<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended June 30, 1996
-------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ______________ to __________________
Commission File Number 0-27142
-------
L & B Financial, Inc.
---------------------
(Exact name of registrant as specified in its charter)
Texas 75-0591450
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
306 North Davis Street, Sulphur Springs, Texas 75482
- ---------------------------------------------- -----------
(Address) (Zip Code)
Registrant's telephone number, including area code : (903) 885-2121
--------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months ( or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporate by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K. [ ]
As of September 19, 1996, the aggregate value of the 1,495,435 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
88,690 shares held by all directors and officers of the Registrant as a group,
was approximately $25,142,001 (1,495,435 shares at $16.8125 per share)
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the
Part of the Form 10-K into which the document is incorporated.
(1) Portions of the Annual Report to Stockholders for the year ended June 30,
1996, are incorporated into Part II, Items 5 through 8 of this Form 10-K.
(2) Portions of the definitive proxy statement for the 1995 Annual Meeting of
Stockholders to be filed within 120 days of June 30, 1996 are incorporated into
Part III, Items 9 through 13 of this Form 10-K.
<PAGE>
EXHIBIT 13
1996 ANNUAL REPORT
------------------
L&B FINANCIAL, INC.
<PAGE>
Table of Contents
-----------------
Letter to the Stockholders 1
Business 2
Selected Consolidated Financial and Other Data 3 - 4
Common Stock Information 5
Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations 6 - 14
Independent Auditor's Report 15
Consolidated Financial Statements 16 - 20
Notes to Consolidated Financial Statements 21 - 40
Directors and Officers 41
Corporate Information 41
Notice of Annual Meeting 42
10-K Information 42
Branch Office Locations 42
----------
<PAGE>
L&B FINANCIAL, INC.
P.O. Box 557
Sulphur Springs, Texas 75483
C. GLYNN LOWE
PRESIDENT
September 1, 1996
Dear Shareholder :
Our fiscal year ending June 30, 1996 produced net earnings of $1,450,000.00 as
compared to $1,382,000.00 in 1995. Year end deposits were $104,565,000.00 as
compared to 1995 totals of $100,933,000.00. Total loans increased to
$66,352,000.00 from $59,382,000.00 at year end 1995.
It was an exciting year for the Bank with the conversion of our charter to a
State Savings Bank whose stock was transferred to our new holding company, L&B
Financial, Inc., in late 1995. Our shareholders now own shares in L&B
Financial, Inc. whose principal asset is 100% of Loan and Building State Savings
Bank stock. With these structural changes our opportunities for expanding
services have been greatly enhanced.
In February, 1996 the New Boston loan production office was moved to our strip
shopping center in Texarkana, Texas and was converted to a full branch office
where all services of the bank are available. This was a good decision and we
are pleased with the new volume of business being generated and expect to
acquire a significant share of the market in this location.
Your company paid dividends totaling $.40 per share during the past year and we
look forward
We are grateful for the confidence of our shareholders and loyal customers and
commend our staff for their dedicated effort.
Yours very truly,
/s/ C. GLYNN LOWE
C. Glynn Lowe
President
<PAGE>
BUSINESS
L&B Financial, Inc. ("L&B") was incorporated in the State of Texas in November
1995, for the purpose of becoming a savings and loan holding company for Loan
and Building State Savings Bank (the "Bank"). The Bank was formerly Sulphur
Springs Loan and Building Association. On October 17, 1995, the stockholders of
the Bank approved a plan to reorganize the Bank into the holding company form of
ownership. The reorganization was completed on November 13, 1995, on which date
the Bank became the wholly-owned subsidiary of L&B, and the stockholders of the
Bank became the shareholders of L&B. Prior to the completion of the
reorganization, L&B had no material assets or liabilities and engaged in no
business activity. Subsequent to the acquisition of the Bank, L&B has engaged
in no significant activity other than holding the stock of the Bank and engaging
in certain passive investment activities. Accordingly, the 1996 consolidated
financial statements reflect the reorganization. Consolidated financial
statements and related data for years prior to 1996 are those of the Bank. L&B
and the Bank are collectively referred to herein as the "Corporation".
The Bank is a state-chartered capital stock savings bank headquartered in
Sulphur Springs, Texas. The Bank was known as Sulphur Springs Loan and Building
Association until October 1994, when its stockholders approved its change to a
state-chartered capital stock savings bank. The Bank, originally chartered in
1890, is a member of the Federal Home Loan Bank system and is subject to
examination and comprehensive regulation by the Texas Savings and Loan
Department, the Bank's chartering authority and primary regulator and by the
Federal Deposit Insurance Corporation ("FDIC"), its primary federal regulator.
The Bank's deposits are insured to the maximum limits allowable by the FDIC
through the Savings Association Insurance Fund ("SAIF"). On October 14, 1994,
the Bank completed its conversion from a Texas-chartered mutual savings
association to a Texas-chartered stock savings association through the sale of
1,667,500 shares of its common stock to certain depositors, borrowers and other
members of the general public. The conversion resulted in net proceeds of
approximately $16 million, substantially increasing the Bank's net worth.
The Bank conducts its business in Sulphur Springs, Texas, and in the surrounding
counties. It is a community oriented savings bank which offers a wide variety
of savings products while focusing its lending activities on residential real
estate loans secured by one-to-four family dwellings in the communities that it
serves. The Bank also makes commercial real estate loans, multi-family real
estate loans, construction loans, and consumer loans and invests in both fixed-
rate and adjustable-rate investment securities and mortgage-backed securities
issued by the United States government, its agencies, or government-sponsored
enterprises.
The Corporation's operations are conducted through its main office at 306 N.
Davis Street, Sulphur Springs, Texas, its five full service branch offices
located in the northeast Texas towns of Mt. Vernon, Mt. Pleasant, Daingerfield,
Texarkana and Pittsburg, and its mortgage loan office located in Sulphur
Springs.
- --------------------------------------------------------------------------------
L&B Financial, Inc.
2
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth selected financial data (dollars in
thousands, except for per share data) of the Corporation for the periods
indicated.
<TABLE>
<CAPTION>
Operations Data:
- ----------------
As of or For the Year Ended June 30,
------------------------------------
1996 1995 1994 1993 1992
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 4,888 $ 4,918 $ 4,419 $ 4,384 $ 3,525
Provision for loan loss (100) 5 204 346 78
--------------------------------------------------------
Net interest income after provision for loan loss 4,988 4,913 4,215 4,038 3,447
Other income 329 146 133 854 395
Other expense 3,353 3,128 2,768 2,629 2,206
--------------------------------------------------------
Income before income taxes 1,964 1,931 1,580 2,263 1,636
Income tax expense 514 549 552 879 407
--------------------------------------------------------
Net income $ 1,450 $ 1,382 $ 1,028 $ 1,384 $ 1,229
--------------------------------------------------------
Net income per common shares stock (1) $ 0.93 $ 0.88 n/a n/a n/a
Weighted average number of common shares outstanding (1) 1,556,720 1,572,790 0 0 0
Financial Condition:
- --------------------
Total assets $ 144,130 $ 133,783 $117,263 $115,999 $117,874
Cash and cash equivalents 8,916 6,418 6,818 15,359 12,487
Investment and mortgage-backed securities 64,164 63,750 53,284 41,489 40,467
Loans receivable, (net) 66,352 59,382 53,177 54,852 59,701
Deposits 104,565 100,933 106,162 106,011 109,460
Stockholders' equity $ 24,783 $ 25,654 $ 10,011 $ 8,996 $ 7,590
--------------------------------------------------------
Full service offices 6 5 5 5 5
Other Selected Data:
- --------------------
Interest rate spread during the year 2.64% 3.41% 3.69% 3.58% 3.12%
Net yield on average interest earning assets 3.56% 4.03% 3.91% 3.77% 3.23%
Return on average assets 1.02% 1.10% 0.88% 1.18% 1.07%
Return on average stockholders' equity 5.70% 7.75% 10.80% 16.72% 17.64%
Dividend payout ratio 43.10% 62.37% n/a n/a n/a
Non-performing assets and troubled debt restructures
to total assets (2) 0.42% 0.45% 0.44% 0.87% 2.16%
Average interest-earning assets to average interest-bearing
liabilities 122.35% 118.54% 106.14% 103.74% 101.25%
Ratio of average stockholders' equity to average assets 17.96% 17.35% 8.15% 7.08% 6.07%
Cash dividends declared and paid per share $ 0.40 $ 0.55 n/a n/a n/a
</TABLE>
- -------------------
(1) See the notes to the consolidated financial statements for additional
information on earnings per share calculations.
(2) Non-performing assets consist of non-accrual loans and accruing loans that
are contractually past due 90 days or more and real estate acquired through
foreclosure. Troubled debt restructured consists of restructured debt in
accordance with Statement of Financial Accounting Standards No. 15. This
ratio is calculated as of year ended June 30, 1996, 1995, 1994, 1993 and
1992.
- --------------------------------------------------------------------------------
L&B Financial, Inc.
3
<PAGE>
<TABLE>
<CAPTION>
Quarterly Data:
- ---------------
Quarter Ended
----------------------------------------------
June 30, March 31, December September
1996 1996 31, 1995 30, 1995
----------------------------------------------
<S> <C> <C> <C> <C>
Interest income $2,577 $2,615 $2,683 $2,656
Interest expense 1,451 1,445 1,453 1,294
----------------------------------------------
Net interest income 1,126 1,170 1,230 1,362
Provision for loan loss (100) 0 0 0
----------------------------------------------
Net interest income after provision for loan loss 1,226 1,170 1,230 1,362
Other income 148 81 60 40
Other expense 897 799 782 875
----------------------------------------------
Income before income taxes 477 452 508 527
Income tax expense 81 128 145 160
Net income $ 396 $ 324 $ 363 $ 367
----------------------------------------------
Net income per common shares stock $0.26 $0.21 $0.23 $0.21
<CAPTION>
Quarter Ended
----------------------------------------------
June 30, March 31, December September
1995 1995 31, 1994 30, 1994
----------------------------------------------
<S> <C> <C> <C> <C>
Interest income $2,398 $2,295 $2,264 $2,123
Interest expense 1,204 1,042 986 930
----------------------------------------------
Net interest income 1,194 1,253 1,278 1,193
Provision for loan loss 0 0 0 5
----------------------------------------------
Net interest income after provision for loan loss 1,194 1,253 1,278 1,188
Other income 30 47 30 39
Other expense 700 880 876 672
----------------------------------------------
Income before income taxes 524 420 432 555
Income tax expense 105 98 183 163
----------------------------------------------
Net income $ 419 $ 322 $ 249 $ 392
----------------------------------------------
Net income per common shares stock (1) $0.26 $0.20 $0.09 n/a
</TABLE>
- ---------------------------
(1) Earnings per share is applicable for periods subsequent to the conversion.
- --------------------------------------------------------------------------------
L&B Financial, Inc.
4
<PAGE>
COMMON STOCK INFORMATION
The common stock of L&B Financial, Inc. is traded on the NASDAQ SmallCap Market
System under the symbol "LBFI". The stock began trading on December 21, 1994.
As of August 30, 1996, there were approximately 292 shareholders of record.
This does not reflect the number of persons, or entities, who held their shares
in nominee, or "street" name.
The following table sets forth the high and low bids for the Corporation's
common stock, by fiscal quarter, as reported by the NASDAQ Stock Market.
<TABLE>
<CAPTION>
Fiscal Year Period High Low Close Dividends paid per share
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 Fourth Quarter 17 1/16 14 1/4 17 $0.10
Third Quarter 14 3/4 14 14 3/4 $0.10
Second Quarter 14 3/4 13 3/4 14 1/4 $0.10
First Quarter 14 3/4 11 1/2 13 7/8 $0.10
----------------------------------------------------------
1995 Fourth Quarter 12 1/4 10 1/16 11 1/2 $0.35
Third Quarter 11 9 1/4 10 3/8 $0.10
Second Quarter 9 7/8 9 1/4 9 1/2 $0.10
</TABLE>
During the year ended June 30, 1996, the Corporation declared aggregate cash
dividends of $.40 per share of common stock. See Note 14 to the Consolidated
Financial Statements for information regarding the restrictions on the
Corporation's ability to pay cash dividends and the Bank's ability to pay
dividends to the Corporation.
- --------------------------------------------------------------------------------
L&B Financial, Inc.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
- -------
L&B was incorporated in the State of Texas in November 1995, for the purpose of
becoming a savings and loan holding company for the Bank. Prior to the
completion of the reorganization, L&B had no material assets or liabilities and
engaged in no business activity. Subsequent to the acquisition of the Bank, L&B
has engaged in no significant activity other than holding the stock of the Bank
and engaging in certain passive investment activities. The Bank, which is L&B's
principal subsidiary, conducts business from its branch bank system located in
northeast Texas in the counties of Hopkins, Franklin, Titus, Camp, Morris and
Bowie. The Bank is subject to competition from other financial institutions and
other financial services companies. The Corporation is subject to the
regulations of certain federal and state agencies and undergoes periodic
examinations by those regulatory authorities.
The profitability of Corporation depends primarily on its net interest income,
which is the difference between interest and dividend income on interest-
earnings assets, principally loans, investment and mortgage-backed securities,
and interest expense on interest-bearing liabilities, principally deposits and
borrowings. Net interest income is affected by the average yield earned on
interest-earning assets, the average rate paid on interest-bearing liabilities,
and the ratio of interest-earning assets to interest-bearing liabilities. The
Corporation's net income is also dependent on the level of its noninterest
income and noninterest expense, such as compensation and employee benefits,
occupancy and equipment, deposit insurance premiums and other general and
administrative expenses and, to a lesser extent, on the level of provisions for
losses on loans and real estate, as well as provisions for federal income tax.
Asset and Liability Management
- ------------------------------
The Corporation is committed to following a program of asset and liability
management in an effort to manage the fluctuations in earnings caused by
movements in interest rates. The ability to maximize net interest income is
largely dependent upon the achievement of a positive net interest rate spread
that can be sustained during fluctuations in prevailing market interest rates.
Interest rate sensitivity is a measure of the difference between amounts of
interest-earning assets and interest-bearing liabilities which either reprice,
or mature, within a given time period. This difference, or the interest rate
repricing "gap", provides an indication of the extent to which the Corporation's
interest rate spread will be affected by changes in interest rates. In addition
to the effects of changes in the relative level of interest rates, changes in
the relationship between long-term interest rates and short-term interest rates
also affect the net interest rate spread of the Corporation. Generally, a
positively sloped yield curve (long-term rates are higher than short-term rate)
increases the Corporation's net interest rate spread while a negatively sloped
yield curve (short-term interest rates are higher than long-term interest rates)
generally leads to a decrease in the net interest rate spread.
One means of evaluating the sensitivity of an institution's net interest income
to changes in interest rates is to examine the extent to which its assets and
liabilities are "interest rate sensitive" and by monitoring an institution's
interest rate sensitivity "gap". An asset or liability is said to be interest
rate sensitive within a specific time period if it will mature or reprice within
that time period. The interest rate sensitivity gap is defined as the
difference between the amount of interest-earning assets maturing or repricing
within a specific time period and the amount of interest-bearing liabilities
maturing or repricing within that time period. A gap is considered positive
when the amount of interest rate sensitive assets exceeds the amount of interest
rate sensitive liabilities and negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
During a period of falling interest rates, the net interest income of an
institution with a positive gap may be adversely affected due to its interest-
earning assets repricing to a greater extent than its interest-bearing
liabilities, while an institution with a negative gap would likely experience
the opposite result. Conversely, during a period of rising interest rates, the
net interest income of an institution with a positive gap may increase since it
is able to increase the yield on its interest-earning assets more rapidly than
the costs of its interest-bearing liabilities, while an institution with a
negative gap would likely have an opposite result.
The following table sets forth (in thousands) the Corporation's interest-earning
assets and interest-bearing liabilities
- --------------------------------------------------------------------------------
L&B Financial, Inc.
6
<PAGE>
at June 30, 1996, which are anticipated, based upon certain assumptions, to
reprice or mature in each of the future time periods shown. The amount of
assets and liabilities shown which reprice or mature during a particular period
were determined in accordance with the earlier of the term to repricing or the
contractual maturity of the asset or liability. The actual maturities of loans,
investment securities and mortgage-backed securities can be significantly
shorter than contractual maturities due to the ability of the borrowers and
issuers to call, repay, or prepay, principal with, or without, call or
prepayment penalties.
<TABLE>
<CAPTION>
Time to Repricing or Maturity from June 30, 1996
-----------------------------------------------------------------
Three Four months Over one
months or through one year through More than
less year five years five years Total
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $15,971 $ 24,693 $ 9,942 $18,730 $ 69,336
Loans held-for-sale 490 -- -- -- 490
Mortgage-backed securities 85 663 1,973 46,208 48,929
Debt and equity securities 3,090 830 8,539 2,943 15,402
Short-term interest-bearing deposits 7,530 -- -- -- 7,530
-----------------------------------------------------------------
Total interest-earning assets 27,166 26,186 20,454 67,881 141,687
Interest-bearing liabilities:
Passbook accounts 120 360 1,484 2,831 4,795
NOW accounts 2,038 266 1,099 2,097 5,500
Money market accounts 7,750 -- -- -- 7,750
Certificate of deposits 23,398 45,434 17,688 -- 86,520
Borrowed funds -- 13,500 -- -- 13,500
-----------------------------------------------------------------
Total interest-bearing liabilities 33,306 59,560 20,271 4,928 118,065
-----------------------------------------------------------------
Interest sensitivity gap $(6,140) $(33,374) $ 183 $62,953 $ 23,622
Cumulative interest sensitivity gap $(6,140) $(39,514) $(39,331) $23,622 --
Cumulative total interest-earning assets as a percentage
of cumulative interest-bearing liabilities 81.56% 57.45% 65.23% 120.00% --
Cumulative interest sensitivity gap as a percentage of
total assets (4.26)% (27.41)% (27.28)% 16.39% --
</TABLE>
As indicated in the preceding table, the Corporation has a negative $39,514
cumulative gap for assets and liabilities maturing or repricing in one year or
less which is equal to 4.26% of total assets . Thus, decreases in interest rates
during this time would generally increase the Corporation's net interest income.
However, certain limitations are inherent in the method of analysis presented in
the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods 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 the
market interest rates, while the interest rates on other types may lag behind
changes in market rates. Additionally, certain assets such as adjustable-rate
mortgage ("ARM") loans have features which restrict changes in interest rates on
a short-term basis and over the life of the asset. Further, in the event of
changes in interest rates, prepayment and decay rates would likely deviate
significantly from those assumed in calculating the table. Finally, the ability
of borrowers to afford the payments on their ARM loans may decrease in the event
of an interest rate rise.
While the preceding table provides an indication of the sensitivity of the
Corporation's net interest income to future changes in interest rates, it does
not include any indication of the sensitivity of servicing fee income earned by
the Corporation for servicing loans for others to changes in interest rates.
These fees are included in noninterest income in the Corporation's consolidated
statements of income. In periods of rising interest rates, when prepayments on
loans generally decline, the servicing fee income on a given group of loans
generally remains higher than if the rates had not increased. The converse is
generally true during periods of falling interest rates. The rate at which
mortgage servicing rights are amortized generally decreases during period of
rising interest rates and increases during periods
- --------------------------------------------------------------------------------
L&B Financial, Inc.
7
<PAGE>
of falling interest rates. Thus, net servicing fee income earned on loans
serviced for others will generally remain higher when rates rise and will
generally be reduced when rates fall.
Yields Earned and Rates Paid
- ----------------------------
The following table sets forth at, or for, the periods and dates indicated, the
weighted average yields earned on the Corporation's interest-earning assets, the
weighted average rate paid on interest-bearing liabilities, the interest rate
spread and net yield on interest-earning assets.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
1996 1995
---- ----
Average Interest & Yield/ Average Interest & Yield/
Balance Dividends Cost Balance Dividends Cost
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $ 59,120 $ 5,381 9.10% $ 52,997 $4,809 9.07%
Other loans 4,086 365 8.93% 3,287 296 9.00%
---------------------------------------------------------------
Total loans 63,206 5,746 9.09% 56,284 5,105 9.07%
Mortgage-backed securities 51,233 3,507 6.85% 39,155 2,596 6.63%
Investment securities 17,752 934 5.26% 21,090 1,167 5.53%
Overnight securities 5,250 344 6.55% 5,350 212 3.96%
---------------------------------------------------------------
Total investment securities 74,235 4,785 6.45% 65,595 3,975 6.06%
---------------------------------------------------------------
Total interest-earning assets 137,441 10,531 7.66% 121,879 9,080 7.45%
---------------------------------------------------------------
Noninterest-earning assets:
Office property and equipment, net 1,873 1,235
Real estate acquired through foreclosure 316 330
Other noninterest-earning assets 1,984 3,157
---------------------------------------------------------------
Total assets 141,614 10,531 7.44% 126,601 9,080 7.17%
===============================================================
Interest-bearing liabilities:
Saving accounts 4,835 146 3.02% 7,192 217 3.01%
NOW accounts 11,091 319 2.87% 12,752 357 2.78%
Certificate accounts 85,304 4,520 5.30% 80,784 3,467 4.29%
Borrowings 11,101 658 5.93% 2,092 121 5.78%
---------------------------------------------------------------
Total interest-bearing liabilities 112,331 5,643 5.02% 102,820 4,162 4.04%
---------------------------------------------------------------
Noninterest-bearing deposits 1,351 789
Other liabilities 2,497 1,023
---------------------------------------------------------------
Total liabilities 116,179 104,632
---------------------------------------------------------------
Stockholders' equity 25,435 21,969
---------------------------------------------------------------
Total liabilities and stockholders' equity 141,614 5,643 3.98% 126,601 4,162 3.29%
===============================================================
Net interest income 4,888 4,918
Interest rate spread 2.64% 3.41%
Net yield on average interest-earning assets 3.56% 4.03%
Ratio of average interest-earning assets to average interest-
bearing liabilities 122.35% 118.54%
</TABLE>
- --------------------------------------------------------------------------------
L&B Financial, Inc.
8
<PAGE>
Rate/Volume Analysis
- --------------------
The following table sets forth certain information (in thousands) regarding
changes in the interest income and interest expense of the Corporation for the
periods indicated. For each category of interest-earning assets and interest-
bearing liabilities, information is provided on changes attributable to (1)
changes in volume (changes in volume multiplied by old rate); (2) changes in
rate (changes in rate multiplied by the old volume); and (3) the total. Changes
in rate/volume (changes in rate multiplied by the changes in volume) have been
allocated to rate and volumes consistently on a proportionate basis.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
1996 vs. 1995 1995 vs. 1994
Increase (decrease) Increase (decrease)
------------------- -------------------
Volume Rate Total Volume Rate Total
-------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Change in interest income:
Loans $ 632 $ 9 $ 641 $ 593 $(568) $ 25
Mortgage-backed securities 801 110 911 844 473 1,317
Debt and equity securities 2 (103) (101) (260) (240) (500)
-------------------------------------------------------
Total interest income 1,435 16 1,451 1,177 (335) 842
-------------------------------------------------------
Change in interest expense:
Deposits 142 802 944 (184) 406 222
Borrowings 424 113 537 121 0 121
-------------------------------------------------------
Total interest expense 566 915 1,481 (63) 406 343
-------------------------------------------------------
Change in net interest income $ 869 $(899) $ (30) $1,240 $(741) $ 499
-------------------------------------------------------
</TABLE>
Results of Operations
- ---------------------
Comparison of Years Ended June 30, 1996 and June 30, 1995
For the year ended June 30, 1996, net income increased $68,000, or 4.9%, to
$1,450,000 as compared with $1,382,000 for fiscal 1995. This increase in
earnings was primarily the result of an increase in other income of $183,000 and
a negative provision for loan loss of $100,000 for the year ended June 30, 1996,
which was partially offset by an increase in other expenses of $225,000 for the
same time period. The Corporation's provision for loan loss for the year ended
June 30, 1995 was $5,000.
Net interest income before provisions for loan loss remained basically
unchanged, decreasing $30,000 to $4,888,000 for the fiscal year ended June 30,
1996 compared to fiscal 1995. This decrease was the net result of total interest
income increasing $1,451,000 for fiscal year 1996 compared to fiscal 1995 while
total interest expense increased $1,481,000 for the same comparative period. The
increases in both total interest income and total interest expense were the
result of increasing portfolio yields due to the general increase in market
interest rates and increased average volumes of interest-earning assets and
interest-bearing liabilities.
Total interest income increased $1,451,000, or 16.0%, to $10,531,000 for the
year ended June 30, 1996, from $9,080,000 for the year ended June 30, 1995.
Increases in interest income on mortgage-backed securities, loans and deposits
and overnight funds of $911,000, $641,000 and $132,000, respectively, for fiscal
1996 as compared to fiscal 1995 were offset by a decrease in the interest and
dividends earned on investment securities of $233,000 for the same time period.
The increases in interest income for loans and mortgage-backed securities were
due to increased portfolio yields and increased average balances of these
assets. The increase in interest income on deposits
- --------------------------------------------------------------------------------
L&B Financial, Inc.
9
<PAGE>
and overnight funds increased primarily due to the generally higher level of
rates paid on deposits and overnight funds experienced in fiscal 1996 as
compared to fiscal 1995. Interest and dividends on investment securities
decreased due to a slight decrease in the portfolio yield and reduced holdings
by the Corporation of these types of assets.
Interest expense increased $1,481,000, or 35.6%, to $5,643,000 for the year
ended June 30, 1996 as compared with $4,162,000 for the year ended June 30,
1995. Interest on deposit accounts increased $944,000 to $4,985,000 for fiscal
1996 as compared with fiscal 1995. This increase is due primarily to the
increase experienced in short-term interest rates over the twelve to eighteen
months combined with increased deposit balances for fiscal 1996 as compared with
fiscal 1995. Interest expense on advances from the FHLB increased $537,000 to
$658,000 for the year ended June 30, 1996 as compared with $121,000 for the year
ended June 30, 1995. This increase was due primarily to the increased level of
borrowing experienced during fiscal 1996 as compared with fiscal 1995.
The provision for loan loss decreased $105,000 for the fiscal year ended June
30, 1996 as compared with fiscal 1995. The Corporation had a negative loss
provision of $100,000 for the year ended June 30, 1996. This negative provision
was the result of analysis assessing the Corporation's historical charge-offs,
its current loan portfolio composition and risk profile, and comparing that
information with industry and peer averages. The allowance for loan loss as a
percentage of total loans at June 30, 1996 was 1.13% as compared with 1.42% for
fiscal year end 1995. The allowance for loan loss as a percentage of total non-
performing loans was 551.8% as of June 30, 1996 as compared with 444.6% at June
30, 1995.
Total other income increased $183,000, or 125.3%, for the year ended June 30,
1996 as compared with the year ended June 30, 1995. The increase was primarily
the result of net gains of $94,000 and $26,000 on the sale of loans held- for-
sale and investments and mortgage-backed securities available-for-sale during
fiscal 1996. The gain on the sale of loans held-for-sale was increased by the
Corporation's adoption of SFAS 122, effective July 1, 1995 (see Accounting
Standards Issued for a complete discussion of this event). Fee income increased
$73,000, or 89.0%, to $155,000 for fiscal 1996 as compared with fiscal 1995.
This increase was due primarily to an increase in service charges and a
nonrecurring gain of $27,000 on the dissolution of a joint venture project
during fiscal 1996.
Total other expense increased $225,000, or 7.2%, to $3,353,000 for the year
ended June 30, 1996 from $3,128,000 for the year ended June 30, 1995. This
increase was primarily the result of an increase in professional services of
$186,000 to $521,000 for fiscal 1996 as compared with $335,000 for fiscal 1995.
The increase in professional services was primarily due to expenses relating to
the potential acquisition of the Corporation. See Note 18 of the Notes to
Consolidated Financial Statements for further discussion. Other expense also
increased $157,000, or 29.9%, for the year ended June 30, 1996 as compared with
the year ended June 30, 1995. This increase is primarily due to a donation,
increased state franchise tax expense based on the increased capital levels of
the Corporation and miscellaneous nonrecurring expenses related to the
conversion to a state savings bank charter and the formation of the holding
company. Compensation and employee benefits decreased $82,000, or 5.0%, to
$1,544,000 for fiscal 1996 as compared with fiscal 1995. This decrease was
primarily due to a reduction in employee benefits in fiscal 1996 and a one-time
payment to retiring directors in fiscal 1995. Occupancy and equipment expense,
deposit insurance premiums and REO operations remained essentially the same,
decreasing $12,000, $14,000 and $10,000, respectively, for the year ended June
30, 1996 as compared with the year ended June 30, 1995.
Comparison of Years Ended June 30, 1995 and June 30, 1994
For the year ended June 30, 1995, net income increased $354,000, or 34.4%, to
$1,382,000 as compared to $1,028,000 for the year ended June 30, 1994. This
increase in net earnings is the result of a $698,000, or 16.6%, increase in net
interest income to $4,913,000 after provision for loan loss for fiscal 1995 as
compared with $4,215,000 for fiscal 1994. This increase was partially offset by
an increase of $360,000, or 13.0%, in other expenses to $3,128,000 for the year
ended June 30, 1995 as compared with $2,768,000 for the year ended June 30,
1994.
Total interest income increased $842,000, or 10.2%, to $9,080,000 for fiscal
1995 from $8,238,000 for fiscal 1994. Interest income on mortgage-backed
securities increased $1,317,000 to $2,596,000 for year ended June 30, 1995 as
compared to the year ended June 30, 1994 due primarily to the investment in such
assets of a significant portion of
- --------------------------------------------------------------------------------
L&B Financial, Inc.
10
<PAGE>
the net proceeds from the Bank's stock conversion. This increase was partially
offset by decreases in interest income on deposits and overnight funds and
interest and dividends on investment securities of $124,000 and $376,000,
respectively, for the year ended June 30, 1995 as compared to the year ended 30,
1994. These decreases were attributable to a decrease in the average balances of
such assets. Interest income on loans remained basically unchanged, increasing
$25,000 to $5,105,000 for year ended June 30, 1995 compared with $5,080,000 for
the year ended June 30, 1994.
Interest expense increased $343,000, or 9.0%, to $4,162,000 for fiscal 1995 from
$3,819,000 for fiscal 1994 due to an increase in interest expense on both
deposits and borrowings. The increase in interest expense on deposits was due to
an increase in the average rate paid, reflecting the general increase in short-
term interest rates during fiscal 1995. Interest expense on borrowings of
$121,000 were the result of borrowings from the FHLB during the year ended June
30, 1995. During the year ended June 30, 1994, there were no such borrowings.
The provision for loan loss decreased $199,000 to $5,000 for the year ended June
30, 1995 as compared with $204,000 for the year ended June 30, 1994. The
decrease in the provision in fiscal 1995 was primarily due to the significant
provision in fiscal 1994. Management believes that the Bank's loan loss
allowance is adequate to absorb estimated future losses. The Bank's allowance
for loan losses at June 30, 1995 equaled 1.36% of the Bank's total loan
portfolio compared to 1.55% at June 30, 1994. The allowance for loan loss as a
percentage of total non-performing loans was 444.6% as of June 30, 1995 compared
with 400.0% as of June 30, 1994.
The allowance for loan loss is increased by charges to income and decreased by
charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on the Bank's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions.
Other income remained basically unchanged, increasing $13,000 to $146,000 for
the year ended June 30, 1995. This increase was primarily due to increased loan
servicing fee income of $10,000 for the year ended June 30, 1995 as compared
with the year ended June 30, 1994.
Other expense increased $360,000, or 13.0%, to $3,128,000 for the year ended
June 30, 1995 from $2,768,000 for the year ended June 30, 1994. This increase
was primarily the result of increases in compensation and other employee
benefits and professional services of $210,000 and $107,000, respectively, for
the year ended June 30, 1995 and 1994. The increase in compensation and employee
benefits was the result of increased directors fees and annual salary reviews.
Professional fees increased due to increased legal and audit fees associated
with the reporting requirements of a public company. Increased occupancy and
equipment expense of $57,000 for the year ended June 30, 1995 as compared with
June 30, 1994 was substantially offset by a decrease in income (loss) on
foreclosed real estate, net, of $50,000 for the same time period. Occupancy and
equipment expenses increased due the costs associated with moving into a new
branch office building in Daingerfield, Texas. During fiscal year 1994,
nonrecurring expenditures relating to the disposition of REO properties caused
the Bank to experience expenses of $35,000 in income (loss) on foreclosed real
estate, net, as compared with income of $15,000 during fiscal year 1995.
Financial Condition, Liquidity and Capital Resources
- ----------------------------------------------------
At June 30, 1996, the Corporation's assets totaled $144,130,000, an increase of
$10,347,000, or 7.7%, as compared with assets of $133,783,000 at June 30, 1995.
Loans receivable, net, increased $6,970,000 to $66,352,000 at June 30, 1996 as
compared with $59,382,000 for the year end June 30, 1995, net of $8,652,000
loans held-for-sale sold during fiscal 1996. The Corporation continued to
increase its holdings of investment and mortgage-backed securities, increasing
the portfolio $414,000 to $64,164,000 at June 30, 1996 from $63,750,000 at June
30, 1995. This growth was financed primarily with advances from the Federal Home
Loan Bank of Dallas, which increased $8,596,000 to $13,500,000 at June 30, 1996
and an increase in deposits of 3.6%, or $3,632,000, to $104,565,000 at June 30,
1996. During the year ended June 30, 1996, $1,199,000 of these funds was used to
repurchase 5%, or 83,375 shares, of the Corporation's outstanding common stock
and $571,000 was used to purchase 40,000 shares of common stock for the stock
compensation plan. This activity was the primary reason for the $871,000
decrease in total stockholders' equity for the year ended June 30, 1996.
- --------------------------------------------------------------------------------
L&B Financial, Inc.
11
<PAGE>
The Corporation's liquidity, as measured for regulatory purposes, was
approximately 66.6% at June 30, 1996. Assets that qualify as eligible liquidity
are defined by applicable state regulation and include cash and cash
equivalents, other readily marketable investments, including unencumbered
federal government sponsored enterprise securities. The required level of liquid
assets, as defined by regulation, is currently 10% of the Corporation's average
daily deposits for the most recently completed calender quarter. The liquidity
requirement can be changed from time to time by the Texas Savings and Loan
Commissioner and the State Finance Commission of Texas to reflect economic
conditions. The Corporation has historically relied upon deposit growth and loan
repayments as its primary source of funds. The Bank now incorporates borrowing
from the Federal Home Loan Bank of Dallas ("FHLB") into its funds matrix as a
secondary source of liquidity. If these sources do not generate sufficient
liquid funds, the Corporation may pledge as collateral its investment and
mortgage-backed securities to secure additional borrowings. Commitments to fund
loans in the ordinary course of business at June 30, 1996 were approximately
$4,406,000. See Note 12 to the consolidated financial statements for further
information about commitments and contingencies.
As of June 30, 1996, the Corporation substantially exceeded the FDIC's capital
requirements. See Note 14 to the consolidated financial statements for a
discussion of these capital requirements.
Recapitalization of SAIF and the Effect of the Reduction in Bank Insurance Fund
- -------------------------------------------------------------------------------
Premiums
- --------
Deposits of the Corporation are currently insured by the Savings Association
Insurance Fund (the "SAIF"). Both the SAIF and the Bank Insurance Fund ("BIF"),
the deposit insurance fund that covers most commercial bank deposits, are
statutorily required to be recapitalized to a ratio of 1.25% of insured reserve
deposits. Members of the SAIF and BIF currently are paying average deposit
insurance premiums of between 23 and 25 basis points. While the BIF has reached
the required reserve ratio, the SAIF is not expected to acquire adequate
reserves until 2002 at the earliest. The Resolution Trust Corporation ("RTC")
Completion Act authorized $8 billion in funding for the SAIF. However, such
funds only become available to the SAIF if the FDIC determines that the funds
are needed to cover losses of the SAIF and several other stringent criteria are
met.
The FDIC has established a new assessment rate schedule ranging from 4 to 31
basis points for BIF members beginning on September 30, 1995. Under that
schedule, approximately 91% of BIF members will pay the lowest assessment rate
of 4 basis points. With respect to SAIF member institutions, the existing
assessment rate ranging from 23 to 31 basis points applicable to SAIF member
institutions has been retained.
Several alternatives to mitigate the effect of the BIF/SAIF premium disparity
have been suggested by the present Administration, by members of Congress and by
industry groups. In July 1995, the Chairman of the FDIC announced in testimony
before Congress a proposal to recapitalize the SAIF by a one-time charge of
SAIF-insured institutions of approximately $6.6 billion, or approximately $.85
to $.90 for every $100 of assessable deposits, and an eventual merger of the
SAIF with the BIF. In July 1996, the FDIC announced a revised estimate of $.68
per every $100 of assessable deposits that would be required to recapitalize the
SAIF insurance fund. The Corporation currently is unable to predict the
likelihood of legislation affecting these changes, although a consensus among
regulators, legislators and bankers appears to be developing in this regard. If
the revised assessment of $.68 per $100 of assessable deposits was affected
based on deposits as of March 31, 1995, as proposed, the Corporation's pro rata
share would amount to approximately $440,000 after taxes.
Impact of Inflation and Changing Prices
- ---------------------------------------
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principals, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the relative purchasing power of money over time due
to inflation. Unlike industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of the general levels of inflation. Interest rates
do not necessarily move in the same direction or with the same magnitude as the
prices of goods and services. However, noninterest expenses do reflect general
levels of inflation.
- --------------------------------------------------------------------------------
L&B Financial, Inc.
12
<PAGE>
Impact of New Accounting Standards Issued
- -----------------------------------------
In December 1991, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosure About
Fair Value of Financial Instruments" ("SFAS 107"), which extended the then
existing fair value disclosure practices by requiring all entities to disclose
the fair value of financial instruments, both assets and liabilities, recognized
and not recognized, for which it is practicable to estimate fair value in the
disclosure of descriptive information pertinent to estimating the value of a
financial instrument. Disclosures about fair value are not required for certain
financial instruments. This standard was effective for financial statements
issued for fiscal years ending after December 15, 1992, except for entities with
less than $150 million in total assets. For those entities, the effective date
of implementation is for fiscal years ending after December 15, 1995. The
Corporation implemented this standard with the issuance of the 1996 Annual
Report.
During October 1994, the FASB issued Statement of Financial Accounting Standards
No. 118, "Accounting By Creditors for Impairment of a Loan-Income Recognition
and Disclosures" ("SFAS 118") which amends SFAS 114 to allow a creditor to use
existing methods for recognizing interest income on an impaired loan. Prior to
the issuance of SFAS 118, SFAS 114 provided for two alternative income
recognition methods to be used to account for changes in the net carrying amount
of an impaired loan subsequent to the initial measurement of impairment. Under
the first income recognition method, a creditor would accrue interest on the net
carrying amount of the loan as an adjustment to the provision for loss. Under
the second income recognition method, a creditor would recognize all changes in
the net carrying amount of the loan as an adjustment to the provision of loss on
loans. While those income recognition methods are no longer required, SFAS 118
does not preclude a creditor form using either of these methods. The adoption of
SFAS 114 and SFAS 118 resulted in no adjustment to the allowance for loan loss.
In March 1995, the FASB issued SFAS 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 121 is effective
for fiscal years beginning after December 15, 1995. Earlier application is
permitted. SFAS 121 will require, among other things, that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Management will adopt the
provisions of SFAS 121 on July 1, 1996, but believes that the adoption of SFAS
121 will not have a material impact on the Corporation's financial statements.
In May 1995, FASB issued Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights" ("SFAS 122"). SFAS 122 eliminates
distinctions between servicing rights that were purchased and those that were
retained upon the sale of loans. The statement requires mortgage servicers to
recognize as separate assets rights to service loans, no matter how the rights
were acquired. Institutions who sell loans and retain the servicing rights will
be required to allocate the total cost of the loans to servicing rights and
loans based on their relative fair values if that value can be estimated. SFAS
122 is effective for fiscal years beginning after December 15, 1995.
Furthermore, SFAS 122 requires that all capitalized mortgage servicing rights be
periodically evaluated for impairment based upon the current fair value of these
rights. The Corporation elected to adopt SFAS 122 effective July 1, 1995. The
adoption of SFAS 122 resulted in an increase of approximately $42,000 in gains
on the sale of loans held-for-sale and a reduction of approximately $4,000 in
loan servicing fees due to the amortization of originated mortgage servicing
rights. At June 30, 1996, the Corporation had $41,000 in mortgage servicing
rights.
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation," which requires adoption not later than fiscal years beginning
after December 15, 1995. The new standard defines a fair value method of
accounting for stock-based employee compensation plans. Under the fair value
method, compensation cost is measured at the grant date based on the fair value
of the award and is recognized over the service period, which is usually the
vesting period. Pursuant to the new standard, companies are encouraged, but not
required, to adopt the fair value method of accounting for employee stock-based
compensation transactions. Companies are also permitted to continue to account
for such transactions under Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," but would be required to disclose in
a note to the financial statements proforma net income and earnings per share as
if the company had applied the new method of accounting. The accounting
requirements of the new method are effective for all employee awards granted
after the beginning of the
- --------------------------------------------------------------------------------
L&B Financial, Inc.
13
<PAGE>
fiscal year of adoption. The Corporation has elected to continue to account for
employee stock-based compensation transactions under APB Opinion No. 25 and will
disclose the proforma data required by SFAS 123. SFAS 123 is not expected to
have an effect on the Corporation's financial condition or results of
operations.
In November 1995, the FASB issued "A Guide to the Implementation of Statement
115 on Accounting for Certain Debt and Equity Securities" (the "Guide"). The
Guide was in response to the high number if inquiries received relating to
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Debt and Equity Securities" (SFAS 115") and its implementation. In connection
with the issuance of the Guide, the FASB created a one time window through which
a company could reevaluate its SFAS 115 classifications and reclassify
securities as deemed necessary for purposes of SFAS 115. Securities reclassified
during this window of opportunity would not "taint" the remaining SFAS 115
classifications. This window closed December 31, 1995. As permitted by the
Guide, the Corporation reclassified approximately $28,421,000 of investment and
mortgage-backed securities from held-to-maturity to available-for-sale.
In December 1994, the AICPA issued SOP 94-6, "Disclosures of Certain Significant
Risks and Uncertainties." SOP 94-6 is effective for fiscal years ending after
December 15, 1995. Earlier application is permitted. SOP 94-6 requires, among
other things, that entities include in their financial statements disclosures
about the nature of their operations and the use of estimates in the preparation
of financial statements. In addition, SOP 94-6 requires disclosures about
current vulnerability due to certain concentrations. Management believes that
the adoption of SOP 96-4 did not have a material impact on the Corporation's
financial statements.
- --------------------------------------------------------------------------------
L&B Financial, Inc.
14
<PAGE>
[LETTERHEAD OF OAKERSON, ARNOLD, WALKER & CO. APPEARS HERE]
INDEPENDENT AUDITOR'S REPORT
----------------------------
The Board of Directors
L&B Financial, Inc.
We have audited the accompanying consolidated balance sheets of L&B Financial,
Inc. and subsidiary (the "Corporation") as of June 30, 1996, and 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years ended June 30, 1996, 1995, and 1994. These
consolidated 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. These standards require that we plan and perform the audits 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 consolidated 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 the Corporation as
of June 30, 1996, and 1995, and the results of its operations and its cash flows
for each of the three years ended June 30, 1996, 1995, and 1994, in conformity
with generally accepted accounting principles.
/s/ OAKERSON, ARNOLD, WALKER & CO.
- ------------------------------------
Oakerson, Arnold, Walker & Co.
Mt. Pleasant, Texas
August 14, 1996
<PAGE>
L&B FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
June 30, June 30,
1996 1995
--------------------
<S> <C> <C>
ASSETS
- ------
Cash and amounts due from depository institutions $ 1,386 $ 1,866
Short-term interest-bearing deposits 7,530 4,552
--------------------
Total cash and cash equivalents 8,916 6,418
--------------------
Investment and mortgage-backed securities:
Held-to-maturity, at amortized cost (fair value 1996 - $42,232, 1995 - $63,649) 42,178 63,557
Available-for-sale, at fair value (amortized cost 1996 - $22,153, 1995 - $202) 21,986 193
--------------------
Total investment and mortgage-backed securities 64,164 63,750
--------------------
Loans receivable, net:
Held-for-sale, at fair value (amortized cost 1996 - $495, 1995 -$796) 490 792
Held-for-investment 65,862 58,590
--------------------
Total loans receivable, net 66,352 59,382
--------------------
Office properties and equipment, net 2,268 1,325
Real Estate:
Acquired for development 0 758
Acquired through foreclosure, less allowance (1996 - $0, 1995 - $0) 353 294
--------------------
Total real estate owned, net 353 1,052
--------------------
Federal Home Loan Bank stock, at cost 751 705
Accrued interest receivable, less allowance 972 919
Other assets 354 232
--------------------
TOTAL ASSETS $144,130 $133,783
====================
LIABILITIES
- -----------
Deposit accounts $104,565 $100,933
Advances from the Federal Home Loan Bank 13,500 4,904
Advances from borrowers for taxes and insurance 826 824
ESOP debt 0 896
Accrued interest and other liabilities 456 572
--------------------
TOTAL LIABILITIES 119,347 108,129
--------------------
STOCKHOLDERS' EQUITY
- --------------------
Preferred stock - no par value, 5,000,000 authorized, 0 issued and outstanding 0 0
Common stock - $0.01 par value - 25,000,000 shares authorized, 1,667,500 and
1,667,500 issued and outstanding, respectively 17 17
Additional paid-in capital 15,165 15,998
Treasury Stock - 83,375 shares at par (1) 0
Unearned ESOP shares (825) (896)
Unearned stock compensation (308) 0
Net unrealized loss on investment and mortgage-backed securities available for sale (118) (9)
Retained earnings, substantially restricted 10,853 10,544
--------------------
TOTAL STOCKHOLDERS' EQUITY 24,783 25,654
--------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $144,130 $133,783
====================
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
L&B Financial, Inc.
16
<PAGE>
L&B FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Year Ended June 30,
-------------------
1996 1995 1994
---------------------------------
<S> <C> <C> <C>
Interest Income:
Loans $ 5,746 $ 5,105 $5,080
Interest and dividends on investment securities 934 1,167 1,543
Mortgage-backed securities 3,507 2,596 1,279
Deposits and overnight funds 344 212 336
---------------------------------
Total interest income 10,531 9,080 8,238
---------------------------------
Interest Expense:
Deposit accounts 4,985 4,041 3,819
Advances from the FHLB 658 121 0
---------------------------------
Total interest expense 5,643 4,162 3,819
---------------------------------
Net interest income 4,888 4,918 4,419
Provision for loan loss 100 (5) (204)
---------------------------------
Net interest after provision for loan loss 4,988 4,913 4,215
---------------------------------
Other Income:
Fees for financial services 155 82 79
Loan servicing fees 54 64 54
Net realized gains on the sale of available-for-sale securities 26 0 0
Net gains on the sale of loans 94 0 0
---------------------------------
Total other income 329 146 133
---------------------------------
Other Expense:
Compensation and employee benefits 1,544 1,626 1,416
Occupancy and equipment 400 412 355
Deposit insurance premiums 231 245 246
Professional services 521 335 228
(Income) loss on foreclosed real estate, net (25) (15) 35
Other 682 525 488
---------------------------------
Total other expense 3,353 3,128 2,768
---------------------------------
Income before income taxes 1,964 1,931 1,580
Income tax expense 514 549 552
---------------------------------
Net income $ 1,450 $ 1,382 $1,028
=================================
Earnings per common share of stock $0.93 $0.63 n/a
Weighted average number of common shares outstanding: 1,556,720 1,572,790 n/a
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
L&B Financial, Inc.
17
<PAGE>
L&B FINANCIAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Net unrealized
gain/(loss) on Retained
Additional Unearned securities Earnings- Total
Common Paid-in Treasury ESOP Unearned available Substantially Stockholders'
Stock Capital Stock Shares Compensation for sale Restricted Equity
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1993 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 8,996 $ 8,996
-------------------------------------------------------------------------------------------------------
Net change in unrealized
gain (loss) on investment
securities - - - - - (13) - (13)
Net income - - - - - - 1,028 1,028
-------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1994 0 0 0 0 0 (13) 10,024 10,011
-------------------------------------------------------------------------------------------------------
Proceeds from sale of
common stock, net of
issuance cost of $660 17 15,998 - (1,000) - - - 15,015
Net change in unrealized
gain (loss) on securities
available-for-sale - - - - - 4 - 4
Fair value of shares
committed to be released
from ESOP - - - 104 - - - 104
Cash dividend ($0.55 per
share) - - - - - - (862) (862)
Net income - - - - - - 1,382 1,382
-------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1995 17 15,998 0 (896) 0 (9) 10,544 25,654
-------------------------------------------------------------------------------------------------------
Net change in unrealized
gain (loss) on securities
available-for-sale - - - - - (109) - (109)
Purchase of treasury stock - (833) (1) - - - (365) (1,199)
Fair value of shares
committed to be released
from ESOP - - - 71 - - - 71
Shares purchased for stock
compensation plan - - - - (420) - (151) (571)
Compensation expense under
stock compensation plan - - - - 112 - - 112
Cash dividend ($0.40 per
share) - - - - - - (625) (625)
Net income - - - - - - 1,450 1,450
-------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1996 $17 $15,165 $(1) $ (825) $(308) $(118) $10,853 $24,783
=======================================================================================================
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
L&B Financial, Inc.
18
<PAGE>
L&B FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Year Ended June 30,
-------------------
1996 1995 1994
-----------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,450 $ 1,382 $1,028
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan loss (100) 5 204
Depreciation expense 142 103 81
Unearned compensation expense 183 - -
Net gain on the sale of investment securities available-for-sale (26) - -
Net gain on the sale of loans held-for-sale (94) - -
Gain on the sale of REO (6) (8) (8)
FHLB stock dividends (46) (36) (23)
(Increase) decrease in accrued interest receivable (53) (158) 20
(Increase) decrease in other assets (122) 104 (69)
(Decrease) increase in interest payable (37) 63 -
(Decrease) increase in other liabilities (922) 243 94
-----------------------------
Net cash provided by operating activities 369 1,698 1,327
-----------------------------
FINANCING ACTIVITIES:
Net increase from issuance of common stock - 16,015 -
Dividends paid (625) (862) -
Purchase of stock for stock compensation plan (571) - -
Purchase of treasury stock (83,375 shares at $14.38 per share) (1,199) - -
Net increase (decrease) in deposits 3,632 (5,229) 151
Proceeds from FHLB advances 18,404 28,665 -
Repayment of FHLB advances (9,808) (23,761) -
-----------------------------
Net cash provided by financing activities 9,833 14,828 151
-----------------------------
</TABLE>
- --------------------------------------------------------------------------------
L&B Financial, Inc.
19
<PAGE>
L&B FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Year Ended June 30,
-------------------
1996 1995 1994
-------------------------------
<S> <C> <C> <C>
INVESTING ACTIVITIES:
Loan originations (38,509) (21,966) (22,615)
Principal repayments on loans 22,929 11,669 14,950
Proceeds from the sale of loans 8,652 3,846 9,427
Purchase of investment and mortgage-backed securities
Held-to-maturity (11,904) (20,500) (18,935)
Available-for-sale (4,463) - -
Proceeds from the sale and maturity of investment and mortgage-backed
Held-to-maturity 1,387 5,362 5,426
Available-for-sale 8,332 - -
Principal repayments on mortgage-backed securities 6,100 4,876 1,701
Proceeds from sale of real estate acquired through foreclosure 100 159 237
Property improvements to real estate owned (1) (2) -
Purchase of premises and equipment (327) (370) (210)
-------------------------------
Net cash used in investing activities (7,704) (16,926) (10,019)
-------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,498 (400) (8,541)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 6,418 6,818 15,359
-------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,916 $ 6,418 $ 6,818
===============================
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Income taxes $ 525 $ 512 $ 580
Interest $ 5,680 $ 4,099 $ 3,835
Non-cash transactions:
Loans foreclosed $ 153 $ 62 $ 109
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
L&B Financial, Inc.
20
<PAGE>
L&B FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED JUNE 30, 1996, 1995, 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - L&B Financial, Inc. ("L&B") was incorporated in the State of
- ------------
Texas in November 1995, for the purpose of becoming a savings and loan holding
company for the Loan and Building State Savings Bank (the "Bank"). On October
17, 1995, the shareholders of the Bank approved a plan to reorganize the Bank
into the holding company form of ownership. The reorganization was completed on
November 13, 1995, on which date the Bank became a wholly-owned subsidiary of
L&B and the shareholders of the Bank exchanged all of their outstanding shares
(1,667,500) for 1,667,500 shares of L&B and became shareholders of L&B. Prior
to the completion of the reorganization, L&B had no material assets or
liabilities and engaged in no business activity. Subsequent to the acquisition
of the Bank, L&B has engaged in no significant activity other than holding the
stock of the Bank and engaging in certain passive investment activities.
Accordingly, the 1996 consolidated financial statements are those of the
reorganization. Consolidated financial statements and related data for years
prior to 1996 are those of the Bank. L&B and the Bank are collectively referred
to herein as the "Corporation".
Business - L&B Financial, Inc.'s principal subsidiary, Loan and Building State
- --------
Savings Bank, is a state-chartered stock savings bank conducting business from
its branch bank system located in northeast Texas in the counties of Hopkins,
Franklin, Titus, Camp, Morris and Bowie. The Corporation is subject to
competition from other financial institutions and other financial services
companies. The business of the Corporation consists primarily of attracting
deposits from the general public and originating loans on residential
properties. The Corporation also makes commercial real estate, construction and
consumer loans. The Corporation is subject to the regulations of certain
federal and state agencies and undergoes periodic examinations by those
regulatory authorities.
Basis of Financial Statement Presentation - The consolidated financial
- -----------------------------------------
statements have been prepared in conformity with generally accepted accounting
principles. In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses for the period. Actual results could
differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan loss, the
valuation of other real estate owned, and the valuation of deferred tax assets
and the effect of prepayments on mortgage servicing rights and the premiums and
discounts associated with mortgage-related securities. Management believes that
the allowance for loan loss, the valuations of other real estate owned and
deferred tax assets are adequate, and that the effect of prepayments on mortgage
servicing rights and premiums and discounts associated with investments and
mortgage-related securities has been adequately evaluated. Various regulatory
agencies, as an integral part of their examination process, periodically review
the Corporation's allowance for loan loss and valuation of other real estate
owned.
Principals of Consolidation - The accompanying consolidated financial statements
- ---------------------------
include the accounts of L&B Financial, Inc., Loan and Building State Savings
Bank and its wholly owned subsidiary, L. B. Resource, Inc. All significant
intercompany transactions and balances are eliminated in consolidation.
Cash and Cash Equivalents - Cash and cash equivalents include cash on hand and
- -------------------------
amounts due from depository institutions, federal funds sold and short-term,
interest-bearing deposits with original maturities of three months or less. The
Corporation maintains cash deposits in other depository institutions which
occasionally exceed the amount of deposit insurance available. Management
periodically assesses the financial condition of these institutions.
The Corporation is required to maintain certain daily reserve balances in
accordance with Federal Reserve Board requirements. At June 30, 1996, aggregate
reserves, in the form of vault cash were maintained to satisfy this requirement.
- --------------------------------------------------------------------------------
L&B Financial, Inc.
21
<PAGE>
Investments and Mortgage-backed Securities - Effective January 1, 1994, the
- ------------------------------------------
Corporation adopted SFAS 115, and accounts for its investment in debt and equity
securities as prescribed in the pronouncement. The following summarizes FASB
115 security classifications and corresponding accounting treatment:
Held-to-Maturity securities are debt securities that the Corporation
has the positive intent and ability to hold to maturity and are
reported at amortized cost. Premiums and discounts are amortized or
accreted as adjustments to income over the life of the security using
the level yield method.
Trading securities are debt and equity securities that are bought and
held principally for the purpose of selling in the near term and are
reported at fair value, with unrealized gains and losses included in
earnings. At June 30, 1996 and 1995, no securities have been
classified as trading securities.
Available-for-sale securities are debt and equity securities not
classified as either held-to-maturity or trading securities and
reported at fair value with unrealized gains and losses excluded from
earnings and reported as a separate component of stockholders' equity,
net of tax. Premiums and discounts are amortized or accreted as
adjustments to income over the life of the security using the level
yield method.
Gains or losses on the sale of securities is based on the specific
identification method. The fair value of securities is 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 securities.
Transfers of securities between classifications are accounted for at fair value.
Federal Home Loan Bank stock is owned due to regulatory and collateral
requirements. Federal Home Loan Bank stock is not considered to be a marketable
equity security under SFAS 115 and, therefore, is carried at cost.
Loans - Loans that the Corporation has the intent and ability to hold to
- -----
maturity or repayment, are recorded at cost and represent the unpaid principal
balances, adjusted for allowance for loan loss, net deferred origination fees or
costs on originated loans and unamortized premiums or discounts on loans
purchased. Loans consist principally of conventional one-to-four family
residential loans, commercial real estate loans, multi-family real estate loans,
one-to-four family construction loans and consumer loans, which primarily
consist of automobile loans, loans on deposits and other personal loans.
Loans are placed on a non-accrual status when, in the opinion of management, the
possibility of collection of additional interest is deemed insufficient to
warrant further accrual. Generally, the Corporation places all loans more than
ninety days past due on non-accrual status. When a loan is placed on non-
accrual status, interest accruals are suspended until, in the opinion of
management, the borrower has regained the ability to make periodic interest and
principal payments in accordance with the terms of the loan agreement.
Discounts on acquired first mortgage loans are amortized to income using methods
that approximate the interest method over the remaining period to contractual
maturity, adjusted for anticipated prepayments of principal. Discounts and
premiums on consumer loans are recognized over the lives of the loans using
methods that approximate the interest method.
Loans Held for Sale - Mortgage loans originated and intended for sale in the
- -------------------
secondary market are valued at the aggregate of lower of cost or market. Net
unrealized losses are recognized through a valuation allowance by charges to
income. Most loans sold are sold with servicing rights retained, however, the
Corporation does sell some loans with servicing released. The decision to
retain or sell the servicing rights is a function of the loan product and the
buyer. Gains and losses on the sale of such loans are recognized when
substantially all risks and rewards of ownership are transferred. If the loan
servicing rights are retained, the value of future servicing rights are
considered in the determination of the amount of gain or loss.
Allowances for Estimated Losses - The Corporation maintains allowances for
- -------------------------------
estimated loan loss, uncollected accrued interest receivable and losses on real
estate acquired in the settlement of loans. Loss provisions are charged to
income when, in the opinion of management, such losses for which no provision
has been made are probable.
- --------------------------------------------------------------------------------
L&B Financial, Inc.
22
<PAGE>
The allowance for loan loss is maintained at a level that management considers
adequate to provide for potential losses based upon an evaluation of known and
inherent risks in the loan portfolio. Management believes that the allowance
for loan loss is adequate. Management's periodic evaluation is based upon
analysis of the portfolio, past loss experience, current economic conditions,
and other relevant factors. While management uses the best information
available to make such evaluations, future adjustments to the allowance may be
necessary if economic conditions differ substantially from the assumptions used
in making the evaluation. In addition, various regulatory agencies as an
integral part of their examination process, periodically review the allowance
for loan loss. Such agencies may require the Corporation to recognize additions
to the allowance for loan loss based on their judgments of information which is
available to them at the time of their examination.
Effective July 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan"
(SFAS 114), and the Statement of Financial Accounting Standards No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures" (SFAS 118), which amends SFAS 114.
SFAS 114, as amended by SFAS 118, defines the recognition criteria for loan
impairment and the measurement methods for certain impaired loans and loans for
which terms have been modified in troubled debt restructuring (a restructured
loan). Specifically, a loan is considered impaired when it is probable a
creditor will be unable to collect all amounts due - both principal and interest
- - according to the contractual terms of the loan agreement. When measuring
impairment, the expected future cash flows of an impaired loan are required to
be discounted at the loan's effective interest rate. Alternatively, impairment
can be measured by reference to an observable market price, if one exists, or
the fair value of the collateral for a collateral dependent loan. Regardless of
the historical measurement method used, SFAS 114 requires a creditor to measure
impairment based on the fair value of the collateral when the creditor
determines foreclosure is probable. Additionally, impairment of a restructured
loan is measured by discounting the total expected future cash flows at the
loan's effective rate of interest as stated in the original loan agreement.
SFAS 118 amends SFAS 114 to allow a creditor to use existing methods for
recognizing interest on an impaired loan. The Corporation has elected to
continue to use its existing nonaccrual methods for recognizing interest income
on impaired loans. The adoption of SFAS 118 and SFAS 114 resulted in no
adjustment to the allowance for loan loss.
Office Properties and Equipment - Office properties and equipment are presented
- -------------------------------
at cost less accumulated depreciation. Depreciation is provided on the
straight-line basis over the estimated useful lives of the assets. Estimated
useful lives for buildings and improvements are 20 - 50 years and generally 5 -
10 years for furniture, fixtures, and equipment.
The cost of maintenance and repairs is charged to expense as incurred, and
improvements and other expenditures, which materially increase property lives
are capitalized. The costs and accumulated depreciation applicable to premises
and equipment retired, or otherwise disposed of, are eliminated from the related
accounts, and any resulting gains or losses are credited or charged to income.
Real Estate Held-for-Development - Real estate held-for-development is carried
- --------------------------------
at the lower of depreciated cost or estimated net realizable value. The
Corporation's investment in real estate consisted of land and commercial rental
property.
Real Estate Acquired Through Foreclosure - Real estate acquired through
- ----------------------------------------
foreclosure is stated at the lower of cost or estimated fair value less selling
costs. Any accrued interest on the related loan at the date of acquisition is
charged to operations. Costs related to the development and improvement of the
property are capitalized to the extent that such costs do not exceed the
estimated fair value less selling costs of the property. Costs related to
holding the property are charged to expense.
Deferred Loan Origination Fees and Costs - Nonrefundable loan fees and certain
- ----------------------------------------
direct loan origination costs are deferred and recognized over the lives of the
loans using the level yield method. Amortization of these deferrals is
recognized as interest income.
- --------------------------------------------------------------------------------
L&B Financial, Inc.
23
<PAGE>
Mortgage Servicing Rights - Mortgage servicing rights represent the carrying
- -------------------------
value of the rights to service mortgage loans for others. The mortgage
servicing rights are amortized against loan servicing fee income on an
accelerated basis in proportion to, and over the period of, estimated net future
loan servicing fee income, which periods initially do not exceed seven years.
Service fee income is recognized when the related loan payments are collected.
On a quarterly basis, management evaluates and makes any necessary adjustments
to the remaining balances of mortgage servicing rights, if the fair value of the
disaggregated servicing rights indicate that the carrying value is not
considered recoverable. Assumptions utilized in the quarterly evaluations are
based on current prepayment and investor rates of return provided by an
independent investment advisor.
Effective July 1, 1995, the Corporation adopted SFAS 122 "Accounting for
Mortgage Servicing Rights." This standard prospectively requires the
Corporation, which services mortgage loans for others in return for a servicing
fee, to recognize these servicing rights as assets, regardless of how such
assets were acquired. Additionally, the Company is required to assess the fair
value of these assets at each reporting date to determine impairment. The
adoption of SFAS 122 resulted in an increase of approximately $42,000 in gains
on the sale of loans held-for-sale and a reduction of approximately $4,000 in
loan servicing fees due to the amortization of originated mortgage servicing
rights. At June 30, 1996, the Corporation had $41,000 in mortgage servicing
rights.
Income taxes - The Corporation and its subsidiaries file a consolidated federal
- ------------
income tax return. The Corporation adopted SFAS 109, "Accounting for Income
Taxes" effective July 1, 1993. Deferred tax assets and liabilities are
recognized for the future effects attributable to the differences between the
financial statement carrying amounts of existing assets and liabilities and
respective tax bases, as well as operating loss and tax credit carryforwards.
Deferred tax assets are recognized for the future deductible "temporary
differences" and tax loss and credit carryforwards if their realization is "more
likely than not." Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date.
Employee Stock Ownership Plan and Recognition and Retention Plan - Shares of
- ----------------------------------------------------------------
common stock issued to the Corporation's Employee Stock Ownership Plan ("ESOP")
were recorded as unearned ESOP shares in stockholders' equity at the fair value
of the shares at the date of issuance to the plan. As shares are committed to
be released, the Corporation reduces the carrying value of the unearned shares
and records compensation expense equal to the current fair value of the shares
committed to be released.
Shares of common stock acquired for the Corporation's Recognition and Retention
Plan were recorded as unearned compensation in stockholders' equity at the fair
value of the shares at the date of award. Total compensation cost was measured
at the fair value of the shares as of the date of the award and is recognized as
compensation expense over sixty months, the term over which the awards vest.
The difference between the fair value of the shares at the date of award and the
purchase price of those shares was charged against additional paid-in capital.
Earnings per Common Share of Stock - Earnings per common share of stock is
- ----------------------------------
computed by dividing net income by the weighted average number of common shares
outstanding during each year. Stock options outstanding are not considered in
determining earnings per share because they have no significant dilutive effect.
The Corporation accounts for the 100,050 shares acquired by the ESOP in
accordance with Statement of Position 93-6. Shares controlled by the ESOP are
not considered in the weighted average shares outstanding until the shares are
committed for allocation.
The Bank completed its initial stock offering on October 14, 1994, and
accordingly, earnings per share for 1995 is calculated by dividing net income
since October 14 , 1994 of approximately $990,000 , by the weighted average
number of common shares outstanding.
Reclassifications - Certain amounts in prior years' financial statements have
- -----------------
been reclassified to conform with current year classifications.
- --------------------------------------------------------------------------------
L&B Financial, Inc.
24
<PAGE>
2. INVESTMENT AND MORTGAGE-BACKED SECURITIES
Held-to-Maturity - Securities classified as held-to-maturity consisted of the
- ----------------
following (in thousands):
<TABLE>
<CAPTION>
June 30, 1996
-------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------
<S> <C> <C> <C> <C>
Investment securities:
U.S. Agency obligations $ 7,388 $ 49 $ (96) $ 7,341
Municipal securities 784 6 (3) 787
---------------------------------------------
Total investment securities 8,172 55 (99) 8,128
---------------------------------------------
Mortgage-backed securities:
FHLMC 4,893 28 (54) 4,867
FNMA 1,827 29 (9) 1,847
GNMA 2,149 26 (8) 2,167
CMO's 25,137 319 (233) 25,223
---------------------------------------------
Total mortgage-backed securities 34,006 402 (304) 34,104
---------------------------------------------
Total held-to-maturity securities $42,178 $457 $(403) $42,232
=============================================
June 30, 1995
-------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------
<S> <C> <C> <C> <C>
Investment securities:
U.S. Agency obligations $16,595 $ 92 $(401) $16,286
Municipal securities 818 5 (8) 815
---------------------------------------------
Total investment securities 17,413 97 (409) 17,101
---------------------------------------------
Mortgage-backed securities:
FHLMC 11,428 206 (19) 11,615
FNMA 7,312 97 (12) 7,397
GNMA 7,985 223 (115) 8,093
CMO's 19,419 292 (268) 19,443
---------------------------------------------
Total mortgage-backed securities 46,144 818 (414) 46,548
---------------------------------------------
Total held-to-maturity securities $63,557 $915 $(823) $63,649
=============================================
</TABLE>
- --------------------------------------------------------------------------------
L&B Financial, Inc.
25
<PAGE>
Available-for-sale - Securities classified as available-for-sale consisted of
- ------------------
the following (in thousands):
<TABLE>
<CAPTION>
June 30, 1996
-------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------
<S> <C> <C> <C> <C>
Investment securities:
U.S. Government and agency
obligations $ 5,964 $ 0 $ (98) $ 5,866
Mutual funds 1,264 0 (23) 1,241
FNMA stock 2 18 0 20
---------------------------------------------
Total investment securities 7,230 18 (121) 7,127
---------------------------------------------
Mortgage-backed securities:
FHLMC 3,958 97 0 4,055
FNMA 2,486 3 (23) 2,466
GNMA 4,614 24 (123) 4,515
CMO's 3,865 17 (59) 3,823
---------------------------------------------
Total mortgage-backed securities 14,923 141 (205) 14,859
---------------------------------------------
Total available-for-sale securities $22,153 $159 $(326) $21,986
=============================================
June 30, 1995
-------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------
<S> <C> <C> <C> <C>
Investment securities:
Mutual funds $ 200 $ 0 $ (22) $ 178
FNMA stock 2 13 0 15
---------------------------------------------
Total investment securities 202 13 (22) 193
---------------------------------------------
Total available-for-sale securities $ 202 $ 13 $ (22) $ 193
=============================================
</TABLE>
Gross realized gains and gross realized losses on sales of available-for-sale
securities were $76,000 and $50,000, respectively, for the year ended June 30,
1996. There were no sales of securities during the years ended June 30, 1995
and 1994.
In accordance with the Financial Accounting Standards Board's implementation
guidance on SFAS 115, the Corporation reassessed the classification of all
securities held on November 31, 1995. As a result of such reassessment, the
Corporation transferred investment and mortgage-backed securities with an
amortized cost of $28,421,000 from held-to-maturity to available-for-sale. The
securities were transferred at fair value resulting in an unrealized gain of
approximately $160,000 , which was recognized, net of deferred tax, as a
separate component of stockholders' equity.
- --------------------------------------------------------------------------------
L&B Financial, Inc.
26
<PAGE>
The maturities of the investment and mortgage-backed securities at June 30, 1996
are as follows (in thousands):
<TABLE>
<CAPTION>
Held-to-maturity Available-for-sale
---------------- ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 4,096 $ 4,095 $ 573 $ 570
Due after one year through five years 3,834 3,749 6,679 6,591
Due after five years through ten years 1,037 2,627 5,739 5,776
Due after ten years 33,211 31,761 7,896 7,790
--------------------------------------------
Total debt investment and mortgage-backed securities 42,178 42,232 20,887 20,727
--------------------------------------------
Mutual funds 0 0 1,264 1,241
FNMA stock 0 0 2 18
--------------------------------------------
Total investment and mortgage-backed securities $42,178 $42,232 $22,153 $21,986
============================================
</TABLE>
As of June 30, 1996, $300,000 par value of debt securities were pledged as
collateral to secure certain deposit accounts.
At June 30, 1996, approximately $9,110,000 par value of the debt securities were
structured notes, which included $4,965,000 of adjustable-rate debt securities
and $4,000,000 with call provisions ranging form 1 month to 3 years. The
adjustment periods for the adjustable-rate debt securities range from monthly to
annual adjustments and are generally adjusted based on the movement of two
specific interest rates plus a margin, such as the ten year constant maturity
rate minus one month London interbank overnight rate ("LIBOR"), plus 250 basis
points. These securities are more sensitive to the movements between interest
rates and the slope of the yield curve than the relative level of interest
rates.
The mortgage-backed securities held at June 30, 1996 mature between one and
forty years. The actual lives of these securities may be significantly shorter
as the result of payments and prepayments of the underlying collateral.
Adjustable-rate mortgage-backed securities totaled approximately $7,757,000 at
June 30, 1996. These securities have interest rates that adjust with movements
in the Cost of Funds Index ("COFI ARM's") and the one year Constant Maturity
Treasury ("CMT ARM's"). Adjustment periods range from monthly to annually.
At June 30, 1996, the Corporation's Collateralized Mortgage Obligations
("CMO's") portfolio consisted of securities issued by the Federal Home Loan
Mortgage Corporation ("FHLMC") or the Federal National Mortgage Corporation
("FNMA"). The Corporation purchases only CMO's that are considered non-high
risk, as computed using the Federal Financial Institution Exam Council (the
"FFIEC") guidelines. All CMO's are subsequently subjected to the FFIEC test at
least annually. At June 30, 1996, all CMO's "passed" the FFIEC test and are
classified non-high risk for regulatory purposes. Adjustable-rate CMO's totaled
approximately $25,137,000 at June 30, 1996 and generally have interest rates
that adjust monthly with movements in one month LIBOR and the prime rate. The
yield on the CMO portfolio was 6.88% at June 30, 1996.
- --------------------------------------------------------------------------------
L&B Financial, Inc.
27
<PAGE>
3. LOANS RECEIVABLE, NET
Loans receivable consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
------------------
1996 1995
------- -------
<S> <C> <C>
Real estate loans:
Fixed-rate single-family residential $15,726 $15,478
Adjustable-rate single-family residential 24,403 22,083
Loans held-for-sale, at fair value 490 792
Multi-family residential 5,228 3,755
Construction 4,669 4,168
Land 1,760 1,152
Commercial mortgage 12,616 11,611
------------------
Total real estate loans 64,892 59,039
------------------
Other loans:
Share loans 1,772 1,576
Consumer and installment loans 2,756 2,133
------------------
Total other loans 4,528 3,709
------------------
Total loans 69,420 62,748
------------------
Less:
Undisbursed portion of interim construction loans (2,230) (2,248)
Allowance for loan loss (756) (858)
Unearned discount (82) (260)
------------------
Total loans, net $66,352 $59,382
==================
Weighted-average interest rate of loans 8.70% 8.73%
</TABLE>
Participations sold and serviced by the Corporation at June 30, 1996, 1995, and
1994 were approximately $21,669,000 $20,521,000 and $21,651,000, respectively.
The Corporation sells loans in the secondary market without recourse and retains
servicing rights on the sale of conventional mortgage loans. The Corporation
originates and sells all FHA/VA servicing released. Servicing loans for others
consists of collecting mortgage payments, maintaining escrow accounts,
disbursing payments to investors and foreclosure processing. Loan servicing
income is recorded on the accrual basis and includes servicing fees received
from the investors as well as certain charges collected from the borrower, such
as late payment fees. In connection with these loans serviced for others, the
Corporation held borrowers' escrow balances of $490,000 at June 30, 1996 and
$517,000 at June 30, 1995.
Adjustable-rate real estate loans ($37,707,000 and $34,986,000 at June 30, 1996
and 1995, respectively) are subject to rate adjustments annually and generally
are adjusted based on the movement of One year Constant Maturity Treasury index.
The maximum loan rates can be adjusted is 200 basis points in any one year with
a maximum life time cap of 500 basis points.
At June 30, 1996 and 1995, loans which were accounted for on a non-accrual basis
or were contractually past due ninety days or more totaled approximately
$137,000 and $183,000, respectively. The amount the Corporation will ultimately
realize from these loans could differ materially from their carrying value
because of future developments affecting the underlying collateral or the
borrower's ability to repay the loans. During the years ended June 30, 1996,
1995 and 1994, the Corporation recognized no interest income on loans past due
90 days or more, whereas, under the original terms of these loans, the
Corporation would have recognized additional interest income of approximately
$1,000, $6,000 and $10,000, respectively.
- --------------------------------------------------------------------------------
L&B Financial, Inc.
28
<PAGE>
Activity in the allowance for loan loss consisted of the following:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
1996 1995 1994
---------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 858,000 $876,000 $716,000
Provisions for loan loss (100,000) 5,000 204,000
Charge-offs, net of recoveries (2,000) (23,000) (44,000)
---------------------------------
Balance at end of year $ 756,000 $858,000 $876,000
=================================
</TABLE>
Directors and officers of the Corporation are customers of the Corporation in
the ordinary course of business. Loans to directors and officers have terms
consistent with those offered to other customers. The aggregate amount of such
loans outstanding at June, 30, 1996 was $518,000. During 1996, new loans to
such related parties amounted to $137,000 and repayments amounted to $107,000.
The Corporation has no commitments to loan additional funds to the borrowers of
impaired or nonaccrual loans.
At June 30, 1996 and 1995, accrued interest receivable on loans was $413,000 and
$433,000, respectively.
4. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
--------
1996 1995
----------------
<S> <C> <C>
Land $ 553 $ 297
Building and improvements 1,697 969
Office furniture, fixtures, and equipment 632 531
----------------
Total 2,882 1,797
Less accumulated depreciation (614) (472)
----------------
Office properties and equipment, net $2,268 $1,325
================
</TABLE>
Depreciation expense totaled $142,000, $103,000, and $81,000 for the years ended
June 30, 1996, 1995, and 1994, respectively.
5. REAL ESTATE OWNED
Real estate acquired through foreclosure (REO) consists of the following types:
<TABLE>
<CAPTION>
June 30,
--------
1996 1995
-------------------
<S> <C> <C>
Real estate acquired through foreclosure
Single-family residential $203,000 $144,000
Commercial 150,000 150,000
-------------------
Total real estate acquired through foreclosure $353,000 $294,000
===================
</TABLE>
- --------------------------------------------------------------------------------
L&B Financial, Inc.
29
<PAGE>
The following is a summary of the results of real estate acquired through
foreclosure operations for the periods indicated:
<TABLE>
<CAPTION>
Year ended June 30,
-------------------
1996 1995 1994
-------------------------------
<S> <C> <C> <C>
Income from the rental and operation of REO $ 34,000 $ 32,000 $ 13,000
Net gain on the sale of REO property 6,000 8,000 8,000
Expense of holding REO (15,000) (25,000) (56,000)
Net income (expense) $ 25,000 $ 15,000 $(35,000)
</TABLE>
There were no balances in the allowance for loss on real estate acquired through
foreclosure for the years ended June 30, 1996, 1995 and 1994.
6. INVESTMENT IN JOINT VENTURE
The Corporation had an ownership interest in a joint venture project, Plaza 30
II, through a wholly-owned subsidiary, L. B. Resource, Inc. (dissolved in
December 1995). The Corporation's ownership share of the joint venture project
was 75.5% and was accounted for by the equity method of accounting. The venture
involved the acquisition, development and rental of commercial real estate.
Plaza 30 II was dissolved in December 1995 with the Corporation acquiring direct
ownership of the sole remaining property.. A summary of the financial position
and results of operations of Plaza 30 II were as follows (in thousands):
<TABLE>
<CAPTION>
June 30,
--------
1996 1995
-------------
<S> <C> <C>
Assets
- ------
Land, buildings and improvements $ 0 $ 758
Other assets 0 15
-------------
Total assets 0 773
=============
Liabilities and Equity
- ----------------------
Notes payable - SSLBA 0 792
Equity (deficit) 0 (19)
-------------
Total liabilities and equity $ 0 $ 773
=============
</TABLE>
<TABLE>
<CAPTION>
Year ended June 30,
-------------------
1996 1995 1994
---------------------
<S> <C> <C> <C>
Income $ 849 $ 74 $ 100
Expense (822) (99) (109)
---------------------
Net income (Loss) $ 27 $ (25) $ (9)
=====================
</TABLE>
- --------------------------------------------------------------------------------
L&B Financial, Inc.
30
<PAGE>
7. SUBSIDIARY CORPORATION
In January 1983, the Corporation established its wholly-owned subsidiary, L. B.
Resource, Inc. This subsidiary was established to acquire, develop, and sell or
rent real estate. In December 1995, L. B. Resource, Inc. was dissolved. A
summary of the financial position and results of operations of the subsidiary
follows (in thousands):
<TABLE>
<CAPTION>
June 30,
--------
1996 1995
-------------
<S> <C> <C>
Assets $ 0 $ 0
- ------ =============
Liabilities and Equity
- ----------------------
Other liabilities $ 0 $ 12
Equity (deficit) $ 0 (12)
-------------
Total liabilities and equity (deficit) $ 0 $ 0
=============
</TABLE>
<TABLE>
<CAPTION>
Year ended June 30,
--------------------
1996 1995 1994
--------------------
<S> <C> <C> <C>
Income $ 27 $ 74 $ 100
Expense 0 99 109
--------------------
Net income (Loss) $ 27 $ (25) $ (9)
====================
</TABLE>
8. DEPOSIT ACCOUNTS
Deposit accounts at June 30, were as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
Account Type Rate Balance % Rate Balance %
- ------------ -------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NOW accounts:
Commercial-noninterest bearing 0.00% $ 1,949 1.86% 0.00% $ 82 0.08%
Noncommercial 1.57% 2,805 2.68% 1.87% 2,908 2.88%
Super NOW accounts 2.39% 746 0.71% 2.77% 758 0.75%
Money market checking accounts 3.12% 7,750 7.41% 3.00% 8,452 8.37%
Savings accounts 3.03% 4,794 4.58% 2.75% 4,773 4.73%
-------------------------------------------------
Total demand and savings deposits 2.39% 18,044 17.26% 2.71% 16,973 16.81%
-------------------------------------------------
Certificates of deposits:
Up to 3.99% 995 0.95% 13,213 13.09%
4.00% - 5.99% 74,021 70.79% 62,504 61.93%
6.00% - 6.99% 8,241 7.88% 7,366 7.30%
Above 7.00% 3,264 3.12% 877 0.87%
---------------- ----------------
Total certificates of deposits 5.32% 86,521 82.74% 5.11% 83,960 83.19%
-------------------------------------------------
Total deposit accounts 4.81% $104,565 100.00% 4.71% $100,933 100.00%
=================================================
</TABLE>
As of June 30, 1996 and 1995, total deposit accounts included approximately
$1,743,000 and $1,756,000,
- --------------------------------------------------------------------------------
L&B Financial, Inc.
31
<PAGE>
respectively, of deposits from the Corporation's officers, directors, employees
or parties related to them.
As of June 30, 1996, deposit accounts with balances of $100,000 and over totaled
approximately $13,702,000.
Certificates of deposits by maturity were as follows (in thousands):
<TABLE>
<CAPTION>
June 30,
--------
Maturity Date 1996 1995
- ------------- ----------------
<S> <C> <C>
Within 1 year $68,843 $66,247
After 1 year but within 2 years 9,874 10,937
After 2 years but within 3 years 3,716 3,251
Thereafter 4,088 3,525
----------------
Total certificates of deposits $86,521 $83,960
================
</TABLE>
Interest expense on deposits consisted of the following (in thousands):
<TABLE>
<CAPTION>
Year ended June 30,
-------------------
Account type 1996 1995 1994
- ------------ ------------------------
<S> <C> <C> <C>
NOW accounts $ 79 $ 72 $ 76
Money market deposit accounts 239 285 361
Savings accounts 146 217 212
Certificate of deposit accounts 4,541 3,486 3,186
Early withdrawal penalties (20) (19) (16)
------------------------
Total interest expense $4,985 $4,041 $3,819
========================
</TABLE>
9. ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank consisted of the following (in
thousands):
<TABLE>
<CAPTION>
June 30,
--------
1996 1995
----------------
<S> <C> <C>
Contractual Maturity:
Within one year - fixed rate $13,500 $4,904
----------------
Total advances $13,500 $4,904
================
Weighted average interest rate 5.51% 6.01%
</TABLE>
The Corporation pledges as collateral to these borrowings their Federal Home
Loan Bank stock and has entered into blanket collateral agreements with the
Federal Home Loan Bank whereby the Corporation maintains, free of other
encumbrances, qualifying mortgages (as defined) with unpaid principal balances
equal to, when discounted at 75% of the principal balances, 100% of total
advances. Under this borrowing arrangement, the Corporation had the ability to
borrow an additional $11,940,000 at June 30, 1996.
As of June 30, 1995, investment securities with a carrying value of $5,004,000
were pledged as collateral for FHLB advances. No investment securities were
pledged as collateral for FHLB advances at June 30, 1996.
- --------------------------------------------------------------------------------
L&B Financial, Inc.
32
<PAGE>
10. INCOME TAXES
The consolidated provision for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
June 30,
--------
1996 1995 1994
---------------------
<S> <C> <C> <C>
Current federal tax expense $611 $493 $491
Deferred federal tax
(benefit) expense (97) 56 61
---------------------
Total federal tax expense $514 $549 $552
=====================
</TABLE>
The provision for federal income taxes differs from that computed by applying
federal statutory rates to income before federal income tax expense, as
indicated in the following analysis (in thousands):
<TABLE>
<CAPTION>
Year ended June 30,
--------------------
1996 1995 1994
--------------------
<S> <C> <C> <C>
Expected tax provision at
a 34% rate $667 $656 $537
Increase (decrease)
resulting from:
Bad debt deduction (45) (39) (9)
Negative loan loss
provision (34) 0 0
Goodwill amortization 0 0 4
Exempt municipal interest (12) (15) (13)
Other, net (62) (53) 33
--------------------
Total provision for
federal income taxes $514 $549 $552
====================
</TABLE>
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at June 30, 1996, and
1995 are as follows (in thousands):
<TABLE>
<CAPTION>
June 30,
--------
1996 1995
---------------
<S> <C> <C>
Deferred tax assets:
Deferred compensation expense $ 26 $ 41
Net unrealized losses on available-for-sale assets 51 5
Other 0 3
---------------
Total gross deferred tax assets 77 49
---------------
Deferred tax liabilities:
FHLB Stock dividends 58 43
Depreciation 25 49
Other 30 34
Total 113 126
---------------
Net deferred tax liability (included in other liabilities) $ 36 $ 98
===============
</TABLE>
The Corporation is permitted a special bad debt deduction in determining federal
taxable income, subject to certain limitations. If the amounts that qualify as
bad debt deductions for federal income tax purposes are later used for purposes
other than for bad debt losses, they will be subject to federal income tax at
the then current corporate rate. As permitted under SFAS 109, no deferred tax
liability is provided for approximately $2,200,000 ($748,000 approximate tax
effect) of such tax bad debt reserves that arose prior to January 1, 1988.
Under recent tax legislation, thrift institutions must recapture certain
"applicable excess bad debt reserves" over a six
- --------------------------------------------------------------------------------
L&B Financial, Inc.
33
<PAGE>
year period, subject to certain requirements, and begin paying taxes on such.
Generally, the 1987 would be exempt from such and prior reserves recapture. The
corporation believes the implementation of this legislation will not have a
material effect on the Corporation's financial statements. At June 30, 1996, the
pre 1988 tax bad debt reserves totaled approximately $2,400,000.
11. EMPLOYEE BENEFIT PLANS
Prior to June 30, 1995, the Corporation maintained a target benefit plan
covering substantially all employees. The plan required an employer's
contribution based on 17.5% of the participants average compensation. Effective
September 15, 1994, the plan and assets thereof were merged into the
Corporation's 401 (k) Plan. The Corporation has maintained a section 401(k) plan
since the adoption of such plan during 1993. Full-time employees who have been
credited with at least 1,000 hours of service during a twelve-month period and
who have attained age 21 are eligible to participate in the plan. The
Corporation's Board of Directors considers a discretionary matching contribution
on an annual basis. Participant benefits ceased to accrue under the target
benefit plan as a result of the merger. Expenses relating to these two plans
included in compensation and employee benefits expense were approximately $0,
$9,000 and $56,000, for the years ended June 30, 1996, 1995 and 1994,
respectively.
In addition to the aforementioned benefit plans, the Corporation has an unfunded
deferred compensation arrangements with two key officers. Expense reported in
the consolidated statements of income under this arrangement totaled
approximately $5,000, $4,000, and $4,000 for the years ended June 30, 1996,
1995, and 1994, respectively. At June 30, 1996, the Corporation had recorded a
liability of $126,000 related to this arrangement.
Effective February 28, 1995, the Corporation established a Recognition and
Retention Plan. The purpose of this plan is to retain personnel of experience
and ability by providing employees and non-employee directors with a proprietary
interest in the Corporation as compensation for their contributions and as an
incentive for such contributions in the future. The Corporation acquired 40,000
shares of its common stock on behalf of the Recognition and Retention Plan
through open market purchases. The shares acquired were recorded as unearned
compensation at the fair value of the shares as of the date of the award. The
fair value of such shares at February 28, 1995, was $10.50 per share, or
$420,000. The difference of $151,000 between the average purchase price of
$14.27 and fair market value of the shares acquired was charged against
additional paid-in capital. For the years ended June 30, 1996 and 1995,
compensation expense relating to the recognition and retention plan was $82,000
and $32,000, respectively. There was no compensation expense related to the
Recognition and Retention Plan for the year ended June 30, 1994.
Effective October 14, 1994, the Corporation established an ESOP that covers all
employees who meet eligibility requirements. The Corporation makes contributions
to the ESOP in an amount equal to the ESOP's debt service less dividends
received, if any, on unallocated shares. For the year ended June 30, 1996,
dividends of $70,000 were used to pay ESOP debt service (including dividends of
$35,000 paid in fiscal 1995). The ESOP shares are pledged as collateral on the
debt. As the debt is repaid, shares are released from collateral and allocated
to active participants accounts based on the principal and interest method.
During the year ended June 30, 1995, the Corporation adopted AICPA Statement of
Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans" ("SOP
93-6"). In accordance with SOP 93-6, the ESOP's debt is reflected in the Bank's
balance sheet as a long-term borrowing, with such debt being eliminated through
consolidation at June 30, 1996. A corresponding reduction in stockholders'
equity termed "Unearned ESOP Shares" reflect the value of the unreleased ESOP
shares. The adoption of SOP 93-6 had no effect on prior year financial
statements. For the years ended June 30, 1996 and 1995, ESOP expense charged to
compensation and employee benefits was $108,000 and $198,000, respectively, of
which $63,000 and $58,000 represented interest expense on ESOP debt. For the
year ended June 30, 1994, there were no ESOP related expenses.
- --------------------------------------------------------------------------------
L&B Financial, Inc.
34
<PAGE>
At June 30, 1996, ESOP shares were as follows:
<TABLE>
<S> <C>
Shares allocated 14,723
Shares committed to be released 4,232
Unallocated shares 81,095
</TABLE>
The ESOP had outstanding debt to L&B Financial, Inc at June 30, 1996 of
$825,000. Such debt is to be repaid over L&B Financial, Inc. acquired the a
period of ten years at an interest rate of 9.0%. Debt service is paid quarterly.
debt from a local financial institution in February 1996. Debt outstanding to
this financial institution was $896,000 at June 30, 1995.
12. COMMITMENTS AND CONTINGENCIES
Loan Commitments - Commitments to extend credit are agreements to lend a
- ----------------
customer funds as long as there is no violation of any condition established in
the contract. Commitments extend over periods of time with the majority of such
commitments to be disbursed within a thirty day period. Commitments generally
have fixed expiration dates or other termination clauses and may require the
payment of a fee. Commitments to extend credit at fixed rates expose the
Corporation to some degree of interest rate risk. The Corporation evaluates each
customer's credit worthiness on a case-by-case basis. The type and amount of
collateral obtained varies and is based on management's evaluation of the
potential borrower's ability to repay the debt.
The Corporation had outstanding loan commitments as follows (in thousands):
<TABLE>
<CAPTION>
June 30,
--------
1996 1995
--------------
<S> <C> <C>
Commitments to extend credit:
Variable interest rate $ 999 $ 282
Fixed interest rate 1,177 624
--------------
Total loan commitments 2,176 906
Undisbursed portion of interim construction loans 2,230 1,902
--------------
Total commitment to extend credit $4,406 $2,808
==============
</TABLE>
Financial Instruments With off-Balance Sheet Risk - The Corporation has no
- -------------------------------------------------
additional financial instruments with off-balance sheet risks.
Concentrations of Credit Risk - The Corporation's business is principally with
- -----------------------------
customers located in northeast Texas. Except for residential mortgage loans in
the Corporation's market area, the Corporation has no other significant
concentrations of credit risk.
Litigation - The Corporation is involved in legal actions in the normal course
- ----------
of business. In the opinion of management, based on the advice of its general
counsel, the resolution of these matters will not have a material adverse impact
on the future results of operations or the financial position of the
Corporation.
Potential Impact of Changes in Interest Rates - The Corporation's profitability
- ---------------------------------------------
depends to a large extent on its net interest income, which is the difference
between interest income from loans and investments and interest expense on
deposits and borrowings. Like most financial institutions, the Corporation's
interest income and interest expense are significantly affected by changes in
market interest rates and other economic factors beyond its control. The
Corporation's interest earning assets consist primarily of long-term, fixed-rate
mortgage loans and investments which adjust more slowly to changes in interest
rates than its interest-bearing liabilities which are primarily term deposits.
Accordingly, the Corporation's earnings would be adversely affected during
periods of rising interest rates.
- --------------------------------------------------------------------------------
L&B Financial, Inc.
35
<PAGE>
13. STOCK OPTION AND OWNERSHIP PLANS
On February 28, 1995, the Corporation implemented the 1995 Stock Option Plan
("Plan") for the benefit of all employees and directors. Under the Plan, 166,750
shares of authorized common stock are reserved for the exercise of stock
options. The options have a maximum duration of ten years from the date of
grant. At June 30, 1996, the Corporation had the following options outstanding:
<TABLE>
<CAPTION>
Grant Date Shares Granted Average Option Price per Share Expiration Date
- ---------- -------------- ------------------------------ ---------------
<S> <C> <C> <C>
February 1995 136,483 $10.50 February 2005
April 1995 10,000 $10.25 April 2005
February 1996 4,015 $14.25 February 2006
</TABLE>
The Plan calls for the grant in February 1997 to non-employee members of the
Board of Directors of options to purchase a total of 4,015 shares of common
stock.
As of June 30, 1996, no options had been exercised.
The Plan also provides for stock appreciation rights ("SAR's"). To date, no
SAR's have been granted.
Employees participate in stock ownership through the 401(k) plan.
In October, 1995, the FASB issued Statement of Accounting Standards No. 123,
"Accounting for Stock Based Compensation" ("SFAS 123") which established
accounting and reporting standards for stock-based employee compensation plans.
Under SFAS 123, companies are encouraged to adopt a new accounting method that
accounts for stock compensation awards based on their estimated fair value at
the date they are granted. Companies are allowed to continue following
accounting standards that currently exist (Accounting Principal Board Opinion
No. 25) which generally do not result in an expense charge for most options
issued. If a company continues to follow existing accounting practices to
account for stock compensations plans, pro-forma disclosures of net income and
earnings per share as if the fair value method of accounting defined by SFAS 123
had been applied are required.
SFAS 123 is generally effective for fiscal years beginning after December 15,
1995. Earlier adoption is permitted. The Corporation has not determined if the
fair value method defined by the new standard will be adopted or if the existing
accounting method will be maintained.
14. STOCKHOLDERS' EQUITY AND DIVIDEND RESTRICTIONS
On October 14, 1994, the Bank converted from a Texas-chartered mutual savings
and loan association to a Texas-chartered stock savings and loan association
through the sale of common stock. The Bank sold shares in a Subscription
Offering to eligible account holders, an Employee Stock Ownership Plan,
supplemental eligible account holders, and other members, officers, directors,
and employees. Shares were also sold in a concurrent Community Offering. Of the
25,000,000 authorized common $0.01 par value shares, 1,667,500 shares were sold
at a price of $10.00 per share. The net proceeds of the offering, after
conversion costs of approximately $660,000, were $15,998,000.
The plan of conversion provided that upon completion of the conversion, a
special liquidation account for the benefit of the eligible account holders and
the supplemental account holders would be established. In this account is an
amount equal to the net worth of the Bank as of the date of its latest statement
of condition contained in the final offering circular used in connection with
the conversion, such date being March 31, 1994. The liquidation account is
maintained for the benefit of the eligible account holders and supplemental
eligible account holders who continue to maintain their accounts at the Bank.
The liquidation account is reduced from time to time to the extent qualifying
balances are reduced. In the event of a complete liquidation, each eligible and
supplemental eligible account holder will be entitled to receive a distribution
from the adjusted qualifying balances for accounts then held. As of June 30,
1996 the amount of retained earnings appropriated as a "liquidation account" was
$9,698,000.
- --------------------------------------------------------------------------------
L&B Financial, Inc.
36
<PAGE>
The Corporation is prohibited from declaring cash dividends on its common stock,
or repurchasing its common stock if the effect thereof would cause its net worth
to be reduced below either the amount required for the liquidation account or
the minimum regulatory capital requirement. In addition, the Bank is also
prohibited from declaring cash dividends and repurchasing its own stock without
prior regulatory approval in any calendar year in excess of 100% of its current
year's net income to the date of any such dividend or repurchase, plus 50% of
the excess of its capital at the beginning of the year in excess of its minimum
regulatory capital requirement.
The Corporation is subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by the regulators that, if taken, could have a material
effect on the Corporation's financial statements. Under capital adequacy
guidelines and the regulatory framework requiring prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative measures of
the bank's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgements by the regulators
about components, risk weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier I
capital ( as defined by regulation) to risk weighted assets (as defined), and
Tier I capital to average assets (as defined). The following table sets forth
(in thousands) the Bank's current capital requirements, actual capital position
and excess capital in both a dollar and percentage basis for June 30, 1996:
<TABLE>
<CAPTION>
Tier One Tier One Tier Two
Core Risk-based Risk-based
Capital Capital Capital
-------------------------------------------
<S> <C> <C> <C>
Adjusted capital 19,006 $19,006 $19,762
Capital ratio 21.38% 22.45% 23.34%
Minimum capital requirement 3,555 3,386 6,773
Minimum capital ratio 4.00% 4.00% 8.00%
Excess capital 15,451 15,620 12,989
Excess capital ratio 17.38% 18.45% 15.34%
Total adjusted assets 88,875 $84,666 $84,666
-------------------------------------------
</TABLE>
15. SUPERVISORY AGREEMENT
On May 17, 1994, the Corporation executed a Supervisory Agreement with the
Office of Thrift Supervision. The Supervisory Agreement related to deficiencies
in the Corporation's electronic data processing ("EDP") capability. The
Supervisory Agreement required the Board to adopt and submit a written plan of
action to ensure that the Corporation is provided with adequate EDP audit
coverage, submit a strategic plan that provides for the EDP planning in
accordance with the guidelines of the Federal Financial Institution Examination
Council, adopt a capital expenditures policy setting forth minimum EDP
requirements, establish an EDP Steering Committee and implement various
safeguards regarding computer operations and security. On July 7, 1995, the
Corporation was notified as to its compliance with the terms and conditions of
the Supervisory Agreement and that said Agreement was terminated.
- --------------------------------------------------------------------------------
L&B Financial, Inc.
37
<PAGE>
16. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by the Corporation using
available market information and appropriate valuation methodologies.
Considerable judgement is required to interpret this information and develop
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Corporation could realize in a current
market exchange. The use of different market assumptions and/ or estimation
methodologies may have a material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995
------------- -------------
Notional Carrying Fair Notional Carrying Fair
Amount Amount Value Amount Amount Value
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 8,916 $ 8,916 $ 6,418 $ 6,418
Investment and mortgage-backed securities
Available-for-sale 21,986 21,986 193 193
Held-to-maturity 42,178 42,232 63,557 63,649
Mortgage loans held for sale 490 490 792 792
Loan receivable, net 65,862 65,340 58,590 57,771
Federal Home Loan Bank stock 751 751 705 705
Liabilities:
Deposits 104,565 104,653 100,933 101,314
Borrowings 13,500 13,500 4,904 4,904
Off balance sheet:
Commitments to extend credit $4,406 $ 4,406 $2,808 $ 2,808
</TABLE>
Cash and cash equivalents - The carrying amounts of cash and short-term
instruments is a reasonable estimate of fair value.
Investments and mortgage-backed securities - The estimated fair value of debt
and equity securities equals quoted market price.
Mortgages held-for-sale - The estimated fair value of mortgage loans held-for-
sale is estimated at the quoted secondary market prices for such loans without
regard to the Corporation's other commitments to make or sell loans.
Loans receivable - The fair value of loans receivable was estimated by
discounting the future cash flows using current rates at which similar loans
would be made to borrowers with similar credit histories and maturities.
Federal Home Loan Bank stock - The carrying amount is a reasonable estimate of
fair value.
Deposits - The fair value of NOW accounts, 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 based on the present value of
the contractual cash flows discounted using the rates currently offered for
deposits of similar maturities.
Borrowed funds - The carrying amount of borrowed funds is a reasonable estimate
of fair value. All borrowings outstanding have maturities of less than one year
and interest rates that adjust with current market rates.
Commitments to extend credit - The notional amount of commitments to extend
credit is a reasonable estimation of fair value because the differences between
current market rates and committed rates are insignificant.
- --------------------------------------------------------------------------------
L&B Financial, Inc.
38
<PAGE>
The fair value estimates presented herein are based on information available to
management as of June 30, 1996 and 1995. Such amounts have not been
comprehensively revalued for purposes of financial statement presentation since
the dates noted.
17. L&B FINANCIAL, INC. FINANCIAL STATEMENTS (PARENT COMPANY ONLY)
Condensed financial statements for L&B are presented as follows (in thousands)
<TABLE>
<CAPTION>
Condensed Balance Sheet June 30, 1996
-------------------------------------------------------------
<S> <C>
Assets
Cash and cash equivalents $ 4,968
Investment in subsidiary 18,893
Other 922
-------
Total Assets 24,783
=======
Liabilities and Stockholders' Equity
Liabilities 0
Stockholders' Equity 24,783
-------
Total Liabilities and Stockholders' Equity $24,783
=======
</TABLE>
Included in other assets is a note receivable due from the Loan and Building
State Savings Bank ESOP in the amount of $825,000. See Note 11 for further
information.
<TABLE>
<CAPTION>
Year Ended
Condensed Statement of Income June 30, 1996
--------------------------------------------------------------
<S> <C>
Equity in undistributed earnings of subsidiary $1,392
Other income 204
------
Total Income 1,596
Other expenses 146
------
Net income $1,450
======
</TABLE>
- --------------------------------------------------------------------------------
L&B Financial, Inc.
39
<PAGE>
<TABLE>
<CAPTION>
Condensed Statement of Cash Flows June 30, 1996
---------------------------------------------------------------
<S> <C>
Operating Activities:
Net income $ 1,450
Equity in undistributed earnings of subsidiary (1,392)
Increase in other assets (922)
-------
Net cash used in operating activities (864)
-------
Financing Activities:
Dividends received from subsidiary 7,500
Purchase of treasury stock (1,199)
Dividends paid (469)
-------
Net cash provided by financing activities 5,832
-------
Net increase in cash 4,968
Cash and cash equivalents at beginning of year 0
-------
Cash and cash equivalents at end of year $ 4,968
=======
</TABLE>
18. PROPOSED ACQUISITION OF THE CORPORATION
On June 25, 1996, the Corporation announced the signing of a Letter of Intent
between the Corporation and Jefferson Savings Bancorp, Inc., Ballwin, Missouri,
outlining the terms of a proposed acquisition by Jefferson Bancorp of all of the
outstanding common stock of the Corporation. That agreement has expired,
however, negotiations were continuing as of the date of this report.
- --------------------------------------------------------------------------------
L&B Financial, Inc.
40
<PAGE>
DIRECTORS
---------
E. L. Ashcroft, III - Chairman of the Board W. T. Allison, II
Investments Attorney
C. Glynn Lowe - President and Chief Executive Officer Dan E. Bonner
Loan and Building State Savings Bank Retired
Bob J. Burgin - CPA J. Herman Connelly
Partner - Burgin, Johnson, Baucum & Co. Retired - Investments
Wayne H. Galyean Thomas J. Payne
Owner - Galyean Insurance Agency Retired - Investments
OFFICERS
--------
C. Glynn Lowe - President and Chief Executive Officer
Jeffrey C. David - Vice President and Chief Financial Officer
Dan M. Phillips - Senior Vice President
Linda J. Galligher - Senior Vice President
CORPORATE INFORMATION
---------------------
Corporate Offices Special Counsel
- ----------------- ---------------
306 North Davis Street Shannon, Gracey, Ratliff & Miller, L.L.P.
Sulphur Springs, Texas 75482 Fort Worth, Texas
Independent Auditors Stock Transfer Agent
- -------------------- --------------------
Oakerson, Arnold, Walker and Co. Mellon Securities
Mt. Pleasant, Texas 85 Challenger Road
Ridgefield Park, New Jersey 07660
General Counsel
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W. T. Allison, II
Sulphur Springs, Texas
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L&B Financial, Inc.
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<PAGE>
NOTICE OF ANNUAL MEETING
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The Annual Meeting of Stockholders will convene at the Hopkins County Civic
Center, 1200 Houston Street, Sulphur Springs, Texas on October 29, 1996, at
11:00 am.
10-K INFORMATION
----------------
A copy of the Form 10-K filed with the Securities and Exchange Commission will
be furnished to stockholders, without charge, upon written request to the
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Corporate Secretary, L&B Financial, Inc., 306 N. Davis Street, Sulphur Springs,
Texas, 75482.
Stockholders needing assistance with stock records, transfers or lost
certificates, please contact the Corporation's transfer agent, Mellon Securities
Trust Company at the address listed above.
BANKING OFFICES
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Main Office Pittsburgh Branch
306 North Davis Street 117 South Greer Street
Sulphur Springs, Texas Pittsburgh, Texas
Mt. Vernon Branch Texarkana Branch
101 Kaufman Street 3501 Sowell Ln
Mt. Vernon, Texas Texarkana, Texas
Mt. Pleasant Branch L & B Mortgage
801 North Jefferson Street 312 North Davis Street
Mt. Pleasant, Texas Sulphur Springs, Texas
Daingerfield Branch
101 Broadnax Street
Daingerfield, Texas
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L&B Financial, Inc.
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