate loans, LSB evaluates both the borrower's ability to make monthly payments and the value of the property securing the loan. Properties securing owner-occupied one- to four-family residential real estate loans made by LSB are appraised by independent fee appraisers. LSB requires borrowers to obtain title insurance and fire, extended coverage casualty and flood insurance (if appropriate). Real estate loans originated by the Company contain a "due on sale" clause allowing the Company to declare the unpaid principal balance due and payable upon the sale of the security property. Multi-Family and Commercial Real Estate Lending LSB originates permanent loans secured by multi-family and commercial real estate. At December 31, 1996, the Company's multi-family and commercial real estate loan portfolio totaled $38.6 million, or 23.00% of the Company's total loan portfolio, compared to $27.1 million and $18.4 million, or 19.60% and 18.19%, at December 31, 1995 and 1994, respectively. The increase in the commercial and multi-family loan portfolio is due to the hiring during 1994 of an experienced commercial loan officer to further develop this portfolio. The Company's permanent multi-family and commercial real estate loan portfolio includes loans secured by apartment buildings, office buildings, churches, warehouses, retail stores, shopping centers, small business facilities and farm properties, most of which are located within the Company's primary market area. Permanent multi-family and commercial real estate loans are originated as three-year and five-year ARMs with up to a 24 year amortization. To a substantially lesser extent, such loans are originated as 10 year fixed-rate loans. The ARMs are tied to an index based on the weekly average of the three-year or five-year U.S. Treasury rate, respectively, plus a margin of 3%. Multi-family loans and commercial real estate loans have been written in amounts of up to 75% of the lesser of the appraised value of the property or the purchase price, and borrowers are generally personally liable for all or part of the indebtedness. Appraisals on properties securing multi-family and commercial real estate loans originated in excess of $100,000 by the Company are performed by independent appraisers designated by the Company at the time the loan is made and reviewed by management. In addition, the Company's underwriting procedures generally require verification of the borrower's credit history, income and financial statements, banking relationships and income projections for the property. Multi-family and commercial real estate loans generally present a higher level of risk than loans secured by one- to four-family residences. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family and 8 commercial real estate is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced (for example, if leases are not obtained or renewed, or a bankruptcy court modifies a lease term, or a major tenant is unable to fulfill its lease obligations), the borrower's ability to repay the loan may be impaired. Construction, Land and Land Development Lending The Company makes construction loans to individuals for the construction of their residences as well as to builders and developers for the construction of one- to four-family residences, multi-family dwellings and commercial real estate projects. At December 31, 1996, substantially all of these loans were secured by property located within the Company's primary market area. At December 31, 1996, the Company had $14.4 million in construction loans outstanding, representing 8.60% of the Company's total loan portfolio. Construction loans to individuals for their residences typically run six to eight months and are generally structured to be converted to permanent loans at the end of the construction phase. These construction loans are fixed-rate loans, with interest rates higher than those offered on one- to four-family loans by the Company. During the construction phase, the borrower pays interest only. Residential construction loans are underwritten pursuant to the same guidelines used for originating permanent residential loans. At December 31, 1996, the Company had $4.2 million of construction loans to borrowers intending to live in the properties upon completion of construction. Construction loans to builders of one- to four-family residences have terms of six to eight months and require the payment of interest only at a fixed-rate for the loan term. The Company limits builders to one home at a time but would consider requests for more than one if the homes are presold. At December 31, 1996, the Company had $3.8 million of construction loans to builders of one- to four-family residences. Construction loans are made to builders of multi-family dwellings and commercial projects with terms up to one year and requiring payment of interest only at a fixed rate for the construction phase of the loan. These loans are generally structured to be converted to one of the Company's permanent commercial loan products at the end of the construction phase. At December 31, 1996, the Company had $6.4 million of loans to finance the construction of multi-family dwellings and commercial projects. The Company also makes loans to builders for the purpose of developing one- to four-family lots and residential condominium projects. These loans typically have terms of two to three years with interest rates tied to the Company's base rate which is determined by a rate survey of a cross section of local banks. The maximum loan to value ratio is 75%. The principal in these loans is typically paid down as lots or units are sold. These loans may be structured as revolving lines of credit with maturities of generally two years or less. At December 31, 1996, the Company had $2.3 million of development loans to builders. The Company also makes a limited number of land acquisition and commercial real estate construction loans. At December 31, 1996, the Company had $1.0 million in loans secured by land. 9 Construction and development loans are obtained principally through continued business from developers and builders who have previously borrowed from the Company, as well as referrals from existing customers and realtors, and walk-in customers. The application process includes a submission to the Company of accurate plans, specifications and costs of the project to be constructed/developed which are used as a basis to determine the appraised value of the subject property. Loans are based on the lesser of current appraised value and/or the cost of construction (land plus building). At December 31, 1996, the Company's largest construction and development loan was a construction loan for a sports center with a $1.1 million commitment and an aggregate outstanding balance of $357,000. The Company had no non-performing construction loans at December 31, 1996. Construction and land development loans generally present a higher level of risk than loans secured by one- to four-family residences. Because of the uncertainties inherent in estimating land development and construction costs and the market for the project upon completion, it is relatively difficult to evaluate accurately the total loan funds required to complete a project, the related loan-to-value ratios and the likelihood of ultimate success of the project. Construction and land development loans to borrowers other than owner-occupants also involve many of the same risks discussed above regarding multi-family and commercial real estate loans and tend to be more sensitive to general economic conditions than many other types of loans. Consumer Lending The Company originates a variety of different types of consumer loans, including home equity loans, direct automobile loans, home improvement loans, credit card loans, deposit account loans and other secured and unsecured loans for household and personal purposes. At December 31, 1996, consumer loans totaled $9.8 million or 5.83% of total loans outstanding. Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower. The largest component of consumer lending is home equity loans which totaled $7.4 million or 4.41% of the total loan portfolio at December 31, 1996. The Company is currently offering a revolving line of credit home equity loan on which the total commitment amount may not exceed 95% of the appraised value of the property, with a five year term and minimum monthly payment requirement of interest due only. The Company's home equity loan portfolio also contains equity loans which were written so that the total commitment amount, when combined with the balance of the first mortgage lien, would not exceed 80% of the appraised value of the property. These loans were revolving lines of credit with adjustable rates and had a ten year term with a minimum monthly payment requirement of 2% of the unpaid balance; however, as of July 1995 the Company was no longer originating such loans. At December 31, 1996, the Company had $7.8 million of unused credit available under its home equity line of credit program. The underwriting standards employed by the Company for consumer loans include a determination of the applicant's payment history on other debts and ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is of primary consideration, the underwriting process also includes a comparison of the value of the 10 security, if any, in relation to the proposed loan amount. Consumer loans may entail greater credit risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. Commercial Business Lending At December 31, 1996, $4.8 million or 2.87% of the Company's total loans were comprised of commercial business loans. LSB's current commercial business lending activities encompass predominantly unsecured lines of credit and purchased leases secured by small business equipment such as copy and facsimile machines. At December 31, 1996, the Company had $2.4 million of loans secured by purchased leases through Bennett Funding Group ("Bennett"). See " - Non- Performing Assets - Non-Accruing Loans." At December 31, 1996, the Company had $499,000 of unsecured lines of credit outstanding with $253,000 of unused credit available. During the early part of 1994, the Company hired an experienced commercial loan officer to develop this area of lending, as well as its commercial real estate portfolio. At December 31, 1996, the Company's commercial business loans totaled $2.4 million compared to $1.3 million at December 31, 1994 (excluding Bennett). The Company intends to continue to increase its portfolio of commercial business loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower's ability to make repayment from his or her employment and other income and which are secured by real property the value of which tends to be more easily ascertainable, commercial business loans typically are made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself (which, in turn, is likely to be dependent upon the general economic environment). The Company's commercial business loans are sometimes, but not always, secured by business assets. However, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. The Company recognizes the generally increased risks associated with commercial business lending. LSB's commercial business lending policy emphasizes credit file documentation and analysis of the borrower's character, capacity to repay the loan, the adequacy of the borrower's capital and collateral as well as an evaluation of the industry conditions affecting the borrower. Analysis of the borrower's past, present and future cash flows is also an important aspect of LSB's credit analysis. 11 Loan Originations, Purchases and Sales Real estate loans are originated by LSB's staff of salaried loan officers and its residential mortgage loan originator who receive applications from existing customers, walk-in customers, and referrals from realtors. All types of loans may be originated in any of the Company's four offices. While the Company originates both adjustable-rate and fixed-rate loans, its ability to originate loans is dependent upon the relative customer demand for loans in its market. Demand is affected by the interest rate environment. Currently, all conforming fixed-rate residential mortgage loans with maturities of 15 years and over are originated for sale in the secondary market. The Company currently sells such loans primarily to FHLMC while retaining the servicing rights. These loans are originated to satisfy customer demand and to generate fee income and are sold to achieve the goals of the Company's asset/liability management program. When loans are sold, the Company retains the responsibility for collecting and remitting loan payments, inspecting the properties, making certain that insurance and real estate tax payments are made on behalf of borrowers, and otherwise servicing the loans. The Company receives a servicing fee for performing these services. The amount of servicing fees received by the Company varies but is generally calculated at 3/8 of 1% per annum for ARMs, and 1/4 of 1% per annum for fixed-rate mortgage loans based on the outstanding principal amount of the loans serviced. The Company services for others mortgage loans that it originated and sold amounting to $39.1 million at December 31, 1996. The Company purchases a limited amount of participation interests in real estate loans from other financial institutions outside its primary market area. The Company currently has loan participations in Indianapolis, Indiana, Michigan and Illinois. The Company carefully reviews and underwrites all loans to be purchased to insure that they meet the Company's underwriting standards. In periods of rising interest rates, the Company's ability to originate large dollar volumes of real estate loans may be substantially reduced or restricted, with a resultant decrease in related fee income and operating earnings. In addition, the Company's ability to sell loans may substantially decrease as potential buyers reduce their purchasing activities. 12 The following table shows the loan and mortgage-backed security origination, purchase, sale and repayment activities of the Company for the periods indicated.
Year Ended December 31, ------------------------------ 1994 1995 1996 ---- ---- ---- (In Thousands) Originations by type: Adjustable rate: Real estate - one- to four-family ..................... $ 12,361 $ 17,535 $ 15,050 - multi-family .......................... 3,274 5,544 7,872 - commercial ............................ 3,536 4,787 3,690 - construction, land and land development 1,310 1,710 48 Non-real estate - consumer ............................ 870 1,704 4,909 - commercial business ................... 631 -- 375 -------- -------- -------- Total adjustable-rate .......................... 21,982 31,280 31,944 -------- -------- -------- Fixed-rate: Real estate - one- to four-family(1) .................. 8,458 18,009 21,538 - multi-family .......................... -- -- 344 - commercial ............................ 667 30 878 - construction, land and land development 5,526 14,661 14,117 Non-real estate - consumer ............................ 2,274 1,282 3,111 - commercial business ................... 999 3,565 5,778 -------- -------- -------- Total fixed-rate ............................... 17,924 37,547 45,766 -------- -------- -------- Total loans originated ......................... 39,906 68,827 77,710 -------- -------- -------- Purchases: Real estate - one- to four-family ..................... -- -- 406 - multi-family .......................... -- 550 -- - commercial ............................ 600 416 51 Non-real estate - consumer ............................ -- -- -- - commercial business ................... -- -- -- -------- -------- -------- Total loans purchased .......................... 600 966 457 -------- -------- -------- Mortgage-backed securities (excluding REMICs and CMOs) ..................................... 1,054 -- -- REMICs and CMOs ....................................... -- -- -- -------- -------- -------- Total mortgage-backed securities purchased ..................................... 1,054 -- -- -------- -------- -------- Total purchases ................................ 1,654 966 457 -------- -------- -------- Sales and Repayments: Real estate - one- to four-family ..................... 3,026 7,748 14,288 - multi-family .......................... -- -- -- - commercial ............................ -- 225 -- Non-real estate - consumer ............................. -- -- -- - commercial business ................... -- -- -- -------- -------- -------- Total loans sold ............................... 3,026 7,973 14,288 Principal repayments .................................. 16,861 28,301 37,062 -------- -------- -------- Total loans sold and repayments ................ 19,887 36,274 51,350 Mortgage-backed securities: Principal repayments .................................. 3,079 714 738 Increase (decrease) in other items, net ................. (231) 249 (34) -------- -------- -------- Net increase ................................... $ 18,363 $ 33,054 $ 26,045 ======== ======== ========
- ------------- (1) Includes $0, $8.4 million and $6.8 million of loans originated during 1994, 1995 and 1996, respectively, which carry a fixed rate of interest for the initial five or seven years and then convert to an adjustable rate of interest for the remaining term of the loan. 13 Asset Quality When a borrower fails to make a required payment on a loan, the Company attempts to cause the delinquency to be cured by contacting the borrower. In the case of residential loans, a late notice is sent for accounts seven or more days delinquent. If the delinquency is not cured by the 15th day, the borrower will be assessed a late charge. Additional written and oral contacts may be made with the borrower between 20 and 30 days after the due date. If the delinquency continues for a period of 60 days, the Company usually sends a default letter to the borrower and, after 90 days, institutes appropriate action to foreclose on the property. If foreclosed, the property is sold at public auction and may be purchased by the Company. Delinquent consumer loans are handled in a generally similar manner. The Company's procedures for repossession and sale of consumer collateral are subject to various requirements under Indiana consumer protection laws. The Company's levels of delinquent loans have not been significant in recent years. Delinquent Loans. The following table sets forth information concerning delinquent loans at December 31, 1996, in dollar amounts and as a percentage of each category of the Company's loan portfolio. The amounts presented represent the total remaining principal balances of the related loans, rather than the actual payment amounts which are overdue.
Loans Delinquent For: -------------------------------------------------------------- 60-89 Days 90 Days and Over Total Delinquent Loans --------------------------- --------------------------- --------------------------- Percent Percent Percent of Loan of Loan of Loan Number Amount Category Number Amount Category Number Amount Category ------ ------ -------- ------ ------ -------- ------ ------ -------- (Dollars in Thousands) Real Estate: One- to four-family...... 4 $339 0.35% 2 $ 93 0.10% 6 $ 432 0.45% Consumer.................. 2 10 0.10 --- --- --- 2 10 0.10 Commercial business........ --- --- --- 1 2,391 49.55 1 2,391 49.55 --- ------ --- ------- --- ------- Total 6 $349 0.21% 3 $2,484 1.48% 9 $2,833 1.69% === ==== === ====== === ======
14 Non-Performing Assets. The table below sets forth the amounts and categories of non-performing assets. Interest income on loans is accrued over the term of the loans based upon the principal outstanding except where serious doubt exists as to the collectibility of a loan, in which case the accrual of interest is discontinued. For all years presented, the Company has had no troubled debt restructurings (which involve forgiving a portion of interest or principal on any loans or making loans at a rate or with a maturity less than that customary in the Company's market). Foreclosed assets include assets acquired in settlement of loans. The loan amounts shown do not reflect reserves set up against such assets. See "- Allowance for Loan Losses."
December 31, ------------------------------------------------------------- 1992 1993 1994 1995 1996 ------------------------------------------------------------- (Dollars in Thousands) Non-accruing loans: One- to four-family ...................... $ 194 $ 39 $ 39 $ -- $ 93 Construction ............................. 22 -- -- -- -- Consumer ................................. 7 7 6 -- -- Commercial business ...................... -- -- -- -- 2,391(1) -------- -------- -------- ------------ -------- Total ............................... 223 46 45 -- 2,484 -------- -------- -------- ------------ -------- Accruing loans delinquent more than 90 days: One- to four-family ...................... -- 21 -- -- -- -------- -------- -------- ------------ -------- Total ................................. -- 21 -- -- -- -------- -------- -------- ------------ -------- Total non-performing assets ................ $ 223 $ 67 $ 45 $ -- $ 2,484 ======== ======== ======== ============ ======== Total as a percentage of total assets ...... 0.21% 0.06% 0.04% ---% 1.35% ======== ======== ======== ============ ======== Total assets ............................... $106,303 $110,697 $124,339 $ 158,973 $184,607 ======== ======== ======== ============ ========
- ----------------- (1) See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Comparison of Operating Results for the Years Ended December 31, 1995 and December 31, 1996 - Provision for Loan Losses" in the Annual Report for a discussion on Bennett. For the year ended December 31, 1996, gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms was $185,000, none of which was included in interest income. Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the Office of Thrift Supervision ("OTS") to be of lesser quality, as "substandard," "doubtful" or "loss." 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 insured institution 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 institution to sufficient risk to warrant classification in one of the 15 aforementioned categories but possess weaknesses are required to be designated "special mention" by management. When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances for loan losses in an amount deemed prudent by management. 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 that portion 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 and the FDIC, which may order the establishment of additional general or specific loss allowances. In connection with the filing of its periodic reports with the OTS and in accordance with its classification of assets policy, the Bank regularly reviews the problem assets in its portfolio to determine whether any assets require classification in accordance with applicable regulations. At December 31, 1996, the Bank had classified $1.5 million of its loans as substandard $844,000 as doubtful and none as loss. At December 31, 1996, the Bank had designated $1.2 million in loans as special mention. Other Loans of Concern. Included in other loans of concern are certain potential problem loans which are classified as substandard or have been categorized as special mention that management believes are adequately secured and for which no material loss is expected, but as to which certain circumstances may cause the borrowers to be unable to comply with the present loan repayment terms at some future date. Such potential problem loans consist primarily of (i) a single family residence and a multi-family residential rental property to a single borrower with outstanding balances of $362,000 at December 31, 1996, to which management has concerns as to the cash flow of the borrower; (ii) multiple loans to a single borrower secured by a retail store and the personal residence of the borrower with an outstanding balance of $304,000 at December 31, 1996 (which was restructured during 1988 whereby interest past due was written as a separate note due and payable when the borrower's other outstanding debt has been paid off), where the retail store is experiencing cash flow problems; and (iii) multiple loans to a single borrower secured by one- to four-family residential rental property and a multi-family residential rental property with an outstanding balance of $297,000 at December 31, 1996, where management has concerns about the cash flow of the borrower. The majority of the remaining classified assets are single loans to borrowers for residential property. Allowance for Loan Losses. The Company establishes an allowance for loan losses based on a systematic analysis of risk factors in the loan portfolio. This analysis includes evaluation of concentrations of credit, past loss experience, current economic conditions, amount and composition of the loan portfolio, estimated fair value of the underlying collateral, loan commitments outstanding, delinquencies, industry standards and other factors. Because the Company has had only nominal loan losses during its recent past, management also considers the loss experience of similar portfolios in comparable lending markets as well as using the services of a consultant to assist in the evaluation of its growing commercial real estate and business loan portfolios. Management's analysis results in the allocation of allowance amounts to each loan type. Although, management 16 believes it uses the best information available to make such determinations, future adjustments to reserves may be necessary, and net income could be significantly affected, if circumstances differ substantially from the assumptions used in making the initial determinations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations Provision for Loan Losses." The following table sets forth an analysis of the Company's allowance for loan losses. Year Ended December ---------------------------------- 1994 1995 1996 --------- ---------- --------- (Dollars in Thousands) Balance at beginning of period ....... $ 922 $ 926 $ 922 Charge-offs: Consumer ........................... -- 6 7 ------ ------ ------ Total Charge-offs ............... -- 6 7 ------ ------ ------ Recoveries: One- to four-family ................ 15 -- -- Consumer ........................... 4 2 -- ------ ------ ------ Total recoveries ................ 19 2 -- ------ ------ ------ Net charge-offs (recoveries) ......... (19) 4 7 Additions charged to operations ...... (15) -- 800 ------ ------ ------ Balance at end of period ............. $ 926 $ 922 $1,715 ====== ====== ====== Net charge-offs to average loans ..... -- -- ---% outstanding Allowance for loan losses to non- .... 2057.8% -- 60.5% performing loans Allowance for loan losses to net loans at end of period .................... 0.94% 0.70% 1.08% The allocation of the Company's allowance for losses on loans at the dates indicated is summarized as follows: 17
December 31, ---------------------------------------------------------------------------------------------------- 1994 1995 1996 ------------------------------- ------------------------------- ------------------------------- Percent Percent Percent of Loans of Loans of Loans Loan in Each Loan in Each Loan in Each Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total Allowance Category Loans Allowance Category Loans Allowance Category Loans --------- -------- -------- --------- -------- -------- --------- -------- -------- (Dollars in Thousands) Real estate: One- to four-family...... $ 221 $ 69,139 68.53% $ 262 $ 86,231 62.40% $ 146 $ 96,987 57.72 Multi-family............. 76 7,643 7.58 120 12,044 8.72 99 19,610 11.67 Commercial real estate... 138 10,712 10.62 181 15,034 10.88 128 19,032 11.33 Land and land development............. 18 2,915 2.89 28 3,880 2.81 39 3,334 1.98 Construction............. 22 3,251 3.22 40 10,379 7.51 7 14,447 8.60 Consumer................. 32 4,620 4.58 36 6,048 4.37 51 9,808 5.84 Commercial business...... 29 2,614 2.59 51 4,570 3.31 997 4,825 2.87 Unallocated.............. 390 --- --- 204 --- --- 248 --- --- ----- -------- ------ ----- -------- ------ ------ -------- ------ Total................. $ 926 $100,894 100.00% $ 922 $138,186 100.00% $1,715 $168,043 100.00% ===== ======== ====== ===== ======== ====== ====== ======== ======
Investment Activities LSB must maintain minimum levels of securities that qualify as liquid assets under OTS regulations. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. Historically, the Company has maintained liquid assets at levels above the minimum requirements imposed by the OTS regulations and above levels believed adequate to meet the requirements of normal operations, including potential deposit outflows. Cash flow projections are regularly reviewed and updated to assure that adequate liquidity is maintained. At December 31, 1996 the Company's liquidity ratio (liquid assets as a percentage of net withdrawable savings deposits and current borrowings) was 7.31%. The Company's level of liquidity is a result of management's asset/liability strategy. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset/Liability Management" and "-Liquidity and Capital Resources" in the Annual Report and "Regulation - Liquidity." Federally chartered savings institutions have the authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, certain bankers' acceptances, repurchase agreements and federal funds. Subject to various restrictions, federally chartered savings institutions may also invest their assets in investment grade commercial paper and corporate debt securities and mutual funds whose assets conform to the investments that a federally chartered savings institution is otherwise authorized to make directly. 18 Generally, the investment policy of the Company is to invest funds among various categories of investments and maturities based upon the Company's asset/liability management policies, concern for the highest investment quality, liquidity needs and performance objectives. At December 31, 1996, the Company's securities portfolio (excluding FHLB Stock) totaled $12.0 million, or 6.48% of total assets. As of such date, the Bank also had a $2.6 million investment in the common stock of the Federal Home Loan Bank ("FHLB") of Indianapolis in order to satisfy the requirement for membership in such institution. It is the Company's general policy to purchase securities which are U.S. Government securities, investment grade municipal and corporate bonds, commercial paper, federal agency obligations, and interest-bearing deposits with the FHLB. The Company owned $4.0 million of mortgage-backed securities at December 31, 1996, all of which were insured or guaranteed by the Federal National Mortgage Association ("FNMA") or the FHLMC. Accordingly, management believes that the Company's mortgage-backed securities are generally more resistant to credit problems than loans, which generally lack such insurance or guarantees. Because these securities represent a passthrough of principal and interest from underlying individual 30-year mortgages, such securities do present prepayment risk. Any such individual security contains mortgages that can be prepaid at any time over the life of the security. In a rising interest rate environment the underlying mortgages are likely to extend their lives versus a stable or declining rate environment. A declining rate environment can result in rapid prepayment. There is no certainty as to the security life or speed of prepayment. The geographic makeup and correlated economic conditions of the underlying mortgages also play an important role in determining prepayment. In addition to prepayment risk, interest rate risk is inherent in holding any debt security. As interest rates rise the value of the security declines and conversely as interest rates decline values rise. Adjustable-rate mortgage-backed securities have the advantage of moving their interest rate within limits with the contractual index used, subject to the risk of prepayment. Interest rate adjustments to $1.7 million of the Company's adjustable-rate mortgage-backed securities are tied to a lagging index, the 11th District cost of funds index, while $1.7 million are tied to a current index, specifically, the six month or twelve month Treasury bill rates or the one month or three month LIBOR rates. At December 31, 1996, 84.35% of the Company's mortgage-backed securities consisted of adjustable-rate mortgage-backed securities. Mortgage-backed securities can serve as collateral for borrowings and, through sales and repayments, as a source of liquidity. Under the Bank's risk-based capital requirement, mortgage- backed securities have a risk weight of 20% in contrast to the 50% risk weight carried by residential loans. See "Regulation." 19 The following table sets forth the composition of the Company's securities portfolio at the dates indicated.
December 31, ---------------------------------------------------------------------------- 1994 1995 1996 ----------------------- ------------------------ --------------------- Carrying % of Carrying % of Carrying % of Value Total Value Total Value Total -------- ----- -------- ----- -------- ----- Debt securities Available for sale: U.S. government securities................ $3,879 49.48% $1,994 22.25% $1,003 19.40% Federal agency obligations................ 1,475 18.81 1,007 11.24 354 6.85 Municipal bonds........................... --- --- 1,703 19.00 984 19.03 Corporate bonds........................... --- --- 1,268 14.15 255 4.93 Commercial paper.......................... --- --- 1,489 16.62 --- --- ------- ------- ------- ------- ------ ------ Subtotal............................... 5,354 68.29 7,461 83.26 2,596 50.20 ------- ------- ------- ------- ------ ------ Held to maturity: Municipal bonds........................... 1,493 19.04 --- --- --- --- Corporate bonds........................... 300 3.83 --- --- --- --- ------- ------- ------- ------- ------ ------ Subtotal............................... 1,793 22.87 --- --- --- --- ------- ------- ------- ------- ------ ------ FHLB stock.................................. 693 8.84 1,500 16.74 2,575 49.80 ------- ------- ------- ------- ------ ------ Total debt securities and FHLB stock........ $7,840 100.00% $8,961 100.00% $5,171 100.00 ====== ====== ====== ====== ====== ====== Average remaining life of debt securities... 1.02 years .58 years .58 years Other interest-earning assets: Interest-bearing deposits with FHLB....... $4,994 100.00% $3,595 100.00% $ 5,410 100.00% ====== ====== ====== ====== ======= ====== Mortgage-backed securities Available for sale: FNMA certificates......................... $2,910 52.46% $2,598 53.74% $ 2,166 54.84% FHLMC certificates........................ 1,721 31.03 2,236 46.26 1,784 45.16 ------- ------- ------- ------- ------ ------ Subtotal................................ 4,631 83.49 4,834 100.00 3,950 100.00 Held to maturity: FHLMC certificates........................ 916 16.51 --- --- --- --- ------- ------- ------- ------- ------ ------ Total mortgage-backed securities....... $5,547 100.00% $4,834 100.00% $ 3,950 100.00% ====== ====== ====== ====== ======= =======
20 The following table sets forth the composition and contractual maturities of the Company's securities portfolio at December 31, 1996. At December 31, 1996, all of the Company's securities were classified as available for sale. The weighted average yields on tax exempt obligations have been computed on a tax equivalent basis.
December 31, 1996 ----------------------------------------------------------------------- Less Than 1 to 5 5 to 10 Over Total Investment 1 Year Years Years 10 Years Securities -------- ------- ------- -------- ----------- Carrying Carrying Carrying Carrying Carrying Market Value Value Value Value Value Value -------- ------- ------- -------- -------- ------ (Dollars in Thousands) U.S. government securities............ $ --- $1,003 $ --- $ --- $1,003 $1,003 Federal agency obligations............ 354 --- --- --- 354 354 Municipal bonds....................... 256 478 --- 250 984 984 Corporate bonds....................... 255 --- --- --- 255 255 FNMA certificates..................... --- --- --- 2,166 2,166 2,166 FHLMC certificates.................... --- 584 --- 1,200 1,784 1,784 -------- ------ ------- ------ ------ ------ Total investment securities............ $ 865 $2,065 $ --- 3,616 $6,546 $6,546 ======== ====== ======= ===== ====== ====== Weighted average yield................. 5.71% 5.92% ---% 6.48% 6.01% 6.01%
Sources of Funds General. The Company's primary sources of funds are deposits, repayment and prepayment of loans, interest earned on or maturation of investment securities and short-term investments, borrowings and funds provided from operations. Deposits. LSB offers a variety of deposit accounts. The Company's deposits consist of passbook and statement savings accounts, money market accounts, NOW accounts and certificate accounts. The Company only solicits deposits from its primary market area and does not use brokers to obtain deposits. The Company relies primarily on competitive pricing policies, advertising, and customer service to attract and retain these deposits. 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 Company has allowed it to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. The Company manages the pricing of its deposits in keeping with its asset/liability management, profitability and growth objectives. Based on its experience, the Company believes that its savings, interest and noninterest-bearing checking accounts are relatively stable sources of deposits. However, the ability of the Company 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. 21 The following table sets forth the savings flows at the Company during the periods indicated. Year Ended December 31, ------------------------------------- 1994 1995 1996 --------- --------- --------- (Dollars in Thousands) Opening balance ........... $ 100,242 $ 107,764 $ 109,977 Deposits .................. 249,784 350,521 472,666 Withdrawals ............... (245,919) (353,169) (469,506) Interest credited ......... 3,657 4,861 3,812 --------- --------- --------- Ending balance ............ $ 107,764 $ 109,977 $ 116,949 ========= ========= ========= Net increase (decrease) ... $ 7,522 $ 2,213 $ 6,972 ========= ========= ========= Percent increase (decrease) 7.50% 2.05% 6.34% ========= ========= ========= The following table sets forth the dollar amount of savings deposits in the various types of deposit programs offered by the Company at the dates indicated.
December 31 ----------------------------------------------------------------- 1994 1995 1996 ---------------------- ------------------ ----------------- Percent Percent Percent Amount of Total Amount of Total Amount of Total -------- -------- ------ -------- ------ -------- (Dollars in Thousands) Transaction and Savings Deposits: Noninterest-bearing..................................... $ 2,517 2.33 $ 3,106 2.82% $ 4,127 3.53% Savings accounts (3.05% at December 31, 1996).......... 20,676 19.17 12,050 10.95 12,538 10.71 NOW Accounts (0-2.47% at December 31, 1996)............. 8,513 7.89 11,341 10.30 11,664 9.97 Money Market Accounts (3.35-3.67% at December 31, 1996).................................... 11,347 10.52 10,272 9.33 9,052 7.74 -------- ------- -------- ------- -------- ------ Total Non-Certificates.................................. 43,053 39.91 36,769 33.41 37,381 31.94 -------- ------- -------- ------- -------- ------ Certificates: 0.00 - 1.99%.......................................... --- --- --- --- --- --- 2.00 - 3.99%.......................................... 8,461 7.84 5 0.00 64 0.05 4.00 - 5.99%.......................................... 40,689 37.72 43,076 39.14 48,677 41.60 6.00 - 7.99%.......................................... 15,276 14.16 30,120 27.37 30,820 26.34 8.00 - and greater..................................... 285 0.26 7 0.01 7 0.01 -------- ------- -------- ------- -------- ------ Total certificates..................................... 64,711 59.99 73,208 66.52 79,568 67.99 Accrued interest....................................... 98 0.09 85 0.08 73 0.06 -------- ------- -------- ------- -------- ------ Total deposits......................................... $107,862 100.00 $110,062 100.00 $117,022 100.00% ======== ======= ======== ====== ======== ======
22 The following table shows rate and maturity information for the Company's certificates of deposit as of December 31, 1996.
2.00- 4.00- 6.00- 8.00- Percent 3.99% 5.99% 7.99% or greater Total of Total ------- ------- ------- ----------- ------- --------- (Dollars in Thousands) Certificate accounts maturing in quarter ending: March 31, 1997...................... $ 25 $10,124 $2,337 $ --- $12,486 15.69% June 30, 1997....................... 39 9,745 3,182 --- 12,966 16.30 September 30, 1997.................. --- 7,298 3,942 --- 11,240 14.13 December 31, 1997................... --- 5,039 2,047 --- 7,086 8.91 March 31, 1998...................... --- 3,539 1,449 --- 4,988 6.27 June 30, 1998....................... --- 4,212 2,038 --- 6,250 7.85 September 30, 1998.................. --- 2,826 7,537 --- 10,363 13.02 December 31, 1998................... --- 1,395 1,386 7 2,788 3.50 March 31, 1999...................... --- 1,571 277 --- 1,848 2.32 June 30, 1999....................... --- 438 3,621 --- 4,059 5.10 September 30, 1999.................. --- 618 689 --- 1,307 1.64 December 31, 1999................... --- 361 862 --- 1,223 1.54 Thereafter.......................... --- 1,511 1,453 --- 2,964 3.73 ---- -------- ------- ----- ------- ------ Total............................ $ 64 $ 48,677 $30,820 $ 7 $79,568 100 00% ==== ======== ======= ===== ======= ====== Percent of total................. 0.08% 61.18% 38.73% 0.01% 100.00% ==== ===== ===== ==== ======
The following table indicates the amount of the Company's certificates of deposit by time remaining until maturity as of December 31, 1996.
Maturity ------------------------------------------------------------- Over Over 3 Months 3 to 6 6 to 12 Over or Less Months Months 12 months Total ---------- -------- --------- ----------- ------- (In Thousands) Certificates of deposit less than $100,000....... $12,360 $10,597 $17,533 $27,476 $67,966 Certificates of deposit of $100,000 or more...... 115 1,228 793 8,314 10,450 Public funds(1).................................. 11 1,141 --- --- 1,152 ------- ------- ------- ------- ------- Total certificates of deposit.................... $12,486 $12,966 $18,326 $35,790 $79,568 ======= ======= ======= ======= =======
- ---------- (1) Deposits from governmental and other public entities. Borrowings. LSB's other available sources of funds include borrowings from the FHLB of Indianapolis and other borrowings. As a member of the FHLB of Indianapolis, the Company is required to own capital stock in the FHLB and is authorized to apply for borrowings from the 23 FHLB. Each FHLB credit program has its own interest rate, which may be fixed or variable, and have a range of maturities. The FHLB of Indianapolis may prescribe the acceptable uses for these, as well as limitations on the size of the borrowings and repayment provisions. The Company utilizes FHLB borrowings as part of its asset/liability management strategy in order to cost effectively extend the maturity of its liabilities. The Company may be required to pay a commitment fee upon application and may be subject to a prepayment fee if the advance is prepaid by the Company. At December 31, 1996, the Company had $50.0 million in advances from the FHLB and the capacity to borrow up to an additional $9.8 million. At that date $32.0 million of such advances have scheduled maturities in 1997; $15.0 million in 1998; and $3.0 million in 1999. The following table sets forth the maximum month-end balance and average balance of FHLB advances and other borrowings for the periods indicated.
Year Ended December 31, ---------------------------------------------- 1994 1995 1996 ------ ------ ------ (In Thousands) Maximum Balance: FHLB advances........................................... $ 7,500 $ 29,364 $ 50,000 Other borrowings........................................ 302 276 243 Average Balance: FHLB advances........................................... $ 3,375 $ 17,947 $ 39,000 Other borrowings........................................ 291 263 234
The following table sets forth certain information as to the Company's borrowings at the dates indicated.
Year Ended December 31, ---------------------------------------------- 1994 1995 1996 ------ ------ ------ (In Thousands) FHLB advances........................................... $ 7,500 $29,364 $ 50,000 Other borrowings........................................ 278 250 220 --------- --------- --------- Total borrowings................................... $ 7,778 $ 29,614 $ 50,220 ======== ======== ======== Weighted average interest rate of FHLB advances......... 5.95% 5.90% 5.65% Weighted average interest rate of other borrowings...... 5.50% 5.50% 5.50%
24 Subsidiary and Other Activities Federal associations generally may invest up to 2% of their assets in service corporations, plus an additional 1% of assets for community purposes. In addition, federal associations may invest, in an amount up to 50% of their total capital, in conforming loans to their service corporations in which they own more than 10% of the capital stock. Federal associations are also permitted to invest an unlimited amount in operating subsidiaries engaged solely in activities which a federal association may engage in directly. The Bank owns a single service corporation, L.S.B. Service Corporation ("LSBSC"). In April 1994, the Company made an initial investment of $51,000 in L.S.B. Service Corporation when it became a 14.16% limited partner in a low-income housing project in Lafayette, Indiana, pursuant to a 10 year commitment totaling $500,000. In February 1995, the Company made a second scheduled investment of $71,000 in the same project, followed by a third scheduled investment of $67,000 in February of 1996. During 1996, LSBSC received $39,000 in tax credit related to its investment in the low income housing project discussed above and recorded a net profit of $18,000. At December 31, 1996, the Bank's total investment in LSBSC was $189,000. The Bank formed Lafayette Insurance and Investments, Inc. ("LIII"), an Indiana corporation, on December 31, 1996. LIII did not engage in any operations during 1996; however, LIII is expected to begin offering various insurance, annuity and investment products and services to the Bank's customers during 1997. Competition LSB faces strong competition, both in originating real estate and other loans and in attracting deposits. Competition in originating real estate loans comes primarily from other savings institutions, commercial banks, credit unions and mortgage bankers making loans secured by real estate located in Tippecanoe County, the Company's primary market area. Other savings institutions, commercial banks, credit unions and finance companies provide vigorous competition in consumer lending. The Company attracts all of its deposits through its branch offices, primarily from the communities in which those branch offices are located; therefore, competition for those deposits is principally from other savings institutions, commercial banks and credit unions located in the same communities as well as mutual funds and other financial intermediaries. The Company competes for these deposits by offering a variety of deposit accounts at competitive rates, convenient business hours and convenient branch locations with interbranch deposit and withdrawal privileges. There are 12 other savings institutions and banks in LSB's primary market area. The Company estimates its share of the savings market and mortgage loans in Tippecanoe County to both be approximately 7%. 25 REGULATION General Lafayette is a federally chartered savings bank, the deposits of which are federally insured and backed by the full faith and credit of the United States Government. Accordingly, Lafayette is subject to broad federal regulation and oversight extending to all its operations. Lafayette is a member of the FHLB of Indianapolis and is subject to certain limited regulation by the Board of Governors of the Federal Reserve System ("Federal Reserve Board"). As the thrift holding company of Lafayette, the Company also is subject to federal regulation and oversight. The purpose of the regulation of the Company and other holding companies is to protect subsidiary savings associations. Lafayette is a member of the BIF and the deposits of Lafayette are insured by the FDIC. As a result, the FDIC has certain regulatory and examination authority over Lafayette. Certain of these regulatory requirements and restrictions are discussed below or elsewhere in this document. Federal Regulation of Savings Associations The OTS has extensive authority over the operations of savings associations. As part of this authority, Lafayette is required to file periodic reports with the OTS and is subject to periodic examinations by the OTS and the FDIC. The last regular OTS and FDIC examinations of Lafayette were as of December 1994 and March 1992, respectively. When these examinations are conducted by the OTS and the FDIC, the examiners may require Lafayette to provide for higher general or specific loan loss reserves. All savings associations are subject to a semi-annual assessment, based upon the savings association's total assets, to fund the operations of the OTS. Lafayette's OTS assessment for the year ended December 31, 1996 was $48,000. The OTS also has extensive enforcement authority over all savings institutions and their holding companies, including Lafayette and the Company. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with the OTS. Except under certain circumstances, public disclosure of final enforcement actions by the OTS is required. In addition, the investment, lending and branching authority of Lafayette is prescribed by federal laws, and it is prohibited from engaging in any activities not permitted by such laws. For instance, no savings institution may invest in non-investment grade corporate debt securities. In addition, the permissible level of investment by federal associations in loans secured by non-residential real property may not exceed 400% of total capital, except with approval of the OTS. Federal savings associations are also generally authorized to branch nationwide. Lafayette is in compliance with the noted restrictions. 26 Lafayette's general permissible lending limit for loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired capital and surplus (except for loans fully secured by certain readily marketable collateral, in which case this limit is increased to 25% of unimpaired capital and surplus). At December 31, 1996, Lafayette's lending limit under this restriction was $2.3 million. See "Lending Activities - General." The OTS, as well as the other federal banking agencies, has adopted guidelines establishing safety and soundness standards on such matters as loan underwriting and documentation, asset quality, earnings standards, internal controls and audit systems, interest rate risk exposure and compensation and other employee benefits. Any institution which fails to comply with these standards must submit a compliance plan. A failure to submit a plan or to comply with an approved plan will subject the institution to further enforcement action. The OTS and other federal banking agencies have also proposed additional guidelines on asset quality and earnings standards. No assurance can be given as to whether or in what form the proposed regulations will be adopted. Insurance of Accounts and Regulation by the FDIC Lafayette is a member of the BIF, which is administered by the FDIC. Deposits are insured up to applicable limits by the FDIC and such insurance is backed by the full faith and credit of the United States Government. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the BIF or the Savings Association Insurance Fund (the "SAIF"). The FDIC also has the authority to initiate enforcement actions against savings associations, after giving the OTS an opportunity to take such action, and may terminate the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices, or is in an unsafe or unsound condition. The FDIC's deposit insurance premiums are assessed through a risk-based system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their level of capital and supervisory evaluation. Under the system, institutions classified as well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1 or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at least 6% and a risk-based capital ratio of at least 10%) and considered healthy pay the lowest premium while institutions that are less than adequately capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a risk-based capital ratio of less than 8%) and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions will be made by the FDIC for each semi-annual assessment period. As is the case with the SAIF, the FDIC is authorized to adjust the insurance premium rates for banks that are insured by the BIF, such as Lafayette, in order to maintain the reserve ratio of the BIF at 1.25% of BIF insured deposits. As a result of the BIF reaching its statutory reserve ratio the FDIC revised the premium schedule for BIF insured institutions to provide a range of .04% to .31% of deposits effective in the third quarter of 1995. In addition, the BIF rates were further revised, effective January 1996, to provide a range of 0% to .27% with a minimum annual assessment of $2,000. The insurance premiums paid by institutions insured by the SAIF were not adjusted, 27 however, and remained at the range previously applicable to both BIF and SAIF insured institutions which was .23% to .31% of deposits. In addition, BIF insured institutions are required to contribute to the cost if financial bonds issued to finance the cost of resolving thrift failures in the 1980s. Until the earlier of the year 2000 or when the BIF and SAIF are merged BIF deposits will only be assessed at a rate of 20% of the rate for SAIF deposits. The rate currently set for BIF and SAIF deposits is 1.3 basis points and 6.5 basis points, respectively. On September 30, 1996 federal legislation was enacted that required the SAIF to be recaptalized with a one-time assessment on virtually all SAIF insured institutions, equal to 65.7 basis points on SAIF insured deposits maintained by those institutions as of March 31, 1995. Regulatory Capital Requirements Federally insured savings associations, such as Lafayette, are required to maintain a minimum level of regulatory capital. The OTS has established capital standards, including a tangible capital requirement, a leverage ratio (or core capital) requirement and a risk-based capital requirement applicable to such savings associations. These capital requirements must be generally as stringent as the comparable capital requirements for national banks. The OTS is also authorized to impose capital requirements in excess of these standards on individual associations on a case-by-case basis. The capital regulations require tangible capital of at least 1.5% of adjusted total assets. Tangible capital generally includes common stockholders' equity and retained income, and certain noncumulative perpetual preferred stock and related income. In addition, all intangible assets, other than a limited amount of purchased mortgage servicing rights, must be deducted from tangible capital. At December 31, 1996, the Company did not have any significant intangible assets. The OTS regulations establish special capitalization requirements for savings associations that own subsidiaries. In determining compliance with the capital requirements, all subsidiaries engaged solely in activities permissible for national banks or engaged in certain other activities solely as agent for its customers are "includable" subsidiaries that are consolidated for capital purposes in proportion to the association's level of ownership. The Bank had no such excludable investments at December 31, 1996. At December 31, 1996, Lafayette had tangible capital of $15.1 million, or 8.23% of adjusted total assets, which is $12.4 million above the minimum requirement of 1.5% of adjusted total assets in effect on that date. The capital standards also require core capital equal to at least 3% of adjusted total assets. Core capital generally consists of tangible capital plus certain intangible assets, including a limited amount of purchased credit card relationships. As a result of the prompt corrective action provisions discussed below, however, a savings association must maintain a core capital ratio of at least 4% to be considered adequately capitalized unless its supervisory condition is such to allow it to maintain a 3% ratio. At December 31, 1996, Lafayette had no intangibles which were subject to these tests. 28 At December 31, 1996, Lafayette had core capital equal to $15.1 million, or 8.23% of adjusted total assets, which is $9.6 million above the minimum leverage ratio requirement of 3% as in effect on that date. The OTS risk-based requirement requires savings associations to have total capital of at least 8% of risk-weighted assets. Total capital consists of core capital, as defined above, and supplementary capital. Supplementary capital consists of certain permanent and maturing capital instruments that do not qualify as core capital and general valuation loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used to satisfy the risk-based requirement only to the extent of core capital. The OTS is also authorized to require a savings association to maintain an additional amount of total capital to account for concentration of credit risk and the risk of non-traditional activities. At December 31, 1996, Lafayette had no capital instruments that qualify as supplementary capital and $1.5 million of general loss reserves, all of which currently qualifies as supplementary capital. Certain exclusions from capital and assets are required to be made for the purpose of calculating total capital. Such exclusions consist of equity investments (as defined by regulation) and that portion of land loans and nonresidential construction loans in excess of an 80% loan-to-value ratio and reciprocal holdings of qualifying capital instruments. Lafayette had no such exclusions from capital and assets at December 31, 1996 In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet items, will be multiplied by a risk weight, ranging from 0% to 100%, based on the risk inherent in the type of asset. For example, the OTS has assigned a risk weight of 50% for prudently underwritten permanent one- to four-family first lien mortgage loans not more than 90 days delinquent and having a loan to value ratio of not more than 80% at origination unless insured to such ratio by an insurer approved by the FNMA or FHLMC. OTS regulations also require that every savings association with more than normal interest rate risk exposure to deduct from its total capital, for purposes of determining compliance with such requirement, an amount equal to 50% of its interest-rate risk exposure multiplied by the present value of its assets. This exposure is a measure of the potential decline in the net portfolio value of a savings association, greater than 2% of the present value of its assets, based upon a hypothetical 200 basis point increase or decrease in interest rates (whichever results in a greater decline). Net portfolio value is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. The rule will not become effective until the OTS evaluates the process by which savings associations may appeal an interest rate risk deduction determination. It is uncertain as to when this evaluation may be completed. Any savings association with less than $300 million in assets and a total capital ratio in excess of 12% is exempt from this requirement unless the OTS determines otherwise. On December 31, 1996 Lafayette had total capital of $16.6 million (including $15.1 million in core capital and $1.5 million in qualifying supplementary capital) and risk-weighted assets of $133.6 million (including $13.6 million in converted off-balance sheet assets); or total capital of 12.44% of risk-weighted assets. This amount was $5.9 million above the 8% requirement in effect on that date. 29 The OTS and the FDIC are authorized and, under certain circumstances required, to take certain actions against savings associations that fail to meet their capital requirements. The OTS is generally required to take action to restrict the activities of an "undercapitalized association" (generally defined to be one with less than either a 4% core capital ratio, a 4% Tier 1 risked-based capital ratio or an 8% risk-based capital ratio). Any such association must submit a capital restoration plan and until such plan is approved by the OTS may not increase its assets, acquire another institution, establish a branch or engage in any new activities, and generally may not make capital distributions. The OTS is authorized to impose the additional restrictions that are applicable to significantly undercapitalized associations. As a condition to the approval of the capital restoration plan, any company controlling an undercapitalized association must agree that it will enter into a limited capital maintenance guarantee with respect to the institution's achievement of its capital requirements. Any savings association that fails to comply with its capital plan or is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios of less than 3% or a risk-based capital ratio of less than 6%) must be made subject to one or more of additional specified actions and operating restrictions which may cover all aspects of its operations and include a forced merger or acquisition of the association. An association that becomes "critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is subject to further mandatory restrictions on its activities in addition to those applicable to significantly undercapitalized associations. In addition, the OTS must appoint a receiver (or conservator with the concurrence of the FDIC) for a savings association, with certain limited exceptions, within 90 days after it becomes critically undercapitalized. Any undercapitalized association is also subject to the general enforcement authority of the OTS and the FDIC, including the appointment of a conservator or a receiver. The OTS is also generally authorized to reclassify an association into a lower capital category and impose the restrictions applicable to such category if the institution is engaged in unsafe or unsound practices or is in an unsafe or unsound condition. The imposition by the OTS or the FDIC of any of these measures on Lafayette may have a substantial adverse effect on Lafayette's operations and profitability and the value of its common stock. Company shareholders do not have preemptive rights, and therefore, if the Company is directed by the OTS or the FDIC to issue additional shares of common stock, such issuance may result in the dilution in the percentage of ownership of the Company. Limitations on Dividends and Other Capital Distributions OTS regulations impose various restrictions on savings associations with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account. OTS regulations also prohibit a savings association from declaring or paying any dividends or from repurchasing any of its stock if, as a result, the regulatory capital of the association would be reduced below the amount required to be maintained for the liquidation account established in connection with its mutual to stock conversion. 30 Generally, savings associations, such as Lafayette, that before and after the proposed distribution meet their capital requirements, may make capital distributions during any calendar year equal to the greater of 100% of net income for the year-to-date plus 50% of the amount by which the lesser of the association's tangible, core or risk-based capital exceeds its capital requirement for such capital component, as measured at the beginning of the calendar year, or 75% of their net income for the most recent four quarter period. However, an association deemed to be in need of more than normal supervision by the OTS may have its dividend authority restricted by the OTS. The Bank may pay dividends in accordance with this general authority. Savings associations proposing to make any capital distributions need only submit written notice to the OTS 30 days prior to such distribution. Savings associations that do not, or would not, meet their current minimum capital requirements following a proposed capital distribution, however, must obtain OTS approval prior to making such distribution. The OTS may object to the distribution during that 30-day notice period based on safety and soundness concerns. See "- Regulatory Capital Requirements." The OTS has proposed regulations that would revise the current capital distribution restrictions. Under the proposal a savings association may make a capital distribution without notice to the OTS (unless it is a subsidiary of a holding company) provided that it has a CAMEL 1 or 2 rating, is not of supervisory concern, and would remain adequately capitalized (as defined in the OTS prompt corrective action regulations) following the proposed distribution. Savings associations that would remain adequately capitalized following the proposed distribution but do not meet the other noted requirements must notify the OTS 30 days prior to declaring a capital distribution. The OTS stated it will generally regard as permissible that amount of capital distributions that do not exceed 50% of the institution's excess regulatory capital plus net income to date during the calendar year. A savings association may not make a capital distribution without prior approval of the OTS and the FDIC if it is undercapitalized before, or as a result of, such a distribution. As under the current rule, the OTS may object to a capital distribution if it would constitute an unsafe or unsound practice. No assurance may be given as to whether or in what form the regulations may be adopted. Liquidity All savings associations, including Lafayette, are required to maintain an average daily balance of liquid assets equal to a certain percentage of the sum of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less. For a discussion of what the Company includes in liquid assets, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" in the Annual Report to Stockholders. This liquid asset ratio requirement may vary from time to time (between 4% and 10%) depending upon economic conditions and savings flows of all savings associations. At the present time, the minimum liquid asset ratio is 5%. In addition, short-term liquid assets (e.g., cash, certain time deposits, certain bankers acceptances and short-term United States Treasury obligations) currently must constitute at least 1% of the association's average daily balance of net withdrawable deposit accounts and current borrowings. Penalties may be imposed upon associations for violations of either liquid asset ratio 31 requirement. At December 31, 1996, Lafayette was in compliance with both requirements, with an overall liquid asset ratio of 7.31% and a short-term liquid assets ratio of 6.36%. Qualified Thrift Lender Test All savings associations, including Lafayette, are required to meet a qualified thrift lender ("QTL") test to avoid certain restrictions on their operations. This test requires a savings association to have at least 65% of its portfolio assets (as defined by regulation) in qualified thrift investments on a monthly average for nine out of every 12 months on a rolling basis. As an alternative, the savings association may maintain 60% of its assets in those assets specified in Section 7701(a)(19) of the Internal Revenue Code of 1986, as amended, (the "Code"). Under either test, such assets primarily consist of residential housing related loans and investments. At December 31, 1996, Lafayette met the test and has always met the test since its effectiveness. Any savings association that fails to meet the QTL test must convert to a national bank charter, unless it requalifies as a QTL and thereafter remains a QTL. If an association does not requalify and converts to a national bank charter, it must remain SAIF-insured until the FDIC permits it to transfer to the BIF. If such an association has not yet requalified or converted to a national bank, its new investments and activities are limited to those permissible for both a savings association and a national bank, and it is limited to national bank branching rights in its home state. In addition, the association is immediately ineligible to receive any new FHLB borrowings and is subject to national bank limits for payment of dividends. If such association has not requalified or converted to a national bank within three years after the failure, it must divest of all investments and cease all activities not permissible for a national bank. In addition, it must repay promptly any outstanding FHLB borrowings, which may result in prepayment penalties. If any association that fails the QTL test is controlled by a holding company, then within one year after the failure, the holding company must register as a bank holding company and become subject to all restrictions on bank holding companies. See "- Holding Company Regulation." Community Reinvestment Act Under the Community Reinvestment Act ("CRA"), every FDIC insured institution has a continuing and affirmative obligation consistent with safe and sound banking practices to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with the examination of Lafayette, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications, such as a merger or the establishment of a branch, by Lafayette. An unsatisfactory rating may be used as the basis for the denial of an application by the OTS. The federal banking agencies, including the OTS, have recently revised the CRA regulations and the methodology for determining an institution's compliance with the CRA in 1995. Due to the heightened attention being given to the CRA in the past few years, the Bank may be required to 32 devote additional funds for investment and lending in its local community. The Bank was examined for CRA compliance in April 1996 and received a rating of outstanding. Transactions with Affiliates Generally, transactions between a savings association or its subsidiaries and its affiliates are required to be on terms as favorable to the association as transactions with non-affiliates. In addition, certain of these transactions, such as loans to an affiliate, are restricted to a percentage of the association's capital. Affiliates of Lafayette include the Company and any company which is under common control with Lafayette. In addition, a savings association may not lend to any affiliate engaged in activities not permissible for a bank holding company or acquire the securities of most affiliates. Lafayette's subsidiaries are not deemed affiliates, however; the OTS has the discretion to treat subsidiaries of savings associations as affiliates on a case by case basis. Certain transactions with directors, officers or controlling persons are also subject to conflict of interest regulations enforced by the OTS. These conflict of interest regulations and other statutes also impose restrictions on loans to such persons and their related interests. Among other things, such loans must be made on terms substantially the same as for loans to unaffiliated individuals. Holding Company Regulation The Company is a unitary thrift holding company subject to regulatory oversight by the OTS. As such, the Company is required to register and file reports with the OTS and is subject to regulation and examination by the OTS. In addition, the OTS has enforcement authority over the Company and its non-savings association subsidiaries which also permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association. As a unitary thrift holding company, the Company generally is not subject to activity restrictions. If the Company acquires control of another savings association as a separate subsidiary, it would become a multiple thrift holding company, and the activities of the Company and any of its subsidiaries (other than Lafayette or any other savings association) would become subject to such restrictions unless such other associations each qualify as a QTL and were acquired in a supervisory acquisition. If Lafayette fails the QTL test, the Company must obtain the approval of the OTS prior to continuing after such failure, directly or through its other subsidiaries, any business activity other than those approved for multiple thrift holding companies or their subsidiaries. In addition, within one year of such failure the Company must register as, and will become subject to, the restrictions applicable to bank holding companies. The activities authorized for a bank holding company are more limited than are the activities authorized for a unitary or multiple thrift holding company. See "--Qualified Thrift Lender Test." The Company must obtain approval from the OTS before acquiring control of any savings association. Such acquisitions are generally prohibited if they result in a multiple thrift holding company controlling savings associations in more than one state. However, such interstate 33 acquisitions are permitted based on specific state authorization or in a supervisory acquisition of a failing savings association. Federal Securities Law The stock of the Company is registered with the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the SEC under the Exchange Act. Company stock held by persons who are affiliates (generally officers, directors and principal stockholders) of the Company may not be resold without registration or unless sold in accordance with certain resale restrictions. If the Company meets specified current public information requirements, each affiliate of the Company is able to sell in the public market, without registration, a limited number of shares in any three-month period. Federal Reserve System The Federal Reserve Board requires all depository institutions to maintain non-interest-bearing reserves at specified levels against their transaction accounts (primarily checking, NOW and Super NOW checking accounts). At December 31, 1996, Lafayette was in compliance with these reserve requirements. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements that may be imposed by the OTS. See "--Liquidity." Savings associations are authorized to borrow from the Federal Reserve Bank "discount window," but Federal Reserve Board regulations require associations to exhaust other reasonable alternative sources of funds, including FHLB borrowings, before borrowing from the Federal Reserve Bank. Federal Home Loan Bank System Lafayette is a member of the FHLB of Indianapolis, which is one of 12 regional FHLBs, that administers the home financing credit function of savings associations. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from 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 which are subject to the oversight of the Federal Housing Finance Board. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term advances are required to provide funds for residential home financing. As a member, Lafayette is required to purchase and maintain stock in the FHLB of Indianapolis. At December 31, 1996, Lafayette had $2.6 million in FHLB stock, which was in compliance with this requirement. In past years, Lafayette has received substantial dividends on its FHLB stock. Over the past five calendar years such dividends have averaged 8.03% and were 7.67% for calendar year 1996. For the year ended December 31, 1996, dividends paid by the FHLB of 34 Indianapolis to Lafayette totaled $157,000, which constitutes a $77,000 increase from the amount of dividends received in calendar year 1995. Under federal law the FHLBs are required to provide funds for the resolution of troubled savings associations and to contribute to low- and moderately priced housing programs through direct loans or interest subsidies targeted for community investment and low- and moderate-income housing projects. These contributions have affected adversely the level of FHLB dividends paid and could continue to do so in the future. These contributions could also have an adverse effect on the value of FHLB stock in the future. A reduction in value of Lafayette's FHLB stock may result in a corresponding reduction in Lafayette's capital. Federal and State Taxation Savings associations such as the Bank that meet certain definitional tests relating to the composition of assets and other conditions prescribed by the Code had been permitted to establish reserves for bad debts and to make annual additions thereto which may, within specified formula limits, be taken as a deduction in computing taxable income for federal income tax purposes. The amount of the bad debt reserve deduction for "non-qualifying loans" was computed under the experience method. The amount of the bad debt reserve deduction for "qualifying real property loans" (generally loans secured by improved real estate) may be computed under either the experience method or the percentage of taxable income method (based on an annual election). Under the experience method, the bad debt reserve deduction was an amount determined under a formula based generally upon the bad debts actually sustained by the savings association over a period of years. The percentage of specially computed taxable income that was used to compute a savings association's bad debt reserve deduction under the percentage of taxable income method (the "percentage bad debt deduction") was 8%. The percentage bad debt deduction thus computed was reduced by the amount permitted as a deduction for non-qualifying loans under the experience method. The availability of the percentage of taxable income method permits qualifying savings associations to be taxed at a lower effective federal income tax rate than that applicable to corporations generally (approximately 31.3% assuming the maximum percentage bad debt deduction). Under the percentage of taxable income method, the percentage bad debt deduction cannot exceed the amount necessary to increase the balance in the reserve for "qualifying real property loans" to an amount equal to 6% of such loans outstanding at the end of the taxable year or the greater of (i) the amount deductible under the experience method or (ii) the amount which when added to the bad debt deduction for "non-qualifying loans" equals the amount by which 12% of the amount comprising savings accounts at year-end exceeds the sum of surplus, undivided profits and reserves at the beginning of the year. In August 1996, legislation was enacted that repeals the reserve method of accounting (including the percentage of taxable income method) used by many thrifts, including the Bank, to calculate their bad debt reserve for federal income tax purposes. As a result, thrifts such as the Bank 35 must recapture that portion of the reserve that exceeds the amount that could have been taken under the specific charge-off method for post 1987 tax years. The legislation also requires thrifts to account for bad debts for federal income tax purposes on the same basis as commercial banks for tax years beginning after December 31, 1995. The recapture will occur over a six year period, the commencement of which will be delayed until the first taxable year beginning after December 31, 1997, provided the institution meets certain residential lending requirements. The management of the Company does not believe that the legislation will have a material impact on the Company or the Bank. In addition to the regular income tax, corporations, including savings associations such as the Bank, generally are subject to a minimum tax. An alternative minimum tax is imposed at a minimum tax rate of 20% on alternative minimum taxable income, which is the sum of a corporation's regular taxable income (with certain adjustments) and tax preference items, less any available exemption. The alternative minimum tax is imposed to the extent it exceeds the corporation's regular income tax and net operating losses can offset no more than 90% of alternative minimum taxable income. For taxable years beginning after 1986 and before 1996, corporations, including savings associations such as the Bank, are also subject to an environmental tax equal to 0.12% of the excess of alternative minimum taxable income for the taxable year (determined without regard to net operating losses and the deduction for the environmental tax) over $2 million. To the extent earnings appropriated to a savings association's bad debt reserves for "qualifying real property loans" and deducted for federal income tax purposes exceed the allowable amount of such reserves computed under the experience method and to the extent of the association's supplemental reserves for losses on loans ("Excess"), such Excess may not, without adverse tax consequences, be utilized for the payment of cash dividends or other distributions to a shareholder (including distributions on redemption, dissolution or liquidation) or for any other purpose (except to absorb bad debt losses). As of December 31, 1995, the Bank's Excess for tax purposes totaled approximately $2.3 million. The Company with the Bank and its subsidiary files consolidated federal income tax returns on a calendar year basis using the accrual method of accounting. Savings associations that file federal income tax returns as part of a consolidated group are required by applicable Treasury regulations to reduce their taxable income for purposes of computing the percentage bad debt deduction for losses attributable to activities of the non-savings association members of the consolidated group that are functionally related to the activities of the savings association member. Neither the Company or the Bank have been audited by the IRS during the last five fiscal years. Indiana Taxation. The State of Indiana imposes an 8.5% franchise tax on corporations transacting the business of a financial institution in Indiana, exempting them from gross income, supplemental net income and intangible taxes. Included in the definition of corporation's transacting the business of a financial institution in Indiana are holding companies of thrift institutions, as well as thrift institutions. Net income for franchise tax purposes will constitute federal taxable income before net operating loss deductions and special deductions, adjusted for certain items, including 36 Indiana income taxes and bad debts. Other applicable Indiana taxes include sales, use and property taxes. Executive Officers The following information as to the business experience during the past five years is supplied with respect to executive officers of the Company. Except as otherwise indicated, the persons named have served as officers of the Company since it became the holding company of the Bank and all positions described below are with the Bank. There are no arrangements or understandings between the persons named and any other person pursuant to which such officers were selected. John W. Corey. Mr. Corey, age 62 was elected as President, Chief Executive Officer and Director of the Bank in 1991. From 1987 to 1991, he was President and Chief Executive Officer of Ludington Savings Bank, FSB in Ludington, Michigan. Harry A. Dunwoody. Mr. Dunwoody, age 50, has served as Senior Vice President of the Bank since 1989 and was elected as a Director in 1993. He is responsible for the lending functions of the Bank. Mary Jo David. Ms. David, age 47, is Vice President, Chief Financial Officer and Secretary-Treasurer of the Bank, positions she has held since 1992. She joined the Bank in 1985. Employees At December 31, 1996, the Company had a total of 63 employees, including five part-time employees. The Company's employees are not represented by any collective bargaining group. Management considers its employee relations to be good. Item 2. Description of Property The Company conducts its business at its main office and three other locations in Lafayette and West Lafayette, Indiana. The Company owns its main office and two branch offices. The second branch office is leased. The total net book value of the Company's premises and equipment (including land, building and leasehold improvements and furniture, fixtures and equipment) at December 31, 1996 was approximately $4.6 million. The Company believes that its current facilities are adequate to meet the present and foreseeable needs of the Company. See Note 5 of the Notes to Consolidated Financial Statements in the Annual Report. The Company maintains an on-line data base of depositor and borrower customer information. The net book value of the data processing and computer equipment and software utilized by the Company at December 31, 1996 was $362,000. Item 3. Legal Proceedings LSB, from time to time, is involved as plaintiff or defendant in various legal actions arising in the normal course of business. While the ultimate outcome of these proceedings cannot be 37 predicted with certainty, it is the opinion of management, after consultation with counsel representing LSB in the proceedings, that the resolution of any prior and pending proceedings should not have a material effect on the Company's financial condition or results of operations. Item 4. Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended December 31, 1996. PART II Item 5. Market for Common Equity and Related Stockholder Matters Inside back cover of the Company's 1996 Annual Report to Stockholders is herein incorporated by reference. Item 6. Management's Discussion and Analysis or Plan of Operation Pages 4 through 17 of the Company's 1996 Annual Report to Stockholders is herein incorporated by reference. Item 7. Financial Statements Pages 18 through 42 of the Company's 1996 Annual Report to Stockholders are herein incorporated by reference. Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure There has been no Current Report on Form 8-K filed within 24 months prior to the date of the most recent financial statements reporting a change in accountants and/or reporting disagreements on any matter of accounting principle or financial statement disclosure. PART III Item 9. Directors and Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act Directors Information concerning Directors of the Company is incorporated herein by reference from the definitive Proxy Statement for the Annual Meeting of Stockholders to be held in April 1997, a copy of which will be filed not later than 120 days after the close of the fiscal year. 38 Executive Officers Information concerning Executive Officers is contained in Part I of this Form 10-KSB. Compliance with Section 16(a) Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than 10% of a registered class of the Company's equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than 10% stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. To the Corporation's knowledge, based solely on a review of the copies of such reports furnished to the Corporation and written representations that no other reports were required, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10 percent beneficial owners were complied with during the fiscal year ended December 31, 1996, except for Director Shen who failed to file on a timely basis a Form 4 reporting his acquisitions of 1,000 shares of Common Stock on November 24, 1995. In April 1996, Director Shen filed the required form to correct this oversight. Item 10. Executive Compensation Information concerning executive compensation is incorporated herein by reference from the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held in April 1997, a copy of which will be filed not later than 120 days after the close of the fiscal year. Item 11. Security Ownership of Certain Beneficial Owners and Management Information concerning security ownership of certain beneficial owners and management is incorporated herein by reference from the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held in April 1997, a copy of which will be filed not later than 120 days after the close of the fiscal year. Item 12. Certain Relationships and Related Transactions Information concerning certain relationships and transactions is incorporated herein by reference from the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held in April 1997, a copy of which will be filed not later than 120 days after the close of the fiscal year. 39 PART IV Item 13. Exhibits and Reports on 8-K (a) Exhibits:
Reference to Prior Filing Regulation or Exhibit S-K Exhibit Number Attached Number Document Hereto - ----------- -------- --------------- 2 Plan of acquisition, reorganization, arrangement, liquid, or succession None 3 Articles of Incorporation and Bylaws.................................... * 4 Instruments defining the rights of security holders, including indentures: Common Stock Certificate............................................... * 9 Voting trust agreement.................................................. None 10 Material contracts: Employee Stock Ownership Plan.......................................... * Stock Option and Incentive Plan........................................ * Severance Agreements................................................... * Recognition and Retention Plan......................................... * 401(k) Retirement/Savings Plan......................................... * 11 Statement re computation of per share earnings.......................... ** 13 Annual Report to Security Holders....................................... 13 16 Letter on change in certifying accountant............................... None 18 Letter on change in accounting principles............................... None 21 Subsidiaries of Registrant.............................................. 21 22 Published report regarding matters submitted to vote of security holders None 23 Consent of Experts and Counsel.......................................... 23 24 Power of Attorney....................................................... Not required 27 Financial Data Schedule................................................. 27 99 Additional Exhibits None
- -------------------- *Filed on September 21, 1994 as exhibits to the Registrant's Registration Statement No. 33-84266 on Form S-1. All of such previously filed documents are hereby incorporated herein by reference in accordance with Item 601 of Regulation S-B. **See Note 13 of the Notes to Consolidated Financial Statements included in the Annual Report under Exhibit 13. (b) Reports on Form 8-K: No reports on Form 8-K have been filed during the three-month period ended December 31, 1996. 40 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. LSB FINANCIAL CORP. Date: March 28, 1997 By: (s) John W. Corey -------------------- ----------------------------------------- John W. Corey, President, Chief Executive Officer and Director (Duly Authorized Representative) Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Mariellen M. Neudeck /s/ John W. Corey - --------------------------------------------------- --------------------------------------------- Mariellen M. Neudeck, Chairman of the Board John W. Corey, President, Chief Executive Officer and Director (Principal Executive and Operating Officer) Date: March 28, 1997 Date: March 28, 1997 ---------------------------------------------- ----------------------------------------- /s/ Harry A. Dunwoody - --------------------------------------------------- ----------------------------------------------- Harry A. Dunwoody, Senior Vice President James A. Andrew, Director and Director Date: March 28, 1997 Date: ---------------------------------------------- ----------------------------------------- /s/ Philip W. Kemmer /s/ Peter Neisel - --------------------------------------------------- ----------------------------------------------- Philip W. Kemmer, Director Peter Neisel, Director Date: March 28, 1997 Date: March 28, 1997 ---------------------------------------------- ----------------------------------------- /s/ Jeffrey A. Poxon /s/ Thomas L. Ryan - --------------------------------------------------- ----------------------------------------------- Jeffrey A. Poxon, Director Thomas L. Ryan, Director Date: March 28, 1997 Date: March 28, 1997 ---------------------------------------------- ----------------------------------------- /s/ John C. Shen /s/ C. Wesley Shook - --------------------------------------------------- ----------------------------------------------- John C. Shen, Director C. Wesley Shook, Director Date: March 28, 1997 Date: March 28, 1997 ---------------------------------------------- ----------------------------------------- /s/ Mary Jo David - --------------------------------------------------- Mary Jo David, Vice President, Chief Financial Officer and Secretary-Treasurer (Principal Financial and Accounting Officer) Date: March 28, 1997 -----------------------------------------------
INDEX TO EXHIBITS Exhibit Number 11 Statement re Computation of Earnings Per Share (See Note 13 of the Notes to Consolidated Financial Statements included in the Annual Report to Security Holders attached hereto as Exhibit 13) 13 Annual Report to Security Holders 21 Subsidiaries of the Registrant 23 Consents of Experts and Counsel 27 Financial Data Schedule EX-13 2 ANNUAL REPORT TO SECURITY HOLDERS LSB FINANCIAL CORP. TABLE OF CONTENTS Letter to Stockholders............................. 2 Selected Financial Information..................... 3 Management's Discussion and Analysis .............. 5 Auditors' Report . ................................ 19 Consolidated Financial Statements.................. 20 Directors and Executive Officers................... 39 Stockholder Information ........................... 40 FINANCIAL HIGHLIGHTS December 31, 1996 (Dollars in Thousands) Total assets............................... $184,607 Total loans................................ 159,216 Securities and other earning assets............................ 11,956 Deposits................................... 116,949 Borrowings................................. 50,220 Net income................................. 876 Shareholders' equity....................... 16,796 Shareholders' equity as percent of assets.................................... 9.10% ------------------------------------ ANNUAL MEETING The Annual Meeting of Stockholders of LSB Financial Corp. will be held April 16, 1997 at 9:00 A.M. at the Riehle Plaza, located at 200 N. Second Street, Lafayette, Indiana. ------------------------------------ LSB FINANCIAL [LOGO] CORP. March 18, 1997 Dear Fellow Shareholder: We are pleased to send you this annual report containing the results of our second year as a stock company. To effectively utilize the capital invested by our shareholders, our strategy continues to be to prudently grow the size of the Bank. This is being done by increasing our loan portfolio using both funds deposited by our customers as well as additional borrowings when needed to take advantage of lending opportunities. The success of this strategy in 1996 was demonstrated as assets increased 16.7% since December 31, 1995, and net interest income increased 18.9% over 1995. Our continuing goal is to maximize long-term shareholder value by appropriately balancing profitability, growth, quality and productivity. We believe that we can best accomplish this goal as an independent, community-oriented financial institution. We will continue working to earn the support of Tippecanoe County and the Greater Lafayette area, investing locally to stimulate community progress, providing an attractive and stable work environment, and by using bank staff who are members of this community to make decisions concerning our customers in this community. The Company's stock performed well in 1996. We experienced, however, a small setback in our plan to increase our post-conversion return on equity due to a loan secured by equipment leases which had to be placed in non-accrual status. We increased the Bank's allowance for loan losses to provide for our estimate of the potential loss on such leases and believe 1997 will show an acceptable resolution to this problem. We're pleased to note that the asset quality of the remainder of our loan portfolio remains high, with non-performing loans totaling only 0.2% of total assets. A primary strategy this year will be to fund more of our new loans with deposits from our customers and correspondingly less with other borrowings. To that end, our efforts will be directed toward increasing our market share of deposits in the community while managing the overall cost of money. We offer a very competitive menu of deposit products. I invite you, as stockholders with a vested interest, to give us the opportunity to work with you regarding your savings and investment needs. To further enhance shareholder value, we are in the process of completing our third stock repurchase program. This repurchase involves the repurchase of over 45,000 shares and should further increase shareholder value. Overall, our core earnings continue to grow and we look forward to continued progress. Thank you for your continuing support. Sincerely, /s/ John W. Corey - ---------------------------------------- John W. Corey President and Chief Executive Officer 1 SELECTED FINANCIAL INFORMATION The following financial information does not purport to be complete and is qualified in its entirety by reference to the more detailed financial information contained elsewhere herein.
December 31, ------------------------------------------------- 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- Selected Financial Condition Data: Total assets......................................... $106,303 $110,685 $124,339 $158,973 $184,607 Loans receivable, net................................ 73,490 78,158 98,602 132,433 159,216 Available-for-sale securities........................ --- --- 9,985 12,295 6,546 Short-term investments............................... 28,871 25,674 7,703 3,595 5,410 Deposits............................................. 97,213 100,242 107,764 109,977 116,949 Total borrowings..................................... 1,700 2,005 7,778 29,614 50,220 Shareholders' equity (net)........................... 6,942 7,819 8,208 18,068 16,796 December 31, ------------------------------------------------- 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- Selected Operations Data: Total interest income................................ $ 8,414 $ 7,851 $ 7,979 $ 10,744 $ 13,247 Total interest expense............................... 5,391 4,618 4,442 5,937 7,530 -------- -------- -------- -------- -------- Net interest income............................... 3,023 3,233 3,537 4,807 5,717 Provision for loan losses............................ (107) --- (15) --- 800(1) -------- -------- -------- -------- -------- Net interest income after provision for loan losses.. 3,130 3,233 3,552 4,807 4,917 Deposit account service charges...................... 85 84 154 239 326 Gain (loss) on sales of mortgage loans............... 116 259 13 68 184 Gain (loss) on sales of securities................... --- --- 6 --- 7 Other non-interest income............................ 150 137 117 322 178 -------- -------- -------- -------- -------- Total non-interest income............................ 351 480 290 629 695 Total non-interest expense........................... 2,321 2,597 3,012 3,470 4,186 -------- -------- -------- -------- -------- Income before taxes and accounting change............ 1,160 1,116 830 1,966 1,426 Taxes................................................ 379 414 265 724 550 Accounting change.................................... --- 175 --- --- --- -------- -------- -------- -------- -------- Net income........................................... $ 781 $ 877 $ 565 $ 1,242 $ 876 ======== ======== ======= ======= ========
- -------- 1See "Provision for Loan Losses" for discussion of Bennett Funding Group. 2
December 31, -------------------------------------------------------- 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- Selected Financial Ratios and Other Data: Performance Ratios: Return on assets (ratio of net income to average total assets)........................... 0.75% 0.80% 0.49% 0.87% 0.51% Return on equity (ratio of net income to average equity)...................... 11.82 11.65 7.07 7.30 5.16 Earnings per share N/A N/A N/A 1.30 1.00 Interest rate spread information: Average during period............................... 2.70 2.87 3.15 3.17 3.27 Net interest margin(1).............................. 2.98 3.07 3.26 3.56 3.52 Operating expense to average total assets............................................. 2.22 2.38 2.61 2.43 2.43 Average interest-earning assets to average interest-bearing liabilities............... 1.05x 1.05x 1.02x 1.09x 1.05x Quality Ratios: Non-performing assets to total assets at end of period................................... 0.21% 0.06% 0.04% 0.00% 1.53% Allowance for loan losses to non-performing loans............................... 410.76 1376.12 2057.78 N/A 60.54 Allowance for loan losses to loans receivable, net.................................... 1.23 1.17 0.94 0.70 1.08 Capital Ratios: Shareholders' equity to total assets at end of period.................................... 6.53 7.06 6.60 11.37 9.10 Average shareholders' equity to average total assets................................ 6.33 6.88 6.92 11.92 9.88 Other Data: Number of full-service offices....................... 2 3 3 3 4
(1) Net interest income divided by average interest-earning assets. 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General On February 3, 1995, LSB Financial Corp. ("LSB" or the "Company"), an Indiana corporation, became the holding company of Lafayette Savings Bank, FSB ("Lafayette" or the "Bank"). Lafayette is a federally chartered stock savings bank headquartered in Lafayette, Indiana. The principal asset of the Company is the outstanding stock of the Bank, its wholly-owned subsidiary. The Company presently has no separate operations and its business consists only of the business of the Bank. All references to the Company, unless otherwise indicated, at or before February 3, 1995, refer to the Bank. Forward Looking Statements Certain statements in this report that relate to LSB Financial Corp.'s plans, objectives or future performance may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Act of 1995. Such statements are based on Management's current expectations. Actual strategies and results in future periods may differ materially from those currently expected because of various risks and uncertainties. Additional discussion of factors affecting LSB Financial's business and prospects is contained in the Company's periodic filings with the Securities and Exchange Commission. Business Strategy LSB has been, and intends to continue to be, a community-oriented financial institution. The primary business of the Company consists of attracting deposits from the general public and using these deposits to provide financing for the purchase and construction of residential and other properties. The Company's results of operations, therefore, are dependent primarily on net interest income, which is the difference between the interest income earned on the Company's loan, mortgage-backed and investment securities portfolios and its cost of funds, which consists of interest expense incurred on deposits and borrowings. Net interest income is directly affected by the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on such amounts. The Company's operating results are also affected by the level of the provision for loan losses, by the level of non-interest income, including gains and losses on the sale of loans, and non-interest expenses. The Company's non-interest expenses consist principally of employee compensation, occupancy expenses, and other general and administrative expenses. Significant external factors impacting the Company's results of operations include the general economic environment, changes in the level of market interest rates, government policies, actions by regulatory authorities and competition. LSB's cost of funds is influenced by interest rates on competing investments and general market rates of interest. Lending activities are influenced by the demand for real estate loans and other types of loans, which are in turn affected by the interest rates 4 at which such loans are made, general economic conditions affecting loan demand and the availability of funds for lending activities. The Company's basic mission is to maintain its focus as an independent, community oriented financial institution serving customers in its market area. The Board of Directors has sought to accomplish this mission through the adoption of a strategy intended to maintain a strong capital position and high asset quality, manage the Company's vulnerability to changes in interest rates, optimize the Company's net interest margin and achieve controlled asset growth. Key components of this strategy have been (i) emphasizing one- to four-family residential mortgage lending, (ii) supplementing residential lending with multi-family, consumer and construction loans, (iii) expanding commercial business lending functions, (iv) emphasizing adjustable rate and/or short term loans and investments and (v) gradually building its core deposit base. The results of the Company's business strategy may be illustrated as follows: o One- to four-family loans increased from $69.1 million at December 31, 1994 to $97.0 million at December 31, 1996. o Multi-family, land and land development, construction and consumer loans increased from $18.5 million at December 31, 1994 to $47.2 million at December 31, 1996. o Commercial real estate and commercial business loans increased from $13.3 million at December 31, 1994 to $23.9 million at December 31, 1996. o At December 31, 1996, 65.26% of the Company's gross loan portfolio had adjustable interest rates. o Non-certificate savings, checking and NOW accounts (excluding money market accounts and after being adjusted for $6.9 million in stock subscription funds held at December 31, 1994) remained at nearly 25% of deposits, decreasing slightly from 24.54% of total deposits at December 31, 1994 to 24.21% at December 31, 1996. Financial Condition The size of the Company's loan portfolio increased from $98.6 million at December 31, 1994 to $159.2 million at December 31, 1996, an increase of 61.46%. Part of this increase was due to the Bank aggressively seeking to attract new residential mortgage borrowers. This was accomplished by offering attractive loan products at competitive rates; establishing good working relationships with local realtors; and providing efficient, personal service with all decisions made locally. Another reason for the success of the Company's strategy was the continued focus on commercial and consumer loan production. The Company sold $8.0 million of fixed-rate loans in the secondary market in 1995 and $14.3 million in 1996 based upon asset/liability management considerations. See "-Asset/ Liability Management." Adjustable rate loans were retained in the Company's loan portfolio. The Company retains the servicing rights on all loans sold in the secondary market. 5 The Company's portfolio of securities and short-term investments decreased from $17.7 million at from December 31, 1994 to $11.9 million at December 31, 1996, as maturing securities were used to fund the growth in the Company's loan portfolio. Deposit accounts increased by 15.99% or $16.1 million from December 31, 1994 to December 31, 1996, excluding the $6.9 million in stock subscription funds held at December 31, 1994 in connection with the Bank's conversion to stock form. Checking accounts with no monthly fees and no minimum balance requirements attracted new depositors, as well as the Bank's continuing effort to offer innovative and competitive certificate of deposit products. . The Company utilizes advances available through the Federal Home Loan Bank ("FHLB") to provide additional funding for loan growth as well as for asset/liability management purposes. At December 31, 1996, the Company had $50.0 million in FHLB advances outstanding, an increase of $21.5 million from December 31, 1995 and $42.5 million from December 31, 1994. Shareholders' equity decreased $1.3 million, or 7.04%, during 1996 primarily as a result of the Company's stock repurchases and the payment of dividends on Common Stock. The Company repurchased 9.00% of its Common Stock, 92,660 shares, under a stock repurchase program completed February 27, 1996, and 5.00% of its Common Stock, 48.235 shares, under a stock repurchase program completed July 2, 1996. In addition , the Company is currently in the process of repurchasing an additional 5%, or 45,888 shares, of its Common Stock, and as of December 31, 1996 has repurchased 15,000 shares under this program. As of December 13, 1996, a total of 155,895 shares of the Company's Common Stock had been repurchased at a cost of approximately $2.6 million, or $16.87 per share. Shareholders' equity to total assets was 9.10% at December 31, 1996 compared to 11.37% at December 31, 1995. Results of Operations The Company's results of operations depend primarily on the levels of net interest and non-interest income and its control of operating expenses. Net interest income is dependent upon the volume of interest-earning assets and interest-bearing liabilities and upon the interest rate which is earned or paid on these items. The Company's results of operations are also affected by the level of the provision for loan losses as well as non-interest income. 6 Average Balances, Interest Rates and Yields The following table presents for the periods indicated the total dollar amount of interest income from average interest earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. No tax equivalent adjustments were made. All average balances are monthly average balances. Non-accruing loans and have been included in the table as loans carrying a zero yield.
Year Ended December 31, --------------------------------------------------------------------- 1994 1995 ----------------------------------- -------------------------------- Average Interest Average Interest Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Balance Paid Rate Balance Paid Rate ----------- -------- ------ ----------- -------- ------ Assets: Interest-Earning Assets: Loans receivable(1).......................... $ 88,723 $7,105 8.01% $114,518 $ 9,595 8.38% Mortgage-backed securities................... 6,266 273 4.36 5,147 313 6.08 Other investments............................ 12,958 561 4.33 14,227 756 5.32 FHLB stock................................... 693 40 5.77 1,030 80 7.77 -------- ------ --------- ------- Total interest-earning assets............... 108,640 7,979 7.34 134,922 10,744 7.96 ------ ------- Non-interest earning assets................... 6,801 7,794 -------- --------- Total assets................................. $115,441 $142,716 ======== ======== Liabilities and Shareholders' Equity Interest-Bearing Liabilities: Savings deposits............................. $ 13,838 400 2.89 13,166 391 2.97 Demand and NOW deposits...................... 22,821 564 2.47 23,341 614 2.63 Time deposits................................ 65,750 3,299 5.02 69,300 3,856 5.56 Borrowings................................... 3,666 179 4.89 18,210 1,076 5.91 -------- ------ --------- ------- Total interest-bearing liabilities.......... 106,075 4,442 4.19 124,017 5,937 4.79 ------ ------- Other liabilities............................ 1,378 1,688 -------- --------- Total liabilities........................... 107,453 125,705 Shareholders' equity.......................... 7,988 17,011 -------- -------- Total liabilities and shareholders' equity . $115,441 $142,716 ======== ======== Net interest income........................... $3,537 $ 4,807 ====== ======= Net interest rate spread...................... 3.15% 3.17% ==== ==== Net earning assets............................ $ 2,565 $ 10,905 ======== ======== Net yield on average interest-earning assets.. 3.26% 3.56% ==== ==== Average interest-earning assets to average interest-bearing liabilities......... 1.02x 1.09x ======= ====
At ------------------------------------ December 31, 1996 1996 ------------------------------------ ------------ Average Interest Outstanding Earned/ Yield/ Yield/ Balance Paid Rate Rate ------------ -------- -------- ------- Assets: Interest-Earning Assets: Loans receivable(1)......................... $149,502 $12,467 8.34% 8.16% Mortgage-backed securities.................. 4,299 260 6.05 6.70 Other investments........................... 6,517 363 5.57 5.97 FHLB stock.................................. 2,046 157 7.67 7.85 --------- ------- Total interest-earning assets.............. 162,364 13,247 8.16 7.96 ------- Non-interest earning assets.................. 9,586 -------- Total assets................................ $171,950 ======== Liabilities and Shareholders' Equity Interest-Bearing Liabilities: Savings deposits............................ $ 12,207 368 3.01 3.05 Demand and NOW deposits..................... 25,272 601 2.38 2.66 Time deposits............................... 77,211 4,355 5.64 5.36 Borrowings.................................. 39,234 2,206 5.62 5.66 -------- ------- Total interest-bearing liabilities......... 153,924 7,530 4.89 5.07 ------- Other liabilities........................... 1,039 -------- Total liabilities.......................... 154,963 Shareholders' equity......................... 16,987 -------- Total liabilities and shareholders' equity $171,950 ======== Net interest income.......................... $ 5,717 ======= Net interest rate spread..................... 3.27% 2.89% ==== ==== Net earning assets........................... $ 8,440 ======== Net yield on average interest-earning assets. 3.52% ==== Average interest-earning assets to average interest-bearing liabilities........ 1.05x =====
- ----------------- (1) Calculated net of deferred loan fees, loan discounts, loans in process and loss reserves. 7 Rate/Volume Analysis of Net Interest Income The following table presents the dollar amount of changes in interest income and interest expense for the major categories of interest-earning assets and interest-bearing liabilities. The change in total interest income and total interest expense is allocated between those related to changes in the outstanding balances and those due to changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and change due to rate.
December 31, ------------------------------------------------------------------------------ 1994 vs. 1995 1995 vs. 1996 ---------------------------------------- ----------------------------------- Increase Increase (Decrease) (Decrease) Due to Total Due to Total ------------------------- Increase ------------------- Increase Volume Rate (Decrease) Volume Rate (Decrease) ---------- -------- ---------- ---------- ------ ------------ Interest-earning assets: Loans receivable...................... $2,148 $342 $2,490 $2,918 $(46) $2,872 Mortgage-backed securities............ (55) 95 40 (51) (2) (53) Other investments..................... 59 136 195 (428) 35 (393) FHLB stock............................ 23 17 40 78 (1) 77 ------ ---- ------ ------ ---- ------ Total interest-earning assets....... $2,175 $590 2,765 $2,516 $(14) 2,503 ====== ==== ------ ====== ==== ------ Interest-bearing liabilities: Savings deposits...................... $ (20) $ 11 (9) $ (29) $ 6 (23) Demand deposits....................... 13 37 50 49 (62) (13) Time deposits......................... 185 372 557 446 53 499 Borrowings............................ 853 44 897 1,185 (55) 1,130 ------ ---- ------ ------ ---- ------ Total interest-bearing liabilities.. $1,030 $465 1,495 $1,651 $(57) 1,593 ====== ==== ------ ====== ==== ------ Net interest income.................... $1,270 $ 910 ====== ======
8 Comparison of Operating Results for the Years Ended December 31, 1995 and December 31, 1996. General. Net income for the year ended December 31, 1996 was $876,000, a decrease of $366,000 or 29.47% compared to net income for the year ended December 31, 1995. This decrease was primarily due to an $800,000 provision for loan losses, which was recorded by management to cover the possibility of losses on the $2.4 million of purchased equipment leases placed on non-accrual status by the Bank during 1996 due to the bankruptcy filing by the Bennett Funding Group, the originator of the leases. The increased provision for loan losses was substantially offset by the net of a $910,000 increase in net interest income, a $716,000 increase in all non-interest expenses and a $174,000 decrease in income tax expenses. Net Interest Income. Net interest income for the year ended December 31, 1996 increased $910,000 or 18.93% over the same period in 1995. This increase was primarily attributable to the success of management's continuing efforts to restructure the Company's balance sheet by investing new funds and shifting existing funds into higher-yielding commercial and consumer loans from lower yielding investment and mortgage-backed securities. The Company's net interest margin (net interest income divided by average interest-earning assets) decreased slightly from 3.56% for the year ended December 31, 1995, to 3.52% for the year ended December 31, 1996. Interest income on loans increased $2.9 million for the year ended 1996 compared to the year ended December 31, 1995 primarily the result of an increase of $35.0 million in average loans outstanding. This increase was primarily due to an active residential real estate market in 1996 due to continued relatively low interest rates and a strong local economy, and the ongoing success of the Company's focus on commercial and consumer loan production. This increase in volume was slightly offset by a decrease in yield on loans from 8.38% for the year ended December 31, 1995 to 8.34% for the year ended December 31, 1996 caused primarily by the increasing competitiveness of the local loan origination market. Both the net interest margin and the average yield on loans were negatively impacted by the placement of the Bennett Funding leases on non-accrual status effective April 1, 1996. Management estimates that interest lost during 1996 from those leases was approximately $170,000. Interest earned on mortgage-backed securities decreased by $53,000 due primarily to an $848,000 decrease in the average balance of the Company's mortgage-backed securities. Interest earned on other investments and FHLB stock decreased by $316,000 for the year 1996 compared to 1995. This was the result of a decrease of $7.7 million in the average balance of other investments, primarily due to the Company's efforts to restructure its balance sheet by channeling funds into higher yielding loans. The decrease was partially offset by interest earned on a $1.0 million increase in the average balance of FHLB stock required to facilitate borrowings from the Federal Home Loan Bank, as well as by an increase in the yield on other investments from 5.32% for the year ended December 31, 1995 to 5.57% for the year ended December 31, 1996. Interest expense for the year ended 1996 increased $1.6 million or 26.83% over the same period in 1995. This increase was primarily due to an increase of $29.9 million in average interest-bearing liabilities, consisting of 9 an additional $8.9 million in the average balance of customer deposit accounts and a $21.0 million increase in the average balance of Federal Home Loan Bank advances drawn to fund loan demand. The increase was also due to an increase in the rate paid on interest bearing liabilities from 4.79% in 1995 to 4.89% in 1996 reflecting the intense competition for deposits, in spite of a decrease in the interest rate paid on borrowings from 5.91% in 1995 to 5.62% in 1996. Provision for Loan Losses. The Company establishes its provision for loan losses based on a systematic analysis of risk factors in the loan portfolio. The analysis includes evaluation of concentration of credit, past loss experience, current economic conditions, the amount and composition of the loan portfolio, estimated fair value of the underlying collateral, loan commitments outstanding , delinquencies, industry standards and other factors. Because the Company has realized only nominal losses during its recent past, management also considers the loss experience of similar portfolios in comparable lending markets, in addition to using the services of a consultant to assist in the evaluation of its growing commercial loan portfolio. Management's analysis results in the allocations of allowance amounts for each loan type. Based on this analysis, during the year ended December 31, 1996 the Company recorded an $800,000 provision for loan losses primarily in response to the situation involving Bennett Funding Group (Bennett) of Syracuse, New York through which the Company owns $2.4 million of equipment leases. On March 29, 1996, the Securities and Exchange Commission filed civil and criminal complaints against an officer of Bennett and shortly thereafter, Bennett sought Chapter 11 bankruptcy protection. The Bank has been paid interest through March 31, 1996. Based upon the bankruptcy filing and the uncertainty about when principal and interest payments might resume, the leases were placed in non-accrual status as of April 1, 1996 and the Bank has allocated $970,000 of its $1.7 million allowance for loan losses to these receivables. The Bank's $2.4 million investment is comprised of numerous small dollar equipment leases. While management believes that the Bank holds original lease documents, the complaint alleges various fraudulent actions including that Bennett may have sold the same leases to two or more buyers. To date management has not been notified of duplication of any leases it owns. Management is currently evaluating settlement offers and believes that its reserve allocation will be sufficient to cover any losses. At December 31, 1996, the Company's allowance equals 1.08% of net loans receivable. Non-performing loans totaled $2.8 million at December 31, 1996, representing 1.53% of total assets. The Bank had no non-performing loans at December 31, 1995. Non-Interest Income. Non-interest income for the year ended December 31, 1996 increased by $66,000, or 10.49% over the same period in 1995. This was primarily due to an $87,000 increase in service charges and fees on deposit accounts due to the increasing number of these accounts, and a $116,000 increase in the gain on the sale of mortgage loans in the secondary market, partially offset by a non-recurring $165,000 state tax refund received in 1995. The increase in the gain on the sale of loans resulted from the increased sales activity and a change in accounting for such sales. Beginning in 1996, the basis of loans sold with servicing retained was allocated between the loan and the originated servicing right. $129,000 of the $184,000 of gains on the sale of loans can be attributed to establishing the originated servicing right asset which will be amortized over the lives of the related loans. In addition, in December 1996, the Company transferred approximately $10.3 million fixed rate mortgage loans to the held for sale portfolio. These loans were sold in December, 1996, and January, 1997, and are part of management's strategy to further diversify the loan portfolio. 10 Non-Interest Expense. Non-interest expense for the year ended December 31, 1996 increased $716,000 over the same period in 1995. The major components of this increase included a $404,000 increase in salaries and employee benefits and a $139,000 increase in occupancy and equipment expense, offset by a $118,000 decrease in FDIC insurance premiums (since the Bank, unlike most thrifts, is insured by the Bank Insurance Fund of the FDIC and benefitted from a reduction in the deposit insurance rate effective June 1, 1995). The increase in salaries and employee benefits, and occupancy and equipment expenses were incurred in connection with the opening of the Company's fourth branch. In addition, salary and employee benefit expenses included expenses related to the Employee Stock Ownership Plan ("ESOP"), which was formed at the time of the Bank's stock conversion, and expenses related to the Recognition and Retention Plan ("RRP") which was approved by shareholders in August 1995. These two plans resulted in a combined expense of $151,000 in 1995 and $233,000 in 1996 and, effectively, replaced the Company's discretionary contribution to its 401(k) plan which was $54,000 in 1994. See Note 10 of the Notes to Consolidated Financial Statements included herein. Income Tax Expense. The Company's income tax provision decreased by $174,000 for the year ended December 31, 1996 compared to the year ended December 31, 1995. This was primarily due to the decrease in income before income taxes. 11 Comparison of Operating Results for the Years Ended December 31, 1995 and December 31, 1994. General. Net income for the year ended December 31, 1995 was $1.2 million, an increase of $677,000 or 119.82% over net income for the year ended December 31, 1994. This increase was primarily due to a $1.3 million increase in net interest income, an $85,000 increase in deposit account service charges and fees, a $165,000 non-recurring state tax refund related to a change in Indiana tax law in the late 1980s, and a $108,000 decrease in FDIC insurance expense. These changes were partially offset by a $565,000 increase in all other operating expenses and by a $459,000 increase in income tax expense. Net Interest Income. Net interest income for the year ended December 31, 1995 increased $1.3 million or 35.91% over the same period in 1994. This increase was primarily attributable to the success of management's continuing efforts to leverage the Company by channeling funds into the Company's higher-yielding loan portfolio. The Company's net interest margin, net interest income divided by average interest-earning assets, increased from 3.26% for the year ended December 31, 1994, to 3.56% for the year ended December 31, 1995. Interest income on loans increased $2.5 million for the year ended 1995 compared to the year ended December 31, 1994 primarily due to an increase of $25.8 million in average loans outstanding. This increase was primarily due to the Bank taking advantage of the opportunity to attract new residential mortgage borrowers to the Bank afforded by an active market for refinance and purchase residential properties in 1995 due to continued low mortgage interest rates and a strong local economy, and the ongoing success of the Company's focus on commercial loan production. This increase in volume was supplemented by an increase in yield on loans from 8.01% for the year ended December 31, 1994 to 8.38% for the year ended December 31, 1995 caused primarily by the upward adjustment of the Company's existing ARMs as well as by the increased amount of higher yielding commercial loans. Interest earned on mortgage-backed securities increased by $40,000 as the increase in yield from 4.36% to 6.08% on the primarily adjustable rate securities more than offset the $1.1 decline in the average balance of the Company's mortgage-backed securities. Interest earned on other investments increased by $195,000 for the year 1995 compared to 1994. This was the result of an increase of $1.3 million in the average balance of other investments, primarily due to the investment of stock proceeds upstreamed to the Holding Company, as well as by in increase in yield from 4.33% for the year ended December 31, 1994 to 5.32% for the year ended December 31, 1995 due to higher interest rates on securities purchased in 1995. Interest expense for the year ended 1995 increased $1.5 million or 33.66% over the same period in 1994. This increase was primarily due to an increase of $17.9 million in average interest-bearing liabilities, consisting of an additional $3.4 million in the average balance of customer deposit accounts and a $14.5 million increase in the average balance of Federal Home Loan Bank advances drawn to fund loan demand. The increase was also due to an increase in the rate paid on interest bearing liabilities from 4.19% in 1994 to 4.79% in 1995 reflecting the general increase in interest rates during the period. 12 Provision for Loan Losses. The Company establishes its provision for loan losses based on a systematic analysis of risk factors in the loan portfolio. The analysis includes evaluation of concentration of credit, past loss experience, current economic conditions, the amount and composition of the loan portfolio, estimated fair value of the underlying collateral, loan commitments outstanding , delinquencies, industry standards and other factors. Because the Company has realized only nominal losses during its recent past, management also considers the loss experience of similar portfolios in comparable lending markets, in addition to using the services of a consultant to assist in the evaluation of its growing commercial loan portfolio. Management's analysis results in the allocations of allowance amounts for each loan type. During the years 1995 and 1994, the Company made no additional provision for loan losses. The Company, during 1994, recovered $15,000 on a loan that had previously been charged off. The Company had no non-performing loans (non-accruing plus accruing loans 90 days or more past due) at December 31, 1995 and $45,000 in non-performing loans at December 31, 1994, representing .04% of total assets. Non-Interest Income. Non-interest income for the year ended December 31, 1995 increased by $339,000, or 116.90% over the same period in 1995. This was primarily due to the previously mentioned $165,000 state tax refund, an $85,000 increase in service charges and fees on deposit accounts due to the increasing number of these accounts, and a $55,000 increase in the gain on the sale of mortgage loans in the secondary market as the Company took advantage of the relatively stable mortgage loan rates to sell fixed-rate mortgages, thereby helping to control interest rate risk. Non-Interest Expense. Non-interest expense for the year ended December 31, 1995 increased $458,000 over the same period in 1994. The major components of this increase included a $312,000 increase in salaries and employee benefits, an $86,000 increase in occupancy and equipment expense, and a $60,000 increase in other operating expenses. Many of these expenses were incurred filling the Company's staffing and equipment needs to effectively leverage the Bank. The Bank also benefitted from a $108,000 decrease in FDIC insurance premiums resulting from a decrease in the premium charged. The Bank, unlike most thrifts, is insured by the Bank Insurance Fund of the FDIC and benefitted from a reduction in the deposit insurance rate effective June 1, 1995. In addition , 1995's salary and employee benefit expense included expenses related to the Employee Stock Ownership Plan ("ESOP"), which was formed at the time of the Bank's stock conversion, and related to the Recognition and Retention Plan ("RRP") approved in August, 1995. LSB records ESOP expense based on the fair value of the shares earned by participants during the year. During 1995, participants earned 8,504 shares with a cost of $85,000 and a fair value of $123,000. The RRP awarded 27,793 share to certain directors and officers of the Company. The cost of these shares is being amortized over the 60 month vesting period and totaled $28,000 for 1995. These two plans resulted in a combined expense of $151,000 in 1995 and, effectively, replaced the Company's discretionary contribution to its 401(k) plan which was $54,000 in 1994. Income Tax Expense. The Company's income tax provision increased by $459,000 for the year ended December 31, 1995 compared to the year ended December 31, 1994. This was primarily due to the increase in income before income taxes. 13 Asset/Liability Management Lafayette, like other financial institutions, is subject to interest rate risk to the extent that its interest-bearing liabilities reprice on a different basis than its interest-earning assets. Office of Thrift Supervision ("OTS") regulations provide a Net Portfolio Value ("NPV") approach to the quantification of interest rate risk. In essence, this approach calculates the difference between the present value of expected cash flows from assets and the present value of expected cash flows from liabilities, as well as cash flows from off balance sheet contracts. Under OTS regulations, an institution's "normal" level of interest rate risk in the event of an assumed change in interest rates is a decrease in the institution's NPV in an amount not exceeding 2% of the present value of its assets. Thrift institutions with greater than "normal" interest rate exposure must take a deduction from their total capital available to meet their risk-based capital requirement. The amount of the deduction is one-half of the difference between (a) the institution's actual calculated exposure to a 200 basis point interest rate increase or decrease (whichever results in the greater pro forma decrease in NPV) and (b) its "normal" level of exposure which is defined as 2% of the present value of its assets. The regulation, however, will not become effective until the OTS evaluates the process by which savings associations may appeal an interest rate risk deduction determination. It is uncertain as to when this evaluation may be completed. Furthermore, the Bank, due to its asset size and level of risk-based capital is exempt from this requirement. Notwithstanding the foregoing, utilizing this measuring concept, as of December 31, 1996, a change in interest rates of positive 200 basis points would have resulted in a 1.21% decrease (as a percentage of the net present value of the Bank's assets) in the Bank's NPV while a change in interest rates of negative 200 basis points would have resulted in an .11% increase (as a percentage of the net present value of the Bank's assets) in the Bank's NPV. Accordingly, the Bank's interest rate risk was considered normal under OTS regulations and no additional risk-based capital would have been required at December 31, 1996. It has been and continues to be a priority of the Company's Board of Directors and management to manage interest rate risk and thereby limit any negative effect of the Company's NPV. The Company's asset/liability policy, established by the Board of Directors, sets forth acceptable limits on the amount of change in NPV given certain changes in interest rates. The Company has an asset/liability management committee which meets weekly to review interest rate positions, and a Board investment committee which meets quarterly to review the Company's interest rate risk position and other related matters and to make recommendations for adjusting such position to the full Board of Directors. In addition, the investment committee meets semi-annually with the Company's investment advisor to review the Company's investment portfolio and strategies relating to interest rate risk. Specific strategies have included the sale of long-term, fixed rate loans to reduce the average maturity of the Company's interest-earning assets and the use of FHLB advances to lengthen the effective maturity of its interest-bearing liabilities. In the future, the Company's community banking emphasis, including the origination of commercial business loans, is intended to further increase the Company's portfolio of short-term and/or adjustable rate loans. 14 Presented below, as of December 31, 1995 and 1996, is an analysis of the Company's interest rate risk as measured by changes in NPV for instantaneous and sustained parallel shifts in the yield curve, in 100 basis point increments, up and down 300 basis points and compared to Board policy limits. Assumptions used in calculating the amounts in this table are OTS assumptions.
At December 31, 1995 At December 31, 1996 Change in Board Limit ----------------------------- ------------------------------ Interest Rate % Change $ Change % Change $ Change % Change ------------- ----------- ----------- ----------- -------------- ----------- (Basis Points) (Dollars in (Dollars in Thousands) Thousands) 300 -40.00 -3,171 -17% -3,207 -23% 200 -18.00 -1,726 - 9% -1,996 -14% 100 -10.00 - 637 -3% -1,015 -6% 0 0.00 0 0% 0 0% -100 -10.00 120 1% 1,411 3% -200 -18.00 -63 0% 2,475 3% -300 -40.00 85 0% 2,687 3%
In evaluating the Company's exposure to interest rate risk, certain shortcomings inherent in the method of analysis presented in the foregoing table must be noted. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Further, in the event of a change in interest rates, prepayments and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. As a result, the actual effect of changing interest rates may differ from that presented in the foregoing table. The Company also makes use of "gap" analysis which measures the difference between the amount of interest-earning assets which are anticipated to mature or reprice within a particular period and the amount of interest bearing liabilities which are expected to reprice in that same period. The Company relies on certain assumptions, such as the amount and timing of loan prepayments in the measurement of the interest rate sensitivity gap. Similar shortcomings to those experienced with NPV analysis are also inherent in the gap method of analysis. Liquidity and Capital Resources The Bank's primary sources of funds are deposits, repayment and prepayment of loans, interest earned on or maturation of investment securities and short-term investments, borrowings and funds provided from operations. While maturities and the scheduled amortization of loans, investments and mortgage-backed securities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by the general market interest rates, economic conditions and competition. 15 The primary investing activities of the Bank are the origination of loans and the purchase of securities. During the years ended December 31, 1994, 1995 and 1996, the Bank originated loans totaling $39.9 million, $68.8 million and $77.7 million respectively. During the years ended December 31, 1994, 1995 and 1996, these investment activities were funded primarily by principal repayments and prepayments on loans and maturities of investment securities totaling $25.1 million, $30.8 million, and $43.8 million, respectively. The proceeds from the sale of loans totaled $3.0 million, $8.0 million and $14.3 million for the years ended December 31, 1994, 1995 and 1996, respectively. Sales of available-for-sale securities in 1994, 1995 and 1996 generated proceeds of $1.1 million, $510,000 and $1.8 million, respectively. The major sources of cash from financing activities in the years ended December 31, 1994, 1995 and 1996 were increases in deposits of $7.5 million, $2.2 million and $7.0 million, respectively. In the years ended December 31, 1994, 1995 and 1996, financing also was provided by net borrowings of $5.8 million, $21.8 million and $20.6 million, respectively. The Bank had available lines of credit from the FHLB, at December 31, 1996, equal to $1.5 million. The Bank currently uses, and intends to continue to use, FHLB advances as a source of funding for loans when advantageous interest rate risk matches can be found. Liquidity management is both a daily and long-term function for the Bank's senior management. The Bank adjusts its investment strategy, within the limits established by the investment policy, based upon assessments of expected loan demand, expected cash flows, FHLB advance opportunities, market yields and objectives of its asset/liability management program. Base levels of liquidity have generally been invested in interest-earning overnight and time deposits with the FHLB of Indianapolis. Funds for which a demand is not foreseen in the near future are invested in investment and other securities for the purpose of yield enhancement and asset/liability management. The Bank is required to maintain minimum levels of liquidity as defined by regulatory agencies. The liquidity requirement, which can vary, is based upon a percentage of deposits and short term borrowings and is currently 5.0%. The Bank's internal policy for liquidity is approximately 8%. The Company's liquidity ratios at December 31, 1994, 1995, 1996 were 14.35%, 14.04% and 7.31%, respectively. Proceeds from the sale of fixed rate mortgage loans in early 1997 were used to restore the Company's liquidity ratio to above its policy level. The Bank anticipates that it will have sufficient funds available to meet current loan commitments. At December 31, 1996, the Bank had outstanding commitments to originate loans and available lines of credit totaling $15.8 million and commitments to provide funds to complete current construction projects in the amount of $6.8 million. Certificates of deposit which will mature in one year or less at December 31, 1996 totaled $43.8 million. Based on its experience, the Bank's certificates of deposit have been a relatively stable source of long-term funds as such certificates are generally renewed upon maturity since the Bank has established long-term banking relationships with its customers. Therefore, management believes a significant portion of such deposits will remain with the Bank, although this cannot be assured. 16 At December 31, 1996, the Bank exceeded all of the OTS capital requirements on a fully phased in basis. See Note 9 of the Notes to Consolidated Financial Statements for a summary of the Bank's regulatory capital requirements. The Company also has a need for, and sources of liquidity. Liquidity is required to fund its operating expenses, fund stock repurchase programs, as well as for the payment of dividends to shareholders. At December 31, 1996 the Company had $797,000 in liquid assets on hand. The primary source of liquidity on an ongoing basis is dividends from the Bank. Dividends totaling $1.0 million were paid from the Bank to the Company during the year ended December 31, 1996. For the year ended December 31, 1996, the Company paid dividends to shareholders totaling $213,000 and repurchased 127,865 shares of common stock at a total cost of $2.2 million. The Company has regulatory approval to repurchase an additional 30,888 shares of Company stock at December 31, 1996. Impact of Inflation and Changing Prices The Consolidated Financial Statements and Notes thereto which are presented herein have been prepared in accordance with generally accepted accounting principals, which require the measurement of financial position and the results of operations in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike most industrial companies, virtually all the Company's assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on the Company's performance than do the effects of the general levels of inflation. Interest rates do not necessarily move in the same direction or to the same degree as the price of goods and services. Impact of Accounting Standards Financial Accounting Standard No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, was issued by the Financial Accounting Standards Board in 1996. It revises the accounting for transfers of financial assets, such as loans and securities, and for distinguishing between sales and secured borrowings. It is effective for some transactions in 1997 and others in 1998. Management does not expect the effect on the Company's financial position and results of operations to be significant. 17 REPORT OF INDEPENDENT AUDITORS Board of Directors LSB Financial Corp. Lafayette, Indiana We have audited the accompanying consolidated statements of financial condition of LSB Financial Corp. as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the three year period ended December 31, 1996. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of LSB Financial Corp. as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 1996 in conformity with generally accepted accounting principles. As discussed in Note 1, LSB Financial Corp. changed its method of accounting for originated mortgage servicing rights in 1996. /s/ Crowe, Chizek and Company LLP --------------------------------- Crowe, Chizek and Company LLP Indianapolis, Indiana January 29, 1997 - ------------------------------------------------------------------------------- 18 LSB FINANCIAL CORP. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, 1995 and 1996 (Dollars in thousands, except per share data) - --------------------------------------------------------------------------------
1995 1996 ---- ---- ASSETS Cash and due from banks $ 4,200 $ 4,388 Short-term investments 3,595 5,410 --------- --------- Cash and cash equivalents 7,795 9,798 Available-for-sale securities (Note 2) 12,295 6,546 Loans held for sale 968 6,230 Total loans (Note 3) 132,387 154,701 Less: Allowance for loan losses (Note 4) (922) (1,715) --------- --------- Loans, net 131,465 152,986 Office properties and equipment - net (Note 5) 3,205 4,570 Federal Home Loan Bank stock, at cost 1,500 2,575 Accrued interest receivable 905 1,006 Other assets 840 896 --------- --------- $ 158,973 $ 184,607 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Deposits (Note 6) $ 109,977 $ 116,949 Short term borrowings 864 -- Advances from Federal Home Loan Bank (Note 7) 28,500 50,000 Note payable (Note 8) 250 220 Accrued interest payable 159 197 Advances from borrowers for taxes and insurance 203 178 Other liabilities 952 267 --------- --------- 140,905 167,811 Commitments and contingent liabilities (Note 11) Shareholders' equity (Notes 1 and 9) Common stock ($.01 par value - 7,000,000 shares authorized; 1,057,369 and 1,058,655 shares issued) 11 11 Additional paid-in capital 10,063 10,143 Retained earnings 9,626 10,289 Unamortized cost of recognition and retention plan (399) (332) Unearned shares held by employee stock ownership plan (739) (653) Treasury stock (28,000 and 155,895 shares, at cost) (466) (2,629) Unrealized loss on available-for-sale securities, net of tax of $19 and $22 (28) (33) --------- --------- 18,068 16,796 --------- --------- $ 158,973 $ 184,607 ========= =========
- -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 19 LSB FINANCIAL CORP. CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 1994, 1995 and 1996 (Dollars in thousands, except per share data) - --------------------------------------------------------------------------------
1994 1995 1996 ---- ---- ---- Interest income Loans, including related fees $ 7,105 $ 9,595 $12,467 Short-term investments 91 311 156 Securities Taxable 730 756 586 Tax exempt 53 82 38 ------- ------- ------- Total interest income 7,979 10,744 13,247 Interest expense Deposits 4,263 4,861 5,324 Federal Home Loan Bank advances 163 1,062 2,193 Other borrowings 16 14 13 ------- ------- ------- Total interest expense 4,442 5,937 7,530 ------- ------- ------- Net interest income 3,537 4,807 5,717 Provision for loan losses (Note 4) (15) -- 800 ------- ------- ------- Net interest income after provision for loan losses 3,552 4,807 4,917 ------- ------- ------- Noninterest income Deposit account service charges and fees 154 239 326 Net gain on sale of mortgage loans 13 68 184 Net gain on securities 6 -- 7 Other 117 322 178 ------- ------- ------- 290 629 695 Noninterest expense Salaries and employee benefits (Note 10) 1,366 1,678 2,082 Occupancy and equipment expense, net 443 529 668 Computer service 217 169 244 Deposit insurance 228 120 2 Advertising 178 251 274 Other 580 723 916 ------- ------- ------- 3,012 3,470 4,186 ------- ------- ------- Income before income taxes 830 1,966 1,426 Income tax provision (Note 12) 265 724 550 ------- ------- ------- Net income $ 565 $ 1,242 $ 876 ======= ======= ======= Net income per share (Note 13) N/A $ 1.30 $ 1.00
- -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 20 LSB FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years ended December 31, 1994, 1995 and 1996 (Dollars in thousands, except per share data) - --------------------------------------------------------------------------------
Net Unrealized Additional Loss on Common Paid-in Retained Available-for- Benefit Treasury Stock Capital Earnings Sale Securities Plans Stock Total ----- ------- -------- --------------- ----- ----- ----- Balance, January 1, 1994 $ -- $ -- $ 7,819 $ -- $ -- $ -- $ 7,819 Net income -- -- 565 -- -- -- 565 Change in net unrealized loss -- -- -- (176) -- -- (176) -------- -------- -------- -------- -------- -------- -------- Balance, December 31, 1994 -- -- 8,384 (176) -- -- 8,208 Issuance of common stock (Note 1) 10 9,599 -- -- -- -- 9,609 Formation of employee stock ownership plan -- -- -- -- (824) -- (824) Formation of recognition and retention plan (RRP) 1 426 -- -- (427) -- -- RRP amortization expense -- -- -- -- 28 -- 28 Acquisition of treasury stock (28,000 shares) -- -- -- -- -- (466) (466) Employee stock ownership shares earned -- 38 -- -- 85 -- 123 Net income -- -- 1,242 -- -- -- 1,242 Change in net unrealized loss -- -- -- 148 -- -- 148 -------- -------- -------- -------- -------- -------- -------- Balance, December 31, 1995 11 10,063 9,626 (28) (1,138) (466) 18,068 Issuance of shares for RRP -- 22 -- -- (22) -- -- RRP amortization expense -- -- -- -- 90 -- 90 Employee stock ownership shares earned -- 58 -- -- 85 -- 143 Acquisition of treasury stock (127,895 shares) -- -- -- -- -- (2,163) (2,163) Dividends paid ($.24 per share) -- -- (213) -- -- -- (213) Net income -- -- 876 -- -- -- 876 Change in net unrealized loss -- -- -- (5) -- -- (5) -------- -------- -------- -------- -------- -------- -------- Balance, December 31, 1996 $ 11 $ 10,143 $ 10,289 $ (33) $ (985) $ (2,629) $ 16,796 ======== ======== ======== ======== ======== ======== ========
- -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 21 LSB FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1994, 1995 and 1996 (Dollars in thousands) - --------------------------------------------------------------------------------
1994 1995 1996 ---- ---- ---- Cash flows from operating activities Net income $ 565 $ 1,242 $ 876 Adjustments to reconcile net income to net cash from operating activities Depreciation 196 214 276 Net amortization on securities 229 83 54 Provision for loan losses (15) - 800 Gain on securities (6) - (7) Gain on sale of loans (13) (68) (184) Loans originated for sale, net of sales proceeds 5,527 (900) (242) Deferred loan fees, net 50 44 42 Employee stock ownership plan - shares earned - 123 143 Changes in assets and liabilities Accrued interest receivable 56 (295) (101) Other assets (758) 475 37 Accrued interest payable 17 42 38 Other liabilities (87) 702 (684) -------- -------- --------- Net cash from operating activities 5,761 1,662 1,048 Cash flows from investing activities Net change in interest-bearing balances with financial institutions 251 - - Proceeds from the maturity and paydown of available-for- sale securities 9,819 7,191 7,578 Proceeds from the maturity and paydown of held-to-maturity securities 1,515 1,437 - Purchase of available-for-sale securities (3,592) (8,075) (3,687) Purchase of held-to-maturity securities (647) (501) - Proceeds from sales of available-for-sale securities 1,051 510 1,802 Purchase of Federal Home Loan Bank stock - (807) (1,075) Loans made to customers net of payments received (25,993) (32,907) (32,645) Proceeds from the sale of loans - - 5,446 Purchase of premises and equipment (400) (159) (1,641) -------- -------- --------- Net cash from investing activities (17,996) (33,311) (24,222) Cash flows from financing activities Net change in deposits 7,522 2,213 6,972 Net change in short term borrowings - 864 (864) Proceeds from Federal Home Loan Bank advances 12,500 31,500 42,500 Payments on advances from Federal Home Loan Bank (6,700) (10,500) (21,000) Net change in advances from borrowers for taxes and insurance 40 9 (25) Payments on note payable (27) (28) (30) Net proceeds from sale of common stock, net of ESOP debt - 8,785 - Dividends paid - - (213) Purchase of treasury stock - (466) (2,163) -------- -------- --------- Net cash from financing activities 13,335 32,377 25,177 -------- -------- --------- Net change in cash and cash equivalents 1,100 728 2,003 Cash and cash equivalents at beginning of period 5,967 7,067 7,795 -------- -------- --------- Cash and cash equivalents at end of period $ 7,067 $ 7,795 $ 9,798 ======== ======== ========= Cash paid during the period for: Interest $ 4,425 $ 5,895 $ 7,492 Income taxes 322 126 1,037 Non cash investing activities: Amortized cost of held-to-maturity securities transferred to available-for-sale 17,757 1,753 - Book value of portfolio loans transferred to held-for-sale - - 10,282
- -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 22 LSB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1994, 1995 and 1996 (Dollars in thousands, except per share amounts) - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation: The consolidated financial statements as of and for the years ended December 31, 1995 and 1996 include the accounts of LSB Financial Corp. (LSB or the Company) and its wholly-owned subsidiary, Lafayette Savings Bank, FSB (Bank) and the Bank's wholly-owned subsidiary, LSB Service Corporation (LSBSC). The 1994 financial statements include the accounts of the Bank and LSBSC. All significant intercompany transactions and balances have been eliminated. Stock Issuance and Conversion: On February 3, 1995, pursuant to a Plan of Conversion adopted May 16, 1994, LSB completed the issuance of 1,029,576 shares of common stock, at a price of $10 per share raising net proceeds of $9,609. In accordance with its Plan of Conversion, $4,805 of the proceeds were utilized to purchase 100% of the stock of the Bank in conjunction with its conversion from a mutual to a stock form of organization. The transaction was accounted for in a manner similar to the pooling of interests method of accounting for a business combination. Accordingly, the assets and liabilities of the Bank are presented in these consolidated financial statements at historical cost and earnings per share have been computed as if the common stock had been outstanding since January 1, 1995. Description of Business: LSB operates primarily in the banking industry which accounts for more than 90% of its revenues, operating income and assets. LSB generates mortgage and consumer loans and receives deposits from customers located primarily in Tippecanoe county in Indiana. A substantial portion of the loan portfolio is secured by single and multi-family residential mortgages. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates most susceptible to change in the near term include the allowance for loan losses and the fair value of securities. Statement of Cash Flows: For purposes of the statement of cash flows, cash and cash equivalents include cash on hand, amounts due from banks and short-term investments. The Bank reports net cash flows for customer loan transactions and deposit transactions and for changes in interest-bearing balances with other financial institutions. - -------------------------------------------------------------------------------- (Continued) 23 LSB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1994, 1995 and 1996 (Dollars in thousands) - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Securities: Securities are classified as held-to-maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available-for-sale when they might be sold before maturity. Available-for-sale securities are carried at fair value, with unrealized holding gains and losses reported separately in shareholders' equity, net of tax. Securities are written down to fair value when a decline in fair value is not temporary. Premium amortization is deducted from and discount accretion is added to interest income. Gains and losses on the sale of available-for-sale securities are determined using the specific identification method. Inventory of Loans Held for Sale: The Bank sells a portion of its mortgage loan production in the secondary market. Whenever loan cost exceeds market value on a net aggregate basis, a valuation reserve is recorded and the loans are carried at the lower of cost or market. At December 31, 1996 and 1995, the market value of such loans exceeded their cost. During December 1996, the Bank transferred approximately $10,282 of fixed rate mortgage loans from the loan portfolio to the held for sale portfolio. This transfer was done to diversify the loan portfolio and as part of management's strategic plan to expand the Bank's consumer and commercial loan portfolios. Approximately 50% of these loans were sold in December 1996 and the balance in January 1997. Allowance for Loan Losses: The allowance for loan losses is a valuation allowance, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required based on past loan loss experience, known and inherent risks in the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off. Loan impairment is reported when full payment under the loan terms is not expected. Impairment is evaluated collectively for smaller-balance loans of similar nature such as residential mortgage, consumer, and credit card loans, and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate. Loans are evaluated for impairment when payments are delayed, typically 90 days or more, or when the internal grading system indicates a doubtful classification. - -------------------------------------------------------------------------------- (Continued) 24 LSB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1994, 1995 and 1996 (Dollars in thousands) - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Allowance for Loan Losses (Continued): The carrying values of impaired loans are periodically adjusted to reflect cash payments, revised estimates of future cash flows, and increases in the present value of expected cash flows due to the passage of time. Cash payments representing interest income are reported as such. Other cash payments are reported as reductions in carrying value, while increases or decreases due to changes in estimates of future payments and due to the passage of time are reported as provision for loan losses expense. Recognition of Income on Loans: Interest income on loans is accrued over the term of the loans. Uncollectible interest on loans that are past due is charged-off or an allowance is established based on management's periodic evaluation. Loan fees, net of direct loan origination costs, are deferred and recognized over the contractual life of the loan as an adjustment to interest income using the interest method. Servicing Rights: Prior to adopting Financial Accounting Standard No. 122 on January 1, 1996, servicing right assets were recorded only for purchased rights to service mortgage loans. Subsequent to adopting this standard, servicing rights represent both purchased rights and the allocated value of servicing rights retained on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, as to geographic and prepayment characteristics. A valuation allowance is recorded to reflect the impairment of a grouping. Real Estate Owned: Real estate acquired through foreclosure or deed-in-lieu-of-foreclosure is carried at the lower of cost (fair value at foreclosure) or fair value less estimated selling costs. Future declines in value, if any, are charged to operations through a provision for loss on real estate owned. The costs of holding the real estate are charged to operations while major improvements are capitalized. Office Properties and Equipment: Office properties and equipment are stated at cost less accumulated depreciation. Depreciation is computed by straight-line and accelerated methods over estimated useful lives. Retirement Plans: The Bank maintains a profit sharing plan, pursuant to Section 401 of the Internal Revenue Code. The plan covers substantially all full time employees. Participants may contribute a percentage of their compensation, subject to certain limits. The plan allows the Bank, at the Board's discretion, to make contributions. - -------------------------------------------------------------------------------- (Continued) 25 LSB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1994, 1995 and 1996 (Dollars in thousands) - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Retirement Plans (Continued): Coincident with conversion to the stock form of organization, the Bank established an Employee Stock Ownership Plan (ESOP) covering substantially all full time employees. The expense recognized as ESOP shares are earned by participants is based on the fair value of such shares. The difference between the cost of ESOP shares earned, and their market value, is reflected as an addition to (or deduction from) additional paid-in capital. Stock Compensation: Expense for employee compensation under stock option plans is reported only if options are granted below market price at grant date. Pro forma disclosures of net income and earnings per share are provided as if the fair value method of Financial Accounting Standard No. 123 were used for stock-based compensation. Income Taxes: Income tax expense is the sum of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Fair Values of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed separately. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on- and off-balance sheet financial instruments does not include the value of anticipated future business or the values of assets and liabilities not considered financial instruments. Reclassifications: Certain items in the 1995 financial statements have been reclassified to be consistent with presentation in the 1996 financial statements. - -------------------------------------------------------------------------------- (Continued) 26 LSB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1994, 1995 and 1996 (Dollars in thousands) - -------------------------------------------------------------------------------- NOTE 2 - AVAILABLE-FOR-SALE SECURITIES The amortized cost and fair value of available-for-sale securities at December 31, 1995 and 1996 are as follows:
1995 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- Obligations of the U.S. Government and its agencies $ 3,008 $ - $ (7) $ 3,001 Mortgage-backed securities 4,896 - (62) 4,834 Obligations of states and political subdivisions 1,687 16 - 1,703 Corporate securities and commercial paper 2,751 6 - 2,757 ------------- ------------- ------------- ------------- $ 12,342 $ 22 $ (69) $ 12,295 ============= ============= ============= ============= 1996 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- Obligations of the U.S. Government and its agencies $ 1,355 $ 7 $ (5) $ 1,357 Mortgage-backed securities 4,007 36 (93) 3950 Obligations of states and political subdivisions 984 - - 984 Corporate securities and commercial paper 255 - - 255 ------------- ------------- ------------- ------------- $ 6,601 $ 43 $ (98) $ 6,546 ============= ============= ============= =============
- -------------------------------------------------------------------------------- (Continued) 27 LSB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1994, 1995 and 1996 (Dollars in thousands) - -------------------------------------------------------------------------------- NOTE 2 - AVAILABLE-FOR-SALE SECURITIES (Continued) The amortized cost and fair value of available-for-sale securities at December 31, 1996, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Fair Cost Value ---- ----- Due in one year or less $ 868 $ 865 Due after one year through five years 1,476 1,481 Due after ten years 250 250 Mortgage-backed securities 4,007 3,950 -------------- ------------- $ 6,601 $ 6,546 ============== =============
The sale of available-for-sale securities during 1994, 1995 and 1996 generated gross gains of $6, $0 and $9 and gross losses of $0, $0 and $2. NOTE 3 - LOANS RECEIVABLE Total loans consisted of the following:
December 31, ------------ 1995 1996 ---- ---- Mortgage loans secured by: One-to-four family residences $ 85,263 $ 90,757 Multi-family residences 12,044 19,610 Commercial real estate 18,914 19,032 Construction and development 10,379 17,781 Home equity lines of credit 4,124 7,415 Commercial business loans 4,570 4,825 Consumer loans 1,924 2,393 -------------- ------------- Gross loans receivable 137,218 161,813 Undisbursed portion of loans in process (4,516) (6,755) Deferred loan fees, net (315) (357) -------------- ------------- $ 132,387 $ 154,701 ============== =============
- -------------------------------------------------------------------------------- (Continued) 28 LSB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1994, 1995 and 1996 (Dollars in thousands) - -------------------------------------------------------------------------------- NOTE 3 - LOANS RECEIVABLE (Continued) Mortgage loans serviced principally for the Federal Home Loan Mortgage Corporation are not included in the accompanying statements of financial condition. The unpaid principal balances of such loans was $28,801 and $39,108 at December 31, 1995 and 1996, respectively. Activity for capitalized mortgage servicing rights during 1996 was as follows: Beginning of year $ 4 Additions 129 Amortized to expense (5) -------------- End of year $ 128 ============== No valuation allowance was deemed necessary at December 31, 1996. The balance of loans not accruing interest was $0 and $2,484 at December 31, 1995 and 1996. Certain of the executive officers and directors are loan customers of the Bank. Activity for those loans was as follows: Balance at January 1, 1996 $ 685 New loans and advances 604 Repayments (220) -------------- Balance at December 31, 1996 $ 1,069 ============== NOTE 4 - ALLOWANCE FOR LOAN LOSSES Activity in the allowance for loan losses was as follows: Year ended December 31, ----------------------- 1994 1995 1996 ---- ---- ---- Beginning balance $ 922 $ 926 $ 922 Provision for loan losses (15) - 800 Loan charge-offs - (6) (7) Recoveries 19 2 - --------- ----------- ---------- Ending balance $ 926 $ 922 $ 1,715 ========= =========== ========== - -------------------------------------------------------------------------------- (Continued) 29 LSB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1994, 1995 and 1996 (Dollars in thousands) - -------------------------------------------------------------------------------- NOTE 4 - ALLOWANCE FOR LOAN LOSSES (Continued) Information about impaired loans is as follows:
1995 1996 ---- ---- Year-end loans with no allowance for loan losses allocated $ - $ - Year-end loans with allowance for loan losses allocated - 2,391 Amount of the allowance allocated - 970 Average of impaired loans during the year - 1,793 Interest income recognized during impairment - - Cash-basis interest income recognized - -
NOTE 5 - OFFICE PROPERTIES AND EQUIPMENT A summary of office properties and equipment is as follows at December 31:
1995 1996 ---- ---- Land $ 520 $ 756 Office buildings and improvements 2,489 3,397 Furniture and equipment 1,401 1,898 -------------- ------------- 4,410 6,051 Less accumulated depreciation and amortization 1,205 1,481 -------------- ------------- $ 3,205 $ 4,570 ============== =============
- -------------------------------------------------------------------------------- (Continued) 30 LSB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1994, 1995 and 1996 (Dollars in thousands) - -------------------------------------------------------------------------------- NOTE 6 - DEPOSITS Deposits at December 31 are summarized as follows:
1995 1996 ---- ---- Amount Percent Amount Percent ------ ------- ------ ------- Non interest-bearing deposits $ 3,106 2.8% $ 4,127 3.5% NOW accounts 21,613 19.7 20,716 17.8 Savings accounts 12,050 10.9 12,538 10.7 ------------ ------- ------------ -------- 36,769 33.4 37,381 32.0 ------------ ------- ------------ -------- Certificates of deposit 2.00% to 3.99% 5 - 64 .1 4.00% to 5.99% 43,076 39.2 48,677 41.6 6.00% to 7.99% 30,120 27.4 30,820 26.3 8.00% to 9.99% 7 - 7 - ------------ ------- ------------ -------- 73,208 66.6 79,568 68.0 ------------ ------- ------------ -------- $ 109,977 100.0% $ 116,949 100.0% ============ ======= ============ ========
At December 31, 1996, scheduled maturities of certificates of deposit are as follows: 1997 $ 43,778 1998 24,389 1999 8,437 2000 1,664 2001 and thereafter 1,300 ------------ $ 79,568 ============ The aggregate amount of certificates of deposit in denominations of $100 or more was $8,735 and $10,450 at December 31, 1995 and 1996, respectively. Individual certificate amounts in excess of $100 are not insured by the FDIC. - -------------------------------------------------------------------------------- (Continued) 31 LSB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1994, 1995 and 1996 (Dollars in thousands) - -------------------------------------------------------------------------------- NOTE 7 - ADVANCES FROM FEDERAL HOME LOAN BANK Advances from the Federal Home Loan Bank (FHLB) are due in full at final maturity, require monthly interest payments and are secured by a blanket pledge of the Bank's eligible securities and mortgage loans. At December 31, 1996, the scheduled maturity and weighted average interest rate of FHLB advances were as follows: Weighted Interest Principal Year Average Balance ---- ------- ------- 1997 5.50% $ 32,000 1998 5.89 15,000 1999 5.90 3,000 ----------- $ 50,000 =========== NOTE 8 - NOTE PAYABLE During 1993, the Bank acquired the property for a second branch from two individuals. In addition to cash, a ten year mortgage note, secured by the branch property, was issued in the amount of $328. The note bears interest at an annual rate of 5.5%. Payments, including interest, are $4 per month with a final maturity of January 2003. NOTE 9 - CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS At the time of its conversion to a stock form of organization, LSB established a liquidation account in an amount equal to its total net worth as of the date of the latest statement of financial condition appearing in the final prospectus, which was $8,066. The liquidation account is maintained for the benefit of eligible depositors who continue to maintain their accounts at the Company after the conversion. The liquidation account declines annually to the extent that eligible depositors have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder's interest in the liquidation account. In the event of a complete liquidation, each eligible depositor will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for accounts then held. The balance allocated to the liquidation account is not available for payment of dividends. - -------------------------------------------------------------------------------- (Continued) 32 LSB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1994, 1995 and 1996 (Dollars in thousands) - -------------------------------------------------------------------------------- NOTE 9 - CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS (Continued) The Bank has qualified under provisions of the Internal Revenue Code which permit it to deduct from taxable income a provision for bad debts that differs from the provision for such losses charged against income in the financial statements, if any. This portion of retained earnings is considered to be restricted because if, in the future, this portion of retained earnings is used for any purpose other than to absorb bad debt losses, federal income taxes would be imposed at the then applicable rates. In accordance with Financial Accounting Standard 109, LSB has not recorded a liability for the portion of the tax reserve established prior to January 1, 1988, which totals $1,861. At current tax rates, the tax liability for such amount would be $744. The Bank is subject to various regulatory capital requirements administered by its primary regulator, the Office of Thrift Supervision (OTS) and by the Federal Deposit Insurance Corporation (FDIC). Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. These guidelines and the regulatory framework for prompt corrective action involve quantitative measures of capital, assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices as well as qualitative judgments by the regulators about components, risk weightings, and other factors. LSB's deposit insurance premium rate is also based, in part, on these requirements. At December 31, 1995 and 1996, the Bank's actual and required minimum capital ratios were as follows:
FDIC ---- OTS To Be Well --- Capitalized Under For Capital Corrective Action Actual Adequacy Purposes Provisions ------ ----------------- ---------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- Total Capital (to Risk Weighted Assets) 1995 $ 15,976 15.03% $ 8,504 8.0% $ 10,630 10.0% 1996 $ 16,623 12.44% $ 10,687 8.0% $ 13,359 10.0% Tier I Capital (to Risk Weighted Assets) 1995 $ 15,054 14.16% $ 4,252 4.0% $ 6,378 6.0% 1996 $ 15,122 11.32% $ 5,344 4.0% $ 8,015 6.0% Tier 1 (Core) Capital (to Adjusted Assets) 1995 $ 15,054 9.58% $ 4,713 3.0% $ 7,857 5.0% 1996 $ 15,122 8.23% $ 5,509 3.0% $ 9,182 5.0% Tangible Capital (to Adjusted Assets) 1995 $ 15,054 9.58% $ 2,357 1.5% N/A 1996 $ 15,122 8.23% $ 2,755 1.5% N/A
- -------------------------------------------------------------------------------- (Continued) 33 LSB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1994, 1995 and 1996 (Dollars in thousands) - -------------------------------------------------------------------------------- NOTE 9 - CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS (Continued) Risk-based capital differs from tangible and core capital due to the inclusion of the Bank's general valuation allowance which totaled $922 and $1,501 at December 31, 1995 and 1996. At December 31, 1996, the Bank's capital ratios result in its being designated a well capitalized institution. NOTE 10 - BENEFIT PLANS The Bank maintains a 401(k) plan for the benefit of eligible employees. Employer contributions are discretionary. Expense recognized for this plan was $54, $0 and $0 in 1994, 1995 and 1996. In August 1995, LSB shareholders approved a Stock Option Plan which reserved 102,957 shares of Common Stock for granting options to directors and officers of the Companies. Under the terms of the Plan, options can be granted at values not less than the fair market value of the shares at the date of the grant. Options vest at each anniversary date over a five year period and must be exercised within ten years of grant. Financial Accounting Standard No. 123, which became effective for 1996, requires pro forma disclosures for companies that do not adopt its fair value accounting method for stock-based employee compensation. Accordingly, the following pro forma information presents net income and earnings per share had the Standard's fair value method been used to measure compensation cost for stock option plans. Compensation cost actually recognized for stock options was $0 for both 1995 and 1996. 1995 1996 ---- ---- Net income as reported $ 1,242 $ 876 Pro forma net income 1,224 821 Earnings per share as reported 1.30 1.00 Pro forma earnings per share 1.29 .93 - -------------------------------------------------------------------------------- (Continued) 34 LSB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1994, 1995 and 1996 (Dollars in thousands, except per share date) - -------------------------------------------------------------------------------- NOTE 10 - BENEFIT PLANS (Continued)
Weighted-Average Weighted-Average Number Per Share Per Share of Options Exercise Price Fair Value of Grants ---------- -------------- -------------------- Outstanding, January 1, 1995 - Granted 74,112 $ 15.375 $ 4.45 Exercised - Forfeited - Expired - ------------ Outstanding, end of 1995 74,112 15.375 4.45 Granted - Exercised - Forfeited - Expired - ------------ Outstanding, end of 1996 74,112 15.375 4.45
Options exercisable at year-end are as follows: Number Weighted-Average of Options Exercise Price ---------- -------------- 1995 - $ - 1996 14,822 $ 15.375 The fair value of options granted during 1995 is estimated using the following weighted-average information: risk-free interest rate of 6.34%, expected life of 7 years, expected volatility of stock price of .15 and expected dividends of 1.56% per year. At year-end 1996, options outstanding were as follows: Number of options 74,112 Exercise price $15.375/share Weighted-average exercise price 15.375/share Weighted-average remaining option life 8.7 years For options now exercisable: Number 14,822 Weighted-average exercise price $15.375/share - -------------------------------------------------------------------------------- (Continued) 35 LSB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1994, 1995 and 1996 (Dollars in thousands) - -------------------------------------------------------------------------------- NOTE 10 - BENEFIT PLANS (Continued) In August 1995, LSB shareholders approved a Recognition and Retention Plan (RRP) that awarded 27,793 shares of stock to certain officers and directors of the Company. An additional 1,286 shares were awarded during 1996. The stock awarded under the Plan is restricted as to certain rights at the time of issuance. These restrictions are removed over a 5 year period. The cost of these shares is amortized over the vesting period. Expense recorded for the RRP totalled $28 and $90 in 1995 and 1996. In conjunction with the conversion, the Bank established an ESOP which purchased 8%, or 82,366 shares, of the stock offered in the conversion. The funds used by the ESOP to purchase the stock were provided by an $824 loan from LSB which will be repaid by contributions to the ESOP by the Bank in the future. Pursuant to the ESOP, the shares are to be allocated to participants annually, over a 12 year period. The ESOP covers substantially all employees and shares are allocated based upon employee compensation levels during the year. ESOP expense is based on the fair value of shares committed to be released and, for 1995 and 1996, totaled $123 and $143. During 1995 and 1996, 8,504 and 8,540 shares were earned by and committed to be released to participants. The number of shares earned each year is determined by the ESOP loan agreement. Shares no longer required to be held as collateral for that loan are committed to be released and are earned by participants. At December 31, 1996, 65,322 unreleased shares with a fair value of $1,274 were held by the ESOP. The ESOP also held 8,504 shares which were allocated to participants' accounts and 8,540 shares which were released for allocation. Dividends paid on shares that are not allocated to participants' accounts are used to service debt. NOTE 11 - COMMITMENTS AND CONTINGENT LIABILITIES The Bank leases branch and office facilities under operating leases that expire in 1999 and 2000. Total expense for leased premises was $26, $34, and $54 for the years ended December 31, 1994, 1995 and 1996. Future minimum lease payments at December 31, 1996 are as follows: 1997 $ 47 1998 47 1999 33 2000 15 2001 - -------------- $ 142 ============== - -------------------------------------------------------------------------------- (Continued) 36 LSB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1994, 1995 and 1996 (Dollars in thousands) - -------------------------------------------------------------------------------- NOTE 11 - COMMITMENTS AND CONTINGENT LIABILITIES (Continued) In the ordinary course of business, the Bank has loans, commitments and contingent liabilities, such as guarantees and commitments to extend credit, which are not reflected in the accompanying consolidated statements of financial condition. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial guarantees is represented by the contractual amounts of those instruments. The Bank uses the same credit policy to make such commitments as it uses for on-balance-sheet items. At December 31, 1995 and 1996 these financial instruments are summarized as follows: 1995 1996 ---- ---- Commitments to extend credit: Fixed rate $ 1,188 $ 1,280 Variable rate 3,386 1,141 Unused portions of lines of credit 9,838 13,413 Standby letters of credit 833 423 The commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established under the contract. Generally, such commitments are for no more than 60 days. At December 31, 1996, the fixed rate loan commitments were at rates ranging from 7.5% to 8.375%. The lines of credit are commercial and home equity lines of credit and are variable rate. Since many commitments to make loans expire without being used, the amounts do not necessarily represent future cash commitments. Collateral obtained upon exercise of the commitment is determined using management's credit evaluation of the borrower. LSB and the Bank are party to various legal actions arising in the course of business. In the opinion of management, the companies have adequate legal defenses and/or insurance coverage with respect to these actions and their resolution will not materially affect the operations or financial position of LSB or the Bank. The Bank is party to an agreement with a third party service organization which provides data processing services to the Bank until the year 2000. Should the Bank terminate the contract prior to completion of the term, it would incur a penalty based on 80% of the expected remaining payments under the agreement. - -------------------------------------------------------------------------------- (Continued) 37 LSB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1994, 1995 and 1996 (Dollars in thousands) - -------------------------------------------------------------------------------- NOTE 12 - INCOME TAXES An analysis of the income tax provision is as follows:
Year ended December 31, ----------------------- 1994 1995 1996 ---- ---- ---- Current provision $ 277 $ 645 $ 692 Deferred provision (benefit) (12) 79 (142) ------------- -------------- ------------- $ 265 $ 724 $ 550 ============= ============== =============
The difference between the financial statement income tax provision and the amount computed by applying the statutory federal tax rate of 34% to income before income taxes is reconciled as follows:
Year ended December 31, ----------------------- 1994 1995 1996 ---- ---- ---- Income tax provision computed at statutory rate $ 282 $ 668 $ 485 Add (subtract) tax effect of Low income housing credit (37) (49) (36) Tax exempt income (16) (24) (10) State tax expense (net) 29 116 89 Other 7 13 22 ------------- -------------- ------------- $ 265 $ 724 $ 550 ============= ============== =============
The net deferred tax asset recorded at December 31, 1995 and 1996 is comprised of the following:
1995 1996 ---- ---- Deferred tax assets from: Bad debt deductions $ 138 $ 460 Loan fee income 125 28 Net unrealized loss on available-for-sale securities 19 22 -------------- ------------- 282 510 Deferred tax liability from: Fixed asset depreciation (71) (133) Other - (21) -------------- ------------- (71) (154) Valuation allowance for deferred tax assets - - -------------- ------------- Net deferred tax asset $ 211 $ 356 ============== =============
- -------------------------------------------------------------------------------- (Continued) 38 LSB FINANCIAL CORP. NOTES TO FINANCIAL STATEMENTS December 31, 1994, 1995 and 1996 (Dollars in thousands) - -------------------------------------------------------------------------------- NOTE 13 - EARNINGS PER SHARE Earnings per share are based on the weighted average number of shares outstanding during the period, adjusted, if the effect is significant, for common stock equivalents. The stock options outstanding are considered common stock equivalents. To evaluate the potential dilutive effect of these common stock equivalents, actual weighted average shares outstanding are increased by the number of shares issuable under the options, assuming full exercise, and reduced by the number of shares that could, hypothetically, be reacquired using the proceeds from the exercise of those options. For 1995 and 1996, the dilutive effect of the stock options was not significant and earnings per share were computed based upon weighted average shares outstanding which were 958,566 in 1995 and 877,411 for 1996. Unreleased shares held by the ESOP are not considered to be outstanding for the purpose of computing earnings per share, whereas shares awarded under the RRP are considered to be outstanding. NOTE 14 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS LSB is required to disclose the estimated fair value of its financial instruments. The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash, Short-term Investments and Federal Home Loan Bank Stock: The carrying amount of these instruments is a reasonable estimate of fair value. Securities: Fair values are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar instruments. Loans: The fair value of loans is based on estimates of the difference in interest rates that LSB would charge borrowers for similar loans with similar maturities applied for an estimated time period until the loan is assumed to reprice or be paid. Loan prepayments are considered when estimating the likely time period until repayment. Deposits: The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. - -------------------------------------------------------------------------------- (Continued) 39 LSB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1994, 1995 and 1996 (Dollars in thousands) - -------------------------------------------------------------------------------- NOTE 14 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) Federal Home Loan Bank Advances: The fair value of these advances was estimated based upon the current rates charged for advances with similar terms. Other Borrowings: The carrying amount of other borrowings is a reasonable estimate of fair value. Off-Balance Sheet Items: Carrying value is a reasonable estimate of fair value. These instruments are generally variable rate and short-term in nature, with minimal fees charged. The estimated fair values of the LSB's financial instruments are as follows:
1995 1996 ---- ---- Carrying Fair Carrying Fair Value Value Value Value ----- ----- ----- ----- Financial assets Cash and short-term investments $ 7,795 $ 7,795 $ 9,798 $ 9,798 Available-for-sale securities 12,295 12,295 6,546 6,546 Federal Home Loan Bank stock 1,500 1,500 2,575 2,575 Loans (net) 132,433 136,859 159,216 160,012 Financial liabilities Deposits (109,977) (110,514) (116,949) (116,838) Federal Home Loan Bank advances (28,500) (28,669) (50,000) (49,975) Other borrowings (1,114) (1,114) (220) (220) Off balance sheet items - - - -
- -------------------------------------------------------------------------------- (Continued) 40 LSB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1994,1995and 1996 (Dollars in thousands) - -------------------------------------------------------------------------------- NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS Presented below are the condensed balance sheet and the related condensed statements of income and cash flows for the parent company. CONDENSED BALANCE SHEETS December 31, 1995 and 1996 1995 1996 ---- ---- ASSETS Short-term investments $ 1,068 $ 797 Investment in the Bank 15,013 15,102 Available-for-sale securities 1,236 250 Loan to ESOP 755 686 Other assets 24 3 ------------- ------------- $ 18,096 $ 16,838 ============= ============= LIABILITIES $ 28 $ 42 SHAREHOLDERS' EQUITY 18,068 16,796 ------------- ------------- $ 18,096 $ 16,838 ============= ============= CONDENSED STATEMENTS OF INCOME For the years ended December 31, 1995 and 1996 1995 1996 ---- ---- Operating income Dividends from the Bank $ - $ 1,000 Other operating income 133 83 ------------- ------------ Total operating income 133 1,083 Operating expenses 32 82 ------------- ------------ Income before taxes and equity in undistributed income of the Bank 101 1,001 Income tax provision 26 (3) ------------- ------------ Income before equity in undistributed income of the Bank 75 1,004 Equity in undistributed income of the Bank 1,167 (128) ------------- ------------ Net income $ 1,242 $ 876 ============= ============ - -------------------------------------------------------------------------------- (Continued) 41 LSB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1994, 1995 and 1996 (Dollars in thousands, except per share amounts) - -------------------------------------------------------------------------------- NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS (Continued CONDENSED STATEMENTS OF CASH FLOWS For the years ended December 31, 1995 and 1996
1995 1996 ---- ---- Cash flows from operating activities Net income $ 1,242 $ 876 Adjustments to reconcile net income to net cash from operating activities Equity in undistributed income of the Bank (1,167) 128 Amortization of premiums paid for securities 36 1 Gain on sale of securities - (9) Change in other assets (24) 21 Change in other liabilities 28 23 ------------- ------------- Net cash from operating activities 115 1,040 Cash flows from investing activities Investment in the Bank (5,102) - Proceeds from the sale of available-for-sale securities 510 814 Purchase of available-for-sale securities (4,370) (840) Proceeds from the maturity of available-for-sale securities 1,100 1,000 Proceeds from repayment of the loan to ESOP 69 69 ------------- ------------- Net cash from investing activities (7,793) 1,043 Cash flows from financing activities Proceeds from issuance of stock, net of ESOP debt 8,785 - Issuance of RRP shares 427 22 Dividends paid - (213) Repurchase of treasury stock (466) (2,163) ------------- ------------- Net cash from financing activities 8,746 (2,354) ------------- ------------- Net changes in cash equivalents 1,068 (271) Cash equivalents at beginning of year - 1,068 ------------- ------------- Cash equivalents at end of year $ 1,068 $ 797 ============= =============
Taxes paid during 1995 and 1996 were $0 and $0. NOTE 16 - PENDING CHANGES IN ACCOUNTING POLICIES Financial Accounting Standard No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," was issued by the Financial Accounting Standards Board in 1996. It revises the accounting for transfers of financial assets, such as loans and securities, and for distinguishing between sales and secured borrowings. It is effective for some transactions in 1997 and others in 1998. Management does not expect the effect on LSB's financial position and results of operations to be significant. - -------------------------------------------------------------------------------- 42 LSB FINANCIAL CORP. and LAFAYETTE SAVINGS BANK, FSB DIRECTORS AND EXECUTIVE OFFICERS
Directors John W. Corey Peter Neisel President and Chief Executive President and CE0, Schwab Corp. Officer, LSB and Lafayette Bank Mariellen M. Neudeck Jeffrey A. Poxon Chairman of the Board, LSB and Investment Vice President, The Lafayette Lafayette Bank Life Insurance Company Vice President, St. Elizabeth Hospital Medical Center James A. Andrew Thomas L. Ryan President and Owner, Henry Poor Partner, Stuart & Branigin Lumber Co. Harry A. Dunwoody John C. Shen Senior Vice President of LSB and Developer and Sole Owner, Lafayette Bank Crestview Apartments and Crestview North Apartments Philip W. Kemmer C. Wesley Shook Business Administrator, Secretary-Treasurer, First Assembly of God Church The Shook Agency Executive Officers John W. Corey Mary Jo David President and Chief Executive Officer Vice President, Chief Financial Officer and Secretary-Treasurer Harry A. Dunwoody Senior Vice President
43 STOCKHOLDER INFORMATION Corporate Profile LSB is an Indiana corporation which was organized in 1994 by the Bank for the purpose of becoming a thrift institution holding company. The Bank was organized in 1869 and converted to a federal savings bank in 1984. On February 3, 1995, the Bank converted to the stock form of organization and concurrently became the wholly-owned subsidiary of LSB through the sale and issuance of 1,029,576 shares of Common Stock. The principal asset of LSB is the outstanding stock of the Bank, its wholly owned subsidiary. The Bank's primary business consists of attracting deposits from the general public and using these deposits to provide financing for the purchase and construction of residential and, to a lesser extent, other properties. Corporate Office Branch Offices 101 Main Street 1020A Sagamore Parkway W. Lafayette, Indiana 47902 West Lafayette, Indiana 1501 Sagamore Parkway W. Lafayette, Indiana 833 Twyckenham Blvd. Lafayette, IN 47905 Independent Auditors Local Counsel Crowe, Chizek and Company LLP Stuart & Branigin 2100 Market Tower 300 Main Street, Suite 800 10 W. Market Street Lafayette, Indiana 47902 Indianapolis, Indiana 46204-2976 Transfer Agent Special Counsel American Securities Transfer, Inc. Silver, Freedman & Taff, L.L.P. 1825 Lawrence Street 1100 New York Avenue, N.W. Denver, Colorado 80202 Washington, D.C. 20005 Form 10-K Report A copy of LSB's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 including financial statements, as filed with the SEC will be furnished without charge to stockholders of LSB upon written request to the Secretary, LSB Financial Corp., 101 Main Street, P.O. Box 1628, Lafayette, Indiana 47902. 44 Commnon Stock As of December 31, 1996, there were approximately 654 holders of record of LSB Common Stock and 902,760 shares of issued and outstanding common stock. LSB's stock is quoted on the Nasdaq National Stock Market under the symbol "LSBI." The following table sets forth, for the periods shown, the high and low prices of the common stock and cash dividends per share declared. The common stock began trading on Nasdaq on February 5, 1995, the date the Bank converted from a mutual to stock company. The prices reflect inter-dealer quotations without retail mark-up, mark-down or commissions and do not necessarily represent actual transactions. Cash Dividends Quarter Ended High Low Declared ------------- ---- --- -------- March 31, 1995 $12.50 $10.75 $0.00 June 30, 1995 14.25 11.75 0.00 September 30, 1995 16.75 13.50 0.00 December 31, 1995 17.25 16.00 0.00 March 31, 1996 17.375 16.50 0.00 June 30, 1996 16.50 15.50 0.08 September 30, 1996 17.25 15.00 0.08 December 31, 1996 19.50 17.25 0.08 Dividend payment decisions are made with consideration of a variety of factors including earnings, financial condition, market considerations and regulatory restrictions. Restrictions on dividend payments are described in Note 9 of the Notes to Consolidated Financial Statements included in this Annual Report. EX-21 3 SUBSIDIARIES OF THE REGISTRANT Exhibit 21 Subsidiaries of the Registrant SUBSIDIARIES OF THE REGISTRANT
Percentage State of of Incorporation Parent Subsidiary Ownership or Organization ------ ---------- ---------- --------------- LSB Financial Corp. Lafayette Savings Bank, FSB 100% Federal Lafayette Savings Bank, FSB L.S.B. Service Corporation 100% Indiana Lafayette Savings Bank, FSB Lafayette Insurance and 100% Indiana Investments, Inc.
The financial statements of LSB Financial Corp are consolidated with those of its subsidiaries. EX-23 4 CONSENT OF INDEPENDENT AUDITORS Exhibit 23 Consent of Independent Auditors Board of Directors LSB Financial Corp. Lafayette, Indiana We consent to the incorporation by reference in the Registration Statements on Form S-8 (Reg. Nos. 33-98518 and 33-98516) of LSB Financial Corp. of our Independent Auditors's Report, date January 29, 1997, on the consolidated statements of financial condition of LSB Financial Corp. As of December 31, 1995 and 1996 and on the consolidated statements of income, changes in shareholder's equity and cash flows for each of the three years in the period ended December 31, 1996, which report is included in Form 10-KSB of LSB Financial Corp. for the year ended December 31, 1996. /s/ Crowe, Chizek and Company LLP --------------------------------------- Crowe, Chizek and Company LLP Indianapolis, Indiana March 28, 1997 EX-27 5 FINANCIAL DATA SCHEDULE
9 The schedule contains summary information extracted from the annual report on Form 10-KSB for the year ended December 31, 1996 and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-31-1996 DEC-31-1996 4,388 5,410 0 0 6,546 0 0 154,701 1,715 184,607 116,949 50,000 642 220 0 0 11 16,785 167,811 12,467 624 156 13,247 5,324 7,530 5,717 800 7 4,186 1,426 1,426 0 0 876 1.00 1.00 3.52 2,484 0 0 1,156 922 7 0 1,715 1,715 0 0
-----END PRIVACY-ENHANCED MESSAGE-----