<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from _______ to _______
Commission file number 0-25070.
LSB FINANCIAL CORP.
(Exact Name of Small Business Issuer as Specified in its Charter)
Indiana 35-1934975
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Main Street, Lafayette, Indiana 47902
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (765) 742-1064
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve months (or for
such shorter period that the Issuer was required to file such reports), and (2)
has been subject to such requirements for the past 90 days. YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The Issuer had $16.2 million in gross income for the year ended
December 31, 1997.
As of March 20, 1998, there were issued and outstanding 916,350 shares
of the Issuer's Common Stock. The aggregate market value of the voting stock
held by non-affiliates of the Issuer, computed by reference to the average of
the closing bid and asked price of such stock as of March 20, 1998, was
approximately $19.9 million. (The exclusion from such amount of the market value
of the shares owned by any person shall not be deemed an admission by the Issuer
that such person is an affiliate of the Issuer.)
DOCUMENTS INCORPORATED BY REFERENCE
PARTS II and IV of Form 10-KSB--1997 Annual Report to Stockholders.
PART III of Form 10-KSB--Proxy Statement for the 1998 Annual Meeting of
Stockholders.
================================================================================
<PAGE>
PART I
Item 1. Description of Business
General
LSB Financial Corp. ("LSB" or the "Company") is an Indiana corporation
which was organized in 1994 by Lafayette Savings Bank, FSB ("Lafayette" or the
"Bank") for the purpose of becoming a thrift institution holding company.
Lafayette is a federally chartered stock savings bank headquartered in
Lafayette, Indiana. Originally organized in 1869, the Bank converted to a
federal savings bank in 1984. Its deposits are insured up to the applicable
limits by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation ("FDIC"). In February 1995, the Bank converted to the stock form of
organization through the sale and issuance of 1,029,576 shares of its common
stock to the Company. The principal asset of the Company is the outstanding
stock of the Bank, its wholly owned subsidiary. The Company presently has no
separate operations and its business consists only of the business of the Bank.
All references to the Company, unless otherwise indicated, at or before February
3, 1995 refer to the Bank.
LSB has been, and intends to continue to be, a community-oriented
financial institution. The principal business of the Company consists of
attracting retail deposits from the general public and investing those funds
primarily in permanent first mortgage loans secured by owner-occupied, one-to
four-family residences, and to a lesser extent, non-owner occupied one- to
four-family residential, commercial real estate, multi-family, construction and
development, consumer and commercial business loans. The Company currently
serves Tippecanoe County, Indiana (the "primary market area") through its three
retail banking offices. At December 31, 1997, LSB had total assets of $206.6
million, deposits of $137.7 million and shareholders' equity of $17.7 million.
The Company's revenues are derived principally from interest on
mortgage and other loans and interest on securities.
Since the Bank, unlike most savings associations, is insured by the
BIF, it was not subject to the federal legislation passed on September 30, 1996,
requiring virtually all SAIF-insured institutions to pay a one-time special
assessment. See "Regulation - Insurance of Accounts and Regulation by the FDIC."
The executive offices of the Company are located at 101 Main Street,
Lafayette, Indiana 47902. Its telephone number at that address is (765)
742-1064.
Lending Activities
General. The principal lending activity of the Company is the
origination of conventional mortgage loans for the purpose of purchasing,
constructing, or refinancing owner-occupied one- to four-family residential real
estate located in the Company's primary market area. The Company also originates
non-owner occupied one- to four-family residential, multi-family and land
development, commercial real estate, consumer and commercial business loans.
2
<PAGE>
In the mid 1980's, the Company began originating adjustable rate
mortgages ("ARMs") for retention in its portfolio in an effort to increase the
percentage of loans with more frequent repricing than traditional long term,
fixed-rate loans. As a result of continued consumer demand for long-term, fixed
rate loans, the Company has continued to originate such loans. LSB underwrites
these mortgage loans utilizing secondary market guidelines allowing them to be
saleable, without recourse, primarily to the Federal Home Loan Mortgage
Corporation ("FHLMC"). The sale of such loans results in additional short-term
income and improves the Company's interest rate risk position. The Company
generally retains servicing rights on loans sold in the secondary market.
Furthermore, in order to limit its potential exposure to increasing interest
rates caused by its traditional emphasis on originating single family mortgage
loans, the Company has diversified its portfolio by increasing its emphasis on
the origination of short-term or adjustable rate multi-family and commercial
real estate, land development, construction, business and consumer loans. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset/Liability Management" in the Annual Report to Stockholders
filed as Exhibit 13 hereto ("Annual Report").
Loan officers and certain executive officers of the Company have
approval authority on loans depending on the type and amount of the loan. All
owner-occupied residential loans greater than $200,000 and all non-owner
occupied residential loans and commercial business loans of $350,000 or more
must be approved by the loan committee of the Board of Directors. Any loan or
aggregate of loans to one borrower of $1 million or more must be approved by a
majority of the full Board of Directors.
At December 31, 1997, the maximum amount which the Bank could have
loaned to any one borrower and the borrower's related entities was $2.7 million.
The Bank's largest lending relationship to a single borrower or a group of
related borrowers totaled $2.2 million at December 31, 1997, consisting of
multiple loans to a single borrower secured by multi-family dwellings used as
student housing. The second largest lending relationship to a single borrower or
a group of related borrowers totaled $2.1 million, consisting of multiple loans
to a single borrower secured by one- to four-family and multi-family rental
properties. The third largest lending relationship to a single borrower or a
group of related borrowers totaled $2.1 million, consisting of multiple loans to
a single borrower secured by one- to four-family and multi-family rental
properties and commercial real estate. All of these loans were performing in
accordance with their terms at December 31, 1997. At December 31, 1997, the
Company had 27 other loans or lending relationships to a single borrower or
group of related borrowers with a principal balance in excess of $1.0 million,
all of which were performing in accordance with their repayment terms.
3
<PAGE>
Loan Portfolio Composition. The following table sets forth information
concerning the composition of the Company's loan portfolio (including loans held
for sale) in dollar amounts and in percentages of the total loan portfolio
(before deductions for loans in process, deferred fees and discounts and
allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
December 31,
1993 1994 1995
----------------- ------------------ -----------------
Amount Percent Amount Percent Amount Percent
------- --------- ------- --------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans
One-to four-family.................. $60,229 74.89% $69,139 68.53% $ 86,231 62.40%
Multi-family........................ 5,972 7.43 7,643 7.58 12,044 8.72
Commercial.......................... 5,565 6.92 10,712 10.62 15,034 10.88
Land and land development .......... 2,153 2.68 2,915 2.89 3,880 2.81
Construction ....................... 1,959 2.44 3,251 3.22 10,379 7.51
----- ----- ----- ---- ------ -----
Total Real Estate Loans........... 75,878 94.36 93,660 92.84 127,568 92.32
------ ----- ------ ----- ------- -----
Other Loans
Consumer loans:
Home Equity ....................... 2,523 3.14 3,393 3.36 4,124 2.98
Home improvement .................. 122 0.15 184 0.18 53 0.04
Automobile ........................ 396 0.49 380 0.38 794 0.57
Deposit account ................... 42 0.05 330 0.33 144 0.10
Other.............................. 526 0.64 333 0.32 933 0.68
--- ---- --- ---- --- -----
Total consumer loans............ 3,609 4.47 4,620 4.57 6,048 4.37
Commercial business loans........... 939 1.17 2,614 2.59 4,570 3.31
--- ---- ----- ---- ----- ---------
Total other loans................. 4,548 5.64 7,234 7.16 10,618 7.68
----- ---- ----- ---- ------ -------
Total loans.................... 80,426 00.00% 100,894 100.00% 138,186 100.00%
------ ====== ------- ====== ------- =======
Less:
Loans in process................... 1,125 1,095 4,516
Deferred fees and discounts........ 221 271 315
Allowance for losses............... 922 926 922
--- --- ---
Total loans receivable, net...... $78,158 $98,602 $132,433
======= ======= ========
</TABLE>
<PAGE>
[RESTUBBED FORM PRECEDING TABLE]
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1996 1997
------------------ ------------------
Amount Percent Amount Percent
------- --------- ------- --------
<S> <C> <C> <C> <C>
Real Estate Loans
One-to four-family.................. $96,987 57.72% $104,416 56.39%
Multi-family........................ 19,610 11.67 20,382 11.01
Commercial.......................... 19,032 11.33 20,888 11.28
Land and land development. . . . . . 3,334 1.98 6,020 3.25
Construction . . . . . . . . . . . . . . . 14,447 8.60 14,326 7.74
------ ----- ------- -----
Total Real Estate Loans........... 153,410 91.30 166,032 89.67
------- ----- ------- -----
Other Loans
Consumer loans:
Home Equity . . . . . . . . . . . 7,415 4.41 10,012 5.41
Home improvement . . . . . . 212 0.13 140 0.08
Automobile . . . . . . . . . . . . 792 0.47 1,633 0.88
Deposit account . . . . . . . . . 238 0.14 165 0.09
Other . . . . . . . . . . . . . . . . . 1,151 0.68 1,348 0.73
----- ---- ------- ----
Total consumer loans. . . . 9,808 5.83 13,298 7.19
Commercial business loans. . 4,825 2.87 5,823 3.14
----- ---- ------- ----
Total other loans . . . . . . . . 14,633 8.70 19,121 10.33
------ ---- ------- -----
Total loans . . . . . . . . . . . 168,043 100.00% 185,153 100.00%
------- ======= ------- =======
Less:
Loans in process . . . . . . . . . 6,755 4,859
Deferred fees and discounts. 357 284
Allowance for losses . . . . . . 1,715 1,478
----- ------
Total loans receivable, net. $159,216 $178,532
======== ========
</TABLE>
4
<PAGE>
The following table shows the composition of the Company's
loan portfolio (including loans held for sale) by fixed- and adjustable-rate at
the dates indicated.
<TABLE>
<CAPTION>
December 31,
1993 1994 1995
----------------------- ------------------------ ------------------------
Amount Percent Amount Percent Amount Percent
------- --------- ------- --------- ------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family(1)............. $29,473 36.65% $32,212 31.93% $ 41,222 29.83%
Multi-family....................... 474 0.59 56 0.06 457 0.33
Commercial......................... 1,318 1.64 2,532 2.51 2,096 1.52
Construction....................... 1,959 2.44 3,251 3.22 10,379 7.51
Land and land development.......... 1,103 1.37 --- --- --- ---
------- ----- ------- ----- -------- -----
Total Real Estate Loans........... 34,327 42.69 38,051 37.721 54,154 39.19
Consumer........................... 1,086 1.35 1,063 1.05 1,619 1.17
Commercial business................ 642 0.80 2,012 1.99 4,570 3.31
------- ----- ------- ----- -------- -----
Total fixed-rate loans........... 36,055 44.84 41.126 40.76 60,343 43.67
------- ----- ------- ----- -------- -----
Adjustable-Rate Loans:
Real estate:
One- to four-family................ 30,756 38.24 36,927 36.60 45,009 32.57
Multi-family....................... 5,498 6.84 7,587 7.52 11,587 8.39
Commercial......................... 4,247 5.28 8,180 8.11 12,938 9.36
Construction....................... --- --- --- --- --- ---
Land and land development.......... 1,050 1.35 2,915 2.89 3,880 2.81
------- ----- ------- ----- -------- -----
Total Real Estate Loans........... 41,551 51.67 55,609 55.12 73,414 53.13
Consumer........................... 2,523 3.14 3,557 3.52 4,429 3.20
Commercial business................ 297 0.35 602 0.60 --- ---
------- ----- ------- ----- -------- -----
Total adjustable-rate loans...... 44,371 55.16 59.768 59.24 77,843 56.33
------- ----- ------- ----- -------- -----
Total loans...................... 80,426 100.00% 100,894 100.00% 138,186 100.00%
------- ======= ------- ======= -------- =======
Less:
Loans in process................... 1,125 1,095 4,516
Deferred fees and discounts........ 221 271 315
Allowance for losses............... 922 926 922
--- --- ---
Total loans receivable, net...... $78,158 $98,602 $132,433
======= ======= ========
</TABLE>
<PAGE>
[RESTUBBED FROM PRECEDING TABLE]
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1996 1997
------------------ ------------------
Amount Percent Amount Percent
------- --------- ------- --------
<S> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family(1)............. $48,204 28.69% $ 46,036 24.86%
Multi-family....................... 401 0.24 857 0.46
Commercial......................... 2,791 1.66 1,107 0.60
Construction....................... 14,447 8.60 14,326 7.74
Land and land development.......... 762 0.45 1,197 0.65
----- ---- ------ -----
Total Real Estate Loans........... 66,605 39.64 63,523 34.31
Consumer........................... 2,393 1.42 2,738 1.48
Commercial business................ 4,103 2.44 5,131 2.77
----- ---- ----- -----
Total fixed-rate loans........... 73,101 43.50 71,392 38.56
------ ----- ------ -----
Adjustable-Rate Loans:
Real estate:
One- to four-family................ 48,783 29.03 58,380 31.53
Multi-family....................... 19,209 11.43 19,525 10.55
Commercial......................... 16,241 9.66 19,781 10.68
Construction....................... --- ----- ------ -----
Land and land development.......... 2,572 1.54 4,823 2.60
----- ----- ------ -----
Total Real Estate Loans........... 86,805 51.66 102,509 55.36
Consumer........................... 7,415 4.41 10,560 5.70
Commercial business................ 722 0.43 692 0.38
----- ----- ----- -----
Total adjustable-rate loans...... 94,942 56.50 113,761 61.44
------ ----- ------- -----
Total loans...................... 168,043 100.00% 185,153 100.00%
------- ======= ------- =======
Less:
Loans in process................... 6,755 4,859
Deferred fees and discounts........ 357 284
Allowance for losses............... 1,715 1,478
----- -----
Total loans receivable, net...... $159,216 $178,532
======== ========
</TABLE>
- -------------
5
<PAGE>
(1) Includes $7.0, $14.7 million and $17.3 million of loans at December 31,
1995, 1996 and 1997, respectively, which carry a fixed rate of interest
for the initial five or seven years and then convert to an adjustable
rate of interest for the remaining term of the loan.
6
<PAGE>
The following schedule illustrates the maturities of the Company's loan
portfolio at December 31, 1997. Loans which have adjustable or renegotiable
interest rates are shown as maturing in the period during which the contract is
due. The schedule does not reflect the effects of possible prepayments or
enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
-----------------------------------------------------------------------------
Multi-family and Construction, Land
One- to Four-Family Commercial and Land Development
--------------------- -------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
-------- ------ -------- ------ -------- ------
(Dollars in Thousands)
Due During
Years Ending
December 31,
<S> <C> <C> <C> <C> <C> <C>
1998(1) .......... $ 2,971 8.51% $ 931 9.59% $ 7,861 9.18%
1999 ............. 442 8.73 642 8.61 1,790 8.74
2000 ............. 418 8.16 500 9.34 38 8.55
2001 and 2002 .... 3,104 8.12 981 7.88 110 8.68
2003 to 2007 ..... 8,499 8.32 1,586 8.80 17 11.00
2008 to 2017 ..... 22,594 8.13 25,857 8.76 355 8.25
2018 and following 66,388 7.89 10,773 8.66 10,175 8.25
-------- -------- --------
TOTAL ........... $104,416 8.01% $ 41,270 8.74% $ 20,346 8.66%
======== ======== ========
</TABLE>
[RESTUBBED FROM TABLE ABOVE] Real Estate
<TABLE>
<CAPTION>
Commercial
Consumer Business Total
--------------------- --------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
-------- ------ -------- ------ -------- -----
(Dollars in Thousands)
Due During
Years Ending
December 31,
<S> <C> <C> <C> <C> <C> <C>
1998(1) .......... $ 619 10.91% $ 2,182 10.09% $ 14,564 9.28%
1999 ............. 484 11.40 782 9.65 4,140 7.64
2000 ............. 1,913 9.00 1,679 2.50 4,548 6.56
2001 and 2002 .... 8,851 8.96 983 9.07 14,029 8.70
2003 to 2007 ..... 1,431 9.99 -- -- 11,533 8.60
2008 to 2017 ..... -- -- 197 8.75 49,003 8.46
2018 and following -- -- -- -- 87,336 8.03
-------- ------- --------
TOTAL ........... $ 13,298 9.25% $ 5,823 6.51% $185,153 8.28%
======== ======= ========
</TABLE>
- ----------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
The total amount of loans due to mature after December 31, 1998 which have
predetermined interest rates is $64.0 million, and which have adjustable or
renegotiable interest rates is $106.6 million.
7
<PAGE>
One- to Four-Family Residential Real Estate Lending
The Company focuses its lending program on the origination of permanent
loans secured by mortgages on owner-occupied, one- to four-family residences.
The Company also originates loans secured by nonowner-occupied, one- to
four-family residences. At December 31, 1997, $104.4 million, or 56.39% of the
Company's total loan portfolio consisted of permanent loans secured by one- to
four-family residences. Substantially all of these loans were secured by
properties located in the Company's primary market area. The Company originates
a variety of residential loans, including conventional 15 and 30 year fixed-rate
loans, fixed-rate loans convertible to ARMs, ARMs and balloon loans.
The Company's one- to four-family residential ARMs are fully amortizing
loans with contractual maturities of up to 30 years. The interest rates on
substantially all of the ARMs originated by the Company are subject to
adjustment at one, three or five year intervals. The Company's ARM products
generally carry interest rates which are reset to a stated margin over the
weekly average of the one, three or five year U.S. Treasury rates. Increases or
decreases in the interest rate of the Company's one-year ARMs are generally
limited to 2% annually with a lifetime interest rate cap of 6% over the initial
rate. Increases or decreases in the interest rate of three-year and five-year
ARMs are limited to a 3% adjustment cap with a 5% lifetime interest rate cap
over the initial rate. The Company's one-year ARMs may be convertible into
fixed-rate loans after the first year and before the sixth year upon payment of
a fee, do not contain prepayment penalties and do not produce negative
amortization. Initial interest rates offered on the Company's ARMs may be below
the fully indexed rate. Borrowers are qualified at 2% over the initial interest
rate for the Company's one-year ARMS and at the initial interest rate for the
Company's three-year and five-year ARMs. At December 31, 1997, the total balance
of one- to four- family ARMs was $58.4 million, or 31.53% of the Company's gross
loan portfolio. The Company generally retains ARMs in its portfolio pursuant to
its asset/liability management strategy. Three-year and five-year ARMs
represented $52.8 million and one-year ARMs represented $5.6 million of the
Company's total ARMs at December 31, 1997.
The Company also offers fixed-rate mortgage loans to owner occupants with
maturities up to 30 years and which conform to FHLMC standards. LSB currently
sells in the secondary market the majority of long-term, conforming, fixed-rate
loans with terms over 15 years it originates. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -Asset/Liability
Management" in the Annual Report. Interest rates charged on these fixed-rate
loans are priced on a daily basis in accordance with FHLMC pricing standards.
These loans do not include prepayment penalties.
In 1995, the Company expanded its product line to better compete for
residential mortgage loan customers by offering 30 year, fixed-rate mortgage
loans which, after five or seven years convert to the Company's standard
one-year ARM for the remainder of the term. The Company had $17.3 million in
five-year and seven-year convertible residential mortgage loans at December 31,
1997 (currently categorized by the Company as fixed-rate loans).
The Company had $36.1 million in nonowner-occupied one- to four-family
residential loans at December 31, 1997. These loans are underwritten using the
same criteria as owner-occupied, one-
8
<PAGE>
to four-family residential loans, but are provided at higher rates than
owner-occupied loans. The Company offers fixed-rate, adjustable-rate and
convertible rate loans, with terms of up to 30 years.
The Company originates residential mortgage loans with loan-to-value ratios
of up to 95% for owner-occupied residential loans and up to 80% for
nonowner-occupied residential loans. LSB requires private mortgage insurance in
an amount intended to reduce the Company's exposure to 80% or less of the lesser
of the purchase price or appraised value of the underlying collateral.
In underwriting one- to four-family residential real estate loans, LSB
evaluates both the borrower's ability to make monthly payments and the value of
the property securing the loan. Properties securing owner-occupied one- to
four-family residential real estate loans made by LSB are appraised by
independent fee appraisers. LSB requires borrowers to obtain title insurance and
fire, extended coverage casualty and flood insurance (if appropriate). Real
estate loans originated by the Company contain a "due on sale" clause allowing
the Company to declare the unpaid principal balance due and payable upon the
sale of the security property.
Multi-Family and Commercial Real Estate Lending
LSB originates permanent loans secured by multi-family and commercial real
estate. At December 31, 1997, the Company's multi-family and commercial real
estate loan portfolio totaled $41.3 million, or 22.29% of the Company's total
loan portfolio, compared to $38.6 million and $27.1 million, or 23.00% and
19.60%, at December 31, 1996 and 1995, respectively. The increase in the
commercial and multi-family loan portfolio is due to the hiring during 1994 of
an experienced commercial loan officer to further develop this portfolio.
The Company's permanent multi-family and commercial real estate loan
portfolio includes loans secured by apartment buildings, office buildings,
churches, warehouses, retail stores, shopping centers, small business facilities
and farm properties, most of which are located within the Company's primary
market area.
Permanent multi-family and commercial real estate loans are originated as
three-year and five-year ARMs with up to a 24 year amortization. To a
substantially lesser extent, such loans are originated as 10 year fixed-rate
loans. The ARMs are tied to an index based on the weekly average of the
three-year or five-year U.S. Treasury rate, respectively, plus a margin of 3%.
Multi-family loans and commercial real estate loans have been written in amounts
of up to 75% of the lesser of the appraised value of the property or the
purchase price, and borrowers are generally personally liable for all or part of
the indebtedness.
Appraisals on properties securing multi-family and commercial real estate
loans originated in excess of $100,000 by the Company are performed by
independent appraisers designated by the Company at the time the loan is made
and reviewed by management. In addition, the Company's underwriting procedures
generally require verification of the borrower's credit history, income and
financial statements, banking relationships and income projections for the
property.
Multi-family and commercial real estate loans generally present a higher
level of risk than loans secured by one- to four-family residences. This greater
risk is due to several factors, including the concentration of principal in a
limited number of loans and borrowers, the effects of general
9
<PAGE>
economic conditions on income producing properties and the increased difficulty
of evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multi-family and commercial real estate is typically dependent
upon the successful operation of the related real estate project. If the cash
flow from the project is reduced (for example, if leases are not obtained or
renewed, or a bankruptcy court modifies a lease term, or a major tenant is
unable to fulfill its lease obligations), the borrower's ability to repay the
loan may be impaired.
Construction, Land and Land Development Lending
The Company makes construction loans to individuals for the construction of
their residences as well as to builders and developers for the construction of
one- to four-family residences, multi-family dwellings and commercial real
estate projects. At December 31, 1997, substantially all of these loans were
secured by property located within the Company's primary market area. At
December 31, 1997, the Company had $14.3 million in construction loans
outstanding, representing 7.74% of the Company's total loan portfolio.
Construction loans to individuals for their residences typically run six to
eight months and are generally structured to be converted to permanent loans at
the end of the construction phase. These construction loans are fixed-rate
loans, with interest rates higher than those offered on one-to four-family loans
by the Company. During the construction phase, the borrower pays interest only.
Residential construction loans are underwritten pursuant to the same guidelines
used for originating permanent residential loans. At December 31, 1997, the
Company had $4.1 million of construction loans to borrowers intending to live in
the properties upon completion of construction.
Construction loans to builders of one- to four-family residences have terms
of six to eight months and require the payment of interest only at a fixed-rate
for the loan term. The Company limits builders to one home at a time but would
consider requests for more than one if the homes are presold. At December 31,
1997, the Company had $3.1 million of construction loans to builders of one- to
four-family residences.
Construction loans are made to builders of multi-family dwellings and
commercial projects with terms up to one year and requiring payment of interest
only at a fixed rate for the construction phase of the loan. These loans are
generally structured to be converted to one of the Company's permanent
commercial loan products at the end of the construction phase. At December 31,
1997, the Company had $7.2 million of loans to finance the construction of
multi-family dwellings and commercial projects.
The Company also makes loans to builders for the purpose of developing one-
to four-family lots and residential condominium projects. These loans typically
have terms of two to three years with interest rates tied to the Company's base
rate which is determined by a rate survey of a cross section of local banks. The
maximum loan to value ratio is 75%. The principal in these loans is typically
paid down as lots or units are sold. These loans may be structured as revolving
lines of credit with maturities of generally two years or less. At December 31,
1997, the Company had $5.3 million of development loans to builders. The Company
also makes a limited number of land acquisition loans. At December 31, 1997, the
Company had $714,000 in loans secured by land.
10
<PAGE>
Construction and development loans are obtained principally through
continued business from developers and builders who have previously borrowed
from the Company, as well as referrals from existing customers and realtors, and
walk-in customers. The application process includes a submission to the Company
of accurate plans, specifications and costs of the project to be
constructed/developed which are used as a basis to determine the appraised value
of the subject property. Loans are based on the lesser of current appraised
value and/or the cost of construction (land plus building).
At December 31, 1997, the Company's largest construction and development
loan was a development loan for a small commercial subdivision for $1.2 million.
The Company had no non-performing construction loans at December 31, 1997.
Construction and land development loans generally present a higher level of
risk than loans secured by one- to four-family residences. Because of the
uncertainties inherent in estimating land development and construction costs and
the market for the project upon completion, it is relatively difficult to
evaluate accurately the total loan funds required to complete a project, the
related loan-to-value ratios and the likelihood of ultimate success of the
project. Construction and land development loans to borrowers other than
owner-occupants also involve many of the same risks discussed above regarding
multi-family and commercial real estate loans and tend to be more sensitive to
general economic conditions than many other types of loans.
Consumer Lending
The Company originates a variety of different types of consumer loans,
including home equity loans, direct automobile loans, home improvement loans,
credit card loans, deposit account loans and other secured and unsecured loans
for household and personal purposes. At December 31, 1997, consumer loans
totaled $13.3 million or 7.19% of total loans outstanding.
Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. The largest component
of consumer lending is home equity loans which totaled $10.0 million or 5.41% of
the total loan portfolio at December 31, 1997. The Company is currently offering
a revolving line of credit home equity loan on which the total commitment amount
may not exceed 95% of the appraised value of the property, with a five year term
and minimum monthly payment requirement of interest due only. At December 31,
1997, the Company had $9.3 million of unused credit available under its home
equity line of credit program.
The underwriting standards employed by the Company for consumer loans
include a determination of the applicant's payment history on other debts and
ability to meet existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is of primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount. Consumer loans may entail greater credit
risk than do residential mortgage loans, particularly in the case of consumer
loans which are unsecured or are secured by rapidly depreciable assets, such as
automobiles. In such cases, any repossessed collateral for a defaulted consumer
loan may not provide an adequate source of repayment of the outstanding loan
balance as a result of the greater likelihood of damage, loss or depreciation.
In addition, consumer loan collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be affected by
adverse personal circumstances. Furthermore, the application of various federal
and state laws, including bankruptcy and insolvency laws, may limit the amount
which can be recovered on such loans.
11
<PAGE>
Commercial Business Lending
At December 31, 1997, $5.8 million or 3.14% of the Company's total loans
were comprised of commercial business loans. LSB's current commercial business
lending activities encompass predominantly unsecured lines of credit and
purchased leases secured by small business equipment such as copy and facsimile
machines. At December 31, 1997, the Company had $2.1 million of loans secured by
purchased leases through Bennett Funding Group ("Bennett"). See " -
NonPerforming Assets - Non-Accruing Loans." At December 31, 1997, the Company
had $523,000 of unsecured lines of credit outstanding with $252,000 of unused
credit available. During the early part of 1994, the Company hired an
experienced commercial loan officer to develop this area of lending, as well as
its commercial real estate portfolio. At December 31, 1997, the Company's
commercial business loans totaled $3.7 million compared to $2.4 million at
December 31, 1996 (excluding Bennett). The Company intends to continue to
increase its portfolio of commercial business loans.
Unlike residential mortgage loans, which generally are made on the basis of
the borrower's ability to make repayment from his or her employment and other
income and which are secured by real property the value of which tends to be
more easily ascertainable, commercial business loans typically are made on the
basis of the borrower's ability to make repayment from the cash flow of the
borrower's business. As a result, the availability of funds for the repayment of
commercial business loans may be substantially dependent on the success of the
business itself (which, in turn, is likely to be dependent upon the general
economic environment). The Company's commercial business loans are sometimes,
but not always, secured by business assets. However, the collateral securing the
loans may depreciate over time, may be difficult to appraise and may fluctuate
in value based on the success of the business.
The Company recognizes the generally increased risks associated with
commercial business lending. LSB's commercial business lending policy emphasizes
credit file documentation and analysis of the borrower's character, capacity to
repay the loan, the adequacy of the borrower's capital and collateral as well as
an evaluation of the industry conditions affecting the borrower. Analysis of the
borrower's past, present and future cash flows is also an important aspect of
LSB's credit analysis.
12
<PAGE>
Loan Originations, Purchases and Sales
Real estate loans are originated by LSB's staff of salaried loan officers
and its residential mortgage loan originator who receive applications from
existing customers, walk-in customers, and referrals from realtors. All types of
loans may be originated in any of the Company's four offices.
While the Company originates both adjustable-rate and fixed-rate loans, its
ability to originate loans is dependent upon the relative customer demand for
loans in its market. Demand is affected by the interest rate environment.
Currently, all conforming fixed-rate residential mortgage loans with maturities
of 15 years and over are originated for sale in the secondary market. The
Company currently sells such loans primarily to FHLMC while retaining the
servicing rights. These loans are originated to satisfy customer demand and to
generate fee income and are sold to achieve the goals of the Company's
asset/liability management program.
When loans are sold, the Company retains the responsibility for collecting
and remitting loan payments, inspecting the properties, making certain that
insurance and real estate tax payments are made on behalf of borrowers, and
otherwise servicing the loans. The Company receives a servicing fee for
performing these services. The Company services for others mortgage loans that
it originated and sold amounting to $51.7 million at December 31, 1997.
The Company purchases a limited amount of participation interests in real
estate loans from other financial institutions outside its primary market area.
The Company currently has loan participations in Michigan and Illinois. The
Company carefully reviews and underwrites all loans to be purchased to insure
that they meet the Company's underwriting standards.
In periods of rising interest rates, the Company's ability to originate
large dollar volumes of real estate loans may be substantially reduced or
restricted, with a resultant decrease in related operating earnings. In
addition, the Company's ability to sell loans may substantially decrease as
potential buyers reduce their purchasing activities.
13
<PAGE>
The following table shows the loan and mortgage-backed security origination,
purchase, sale and repayment activities of the Company for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1995 1996 1997
--------- -------- -------
(In Thousands)
<S> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate - one- to four-family........................... $ 17,535 $15,050 $15,055
- multi-family................................ 5,544 7,872 3,249
- commercial.................................. 4,787 3,690 2,944
- construction, land and land development..... 1,710 48 2,644
Non-real estate - consumer.................................. 1,704 4,909 6,244
- commercial business......................... --- 375 ---
-------- -------- -------
Total adjustable-rate................................ 31,280 31,944 30,136
-------- -------- -------
Fixed-rate:
Real estate - one- to four-family(1)........................ 18,009 21,538 23,384
- multi-family................................ --- 344 ---
- commercial.................................. 30 878 706
- construction, land and land development..... 14,661 14,117 17,986
Non-real estate - consumer.................................. 1,282 3,111 3,194
- commercial business......................... 3,565 5,778 2,877
-------- -------- -------
Total fixed-rate..................................... 37,547 45,766 48,147
-------- -------- -------
Total loans originated............................... 68,827 77,710 78,283
-------- -------- -------
Purchases:
Real estate - one- to four-family........................... --- 406 180
- multi-family................................ 550 --- ---
- commercial.................................. 416 51 ---
Non-real estate - consumer.................................. --- --- ---
- commercial business......................... --- --- ---
-------- -------- -------
Total loans purchased................................ 966 457 180
-------- -------- -------
Mortgage-backed securities (excluding
REMICs and CMOs)........................................... --- --- ---
REMICs and CMOs............................................. --- --- ---
-------- -------- -------
Total mortgage-backed securities
purchased........................................... --- --- ---
-------- -------- -------
Total purchases...................................... 966 457 180
-------- -------- -------
Sales and Repayments:
Real estate - one- to four-family........................... 7,748 14,288 20,199
- multi-family................................ --- --- ---
- commercial.................................. 225 --- ---
Non-real estate - consumer................................... --- --- ---
- commercial business......................... --- --- ---
-------- -------- -------
Total loans sold..................................... 7,973 14,288 20,199
Principal repayments........................................ 28,301 37,062 38,883
-------- -------- -------
Total loans sold and repayments...................... 36,274 51,350 59,082
Mortgage-backed securities:
Principal repayments........................................ 714 738 574
Increase (decrease) in other items, net....................... 249 (34) (65)
-------- -------- -------
Net increase......................................... $ 33,054 $ 26,045 $18,742
======== ======== =======
</TABLE>
- -------------
(1) Includes $8.4 million, $6.8 million and $4.0 million of loans
originated during 1995, 1996 and 1997, respectively, which carry a
fixed rate of interest for the initial five or seven years and then
convert to an adjustable rate of interest for the remaining term of the
loan.
14
<PAGE>
Asset Quality
When a borrower fails to make a required payment on a loan, the Company
attempts to cause the delinquency to be cured by contacting the borrower. In the
case of residential loans, a late notice is sent for accounts seven or more days
delinquent. If the delinquency is not cured by the 15th day, the borrower will
be assessed a late charge. Additional written and oral contacts may be made with
the borrower between 20 and 30 days after the due date. If the delinquency
continues for a period of 60 days, the Company usually sends a default letter to
the borrower and, after 90 days, institutes appropriate action to foreclose on
the property. If foreclosed, the property is sold at public auction and may be
purchased by the Company. Delinquent consumer loans are handled in a generally
similar manner. The Company's procedures for repossession and sale of consumer
collateral are subject to various requirements under Indiana consumer protection
laws. The Company's levels of delinquent loans have not been significant in
recent years.
Delinquent Loans. The following table sets forth information concerning
delinquent loans at December 31, 1997, in dollar amounts and as a percentage of
each category of the Company's loan portfolio. The amounts presented represent
the total remaining principal balances of the related loans, rather than the
actual payment amounts which are overdue.
<TABLE>
<CAPTION>
Loans Delinquent For:
60-89 Days 90 Days and Over Total Delinquent Loans
--------------------------- --------------------------- ---------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family........ 5 $250 0.24% 1 $ 23 0.02% 6 $ 273 0.26%
Consumer.................. 1 15 0.11 --- --- --- 1 15 0.11
Commercial business........ --- --- --- 1 671 11.52 1 671 11.52
--- ------ --- ---- --- -----
Total 6 $265 0.14 2 $694 0.37 8 $ 959 0.52
=== ==== == ==== == =====
</TABLE>
15
<PAGE>
Non-Performing Assets. The table below sets forth the amounts and
categories of non-performing assets. Interest income on loans is accrued over
the term of the loans based upon the principal outstanding except where serious
doubt exists as to the collectibility of a loan, in which case the accrual of
interest is discontinued. Non-accruing loans at December 31, 1997 include a $1.4
million troubled debt restructurings (which involve forgiving a portion of
interest or principal on any loans or making loans at a rate or with a maturity
less than that customary in the Company's market) related to the Bennett leases.
Foreclosed assets include assets acquired in settlement of loans. The loan
amounts shown do not reflect reserves set up against such assets. See "-
Allowance for Loan Losses."
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- ---------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family ...................... $ 39 $ 39 $ -- $ 93 $ 23
Consumer ................................. 7 6 -- -- --
Commercial business ...................... -- -- -- 2,391 2,071(1)
-------- ---------- -------- --------
Total ............................... 46 45 -- 2,484 2,094
-------- -------- ---------- -------- --------
Accruing loans delinquent more than 90 days:
One- to four-family ...................... 21 -- -- -- --
-------- -------- ---------- -------- --------
Total ................................. 21 -- -- -- --
-------- -------- ---------- -------- --------
Total non-performing assets ................ $ 67 $ 45 $ -- $ 2,484 $ 2,094
======== ======== ========== ======== ========
Total as a percentage of total assets ...... 0.21% 0.06% 0.04% 1.35% 1.01%
======== ======== ========== ======== ========
Total assets ............................... $110,697 $124,339 $ 158,973 $184,607 $206,584
======== ======== ========== ======== ========
</TABLE>
- --------
(1) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Comparison of Operating Results for the Years Ended December 31,
1996 and December 31, 1997 - Provision for Loan Losses" in the Annual Report for
a discussion on Bennett.
For the year ended December 31, 1997, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms was $185,000, none of which was included in interest
income.
Classified Assets. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities considered by the
Office of Thrift Supervision ("OTS") to be of lesser quality, as "substandard,"
"doubtful" or "loss." An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized by
the "distinct possibility" that the insured institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as "doubtful" have all
of the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the institution to sufficient risk to warrant
classification in one of the
16
<PAGE>
aforementioned categories but possess weaknesses are required to be designated
"special mention" by management.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the OTS and the FDIC, which may order the establishment of
additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Bank regularly
reviews the problem assets in its portfolio to determine whether any assets
require classification in accordance with applicable regulations. At December
31, 1997, the Bank had classified $2.0 million of its loans as substandard,
$671,000 as doubtful and none as loss. At December 31, 1997, the Bank had
designated $1.1 million in loans as special mention.
Other Loans of Concern. Included in other loans of concern are certain
potential problem loans which are classified as substandard or have been
categorized as special mention that management believes are adequately secured
and for which no material loss is expected, but as to which certain
circumstances may cause the borrowers to be unable to comply with the present
loan repayment terms at some future date. Such potential problem loans consist
primarily of (I) a single family residence and a multi-family residential rental
property to a single borrower with outstanding balances of $346,000 at December
31, 1997, to which management has concerns as to the cash flow of the borrower;
(ii) multiple loans to a single borrower secured by a retail store and the
personal residence of the borrower with an outstanding balance of $274,000 at
December 31, 1997 (which was restructured during 1988 whereby interest past due
was written as a separate note due and payable when the borrower's other
outstanding debt has been paid off), where the retail store is experiencing cash
flow problems; (iii) multiple loans to a single borrower secured by one- to
four-family residential rental property and a multi-family residential rental
property with an outstanding balance of $287,000 at December 31, 1997, where
management has concerns about the cash flow of the borrower; and (iv) multiple
loans to a single borrower, partially secured by a residence and equipment, with
an outstanding balance of $196,000 at December 31, 1997, where management has
concerns about the viability of the underlying business. The majority of the
remaining classified assets are single loans to borrowers for residential
property.
Allowance for Loan Losses. The Company establishes an allowance for
loan losses based on a systematic analysis of risk factors in the loan
portfolio. This analysis includes evaluation of concentrations of credit, past
loss experience, current economic conditions, amount and composition of the loan
portfolio, estimated fair value of the underlying collateral, loan commitments
outstanding, delinquencies, industry standards and other factors. Because the
Company has had only nominal loan losses during its recent past, management also
considers the loss experience of similar portfolios in comparable lending
markets as well as using the services of a consultant to assist in the
evaluation of its growing commercial real estate and business loan portfolios.
Management's analysis results
17
<PAGE>
in the allocation of allowance amounts to each loan type. Although, management
believes it uses the best information available to make such determinations,
future adjustments to reserves may be necessary, and net income could be
significantly affected, if circumstances differ substantially from the
assumptions used in making the initial determinations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Results of Operations - Provision for Loan Losses."
The following table sets forth an analysis of the Company's allowance
for loan losses.
<TABLE>
<CAPTION>
Year Ended December
------------------------------------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period ....... $ 916 $ 922 $ 926 $ 922 $1,715
Charge-offs:
Consumer ........................... 2 0 6 7 3
Commercial business ................ 0 0 0 0 319
------ ------ ------ ------ ------
Total Charge-offs ............... 2 0 6 7 322
------ ------ ------ ------ ------
Recoveries:
One- to four-family ................ 0 15 0 0 11
Consumer ........................... 4 4 2 0 2
Commercial business ................ 4 0 0 0 0
------ ------ ------ ------ ------
Total recoveries ................ 8 19 2 0 13
------ ------ ------ ------ ------
Net charge-offs (recoveries) ......... (6) (19) 4 7 309
Additions charged to operations ...... 0 (15) 0 800 72
------ ------ ------ ------ ------
Balance at end of period ............. $ 922 $ 926 $ 922 $1,715 $1,478
====== ====== ====== ====== ======
Net charge-offs to average loans ..... (0.01%) (0.02%) -- -- 0.18%
outstanding
Allowance for loan losses to non- 1376.1% 2057.7% -- 69.0% 70.6%
performing loans......................
Allowance for loan losses to net 1.17% 0.94% 0.70% 1.08% 0.83%
loans at end of period................
</TABLE>
18
<PAGE>
The allocation of the Company's allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------- -------------------------------- --------- ----------------------------------
1993 1994 1995
---------------------- -------------------------------- --------------------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Amount Loan in Each Amount Loan in Each Amount Loan in Each
of Amounts Category of Amounts Category of Amounts Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- -------- ------ --------- -------- ------ --------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
One- to four-family..... $ 138 $ 60,229 74.89% $ 221 $ 69,139 68.53% $ 262 $ 86,231 62.40%
Multi-family............ 29 5,972 7.43 76 7,643 7.58 120 12,044 8.72
Commercial real estate.. 65 5,565 6.92 138 10,712 10.62 181 15,034 10.88
Land and land
development............ 7 2,153 2.68 18 2,915 2.89 28 3,880 2.81
Construction............ 4 1,959 2.44 22 3,251 3.22 40 10,379 7.51
Consumer................ 24 3,609 4.47 32 4,620 4.57 36 6,048 4.37
Commercial business..... 9 939 1.17 29 2,614 2.59 51 4,570 3.31
Unallocated............. 646 --- --- 390 --- --- 204 --- ---
----- -------- ------ ---- -------- ------ ----- -------- ------
Total................ $ 922 $ 80,426 100.00% $926 $100,894 100.00% $ 922 $138,186 100.00%
===== ======== ====== ==== ======== ====== ===== ======== ======
</TABLE>
[RESTUBBED FROM TABLE ABOVE]
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------
1996 1997
------------------------------------- ---------------------------------
Percent Percent
of Loans of Loans
Amount Loan in Each Amount Loan in Each
of Amounts Category of Amounts Category
Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans
--------- -------- ----- --------- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate:
One- to four-family ....... $ 146 $ 96,987 57.72% $ 145 $104,416 56.39
Multi-family .............. 99 19,610 11.67 103 20,382 11.01
Commercial real estate .... 128 19,032 11.33 130 20,888 11.28
Land and land
development .............. 39 3,334 1.98 75 6,020 3.25
Construction .............. 7 14,447 8.60 28 14,326 7.74
Consumer .................. 51 9,808 5.83 74 13,298 7.19
Commercial business ....... 997 4,825 2.87 729 5,823 3.14
Unallocated ............... 248 -- -- 194 -- --
-------- -------- ------ ------ -------- ------
Total .................. $ 1,715 $168,043 100.00% $1,478 $185,153 100.00%
======== ======== ====== ====== ======== ======
</TABLE>
19
<PAGE>
Investment Activities
LSB must maintain minimum levels of securities that qualify as liquid
assets under OTS regulations. Liquidity may increase or decrease depending upon
the availability of funds and comparative yields on investments in relation to
the return on loans. Historically, the Company has maintained liquid assets at
levels above the minimum requirements imposed by the OTS regulations and above
levels believed adequate to meet the requirements of normal operations,
including potential deposit outflows. Cash flow projections are regularly
reviewed and updated to assure that adequate liquidity is maintained. At
December 31, 1997 the Company's liquidity ratio (liquid assets as a percentage
of net withdrawable savings deposits and current borrowings) was 7.76%. The
Company's level of liquidity is a result of management's asset/liability
strategy. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset/Liability Management" and "-Liquidity and Capital
Resources" in the Annual Report and "Regulation Liquidity."
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in investment grade
commercial paper and corporate debt securities and mutual funds whose assets
conform to the investments that a federally chartered savings institution is
otherwise authorized to make directly.
Generally, the investment policy of the Company is to invest
funds among various categories of investments and maturities based upon the
Company's asset/liability management policies, concern for the highest
investment quality, liquidity needs and performance objectives.
At December 31, 1997, the Company's securities portfolio (excluding
FHLB Stock) totaled $13.4 million, or 6.51% of total assets. As of such date,
the Bank also had a $2.6 million investment in the common stock of the Federal
Home Loan Bank ("FHLB") of Indianapolis in order to satisfy the requirement for
membership in such institution. It is the Company's general policy to purchase
securities which are U.S. Government securities, investment grade municipal and
corporate bonds, commercial paper, federal agency obligations, and
interest-bearing deposits with the FHLB.
The Company owned $3.3 million of mortgage-backed securities at
December 31, 1997, all of which were insured or guaranteed by the Federal
National Mortgage Association ("FNMA") or the FHLMC. Accordingly, management
believes that the Company's mortgage-backed securities are generally more
resistant to credit problems than loans, which generally lack such insurance or
guarantees. Because these securities represent a passthrough of principal and
interest from underlying individual 30-year mortgages, such securities do
present prepayment risk. Any such individual security contains mortgages that
can be prepaid at any time over the life of the security. In a rising interest
rate environment the underlying mortgages are likely to extend their lives
versus a stable or declining rate environment. A declining rate environment can
result in rapid prepayment. There is no certainty as to the security life or
speed of prepayment. The geographic makeup and correlated economic conditions of
the underlying mortgages also play an important role in determining prepayment.
In addition to prepayment risk, interest rate risk is inherent in holding any
20
<PAGE>
debt security. As interest rates rise the value of the security declines and
conversely as interest rates decline values rise. Adjustable-rate
mortgage-backed securities have the advantage of moving their interest rate
within limits with the contractual index used, subject to the risk of
prepayment. Interest rate adjustments to $1.4 million of the Company's
adjustable-rate mortgage-backed securities are tied to a lagging index, the 11th
District cost of funds index, while $1.3 million are tied to a current index,
specifically, the six month or twelve month Treasury bill rates or the one month
or three month LIBOR rates. At December 31, 1997, 86.04% of the Company's
mortgage-backed securities consisted of adjustable-rate mortgage-backed
securities.
Mortgage-backed securities can serve as collateral for borrowings and,
through sales and repayments, as a source of liquidity. Under the Bank's
risk-based capital requirement, mortgage- backed securities have a risk weight
of 20% in contrast to the 50% risk weight carried by residential loans. See
"Regulation."
21
<PAGE>
The following table sets forth the composition of the Company's
securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------
1995 1996 1997
------------------------ -------------------- ----------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
<S> <C> <C> <C> <C> <C> <C>
Debt securities
U.S. government securities................ $1,994 22.25% $1,003 19.40% $2,525 35.37%
Federal agency obligations................ 1,007 11.24 354 6.85 507 7.11
Municipal bonds........................... 1,703 19.00 984 19.02 1,283 17.97
Corporate bonds........................... 1,268 14.15 255 4.93 224 3.14
Commercial paper.......................... 1,489 16.62 --- --- --- ---
------ ------ ------ ------ ------ ------
Subtotal............................... 7,461 83.26 2,596 50.20 4,539 63.59
------ ------ ------ ------ ------ ------
FHLB stock.................................. 1,500 16.74 2,575 49.80 2,600 36.41
------ ------ ------ ------ ------ ------
Total debt securities and FHLB stock........ $8,961 100.00% $5,171 100.00% $7,139 100.00
====== ====== ====== ====== ====== ======
Average remaining life of debt securities... 1.02 years .58 years 3.10 years
Other interest-earning assets:
Interest-bearing deposits with FHLB....... $3,595 100.00% $5,410 100.00% $5,580 100.00%
====== ====== ====== ====== ====== ======
Mortgage-backed securities
FNMA certificates......................... $2,598 53.74% $2,166 54.84% $1,868 56.20%
FHLMC certificates........................ 2,236 46.26 1,784 45.16 1,456 43.80
------ ------ ------ ------ ------ ------
Total mortgage-backed securities....... $4,834 100.00% $3,950 100.00% $3,324 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
22
<PAGE>
The following table sets forth the composition and contractual
maturities of the Company's securities portfolio at December 31, 1997. At
December 31, 1997, all of the Company's securities were classified as available
for sale. The weighted average yields on tax exempt obligations have been
computed on a tax equivalent basis.
<TABLE>
<CAPTION>
December 31, 1997
Less Than 1 to 5 5 to 10 Over Total Investment
1 Year Years Years 10 Years Securities
-------- ------- ------- -------- -----------
Carrying Carrying Carrying Carrying Carrying Market
Value Value Value Value Value Value
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. government securities............ $ --- $2,525 $ --- $ --- $2,525 $2,525
Federal agency obligations............ --- 507 --- --- 507 507
Municipal bonds....................... 301 732 --- 250 1,283 1,283
Corporate bonds....................... --- 224 --- --- 224 224
FNMA certificates..................... --- 1,868 --- --- 1,868 1,868
FHLMC certificates.................... 464 992 --- --- 1,456 1,456
------- -------- ---------- ----- ------- -----
Total investment securities........... $765 $6,848 $ --- 250 $7,863 $7,863
===== ====== ========= ===== ====== ======
Weighted average yield................ 5.44% 6.22% ---% 6.00% 6.14% 6.14%
</TABLE>
Sources of Funds
General. The Company's primary sources of funds are deposits, repayment
and prepayment of loans, interest earned on or maturation of investment
securities and short-term investments, borrowings and funds provided from
operations.
Deposits. LSB offers a variety of deposit accounts. The Company's
deposits consist of passbook and statement savings accounts, money market
accounts, NOW accounts and certificate accounts. The Company only solicits
deposits from its primary market area and does not use brokers to obtain
deposits. The Company relies primarily on competitive pricing policies,
advertising, and customer service to attract and retain these deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition. The variety of deposit accounts offered by the Company has allowed
it to be competitive in obtaining funds and to respond with flexibility to
changes in consumer demand. The Company manages the pricing of its deposits in
keeping with its asset/liability management, profitability and growth
objectives. Based on its experience, the Company believes that its savings,
interest and noninterest-bearing checking accounts are relatively stable sources
of deposits. However, the ability of the Company to attract and maintain
certificates of deposit, and the rates paid on these deposits, has been and will
continue to be significantly affected by market conditions.
23
<PAGE>
The following table sets forth the savings flows at the Company during
the periods indicated.
Year Ended December 31,
-------------------------------------------
1995 1996 1997
--------- --------- ---------
(Dollars in Thousands)
Opening balance ........... $ 107,764 $ 109,977 $ 116,949
Deposits .................. 350,521 472,666 559,910
Withdrawals ............... (353,169) (469,506) (543,396)
Interest credited ......... 4,861 3,812 4,223
--------- --------- ---------
Ending balance ............ $ 109,977 $ 116,949 $ 137,686
========= ========= =========
Net increase (decrease) ... $ 2,213 $ 6,972 $ 20,737
========= ========= =========
Percent increase (decrease) 2.05% 6.34% 17.73%
========= ========= =========
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Company at the dates
indicated.
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------------------------------
1995 1996 1997
--------------------- --------------------- ---------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------- ------ -------- ------ -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transaction and Savings Deposits:
- ---------------------------------
Noninterest-bearing .......................... $ 3,106 2.82% $ 4,127 3.53% $ 5,097 3.70%
Savings accounts (3.05% at December 31, 1997) 12,050 10.95 12,538 10.71 13,958 10.13
NOW Accounts (0-2.00% at December 31, 1997) .. 11,341 10.30 11,664 9.97 15,214 11.04
Money Market Accounts (3.35-3.67% at
December 31, 1997) ......................... 10,272 9.33 9,052 7.74 8,254 5.99
-------- ------ -------- ------ -------- ------
Total Non-Certificates ....................... 36,769 33.40 37,381 31.95 42,523 30.86
-------- ------ -------- ------ -------- ------
Certificates:
- -------------
2.00 - 3 99%................................ 5 0.00 64 0.05 95 0.07
4.00 - 5 99%................................ 43,076 39.14 48,677 41.60 51,847 37.64
6.00 - 7 99%................................ 30,120 27.37 30,820 26.33 43,214 31.37
8.00 - and greater .......................... 7 0.01 7 0.01 7 0.01
-------- ------ -------- ------ -------- ------
Total certificates .......................... 73,208 66.52 79,568 67.99 95,163 69.09
Accrued interest ............................ 85 0.08 73 0.06 62 0.05
-------- ------ -------- ------ -------- ------
Total deposits .............................. $110,062 100.00 $117,022 100.00 $137,748 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
24
<PAGE>
The following table shows rate and maturity information for the
Company's certificates of deposit as of December 31, 1997.
<TABLE>
<CAPTION>
2.00- 4.00- 6.00- 8.00- Percent
3.99% 5.99% 7.99% or greater Total of Total
------- ------- ------- ----------- ------- ---------
(Dollars in Thousands)
Certificate accounts maturing in quarter ending:
<S> <C> <C> <C> <C> <C> <C>
March 31, 1998...................... $ 44 $13,797 $1,522 $ --- $15,363 16.16%
June 30, 1998....................... 45 14,379 2,209 --- 16,633 17.48
September 30, 1998.................. 5 9,395 8,015 --- 17,415 18.30
December 31, 1998................... 1 4,833 2,806 7 7,647 8.04
March 31, 1999...................... --- 2,573 3,956 --- 6,529 6.86
June 30, 1999....................... --- 1,468 7,923 --- 9,391 9.87
September 30, 1999.................. --- 1,659 4,834 --- 6,493 6.82
December 31, 1999................... --- 953 4,008 --- 4,961 5.21
March 31, 2000...................... --- 857 2,259 --- 3,116 3.27
June 30, 2000....................... --- 568 1,958 --- 2,526 2.65
September 30, 2000.................. --- 391 944 --- 1,335 1.40
December 31, 2000................... --- 114 30 --- 144 0.15
Thereafter.......................... --- 860 2,750 --- 3,610 3.79
----- --------- -------- ----- --------- ---------
Total............................ $ 95 $ 51,847 $43,214 $ 7 $95,163 100 00%
==== ======== ======= ===== ======= ======
Percent of total................. 0.10% 54.48% 45.41% 0.01% 100.00%
==== ===== ===== ==== ======
</TABLE>
The following table indicates the amount of the Company's certificates
of deposit by time remaining until maturity as of December 31, 1997.
<TABLE>
<CAPTION>
Maturity
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
-------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000 $13,253 $12,020 $22,223 $32,066 $79,562
Certificates of deposit of $100,000 or more 2,100 3,818 2,660 6,039 14,617
Public funds(1) ........................... 10 795 179 -- 984
------- ------- ------- ------- -------
Total certificates of deposit ............. $15,363 $16,633 $25,062 $38,105 $95,163
======= ======= ======= ======= =======
</TABLE>
(1) Deposits from governmental and other public entities.
Borrowings. LSB's other available sources of funds include borrowings
from the FHLB of Indianapolis and other borrowings. As a member of the FHLB of
Indianapolis, the Company is required to own capital stock in the FHLB and is
authorized to apply for borrowings from the FHLB. Each FHLB credit program has
its own interest rate, which may be fixed or variable, and
25
<PAGE>
have a range of maturities. The FHLB of Indianapolis may prescribe the
acceptable uses for these, as well as limitations on the size of the borrowings
and repayment provisions.
The Company utilizes FHLB borrowings as part of its asset/liability
management strategy in order to cost effectively extend the maturity of its
liabilities. The Company may be required to pay a commitment fee upon
application and may be subject to a prepayment fee if the advance is prepaid by
the Company. At December 31, 1997, the Company had $50.0 million in advances
from the FHLB and the capacity to borrow up to an additional $13.8 million. At
that date $16.0 million of such advances have scheduled maturities in 1998;
$11.0 million in 1999; $4 million in 2000; and $19.0 million in 2002.
The following table sets forth the maximum month-end balance and
average balance of FHLB advances and other borrowings for the periods indicated.
Year Ended December 31,
---------------------------------------
1995 1996 1997
------- ------- -------
(In Thousands)
Maximum Balance:
- ----------------
FHLB advances ................ $29,364 $50,000 $50,000
Other borrowings ............. 276 243 218
Average Balance:
- ----------------
FHLB advances ................ $17,947 $39,000 $46,125
Other borrowings ............. 263 234 204
The following table sets forth certain information as to the Company's
borrowings at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1995 1996 1997
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances .................................... $29,364 $50,000 $50,000
Other borrowings ................................. 250 220 189
------- ------- -------
Total borrowings ............................ $29,614 $50,220 $50,189
======= ======= =======
Weighted average interest rate of FHLB advances .. 5.90% 5.65% 5.94%
Weighted average interest rate of other borrowings 5.50% 5.50% 5.50%
</TABLE>
26
<PAGE>
Subsidiary and Other Activities
Federal associations generally may invest up to 2% of their assets in
service corporations, plus an additional 1% of assets for community purposes. In
addition, federal associations may invest, in an amount up to 50% of their total
capital, in conforming loans to their service corporations in which they own
more than 10% of the capital stock. Federal associations are also permitted to
invest an unlimited amount in operating subsidiaries engaged solely in
activities which a federal association may engage in directly.
The Bank owns a service corporation, L.S.B. Service Corporation
("LSBSC"). In April 1994, the Company made an initial investment of $51,000 in
LSBSC when it became a 14.16% limited partner in a low-income housing project in
Lafayette, Indiana, pursuant to a 10 year commitment totaling $500,000. In
February 1995, the Company made a second scheduled investment of $71,000 in the
same project, followed by a third scheduled investment of $67,000 in February of
1996 and a fourth scheduled investment of $67,000 in February of 1997. During
1997, LSBSC received $36,000 in tax credit related to its investment in the low
income housing project discussed above and recorded a net profit of $12,000. At
December 31, 1997, the Bank's total investment in LSBSC was $266,000.
The Bank formed Lafayette Insurance and Investments, Inc. ("LIII"), an
Indiana corporation, on December 31, 1996. LIII began offering various
insurance, annuity and investment products and services to the Bank's customers
in June of 1997. At December 31, 1997, the Bank's total investment in LIII was
$16,000. Because much of the first six months of operation was spent laying
groundwork for future activity, LIII recognized losses of $24,000 during this
period.
Competition
LSB faces strong competition, both in originating real estate and other
loans and in attracting deposits. Competition in originating real estate loans
comes primarily from other savings institutions, commercial banks, credit unions
and mortgage bankers making loans secured by real estate located in Tippecanoe
County, the Company's primary market area. Other savings institutions,
commercial banks, credit unions and finance companies provide vigorous
competition in consumer lending.
The Company attracts all of its deposits through its branch offices,
primarily from the communities in which those branch offices are located;
therefore, competition for those deposits is principally from other savings
institutions, commercial banks and credit unions located in the same communities
as well as mutual funds and other financial intermediaries. The Company competes
for these deposits by offering a variety of deposit accounts at competitive
rates, convenient business hours and convenient branch locations with
interbranch deposit and withdrawal privileges.
There are 12 other savings institutions and banks in LSB's primary
market area. The Company estimates its share of the savings market and mortgage
loans in Tippecanoe County to both be approximately 9%.
27
<PAGE>
REGULATION
General
Lafayette is a federally chartered savings bank, the deposits of which
are federally insured and backed by the full faith and credit of the United
States Government. Accordingly, Lafayette is subject to broad federal regulation
and oversight extending to all its operations. Lafayette is a member of the FHLB
of Indianapolis and is subject to certain limited regulation by the Board of
Governors of the Federal Reserve System ("Federal Reserve Board"). As the thrift
holding company of Lafayette, the Company also is subject to federal regulation
and oversight. The purpose of the regulation of the Company and other holding
companies is to protect subsidiary savings associations. Lafayette is a member
of the BIF and the deposits of Lafayette are insured by the FDIC. As a result,
the FDIC has certain regulatory and examination authority over Lafayette.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations
The OTS has extensive authority over the operations of savings
associations. As part of this authority, Lafayette is required to file periodic
reports with the OTS and is subject to periodic examinations by the OTS and the
FDIC. The last regular OTS and FDIC examinations of Lafayette were as of
September 1997 and March 1992, respectively. When these examinations are
conducted by the OTS and the FDIC, the examiners may require Lafayette to
provide for higher general or specific loan loss reserves. All savings
associations are subject to a semi-annual assessment, based upon the savings
association's total assets, to fund the operations of the OTS. Lafayette's OTS
assessment for the year ended December 31, 1997 was $54,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including Lafayette and the Company.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of
Lafayette is prescribed by federal laws, and it is prohibited from engaging in
any activities not permitted by such laws. For instance, no savings institution
may invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also generally authorized
to branch nationwide. Lafayette is in compliance with the noted restrictions.
Lafayette's general permissible lending limit for loans-to-one-borrower
is equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain
28
<PAGE>
readily marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At December 31, 1997, Lafayette's lending limit
under this restriction was $2.7 million. See "Lending Activities - General."
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan. A failure to submit a plan or to comply
with an approved plan will subject the institution to further enforcement
action.
Insurance of Accounts and Regulation by the FDIC
Lafayette is a member of the BIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the United States Government. As insurer,
the FDIC imposes deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC-insured institutions. It also
may prohibit any FDIC-insured institution from engaging in any activity the FDIC
determines by regulation or order to pose a serious risk to the BIF or the
Savings Association Insurance Fund (the "SAIF"). The FDIC also has the authority
to initiate enforcement actions against savings associations, after giving the
OTS an opportunity to take such action, and may terminate the deposit insurance
if it determines that the institution has engaged in unsafe or unsound
practices, or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period.
As is the case with the SAIF, the FDIC is authorized to adjust the
insurance premium rates for banks that are insured by the BIF, such as
Lafayette, in order to maintain the reserve ratio of the BIF at 1.25% of BIF
insured deposits. As a result of the BIF reaching its statutory reserve ratio
the FDIC revised the premium schedule for BIF insured institutions to provide a
range of .04% to .31% of deposits effective in the third quarter of 1995. In
addition, the BIF rates were further revised, effective January 1996, to provide
a range of 0% to .27% with a minimum annual assessment of $2,000. The insurance
premiums paid by institutions insured by the SAIF were not adjusted, however,
and remained at the range previously applicable to both BIF and SAIF insured
institutions which was .23% to .31% of deposits. In addition, BIF insured
institutions are required to contribute to the cost if financial bonds issued to
finance the cost of resolving thrift failures in the 1980s. Until the earlier of
the year 2000 or when the BIF and SAIF are merged BIF deposits will only be
assessed
29
<PAGE>
at a rate of 20% of the rate for SAIF deposits. The rate currently set for BIF
and SAIF deposits is 1.3 basis points and 6.5 basis points, respectively.
On September 30, 1996 federal legislation was enacted that required the
SAIF to be recapitalized with a one-time assessment on virtually all SAIF
insured institutions, equal to 65.7 basis points on SAIF insured deposits
maintained by those institutions as of March 31, 1995.
Regulatory Capital Requirements
Federally insured savings associations, such as Lafayette, are required
to maintain a minimum level of regulatory capital. The OTS has established
capital standards, including a tangible capital requirement, a leverage ratio
(or core capital) requirement and a risk-based capital requirement applicable to
such savings associations. These capital requirements must be generally as
stringent as the comparable capital requirements for national banks. The OTS is
also authorized to impose capital requirements in excess of these standards on
individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets. Tangible capital generally includes common stockholders'
equity and retained income, and certain noncumulative perpetual preferred stock
and related income. In addition, all intangible assets, other than a limited
amount of purchased mortgage servicing rights, must be deducted from tangible
capital. At December 31, 1997, the Company did not have any significant
intangible assets.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. The Bank had no
such excludable investments at December 31, 1997.
At December 31, 1997, Lafayette had tangible capital of $16.5 million,
or 8.01% of adjusted total assets, which is $13.4 million above the minimum
requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At December 31, 1997,
Lafayette had no intangibles which were subject to these tests.
At December 31, 1997, Lafayette had core capital equal to $16.5
million, or 8.01% of adjusted total assets, which is $10.3 million above the
minimum leverage ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and
30
<PAGE>
supplementary capital. Supplementary capital consists of certain permanent and
maturing capital instruments that do not qualify as core capital and general
valuation loan and lease loss allowances up to a maximum of 1.25% of
risk-weighted assets. Supplementary capital may be used to satisfy the
risk-based requirement only to the extent of core capital. The OTS is also
authorized to require a savings association to maintain an additional amount of
total capital to account for concentration of credit risk and the risk of
non-traditional activities. At December 31, 1997, Lafayette had no capital
instruments that qualify as supplementary capital and $1.0 million of general
loss reserves, all of which currently qualifies as supplementary capital.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. Lafayette had no such
exclusions from capital and assets at December 31, 1997.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.
OTS regulations also require that every savings association with more
than normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings association, greater than 2% of the present value of its
assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule will not become effective until the OTS
evaluates the process by which savings associations may appeal an interest rate
risk deduction determination. It is uncertain as to when this evaluation may be
completed. Any savings association with less than $300 million in assets and a
total capital ratio in excess of 12% is exempt from this requirement unless the
OTS determines otherwise.
On December 31, 1997 Lafayette had total capital of $17.6 million
(including $16.5 million in core capital and $1.0 million in qualifying
supplementary capital) and risk-weighted assets of $146.6 million (including
$18.7 million in converted off-balance sheet assets); or total capital of 11.98%
of risk-weighted assets. This amount was $5.8 million above the 8% requirement
in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire
31
<PAGE>
another institution, establish a branch or engage in any new activities, and
generally may not make capital distributions. The OTS is authorized to impose
the additional restrictions that are applicable to significantly
undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized.
Any undercapitalized association is also subject to the general
enforcement authority of the OTS and the FDIC, including the appointment of a
conservator or a receiver. The OTS is also generally authorized to reclassify an
association into a lower capital category and impose the restrictions applicable
to such category if the institution is engaged in unsafe or unsound practices or
is in an unsafe or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on
Lafayette may have a substantial adverse effect on Lafayette's operations and
profitability and the value of its common stock. Company shareholders do not
have preemptive rights, and therefore, if the Company is directed by the OTS or
the FDIC to issue additional shares of common stock, such issuance may result in
the dilution in the percentage of ownership of the Company.
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions on savings associations
with respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit a
savings association from declaring or paying any dividends or from repurchasing
any of its stock if, as a result, the regulatory capital of the association
would be reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to stock conversion.
Generally, savings associations, such as Lafayette, that before and
after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of their net income for the most recent four quarter
period. However, an association deemed to be in need of more than
32
<PAGE>
normal supervision by the OTS may have its dividend authority restricted by the
OTS. The Bank may pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distributions need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not, meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day notice period based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
supervisory concern, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
Liquidity
All savings associations, including Lafayette, are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. For a discussion of what the Company
includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
in the Annual Report to Stockholders. This liquid asset ratio requirement may
vary from time to time (between 4% and 10%) depending upon economic conditions
and savings flows of all savings associations. At the present time, the minimum
liquid asset ratio is 4%. Penalties may be imposed upon associations for
violations of either liquid asset ratio requirement. At December 31, 1997,
Lafayette was in compliance with both requirements, with an overall liquid asset
ratio of 7.76%.
Qualified Thrift Lender Test
All savings associations, including Lafayette, are required to meet a
qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings association to have at least 65% of its
portfolio assets (as defined by regulation) in qualified thrift investments on a
monthly average for nine out of every 12 months on a rolling basis. As an
alternative, the savings association may maintain 60% of its assets in those
assets specified in Section 7701(a)(19) of the Internal Revenue Code of 1986, as
amended, (the "Code"). Under either test, such assets primarily consist of
residential housing related loans and investments. At December 31, 1997,
Lafayette met the test and has always met the test since its effectiveness.
33
<PAGE>
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of
Lafayette, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by Lafayette.
An unsatisfactory rating may be used as the basis for the denial of an
application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA in 1995. Due to the heightened attention being given to
the CRA in the past few years, the Bank may be required to devote additional
funds for investment and lending in its local community. The Bank was examined
for CRA compliance in April 1996 and received a rating of outstanding.
Transactions with Affiliates
Generally, transactions between a savings association or its
subsidiaries and its affiliates are required to be on terms as favorable to the
association as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the association's capital. Affiliates of Lafayette include the Company and any
company which is under common control with Lafayette. In addition, a savings
association may not lend to any affiliate engaged in activities not permissible
for a bank holding company or acquire the securities of most affiliates.
Lafayette's subsidiaries are not deemed affiliates, however; the OTS has the
discretion to treat subsidiaries of savings associations as affiliates on a case
by case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes
34
<PAGE>
also impose restrictions on loans to such persons and their related interests.
Among other things, such loans must be made on terms substantially the same as
for loans to unaffiliated individuals.
Holding Company Regulation
The Company is a unitary thrift holding company subject to regulatory
oversight by the OTS. As such, the Company is required to register and file
reports with the OTS and is subject to regulation and examination by the OTS. In
addition, the OTS has enforcement authority over the Company and its non-savings
association subsidiaries which also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
association.
As a unitary thrift holding company, the Company generally is not
subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple thrift
holding company, and the activities of the Company and any of its subsidiaries
(other than Lafayette or any other savings association) would become subject to
such restrictions unless such other associations each qualify as a QTL and were
acquired in a supervisory acquisition.
If Lafayette fails the QTL test, the Company must obtain the approval
of the OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
thrift holding companies or their subsidiaries. In addition, within one year of
such failure the Company must register as, and will become subject to, the
restrictions applicable to bank holding companies. The activities authorized for
a bank holding company are more limited than are the activities authorized for a
unitary or multiple thrift holding company. See "--Qualified Thrift Lender
Test."
The Company must obtain approval from the OTS before acquiring control
of any savings association. Such acquisitions are generally prohibited if they
result in a multiple thrift holding company controlling savings associations in
more than one state. However, such interstate acquisitions are permitted based
on specific state authorization or in a supervisory acquisition of a failing
savings association.
Federal Securities Law
The stock of the Company is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is
subject to the information, proxy solicitation, insider trading restrictions and
other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
35
<PAGE>
Federal Reserve System
The Federal Reserve Board requires all depository institutions to
maintain non-interest-bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts).
At December 31, 1997, Lafayette was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements that
may be imposed by the OTS. See "--Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
Lafayette is a member of the FHLB of Indianapolis, which is one of 12
regional FHLBs, that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures, established
by the board of directors of the FHLB which are subject to the oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.
As a member, Lafayette is required to purchase and maintain stock in
the FHLB of Indianapolis. At December 31, 1997, Lafayette had $2.6 million in
FHLB stock, which was in compliance with this requirement. In past years,
Lafayette has received substantial dividends on its FHLB stock. Over the past
five calendar years such dividends have averaged 7.51% and were 7.99% for
calendar year 1997. For the year ended December 31, 1997, dividends paid by the
FHLB of Indianapolis to Lafayette totaled $207,000, which constitutes a $50,000
increase from the amount of dividends received in calendar year 1996.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies
targeted for community investment and low- and moderate-income housing projects.
These contributions have affected adversely the level of FHLB dividends paid and
could continue to do so in the future. These contributions could also have an
adverse effect on the value of FHLB stock in the future. A reduction in value of
Lafayette's FHLB stock may result in a corresponding reduction in Lafayette's
capital.
Federal and State Taxation
Savings associations such as the Bank that meet certain definitional
tests relating to the composition of assets and other conditions prescribed by
the Code had been permitted to establish reserves for bad debts and to make
annual additions thereto which may, within specified formula
36
<PAGE>
limits, be taken as a deduction in computing taxable income for federal income
tax purposes. The amount of the bad debt reserve deduction for "non-qualifying
loans" was computed under the experience method. The amount of the bad debt
reserve deduction for "qualifying real property loans" (generally loans secured
by improved real estate) may be computed under either the experience method or
the percentage of taxable income method (based on an annual election).
Under the experience method, the bad debt reserve deduction was an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
The percentage of specially computed taxable income that was used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") was 8%. The
percentage bad debt deduction thus computed was reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permits qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction).
Under the percentage of taxable income method, the percentage bad debt
deduction cannot exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (I) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for "non-qualifying loans" equals the amount by
which 12% of the amount comprising savings accounts at year-end exceeds the sum
of surplus, undivided profits and reserves at the beginning of the year.
In August 1996, legislation was enacted that repeals the reserve
method of accounting (including the percentage of taxable income method) used by
many thrifts, including the Bank, to calculate their bad debt reserve for
federal income tax purposes. As a result, thrifts such as the Bank must
recapture that portion of the reserve that exceeds the amount that could have
been taken under the specific charge-off method for post 1987 tax years. The
legislation also requires thrifts to account for bad debts for federal income
tax purposes on the same basis as commercial banks for tax years beginning after
December 31, 1995. The recapture will occur over a six year period, the
commencement of which will be delayed until the first taxable year beginning
after December 31, 1997, provided the institution meets certain residential
lending requirements. The management of the Company does not believe that the
legislation will have a material impact on the Company or the Bank.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environmental tax equal to
37
<PAGE>
0.12% of the excess of alternative minimum taxable income for the taxable year
(determined without regard to net operating losses and the deduction for the
environmental tax) over $2 million.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of December 31, 1997, the Bank's Excess for this purpose totaled
approximately $1.9 million.
The Company with the Bank and its subsidiary files consolidated
federal income tax returns on a calendar year basis using the accrual method of
accounting. Savings associations that file federal income tax returns as part of
a consolidated group are required by applicable Treasury regulations to reduce
their taxable income for purposes of computing the percentage bad debt deduction
for losses attributable to activities of the non-savings association members of
the consolidated group that are functionally related to the activities of the
savings association member.
Neither the Company or the Bank have been audited by the IRS during the
last five fiscal years.
Indiana Taxation. The State of Indiana imposes an 8.5% franchise tax on
corporations transacting the business of a financial institution in Indiana,
exempting them from gross income, supplemental net income and intangible taxes.
Included in the definition of corporation's transacting the business of a
financial institution in Indiana are holding companies of thrift institutions,
as well as thrift institutions. Net income for franchise tax purposes will
constitute federal taxable income before net operating loss deductions and
special deductions, adjusted for certain items, including Indiana income taxes
and bad debts. Other applicable Indiana taxes include sales, use and property
taxes.
Executive Officers
The following information as to the business experience during the past
five years is supplied with respect to executive officers of the Company. Except
as otherwise indicated, the persons named have served as officers of the Company
since it became the holding company of the Bank and all positions described
below are with the Bank. There are no arrangements or understandings between the
persons named and any other person pursuant to which such officers were
selected.
John W. Corey. Mr. Corey, age 63 was elected as President, Chief
Executive Officer and Director of the Bank in 1991. From 1987 to 1991, he was
President and Chief Executive Officer of Ludington Savings Bank, FSB in
Ludington, Michigan.
Harry A. Dunwoody. Mr. Dunwoody, age 51, has served as Senior Vice
President of the Bank since 1989 and was elected as a Director in 1993. He is
responsible for the lending functions of the Bank.
38
<PAGE>
Mary Jo David. Ms. David, age 48, is Vice President, Chief Financial
Officer and Secretary- Treasurer of the Bank, positions she has held since 1992.
She joined the Bank in 1985.
Employees
At December 31, 1997, the Company had a total of 66 employees,
including three part-time employees. The Company's employees are not represented
by any collective bargaining group. Management considers its employee relations
to be good.
Item 2. Description of Property
The Company conducts its business at its main office and three other
locations in Lafayette and West Lafayette, Indiana. The Company owns its main
office and two branch offices. The second branch office is leased. The total net
book value of the Company's premises and equipment (including land, building and
leasehold improvements and furniture, fixtures and equipment) at December 31,
1997 was approximately $4.9 million. The Company has recently purchased property
for a potential new branch location. The Company has also begun exploring
expansion possibilities at the main office location as its growth rate will
require space for additional personnel in the next few years. See Note 5 of the
notes to Consolidated Financial Statements in the Annual Report.
The Company maintains an on-line data base of depositor and borrower
customer information. The net book value of the data processing and computer
equipment and software utilized by the Company at December 31, 1997 was
$381,000.
Item 3. Legal Proceedings
LSB, from time to time, is involved as plaintiff or defendant in
various legal actions arising in the normal course of business. While the
ultimate outcome of these proceedings cannot be predicted with certainty, it is
the opinion of management, after consultation with counsel representing LSB in
the proceedings, that the resolution of any prior and pending proceedings should
not have a material effect on the Company's financial condition or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1997.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Inside back cover of the Company's 1997 Annual Report to Stockholders
is herein incorporated by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
39
<PAGE>
Pages 3 through 16 of the Company's 1997 Annual Report to Stockholders
is herein incorporated by reference.
Item 7. Financial Statements
Pages 17 through 40 of the Company's 1997 Annual Report to Stockholders
are herein incorporated by reference.
Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change in
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
Item 9. Directors and Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act
Directors
Information concerning Directors of the Company is incorporated herein
by reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in April 1998, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
Executive Officers
Information concerning Executive Officers is contained in Part I of
this Form 10-KSB.
Compliance with Section 16(a)
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10% of
a registered class of the Company's equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Officers, directors and greater than
10% stockholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file.
To the Corporation's knowledge, based solely on a review of the copies
of such reports furnished to the Corporation and written representations that no
other reports were required, all Section 16(a) filing requirements applicable to
its officers, directors and greater than 10 percent beneficial owners were
complied with during the fiscal year ended December 31, 1997.
Item 10. Executive Compensation
40
<PAGE>
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held in April 1998, a copy of which will be filed not
later than 120 days after the close of the fiscal year.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Company's definitive
Proxy Statement for the Annual Meeting of Stockholders to be held in April 1998,
a copy of which will be filed not later than 120 days after the close of the
fiscal year.
Item 12. Certain Relationships and Related Transactions
Information concerning certain relationships and transactions is
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders to be held in April 1998, a copy of which
will be filed not later than 120 days after the close of the fiscal year.
41
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Reference to
Prior Filing
Regulation or Exhibit
S-K Exhibit Number Attached
Number Document Hereto
<S> <C> <C>
2 Plan of acquisition, reorganization, arrangement, liquid, or succession None
3 Articles of Incorporation and Bylaws.................................... *
4 Instruments defining the rights of security holders,
including indentures:
Common Stock Certificate............................................... *
9 Voting trust agreement.................................................. None
10 Material contracts:
Employee Stock Ownership Plan.......................................... *
Stock Option and Incentive Plan........................................ *
Severance Agreements................................................... *
Recognition and Retention Plan......................................... *
401(k) Retirement/Savings Plan......................................... *
11 Statement re computation of per share earnings.......................... **
12 Statement re computation of ratios...................................... None
13 Annual Report to Security Holders....................................... 13
16 Letter on change in certifying accountant............................... None
18 Letter on change in accounting principles............................... None
21 Subsidiaries of Registrant.............................................. 21
22 Published report regarding matters submitted to vote of security holders None
23 Consent of Experts and Counsel.......................................... 23
24 Power of Attorney....................................................... Not required
27 Financial Data Schedule................................................. 27
99 Additional Exhibits None
</TABLE>
- --------------------
*Filed on September 21, 1994 as exhibits to the Registrant's
Registration Statement No. 33-84266 on Form S-1. All of such previously filed
documents are hereby incorporated herein by reference in accordance with Item
601 of Regulation S-B.
**See Note 12 of the Notes to Consolidated Financial Statements
included in the Annual Report under Exhibit 13.
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the three-month period
ended December 31, 1997.
42
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LSB FINANCIAL CORP.
Date: March 25, 1998 By: /s/ John W. Corey
----------------- ------------------
John W. Corey, President, Chief Executive
Officer and Director
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ Mariellen M. Neudeck /s/ John W. Corey
- ---------------------------------------------- -----------------
Mariellen M. Neudeck, Chairman of the Board John W. Corey, President, Chief Executive
Officer and Director
(Principal Executive and Operating Officer)
Date: March 26, 1998 Date: March 25, 1998
---------------------------------------- --------------
/s/ Harry A. Dunwoody /s/ James A. Andrew
- ---------------------------------------------- -------------------
Harry A. Dunwoody, Senior Vice President James A. Andrew, Director
and Director
Date: March 25, 1998 Date: March 26, 1998
---------------------------------------- ---------------
/s/ Philip W. Kemmer /s/ Peter Neisel
- ---------------------------------------------- -------------------
Philip W. Kemmer, Director Peter Neisel, Director
Date: March 26, 1998 Date: March 26, 1998
----------------------------------------- --------------
/s/ Jeffrey A. Poxon
----------------------------------------- -------------------
Jeffrey A. Poxon, Director Thomas L. Ryan
Date: March 26, 1998 Date:
----------------------------------------- --------------
/s/ C. Wesley Shook
----------------------------------------- --------------------
John C. Shen C. Wesley Shook, Director
Date: Date: March 26, 1998
----------------------------------------- --------------
/s/ Mary Jo David
Mary Jo David, Vice President, Chief Financial
Officer and Secretary-Treasurer
(Principal Financial and Accounting Officer)
Date: March 26, 1998
-----------------------------------------
</TABLE>
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number
- ------
11 Statement re Computation of Earnings Per Share (See Note 13 of the
Notes to Consolidated Financial Statements included in the Annual
Report to Security Holders attached hereto as Exhibit 13)
13 Annual Report to Security Holders
21 Subsidiaries of the Registrant
23 Consents of Experts and Counsel
27 Financial Data Schedule
<PAGE>
EXHIBIT 13
ANNUAL REPORT TO SECURITY HOLDERS
<PAGE>
SELECTED FINANCIAL INFORMATION
($ in thousands, except per share data)
The following financial information does not purport to be complete
and is qualified in its entirety by reference to the more detailed financial
information contained elsewhere herein.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
1993 1994 1995 1996 1997
---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data
Total assets ...................................... $ 110,685 $ 124,339 $ 158,973 $ 184,607 $ 206,584
Loans receivable, net ............................. 78,158 98,602 132,433 159,216 178,532
Available-for-sale securities ..................... -- 9,985 12,295 6,546 7,863
Short-term investments ............................ 25,674 7,703 3,595 5,410 5,580
Deposits .......................................... 100,242 107,764 109,977 116,949 137,686
Total borrowings .................................. 2,005 7,778 29,614 50,220 50,189
Shareholders' equity (net) ........................ 7,819 8,208 18,068 16,796 17,734
December 31,
---------------------------------------------------------------
1993 1994 1995 1996 1997
---------- --------- ---------- ---------- ---------
Selected Operations Data:
Total interest income ............................. $ 7,851 $ 7,979 $ 10,744 $ 13,247 $ 15,249
Total interest expense ............................ 4,618 4,442 5,937 7,530 8,708
--------- --------- --------- --------- ---------
Net interest income ............................ 3,233 3,537 4,807 5,717 6,541
Provision for loan losses ......................... -- (15) -- 800(1) 72
--------- --------- --------- --------- ---------
Net interest income after provision for loan losses 3,233 3,552 4,807 4,917 6,469
Deposit account service charges ................... 84 154 239 326 445
Gain (loss) on sales of mortgage loans ............ 259 13 68 184 243
Gain (loss) on sales of securities ................ -- 6 -- 7 --
Other non-interest income ......................... 137 117 322 178 236
--------- --------- --------- --------- ---------
Total non-interest income ......................... 480 290 629 695 924
Total non-interest expense ........................ 2,597 3,012 3,470 4,186 4,787
--------- --------- --------- --------- ---------
Income before taxes and accounting change ......... 1,116 830 1,966 1,426 2,606
Taxes ............................................. 414 265 724 550 1,040
Accounting change ................................. 175 -- -- -- --
--------- --------- --------- --------- ---------
Net income ........................................ $ 877 $ 565 $ 1,242 $ 876 $ 1,566
========= ========= ========= ========= =========
</TABLE>
- --------
(1) See "Provision for Loan Losses" for discussion of Bennett Funding Group.
1
<PAGE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------
1993 1994 1995 1996 1997
---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income
to average total assets)........................... 0.80% 0.49% 0.87% 0.51% 0.80%
Return on equity (ratio of
net income to average equity)...................... 11.65 7.07 7.30 5.16 9.09
Earnings per share N/A N/A $1.23 $0.95 $1.81
Interest rate spread information:
Average during period............................... 2.87% 3.15% 3.17% 3.27% 3.39%
Net interest margin(1).............................. 3.07 3.26 3.56 3.52 3.56
Operating expense to average total
assets............................................. 2.38% 2.61% 2.43% 2.43% 2.45%
Average interest-earning assets to
average interest-bearing liabilities............... 1.05x 1.02x 1.09x 1.05x 1.04x
Quality Ratios:
Non-performing assets to total assets
at end of period................................... 0.06% 0.04% 0.00% 1.53% 1.01%
Allowance for loan losses to
non-performing loans............................... 1376.12 2057.78 N/A 60.54 70.59
Allowance for loan losses to loans
receivable, net.................................... 1.17 0.94 0.70 1.08 0.83
Capital Ratios:
Shareholders' equity to total assets
at end of period.................................... 7.06 6.60 11.37 9.10 8.58
Average shareholders' equity to
average total assets................................ 6.88 6.92 11.92 9.88 8.82
Other Data:
Number of full-service offices....................... 3 3 3 4 4
</TABLE>
- ----------
(1) Net interest income divided by average interest-earning assets.
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
On February 3, 1995, LSB Financial Corp. ("LSB" or the "Company"), an
Indiana corporation, became the holding company of Lafayette Savings Bank, FSB
("Lafayette" or the "Bank"). Lafayette is a federally chartered stock savings
bank headquartered in Lafayette, Indiana. The principal asset of the Company is
the outstanding stock of the Bank, its wholly-owned subsidiary. The Company
presently has no separate operations and its business consists only of the
business of the Bank. All references to the Company, unless otherwise indicated,
on or before February 3, 1995, refer to the Bank.
Forward-Looking Statement
When used in this Annual Report, the words or phrases "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties
including changes in economic conditions in the Company's market area, changes
in policies by regulatory agencies, fluctuations in interest rates, demand for
loans in the Company's market area and competition, that could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.
Business Strategy
LSB has been, and intends to continue to be, a community-oriented
financial institution. The primary business of the Company consists of
attracting deposits from the general public and using these deposits to provide
financing for the purchase and construction of residential and other properties.
The Company's results of operations, therefore, are dependent primarily on net
interest income, which is the difference between the interest income earned on
the Company's loan and securities portfolios and its cost of funds, which
consists of interest expense incurred on deposits and borrowings. Net interest
income is directly affected
3
<PAGE>
by the relative amounts of interest-earning assets and interest-bearing
liabilities and the interest rates earned or paid on such amounts. The Company's
operating results are also affected by the level of the provision for loan
losses, by the level of non-interest income, including gains and losses on the
sale of loans, and non-interest expenses. The Company's non-interest expenses
consist principally of employee compensation, occupancy expenses, and other
general and administrative expenses.
Significant external factors impacting the Company's results of
operations include the general economic environment, changes in the level of
market interest rates, government policies, actions by regulatory authorities
and competition. LSB's cost of funds is influenced by interest rates on
competing investments and general market rates of interest. Lending activities
are influenced by the demand for real estate loans and other types of loans,
which are in turn affected by the interest rates at which such loans are made,
general economic conditions affecting loan demand and the availability of funds
for lending activities.
The Company's basic mission is to maintain its focus as an
independent, community oriented financial institution serving customers in its
market area. The Board of Directors has sought to accomplish this mission
through the adoption of a strategy intended to maintain a strong capital
position and good asset quality, manage the Company's vulnerability to changes
in interest rates, optimize the Company's net interest margin and achieve
controlled asset growth. Key components of this strategy have been (i)
emphasizing one- to four-family residential mortgage lending, (ii) supplementing
residential lending with multi-family, commercial real estate and consumer
loans, (iii) gradually expanding commercial business lending functions, (iv)
emphasizing adjustable rate and/or short term loans and investments and (v)
gradually building its core deposit base.
The results of the Company's business strategy may be illustrated as
follows:
o One- to four-family loans increased from $86.2 million at
December 31, 1995 to $104.4 million at December 31, 1997.
o Multi-family, land and land development, construction and
consumer loans increased from $32.4 million at December 31,
1995 to $54.0 million at December 31, 1997.
o Commercial real estate and commercial business loans increased
from $19.6 million at December 31, 1995 to $26.7 million at
December 31, 1997.
o At December 31, 1997, 61.44% of the Company's gross loan
portfolio had adjustable interest rates.
o Non-certificate deposit accounts remained at nearly 25% of
deposits, and increased from $36.8 million at December 31,
1995 to $42.5 million at December 31, 1997.
4
<PAGE>
Financial Condition
The Company's loan portfolio increased from $132.4 million at December
31, 1995 to $178.5 million at December 31, 1997, an increase of 34.82%. Part of
this increase was due to the Bank aggressively seeking to attract new
residential mortgage borrowers. This was accomplished by offering attractive
loan products at competitive rates; establishing good working relationships with
local realtors; and providing efficient, personal service with all decisions
made locally. Another reason for the success of the Company's strategy was the
continued focus on multi-family and commercial real estate, land development and
consumer loan production. The Company sold $8.0 million of fixed-rate loans in
the secondary market in 1995, $14.3 million in 1996 and $19.8 million in 1997
based upon asset/liability management considerations. See "-Asset/ Liability
Management." Adjustable rate loans were retained in the Company's loan
portfolio. The Company retained the servicing rights on all loans sold in the
secondary market through December 31, 1997.
The Company's portfolio of securities and short-term investments
decreased from $15.9 million at from December 31, 1995 to $13.4 million at
December 31, 1997, as maturing securities were used to fund the growth in the
Company's loan portfolio.
Deposit accounts increased by 25.19% or $27.7 million from December
31, 1995 to December 31, 1997. Checking accounts with no monthly fees and no
minimum balance requirements attracted new depositors, as well as the Bank's
continuing effort to offer innovative and competitive certificate of deposit
products.
The Company utilizes advances available through the Federal Home Loan
Bank ("FHLB") to provide additional funding for loan growth as well as for
asset/liability management purposes. At December 31, 1997 and December 31, 1996
the Company had $50.0 million in FHLB advances outstanding, an increase of $21.5
million from December 31, 1995.
Shareholders' equity increased $938,000, or 5.59% during 1997
primarily as a result of net income of $1.6 million partially offset by the
Company's stock repurchases and the payment of dividends on Common Stock. The
Company completed the repurchase of 5.00% of its Common Stock, 45,888 shares,
under a stock repurchase program ended August 6, 1997. As of December 31, 1997,
a total of 186,783 shares of the Company's Common Stock had been repurchased at
a cost of approximately $3.3 million, or $17.46 per share. Shareholders' equity
to total assets was 8.58% at December 31, 1997 compared to 9.10% at December 31,
1996.
Results of Operations
The Company's results of operations depend primarily on the levels of
net interest and non-interest income and its control of operating expenses. Net
interest income is dependent upon the volume of interest-earning assets and
interest-bearing liabilities and upon the interest
5
<PAGE>
rate which is earned or paid on these items. The Company's results of operations
are also affected by the level of the provision for loan losses as well as
non-interest income.
6
<PAGE>
Average Balances, Interest Rates and Yields
The following table presents for the periods indicated the total
dollar amount of interest income from average interest earning assets and the
resultant yields, as well as the interest expense on average interest-bearing
liabilities, expressed both in dollars and rates. No tax equivalent adjustments
were made. All average balances are monthly average balances. Non-accruing loans
have been included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1995 1996
-------------------------------- ---------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
----------- -------- ------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-Earning Assets:
Loans receivable(1)........................ $ 114,518 $ 9,595 8.38 $ 149,502 $12,467 8.34%
Mortgage-backed securities................. 5,147 313 6.08 4,299 260 6.05
Other investments.......................... 14,227 756 5.32 6,517 363 5.57
FHLB stock................................. 1,030 80 7.77 2,046 157 7.67
----------- -------- ------ ------
Total interest-earning assets............. 134,922 10,744 7.96 162,364 13,247 8.16
-------- ------
Non-interest earning assets................. 7,794 9,586
-------- ---------
Total assets............................... $142,716 $171,950
======== ========
Liabilities and Shareholders' Equity
Interest-Bearing Liabilities:
Savings deposits........................... $ 13,166 391 2.$7 12,207 368 3.0$
Demand and NOW deposits.................... 23,341 614 2.63 25,272 601 2.38
Time deposits.............................. 69,300 3,856 5.56 77,211 4,355 5.64
Borrowings................................. 18,210 1,076 5.91 39,234 2,206 5.62
------- ------- ------- ------
Total interest-bearing liabilities........ 124,017 5,937 4.79 153,924 7,530 4.89
------ -------
Other liabilities.......................... 1,688 1,039
-------- --------
Total liabilities......................... 125,705 154,963
Shareholders' equity........................ 17,011 16,987
--------- ---------
Total liabilities and shareholders'
equity .................................. $142,716 $171,950
======== ========
Net interest income......................... $4,807 $5,717
======= ======
Net interest rate spread.................... 3.17% 3.27%
==== ====
Net earning assets.......................... $10,905 $ 8,440
======== ========
Net yield on average interest-earning
assets .................................... 3.56% 3.52%
===== =====
Average interest-earning assets to
average interest-bearing liabilities....... 1.09x 1.05x
====== ====
</TABLE>
<PAGE>
RESTUBBED TABLE
<TABLE>
<CAPTION>
At
Year Ended December 31, December
----------------------------- 31,
1997 1997
---------------------------- --------
Average Interest
Outstanding Earned/ Yield/ Yield/
Balance Paid Rate Rate
------------ -------- ------- ------
<S> <C> <C> <C> <C>
Assets:
Interest-Earning Assets:
Loans receivable(1)........................ $ 169,465 $14,384 8.49% 8.28%
Mortgage-backed securities................. 3,597 238 6.62 6.00
Other investments.......................... 7,855 420 5.35 5.97
FHLB stock................................. 2,592 207 7.99 8.00
--------- ------
Total interest-earning assets............. 183,509 15,249 8.31 7.96
------
Non-interest earning assets................. 11,835
---------
Total assets............................... $ 195,344
=========
Liabilities and Shareholders' Equity
Interest-Bearing Liabilities:
Savings deposits........................... 13,347 401 3.00 3.05
Demand and NOW deposits.................... 28,700 582 2.03 1.49
Time deposits.............................. 88,688 4981 5.62 5.87
Borrowings................................. 46,329 2,744 5.92 5.94
------- ------
Total interest-bearing liabilities........ 177,064 8,708 4.92 5.05
------
Other liabilities.......................... 1,045
--------
Total liabilities......................... 178,109
Shareholders' equity........................ 17,235
--------
Total liabilities and shareholders'
equity ..................................$ 195,344
=========
Net interest income......................... $6,541
======
Net interest rate spread.................... 3.39% 2.91%
==== =====
Net earning assets..........................$ 6,445
========
Net yield on average interest-earning
assets .................................... 3.56%
=====
Average interest-earning assets to
average interest-bearing liabilities....... 1.05x
=====
</TABLE>
- ----------
(1) Calculated net of deferred loan fees, loan discounts, loans in process
and loss reserves.
7
<PAGE>
Rate/Volume Analysis of Net Interest Income
The following table presents the dollar amount of changes in interest
income and interest expense for the major categories of interest-earning assets
and interest-bearing liabilities. The change in total interest income and total
interest expense is allocated between those related to changes in the
outstanding balances and those due to changes in interest rates. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and change due to rate.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------
1995 vs. 1996 1996 vs. 1997
-----------------------------------------------------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
-------------------------- Increase ----------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable...................... $2,918 $ (46) $2,872 $1,691 $226 $1,917
Mortgage-backed securities............ (51) (2) (53) (45) 23 57
Other investments..................... (428) 35 (393) 72 (15) (22)
FHLB stock............................ 78 (1) 77 43 7 50
------- ------ ------- ------- ----- -------
Total interest-earning assets....... $2,516 $ (14) 2,503 $1,761 $ 241 2,002
======= ====== ------- ======= ===== -------
Interest-bearing liabilities:
Savings deposits...................... $ (29) $ 6 (23) $ 34 $ (1) 33
Demand deposits....................... 49 (62) (13) 76 (95) (19)
Time deposits......................... 446 53 499 644 (18) 626
Borrowings............................ 1,185 (55) 1,130 415 123 538
------- ------ -------- ------ ------ ------
Total interest-bearing liabilities.. $1,651 $ (57) 1,593 $1,169 $ 9 1,178
======= ====== --------- ====== ====== ------
Net interest income.................... $ 910 $824
===== ====
</TABLE>
8
<PAGE>
Comparison of Operating Results for the Years Ended December 31, 1996 and
December 31, 1997.
General. Net income for the year ended December 31, 1997 was $1.6
million, an increase of $690,000 or 78.78% over the year ended December 31,
1996. This increase was primarily due to an $800,000 provision for loan losses,
which was recorded by management in 1996 to cover the possibility of losses on
purchased equipment leases placed on non-accrual status by the Bank. Other
factors contributing to the increase were an $824,000 increase in net interest
income, and a $119,000 increase in deposit account service charges, partially
offset by a $601,000 increase in all non-interest expenses and a $490,000
increase in income tax expenses.
Net Interest Income. Net interest income for the year ended December
31, 1997 increased $824,000 or 14.41% over the same period in 1996. This
increase was primarily attributable to the success of management's continuing
efforts to restructure the Company's balance sheet by investing new funds and
shifting existing funds into higher-yielding multi-family and commercial real
estate, land development and consumer loans from lower yielding investments and
mortgage-backed securities. The Company's net interest margin (net interest
income divided by average interest-earning assets) increased slightly from 3.52%
for the year ended December 31, 1996, to 3.56% for the year ended December 31,
1997.
Interest income on loans increased $1.9 million for the year ended
1997 compared to 1996, primarily the result of an increase of $20.0 million in
average loans outstanding. This increase was primarily due to an active
residential real estate market in 1997 due to continued low interest rates and a
strong local economy, and the ongoing success of the Company's focus on
multi-family and commercial real estate, land development and consumer loan
production. This increase in volume was also enhanced by an increase in yield on
loans from 8.34% for the year ended December 31, 1996 to 8.49% for the year
ended December 31, 1997, caused primarily by the increasing percentage of loans
in these higher yielding categories.
Interest earned on other investments and FHLB stock increased by
$107,000 for the year 1997 compared to 1996. This was the result of an increase
of $1.3 million in the average balance of other investments, primarily due to
the Company's efforts to rebuild its liquidity portfolio with an eye toward
addressing its relatively high tax burden, partially offset by a decrease in the
yield on other investments from 5.57% in 1996 to 5.35% in 1997. The increase in
interest earned was further augmented by interest earned on a $546,000 increase
in the average balance of FHLB stock required to facilitate borrowings from the
FHLB, as well as by an increase in the yield on FHLB stock from 7.67% for the
year ended December 31, 1996 to 7.99% for the year ended December 31, 1997.
Interest expense for the year ended 1997 increased $1.2 million or
15.64% over the same period in 1996. This increase was primarily due to an
increase of $23.1 million in average interest-bearing liabilities, consisting of
an additional $16.0 million in the average balance of customer deposit accounts
and a $7.1 million increase in the average balance of FHLB advances drawn to
fund loan demand.
9
<PAGE>
Provision for Loan Losses. The Company establishes its provision for
loan losses based on a systematic analysis of risk factors in the loan
portfolio. The analysis includes evaluation of concentration of credit, past
loss experience, current economic conditions, the amount and composition of the
loan portfolio, estimated fair value of the underlying collateral, loan
commitments outstanding, delinquencies and industry standards. From time to
time, management also uses the services of a consultant to assist in the
evaluation of its growing multi-family and commercial real estate loan
portfolio. Management's analysis results in the allocations of allowance amounts
for each loan type. Based on this analysis, during the quarter ended June 30,
1996 the Company recorded an $800,000 provision for loan losses primarily in
response to a specific situation involving the Bennett Funding Group ("Bennett")
of Syracuse, New York through which the Company owned $2.4 million of equipment
leases. A settlement involving the restructuring of these loans was reached
during the second quarter of 1997 and resulted in a write down of $319,000.
Management continues to allocate $651,000 of the Bank's $1.5 million allowance
to the remaining leases and the restructured loan to provide for potential
losses. In addition, the Company recorded a $72,000 provision for loan losses
during 1997 as a result of its analysis of the Company's current loan
portfolios. In addition to the $2.1 million of Bennett leases there were $23,000
of non-performing or restructured loans at December 31, 1997. At December 31,
1997, the Company's allowance equaled 0.83% of net loans receivable.
Non-Interest Income. Non-interest income for the year ended December
31, 1997 increased by $229,000, or 32.95% over the same period in 1996. This was
primarily due to a $119,000 increase in service charges and fees on deposit
accounts due to the increasing number of these accounts, and a $59,000 increase
in the gain on the sale of mortgage loans in the secondary market resulting from
the increased sales activity. Beginning in 1996, the basis of loans sold with
servicing retained was allocated between the loan and the originated servicing
right. $182,000 of the $243,000 of gains on the sale of loans in 1997 and
$129,000 of the $184,000 of gains in 1996 can be attributed to establishing the
originated servicing right asset which is amortized over the expected lives of
the related loans.
Non-Interest Expense. Non-interest expense for the year ended December
31, 1997 increased $601,000 over the same period in 1996. The major components
of this increase included a $357,000 increase in salaries and employee benefits,
a $93,000 increase in occupancy and equipment expense and a $68,000 increase in
advertising. These increases generally reflect the additional expenses incurred
in operating the Company's fourth branch. In addition, salary and employee
benefits expense includes expenses related to the Employee Stock Ownership Plan
("ESOP"), which was formed at the time of the Bank's stock conversion, and
expenses related to the Recognition and Retention Plan ("RRP") which was
approved by shareholders in August 1995. ESOP expenses rise and fall based on
the change in the Company's stock price. These two plans resulted in a combined
expense of $274,000 in 1997 and $233,000 in 1996. See Note 9 of the Notes to
Consolidated Financial Statements included herein.
Income Tax Expense. The Company's income tax provision increased by
$490,000 for the year ended December 31, 1997 compared to the year ended
December 31, 1996. This was primarily due to the increase in income before
income taxes.
10
<PAGE>
Comparison of Operating Results for the Years Ended December 31, 1996 and
December 31, 1995.
General. Net income for the year ended December 31, 1996 was $876,000,
a decrease of $366,000 or 29.47% compared to net income for the year ended
December 31, 1995. This decrease was primarily due to an $800,000 provision for
loan losses, which was recorded by management to cover the possibility of losses
on the $2.4 million of Bennett equipment leases placed on non-accrual status by
the Bank during 1996. This $800,000 was offset by the net impact of a $910,000
increase in net interest income, a $716,000 increase in all non-interest
expenses and a $174,000 decrease in income tax expense.
Net Interest Income. Net interest income for the year ended December
31, 1996 increased $910,000 or 18.93% over the same period in 1995. This
increase was primarily attributable to the success of management's continuing
efforts to restructure the Company's balance sheet by investing new funds and
shifting existing funds into higher-yielding multi-family and commercial real
estate, construction and consumer loans. The Company's net interest margin (net
interest income divided by average interest-earning assets) decreased from 3.56%
for the year ended December 31, 1995, to 3.52% for the year ended December 31,
1996.
Interest income on loans increased $2.9 million for the year ended
1996 compared to 1995 primarily due to an increase of $35.0 million in average
loans outstanding. This increase was primarily due to an active residential real
estate market in 1996 due to continued relatively low interest rates and a
strong local economy, and the ongoing success of the Company's focus on
multi-family and commercial real estate, construction and consumer loan
production.
Interest earned on other investments and FHLB stock decreased by
$316,000 for the year 1996 compared to 1995. This was the result of a decrease
of $7.7 million in the average balance of other investments, primarily due to
the Company's efforts to restructure its balance sheet by channeling funds into
higher yielding loans. The decrease was partially offset by interest earned on a
$1.0 million increase in the average balance of FHLB stock, as well as by an
increase in the yield on other investments from 5.32% for the year ended
December 31, 1995 to 5.57% for the year ended December 31, 1996.
Interest expense for the year ended 1996 increased $1.6 million or
26.83% over the same period in 1995. This increase was primarily due to an
increase of $29.9 million in average interest-bearing liabilities, consisting of
an additional $8.9 million increase in the average balance of customer deposit
accounts and a $21.0 million increase in the average balance of FHLB advances
drawn to fund loan demand. The increase was also due to an increase in the rate
paid on interest bearing liabilities from 4.79% in 1995 to 4.89% in 1996
reflecting the intense competition for deposits, in spite of a decrease in the
interest rate on borrowings from 5.91% in 1995 to 5.62% in 1996.
Provision for Loan Losses. During the quarter ended June 30, 1996 the
Company recorded an $800,000 provision for loan losses primarily in response to
the Bennett situation. On
11
<PAGE>
March 29, 1996, the Securities and Exchange Commission filed civil and criminal
complaints against an officer of Bennett and shortly thereafter, Bennett sought
Chapter 11 bankruptcy protection. The Company had been paid interest through
March 31, 1996. The Company's $2.4 million investment was comprised of numerous
equipment leases. The Company had no other significant non-accruing loans in
1995 or 1996 and recorded no provision for loan losses in 1995.
Non-Interest Income. Non-interest income for the year ended December
31, 1996 increased by $66,000, or 10.49% over the same period in 1995. This was
primarily due to an $87,000 increase in service charges and fees on deposit
accounts due to the increasing number of these accounts, and a $116,000 increase
in the gain on the sale of mortgage loans in the secondary market, partially
offset by a non-recurring $165,000 state tax refund received in 1995. The
increase in the gain on the sale of loans resulted from the increased sales
activity and a change in accounting for such sales. Beginning in 1996, the basis
of loans sold with servicing retained was allocated between the loan and the
servicing right. $129,000 of the $184,000 of gains on the sale of loans can be
attributed to establishing the originated servicing right asset which will be
amortized over the expected lives of the related loans. In addition, in December
1996, the Company transferred approximately $10.3 million of fixed rate mortgage
loans to the held for sale portfolio. These loans were sold in December, 1996,
and January, 1997, and are part of management's strategy to further diversify
the loan portfolio.
Non-Interest Expense. Non-interest expense for the year ended December
31, 1996 increased $716,000 over the same period in 1995. The major components
of this increase included a $404,000 increase in salaries and employee benefits,
a $139,000 increase in occupancy and equipment expense, offset by a $118,000
decrease in FDIC insurance premiums (since the Bank, unlike most thrifts, is
insured by the Bank Insurance Fund of the FDIC and benefitted from a reduction
in the deposit insurance rate effective June 1, 1995.) The increase in salaries
and employee benefits, and occupancy and equipment expenses were incurred in
connection with the opening of the Company's fourth branch. In addition, 1995's
salary and employee benefit expense included expenses related to the ESOP and
the RRP. These two plans resulted in a combined expense of $151,000 in 1995 and
$233,000 in 1996.
Income Tax Expense. The Company's income tax provision decreased by
$174,000 for the year ended December 31, 1996 compared to the year ended
December 31, 1995. This was primarily due to the decrease in income before
income taxes.
12
<PAGE>
Asset/Liability Management
The Bank, like other financial institutions, is subject to interest
rate risk to the extent that its interest-bearing liabilities reprice on a
different basis than its interest-earning assets. Office of Thrift Supervision
("OTS") regulations provide a Net Portfolio Value ("N.V.") approach to the
quantification of interest rate risk. In essence, this approach calculates the
difference between the present value of expected cash flows from assets and the
present value of expected cash flows from liabilities, as well as cash flows
from off balance sheet contracts.
It has been and continues to be a priority of the Company's Board of
Directors and management to manage interest rate risk and thereby limit any
negative effect of changes in interest rates on the Company's N.V. The Company's
asset/liability policy, established by the Board of Directors, sets forth
acceptable limits on the amount of change in N.V. given certain changes in
interest rates. The Company has an asset/liability management committee which
meets weekly to review interest rate positions, and a Board investment committee
which meets quarterly to review the Company's interest rate risk position and
other related matters and to make recommendations for adjusting such position to
the full Board of Directors. In addition, the investment committee meets
semi-annually with the Company's investment advisor to review the Company's
investment portfolio and strategies relating to interest rate risk. Specific
strategies have included the sale of long-term, fixed rate loans to reduce the
average maturity of the Company's interest-earning assets and the use of FHLB
advances to lengthen the effective maturity of its interest-bearing liabilities.
In the future, the Company's community banking emphasis, is intended to further
increase the Company's portfolio of short-term and/or adjustable rate loans.
13
<PAGE>
Presented below, as of December 31, 1996 and 1997, is an analysis of
the Company's interest rate risk as measured by changes in N.V. for
instantaneous and sustained parallel shifts in the yield curve, in 100 basis
point increments, up and down 300 basis points and compared to Board policy
limits. Assumptions used in calculating the amounts in this table are OTS
assumptions.
<TABLE>
<CAPTION>
At December 31, 1996 At December 31, 1997
Change in Board Limit -------------------------------- ------------------------------
Interest Rate % Change $ Change % Change $ Change % Change
------------- -------- -------------- ------------- -------------- -----------
(Basis Points) (Dollars in (Dollars in
Thousands) Thousands)
<S> <C> <C> <C> <C> <C>
300 -40.00 -3,207 -23% -2,915 -14%
200 -18.00 -1,996 -14% -1,965 -10%
100 -10.00 -1,015 -6% -1,106 -5%
0 0.00 0 0% 0 0%
-100 -10.00 1,411 3% 1,290 6%
-200 -18.00 2,475 3% 1,972 10%
-300 -40.00 2,687 3% 3,020 15%
</TABLE>
In evaluating the Company's exposure to interest rate risk, certain
shortcomings inherent in the method of analysis presented in the foregoing table
must be noted. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Further, in the event of a change in interest rates, prepayments and
early withdrawal levels would likely deviate significantly from those assumed in
calculating the table. Finally, the ability of many borrowers to service their
debt may decrease in the event of an interest rate increase. As a result, the
actual effect of changing interest rates may differ from that presented in the
foregoing table.
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits, repayment and
prepayment of loans, interest earned on or maturation of investment securities
and short-term investments, borrowings and funds provided from operations. While
maturities and the scheduled amortization of loans, investments and
mortgage-backed securities are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by the general market interest
rates, economic conditions and competition.
The primary investing activities of the Bank are the origination of loans
and the purchase of securities. During the years ended December 31, 1995, 1996
and 1997, the Bank originated loans totaling $68.8 million, $77.7 million and
$78.2 million respectively.
During 1995, 1996 and 1997, these investment activities were funded
primarily by principal repayments and prepayments on loans and maturities of
investment securities totaling $30.8 million, $43.8 million, and $50.0 million,
respectively. The proceeds from the sale of
14
<PAGE>
loans totaled $8.0 million, $14.3 million and $20.2 million for the years ended
1995, 1996 and 1997, respectively. Sales of available-for-sale securities in
1995 and 1996 generated proceeds of $510,000 and $1.8 million. There were no
sales in 1997.
The major sources of cash from financing activities in 1995, 1996 and
1997 were increases in deposits of $2.2 million, $7.0 million and $20.7 million,
respectively. In 1995 and 1996, financing also was provided by net borrowings of
$21.8 million, $20.6 million, respectively. There was no increase in net
borrowings in 1997. The Bank had available lines of credit from the FHLB, at
December 31, 1996 and 1997, equal to $1.5 million. The Bank currently uses, and
intends to continue to use, FHLB advances as a source of funding for loans when
advantageous interest rate matches can be found.
Liquidity management is both a daily and long-term function for the
Bank's senior management. The Bank adjusts its investment strategy, within the
limits established by the investment policy, based upon assessments of expected
loan demand, expected cash flows, FHLB advance opportunities, market yields and
objectives of its asset/liability management program. Base levels of liquidity
have generally been invested in interest-earning overnight and time deposits
with the FHLB of Indianapolis. Funds for which a demand is not foreseen in the
near future are invested in investment and other securities for the purpose of
yield enhancement and asset/liability management.
The Bank is required to maintain minimum levels of liquidity as defined
by regulatory agencies. The liquidity requirement, which can vary, is based upon
a percentage of deposits and short term borrowings and is currently 4.0%. The
Bank's internal policy for liquidity is approximately 6% to 8%. The Company's
liquidity ratios at December 31, 1995, 1996 and 1997 were 14.04%, 7.31% and
7.76%, respectively.
The Bank anticipates that it will have sufficient funds available to meet
current loan commitments. At December 31, 1997, the Bank had outstanding
commitments to originate loans and available lines of credit totaling $19.4
million and commitments to provide funds to complete current construction
projects in the amount of $4.9 million. Certificates of deposit which will
mature in one year or less at December 31, 1997 totaled $57.1 million. Based on
its experience, the Bank's certificates of deposit have been a relatively stable
source of long-term funds as such certificates are generally renewed upon
maturity since the Bank has established long-term banking relationships with its
customers. Therefore, management believes a significant portion of such deposits
will remain with the Bank, although this cannot be assured.
At December 31, 1997, the Bank exceeded all of the OTS capital
requirements on a fully phased in basis. See Note 8 of the Notes to Consolidated
Financial Statements for a summary of the Bank's regulatory capital
requirements.
The Company also has a need for, and sources of liquidity. Liquidity is
required to fund its operating expenses, fund stock repurchase programs, as well
as for the payment of dividends to shareholders. At December 31, 1997 the
Company had $91,000 in liquid assets
15
<PAGE>
on hand. The primary source of liquidity on an ongoing basis is dividends from
the Bank. Dividends totaling $180,000 were paid from the Bank to the Company
during the year ended December 31, 1997. For the year ended December 31, 1997,
the Company paid dividends to shareholders totaling $311,000 and repurchased
30,888 shares of common stock at a total cost of $633,000. This completed a 5%
repurchase program for the Company.
Year 2000
The Company is conducting a formal review of its systems and system
providers, due to concerns regarding possible consequences that the year 2000
may pose to computer and other operating systems utilized in its business
activities. While a preliminary review has resulted in the identification of
certain issues which require resolution, management believes that appropriate
plans are in place to resolve these issues in a timely manner. Management does
not believe the resolution of these issues will significantly impair the
Company's ability to provide necessary services to our customers, nor are the
costs involved in this program expected to have a material impact on the
Company's earnings or financial condition.
Impact of Accounting Standards
Financial Accounting Standard No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities, was issued by
the Financial Accounting Standards Board in 1996. It revises the accounting for
transfers of financial assets, such as loans and securities, and for
distinguishing between sales and secured borrowings. It is effective for some
transactions in 1997 and others in 1998. Management does not expect the effect
on the Company's financial position and results of operations to be significant.
16
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
LSB Financial Corp.
Lafayette, Indiana
We have audited the accompanying consolidated statements of financial condition
of LSB Financial Corp. as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the years in the three year period ended December 31, 1997.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of LSB Financial Corp.
as of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the years in the three year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
-----------------------------------
Crowe, Chizek and Company LLP
Indianapolis, Indiana
February 4, 1998
- --------------------------------------------------------------------------------
17
<PAGE>
LSB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1996 and 1997
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,388 $ 4,358
Short-term investments 5,410 5,580
--------- ---------
Cash and cash equivalents 9,798 9,938
Available-for-sale securities 6,546 7,863
Loans held for sale 6,230 1,265
Total loans 154,701 178,745
Less: Allowance for loan losses (1,715) (1,478)
--------- ---------
Loans, net 152,986 177,267
Office properties and equipment - net 4,570 4,912
Federal Home Loan Bank stock, at cost 2,575 2,600
Accrued interest receivable and other assets 1,902 2,739
--------- ---------
$ 184,607 $ 206,584
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits $ 116,949 $ 137,686
Advances from Federal Home Loan Bank 50,000 50,000
Note payable 220 189
Accrued interest payable and other liabilities 642 975
--------- ---------
167,811 188,850
Shareholders' equity
Common stock ($.01 par value - 7,000,000 shares
authorized; 1,058,655 and 916,350 shares issued) 11 9
Additional paid-in capital 10,143 7,854
Retained earnings 10,289 10,677
Unamortized cost of recognition and retention plan (332) (242)
Unearned shares held by employee stock ownership plan (653) (570)
Treasury stock (155,895, at cost, in 1996) (2,629) --
Net unrealized gain/(loss) on available-for-sale securities (33) 6
--------- ---------
16,796 17,734
--------- ---------
$ 184,607 $ 206,584
========= =========
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
18
<PAGE>
LSB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1995, 1996 and 1997
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Interest income
Loans, including related fees $ 9,595 $12,467 $14,384
Taxable securities 756 586 645
Tax exempt securities 82 38 45
Other 311 156 175
------- ------- -------
10,744 13,247 15,249
Interest expense
Deposits 4,861 5,324 5,964
Federal Home Loan Bank advances 1,062 2,193 2,733
Other 14 13 11
------- ------- -------
5,937 7,530 8,708
------- ------- -------
Net interest income 4,807 5,717 6,541
Provision for loan losses -- 800 72
------- ------- -------
Net interest income after provision for loan losses 4,807 4,917 6,469
------- ------- -------
Noninterest income
Deposit account service charges and fees 239 326 445
Net gain on sale of mortgage loans 68 184 243
Net gain on securities -- 7 --
Other 322 178 236
------- ------- -------
629 695 924
Noninterest expense
Salaries and employee benefits 1,678 2,082 2,439
Occupancy and equipment, net 529 668 761
Computer service 169 244 246
Deposit insurance 120 2 15
Advertising 251 274 342
Other 723 916 984
------- ------- -------
3,470 4,186 4,787
------- ------- -------
Income before income taxes 1,966 1,426 2,606
Income tax provision 724 550 1,040
------- ------- -------
Net income $ 1,242 $ 876 $ 1,566
======= ======= =======
Earnings per share $ 1.23 $ .95 $ 1.81
Earnings per share, assuming dilution 1.23 .95 1.77
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
19
<PAGE>
LSB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1995, 1996 and 1997
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net
Unrealized
Additional Gain (Loss) on
Common Paid-in Retained Benefit Treasury Available-for-
Stock Capital Earnings Plans Stock Sale Securities Total
----- ------- -------- ----- ----- --------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $ -- $ -- $ 8,384 $ -- $ -- $ (176) $ 8,208
Issuance of common stock 10 9,599 -- -- -- -- 9,609
Formation of employee stock
ownership plan -- -- -- (824) -- -- (824)
Formation of recognition and
retention plan (RRP) 1 426 -- (427) -- -- (824)
RRP amortization expense -- -- -- 28 -- -- 28
Acquisition of treasury stock
(28,000 shares) -- -- -- -- (466) -- (466)
Employee stock ownership plan-
shares earned -- 38 -- 85 -- 123
Net income -- -- 1,242 -- -- -- 1,242
Change in net unrealized gain/(loss) -- -- -- -- -- 148 148
-------- -------- -------- ------- ------ -------- --------
Balance, December 31, 1995 11 10,063 9,626 (1,138) (466) (28) 18,068
Issuance of shares for RRP -- 22 -- (22) -- -- --
RRP amortization expense -- -- -- 90 -- -- 90
Employee stock ownership plan-
shares earned -- 58 -- 85 -- -- 143
Acquisition of treasury stock
(127,895 shares) -- -- -- -- (2,163) -- (2,163)
Dividends paid ($.24 per share) -- -- (213) -- -- -- (213)
Net income -- -- 876 -- -- -- 876
Change in net unrealized gain (loss) -- -- -- -- -- (5) (5)
Balance, December 31, 1996 11 10,143 10,289 (985) (2,629) (33) 16,796
-------- -------- -------- ------- ------ -------- --------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
20
<PAGE>
LSB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1995, 1996 and 1997
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net
Unrealized
Additional Gain (Loss) on
Common Paid-in Retained Benefit Treasury Available-for-
Stock Capital Earnings Plans Stock Sale Securities Total
----- ------- -------- ----- ----- --------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Exercise of stock options (206 shares) -- 3 -- -- -- -- 3
RRP amortization expense -- -- -- 90 -- -- 90
Employee stock ownership plan-
shares earned -- 101 -- 83 -- -- 184
Acquisition of treasury stock
(30,888 shares) -- -- -- -- (633) -- (633)
Retirement of treasury stock
(186,783 shares) (2) (3,260) -- -- 3,262 -- --
Dividends paid ($.35 per share) -- -- (311) -- -- -- (311)
Stock dividend (44,272 shares) -- 867 (867) -- -- -- --
Net income -- -- 1,566 -- -- -- 1,566
Change in net unrealized gain/(loss) -- -- -- -- -- 39 39
-------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1997 $ 9 $ 7,854 $ 10,677 $ (812) $ -- $ 6 $ 17,734
======== ======== ======== ======== ======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes.
21
<PAGE>
LSB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1996 and 1997
(Dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,242 $ 876 $ 1,566
Adjustments to reconcile net income to net cash from operating activities
Depreciation 214 276 348
Net amortization on securities 83 54 32
Provision for loan losses -- 800 72
Gain on securities -- (7) --
Gain on sale of loans (68) (184) (243)
Loans originated for sale, net of sales proceeds (900) (242) 5,208
Employee stock ownership plan - shares earned 123 143 184
Deferred loan fees, net 44 42 (73)
Changes in assets and liabilities
Accrued interest receivable (295) (101) (200)
Other assets 475 37 (574)
Accrued interest payable 42 38 (5)
Other liabilities 711 (709) 338
-------- -------- --------
Net cash from operating activities 1,671 1,023 6,653
Cash flows from investing activities
Proceeds from the maturity and paydown of available-for- sale securities 7,191 7,578 2,743
Proceeds from the maturity and paydown of held-to-maturity securities 1,437 -- --
Purchase of available-for-sale securities (8,075) (3,687) (4,026)
Purchase of held-to-maturity securities (501) -- --
Proceeds from sales of available-for-sale securities 510 1,802 --
Purchase of Federal Home Loan Bank stock (807) (1,075) (25)
Loans made to customers net of payments received (32,907) (32,645) (24,280)
Proceeds from the sale of loans -- 5,446 --
Purchase of premises and equipment (159) (1,641) (690)
-------- -------- --------
Net cash from investing activities (33,311) (24,222) (26,278)
Cash flows from financing activities
Net change in deposits 2,213 6,972 20,737
Net change in short term borrowings 864 (864) --
Proceeds from Federal Home Loan Bank advances 31,500 42,500 39,000
Payments on advances from Federal Home Loan Bank (10,500) (21,000) (39,000)
Payments on note payable (28) (30) (31)
Net proceeds from sale of common stock, net of ESOP debt 8,785 -- --
Dividends paid -- (213) (311)
Stock options exercised -- -- 3
Purchase of treasury stock (466) (2,163) (633)
-------- -------- --------
Net cash from financing activities 32,368 25,202 19,765
-------- -------- --------
Net change in cash and cash equivalents 728 2,003 140
Cash and cash equivalents at beginning of period 7,067 7,795 9,798
-------- -------- --------
Cash and cash equivalents at end of period $ 7,795 $ 9,798 $ 9,938
======== ======== ========
Cash paid during the period for:
Interest $ 5,895 $ 7,492 $ 8,713
Income taxes 126 1,037 886
Non cash investing activities:
Amortized cost of held-to-maturity securities transferred to
available-for-sale 1,753 -- --
Book value of portfolio loans transferred to held-for-sale -- 10,282 --
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes.
22
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements include the
accounts of LSB Financial Corp. (LSB or the Company) and its wholly-owned
subsidiary, Lafayette Savings Bank, FSB (Bank) and the Bank's wholly-owned
subsidiaries, LSB Service Corporation (LSBSC), and Lafayette Insurance &
Investments, Inc. (LI&I). All significant intercompany transactions and balances
have been eliminated.
Stock Issuance and Conversion: On February 3, 1995, pursuant to a Plan of
Conversion adopted May 16, 1994, LSB completed the issuance of 1,029,576 shares
of common stock, at a price of $10 per share raising net proceeds of $9,609. In
accordance with its Plan of Conversion, $4,805 of the proceeds were utilized to
purchase 100% of the stock of the Bank in conjunction with its conversion from a
mutual to a stock form of organization. The transaction was accounted for in a
manner similar to the pooling of interests method of accounting for a business
combination. Accordingly, the assets and liabilities of the Bank are presented
in these consolidated financial statements at historical cost and earnings per
share have been computed as if the common stock had been outstanding since
January 1, 1995.
Description of Business: LSB operates primarily in the banking industry which
accounts for more than 90% of its revenues, operating income and assets. LSB
generates mortgage and consumer loans and receives deposits from customers
located primarily in Tippecanoe county in Indiana. A substantial portion of the
loan portfolio is secured by single and multi-family residential mortgages.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions based on available information that affect the amounts reported
in the financial statements and the disclosures provided. Actual results could
differ from those estimates. Estimates most susceptible to change in the near
term include the allowance for loan losses and the fair value of securities.
Cash Flow Reporting: Cash and cash equivalents include cash on hand, amounts due
from banks and short-term investments. LSB reports net cash flows for customer
loan and deposit transactions, and interest-bearing balances with other
financial institutions.
Securities: Securities are classified as available-for-sale because they might
be sold before maturity and are carried at fair value, with unrealized holding
gains and losses reported separately in shareholders' equity, net of tax.
Securities are written down to fair value when a decline in fair value is not
temporary. Premium amortization is deducted from and discount accretion is added
to interest income. Gains and losses on the sale of available-for-sale
securities are determined using the specific identification method.
- --------------------------------------------------------------------------------
(Continued)
23
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Inventory of Loans Held for Sale: The Bank sells a portion of its mortgage loan
production in the secondary market. Whenever loan cost exceeds market value on a
net aggregate basis, a valuation reserve is recorded and the loans are carried
at the lower of cost or market. At December 31, 1996 and 1997, the market value
of such loans exceeded their cost.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance required
based on past loan loss experience, known and inherent risks in the portfolio,
information about specific borrower situations and estimated collateral values,
economic conditions, and other factors. Allocations of the allowance may be made
for specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged-off.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated collectively for smaller-balance loans of
similar nature such as residential mortgage, consumer, and credit card loans,
and on an individual loan basis for other loans. If a loan is impaired, a
portion of the allowance is allocated so that the loan is reported, net, at the
present value of estimated future cash flows using the loan's existing rate.
Loans are evaluated for impairment when payments are delayed, typically 90 days
or more, or when the internal grading system indicates a doubtful
classification.
The carrying values of impaired loans are periodically adjusted to reflect cash
payments, revised estimates of future cash flows, and increases in the present
value of expected cash flows due to the passage of time. Cash payments
representing interest income are reported as such. Other cash payments are
reported as reductions in carrying value, while increases or decreases due to
changes in estimates of future payments and due to the passage of time are
reported as provision for loan losses expense.
Recognition of Income on Loans: Interest income on loans is accrued over the
term of the loans. Uncollectible interest on loans that are past due is
charged-off or an allowance is established based on management's periodic
evaluation. Loan fees, net of direct loan origination costs, are deferred and
recognized over the contractual life of the loan as an adjustment to interest
income using the interest method.
- --------------------------------------------------------------------------------
(Continued)
24
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Servicing Rights: Servicing rights represent both purchased rights and the
allocated value of servicing rights retained on loans sold. Servicing rights are
expensed in proportion to, and over the period of, estimated net servicing
revenues. Impairment is evaluated based on the fair value of the rights, using
groupings of the underlying loans as to interest rates and then, secondarily, as
to geographic and prepayment characteristics. A valuation allowance is recorded
to reflect the impairment of a grouping.
Real Estate Owned: Real estate acquired through foreclosure or
deed-in-lieu-of-foreclosure is carried at the lower of cost (fair value at
foreclosure) or fair value less estimated selling costs. Future declines in
value, if any, are charged to operations through a provision for loss on real
estate owned. The costs of holding the real estate are charged to operations
while major improvements are capitalized.
Office Properties and Equipment: Office properties and equipment are stated at
cost less accumulated depreciation. Depreciation is computed by straight-line
and accelerated methods over estimated useful lives.
Retirement Plans: The Bank maintains a profit sharing plan, pursuant to Section
401 of the Internal Revenue Code. The plan covers substantially all full time
employees. Participants may contribute a percentage of their compensation,
subject to certain limits. The plan allows the Bank, at the Board's discretion,
to make contributions. No contributions were made during 1995, 1996, or 1997.
The Bank also maintains an Employee Stock Ownership Plan (ESOP) covering
substantially all full time employees. The expense recognized as ESOP shares are
earned by participants is based on the fair value of such shares. The difference
between the cost of ESOP shares earned, and their market value, is reflected as
an addition to additional paid-in capital.
Stock Options: Expense for employee compensation under stock option plans is
reported only if options are granted below market price at grant date. Pro forma
disclosures of net income and earnings per share are provided as if the fair
value method were used for stock-based compensation.
Income Taxes: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
- --------------------------------------------------------------------------------
(Continued)
25
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Values of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed separately. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments, and
other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the
estimates.
Earnings Per Share: Earnings per share are based on the weighted average number
of shares outstanding during the period. Diluted earnings per share further
assume the issuance of any dilutive potential shares. The accounting standard
for computing earnings per share was revised for 1997 and all earnings per share
data previously reported have been restated to follow the new standard. All
earnings per share data has been restated for the 5% stock dividend paid during
1997.
Dividend Restriction: Banking regulations require the maintenance of certain
capital levels and may limit the amount of dividends which may be paid. For
regulatory capital requirements, see a seperate note.
Future Accounting Changes: New accounting standards have been issued which will
require future reporting of comprehensive income (net income plus changes in
holding gains and losses on available for sale securities) and may require
redetermination of industry segment financial information.
NOTE 2 - AVAILABLE-FOR-SALE SECURITIES
The amortized cost and fair value of available-for-sale securities at year-end
are as follows:
<TABLE>
<CAPTION>
1996
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Obligations of the U.S.
Government and its agencies $ 1,355 $ 7 $ (5) $ 1,357
Mortgage-backed securities 4,007 36 (93) 3,950
States and political
subdivisions 984 -- -- 984
Corporate securities and
commercial paper 255 -- -- 255
------- ------- ------- -------
$ 6,601 $ 43 $ (98) $ 6,546
======= ======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
26
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 2 - AVAILABLE-FOR-SALE SECURITIES (Continued)
<TABLE>
<CAPTION>
1997
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Obligations of the U.S.
Government and its agencies $ 2,994 $ 38 $ -- $ 3,032
Mortgage-backed securities 3,355 -- (31) 3,324
States and political
subdivisions 1,281 2 -- 1,283
Corporate securities and
commercial paper 223 1 -- 224
------- ------- ------- -------
$ 7,853 $ 41 $ (31) $ 7,863
======= ======= ======= =======
</TABLE>
The amortized cost and fair value of available-for-sale securities at December
31, 1997, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because issuers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
-------- ------
Due in one year or less $ 301 $ 302
Due after one year through five years 3,947 3,987
Due after ten years 250 250
Mortgage-backed securities 3,355 3,324
------ ------
$7,853 $7,863
====== ======
The sale of available-for-sale securities during 1995, 1996 and 1997 generated
gross gains of $0, $9 and $0 and gross losses of $0, $2 and $0.
- --------------------------------------------------------------------------------
(Continued)
27
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE
Year-end loans consisted of the following:
1996 1997
--------- ---------
Mortgage loans secured by:
One-to-four family residences $ 90,757 $ 103,151
Multi-family residences 19,610 20,382
Commercial real estate 19,032 20,888
Construction and development 17,781 20,346
Home equity lines of credit 7,415 10,012
Commercial business loans 4,825 5,823
Consumer loans 2,393 3,286
--------- ---------
Gross loans receivable 161,813 183,888
Undisbursed portion of loans in process (6,755) (4,859)
Deferred loan fees, net (357) (284)
--------- ---------
$ 154,701 $ 178,745
========= =========
Mortgage loans serviced principally for the Federal Home Loan Mortgage
Corporation are not included in the accompanying statements of financial
condition. The unpaid principal balances of such loans were $39,108 and $51,681
at December 31, 1996 and 1997, respectively.
Activity for capitalized mortgage servicing rights was as follows:
1996 1997
---- ----
Beginning of year $ 4 $ 128
Additions 129 182
Amortized to expense (5) (36)
----- -----
End of year $ 128 $ 274
===== =====
No valuation allowance was deemed necessary at December 31, 1997.
Certain executive officers and directors are loan customers of the Bank.
Activity for those loans was as follows:
Balance at January 1, 1997 $ 745
Change in persons included 166
New loans and advances 450
Repayments (454)
-------
Balance at December 31, 1997 $ 907
=======
- --------------------------------------------------------------------------------
(Continued)
28
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Beginning balance $ 926 $ 922 $ 1,715
Provision for loan losses -- 800 72
Loan charge-offs (6) (7) (322)
Recoveries 2 -- 13
------- ------- -------
Ending balance $ 922 $ 1,715 $ 1,478
======= ======= =======
Information about impaired loans is as follows:
Year-end loans with no allowance for loan losses allocated $ -- $ -- $ --
Year-end loans with allowance for loan losses allocated -- 2,391 2,071
Amount of the allowance allocated -- 970 651
Average of impaired loans during the year -- 1,793 2,231
Interest income recognized during impairment -- -- 7
Cash-basis interest income recognized -- -- 7
</TABLE>
NOTE 5 - OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment is as follows at year-end:
1996 1997
---- ----
Land $ 756 $1,255
Office buildings and improvements 3,397 3,416
Furniture and equipment 1,898 2,070
------ ------
6,051 6,741
Less accumulated depreciation and amortization 1,481 1,829
------ ------
$4,570 $4,912
====== ======
- --------------------------------------------------------------------------------
(Continued)
29
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 6 - DEPOSITS
Deposits at year-end are summarized as follows:
<TABLE>
<CAPTION>
1996 1997
------------------------- ----------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Non interest-bearing deposits $ 4,127 3.5% $ 5,097 3.7%
NOW accounts 20,716 17.8 23,468 17.0
Savings accounts 12,538 10.7 13,958 10.2
-------- ----- -------- -----
37,381 32.0 42,523 30.9
-------- ----- -------- -----
Certificates of deposit
2.00% to 3.99% 64 .1 95 .1
4.00% to 5.99% 48,677 41.6 51,847 37.6
6.00% to 7.99% 30,820 26.3 43,214 31.4
8.00% to 9.99% 7 0.0 7 0.0
-------- ----- -------- -----
79,568 68.0 95,163 69.1
-------- ----- -------- -----
$116,949 100.0% $137,686 100.0%
======== ===== ======== =====
</TABLE>
At December 31, 1997, scheduled maturities of certificates of deposit are as
follows:
1998 $ 57,058
1999 27,374
2000 7,121
2001 1,858
2002 and thereafter 1,752
------------
$ 95,163
============
The aggregate amount of certificates of deposit in denominations of $100 or more
was $10,450 and $14,617 at December 31, 1996 and 1997, respectively. Individual
certificate amounts in excess of $100 are not insured by the FDIC.
- --------------------------------------------------------------------------------
(Continued)
30
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 7 - ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank (FHLB) are due in full at final
maturity, require monthly interest payments and are secured by a blanket pledge
of the Bank's eligible securities and mortgage loans.
At December 31, 1997, the year of maturity and weighted average interest rate of
FHLB advances were as follows:
Weighted
Interest Principal
Year Average Balance
---- ------- -------
1998 5.91% $ 16,000
1999 6.16 11,000
2000 5.63 4,000
2002 5.91 19,000
-----------
$ 50,000
===========
NOTE 8 - CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS
At the time of its conversion to a stock form of organization, LSB established a
liquidation account in an amount equal to its total net worth as of the date of
the latest statement of financial condition appearing in the final prospectus,
which was $8,066. The liquidation account is maintained for the benefit of
eligible depositors who continue to maintain their accounts at the Company after
the conversion. The liquidation account declines annually to the extent that
eligible depositors have reduced their qualifying deposits. Subsequent increases
will not restore an eligible account holder's interest in the liquidation
account. In the event of a complete liquidation, each eligible depositor will be
entitled to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts then
held. The balance allocated to the liquidation account is not available for
payment of dividends.
The Bank has qualified under provisions of the Internal Revenue Code which
permit it to deduct from taxable income a provision for bad debts that differs
from the provision for such losses charged against income in the financial
statements, if any. This portion of retained earnings is considered to be
restricted because if, in the future, this portion of retained earnings is used
for any purpose other than to absorb bad debt losses, federal income taxes would
be imposed at the then applicable rates. In accordance with Financial Accounting
Standard 109, LSB has not recorded a liability for the portion of the tax
reserve established prior to January 1, 1988, which totals $1,861. At current
tax rates, the tax liability for such amount would be $744.
- --------------------------------------------------------------------------------
(Continued)
31
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 8 - CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS (Continued)
The Bank is subject to various regulatory capital requirements administered by
its primary regulator, the Office of Thrift Supervision (OTS) and by the Federal
Deposit Insurance Corporation (FDIC). Failure to meet minimum capital
requirements can result in certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the financial statements. These guidelines and the regulatory
framework for prompt corrective action involve quantitative measures of capital,
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices as well as qualitative judgments by the
regulators about components, risk weightings, and other factors. The Bank's
deposit insurance premium rate is also based, in part, on these requirements. At
December 31, 1996 and 1997, the Bank's actual and required minimum capital
ratios were as follows:
<TABLE>
<CAPTION>
FDIC
-------------------
To Be Well
OTS Capitalized Under
For Capital Corrective Action
Actual Adequacy Purposes Provisions
--------------- --------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk
Weighted Assets)
1996 $16,623 12.44% $0,687 8.0% $ 13,359 10.0%
1997 17,556 11.98 1,725 8.0 14,656 10.0
Tier I Capital (to Risk
Weighted Assets)
1996 $15,122 11.32% $5,344 4.0% $ 8,015 6.0%
1997 16,510 11.27 5,862 4.0 8,793 6.0
Tier 1 (Core) Capital
(to Adjusted Assets)
1996 $15,122 8.23%$ 5,509 3.0% $ 9,182 5.0%
1997 16,510 8.01 6,183 3.0 10,305 5.0
Tangible Capital
(to Adjusted Assets)
1996 $15,122 8.23% $2,755 1.5% N/A
1997 16,510 8.01 3,091 1.5
</TABLE>
Risk-based capital differs from tangible and core capital due to the inclusion
of the Bank's general valuation allowance which totaled $1,501 and $1,046 at
December 31, 1996 and 1997.
At December 31, 1996 and 1997, the Bank's capital ratios result in its being
designated a well capitalized institution.
- --------------------------------------------------------------------------------
(Continued)
32
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 9 - BENEFIT PLANS
The LSB Stock Option Plan reserved 102,957 shares of Common Stock for granting
options to directors and officers of the Companies. Under the terms of the Plan,
options can be granted at values not less than the fair market value of the
shares at the date of the grant. Options vest at each anniversary date over a
five year period and must be exercised within ten years of grant.
The following pro forma information presents net income and earnings per share
had the fair value method been used to measure compensation cost for stock
option plans.
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net income as reported $ 1,242 $ 876 $ 1,566
Pro forma net income 1,224 821 1,511
Diluted earnings per share as reported 1.23 .95 1.77
Pro forma earnings per share 1.22 .88 1.72
</TABLE>
<TABLE>
<CAPTION>
Weighted-Average Weighted-Average
Number Per Share Per Share
of Options Exercise Price Fair Value of Grants
---------- -------------- --------------------
<S> <C> <C> <C>
Outstanding, January 1, 1995 -
Granted (1) 77,767 $ 14.64 $ 4.24
Exercised -
Forfeited -
Expired -
------
Outstanding, end of 1995 77,767 14.64
Granted -
Exercised -
Forfeited -
Expired -
------
Outstanding, end of 1996 77,767 14.64
Granted 4,320 27.50 7.57
Exercised (206) 15.375
Forfeited (823) 15.375
Expired -
------
Outstanding, end of 1997 81,058
======
</TABLE>
(1) Adjusted for 5% stock dividend paid in 1997
- --------------------------------------------------------------------------------
(Continued)
33
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 9 - BENEFIT PLANS (Continued)
Options exercisable at year-end are as follows:
Weighted-Average
Number Per Share
of Options Exercise Price
---------- --------------
1995 -- $ --
1996 14,822 15.375
1997 30,695 14.64
The fair value of options granted during 1996 and 1997 was estimated using the
following weighted-average information: risk-free interest rates of 6.34% and
5.50%, expected life of 7 years, expected volatility of stock price of .15 and
expected annual dividend yields of 1.56% and 1.27%.
At year-end, options outstanding were as follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Number of options 77,767 81,058
Exercise price range $14.64 / share $14.64 - $27.50 / share
Weighted-average exercise price 14.64 / share 15.32 / share
Weighted-average
remaining option life 8.7 years 7.9 years
</TABLE>
The LSB Recognition and Retention Plan (RRP) has awarded 29,079 shares of stock
to certain officers and directors of the Company. Stock awarded under the Plan
is restricted as to certain rights at the time of issuance. These restrictions
are removed over a 5 year period. The cost of these shares is amortized over the
vesting period. Expense recorded for the RRP totaled $28, $90, and $90 in 1995,
1996, and 1997.
The Bank maintains an ESOP which purchased 8%, or 82,366 shares, of the stock
offered in the conversion using funds provided by an $824 loan from LSB which
will be repaid by contributions to the ESOP by the Bank in the future. Pursuant
to the ESOP, the shares are to be allocated to participants annually, over a 12
year period, based upon employee compensation levels during the year. ESOP
expense is based on the fair value of shares committed to be released. The
number of shares earned each year is determined by the ESOP loan agreement.
Shares no longer required to be held as collateral for that loan are committed
to be released and are earned by participants. Dividends paid on shares that are
not allocated to participants' accounts are used to service debt. Unearned ESOP
shares are not considered to be outstanding for the purpose of computing
earnings per share.
- --------------------------------------------------------------------------------
(Continued)
34
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 9 - BENEFIT PLANS (Continued)
The following table presents information about the ESOP at year-end or for the
year:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Shares earned for the year 8,504 8,540 8,584
Shares allocated to participants at year-end - 8,504 17,632
Shares committed to be released at year-end 8,504 8,540 8,584
Unreleased shares at year-end 73,862 65,322 60,000
Fair value of unreleased shares at year-end $ 1,274 $ 1,274 $ 1,710
Expense recognized for the year 123 143 184
</TABLE>
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES
In the ordinary course of business, the Bank has loans, commitments and
contingent liabilities, such as guarantees and commitments to extend credit,
which are not reflected in the accompanying consolidated statements of financial
condition. The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial guarantees is represented by the contractual
amounts of those instruments. The Bank uses the same credit policy to make such
commitments as it uses for on-balance-sheet items.
At year-end these financial instruments are summarized as follows:
1996 1997
---------- ---------
Commitments to extend credit:
Fixed rate $ 1,280 $ 2,282
Variable rate 1,141 1,169
Unused portions of lines of credit 13,413 15,949
Standby letters of credit 423 108
The commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established under the contract.
Generally, such commitments are for no more than 60 days. At December 31, 1997,
the fixed rate loan commitments were at rates ranging from 7.375% to 8.75%.
Unused portions of lines of credit include balances available on commercial,
home equity and credit card loans and are variable rate.
Since many commitments to make loans expire without being used, the amounts do
not necessarily represent future cash commitments. Collateral obtained upon
exercise of the commitment is determined using management's credit evaluation of
the borrower.
- --------------------------------------------------------------------------------
(Continued)
35
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
LSB and the Bank are party to various legal actions arising in the course of
business. In the opinion of management, the companies have adequate legal
defenses and/or insurance coverage with respect to these actions and their
resolution will not materially affect the operations or financial position of
LSB or the Bank.
The Bank is party to an agreement with a third party service organization which
provides data processing services to the Bank until the year 2000. Should the
Bank terminate the contract prior to completion of the term, it would incur a
penalty based on 80% of the expected remaining payments under the agreement.
NOTE 11 - INCOME TAXES
An analysis of the income tax provision is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------
1995 1996 1997
----------- ----------- ----------
<S> <C> <C> <C>
Current provision $ 645 $ 692 $ 853
Deferred provision (benefit) 79 (142) 187
---------- ---------- ----------
$ 724 $ 550 $ 1,040
========== ========== ==========
</TABLE>
The difference between the financial statement income tax provision and the
amount computed by applying the statutory federal tax rate of 34% to income
before income taxes is reconciled as follows:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------
1995 1996 1997
----------- ----------- ----------
<S> <C> <C> <C>
Income tax provision computed at statutory rate $ 668 $ 485 $ 886
Add (subtract) tax effect of
Low income housing credit (49) (36) (17)
Tax exempt income (24) (10) (17)
State tax expense (net of federal tax benefit) 116 89 156
Other 13 22 32
------- ------- -------
$ 724 $ 550 $ 1,040
======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
36
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 11- INCOME TAXES (Continued)
The net deferred tax asset recorded at December 31, 1996 and 1997 is comprised
of the following:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Deferred tax assets from:
Bad debt deductions $ 460 $ 363
Loan fee income 28 28
Net unrealized loss on available-for-sale securities 22 -
Deferred compensation - 29
------- -------
510 420
Deferred tax liability from:
Fixed asset depreciation (133) (133)
Other (21) (32)
Net unrealized gain on available-for-sale securities - (4)
Mortgage servicing rights - (108)
------- -------
(154) (277)
Valuation allowance for deferred tax assets - -
------- -------
Net deferred tax asset $ 356 $ 143
======= =======
</TABLE>
NOTE 12 - EARNINGS PER SHARE
The following table presents the data used to compute earnings per share:
<TABLE>
<CAPTION>
1995 1996 1997
--------- ------- -------
Weighted average shares outstanding
<S> <C> <C> <C>
during the year 1,006,494 921,282 865,457
Dilutive effect of potential shares 4,382 5,339 20,232
--------- ------- -------
Shares used to compute diluted
earnings per share 1,010,876 926,621 885,689
========= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
37
<PAGE>
LSB FINANCIAL CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 13 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments at year-end are as follows, in thousands.
<TABLE>
<CAPTION>
1996 1997
----------------------------- ----------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Financial assets
Cash and short-term
investments $ 9,798 $ 9,798 $ 9,938 $ 9,938
Available-for-sale securities 6,546 6,546 7,863 7,863
Federal Home Loan Bank stock 2,575 2,575 2,600 2,600
Loans (net) 159,216 160,012 178,532 179,599
Accrued interest receivable 1,006 1,006 1,206 1,206
Financial liabilities
Deposits (116,949) (116,838) (137,686) (137,858)
Federal Home Loan Bank
advances (50,000) (49,975) (50,000) (49,707)
Note payable (220) (220) (189) (189)
Accrued interest payable (197) (197) (192) (192)
</TABLE>
The estimated fair value approximates carrying amount for all items except those
described below. Estimated fair value for securities is based on quoted market
values for the individual securities or for equivalent securities. Estimated
fair value for loans is based on the rates charged at year end for new loans
with similar maturities, applied until the loan is assumed to reprice or be
paid. Estimated fair value for time deposits and FHLB advances is based on the
rates paid at year end for new deposits or borrowings, applied until maturity.
Estimated fair value for off-balance-sheet loan commitments are considered
nominal.
- --------------------------------------------------------------------------------
(Continued)
38
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS
Presented below are the condensed balance sheets and the related condensed
statements of income and cash flows for the parent company.
CONDENSED BALANCE SHEETS
December 31, 1996 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1997
------------- -------------
ASSETS
<S> <C> <C>
Short-term investments $ 797 $ 99
Investment in the Bank 15,102 16,791
Available-for-sale securities 250 250
Loan to ESOP 686 618
Other assets 3 -
------------- -------------
$ 16,838 $ 17,758
============= =============
LIABILITIES $ 42 24
SHAREHOLDERS' EQUITY 16,796 17,734
------------- -------------
$ 16,838 $ 17,758
============= =============
</TABLE>
CONDENSED STATEMENTS OF INCOME
For the years ended December 31, 1995, 1996 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Operating income
Dividends from the Bank $ - $ 1,000 $ 180
Other operating income 133 83 68
----------- ----------- -----------
Total operating income 133 1,083 248
Operating expenses 32 82 59
----------- ----------- -----------
Income before taxes and equity in undistributed income
of the Bank 101 1,001 189
Income tax provision 26 (3) (1)
----------- ----------- -----------
Income before equity in undistributed income of the Bank 75 1,004 190
Equity in undistributed income of the Bank 1,167 (128) 1,376
----------- ----------- -----------
Net income $ 1,242 $ 876 $ 1,566
=========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
39
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1995, 1996, and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,242 $ 876 $ 1,566
Adjustments to reconcile net income to net cash from operating
activities
Equity in undistributed income of the Bank (1,167) 128 (1,376)
Amortization of premiums paid for securities 36 1 -
Gain on sale of securities - (9) -
Change in other assets (24) 21 3
Change in other liabilities 28 23 (18)
----------- ----------- -----------
Net cash from operating activities 115 1,040 175
Cash flows from investing activities
Investment in the Bank (5,102) - -
Proceeds from the sale of available-for-sale securities 510 814 -
Purchase of available-for-sale securities (4,370) (840) -
Proceeds from the maturity of available-for-sale securities 1,100 1,000 -
Proceeds from repayment of the loan to ESOP 69 69 68
----------- ----------- -----------
Net cash from investing activities (7,793) 1,043 68
Cash flows from financing activities
Proceeds from issuance of stock, net of ESOP debt 8,785 - -
Issuance of RRP shares 427 22 -
Dividends paid - (213) (311)
Stock options exercised - - 3
Repurchase of treasury stock (466) (2,163) (633)
----------- ----------- -----------
Net cash from financing activities 8,746 (2,354) (941)
----------- ----------- -----------
Net changes in cash equivalents 1,068 (271) (698)
Cash equivalents at beginning of year - 1,068 797
----------- ----------- -----------
Cash equivalents at end of year $ 1,068 $ 797 $ 99
=========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
40
<PAGE>
LSB FINANCIAL CORP.
AND
LAFAYETTE SAVINGS BANK, FSB
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
<S> <C>
Directors
John W. Corey Peter Neisel
President and Chief Executive President and CEO, Schwab Corp.
Officer, LSB and Lafayette Bank
Mariellen M. Neudeck Jeffrey A. Poxon
Chairman of the Board, LSB and Senior Vice President, Investments and
Lafayette Bank Chief Investment Officer, Lafayette Life
Vice President, St. Elizabeth Insurance Company
Hospital Medical Center
James A. Andrew Thomas L. Ryan
President and Owner, Henry Poor Partner, Stuart & Branigin
Lumber Co.
Harry A. Dunwoody John C. Shen
Senior Vice President of LSB and Developer and Sole Owner,
Lafayette Bank Crestview Apartments and Crestview
North Apartments
Philip W. Kemmer C. Wesley Shook
Business Administrator, Secretary-Treasurer,
First Assembly of God Church The Shook Agency
Executive Officers
John W. Corey Mary Jo David
President and Chief Executive Officer Vice President, Chief Financial Officer
and Secretary-Treasurer
Harry A. Dunwoody Gregory A. Milakis
Senior Vice President Vice President
</TABLE>
41
<PAGE>
STOCKHOLDER INFORMATION
Corporate Profile
LSB is an Indiana corporation which was organized in 1994 by the Bank
for the purpose of becoming a thrift institution holding company. The Bank was
organized in 1869 and converted to a federal savings bank in 1984. On February
3, 1995, the Bank converted to the stock form of organization and concurrently
became the wholly-owned subsidiary of LSB through the sale and issuance of
1,029,576 shares of common stock. The principal asset of LSB is the outstanding
stock of the Bank, its wholly owned subsidiary. The Bank's primary business
consists of attracting deposits from the general public and using these deposits
to provide financing for the purchase and construction of residential and, to a
lesser extent, other properties and to fund consumer loans.
Corporate Office Branch Offices
101 Main Street 1020A Sagamore Parkway W.
Lafayette, Indiana 47902 West Lafayette, Indiana
1501 Sagamore Parkway W.
Lafayette, Indiana
833 Twyckenham Blvd.
Lafayette, IN 47905
Independent Auditors Local Counsel
Crowe, Chizek and Company LLP Stuart & Branigin
2100 Market Tower 300 Main Street, Suite 800
10 W. Market Street Lafayette, Indiana 47902
Indianapolis, Indiana 46204-2976
Transfer Agent Special Counsel
American Securities Transfer, Inc. Silver, Freedman & Taff, L.L.P.
1825 Lawrence Street 1100 New York Avenue, N.W.
Denver, Colorado 80202 Washington, D.C. 20005
Form 10-K Report
A copy of LSB's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 including financial statements, as filed with the SEC will be
furnished without charge to stockholders of LSB upon written request to the
Secretary, LSB Financial Corp., 101 Main Street, P.O. Box 1628, Lafayette,
Indiana 47902.
42
<PAGE>
Common Stock
As of December 31, 1997, there were approximately 610 holders of record
of LSB Common Stock and 916,350 shares of issued and outstanding common stock.
LSB's stock is quoted on the Nasdaq National Stock Market under the symbol
"LSBI."
The following table sets forth, for the periods shown, the high and low
prices of the common stock and cash dividends per share declared. Dividend
amounts were not restated for the 5% stock dividend paid in June 1997. The
common stock began trading on Nasdaq on February 5, 1995, the date the Bank
converted from a mutual to stock company.
The prices reflect inter-dealer quotations without retail mark-up,
mark-down or commissions and do not necessarily represent actual transactions.
Cash
Dividends
Quarter Ended High Low Declared
------------- ---- --- --------
March 31, 1995 $12.50 $10.75 $0.00
June 30, 1995 14.25 11.75 0.00
September 30, 1995 16.75 13.50 0.00
December 31, 1995 17.25 16.00 0.00
March 31, 1996 17.375 16.50 0.00
June 30, 1996 16.50 15.50 0.08
September 30, 1996 17.25 15.00 0.08
December 31, 1996 19.50 17.25 0.08
March 31, 1997 20.75 18.75 0.085
June 30, 1997 20.875 19.375 0.085
September 30, 1997 26.50 20.25 0.085
December 31, 1997 28.50 23.875 0.10
Dividend payment decisions are made with consideration of a variety of factors
including earnings, financial condition, market considerations and regulatory
restrictions. Restrictions on dividend payments are described in Note 9 of the
Notes to Consolidated Financial Statements included in this Annual Report.
43
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Percentage State of
of Incorporation
Parent Subsidiary Ownership or Organization
- --------------------------- -------------------------- --------- ---------------
<S> <C> <C> <C>
LSB Financial Corp. Lafayette Savings Bank, FSB 100% Federal
Lafayette Savings Bank, FSB L.S.B. Service Corporation 100% Indiana
Lafayette Savings Bank, FSB Lafayette Insurance and 100% Indiana
Investments, Inc.
</TABLE>
The financial statements of LSB Financial Corp are consolidated with
those of its subsidiaries.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
<PAGE>
Consent of Independent Auditors
Board of Directors
LSB Financial Corp.
Lafayette, Indiana
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (Reg. Nos. 33-98518 and 33-98516) of LSB Financial Corp. of our Report
of Independent Auditors, dated February 4, 1998, on the consolidated statements
of financial condition of LSB Financial Corp. as of December 31, 1997 and 1996
and on the consolidated statements of income, changes in shareholders' equity
and cash flows for each of the years in the three year period ended December 31,
1997, which report is included in Form 10-KSB of LSB Financial Corp. for the
year ended December 31, 1997.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Indianapolis, Indiana
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000930405
<NAME> LSB FINANCIAL CORP.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,358
<INT-BEARING-DEPOSITS> 5,580
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,863
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 178,745
<ALLOWANCE> 1,478
<TOTAL-ASSETS> 206,584
<DEPOSITS> 137,685
<SHORT-TERM> 50,000
<LIABILITIES-OTHER> 976
<LONG-TERM> 220
0
0
<COMMON> 9
<OTHER-SE> 17,725
<TOTAL-LIABILITIES-AND-EQUITY> 188,850
<INTEREST-LOAN> 14,384
<INTEREST-INVEST> 709
<INTEREST-OTHER> 156
<INTEREST-TOTAL> 15,249
<INTEREST-DEPOSIT> 5,975
<INTEREST-EXPENSE> 8,708
<INTEREST-INCOME-NET> 6,541
<LOAN-LOSSES> 72
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,786
<INCOME-PRETAX> 2,607
<INCOME-PRE-EXTRAORDINARY> 2,607
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,566
<EPS-PRIMARY> 1.81
<EPS-DILUTED> 1.77
<YIELD-ACTUAL> 3.56
<LOANS-NON> 2,094
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,400
<LOANS-PROBLEM> 1,112
<ALLOWANCE-OPEN> 1,715
<CHARGE-OFFS> 322
<RECOVERIES> 13
<ALLOWANCE-CLOSE> 1,478
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 194
</TABLE>
