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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
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-25070.
LSB FINANCIAL CORP.
(Exact Name of Small Business Issuer as Specified in its Charter)
Indiana 35-1934975
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Main Street, Lafayette, Indiana 47902
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (765) 742-1064
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve months (or for
such shorter period that the Issuer was required to file such reports), and (2)
has been subject to such requirements for the past 90 days. YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The Issuer had $18.418 million in gross income for the year ended December
31, 1998.
As of March 20, 1999, there were issued and outstanding 917,586 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, 1999, was
approximately $20.3 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--1998 Annual Report to Stockholders.
PART III of Form 10-KSB--Proxy Statement for the 1998 Annual Meeting of
Stockholders.
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FORWARD-LOOKING STATEMENTS
LSB Financial Corp. and its wholly-owned subsidiary Lafayette Savings Bank,
FSB may from time to time make written or oral forward-looking statements,
including statements contained in our filings with the Securities and Exchange
Commission, including this Annual Report on Form 10-KSB and its exhibits, and in
other communications by us, which are made in good faith pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. The
words "may", "could", "should", "would", "believe", "anticipate", "estimate",
"expect", "intend", "plan" and similar expressions are intended to identify
forward-looking statements.
Forward-looking statements include statements with respect to our beliefs,
plans, objectives, goals, expectations, anticipations, estimates and intentions,
that are subject to significant risks and uncertainties. The following factors,
many of which are subject to change based on various other factors beyond our
control, could cause our financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements:
o the strength of the United States economy in general and the strength
of the local economies in which we conduct our operations;
o the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Federal Reserve
Board;
o inflation, interest rate, market and monetary fluctuations;
o the timely development of and acceptance of our new products and
services and the perceived overall value of these products and
services by users, including the features, pricing and quality
compared to competitors' products and services;
o the willingness of users to substitute competitors' products and
services for our products and services;
o our success in gaining regulatory approval of our products and
services, when required;
o the impact of changes in financial services' laws and regulations
(including laws concerning taxes, banking, securities and insurance);
o the impact of technological changes;
o acquisitions;
o changes in consumer spending and saving habits; and
o our success at managing the risks involved in the foregoing.
This list of important factors is not exclusive. We do not undertake to
update any forward-looking statement, whether written or oral, that we may make.
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PART I
Item 1. Description of Business
General
LSB Financial Corp. is an Indiana corporation which was organized in 1994
by Lafayette Savings Bank, FSB for the purpose of becoming a thrift institution
holding company. Lafayette Savings is a federally chartered stock savings bank
headquartered in Lafayette, Indiana. Originally organized in 1869, Lafayette
Savings converted to a federal savings bank in 1984. Lafayette Savings' deposits
are insured up to the applicable limits by the Bank Insurance Fund of the
Federal Deposit Insurance Corporation (the "FDIC"). In February 1995, Lafayette
Savings converted to the stock form of organization through the sale and
issuance of 1,029,576 shares of its common stock to LSB Financial. LSB
Financial's principal asset is the outstanding stock of Lafayette Savings. LSB
Financial presently has no separate operations and its business consists only of
the business of Lafayette Savings. References in this Form 10-KSB to "we", "us",
and "our" refer to LSB Financial and/or Lafayette Savings as the context
requires.
We have been, and intend to continue to be, a community-oriented financial
institution. Our principal business 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. We currently serve Tippecanoe County, Indiana through our three
retail banking offices. At December 31, 1998, we had total assets of $232.8
million, deposits of $161.8 million and shareholders' equity of $18.2 million.
Our revenues are derived principally from interest on mortgage and other
loans and interest on securities.
Our executive offices are located at 101 Main Street, Lafayette, Indiana
47902. Our telephone number at that address is (765) 742-1064.
Lending Activities
General. Our principal lending activity 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 our
primary market area. We also originate non-owner occupied one- to four-family
residential, multi-family and land development, commercial real estate, consumer
and commercial business loans.
In the mid 1980's, we began originating adjustable rate loans for retention
in our 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, we have continued to
originate such loans. We underwrite these mortgage loans utilizing secondary
market guidelines allowing them to be saleable, without recourse, primarily to
Freddie Mac. The sale of these loans results in additional short-term income and
improves our interest rate risk position. We generally retain servicing rights
on loans sold in the secondary market. Furthermore, in order to limit our
potential exposure to increasing interest rates caused by our traditional
emphasis
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on originating single family mortgage loans, we have diversified our portfolio
by increasing our emphasis on the origination of short-term or adjustable rate
multi-family and commercial real estate and commercial business loans. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset/Liability Management; Market Risk Analysis" in the Annual
Report to Stockholders filed as Exhibit 13 to this Annual Report.
Our loan officers and certain executive officers have approval authority on
loans depending on the type and amount of the loan. All owner-occupied
residential loans greater than $250,000 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 $1.0 million or more must be approved by a majority of the full
board of directors.
At December 31, 1998, the maximum amount we could have loaned to any one
borrower and the borrower's related entities was $2.8 million. Our largest
lending relationship to a single borrower or a group of related borrowers
totaled $2.6 million at December 31, 1998, consisting of two loans to a single
borrower secured by a multi-family dwelling and a single family residence. The
second largest lending relationship totaled $2.4 million, consisting of multiple
loans to a single borrower secured by multi-family rental properties. The third
largest lending relationship totaled $2.2 million, consisting of multiple loans
to a single borrower secured by one- to four-family and multi-family rental
properties. All of these loans were performing in accordance with their terms at
December 31, 1998. At December 31, 1998, we had 26 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.
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Loan Portfolio Composition. The following table sets forth information
concerning the composition of our 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.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
---------------- ---------------- --------------- ---------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans
One-to four-family ........... $ 69,139 68.53% $ 86,231 62.40% $ 96,987 57.72% $104,416 56.39% $113,231 55.08%
Multi-family ................. 7,643 7.58 12,044 8.72 19,610 11.67 20,382 11.01 25,530 12.42
Commercial ................... 10,712 10.62 15,034 10.88 19,032 11.33 20,888 11.28 26,342 12.82
Land and land development .... 2,915 2.89 3,880 2.81 3,334 1.98 6,020 3.25 6,174 3.00
Construction ................. 3,251 3.22 10,379 7.51 14,447 8.60 14,326 7.74 12,220 5.95
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total Real Estate Loans .... 93,660 92.84 127,568 92.32 153,410 91.30 166,032 89.67 183,497 89.27
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Other Loans
Consumer loans:
Home Equity ................. 3,393 3.36 4,124 2.98 7,415 4.41 10,012 5.41 10,572 5.14
Home improvement ............ 184 0.18 53 0.04 212 0.13 140 0.08 301 0.15
Automobile .................. 380 0.38 794 0.57 792 0.47 1,633 0.88 1,639 0.80
Deposit account ............. 330 0.33 144 0.10 238 0.14 165 0.09 66 0.03
Other ....................... 333 0.32 933 0.68 1,151 0.68 1,348 0.73 1,848 0.90
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans ..... 4,620 4.57 6,048 4.37 9,808 5.83 13,298 7.19 14,426 7.02
Commercial business loans .... 2,614 2.59 4,570 3.31 4,825 2.87 5,823 3.14 7,627 3.71
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total other loans .......... 7,234 7.16 10,618 7.68 14,633 8.70 19,121 10.33 22,053 10.73
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans ............. 100,894 100.00% 138,186 100.00% 168,043 100.00% 185,153 100.00% 205,550 100.00%
-------- ====== -------- ====== -------- ====== -------- ====== ======== ======
Less:
Loans in process ............ 1,095 4,516 6,755 4,859 4,401
Deferred fees and discounts . 271 315 357 284 225
Allowance for losses ........ 926 922 1,715 1,478 1,578
-------- -------- -------- -------- --------
Total loans receivable, net $ 98,602 $132,433 $159,216 $178,532 $199,346
======== ======== ======== ======== ========
</TABLE>
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The following table shows the composition of our loan portfolio, including
loans held for sale, by fixed- and adjustable-rate at the dates indicated. The
one- to four-family fixed-rate loans include $14.7 million, $17.3 million and
$16.7 million of loans at December 31, 1996, 1997 and 1998, respectively, which
carry a fixed rate of interest for the initial five or seven years and then
convert to a one year adjustable rate of interest for the remaining term of the
loan.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
---------------- ---------------- --------------- ---------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family ......... $ 32,212 31.93% $ 41,222 29.83% 48,204 28.69% $ 46,036 24.86% $ 50,480 24.57%
Multi-family ................ 56 0.06 457 0.33 401 0.24 857 0.46 434 0.21
Commercial .................. 2,532 2.51 2,096 1.52 2,791 1.66 1,107 0.60 1,179 0.57
Construction 3,251 3.22 10,379 7.51 14,447 8.60 14,326 7.74 2,427 1.18
Land and land development ... -- -- -- -- 762 0.45 1,197 0.65 1,629 0.79
-------- ------ -------- ------ ------- ------ -------- ------ -------- ------
Total Real Estate Loans .... 38,051 37.72 54,154 39.19 66,605 39.64 63,523 34.31 56,149 27.32
Consumer .................... 1,063 1.05 1,619 1.17 2,393 1.42 2,738 1.48 3,152 1.53
Commercial business ......... 2,012 1.99 4,570 3.31 4,103 2.44 5,131 2.77 5,567 2.71
-------- ------ -------- ------ ------- ------ -------- ------ -------- ------
Total fixed-rate loans .... 41.126 40.76 60,343 43.67 73,101 43.50 71,392 38.56 64,868 31.56
-------- ------ -------- ------ ------- ------ -------- ------ -------- ------
Adjustable-Rate Loans:
Real estate:
One- to four-family ......... 36,927 36.60 45,009 32.57 48,783 29.03 58,380 31.53 62,751 30.53
Multi-family ................ 7,587 7.52 11,587 8.39 19,209 11.43 19,525 10.55 25,096 12.21
Commercial .................. 8,180 8.11 12,938 9.36 16,241 9.66 19,781 10.68 25,163 12.24
Construction ................ -- -- -- -- -- -- -- -- 9,793 4.76
Land and land development ... 2,915 2.89 3,880 2.81 2,572 1.54 4,823 2.60 4,545 2.21
-------- ------ -------- ------ ------- ------ -------- ------ -------- ------
Total Real Estate Loans .... 55,609 55.12 73,414 53.13 86,805 51.66 102,509 55.36 127,348 61.95
Consumer .................... 3,557 3.52 4,429 3.20 7,415 4.41 10,560 5.70 11,274 5.49
Commercial business ......... 602 0.60 -- -- 722 0.43 692 0.38 2,060 1.00
-------- ------ -------- ------ ------- ------ -------- ------ -------- ------
Total adjustable-rate loans 59.768 59.24 77,843 56.33 94,942 56.50 113,761 61.44 140,682 68.44
-------- ------ -------- ------ ------- ------ -------- ------ -------- ------
Total loans ............... 100,894 100.00% 138,186 100.00% 168,043 100.00% 185,153 100.00% 205,550 100.00%
-------- ====== -------- ====== ------- ====== -------- ====== -------- ======
Less:
Loans in process ............ 1,095 4,516 6,755 4,859 4,401
Deferred fees and discounts . 271 315 357 284 225
Allowance for losses ........ 926 922 1,715 1,478 1,578
-------- -------- -------- -------- --------
Total loans receivable, net $ 98,602 $132,433 $159,216 $178,532 $199,346
======== ======== ======== ======== ========
</TABLE>
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The following schedule illustrates the maturities of our loan portfolio at
December 31, 1998. 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 Construction, Land
One- and and Commercial
to Four-Family Commercial Land Development Consumer Business Total
---------------- ---------------- ------------------ ---------------- ----------------- -----------------
Weighted Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Due During
Years Ending
December 31,
- - -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999 ............. $ 4,831 8.29% $ 930 9.11% $ 5,235 8.70% $ 386 8.91% $ 2,913 9.48% $ 14,295 8.89%
2000 ............. 292 8.68 13 9.50 2,550 8.48 983 8.67 2,190 1.15 6,028 5.86
2001 ............. 1,084 8.01 277 7.69 91 7.37 2,572 8.43 1,124 8.47 5,148 8.29
2002 and 2003 .... 2,565 8.08 648 7.95 173 8.57 10,139 7.81 617 9.16 14,142 7.93
2004 to 2008 ..... 7,173 8.10 2,646 8.92 15 11.00 346 9.25 593 8.19 10,773 7.89
2009 to 2018 ..... 21,587 7.73 29,763 8.50 437 7.63 -- -- 190 8.75 51,977 7.78
2019 and following 75,699 7.68 17,595 7.55 9,893 7.55 -- -- -- -- 103,187 8.03
-------- -------- -------- -------- -------- --------
TOTAL ........... $113,231 7.77% $ 51,872 8.46% $ 18,394 8.02% $ 14,426 8.04% $ 7,627 6.16% $205,550 7.93%
======== ======== ======== ======== ======== ========
</TABLE>
The total amount of loans due to mature after December 31, 1999 which have
fixed interest rates is $74.9 million, and which have adjustable or renegotiable
interest rates is $116.4 million.
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One- to Four-Family Residential Real Estate Lending
Our lending program focuses on the origination of permanent loans secured
by mortgages on owner-occupied, one- to four-family residences. We also
originate loans secured by nonowner-occupied, one- to four-family residences. At
December 31, 1998, $113.2 million, or 55.08% of our 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 our
primary market area. We originate a variety of residential loans, including
conventional 15 and 30 year fixed-rate loans, fixed-rate loans convertible to
adjustable rate loans, adjustable rate loans and balloon loans.
Our one- to four-family residential adjustable rate loans are fully
amortizing loans with contractual maturities of up to 30 years. The interest
rates on substantially all of the adjustable rate loans originated by us are
subject to adjustment at one, three or five year intervals. Our adjustable rate
mortgage 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 our one-year adjustable
rate loans 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 adjustable rate loans are limited to a 3% adjustment
cap with a 5% lifetime interest rate cap over the initial rate. Our one-year
adjustable rate loans may be convertible into fixed-rates 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 our adjustable rate loans may be below the fully indexed rate.
Borrowers are qualified at 2% over the initial interest rate for our one-year
adjustable rate loans and at the initial interest rate for our three-year and
five-year adjustable rate loans. At December 31, 1998, the total balance of one-
to four- family adjustable rate loans was $62.7 million, or 30.53% of our gross
loan portfolio. We generally retain adjustable rate loans in our portfolio
pursuant to the asset/liability management strategy. Three-year and five-year
adjustable rate loans represented $60.2 million and one-year adjustable rate
loans represented $2.5 million of our total adjustable rate loans at December
31, 1998.
We also offer fixed-rate mortgage loans to owner occupants with maturities
up to 30 years and which conform to Freddie Mac standards. We currently sell in
the secondary market the majority of our long-term, conforming, fixed-rate loans
with terms over 15 years. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -Asset/Liability Management; Market Risk
Analysis" in the Annual Report to Stockholders filed as Exhibit 13 to this
Annual Report. Interest rates charged on these fixed-rate loans are priced on a
daily basis in accordance with Freddie Mac pricing standards. These loans do not
include prepayment penalties.
In 1995, we expanded our 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 our standard one-year adjustable rate
mortgage for the remainder of the term.
We had $42.5 million in nonowner-occupied one- to four-family residential
loans at December 31, 1998. These loans are underwritten using the same criteria
as owner-occupied, one-to four-family residential loans, but are provided at
higher rates than owner-occupied loans. We offer fixed-rate, adjustable-rate and
convertible rate loans, with terms of up to 30 years.
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We originate 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. We require private mortgage insurance in an amount intended
to reduce our 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, we
evaluate 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 that we make are appraised by
independent fee appraisers. We require borrowers to obtain title insurance and
fire, extended coverage casualty and flood insurance, if appropriate. Real
estate loans that we originate contain a "due on sale" clause allowing us to
declare the unpaid principal balance due and payable upon the sale of the
security property.
Multi-Family and Commercial Real Estate Lending
We originate permanent loans secured by multi-family and commercial real
estate. At December 31, 1998, our multi-family and commercial real estate loan
portfolio totaled $51.9 million, or 25.24% of our total loan portfolio, compared
to $41.3 million and $38.6 million, or 22.29% and 23.00%, at December 31, 1997
and 1996, 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.
Our 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 our primary market area.
Permanent multi-family and commercial real estate loans are originated as
three-year and five-year adjustable rate loans with up to a 24 year
amortization. To a substantially lesser extent, such loans are originated as 10
year fixed-rate loans. The adjustable rate loans are tied to an index based on
the weekly average of the three-year or five-year U.S. Treasury rate,
respectively, plus a stated margin over the index. 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 us are performed by independent
appraisers designated by us at the time the loan is made and reviewed by
management. In addition, our underwriting procedures generally require
verification of the borrower's credit history, income and financial statements,
banking relationships and income projections for the property.
Multi-family and commercial real estate loans generally present a higher
level of risk than loans secured by one- to four-family residences. This greater
risk is due to several factors, including the concentration of principal in a
limited number of loans and borrowers, the effects of general economic
conditions on income producing properties and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multi-family and 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
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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
We make 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, 1998, substantially all of these loans were secured by
property located within our primary market area. At December 31, 1998, we had
$12.2 million in construction loans outstanding, representing 5.95% of our 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 that we offer on one- to
four-family loans. 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,
1998, we had $4.3 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. We limit builders to one home construction loan at a time but
would consider requests for more than one if the homes are presold. At December
31, 1998, we had $3.9 million of construction loans to builders of one-to
four-family residences.
We make construction loans to builders of multi-family dwellings and
commercial projects with terms up to one year and require 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 our permanent commercial loan
products at the end of the construction phase. At December 31, 1998, we had $4.0
million of loans to finance the construction of multi-family dwellings and
commercial projects.
We also make 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 our 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, 1998, we
had $5.2 million of development loans to builders. We also make a limited number
of land acquisition loans. At December 31, 1998, we had $925,000 in loans
secured by land.
Construction and development loans are obtained principally through
continued business from developers and builders who have previously borrowed
from us, as well as referrals from existing customers and realtors, and walk-in
customers. The application process includes a submission to us 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, which is the land plus the building.
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At December 31, 1998, our largest construction and development loan was a
development loan for a small residential subdivision for $900,000. We had no
non-performing construction loans at December 31, 1998.
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
We originate 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. 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 $10.6
million or 5.14% of the total loan portfolio at December 31, 1998. We are
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 only. At December 31, 1998, we had $11.3 million of unused credit
available under our home equity line of credit program.
Our underwriting standards for consumer loans include a determination of
the applicant's payment history on other debts and their ability to meet
existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is of primary consideration, our 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.
Commercial Business Lending
Our 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, 1998, we had
$523,000 of unsecured lines of credit outstanding with $631,000 of unused credit
available. During the early part of 1994, we hired an experienced commercial
loan officer to develop this area of lending, as well as our commercial real
estate
11
<PAGE>
portfolio. At December 31, 1998, our commercial business loans totaled $5.5
million compared to $3.7 million at December 31, 1997, excluding $2.1 million of
loans secured by purchased leases through the Bennett Funding Group. See " -
Non-Performing Assets - Non-Accruing Loans." We intend to continue to increase
our 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 is likely to be dependent upon the general economic
environment. Our 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.
We recognize the increased risks associated with commercial business
lending. Our 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
our credit analysis.
Loan Originations, Purchases and Sales
Real estate loans are originated by our staff of salaried loan officers and
our residential mortgage loan originators who receive applications from existing
customers, walk-in customers, and referrals from realtors. All types of loans
may be originated in any of our four offices.
While we originate both adjustable-rate and fixed-rate loans, our ability
to originate loans is dependent upon the relative customer demand for loans in
our 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. We currently sell such
loans primarily to Freddie Mac 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 our asset/liability management program.
When loans are sold, we retain 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 service the loans. We receive a servicing fee for performing these
services. We service for others mortgage loans that we originate and sell which
amounted to $61.3 million at December 31, 1998.
We purchase a limited amount of participation interests in real estate
loans from other financial institutions outside our primary market area. We
currently have loan participations in Michigan and Illinois. We carefully review
and underwrite all loans to be purchased to insure that they meet our
underwriting standards.
In periods of rising interest rates, our ability to originate large dollar
volumes of real estate loans may be substantially reduced or restricted, with a
resultant decrease in related operating
12
<PAGE>
earnings. In addition, our ability to sell loans may substantially decrease as
potential buyers reduce their purchasing activities.
The following table shows our loan and mortgage-backed security
origination, purchase, sale and repayment activities for the periods indicated.
One- to four-family fixed rate loans include $6.8 million, $4.0 million $3.3
million of loans originated during 1996, 1997 and 1998, respectively, which
carry a fixed rate of interest for the initial five or seven years and then
convert to a one year adjustable rate of interest for the remaining term of the
loan
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1997 1998
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate - one- to four-family ..................... $ 15,050 $ 15,055 $ 22,717
- multi-family .......................... 7,872 3,249 8,939
- commercial ............................ 3,690 2,944 7,849
- construction, land and land development 48 2,644 12,318
Non-real estate - consumer ............................ 4,909 6,244 3,236
- commercial business ................... 375 -- 453
-------- -------- --------
Total adjustable-rate .......................... 31,944 30,136 55,512
-------- -------- --------
Fixed-rate:
Real estate - one- to four-family ..................... 21,538 23,384 39,053
- multi-family .......................... 344 -- 38
- commercial ............................ 878 706 120
- construction, land and land development 14,117 17,986 2,531
Non-real estate - consumer ............................ 3,111 3,194 1,755
- commercial business ................... 5,778 2,877 2,617
-------- -------- --------
Total fixed-rate ............................... 45,766 48,147 46,114
-------- -------- --------
Total loans originated ......................... 77,710 78,283 101,626
-------- -------- --------
Purchases:
Real estate - one- to four-family ..................... 406 180 748
- commercial ............................ 51 -- 12
Total purchases ................................ 457 180 760
-------- -------- --------
Total mortgage-backed securities
purchased ..................................... -- -- --
-------- -------- --------
Total purchases ................................ 457 180 760
-------- -------- --------
Sales and Repayments:
Real estate - one- to four-family ..................... 14,288 20,199 26,508
Total loans sold ............................... 14,288 20,199 26,508
Principal repayments .................................. 37,062 38,883 55,107
-------- -------- --------
Total loans sold and repayments ................ 51,350 59,082 81,315
Mortgage-backed securities:
Principal repayments .................................. 738 574 1,167
Increase (decrease) in other items, net ................. (34) (65) 325
-------- -------- --------
Net increase ................................... $ 26,045 $ 18,742 $ 19,839
======== ======== ========
</TABLE>
13
<PAGE>
Asset Quality
When a borrower fails to make a required payment on a loan, we attempt 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, we usually send a default letter to the
borrower and, after 90 days, institute appropriate action to foreclose on the
property. If foreclosed, the property is sold at public auction and we may
purchase it. Delinquent consumer loans are handled in a similar manner. Our
procedures for repossession and sale of consumer collateral are subject to
various requirements under Indiana consumer protection laws. Our 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, 1998, in dollar amounts and as a percentage of
each category of our loan portfolio. The amounts 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 ..................... 6 $ 320 0.31% 7 $ 494 0.47% 13 $ 814 0.78%
Construction/development ................ 3 266 1.31 -- -- -- 3 266 1.31
Consumer ................................ 1 1 0.01 1 23 0.11 2 24 0.11
Commercial business ..................... -- -- -- 6 2,213 38.00 6 2,213 38.00
------ ------ ----- ------ ------ -----
Total .............................. 10 $ 587 0.32 14 $2,730 1.47 24 $3,317 1.79
====== ====== ===== ====== ====== =====
</TABLE>
14
<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, 1998 include a $1.4
million troubled debt restructuring, 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 our market, related to the Bennett Funding Group
leases. We are earning only 1.0% on the loan. At December 31, 1998, we did not
have an accruing loan delinquent more than 90 days or foreclosed assets. The
loan amounts shown do not reflect reserves set up against such assets. See "-
Allowance for Loan Losses."
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family ............... $ 39 $ -- $ 93 $ 23 $ 494
Consumer .......................... 6 10 -- 23
Commercial business ............... -- -- 2,391 2,071 2,213
-------- -------- -------- -------- --------
Total ........................ 45 -- 2,494 2,094 2,730
-------- -------- -------- -------- --------
Total non-performing assets ......... $ 45 $ -- $ 2,494 $ 2,094 $ 2,730
======== ======== ======== ======== ========
Total as a percentage of total assets 0.04% 0.00% 1.35% 1.01% 1.17%
======== ======== ======== ======== ========
Total assets ........................ $124,339 $158,973 $184,607 $206,584 $232,811
======== ======== ======== ======== ========
</TABLE>
For the year ended December 31, 1998, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms was $157,000, none of which was included in interest
income.
In 1996, 1997 and 1998, the non-accruing commercial business loan consisted
almost entirely of small equipment lease loans to the Bennett Funding Group. In
1997, we restructured $1.5 million of the $2.4 million of Bennett Funding Group
loans and recorded a $135,000 loss on the loan. We are earning 1.0% on the
restructured amount until December, 1999 when we will be paid the full amount.
We recorded a $184,000 loss on the remaining $855,000 balance, leaving $671,000
subject to litigation and classified as non-performing.
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 to be of lesser quality, as "substandard,"
"doubtful" or "loss." An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized by
the "distinct possibility" that the insured institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as "doubtful" have all
of the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the institution to sufficient risk to warrant
classification in one of the
15
<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 Office of
Thrift Supervision and the FDIC, which may order the establishment of additional
general or specific loss allowances.
In connection with the filing of our periodic reports with the Office of
Thrift Supervision and in accordance with our classification of assets policy,
we regularly review the problem assets in our portfolio to determine whether any
assets require classification in accordance with applicable regulations. At
December 31, 1998, we had classified $2.1 million of our loans as substandard,
$671,000 as doubtful and none as loss. At December 31, 1998, we had designated
$1.5 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 $327,000 at December
31, 1998, 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 $241,000 at
December 31, 1998, 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 $294,000 at December 31, 1998, 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 $183,000 at December 31, 1998, 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. We established 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 we have had only
nominal loan losses during our 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
16
<PAGE>
evaluation of our growing commercial real estate and business loan portfolios.
Management's analysis results 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 our allowance for loan
losses.
<TABLE>
<CAPTION>
Year Ended December
-----------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of
period .......................... $ 922 $ 926 $ 922 $1,715 $1,478
Charge-offs:
Consumer ...................... -- 6 7 3 4
Commercial business ........... -- -- -- 319 --
------ ------ ------ ------ ------
Total Charge-offs .......... -- 6 7 322 4
------ ------ ------ ------ ------
Recoveries:
One- to four-family ........... 15 -- -- 11 --
Consumer ...................... 4 2 -- 2 --
------ ------ ------ ------ ------
Total recoveries ........... 19 2 -- 13 --
------ ------ ------ ------ ------
Net charge-offs (recoveries) .... (19) 4 7 309 4
Additions charged to operations . (15) -- 800 72 104
------ ------ ------ ------ ------
Balance at end of period ........ $ 926 $ 922 $1,715 $1,478 $1,578
====== ====== ====== ====== ======
Net charge-offs to average loans
outstanding ..................... (0.02%) -- -- 0.18% ---%
Allowance for loan losses to non-
performing loans ................ 2057.8% -- 60.5% 70.6% 57.8%
Allowance for loan losses to net
loans at end of period .......... 0.94% 0.70% 1.08% 0.83% 0.79%
</TABLE>
17
<PAGE>
The allocation of our allowance for losses on loans at the dates indicated
is summarized as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
1994 1995 1996
----------------------------------------------------------------------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
One- to four-family ................ $ 221 $ 69,139 68.53% $ 262 $ 86,231 62.40% $ 146 $ 96,987 57.72%
Multi-family ....................... 76 7,643 7.58 120 12,044 8.72 99 19,610 11.67
Commercial real estate ............. 138 10,712 10.62 181 15,034 10.88 128 19,032 11.33
Land and land
development ....................... 18 2,915 2.89 28 3,880 2.81 39 3,334 1.98
Construction ....................... 22 3,251 3.22 40 10,379 7.51 7 14,447 8.60
Consumer ........................... 32 4,620 4.57 36 6,048 4.37 51 9,808 5.83
Commercial business ................ 29 2,614 2.59 51 4,570 3.31 997 4,825 2.87
Unallocated ........................ 390 -- -- 204 -- -- 248 -- --
-------- -------- ------ -------- -------- ------ -------- -------- ------
Total ........................... $ 926 $100,894 100.00% $ 922 $138,186 100.00% $ 1,715 $168,043 100.00%
======== ======== ====== ======== ======== ====== ======== ======== ======
<CAPTION>
--------------------------------------------------------------------
1997 1998
--------------------------------------------------------------------
Percent Percent
of Loans of Loans
Loan in Each Amount Loan in Each
Amount of Amounts Category of Amounts Category
Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans
-------------------------------------------------------------------
Real estate:
One- to four-family .... $ 145 $104,416 56.39 $ 197 $113,231 55.08%
Multi-family ........... 103 20,382 11.01 130 25,530 12.42
Commercial real estate . 130 20,888 11.28 162 26,342 12.82
Land and land
development ........... 75 6,020 3.25 61 6,174 3.00
Construction ........... 28 14,326 7.74 18 12,220 5.95
Consumer ............... 74 13,298 7.19 272 14,426 7.02
Commercial business .... 729 5,823 3.14 603 7,627 3.71
Unallocated ............ 194 -- -- 135 -- --
-------- -------- -------- -------- -------- --------
Total ............... $ 1,478 $185,153 100.00% $ 1,578 $205,550 100.00%
======== ======== ======== ======== ======== ========
</TABLE>
18
<PAGE>
Investment Activities
We must maintain minimum levels of securities that qualify as liquid assets
under the Office of Thrift Supervision 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, we have maintained
liquid assets at levels above the minimum requirements imposed by the Office of
Thrift Supervision 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, 1998 our liquidity ratio, liquid assets
as a percentage of net withdrawable savings deposits and current borrowings was
11.77%. Our 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; Market Risk Analysis" and
"-Liquidity and Capital Resources" in the Annual Report to Stockholders filed as
Exhibit 13 to this Annual Report.
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, we invest funds among various categories of investments and
maturities based upon our asset/liability management policies, concern for the
highest investment quality, liquidity needs and performance objectives. It is
our 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 Federal Home Loan Bank.
19
<PAGE>
The following table sets forth the composition of our securities portfolio
at the dates indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------
1996 1997 1998
--------------------- ---------------------- -----------------------
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 ............ $ 1,003 19.40% $ 2,525 35.37% $ 1,528 11.45%
Federal agency obligations ............ 354 6.85 507 7.11 2,542 19.05
Municipal bonds ....................... 984 19.02 1,283 17.97 3,395 25.44
Corporate bonds ....................... 255 4.93 224 3.14 3,056 22.90
------- ------- ------- ------- ------- -------
Subtotal ............................ 2,596 50.20 4,539 63.59 10,521 78.83
------- ------- ------- ------- ------- -------
Federal Home Loan Bank stock ............ 2,575 49.80 2,600 36.41 2,825 21.17
------- ------- ------- ------- ------- -------
Total debt securities and Federal Home
Loan Bank stock ......................... $ 5,171 100.00% $ 7,139 100.00 $13,346 100.00
======= ======= ======= ======= ======= =======
Average remaining life of debt securities .58 years 3.10 years 1.72 years
Other interest-earning assets:
Interest-bearing deposits with Federal
Home Loan Bank .......................... $ 5,410 100.00% $ 5,580 100.00% $ 8,254 100.00%
======= ======= ======= ======= ======= =======
Mortgage-backed securities
Fannie Mae certificates ................. $ 2,166 54.84% $ 1,868 56.20% 1,447 67.19%
Freddie Mac certificates ................ 1,784 45.16 1,456 43.80 707 32.81
------- ------- ------- ------- ------- -------
Total mortgage-backed securities .... $ 3,950 100.00% $ 3,324 100.00% $ 2,154 100.00%
======= ======= ======= ======= ======= =======
</TABLE>
20
<PAGE>
The following table sets forth the composition and contractual maturities
of our securities portfolio at December 31, 1998. At December 31, 1998, all of
our 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, 1998
--------------------------------------------------------------------------------------------------
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 $ 500 $ 1,028 $ -- $ -- $ 1,528 $ 1,528
Federal agency obligations 1,522 1,020 -- -- 2,542 2,542
Municipal bonds .......... 101 2,681 363 250 3,395 3,395
Corporate bonds .......... 222 2,834 -- -- 3,056 3,056
Fannie Mae certificates .. -- 1,447 -- -- 1,447 1,447
Freddie Mac certificates . -- 707 -- -- 707 707
------- ------- ------- ------- ------- -------
Total investment securities $ 2,345 $ 9,717 $ 363 250 $12,675 $12,675
======= ======= ======= ======= ======= =======
Weighted average yield .... 5.61% 5.50% 3.92% 6.00% 5.48% 5.48%
</TABLE>
Sources of Funds
General. Our primary source 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. We offer a variety of deposit accounts. Our deposits consist of
passbook and statement savings accounts, money market accounts, NOW accounts and
certificate accounts. We only solicit deposits from our primary market area and
we do not use brokers to obtain deposits. We rely 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 we offer has allowed us to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. We manage the pricing of our deposits in keeping with our
asset/liability management, profitability and growth objectives. Based on our
experience, we believe that our savings, interest and noninterest-bearing
checking accounts are relatively stable sources of deposits. However, our
ability to attract and maintain certificates of deposit, and the rates paid on
these deposits, has been and will continue to be significantly affected by
market conditions.
21
<PAGE>
The following table sets forth our savings flows during the periods
indicated.
Year Ended December 31,
-----------------------------------------
1996 1997 1998
--------- --------- ---------
(Dollars in Thousands)
Opening balance ................ $ 109,977 $ 116,949 $ 137,686
Deposits ....................... 472,666 559,910 746,241
Withdrawals .................... (469,506) (543,396) (727,504)
Interest credited .............. 3,812 4,223 5,358
--------- --------- ---------
Ending balance ................. $ 116,949 $ 137,686 $ 161,781
========= ========= =========
Net increase (decrease) ........ $ 6,972 $ 20,737 $ 24,095
========= ========= =========
Percent increase (decrease) .... 6.34% 17.73% 17.50%
========= ========= =========
The following table sets forth the dollar amount of savings deposits in the
various types of deposit programs offered by us at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------
1996 1997 1998
---------------------- ----------------------- -----------------------
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 ......................... $ 4,127 3.53 $ 5,097 3.70% $ 7,592 4.69%
Savings accounts (3.05% at December 31, 1998) 12,538 10.71 13,958 10.13 14,868 9.18
NOW Accounts (0-2.00% at December 31, 1998) . 11,664 9.97 15,214 11.04 18,936 11.71
Money Market Accounts (3.35-3.67% at
December 31, 1998) ........................ 9,052 7.74 8,254 5.99 7,239 4.47
-------- --------- --------- --------- --------- ---------
Total Non-Certificates ...................... 37,381 31.95 42,523 30.86 48,635 30.05
-------- --------- --------- --------- --------- ---------
Certificates:
2.00 - 3.99% ............................... 64 0.05 95 0.07 617 0.38
4.00 - 5.99% ............................... 48,677 41.60 51,847 37.64 79,983 49.41
6.00 - 7.99% ............................... 30,820 26.33 43,214 31.37 32,546 20.11
8.00 - and greater ......................... 7 0.01 7 0.01 -- --
-------- --------- --------- --------- --------- ---------
Total certificates ......................... 79,568 67.99 95,163 69.09 113,146 69.91
Accrued interest ........................... 73 0.06 62 0.05 56 0.04
-------- --------- --------- --------- --------- ---------
Total deposits ............................. $117,022 100.00% $ 137,748 100.00% $ 161,837 100.00%
======== ========= ========= ========= ========= =========
</TABLE>
22
<PAGE>
The following table shows rate and maturity information for our
certificates of deposit as of December 31, 1998.
<TABLE>
<CAPTION>
2.00- 4.00- 6.00- Percent
3.99% 5.99% 7.99% Total of Total
-------- -------- -------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Certificate accounts maturing
in quarter ending:
March 31, 1999 .... $ 279 $ 17,530 $ 4,178 $ 21,987 19.43%
June 30, 1999 ..... 314 19,484 8,103 27,901 24.66
September 30, 1999 24 12,477 4,932 17,433 15.41
December 31, 1999 . -- 5,577 4,178 9,755 8.62
March 31, 2000 .... -- 4,254 3,473 7,727 6.83
June 30, 2000 ..... -- 5,017 2,437 7,454 6.59
September 30, 2000 -- 2,492 1,015 3,507 3.10
December 31, 2000 . -- 2,176 31 2,207 1.95
March 31, 2001 .... -- 2,700 513 3,213 2.84
June 30, 2001 ..... -- 2,005 438 2,443 2.16
September 30, 2001 -- 1,615 245 1,860 1.64
December 31, 2001 . -- 553 384 937 0.83
Thereafter ........ -- 4,103 2,619 6,722 5.94
-------- -------- -------- --------- ---------
Total .......... $ 617 $ 79,983 $ 32,546 $ 113,146 100 00%
======== ======== ======== ========= =========
Percent of total 0.55% 70.69% 28.76% 100.00%
======== ======== ======== =========
</TABLE>
The following table indicates the amount of our certificates of deposit by
time remaining until maturity as of December 31, 1998.
<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>
Certificates of deposit less than $100,000 $ 21,937 $ 27,851 $ 12,297 $ 30,674 $ 92,759
Certificates of deposit of $100,000 or more -- -- 14,890 5,396 20,286
Public funds .............................. 50 50 1 -- 101
-------- -------- -------- -------- --------
Total certificates of deposit ............. $ 21,987 $ 27,901 $ 27,188 $ 36,070 $113,146
======== ======== ======== ======== ========
</TABLE>
Borrowings. Our other available sources of funds include borrowings from
the Federal Home Loan Bank of Indianapolis and other borrowings. As a member of
the Federal Home Loan Bank of Indianapolis, we are required to own capital stock
in the Federal Home Loan Bank and are authorized to apply for borrowings from
the Federal Home Loan Bank. Each Federal Home Loan Bank credit program has its
own interest rate, which may be fixed or variable, and have a range of
maturities. The Federal Home Loan Bank of Indianapolis may prescribe the
acceptable uses for these, as well as limitations on the size of the borrowings
and repayment provisions.
23
<PAGE>
We utilize Federal Home Loan Bank borrowings as part of our asset/liability
management strategy in order to cost effectively extend the maturity of our
liabilities. We may be required to pay a commitment fee upon application and may
be subject to a prepayment fee if we prepay the advance. See Note 6 of the Notes
to the Consolidated Financial Statements contained in the Annual Report to
Shareholders attached as Exhibit 13 to this Annual Report.
The following table sets forth the maximum month-end balance and average
balance of Federal Home Loan Bank advances and other borrowings for the periods
indicated.
Year Ended December 31,
---------------------------------
1996 1997 1998
------- ------- -------
(In Thousands)
Maximum Balance:
Federal Home Loan Bank advances ....... $50,000 $50,000 $51,500
Other borrowings ...................... 243 218 186
Average Balance:
Federal Home Loan Bank advances ....... $39,000 $46,125 $50,667
Other borrowings ...................... 234 204 171
The following table sets forth certain information as to our borrowings at
the dates indicated.
<TABLE>
<CAPTION>
December 31,
---------------------------------
1996 1997 1998
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Federal Home Loan Bank advances .................. $50,000 $50,000 $51,500
Other borrowings ................................. 220 189 156
------- ------- -------
Total borrowings ............................ $50,220 $50,189 $51,656
======= ======= =======
Weighted average interest rate of Federal Home
Loan Bank advances ............................ 5.65% 5.94% 5.82%
Weighted average interest rate of other borrowings 5.50% 5.50% 5.50%
</TABLE>
24
<PAGE>
Subsidiary and Other Activities
We own a service corporation, L.S.B. Service Corporation. In April 1994, we
made an initial investment of $51,000 in L.S.B. Service Corporation when it
became a 14.16% limited partner in a low-income housing project in Lafayette,
Indiana, pursuant to a 10 year commitment totaling $500,000. During 1998, L.S.B.
Service Corporation received a $23,000 tax credit related to its investment in
the project and recorded a net loss of $3,000. At December 31, 1998, our total
investment in L.S.B. Service Corporation was $262,000.
Lafayette Savings formed Lafayette Insurance and Investments, Inc., an
Indiana corporation, on December 31, 1996. Lafayette Insurance and Investments,
Inc. began offering various insurance, annuity and investment products and
services to our customers in June of 1997. At December 31, 1998, our total
investment in Lafayette Insurance and Investments, Inc. was $9,000. Lafayette
Insurance and Investments, Inc. recognized losses of $12,000 during 1998.
Competition
We face 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, our primary market area. Other savings institutions, commercial banks,
credit unions and finance companies provide vigorous competition in consumer
lending.
We attract all of our deposits through our 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. We compete 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 our primary market
area. We estimate our share of the savings market and mortgage loans in
Tippecanoe County to both be approximately 9%.
REGULATION
General
We are 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, we are subject to broad federal regulation and
oversight extending to all our operations. We are a member of the Federal Home
Loan Bank of Indianapolis and are subject to certain limited regulation by the
Board of Governors of the Federal Reserve System. As the thrift holding company
of Lafayette Savings, LSB Financial also is subject to federal regulation and
oversight.
25
<PAGE>
Federal Regulation of Savings Associations
The Office of Thrift Supervision has extensive authority over the
operations of savings institutions. As part of this authority, we are required
to file periodic reports with the Office of Thrift Supervision and are subject
to periodic examinations by the Office of Thrift Supervision and the FDIC. The
last regular Office of Thrift Supervision and FDIC examinations were September
1997 and March 1992, respectively. When these examinations are conducted by the
Office of Thrift Supervision and the FDIC, the examiners may require us to
provide for higher general or specific loan loss reserves. All savings
institutions are subject to a semi-annual assessment, based upon the savings
institution's total assets, to fund the operations of the Office of Thrift
Supervision.
The Office of Thrift Supervision also has extensive enforcement authority
over all savings institutions and their holding companies. 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.
Our general permissible lending limit for loans-to-one-borrower is equal to
the greater of $500,000 or 15% of unimpaired capital and surplus, except for
loans fully secured by certain readily marketable collateral, in which case this
limit is increased to 25% of unimpaired capital and surplus. At December 31,
1998, our lending limit under this restriction was $2.8 million. See "Lending
Activities - General."
Insurance of Accounts and Regulation by the FDIC
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 Bank Insurance Fund or the Savings Association Insurance Fund. The FDIC
also has the authority to initiate enforcement actions against savings
institutions, after giving the Office of Thrift Supervision an opportunity to
take action, and may terminate deposit insurance if it determines that an
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 is made by the FDIC semi-annually.
Effective January 1, 1997, the premium schedule for Bank Insurance Fund and
Savings Association Insurance Fund insured institutions ranged from 0 to 27
basis points. However, Savings Association Insurance Fund-insured institutions
are required to pay a Financing Corporation assessment, in order to fund the
interest on bonds issued to resolve thrift failures in the 1980s. In
26
<PAGE>
1998, this amount was equal to about six basis points for each $100 in domestic
deposits for Savings Association Insurance Fund members, while Bank Insurance
Fund-insured institutions pay an assessment equal to approximately 1.50 basis
points for each $100 in domestic deposits. The savings institutions assessment
is expected to be reduced to about two basis points no later than January 1,
2000, when Bank Insurance Fund insured institutions fully participate in the
assessment. These assessments, which may be revised based upon the level of Bank
Insurance Fund and Savings Association Insurance Fund deposits, will continue
until the bonds mature in the year 2017.
Regulatory Capital Requirements
All federally insured savings institutions are required to maintain minimum
capital standards, including a tangible capital, a leverage ratio (or core
capital) and a risk-based capital requirements. The capital regulations require
tangible capital of at least 1.5% of adjusted total assets, as defined by
regulations. At December 31, 1998, we had tangible capital of $17.0 million, or
7.34% of adjusted total assets, which is $13.5 million above the minimum
requirement of 1.5% of adjusted total assets.
The capital standards also require core capital equal to at least 3% to 4%
of adjusted total assets, depending on an institutions's supervisory rating.
Core capital generally consists of tangible capital plus certain intangible
assets including a limited amount of purchased credit card relationships. At
December 31, 1998, we had core capital equal to $17.0 million, or 7.34% of
adjusted total assets, which is $10.1 million above the minimum leverage ratio
requirement of 3% as in effect on that date.
The Office of Thrift Supervision risk-based requirement requires savings
institutions to have total capital of at least 8% of risk-weighted assets. Total
capital consists of core capital, as defined above, and supplementary capital.
Supplementary capital consists of certain permanent and maturing capital
instruments that do not qualify as core capital and general valuation loan and
lease loss allowances up to a maximum of 1.25% of risk-weighted assets.
Supplementary capital may be used to satisfy the risk-based requirement only to
the extent of core capital.
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 Office of Thrift Supervision 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 Fannie Mae or
Freddie Mac.
On December 31, 1998 we had total capital of $18.1 million, including $17.0
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 11.5% of risk-weighted assets.
This amount was $5.1 million above the 8% requirement in effect on that date.
The Office of Thrift Supervision is authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis. The Office of Thrift Supervision and the FDIC are authorized
and, under certain circumstances required, to take certain actions against
savings institutions that fail to meet their capital requirements. These actions
may include
27
<PAGE>
submission of a capital restoration plan and various limitations on an
institution's growth and operations, depending upon an institution's capital
category. In certain cases the FDIC or the Office of Thrift Supervision may
appoint a conservator or receiver for the institution.
The Office of Thrift Supervision is also generally authorized to reclassify
an institution 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 Office of Thrift Supervision or the FDIC of any of
these measures on Lafayette Savings may have a substantial adverse effect on its
operations and profitability.
Limitations on Dividends and Other Capital Distributions
Office of Thrift Supervision regulations impose various restrictions on
savings institutions 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. Office of Thrift
Supervision regulations also prohibit a savings institution 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.
The Office of Thrift Supervision recently revised regulations provide that
a savings institution may make a capital distribution without notice to the
Office of Thrift Supervision, unless it is a subsidiary of a holding company,
provided that it has a regulatory rating in the two top examination categories,
is not of supervisory concern, and would remain well-capitalized, as defined in
the Office of Thrift Supervision prompt corrective action regulations, following
the proposed distribution, and the distribution does not exceed its net income
for the calendar year-to-date plus retained net income for the previous two
calendar years (less any dividends previously paid). Savings institutions that
would remain adequately capitalized following the proposed distribution and meet
the other noted requirements must notify the Office of Thrift Supervision 30
days prior to declaring a capital distribution. All other institutions or those
seeking to exceed the noted amounts must file an application before making the
distribution.
Qualified Thrift Lender Test
All savings institutions are required to meet a qualified thrift lender
test to avoid certain restrictions on their operations. This test requires a
savings institution 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 institution
may maintain 60% of its assets in those assets specified in Section 7701(a)(19)
of the Internal Revenue Code of 1986, as amended. Under either test, these
assets primarily consist of residential housing related loans and investments.
At December 31, 1998, we met the test and have always met the test since it
became effective.
Any savings institution that fails to meet the qualified thrift lender test
must convert to a national bank, unless it requalifies as a qualified thrift
lender and remains a qualified thrift lender. If an institution has not yet
requalified or converted to a national bank, its new investments and
28
<PAGE>
activities are limited to those permissible for both a savings institution and a
national bank, and it is limited to national bank branching rights in its home
state. In addition, the institution is immediately ineligible to receive any new
Federal Home Loan Bank borrowings. If the institution has not requalified or
converted to a national bank within three years after the failure, it must sell
all investments and stop all activities not permissible for a national bank. In
addition, it must repay promptly any outstanding Federal Home Loan Bank
borrowings, which may result in prepayment penalties. If any institution that
fails the qualified thrift lender 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, 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 Community Reinvestment Act requires the
Office of Thrift Supervision, in connection with our examination, to assess our
record of meeting the credit needs of our community and to take this record into
account in its evaluation of certain applications, such as a merger or the
establishment of a branch, by Lafayette Savings. An unsatisfactory rating may be
used as the basis for the denial of an application by the Office of Thrift
Supervision. We were examined for Community Reinvestment Act compliance in
January 1999 and received a rating of outstanding.
Holding Company Regulation
LSB Financial is a unitary savings and loan holding company subject to
regulatory oversight by the Office of Thrift Supervision. LSB Financial is
required to register and file reports with the Office of Thrift Supervision and
is subject to regulation and examination by the Office of Thrift Supervision. In
addition, the Office of Thrift Supervision has enforcement authority over us and
our non-savings institution subsidiaries which also permits the Office of Thrift
Supervision to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings institution.
As a unitary savings and loan holding company, LSB Financial generally is
not subject to activity restrictions. If LSB Financial acquires control of
another savings institution as a separate subsidiary, it would become a multiple
savings and loan holding company, and its activities and any of its subsidiaries
(other than Lafayette Savings or any other savings institution) would generally
become subject to additional restrictions.
If LSB Financial fails the qualified thrift lender test, within one year it
must register as, and become subject to, the significant activity restrictions
applicable to bank holding companies.
Federal Securities Law
LSB Financial stock is registered with the SEC under the Securities
Exchange Act of 1934, as amended. We are subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the SEC
under the Securities Exchange Act of 1934, as amended.
29
<PAGE>
LSB Financial stock that is held by persons who are affiliates, generally
including officers, directors and 10% stockholders of LSB Financial, may not be
resold without registration or unless sold in accordance with certain resale
restrictions. If we meet specified current public information requirements, each
of our affiliates are able to sell in the public market, without registration, a
limited number of shares in any three-month period.
Federal Home Loan Bank System
We are a member of the Federal Home Loan Bank of Indianapolis, which is one
of 12 regional Federal Home Loan Banks that administers the home financing
credit function of savings institutions. Each Federal Home Loan Bank serves as a
reserve or central bank for its members within its assigned region. It makes
loans to members in accordance with policies and procedures, established by the
board of directors of the Federal Home Loan Bank, which are subject to the
oversight of the Federal Housing Finance Board. All advances from the Federal
Home Loan Bank are required to be fully secured by sufficient collateral as
determined by the Federal Home Loan Bank. In addition, all long-term advances
must be used for residential home financing.
As a member, we are required to purchase and maintain stock in the Federal
Home Loan Bank of Indianapolis. At December 31, 1998, we had $2.8 million in
Federal Home Loan Bank stock, which was in compliance with this requirement. We
receive dividends on our Federal Home Loan Bank stock. These dividends averaged
7.98% for 1998.
Federal and State Taxation
Savings institutions that meet certain definitional tests relating to the
composition of assets and other conditions prescribed by the Internal Revenue
Code of 1986, as amended, are permitted to establish reserves for bad debts and
to make annual additions which may, within specified formula limits, be taken as
a deduction in computing taxable income for federal income tax purposes. The
amount of the bad debt reserve deduction is computed under the experience
method.
In addition to the regular income tax, corporations, including savings
institutions, 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.
A portion of our reserves for losses on loans which are presented on the
statement of financial condition as retained earnings, 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, 1998, the portion of our reserves subject to this
treatment for tax purposes totaled approximately $1.9 million.
We file consolidated federal income tax returns with our subsidiaries on a
calendar year basis using the accrual method of accounting. Savings institutions
that file federal income tax returns as part of a consolidated group are
required by applicable Treasury regulations to reduce their
30
<PAGE>
taxable income for purposes of computing the percentage bad debt deduction for
losses attributable to activities of the non-savings institution members of the
consolidated group that are functionally related to the activities of the
savings institution member.
We have not 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 LSB Financial.
Except as otherwise indicated, the persons named have served as officers of the
LSB Financial since it became the holding company of Lafayette Savings and all
positions described below are with Lafayette Savings. 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 64, was elected as President, Chief Executive
Officer and Director of Lafayette Savings 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 52, has served as Senior Vice
President of Lafayette Savings since 1989 and was elected as a Director in 1993.
He is responsible for the lending functions of Lafayette Savings.
Mary Jo David. Ms. David, age 49, is Vice President, Chief Financial
Officer and Secretary- Treasurer of Lafayette Savings, positions she has held
since 1992. She joined Lafayette Savings in 1985.
Gregory A. Milakis. Mr. Milakis, age 38, joined Lafayette Savings as Vice
President of Commercial Lending in 1994 and was named an executive officer of
the company in 1998.
Employees
At December 31, 1998, we had a total of 73 employees, including five
part-time employees. Our employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.
31
<PAGE>
Item 2. Description of Property
We conduct our business at our main office and three other locations in
Lafayette and West Lafayette, Indiana. We own our main office and two branch
offices. The second branch office is leased. The total net book value of our
premises and equipment (including land, building and leasehold improvements and
furniture, fixtures and equipment) at December 31, 1998 was approximately $5.8
million. We have recently purchased property for a potential new branch
location. We have also purchased an office building adjacent to the main office
location as our growth rate will require space for additional personnel in the
next few years.
We maintain an on-line data base of depositor and borrower customer
information. The net book value of our data processing, computer equipment and
software at December 31, 1998 was $327,000.
Item 3. Legal Proceedings
We are, from time to time, 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 us in the
proceedings, that the resolution of any prior and pending proceedings should not
have a material effect on our 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,
1998.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Inside back cover of our 1998 Annual Report to Stockholders is incorporated
herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
Pages 4 through 17 of our 1998 Annual Report to Stockholders are
incorporated herein by reference.
Item 7. Financial Statements
Pages 18 through 43 of our 1998 Annual Report to Stockholders are
incorporated herein by reference.
32
<PAGE>
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 Securities Exchange Act of 1934,
as amended
Directors
Information concerning LSB Financial Directors are incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in April 1999, 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 Exchange Act requires our directors and executive
officers and persons who own more than 10% of a registered class of our equity
securities, to file with the SEC initial reports of ownership and reports of
changes in ownership of our common stock and our other equity securities by the
tenth of the month following a change. Officers, directors and greater than 10%
stockholders are required by SEC regulation to furnish us with copies of all
Section 16(a) forms they file.
To our knowledge, based solely on a review of the copies of such reports
furnished to us and written representations that no other reports were required,
during the fiscal year ended December 31, 1998, all Section 16(a) filing
requirements applicable to our officers, directors and 10% beneficial owners
were complied with except that (i) Mr. Andrew inadvertently failed to file Form
4s to report the purchase of 1,000, 500, 200 and 300 shares of common stock on
February 18, 1998, August 10, 1998, August 13, 1998 and August 14, 1998,
respectively; (ii) Mr. Dunwoody inadvertently failed to file a Form 4 to report
the sale of 850 shares of common stock on November 9, 1998, and (iii) Mr. Corey
inadvertently failed to file a Form 4 to report the sale of 800 shares of common
stock on November 9, 1998. These transactions have been subsequently reported on
Form 5s.
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from our definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in April 1999, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
33
<PAGE>
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 our definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in April 1999, 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 our definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in April 1999, a copy of which will be
filed not later than 120 days after the close of the fiscal year.
34
<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 11 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, 1998.
35
<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 26, 1999 By: /s/ John W. Corey
--------------------------------------
John W. Corey, President, Chief
Executive Officer and Director
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Mariellen M. Neudeck /s/ John W. Corey
- - --------------------------------------- ---------------------------------
Mariellen M. Neudeck, Chairman John W. Corey, President, Chief
of the Board Officer Executive and Director
(Principal Executive and
Operating Officer)
Date: March 26, 1999 Date: March 26, 1999
/s/ Harry A. Dunwoody /s/ James A. Andrew
- - --------------------------------------- ---------------------------------
Harry A. Dunwoody, Senior Vice President James A. Andrew, Director
and Director
Date: March 26, 1999 Date: March 26, 1999
/s/ Philip W. Kemmer /s/ Peter Neisel
- - --------------------------------------- ---------------------------------
Philip W. Kemmer, Director Peter Neisel, Director
Date: March 26, 1999 Date: March 26, 1999
/s/ Jeffrey A. Poxon /s/ Thomas L. Ryan
- - --------------------------------------- ---------------------------------
Jeffrey A. Poxon, Director Thomas L. Ryan, Director
Date: March 26, 1999 Date: March 26, 1999
/s/ John C. Shen /s/ C. Wesley Shook
- - --------------------------------------- ---------------------------------
John C. Shen, Director C. Wesley Shook, Director
Date: March 26, 1999 Date: March 26, 1999
/s/ Mary Jo David
- - ----------------------------------------------
Mary Jo David, Vice President, Chief Financial
Officer and Secretary-Treasurer
(Principal Financial and Accounting Officer)
Date: March 26, 1999
36
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number
------
11 Statement re Computation of Earnings Per Share (See Note 11 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
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
All references to LSB Financial, unless otherwise indicated, at or before
February 3, 1995, refer to Lafayette Savings. References in this Annual Report
to "we," and "us" and "our" refer to LSB Financial and/or Lafayette Savings as
the context requires.
Year 2000 Issues
The approaching millennium is causing organizations of all types to review
their computer systems for the ability to properly accommodate the year 2000.
When computer systems were first developed, two digits were used to designate
the year in date calculations and "19" was assumed for the century. As a result,
there is significant concern about the integrity of date sensitive calculations
when the calendar rolls over to January 1, 2000. An older system could interpret
01/01/00 as January 1, 1900 potentially causing major problems calculating
interest, payment, delinquency or maturity dates. An internal committee
comprised of four officers has been formed to address the potential risk that
the year 2000 poses for Lafayette Savings. This committee reports to the audit
committee of the board and the full board of directors quarterly or more often
as warranted.
Financial institution regulators recently have increased their focus upon
year 2000 compliance issues and have issued guidance concerning the
responsibilities of senior management and directors. The Federal Financial
Institutions Examination Council has issued several interagency statements on
Year 2000 Project Management Awareness. These statements require financial
institutions to, among other things, examine the year 2000 issue with respect to
their customers, suppliers and borrowers. These statements also require each
federally insured financial institution to survey its exposure, measure its risk
and prepare a plan to address the year 2000 issue. In addition, the federal
banking regulators have issued safety and soundness guidelines to be followed by
insured depository institutions to assure resolution of any year 2000 problems.
Accurate data processing is essential to our operations and a lack of
accurate processing by our vendors or us could have a significant adverse impact
on our financial condition and results of operations. We have been assured by
our outside data processing service that their computer services will function
properly on and after January 1, 2000. A contingency plan, however, has been
developed by Lafayette Savings in the unlikely event that our data processing
service does not function properly on or after January 1, 2000. This plan
focuses on conducting operations in a manual mode, including the recording of
transactions on spreadsheets.
We have also received year 2000 updates from most of our material,
non-information system providers, including but not limited to security cameras,
credit card and ATM card processors, the vault alarm, check printers, telephone
systems, participation loan servicers, and institutions we invest through or
with. Based on these updates, we do not anticipate any significant year 2000
issues. We expect software upgrades and new personal computers to be installed
by March 1999. Our anticipated expenditure on this equipment is approximately
$184,000.
4
<PAGE>
In addition to expenses related to our own systems, we could incur losses
if loan payments are delayed due to year 2000 problems affecting any of our
significant borrowers or impairing the payroll systems of large employers in our
market area. We have been communicating with our vendors to assess their
progress in evaluating their systems and implementing any corrective measures
required by them to be prepared for the year 2000. We have also sent year 2000
readiness request letters to certain borrowers. These borrowers were selected
based on the aggregate amounts owed to Lafayette Savings, the type of loans
outstanding, and the perceived year 2000 risk based on our knowledge of the loan
customers and their operations. We have been advised by such parties that they
have plans in place to address and correct the issues associated with the year
2000 problem; however, no assurance can be given as to the adequacy of these
plans or to the timeliness of their implementation. Currently, due to the types
of borrowers doing business with Lafayette Savings and the nature of our loans
with these borrowers, we do not consider the year 2000 issue as part of our
underwriting criteria.
Business Strategy
We have been, and intend to continue to be, a community-oriented financial
institution. Our 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 other properties. Our results of operations,
therefore, are dependent primarily on net interest income, which is the
difference between the interest income earned on our loan and investment
portfolios and our cost of funds, which consists of interest expense incurred on
deposits and borrowings. Net interest income is directly affected by the
relative amounts of interest-earning assets and interest-bearing liabilities and
the interest rates earned or paid on these amounts. Our 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. Our non-interest expenses consist principally of employee
compensation, occupancy expenses, and other general and administrative expenses.
Significant external factors impacting our results of operations include
the general economic environment, changes in the level of market interest rates,
government policies, actions by regulatory authorities and competition. Our 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 these loans are made, general economic conditions
affecting loan demand and the availability of funds for lending activities.
Our basic mission is to maintain our focus as an independent, community
oriented financial institution serving customers in our market area. We have
sought to accomplish this mission through the adoption of a strategy intended to
maintain a strong capital position and high asset quality, manage our
vulnerability to changes in interest rates, optimize our net interest margin and
achieve controlled asset growth. Key components of this strategy have been (i)
emphasizing one- to four-family residential mortgage lending, (ii) supplementing
residential lending with multi-family, consumer and construction loans, (iii)
expanding commercial business lending functions, (iv) emphasizing adjustable
rate and/or short term loans and investments and (v) gradually building our core
deposit base.
The results of our business strategy may be illustrated as follows:
5
<PAGE>
o One- to four-family loans increased from $97.0 million at December 31,
1996 to $113.2 million at December 31, 1998.
o Multi-family, land and land development, construction and consumer
loans increased from $47.2 million at December 31, 1996 to $58.4
million at December 31, 1998.
o Commercial real estate and commercial business loans increased from
$23.9 million at December 31, 1996 to $34.0 million at December 31,
1998.
o At December 31, 1998, 76.56% of our loan portfolio had adjustable
interest rates.
o Total deposits increased from $116.9 million at December 31, 1996 to
$161.8 million at December 31, 1998.
Financial Condition
The size of our loan portfolio increased from $159.2 million at December
31, 1996 to $199.3 million at December 31, 1998, an increase of 25.20%. Part of
this increase was due to our 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 our strategy was the continued focus
on commercial and consumer loan production. We sold in the secondary market,
with servicing rights retained, $14.3 million of fixed-rate loans in 1996, $19.8
million in 1997 and $27.8 million in 1998 based upon asset/liability management
considerations. In addition, during 1998 we originated and sold $6.3 million of
fixed-rate loans in the secondary market with servicing released. See "-Asset/
Liability Management; Market Risk Analysis." Adjustable rate loans were retained
in our loan portfolio.
Our portfolio of securities and short-term investments increased from $12.0
million at from December 31, 1996 to $20.9 million at December 31, 1998, as
efforts were made to maintain our liquidity levels.
Deposit accounts increased by 38.33% or $44.8 million from December 31,
1996 to December 31, 1998. Checking accounts with no monthly fees and no minimum
balance requirements attracted new depositors, as did our continuing effort to
offer innovative and competitive certificate of deposit products.
We utilize advances available through the Federal Home Loan Bank to provide
additional funding for loan growth as well as for asset/liability management
purposes. At December 31, 1998 we had $51.5 million in Federal Home Loan Bank
advances outstanding, an increase of $1.5 million from the $50.0 million at
December 31, 1996 and December 31, 1997.
Shareholders' equity increased $460,000, or 2.59%, during 1998 primarily as
a result of net income of $1.7 million partially offset by stock repurchases and
the payment of dividends on common stock. We repurchased 43,591 shares of common
stock in 1998 as part of a repurchase of
6
<PAGE>
5.00% of common stock which was completed on January 6, 1999. As of December 31,
1998, a total of 230,374 shares of our common stock had been repurchased at a
cost of approximately $4.7 million, or $20.23 per share. Shareholders' equity to
total assets was 7.81% at December 31, 1998 compared to 8.58% at December 31,
1997.
Results of Operations
Our results of operations depend primarily on the levels of net interest
and non-interest income and control of operating expenses. Net interest income
is dependent upon the volume of interest-earning assets and interest-bearing
liabilities and upon the interest rate which is earned or paid on these items.
Our results of operations are also affected by the level of the provision for
loan losses as well as non-interest income.
7
<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. Loans receivable are
calculated net of deferred loan fees, loan discounts, loans in process and loss
reserves.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------
1996 1997
--------------------------------------------------------------------------
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............................. $149,502 $12,467 8.34% $ 169,465 $14,384 8.49%
Mortgage-backed securities................... 4,299 260 6.05 3,597 238 6.62
Other investments............................ 6,517 363 5.57 7,855 420 5.35
Federal Home Loan Bank stock................. 2,046 157 7.67 2,592 207 7.99
---------- -------- --------- ---------
Total interest-earning assets............... 162,364 13,247 8.16 183,509 15,249 8.31
------ -------
Non-interest earning assets................... 9,586 11,835
---------- ---------
Total assets................................. $171,950 $195,344
======== ========
Liabilities and Shareholders' Equity
Interest-Bearing Liabilities:
Savings deposits............................. $ 12,207 368 3.01 $ 13,347 401 3.00
Demand and NOW deposits...................... 25,272 601 2.38 28,700 582 2.03
Time deposits................................ 77,211 4,355 5.64 88,688 4,981 5.62
Borrowings................................... 39,234 2,206 5.62 46,329 2,744 5.92
--------- ------- --------- -------
Total interest-bearing liabilities.......... 153,924 7,530 4.89 177,064 8,708 4.92
------- -------
Other liabilities............................ 1,039 1,045
---------- ----------
Total liabilities........................... 154,963 178,109
Shareholders' equity.......................... 16,987 17,235
--------- ---------
Total liabilities and shareholders' equity . $171,950 $195,344
======== ========
Net interest income........................... $ 5,717 $ 6,541
======= =======
Net interest rate spread...................... 3.27% 3.39%
==== ====
Net earning assets............................ $ 8,440 $ 6,445
========= =========
Net yield on average interest-earning assets.. 3.52% 3.56%
===== =====
Average interest-earning assets to
average interest-bearing liabilities......... 1.05x 1.04x
==== =====
<CAPTION>
------------------------------------
1998
------------------------------------
Average Interest
Outstanding Earned/ Yield/
Balance Paid Rate
------------------------------------
<S> <C> <C> <C>
Assets:
Interest-Earning Assets:
Loans receivable............................. $189,702 $15,954 8.41%
Mortgage-backed securities................... 2,724 180 6.61
Other investments............................ 14,922 684 4.58
Federal Home Loan Bank stock................. 2,731 218 7.98
--------- --------
Total interest-earning assets............... 210,079 17,036 8.11
-------
Non-interest earning assets................... 11,793
---------
Total assets................................. $221,872
========
Liabilities and Shareholders' Equity
Interest-Bearing Liabilities:
Savings deposits............................. $ 14,745 441 2.99
Demand and NOW deposits...................... 31,916 502 1.57
Time deposits................................ 104,411 5,843 5.60
Borrowings................................... 50,838 3,041 5.98
--------- ------
Total interest-bearing liabilities.......... 201,910 9,827 4.87
------
Other liabilities............................ 1,724
----------
Total liabilities........................... 203,634
Shareholders' equity.......................... 18,238
----------
Total liabilities and shareholders' equity . $221,872
========
Net interest income........................... $7,209
======
Net interest rate spread...................... 3.24%
====
Net earning assets............................ $ 8,169
=========
Net yield on average interest-earning assets.. 3.43%
=====
Average interest-earning assets to
average interest-bearing liabilities......... 1.04x
=====
</TABLE>
8
<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. 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>
Years Ended December 31,
------------------------------------------------------------------------------
1996 vs. 1997 1997 vs. 1998
------------------------------------------------------------------------------
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 .............................. $ 1,691 $ 226 $ 1,917 $ 1,703 $ (133) $ 1,570
Mortgage-backed securities .................... (45) 23 (22) (58) -- (58)
Other investments ............................. 72 (15) 57 331 (67) 264
Federal Home Loan Bank stock .................. 43 7 50 11 -- 11
------- ------- ------- ------- ------- -------
Total interest-earning assets ............... $ 1,761 $ 241 2,002 $ 1,987 $ (200) 1,787
======= ======= ======= ======= ======= =======
Interest-bearing liabilities:
Savings deposits .............................. $ 34 $ (1) 33 $ 42 $ (2) 40
Demand deposits ............................... 76 (95) (19) 60 (140) (80)
Time deposits ................................. 644 (18) 626 882 (20) 862
Borrowings .................................... 415 123 538 269 28 297
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities .......... $ 1,169 $ 9 1,178 $ 1,253 $ (134) 1,119
======= ======= ======= ======= ======= =======
Net interest income ............................ $ 824 $ 668
======= =======
</TABLE>
9
<PAGE>
Comparison of Operating Results for the Years Ended December 31, 1998 and
December 31, 1997.
General. Net income for the year ended December 31, 1998 was $1.7 million,
an increase of $174,000 or 11.11% compared to net income for the year ended
December 31, 1997. This increase was primarily due to a $668,000 increase in net
interest income, a $106,000 increase in deposit account service charges, and a
$182,000 increase in the net gain on sale on mortgage loans, partially offset by
a $710,000 increase in all non-interest expenses and a $152,000 increase in
income tax expenses.
Net Interest Income. Net interest income for the year ended December 31,
1998 increased $668,000 or 10.21% over the same period in 1997. This increase
was primarily volume driven as we succeeded in growing our balance sheet. Our
net interest margin, which is net interest income divided by average
interest-earning assets, decreased slightly from 3.56% for the year ended
December 31, 1997, to 3.43% for the year ended December 31, 1998. This was
primarily due to shrinking interest rate margins partially driven by the
continuing level of loan refinancings as borrowers took advantage of lower
interest rates in the economy to decrease the rates on their existing loans.
Interest income on loans increased $1.6 million for the year ended 1998
compared to the year ended December 31, 1997, primarily the result of an
increase of $20.2 million in average loans outstanding. This increase was
primarily due to an active residential real estate market in 1998 due to
continued low interest rates and a strong local economy, and the ongoing success
of our focus on commercial and consumer loan production. This increase in volume
was partially offset by a decrease in yield on loans from 8.49% for the year
ended December 31, 1997 to 8.41% for the year ended December 31, 1998 caused
primarily by the decrease in interest rates generally.
Interest earned on mortgage-backed securities decreased by $58,000 due
primarily to an $873,000 decrease in the average balance of our mortgage-backed
securities.
Interest earned on other investments and Federal Home Loan Bank stock
increased by $275,000 for the year 1998 compared to 1997. This was the result of
an increase of $7.1 million in the average balance of other investments,
primarily due to our efforts to rebuild liquidity with an eye toward addressing
our relatively high tax burden, partially offset by a decrease in the yield on
other investments from 5.35% in 1997 to 4.58% in 1998. The increase in interest
earned was further augmented by interest earned on a $139,000 increase in the
average balance of Federal Home Loan Bank stock required to facilitate
borrowings from the Federal Home Loan Bank for the year ended December 31, 1998
over the year ended December 31, 1997.
Interest expense for the year ended 1998 increased $1.1 million or 12.85%
over the same period in 1997. This increase was primarily due to an increase of
$24.8 million in average interest-bearing liabilities, consisting of an
additional $20.3 million in the average balance of customer deposit accounts and
a $4.5 million increase in the average balance of Federal Home Loan Bank
advances drawn to fund loan demand. The increase was partially offset by a
decrease in the rate paid on interest bearing liabilities from 4.92% in 1997 to
4.87% in 1998 reflecting the general decrease in interest rates over the period.
10
<PAGE>
Provision for Loan Losses. We establish the 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, we also use the
services of a consultant to assist in the evaluation of our growing commercial
loan portfolio. Our analysis results in the allocations of allowance amounts for
each loan type. During 1996 we recorded an $800,000 provision for loan losses
primarily in response to the situation involving Bennett Funding Group of
Syracuse, New York through which we 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. We continue to
allocate $651,000 of the $1.6 million allowance to the remaining leases and the
restructured loan to provide for potential losses. We believe this reserve
allocation will be sufficient to cover any losses. We recorded a $104,000
provision for loan losses during 1998 as a result of our analysis of our current
loan portfolios. In addition to the $2.1 million of Bennett Funding Group leases
there were $659,000 of non-performing loans at December 31, 1998, consisting of
$494,000 in single-family residences, $23,000 in consumer loans and $142,000 in
commercial business loans. At December 31, 1998, our allowance equaled 0.79% of
net loans receivable. Non-performing loans totaled $2.7 million at December 31,
1998.
Non-Interest Income. Non-interest income for the year ended December 31,
1998 increased by $400,000, or 43.29% over the same period in 1997. This was
primarily due to a $106,000 increase in service charges and fees on deposit
accounts due to the increasing number of these accounts, and a $182,000 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. $250,000 of $425,000 of gains on the sale of loans in 1998 and $182,000
of the $243,000 of gains in 1997 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,
1998 increased $710,000, or 14.83%, over the same period in 1997. The major
components of this increase included a $367,000 increase in salaries and
employee benefits, a $96,000 increase in occupancy and equipment expense and a
$55,000 increase in advertising. These increases generally reflect the
additional expenses incurred in connection with our continuing growth in asset
size. In addition, salary and employee benefit expenses included expenses
related to the Employee Stock Ownership Plan, which was formed at the time of
our stock conversion, and expenses related to the Recognition and Retention Plan
which was approved by shareholders in August 1995. These two plans resulted in a
combined expense of $274,000 in 1997 and $341,000 in 1998.
Income Tax Expense. Our income tax provision increased by $152,000 for the
year ended December 31, 1998 compared to the year ended December 31, 1997. This
was primarily due to the increase in income before income taxes, as the
effective tax rate remained at approximately 40% in both years.
11
<PAGE>
Comparison of Operating Results for the Years Ended December 31, 1997 and
December 31, 1996.
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 we placed on non-accrual status. 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
grow and restructure the 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. Our net interest margin 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 our 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 Federal Home Loan Bank 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 our efforts to rebuild the liquidity portfolio, 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 Federal Home Loan Bank
stock required to facilitate borrowings from the Federal Home Loan Bank, as well
as by an increase in the yield on this 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 Federal Home Loan Bank
advances drawn to fund loan demand.
Provision for Loan Losses. As discussed earlier, during the quarter ended
June 30, 1996 we recorded an $800,000 provision for loan losses primarily in
response to a specific situation involving the Bennett Funding Group of
Syracuse, New York through which we owned $2.4 million of equipment leases.
During 1997, we recorded a $72,000 provision for loan losses as a result of our
12
<PAGE>
analysis of our current loan portfolios. In addition to the $2.1 million of
Bennett Funding Group leases there were $23,000 of non-performing or
restructured loans at December 31, 1997. At December 31, 1997, our 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 or 14.36% 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 our fourth branch. In addition, salary
and employee benefits expense includes expenses related to the Employee Stock
Ownership Plan , which was formed at the time of our stock conversion, and
expenses related to the Recognition and Retention Plan which was approved by
shareholders in August 1995. Employee Stock Ownership Plan expenses rise and
fall based on the change in our stock price. These two plans resulted in a
combined expense of $274,000 in 1997 and $233,000 in 1996.
Income Tax Expense. Our 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.
Asset/Liability Management; Market Risk Analysis
Lafayette Savings, like other financial institutions, is subject to
interest rate risk to the extent that our interest-bearing liabilities reprice
on a different basis than our interest-earning assets. Office of Thrift
Supervision regulations provide a net portfolio value 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 to manage interest rate risk and
thereby limit any negative effect of interest rate changes on our net portfolio
value. Our asset/liability policy, established by the board of directors, sets
forth acceptable limits on the amount of change in net portfolio value given
certain changes in interest rates. We have an asset/liability management
committee which meets weekly to review interest rate positions, and a board
investment committee which meets quarterly to review our interest rate risk
position and other related matters and to make recommendations for adjusting
this position to the full board of directors. In addition, the investment
committee meets semi-annually with our investment advisor to review our
investment portfolio and strategies relating to interest rate risk. Specific
strategies have included the sale of
13
<PAGE>
long-term, fixed rate loans to reduce the average maturity of our
interest-earning assets and the use of Federal Home Loan Bank advances to
lengthen the effective maturity of our interest-bearing liabilities. In the
future, our community banking emphasis, including the origination of commercial
business loans, is intended to further increase our portfolio of short-term
and/or adjustable rate loans.
Presented below, as of December 31, 1998 and 1997, is an analysis of our
interest rate risk as measured by changes in net portfolio value 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 Office of
Thrift Supervision assumptions.
At December 31, 1997 At December 31, 1998
Change in Board Limit --------------------------------------------------
Interest Rate % Change $ Change % Change $ Change % Change
- - --------------------------------------------------------------------------------
(Basis Points) (Dollars in (Dollars in
Thousands) Thousands)
300 -40.00 -3,015 -16% 2,611 -12%
200 -18.00 -1,516 - 8% -1,076 - 5%
100 -10.00 - 429 -2% - 192 -1%
0 0.00 0 0% 0 0%
-100 -10.00 -238 -1% -254 -1%
-200 -18.00 -851 -5% -540 -2%
-300 -40.00 -1,343 -7% -364 -2%
In evaluating our exposure to interest rate risk, certain shortcomings
inherent in the method of analysis presented in this 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.
We also make use of "gap" analysis which measures the difference between
the amount of interest-earning assets which are anticipated to mature or reprice
within a particular period and the amount of interest bearing liabilities which
are expected to reprice in that same period. We rely on certain assumptions,
such as the amount and timing of loan prepayments in the measurement of the
interest rate sensitivity gap. Similar shortcomings to those experienced with
net portfolio value analysis are also inherent in the gap method of analysis.
Liquidity and Capital Resources
Our 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
14
<PAGE>
prepayments are greatly influenced by the general market interest rates,
economic conditions and competition.
Our primary investing activities are the origination of loans and the
purchase of securities. During the years ended December 31, 1996, 1997 and 1998,
we originated loans totaling $77.7 million, $78.2 million and $93.0 million
respectively.
During the years ended December 31, 1996, 1997 and 1998, these investment
activities were funded primarily by principal repayments and prepayments on
loans and maturities of investment securities totaling $43.8 million, $50.0
million, and $59.0 million, respectively. The proceeds from the sale of loans
totaled $14.3 million, $20.2 million and $34.1 million for these same years.
Sales of available-for-sale securities in 1996 and 1998 generated proceeds of
$1.8 million and $1.0 million respectively. There were no sales in 1997.
The major sources of cash from financing activities in the years ended
December 31, 1996, 1997 and 1998 were increases in deposits of $7.0 million,
$20.7 million and $24.1 million, respectively. In the years ended December 31,
1996 and 1998, financing also was provided by net borrowings of $21.8 million
and $1.5 million, respectively. We had available lines of credit from the
Federal Home Loan Bank, at December 31, 1996, 1997 and 1998 equal to $1.5
million. We currently use, and intend to continue to use, Federal Home Loan Bank
advances as a source of funding for loans when advantageous interest rate risk
matches can be found.
Liquidity management is both a daily and long-term function. We adjust our
investment strategy, within the limits established by the investment policy,
based upon assessments of expected loan demand, expected cash flows, Federal
Home Loan Bank advance opportunities, market yields and objectives of our
asset/liability management program. Base levels of liquidity have generally been
invested in interest-earning overnight and time deposits with the Federal Home
Loan Bank 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.
We are 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%. Our
internal policy for liquidity is approximately 6% to 8%. Our liquidity ratios at
December 31, 1996, 1997 and 1998 were 7.31%, 7.76% and 11.77%, respectively.
We anticipate that we will have sufficient funds available to meet current
loan commitments. At December 31, 1998, we had outstanding commitments to
originate loans and available lines of credit totaling $27.7 million and
commitments to provide funds to complete current construction projects in the
amount of $4.4 million. Certificates of deposit which will mature in one year or
less at December 31, 1998 totaled $77.1 million. Based on our experience,
certificates of deposit have been a relatively stable source of long-term funds
as these certificates are generally renewed upon maturity since we have
established long-term banking relationships with our customers. Therefore, we
believe a significant portion of these deposits will remain with us, although
this cannot be assured.
At December 31, 1998, we exceeded all of the Office of Thrift Supervision
capital requirements on a fully phased in basis.
15
<PAGE>
LSB Financial also has a need for, and sources of liquidity separate from
the bank. Liquidity is required to fund our operating expenses, fund stock
repurchase programs, as well as for the payment of dividends to shareholders. At
December 31, 1998 LSB Financial had $99,000 in liquid assets on hand. The
primary source of liquidity on an ongoing basis is dividends from Lafayette
Savings. Dividends totaling $1.8 million were paid from Lafayette Savings to LSB
Financial during the year ended December 31, 1998. For the year ended December
31, 1998, LSB Financial paid dividends to shareholders totaling $355,000 and
repurchased 43,591 shares of common stock at a total cost of $1.4 million.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes which are presented here
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and the results of
operations in terms of historical dollars without considering the change in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of our operations. Unlike most
industrial companies, virtually all our assets and liabilities are monetary in
nature. As a result, interest rates have a greater impact on our performance
than do the effects of the general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same degree as the price of
goods and services.
Impact of Accounting Standards
The Financial Accounting Standards Board issues Financial Accounting
Standards that affect us.
Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities"
Effective January 1, 2000, Financial Accounting Standard 133 will require
all derivatives to be recorded at fair value. Unless designated as hedges,
changes in these fair values will be recorded in the income statement. Fair
value changes involving hedges will generally be recorded by offsetting gains
and losses on the hedge and on the hedged item, even if the fair value of the
hedged item is not otherwise recorded. Upon adoption of this Standard, entities
may redesignate securities as either available-for-sale or held-to-maturity. We
do not expect adoption of this standard to have a material effect but the effect
will depend upon our use of derivatives upon adoption.
Disclosure Regarding Forward Looking Statements
LSB Financial and Lafayette Savings may from time to time make written or
oral forward-looking statements. These forward-looking statement may be
contained in this Annual Report to Shareholders, in our filings with the
Securities and Exchange Commission, including our Annual Report on Form 10-KSB
and its exhibits, and in other communications by us, which are made in good
faith pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. The words "may", "could", "should", "would",
"believe", "anticipate", "estimate", "expect", "intend", "plan" and similar
expressions are intended to identify forward-looking statements.
16
<PAGE>
Forward-looking statements include statements with respect to our beliefs,
plans, objectives, goals, expectations, anticipations, estimates and intentions,
that are subject to significant risks and uncertainties. The following factors,
many of which are subject to change based on various other factors beyond our
control, could cause our financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements:
o the strength of the United States economy in general and the strength
of the local economies in which we conduct our operations;
o the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Federal Reserve
Board;
o inflation, interest rate, market and monetary fluctuations;
o the timely development of and acceptance of new products and services
of Lafayette Savings and the perceived overall value of these products
and services by users, including the features, pricing and quality
compared to competitors' products and services;
o the willingness of users to substitute competitors' products and
services for our products and services;
o the success of Lafayette Savings in gaining regulatory approval of its
products and services, when required;
o the impact of changes in financial services' laws and regulations
(including laws concerning taxes, banking, securities and insurance);
o the impact of technological changes;
o acquisitions;
o changes in consumer spending and saving habits; and o our success at
managing the risks involved in the foregoing.
This list of important factors is not exclusive. We incorporate by
reference those risk factors included in LSB Financial's Registration Statement
on Form S-1 (Reg. No. 33-84266) filed with the Securities and Exchange
Commission under the Securities Act of 1933. We do not undertake to update any
forward-looking statement, whether written or oral, that may be made from time
to time by or on behalf of LSB Financial or Lafayette Savings.
17
<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, 1998 and 1997, 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, 1998.
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, 1998 and 1997, and the results of its operations and its cash
flows for each of the years in the three year period ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Indianapolis, Indiana
February 5, 1999
- - --------------------------------------------------------------------------------
18
<PAGE>
LSB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1997 and 1998
(Dollars in thousands, except per share data)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,358 $ 1,392
Short-term investments 5,580 8,254
--------- ---------
Cash and cash equivalents 9,938 9,646
Available-for-sale securities 7,863 12,675
Loans held for sale 1,265 2,694
Loans, net of allowance ($1,478 and $1,578) 177,267 196,652
Office properties and equipment - net 4,912 5,805
Federal Home Loan Bank stock, at cost 2,600 2,825
Accrued interest receivable and other assets 2,739 2,514
--------- ---------
$ 206,584 $ 232,811
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits $ 137,686 $ 161,781
Advances from Federal Home Loan Bank 50,000 51,500
Note payable 189 156
Accrued interest payable and other liabilities 975 1,180
--------- ---------
188,850 214,617
Shareholders' equity
Common stock ($.01 par value - 7,000,000 shares
authorized; 916,350 and 919,686 shares issued) 9 9
Additional paid-in capital 7,854 8,064
Retained earnings 10,677 10,703
Unamortized cost of recognition and retention plan (242) (152)
Unearned shares held by employee stock ownership plan (570) (492)
Accumulated other comprehensive income 6 62
--------- ---------
17,734 18,194
--------- ---------
$ 206,584 $ 232,811
========= =========
</TABLE>
- - --------------------------------------------------------------------------------
See accompanying notes.
19
<PAGE>
LSB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME Years
ended December 31, 1996, 1997 and 1998
(Dollars in thousands, except per share data)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Interest income
Loans, including related fees $12,467 $14,384 $15,954
Taxable securities 586 645 734
Tax exempt securities 38 45 84
Other 156 175 264
------- ------- -------
13,247 15,249 17,036
Interest expense
Deposits 5,324 5,964 6,786
Federal Home Loan Bank advances 2,193 2,733 3,031
Other 13 11 10
------- ------- -------
7,530 8,708 9,827
------- ------- -------
Net interest income 5,717 6,541 7,209
Provision for loan losses 800 72 104
------- ------- -------
Net interest income after provision for loan losses 4,917 6,469 7,105
------- ------- -------
Noninterest income
Deposit account service charges and fees 326 445 551
Net gain on sale of mortgage loans 184 243 425
Net gain on securities 7 -- 9
Other 178 236 339
------- ------- -------
695 924 1,324
Noninterest expense
Salaries and employee benefits 2,082 2,439 2,806
Occupancy and equipment, net 668 761 857
Computer service 244 246 265
Deposit insurance 2 15 17
Advertising 274 342 397
Other 916 984 1,155
------- ------- -------
4,186 4,787 5,497
------- ------- -------
Income before income taxes 1,426 2,606 2,932
Income tax provision 550 1,040 1,192
------- ------- -------
Net income $ 876 $ 1,566 $ 1,740
======= ======= =======
Earnings per share $ .91 $ 1.72 $ 1.95
Earnings per share, assuming dilution .90 1.68 1.88
</TABLE>
- - --------------------------------------------------------------------------------
See accompanying notes.
20
<PAGE>
LSB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1996, 1997 and 1998
(Dollars in thousands, except per share data)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Retained Benefit Treasury Comprehensive
Stock Capital Earnings Plans Stock Income Total
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $ 11 $ 10,063 $ 9,626 $ (1,138) $ (466) $ (28) $ 18,068
Comprehensive income
Net income -- -- 876 -- -- -- 876
Change in net unrealized gain (loss) (5) (5)
--------
Total comprehensive income 871
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 ($.22 per share) -- -- (213) -- -- -- (213)
-------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1996 11 10,143 10,289 (985) (2,629) (33) 16,796
Comprehensive income
Net income -- -- 1,566 -- -- -- 1,566
Change in net unrealized gain (loss) 39 39
--------
Total comprehensive income -- -- -- -- -- -- 1,605
Exercise of stock options (206 shares) -- 3 -- -- -- -- 3
RRP amortization expense -- -- -- 90 -- -- 90
Employee stock ownership plan-shares earned -- 101 -- 83 -- -- 184
Acquisition of treasury stock (30,888 shares) -- -- -- -- (633) -- (633)
Retirement of treasury stock (186,783 shares) (2) (3,260) -- -- 3,262 -- --
Dividends paid ($.33 per share) -- -- (311) -- -- -- (311)
Stock dividend (44,272 shares) -- 867 (867) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1997 9 7,854 10,677 (812) -- 6 17,734
</TABLE>
- - --------------------------------------------------------------------------------
(Continued)
21
<PAGE>
LSB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1996, 1997 and 1998
(Dollars in thousands, except per share data)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Retained Benefit Treasury Comprehensive
Stock Capital Earnings Plans Stock Income Total
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Comprehensive income
Net income $ $ $ 1,740 $ $ $ $ 1,740
Change in net unrealized gain (loss) 56 56
---------
Total comprehensive income 1,796
Exercise of stock options (1,659 shares) 23 23
RRP amortization expense 90 90
Employee stock ownership plan-shares earned 173 78 251
Acquisition and retirement of stock (43,591 shares) (1,345) (1,345)
Dividends paid ($.40 per share) (355) (355)
Stock dividend (45,268 shares) 1,359 (1,359) --
-------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1998 $ 9 $ 8,064 $ 10,703 $ (644) $ -- $ 62 $ 18,194
======== ======== ======== ======== ======== ======== =========
</TABLE>
- - --------------------------------------------------------------------------------
See accompanying notes.
22
<PAGE>
LSB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1997 and 1998
(Dollars in thousands)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 876 $ 1,566 $ 1,740
Adjustments to reconcile net income to net cash from operating activities
Depreciation 276 348 395
Net amortization on securities 54 32 11
Provision for loan losses 800 72 104
Gain on securities (7) -- (9)
Employee stock ownership plan - shares earned 143 184 251
Changes in assets and liabilities
Loans held for sale (426) 4,965 (1,429)
Accrued interest receivable and other assets (64) (774) 277
Accrued interest payable and other liabilities (671) 333 205
-------- -------- --------
Net cash from operating activities 981 6,726 1,545
Cash flows from investing activities
Proceeds from the maturity and paydown of available-for-sale securities 7,578 2,743 3,713
Purchase of available-for-sale securities (3,687) (4,026) (9,442)
Proceeds from sales of available-for-sale securities 1,802 -- 1,009
Purchase of Federal Home Loan Bank stock (1,075) (25) (225)
Loans made to customers net of payments received (32,603) (24,353) (19,489)
Proceeds from the sale of loans 5,446 -- --
Purchase of premises and equipment (1,641) (690) (1,288)
-------- -------- --------
Net cash from investing activities (24,180) (26,351) (25,722)
Cash flows from financing activities
Net change in deposits 6,972 20,737 24,095
Net change in short term borrowings (864) -- --
Proceeds from Federal Home Loan Bank advances 42,500 39,000 17,500
Payments on advances from Federal Home Loan Bank (21,000) (39,000) (16,000)
Payments on note payable (30) (31) (33)
Dividends paid (213) (311) (355)
Stock options exercised -- 3 23
Purchase of treasury stock (2,164) (633) (1,345)
-------- -------- --------
Net cash from financing activities 25,202 19,765 23,885
-------- -------- --------
Net change in cash and cash equivalents 2,003 140 (292)
Cash and cash equivalents at beginning of period 7,795 9,798 9,938
-------- -------- --------
Cash and cash equivalents at end of period $ 9,798 $ 9,938 $ 9,646
======== ======== ========
Cash paid during the period for:
Interest $ 7,492 $ 8,713 $ 9,805
Income taxes 1,037 886 1,168
Non cash investing activities:
Book value of portfolio loans transferred to held for sale 10,282 -- --
</TABLE>
- - --------------------------------------------------------------------------------
See accompanying notes.
23
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
(Dollars in thousands)
- - --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation: 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). Intercompany transactions and balances
have been eliminated. 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: To prepare financial statements in conformity with generally
accepted accounting principles management makes estimates and assumptions based
on available information. These estimates and assumptions affect the amounts
reported in the financial statements and the disclosures provided, and future
results could differ. The allowance for loan losses and fair values of financial
instruments are particularly subject to change.
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 included in other comprehensive income. Securities are written
down to fair value when a decline in fair value is not temporary. Other
securities such as Federal Home Loan Bank stock are carried at cost. 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.
Loans: Loans are reported at the principal balance outstanding, net of unearned
interest, deferred loan fees and costs, and an allowance for loan losses. Loans
held for sale are reported at the lower of cost or market, on an aggregate
basis.
Interest income is reported on the interest method and includes amortization of
net deferred loan fees and costs over the loan term. Interest income is not
reported when full loan repayment is in doubt, typically when the loan is
impaired or payments are past due over 90 days (180 days for residential
mortgages). Payments received on such loans are reported as principal
reductions.
- - --------------------------------------------------------------------------------
(Continued)
24
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
(Dollars in thousands)
- - --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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.
Foreclosed Assets: Assets acquired through or instead of loan foreclosure are
initially recorded at fair value when acquired, establishing a new cost basis.
If fair value declines, a valuation allowance is recorded through expense. Costs
after acquisition are expensed.
- - --------------------------------------------------------------------------------
(Continued)
25
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
(Dollars in thousands)
- - --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Long-Term Assets: These assets are reviewed for impairment when events indicate
their carrying amount may not be recoverable from future undiscounted cash
flows. If impaired, the assets are recorded at discounted amounts.
Stock Compensation: Compensation expense under stock option plans is reported if
options are granted below market price at grant date. Pro forma disclosures of
net income and earnings per share are shown using the fair value method to
measure expense, using an option pricing model to estimate fair value.
Employee Stock Ownership Plan: The cost of shares issued to the ESOP, but not
yet allocated to participants, is shown as a reduction of shareholders' equity.
Compensation expense is based on the market price of shares as they are
committed to be released to participant accounts. Dividends on allocated ESOP
shares reduce retained earnings; dividends on unearned ESOP shares reduce debt
and accrued interest.
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.
Financial Instruments: Financial instruments include credit instruments, such as
commitments to make loans and standby letters of credit, issued to meet customer
financing needs. The face amount for these items represents the exposure to
loss, before considering customer collateral or ability to repay.
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.
- - --------------------------------------------------------------------------------
(Continued)
26
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
(Dollars in thousands)
- - --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share: Earnings per share is net income divided by the weighted
average number of common shares outstanding during the period. ESOP shares are
considered outstanding for this calculation unless unearned. Diluted earnings
per share include the dilutive effect of additional potential common shares
issuable under stock options. Earnings and dividends per share are restated for
all stock splits and dividends through the date of issue of the financial
statements.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale which are also recognized as separate
components of equity. The accounting standard that requires reporting
comprehensive income first applied for 1998, with prior information restated to
be comparable.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
material effect on the financial statements.
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 separate note.
Industry Segment: Internal financial information is reported and aggregated
solely in the banking line of business.
New Accounting Pronouncement: Beginning January 1, 2000, a new accounting
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be recorded
by offsetting gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not otherwise recorded. This is not expected to
have a material effect but the effect will depend on derivative holdings when
this standard applies.
- - --------------------------------------------------------------------------------
(Continued)
27
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
(Dollars in thousands)
- - --------------------------------------------------------------------------------
NOTE 2 - AVAILABLE-FOR-SALE SECURITIES
Securities at year-end are as follows:
<TABLE>
<CAPTION>
1 9 9 7
-------
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
============ ============ ============ ============
<CAPTION>
1 9 9 8
-------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Obligations of the U.S.
Government and its agencies $ 4,014 $ 56 $ - $ 4,070
Mortgage-backed securities 2,166 5 (17) 2,154
States and political
subdivisions 3,349 46 - 3,395
Corporate securities and
commercial paper 3,042 19 (5) 3,056
------------ ------------ ------------ ------------
$ 12,571 $ 126 $ (22) $ 12,675
============ ============ ============ ============
</TABLE>
- - --------------------------------------------------------------------------------
(Continued)
28
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
(Dollars in thousands)
- - --------------------------------------------------------------------------------
NOTE 2 - AVAILABLE-FOR-SALE SECURITIES (Continued)
The amortized cost and fair value of available-for-sale securities at December
31, 1998, 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 $ 2,338 $ 2,345
Due after one year through five years 7,458 7,563
Due after five years through ten years 359 363
Due after ten years 250 250
Mortgage-backed securities 2,166 2,154
------------ ------------
$ 12,571 $ 12,675
============ ============
The sale of available-for-sale securities during 1996, 1997 and 1998 generated
gross gains of $9, $0 and $9 and gross losses of $2, $0 and $0.
NOTE 3 - LOANS RECEIVABLE
Year-end loans consisted of the following:
1997 1998
---- ----
Mortgage loans secured by:
One-to-four family residences $ 103,151 $ 110,537
Multi-family residences 20,382 25,530
Commercial real estate 20,888 26,342
Construction and development 20,346 18,394
Home equity lines of credit 10,012 10,572
Commercial business loans 5,823 7,627
Consumer loans 3,286 3,854
------------ ------------
Gross loans receivable 183,888 202,856
Undisbursed portion of loans in process (4,859) (4,401)
Deferred loan fees, net (284) (225)
Allowance for loan losses (1,478) (1,578)
------------ ------------
$ 177,267 $ 196,652
============ ============
- - --------------------------------------------------------------------------------
(Continued)
29
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
(Dollars in thousands)
- - --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE (Continued)
Mortgage loans serviced principally for the Federal Home Loan Mortgage
Corporation are not included in the accompanying statements of financial
condition. The unpaid principal balances of such loans were $51,681 and $61,316
at December 31, 1997 and 1998, respectively.
Activity for capitalized mortgage servicing rights was as follows:
1996 1997 1998
---- ---- ----
Beginning of year $ 4 $ 128 $ 274
Additions 129 182 250
Amortized to expense (5) (36) (101)
------------- ------------ ------------
End of year $ 128 $ 274 $ 423
============ ============ ============
No valuation allowance was deemed necessary at December 31, 1998.
Certain executive officers and directors are loan customers of the Bank. Total
loans outstanding to these individuals or their associates were $990 and $295 at
December 31, 1997 and 1998.
Activity in the allowance for loan losses was as follows:
1996 1997 1998
---- ---- ----
Beginning balance $ 922 $ 1,715 $ 1,478
Provision for loan losses 800 72 104
Loan charge-offs (7) (322) (4)
Recoveries - 13 -
------------ ------------ ------------
Ending balance $ 1,715 $ 1,478 $ 1,578
============ ============ ============
- - --------------------------------------------------------------------------------
(Continued)
30
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
(Dollars in thousands)
- - --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE (Continued)
Information about impaired loans is as follows:
<TABLE>
<S> <C> <C> <C>
Year-end loans with no allowance
for loan losses allocated $ -- $ -- $ --
Year-end loans with allowance for
loan losses allocated 2,391 2,071 2,254
Amount of the allowance allocated 970 651 734
Average of impaired loans during the year 1,793 2,231 2,223
Interest income recognized during impairment - 7 14
Cash-basis interest income recognized - 7 14
</TABLE>
NOTE 4 - OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment is as follows at year-end:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Land $ 1,255 $ 1,255
Office buildings and improvements 3,416 4,364
Furniture and equipment 2,070 2,410
----------- -----------
6,741 8,029
Less accumulated depreciation and amortization 1,829 2,224
----------- -----------
$ 4,912 $ 5,805
=========== ===========
</TABLE>
NOTE 5 - DEPOSITS
Deposits at year-end are summarized as follows:
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 8
------- -------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Non interest-bearing deposits $ 5,097 3.7% $ 7,592 4.7%
NOW accounts 23,468 17.0 26,175 16.2
Savings accounts 13,958 10.2 14,868 9.2
----------- ------- ----------- ------
42,523 30.9 48,635 30.1
----------- ------- ----------- ------
Certificates of deposit
2.00% to 3.99% 95 .1 617 .4
4.00% to 5.99% 51,847 37.6 79,983 49.4
6.00% to 7.99% 43,214 31.4 32,546 20.1
8.00% to 9.99% 7 - - -
----------- ------- ----------- ------
95,163 69.1 113,146 69.9
----------- ------- ----------- ------
$ 137,686 100.0% $ 161,781 100.0%
=========== ======= =========== ======
</TABLE>
- - --------------------------------------------------------------------------------
(Continued)
31
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
(Dollars in thousands)
- - --------------------------------------------------------------------------------
NOTE 5 - DEPOSITS (Continued)
At December 31, 1998, scheduled maturities of certificates of deposit are as
follows:
1999 $ 77,076
2000 20,895
2001 8,453
2002 2,897
2003 3,814
Thereafter 11
---------
$ 113,146
=========
Time deposits of $100 or more were $14,617 and $14,617 at December 31, 1997 and
1998, respectively.
NOTE 6 - ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank (FHLB) require monthly interest
payments and are secured by a blanket pledge of the Bank's eligible securities
and mortgage loans. At December 31, 1998, the year of final maturity and the
current weighted average interest rate of FHLB advances were as follows:
Weighted
Interest Principal
Year Average Balance
---- ------- -------
1999 6.16% $ 11,000
2000 5.63 6,500
2002 5.91 19,000
2003 5.84 8,000
2008 5.19 7,000
------------
$ 51,500
============
The advances due in 2002 and $4,000 of the advances due in 2000 may, at certain
dates, be converted to adjustable rate advances by the FHLB. If converted, the
advances may be prepaid without penalty. Except for a $2,000 advance with a
final maturity of 2008, advances are due in full at maturity. That advance has
required principal payments during the next five years of $68 (1999), $159
(2000), $232 (2001), $203 (2002) and $177 (2003).
- - --------------------------------------------------------------------------------
(Continued)
32
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
(Dollars in thousands)
- - --------------------------------------------------------------------------------
NOTE 7 - CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS
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, 1997 and 1998, the Bank's actual and required minimum capital
ratios were as follows:
<TABLE>
<CAPTION>
FDIC
----
OTS To Be Well
--- 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)
1997 $ 17,556 11.98% $ 11,725 8.0% $ 14,656 10.0%
1998 18,069 11.15 12,960 8.0 16,201 10.0
Tier I Capital (to Risk
Weighted Assets)
1997 $ 16,510 11.27% $ 5,862 4.0% $ 8,793 6.0%
1998 17,028 10.51 6,480 4.0 9,720 6.0
Tier 1 (Core) Capital
(to Adjusted Assets)
1997 $ 16,510 8.01% $ 6,183 3.0% $ 10,305 5.0%
1998 17,028 10.51 6,964 3.0 11,607 5.0
Tangible Capital
(to Adjusted Assets)
1997 $ 16,510 8.01% $ 3,091 1.5% N/A N/A
1998 17,028 7.34 3,482 1.5 N/A N/A
</TABLE>
Risk-based capital differs from tangible and core capital due to the inclusion
of the Bank's general valuation allowance which totaled $1,046 and $1,041 at
December 31, 1997 and 1998.
At December 31, 1997 and 1998, the Bank's capital ratios result in its being
designated a well capitalized institution.
- - --------------------------------------------------------------------------------
(Continued)
33
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
(Dollars in thousands)
- - --------------------------------------------------------------------------------
NOTE 7 - CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS (Continued)
The Qualified Thrift Lender test requires at least 65% of assets be maintained
in housing-related financial and other specified areas. If this test is not met,
limits are placed on growth, branching, new investments, FHLB advances and
dividends, or the Bank must convert to a commercial bank charter. Management
believes that this test is met.
OTS regulations limit capital distributions by savings institutions. The least
restriction is placed on "tier 1" institutions, defined as well-capitalized and
with favorable qualitative OTS examination ratings, which can make distributions
in a year up to one-half the capital in excess of the most stringent capital
requirement at the beginning of the year plus net income to date. Other
institutions have more stringent requirements, the most restrictive being prior
OTS approval of any capital distribution. The Bank is a tier 1 institution.
LSB converted from a mutual to a stock institution, and a "liquidation account"
was established at $8,066, which was net worth reported in the conversion
prospectus. Eligible depositors who have maintained their accounts, less annual
reductions to the extent they have reduced their deposits, would receive a
distribution from this account if the Bank liquidated. Dividends may not reduce
shareholders' equity below the required liquidation account balance.
NOTE 8 - 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.
1996 1997 1998
---- ---- ----
Pro forma net income $ 821 $ 1,511 $ 1,678
Pro forma earnings per share .89 1.66 1.88
Pro forma diluted earnings per share .84 1.63 1.82
- - --------------------------------------------------------------------------------
(Continued)
34
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
(Dollars in thousands)
- - --------------------------------------------------------------------------------
NOTE 8 - BENEFIT PLANS (Continued)
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Price per Price Per Price Per
Options Share Options Share Options Share
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Beginning of year 74,112 $ 15.38 74,112 $ 15.38 81,058 $ 15.32
Granted - 4,320 27.50 -
Exercised - (206) 15.38 (1,659) 14.08
Forfeited - (823) 15.38 (1,134) 13.95
Expired - - -
Adjustment for stock
dividend - 3,655 4,040
----------- ----------- -----------
End of year 74,112 15.38 81,058 15.32 82,305 14.64
=========== =========== ===========
Weighted average
remaining option life 8.7 years 7.9 years 7.0 years
Price range of options $15.38/share $14.64-$27.50/share $13.95-$26.49/share
</TABLE>
Options exercisable at year-end are as follows:
Weighted-Average
Number Per Share
of Options Exercise Price
---------- --------------
1996 14,822 $ 15.375
1997 30,695 14.64
1998 47,349 14.19
The fair value of options granted during 1997 was $7.57 per share which was
estimated using the following weighted-average information: risk-free interest
rate of 5.50%, expected life of 7 years, expected volatility of stock price of
.15 and expected annual dividend yield of 1.27%.
- - --------------------------------------------------------------------------------
(Continued)
35
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
(Dollars in thousands)
- - --------------------------------------------------------------------------------
NOTE 8 - BENEFIT PLANS (Continued)
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 $90 for each year reported.
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. 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.
The following table presents information about the ESOP at year-end or for the
year:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Shares earned for the year 8,540 8,584 8,610
Shares allocated to participants at year-end 8,504 17,896 26,703
Shares committed to be released at year-end 8,540 8,584 8,610
Unreleased shares at year-end 65,322 60,004 54,326
Fair value of unreleased shares at year-end $ 1,274 $ 1,710 $ 1,548
Expense recognized for the year 143 184 251
</TABLE>
- - --------------------------------------------------------------------------------
(Continued)
36
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
(Dollars in thousands)
- - --------------------------------------------------------------------------------
NOTE 9 - 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:
1997 1998
---- ----
Commitments to extend credit:
Fixed rate $ 2,282 $ 4,368
Variable rate 1,169 2,782
Unused portions of lines of credit 15,949 20,521
Standby letters of credit 108 169
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, 1998,
the fixed rate loan commitments were at rates ranging from 6.25% to 10.00%.
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.
NOTE 10 - INCOME TAXES
An analysis of the income tax provision is as follows:
Year Ended December 31,
-----------------------
1996 1997 1998
-------- -------- --------
Current provision $ 692 $ 853 $ 1,294
Deferred provision (benefit) (142) 187 (102)
-------- -------- --------
$ 550 $ 1,040 $ 1,192
======== ======== ========
- - --------------------------------------------------------------------------------
(Continued)
37
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
(Dollars in thousands)
- - --------------------------------------------------------------------------------
NOTE 10 - INCOME TAXES (Continued)
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,
-----------------------
1996 1997 1998
<S> <C> <C> <C>
Income tax provision computed
at statutory rate $ 485 $ 886 $ 997
Add (subtract) tax effect of
Low income housing credit (36) (17) (37)
Tax exempt income (10) (17) (25)
State tax expense (net of federal tax benefit) 89 156 179
ESOP expense 20 34 59
Other 2 (2) 19
------- ------- -------
$ 550 $ 1,040 $ 1,192
======= ======= =======
</TABLE>
The net deferred tax asset recorded at December 31, 1997 and 1998 is comprised
of the following:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets from:
Bad debt deductions $ 363 $ 440
Loan fee income 28 9
Deferred compensation 29 41
------- -------
420 490
Deferred tax liability from:
Fixed asset depreciation (133) (146)
Net unrealized gain on available-for-sale securities (4) (42)
Mortgage servicing rights (108) (168)
Other (32) (131)
------- -------
(277) (487)
Valuation allowance for deferred tax assets - -
------- -------
Net deferred tax asset $ 143 $ 3
======= =======
</TABLE>
- - --------------------------------------------------------------------------------
(Continued)
38
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
(Dollars in thousands)
- - --------------------------------------------------------------------------------
NOTE 10 - INCOME TAXES (Continued)
Federal income tax laws provided additional bad debt deductions through 1987,
totaling $1,861. Accounting standards do not require a deferred tax liability to
be recorded on this amount, which liability otherwise would total $744 at
December 31, 1998. If the Bank were liquidated or otherwise ceases to be a bank
or if tax laws were to change, this amount would be expensed. Under 1996 tax law
changes, bad debts are based on actual loss experience and tax bad debt reserves
accumulated since 1987 are to be reduced. This requires payment of approximately
$37 annually for six years beginning in 1998.
NOTE 11 - EARNINGS PER SHARE
The following table presents the data used to compute earnings per share:
1996 1997 1998
------- ------- -------
Weighted average shares outstanding
during the year 967,346 908,730 890,301
Dilutive effect of potential shares 5,606 21,244 35,727
------- ------- -------
Shares used to compute diluted
earnings per share 972,952 929,974 926,028
======= ======= =======
- - --------------------------------------------------------------------------------
(Continued)
39
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
(Dollars in thousands)
- - --------------------------------------------------------------------------------
NOTE 12 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments at year-end are as follows, in thousands.
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 8
------- -------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Financial assets
Cash and short-term
investments $ 9,938 $ 9,938 $ 9,646 $ 9,646
Available-for-sale securities 7,863 7,863 12,675 12,675
Federal Home Loan Bank stock 2,600 2,600 2,825 2,825
Loans (net) 178,532 179,599 196,652 201,530
Accrued interest receivable 1,206 1,206 1,251 1,251
Financial liabilities
Deposits (137,686) (137,858) (161,781) (162,225)
Federal Home Loan Bank
advances (50,000) (49,707) (51,500) (51,995)
Note payable (189) (189) (156) (156)
Accrued interest payable (192) (192) (176) (176)
</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)
40
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
(Dollars in thousands)
- - --------------------------------------------------------------------------------
NOTE 13 - 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, 1997 and 1998
1997 1998
---- ----
ASSETS
Short-term investments $ 99 $ 18
Investment in the Bank 16,791 17,090
Available-for-sale securities 250 250
Loan to ESOP 618 583
Other assets - 253
----------- -----------
$ 17,758 $ 18,194
=========== ===========
LIABILITIES 24 -
SHAREHOLDERS' EQUITY 17,734 18,194
----------- -----------
$ 17,758 $ 18,194
=========== ===========
CONDENSED STATEMENTS OF INCOME
For the years ended December 31, 1996, 1997 and 1998
1996 1997 1998
------- ------- -------
Operating income
Dividends from the Bank $ 1,000 $ 180 $ 1,840
Other operating income 83 68 38
Operating expenses (82) (59) (55)
Income tax benefit 3 1 15
------- ------- -------
Income before equity in undistributed
income of the Bank 1,004 190 1,838
Equity in undistributed income of the Bank (128) 1,376 (98)
------- ------- -------
Net income $ 876 $ 1,566 $ 1,740
======= ======= =======
- - --------------------------------------------------------------------------------
(Continued)
41
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
(Dollars in thousands)
- - --------------------------------------------------------------------------------
NOTE 13 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS For
the years ended December 31, 1996, 1997, and 1998
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 876 $ 1,566 $ 1,740
Adjustments to reconcile net income to net cash from operating
activities
Equity in undistributed income of the Bank 128 (1,376) 98
Amortization of premiums paid for securities 1 -- --
Gain on sale of securities (9) -- --
Change in other assets 21 3 (253)
Change in other liabilities 23 (18) (24)
------- ------- -------
Net cash from operating activities 1,040 175 1,561
Cash flows from investing activities
Proceeds from the sale of available-for-sale securities 814 -- --
Purchase of available-for-sale securities (840) -- --
Proceeds from the maturity of available-for-sale securities 1,000 -- --
Proceeds from repayment of the loan to ESOP 69 68 35
------- ------- -------
Net cash from investing activities 1,043 68 35
Cash flows from financing activities
Issuance of RRP shares 22 -- --
Dividends paid (213) (311) (355)
Stock options exercised -- 3 23
Repurchase of treasury stock (2,163) (633) (1,345)
------- ------- -------
Net cash from financing activities (2,354) (941) (1,677)
------- ------- -------
Net changes in cash equivalents (271) (698) (81)
Cash equivalents at beginning of year 1,068 797 99
------- ------- -------
Cash equivalents at end of year $ 797 $ 99 $ 18
======= ======= =======
</TABLE>
- - --------------------------------------------------------------------------------
(Continued)
42
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
(Dollars in thousands)
- - --------------------------------------------------------------------------------
NOTE 14 - OTHER COMREPHENSIVE INCOME
Other comprehensive income components and related taxes were as follows:
1996 1997 1998
----- ----- -----
Unrealized holding gains and losses on
available-for-sale securities $ (1) $ 65 $ 103
Less reclassification adjustments for gains
and losses later recognized in income (7) -- (9)
----- ----- -----
Net unrealized gains and losses (8) 65 94
Tax effect 3 (26) (38)
----- ----- -----
Other comprehensive income $ (5) $ 39 $ 56
===== ===== =====
- - --------------------------------------------------------------------------------
(Continued)
43
<PAGE>
LSB FINANCIAL CORP.
and
LAFAYETTE SAVINGS BANK, FSB
DIRECTORS AND EXECUTIVE OFFICERS
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
Vice President, Greater Lafayette Life Insurance Company
Health Services, Inc.
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
44
<PAGE>
STOCKHOLDER INFORMATION
Corporate Profile
LSB Financial is an Indiana corporation which was organized in 1994 by
Lafayette Savings for the purpose of becoming a thrift institution holding
company. Lafayette Savings was organized in 1869 and converted to a federal
savings bank in 1984. On February 3, 1995, Lafayette Savings converted to the
stock form of organization and concurrently became the wholly-owned subsidiary
of LSB Financial through the sale and issuance of 1,029,576 shares of Common
Stock. The principal asset of LSB Financial is the outstanding stock of
Lafayette Savings, its wholly owned subsidiary. Lafayette Savings' primary
business consists of attracting deposits from the general public and using these
deposits to provide financing for the purchase and construction of residential
and, to a lesser extent, other properties.
Corporate Office Branch Offices
101 Main Street 1020A Sagamore Parkway W.
Lafayette, Indiana 47902 West Lafayette, Indiana 47906
1501 Sagamore Parkway W.
Lafayette, Indiana 47905
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 & Trust, Inc. Silver, Freedman & Taff, L.L.P.
1825 Lawrence Street 1100 New York Avenue, N.W.
Denver, Colorado 80202 Washington, D.C. 20005
45
<PAGE>
Common Stock
As of December 31, 1998, there were approximately 838 holders of record of
LSB Financial Common Stock and 919,686 shares of issued and outstanding common
stock. LSB Financial's stock is quoted on the Nasdaq National Stock Market under
the symbol "LSBI."
The following table sets forth, for the periods shown, the high and low
prices of the common stock and cash dividends per share declared. The common
stock began trading on Nasdaq on February 5, 1995, the date Lafayette Savings
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, 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 27.75 23.875 0.10
March 31, 1998 33.00 26.75 0.10
June 30, 1998 33.00 30.00 0.10
September 30, 1998 32.00 29.50 0.10
December 31, 1998 30.00 26.25 0.12
Dividend payment decisions are made after consideration of a variety of
factors including earnings, financial condition, market considerations and
regulatory restrictions. Restrictions on dividend payments are described in Note
7 of the Notes to Consolidated Financial Statements included in this Annual
Report.
46
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Percentage State of
of Incorporation or
Parent Subsidiary Ownership 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.
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 5, 1999, on the consolidated statements
of financial condition of LSB Financial Corp. as of December 31, 1998 and 1997
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,
1998, which report is included in Form 10-KSB of LSB Financial Corp. for the
year ended December 31, 1998.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Indianapolis, Indiana
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary information extracted from the annual report on
Form 10-KSB for the year ended December 31, 1998 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1392
<INT-BEARING-DEPOSITS> 8254
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12675
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 200924
<ALLOWANCE> 1578
<TOTAL-ASSETS> 232811
<DEPOSITS> 161781
<SHORT-TERM> 51500
<LIABILITIES-OTHER> 1180
<LONG-TERM> 156
0
0
<COMMON> 9
<OTHER-SE> 18185
<TOTAL-LIABILITIES-AND-EQUITY> 214617
<INTEREST-LOAN> 15954
<INTEREST-INVEST> 818
<INTEREST-OTHER> 264
<INTEREST-TOTAL> 17036
<INTEREST-DEPOSIT> 6786
<INTEREST-EXPENSE> 9827
<INTEREST-INCOME-NET> 7209
<LOAN-LOSSES> 104
<SECURITIES-GAINS> 9
<EXPENSE-OTHER> 5497
<INCOME-PRETAX> 2932
<INCOME-PRE-EXTRAORDINARY> 2932
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1740
<EPS-PRIMARY> 1.95
<EPS-DILUTED> 1.88
<YIELD-ACTUAL> 3.43
<LOANS-NON> 2730
<LOANS-PAST> 0
<LOANS-TROUBLED> 1400
<LOANS-PROBLEM> 1215
<ALLOWANCE-OPEN> 1478
<CHARGE-OFFS> 4
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1578
<ALLOWANCE-DOMESTIC> 1578
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 135
</TABLE>
