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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, 1999
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 $19.7 million in revenues for the year ended December 31,
1999.
As of March 10, 2000, there were issued and outstanding 1,381,458 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 10, 2000, was
approximately $13.6 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--1999 Annual Report to Stockholders.
PART III of Form 10-KSB--Proxy Statement for the Annual Meeting of
Stockholders to be held in April 2000.
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<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This document, including information included or incorporated by
reference, contains, and future filings by LSB Financial on Form 10-QSB and Form
8-K and future oral and written statements by LSB Financial and our management
may contain, forward-looking statements about LSB Financial and its subsidiary
which we believe are within the meaning of the Private Securities Litigation
Reform Act of 1995. These forward-looking statements include, without
limitation, statements with respect to anticipated future operating and
financial performance, growth opportunities, interest rates, cost savings and
funding advantages expected or anticipated to be realized by management. Words
such as "may," "could," "should," "would," "believe," "anticipate," "estimate,"
"expect," "intend," "plan" and similar expressions are intended to identify
these forward-looking statements. Forward-looking statements by LSB Financial
and its management are based on beliefs, plans, objectives, goals, expectations,
anticipations, estimates and intentions of management and are not guarantees of
future performance. We disclaim any obligation to update or revise any
forward-looking statements based on the occurrence of future events, the receipt
of new information, or otherwise. The important factors we discuss below and
elsewhere in this document, as well as other factors discussed under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our Annual Report to Shareholders attached to this Form 10-KSB as
Exhibit 13 and identified in our filings with the SEC and those presented
elsewhere by our management from time to time, could cause actual results to
differ materially from those indicated by the forward-looking statements made in
this document:
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.
2
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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 and its
surrounding counties through our four retail banking offices. At December 31,
1999, we had total assets of $257.1 million, deposits of $174.6 million and
shareholders' equity of $19.8 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.
Recent Legislation
On November 12, 1999, the Gramm-Leach-Bliley Act, which modernizes the
financial services industry by, among other things, permitting banking,
insurance and securities companies to combine, was signed into law. It is
unclear what impact this legislation will have on our operations, although the
anticipated creation of larger and stronger financial services competitors could
materially affect our business.
Market Area
Tippecanoe County and the eight surrounding counties comprise Lafayette
Savings' primary market area. Lafayette is the county seat of Tippecanoe County,
and West Lafayette is the home of Purdue University. In addition to the jobs
provided by these two major employers, there is a strong manufacturing base
anchored by Subaru/Isuzu and Wabash National Corporation, while the presence of
Purdue University also attracts many high-tech industries to the area. The
Greater Lafayette area
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<PAGE>
has experienced consistent growth and low unemployment for several years and
because of the diverse employment base is expected to continue to do so for the
foreseeable future. The unemployment rate in Lafayette in December 1999 was 1.9
percent compared to 3.4% for the State of Indiana and 4.5% nationally.
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 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 loans and
commercial business and consumer loans. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Asset/Liability
Management" in the Annual Report to Stockholders filed as Exhibit 13 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, 1999, the maximum amount we could have loaned to any one
borrower and the borrower's related entities was $2.9 million. We had three
lending relationships to a single borrower or a group of related borrowers at
December 31, 1999, each with an outstanding balance of approximately $2.6
million. The first lending relationship to a single borrower or a group of
related borrowers which totaled $2.6 million at December 31, 1999, consists of
two loans to a single borrower secured by a multi-family dwelling and a single
family residence. The second $2.6 million lending relationship consists of
multiple loans to a single borrower secured by multi-family rental properties
and the third lending relationship consists 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,
1999. At December 31, 1999, we had 33 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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<PAGE>
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,
-------------------------------------------------------------------------------------
1995 1996 1997
-------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
------------ ------- ----------- ------- ----------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans
One-to four-family ............... $ 86,231 62.40% $ 96,987 57.72% $ 104,416 56.39%
Multi-family ..................... 12,044 8.72 19,610 11.67 20,382 11.01
Commercial ....................... 15,034 10.88 19,032 11.33 20,888 11.28
Land and land development ........ 3,880 2.81 3,334 1.98 6,020 3.25
Construction ..................... 10,379 7.51 14,447 8.60 14,326 7.74
----------- ----- ----------- ----- ----------- -----
Total Real Estate Loans ........ 127,568 92.32 153,410 91.30 166,032 89.67
----------- ----- ----------- ----- ----------- -----
Other Loans
Consumer loans:
Home equity ..................... 4,124 2.98 7,415 4.41 10,012 5.41
Home improvement ................ 53 0.04 212 0.13 140 0.08
Automobile ...................... 794 0.57 792 0.47 1,633 0.88
Deposit account ................. 144 0.10 238 0.14 165 0.09
Other ........................... 933 0.68 1,151 0.68 1,348 0.73
----------- ----- ----------- ----- ----------- -----
Total consumer loans ......... 6,048 4.37 9,808 5.83 13,298 7.19
Commercial business loans ........ 4,570 3.31 4,825 2.87 5,823 3.14
----------- ----- ----------- ----- ----------- -----
Total other loans .............. 10,618 7.68 14,633 8.70 19,121 10.33
----------- ----- ----------- ----- ----------- -----
Total loans ................. 138,186 100.00% 168,043 100.00% 185,153 100.00%
=========== ===== =========== ===== =========== =====
Less:
Loans in process ................ 4,516 6,755 4,859
Deferred fees and discounts ..... 315 357 284
Allowance for losses ............ 922 1,715 1,478
----------- ----------- -----------
Total loans receivable, net ... $ 132,433 $ 159,216 $ 178,532
=========== =========== ===========
<CAPTION>
December 31,
----------------------------------------------------------
1998 1999
----------------------------------------------------------
Amount Percent Amount Percent
----------- ------- ----------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real Estate Loans
One-to four-family ............... $ 113,231 55.08% $ 128,718 56.36%
Multi-family ..................... 25,530 12.42 28,870 12.64
Commercial ....................... 26,342 12.82 31,010 13.58
Land and land development ........ 6,174 3.00 6,654 2.91
Construction ..................... 12,220 5.95 13,038 5.71
----------- ----- ----------- -----
Total Real Estate Loans ........ 183,497 89.27 208,290 91.20
----------- ----- ----------- -----
Other Loans
Consumer loans:
Home equity ..................... 10,572 5.14 11,685 5.12
Home improvement ................ 301 0.15 282 0.12
Automobile ...................... 1,639 0.80 2,325 1.02
Deposit account ................. 66 0.03 123 0.05
Other ........................... 1,848 0.90 1,718 0.75
----------- ----- ----------- -----
Total consumer loans ......... 14,426 7.02 16,133 7.06
Commercial business loans ........ 7,627 3.71 3,974 1.74
----------- ----- ----------- -----
Total other loans .............. 22,053 10.73 20,107 8.80
----------- ----- ----------- -----
Total loans ................. 205,550 100.00% 228,397 100.00%
=========== ===== =========== =====
Less:
Loans in process ................ 4,401 3,927
Deferred fees and discounts ..... 225 214
Allowance for losses ............ 1,578 894
----------- ----------
Total loans receivable, net ... $ 199,346 $ 223,362
=========== ==========
</TABLE>
5
<PAGE>
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 $17.3 million, $16.7 million and
$9.7 million of loans at December 31, 1997, 1998 and 1999, 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,
-------------------------------------------------------------------------------------
1995 1996 1997
-------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
------------ ------- ----------- ------- ----------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family ............. $ 41,222 29.83% $ 48,204 28.69% $ 46,036 24.86%
Multi-family .................... 457 0.33 401 0.24 857 0.46
Commercial ...................... 2,096 1.52 2,791 1.66 1,107 0.60
Construction .................... 10,379 7.51 14,447 8.60 14,326 7.74
Land and land development ....... -- -- 762 0.45 1,197 0.65
----------- ----------- ----------- ----------- ----------- -----------
Total Real Estate Loans ....... 54,154 39.19 66,605 39.64 63,523 34.31
Consumer ........................ 1,619 1.17 2,393 1.42 2,738 1.48
Commercial business ............. 4,570 3.31 4,103 2.44 5,131 2.77
----------- ----------- ----------- ----------- ----------- -----------
Total fixed-rate loans ........ 60,343 43.67 73,101 43.50 71,392 38.56
----------- ----------- ----------- ----------- ----------- -----------
Adjustable-Rate Loans:
Real estate:
One- to four-family ............. 45,009 32.57 48,783 29.03 58,380 31.53
Multi-family .................... 11,587 8.39 19,209 11.43 19,525 10.55
Commercial ...................... 12,938 9.36 16,241 9.66 19,781 10.68
Construction .................... -- -- -- -- -- --
Land and land development ....... 3,880 2.81 2,572 1.54 4,823 2.60
----------- ----------- ----------- ----------- ----------- -----------
Total Real Estate Loans ....... 73,414 53.13 86,805 51.66 102,509 55.36
Consumer ........................ 4,429 3.20 7,415 4.41 10,560 5.70
Commercial business ............. -- -- 722 0.43 692 0.38
----------- ----------- ----------- ----------- ----------- -----------
Total adjustable-rate loans ... 77,843 56.33 94,942 56.50 113,761 61.44
----------- ----------- ----------- ----------- ----------- -----------
Total loans ................... 138,186 100.00% 168,043 100.00% 185,153 100.00%
----------- =========== ----------- =========== ----------- ===========
Less:
Loans in process ................ 4,516 6,755 4,859
Deferred fees and discounts ..... 315 357 284
Allowance for losses ............ 922 1,715 1,478
----------- ----------- -----------
Total loans receivable, net ... $ 132,433 $ 159,216 $ 178,532
=========== =========== ===========
<CAPTION>
December 31,
----------------------------------------------------------
1998 1999
----------------------------------------------------------
Amount Percent Amount Percent
----------- ------- ----------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family ............. $ 50,480 24.57% $ 43,870 19.20%
Multi-family .................... 434 0.21 66 0.03
Commercial ...................... 1,179 0.57 1,345 0.59
Construction .................... 2,427 1.18 2,776 1.22
Land and land development ....... 1,629 0.79 3,765 1.65
----------- ----------- ----------- -----------
Total Real Estate Loans ....... 56,149 27.32 51,822 22.69
Consumer ........................ 3,152 1.53 3,492 1.53
Commercial business ............. 5,567 2.71 2,418 1.06
----------- ----------- ----------- -----------
Total fixed-rate loans ........ 64,868 31.56 57,732 25.28
----------- ----------- ----------- -----------
Adjustable-Rate Loans:
Real estate:
One- to four-family ............. 62,751 30.53 84,848 37.14
Multi-family .................... 25,096 12.21 28,804 12.61
Commercial ...................... 25,163 12.24 29,665 12.99
Construction .................... 9,793 4.76 3,878 1.70
Land and land development ....... 4,545 2.21 9,273 4.06
----------- ----------- ----------- -----------
Total Real Estate Loans ....... 127,348 61.95 156,468 68.50
Consumer ........................ 11,274 5.49 12,641 5.54
Commercial business ............. 2,060 1.00 1,556 0.68
----------- ----------- ----------- -----------
Total adjustable-rate loans ... 140,682 68.44 170,665 74.72
----------- ----------- ----------- -----------
Total loans ................... 205,550 100.00% 228,397 100.00%
----------- =========== ----------- ===========
Less:
Loans in process ................ 4,401 3,927
Deferred fees and discounts ..... 225 214
Allowance for losses ............ 1,578 894
----------- ----------
Total loans receivable, net ... $ 199,346 $ 223,362
=========== ==========
</TABLE>
6
<PAGE>
The following schedule illustrates the maturities of our loan portfolio at
December 31, 1999. 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
----------------------------------------------
Construction, Land Commercial
Mortgage(1) and Land Development Consumer Business Total
-------------------- ---------------------- ---------------------- ---------------------- --------------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
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>
2000 ............. $ 3,609 9.17% $ 8,225 8.70% $ 910 9.07% $ 2,400 9.49% $ 15,144 8.96%
2001 to 2004 ..... 5,014 7.94 1,428 7.74 15,034 9.13 910 9.15 22,386 8.78
2005 and following 179,975 7.74 10,039 7.66 189 9.28 664 8.10 190,867 7.74
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
TOTAL ........... $188,598 7.77% $ 19,692 8.10% $ 16,133 9.13% $ 3,974 9.18% $228,397 7.92%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
</TABLE>
- ----------
(1) Includes one- to four-family, multi-family and commercial real estate loans.
7
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The total amount of loans due to mature after December 31, 2000 which have
fixed interest rates is $54.9 million, and which have adjustable or renegotiable
interest rates is $158.4 million.
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, 1999, $128.7 million, or 56.35% 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, 1999, the total balance of
one- to four- family adjustable rate loans was $84.8 million, or 37.14% 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 $82.2 million and one-year adjustable rate
loans represented $2.6 million of our total adjustable rate loans at December
31, 1999.
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 $54.6 million in nonowner-occupied one- to four-family residential
loans at December 31, 1999. These loans are underwritten using the same criteria
as owner-occupied, one-
8
<PAGE>
to four-family residential loans, but are provided at higher rates than
owner-occupied loans. We offer fixed-rate, adjustable-rate and convertible rate
loans, with terms of up to 30 years.
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, 1999, our multi-family and commercial real estate loan
portfolio totaled $59.9 million, or 26.22% of our total loan portfolio, compared
to $27.1 million or 19.6% at December 31, 1995. 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
9
<PAGE>
commercial real estate is typically dependent upon the successful operation of
the related real estate project. If the cash flow from the project is reduced
(for example, if leases are not obtained or renewed, or a bankruptcy court
modifies a lease term, or a major tenant is unable to fulfill its lease
obligations), the borrower's ability to repay the loan may be impaired.
Construction, Land and Land Development Lending
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, 1999, substantially all of these loans were secured by
property located within our primary market area. At December 31, 1999, we had
$13.0 million in construction loans outstanding, representing 5.71% 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,
1999, we had $3.4 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, 1999, we had $3.6 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, 1999, we had $6.1
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, 1999, we
had $5.9 million of development loans to builders. We also make a limited number
of land acquisition loans. At December 31, 1999, we had $797,000 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
10
<PAGE>
property. Loans are based on the lesser of current appraised value and/or the
cost of construction, which is the land plus the building.
At December 31, 1999, our largest construction and development loan was a
development loan for a small residential subdivision for $1.6 million. We had no
non-performing construction loans at December 31, 1999.
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 $11.7
million or 5.12% of the total loan portfolio at December 31, 1999. 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, 1999, we had $11.8 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.
11
<PAGE>
Commercial Business Lending
Our current commercial business lending activities encompass predominantly
secured and unsecured lines of credit and loans secured by small business
equipment and vehicles. At December 31, 1999, we had $994,000 of unsecured loans
and lines of credit outstanding (with $596,000 of unused credit available) and
$2.3 million of loans and lines of credit (with $818,000 of unused credit
available) secured by small business equipment and vehicles. At December 31,
1999, our commercial business loans totaled $4.0 million.
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. 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 $64.4 million at December 31, 1999.
We occasionally purchase a limited amount of participation interests in
real estate loans from other financial institutions outside our primary market
area. We carefully review and underwrite all loans to be purchased to insure
that they meet our underwriting standards.
12
<PAGE>
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 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 $4.0 million, $3.3 million and $3.4
million of loans originated during 1997, 1998 and 1999, 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,
---------------------------------
1997 1998 1999
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate - one- to four-family ............................ $ 15,055 $ 22,717 $ 23,300
- multi-family ................................. 3,249 8,939 4,568
- commercial ................................... 2,944 7,849 6,351
- construction, land and land development ...... 2,644 12,318 10,482
Non-real estate - consumer ................................... 6,244 3,236 --
- commercial business .......................... -- 453 408
-------- -------- --------
Total adjustable-rate ................................. 30,136 55,512 45,109
-------- -------- --------
Fixed-rate:
Real estate - one- to four-family ............................ 23,384 39,053 25,971
- multi-family ................................. -- 38 1,575
- commercial ................................... 706 120 2,877
- construction, land and land development ...... 17,986 2,531 8,497
Non-real estate - consumer ................................... 3,194 1,755 6,880
- commercial business .......................... 2,877 2,617 2,365
-------- -------- --------
Total fixed-rate ...................................... 48,147 46,114 48,165
-------- -------- --------
Total loans originated ................................ 78,283 101,626 93,274
-------- -------- --------
Purchases:
Real estate - one- to four-family ............................ 180 748 --
- commercial ................................... -- 12 --
Total loan purchased .................................. 180 760 --
-------- -------- --------
Total mortgage-backed securities purchased ............ -- -- 982
-------- -------- --------
Total purchases ....................................... 180 760 982
-------- -------- --------
Sales and Repayments:
Real estate - one- to four-family ............................ 20,199 26,508 15,476
-------- -------- --------
Total loans sold ...................................... 20,199 26,508 15,476
Principal repayments ......................................... 38,883 55,107 54,951
-------- -------- --------
Total loans sold and repayments ....................... 59,082 81,315 70,427
Mortgage-backed securities:
Principal repayments ......................................... 574 1,167 579
Increase (decrease) in other items, net ........................ (65) 325 --
-------- -------- --------
Net increase .......................................... $ 18,742 $ 19,839 $ 23,250
======== ======== ========
</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, 1999, 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 ......... 8 $ 526 0.41% 7 $ 528 0.41% 15 $1,054 0.82%
Commercial .................. -- -- -- 1 191 0.62 1 191 0.62
Consumer .................... -- -- -- 7 59 0.20 7 59 0.36
--- ------ --- ------ --- ------
Total .................... 8 $ 526 0.23% 15 $ 778 0.34% 23 $1,304 0.57%
=== ====== === ====== === ======
</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. We did not have any accruing loans delinquent more
than 90 days, or troubled debt restructured loans for the periods reported. The
amounts shown do not reflect reserves set up against such assets. See "-
Allowance for Loan Losses."
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------
1995 1996 1997 1998 1999
------------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family .......................... $ -- $ 93 $ 23 $ 494 $ 528
Commercial real estate ....................... -- -- -- -- 191
Consumer ..................................... 10 -- 23 59
Commercial business .......................... -- 2,391 2,071 2,213 --
------------- -------- -------- -------- --------
Total ................................... -- 2,494 2,094 2,730 778
Foreclosed assets:
One- to four-family .......................... -- -- -- -- 215
------------- -------- -------- -------- --------
Total non-performing assets .................... $ -- $ 2,494 $ 2,094 $ 2,730 $ 993
============= ======== ======== ======== ========
Total as a percentage of total assets .......... 0.00% 1.35% 1.01% 1.17% 0.39%
============= ======== ======== ======== ========
Total assets ................................... $ 158,973 $184,607 $206,584 $232,811 $257,139
============= ======== ======== ======== ========
</TABLE>
For the year ended December 31, 1999, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms was $26,000, of which none was included in interest income.
In 1996, 1997 and 1998, the non-accruing commercial business loans
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. We earned 1.0% on the
restructured amount until December, 1999 when the restructured portion of the
loans was paid in full. We recorded a $184,000 loss on the remaining $855,000 in
1997 and $671,000 loss in 1999, although the $855,000 is still in litigation.
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, 1999, we had classified $84,000 of our loans as substandard, none
as doubtful and none as loss. At December 31, 1999, we had designated $1.8
million in loans as special mention.
Other Loans of Concern. Included in other loans of concern are certain
potential problem loans which 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) multiple loans totaling
$282,000 at December 31, 1999, to a single borrower secured by a one- to
four-family residential rental property and a multi-family rental property,
where management has concerns about the cash flow of the borrower; (ii) a
commercial real estate loan to a single borrower with an outstanding balance at
December 31, 1999 of $191,000, secured by a restaurant, where the borrower is
trying to sell the business and management has concerns about the viability of
the underlying business; and (iii) a commercial real estate loan to a single
borrower with an outstanding balance at December 31, 1999 of $105,000, secured
by an office building and where management has concerns about the cash flow of
the borrower. The majority of the remaining classified assets are 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, we also consider the loss experience
of similar portfolios in comparable lending markets as well as using the
services of a consultant to assist in the evaluation of our growing commercial
real estate and business loan portfolios. Our analysis results in the allocation
of allowance amounts to each loan type. Although, we believe we use the best
information available to make such determinations, future adjustments to
reserves may be necessary,
16
<PAGE>
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
------------------------------------------------------------------
1995 1996 1997 1998 1999
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period .......................... $ 926 $ 922 $1,715 $1,478 $1,578
Charge-offs:
One- to four-family ................................... -- -- -- -- 39
Consumer .............................................. 6 7 3 4 7
Commercial business ................................... -- -- 319 -- 758
------ ------ ------ ------ ------
Total Charge-offs ................................... 6 7 322 4 804
------ ------ ------ ------ ------
Recoveries:
One- to four-family ................................... -- -- 11 -- --
Consumer .............................................. 2 -- 2 -- --
------ ------ ------ ------ ------
Total recoveries ................................... 2 -- 13 -- --
------ ------ ------ ------ ------
Net charge-offs ......................................... 4 7 309 4 804
Additions charged to operations ......................... -- 800 72 104 120
------ ------ ------ ------ ------
Balance at end of period ................................ $ 922 $1,715 $1,478 $1,578 $ 894
====== ====== ====== ====== ======
Net charge-offs to average loans outstanding ............ -- -- 0.18% ---% 0.37%
Allowance for loan losses to
non-performing assets ................................. -- 60.5% 70.6% 57.8% 90.03%
Allowance for loan losses to net loans
at end of period ...................................... 0.70% 1.08% 0.83% 0.79% 0.40%
</TABLE>
17
<PAGE>
The allocation of our allowance for losses on loans at the dates indicated
is summarized as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
1995 1996 1997
-----------------------------------------------------------------------------------------------
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..... $262 $ 86,231 62.40% $ 146 $ 96,987 57.72% $ 145 $104,416 56.39
Multi-family............ 120 12,044 8.72 99 19,610 11.67 103 20,382 11.01
Commercial real estate.. 181 15,034 10.88 128 19,032 11.33 130 20,888 11.28
Land and land
development............ 28 3,880 2.81 39 3,334 1.98 75 6,020 3.25
Construction............ 40 10,379 7.51 7 14,447 8.60 28 14,326 7.74
Consumer.................. 36 6,048 4.37 51 9,808 5.83 74 13,298 7.19
Commercial business....... 51 4,570 3.31 997 4,825 2.87 729 5,823 3.14
Unallocated............... 204 -- -- 248 -- -- 194 -- --
---- -------- ------ ------ -------- ------ ------ -------- ------
Total................ $922 $138,186 100.00% $1,715 $168,043 100.00% $1,478 $185,153 100.00%
==== ======== ====== ====== ======== ====== ====== ======== ======
<CAPTION>
----------------------------------------------------------------
1998 1999
----------------------------------------------------------------
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
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate:
One- to four-family..... $197 $113,231 55.08% $185 $128,718 56.36%
Multi-family............ 130 25,530 12.42 146 28,870 12.64
Commercial real estate.. 162 26,342 12.82 158 31,010 13.58
Land and land
development............ 61 6,174 3.00 50 6,654 2.91
Construction............ 18 12,220 5.95 26 13,038 5.71
Consumer.................. 272 14,426 7.02 84 16,133 7.06
Commercial business....... 603 7,627 3.71 50 3,974 1.74
Unallocated............... 135 -- -- 195 -- --
------ -------- ------ ---- -------- ------
Total................ $1,578 $205,550 100.00% $894 $228,397 100.00%
====== ======== ====== ==== ======== ======
</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, 1999 our liquidity ratio,
liquid assets as a percentage of net withdrawable savings deposits and current
borrowings was 8.79%. 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" 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,
-------------------------------------------------------------------------
1997 1998 1999
-------------------------------------------------------------------------
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 .................... $ 2,525 35.37% $ 1,528 11.45% $ 1,003 8.89%
Federal agency obligations .................... 507 7.11 2,542 19.05 1,475 13.07
Municipal bonds ............................... 1,283 17.97 3,395 25.44 2,915 25.83
Corporate bonds ............................... 224 3.14 3,056 22.90 2,754 24.40
------- ------- ------- ------- ------- -------
Subtotal .................................... 4,539 63.59 10,521 78.83 8,147 72.19
------- ------- ------- ------- ------- -------
Other:
Federal Home Loan Bank stock .................. 2,600 36.41 2,825 21.17 3,138 27.81
------- ------- ------- ------- ------- -------
Total debt securities and Federal Home
Loan Bank stock ............................. $ 7,139 100.00% $13,346 100.00% $11,285 100.00%
======= ======= ======= ======= ======= =======
Average remaining life of debt securities ..... 3.10 years 1.72 years 2.06 years
Other interest-earning assets:
Interest-bearing deposits with Federal
Home Loan Bank .............................. $ 5,580 100.00% $ 8,254 100.00% $ 7,500 100.00%
======= ======= ======= ======= ======= =======
Mortgage-backed securities:
Fannie Mae certificates ....................... $ 1,868 56.20% 1,447 67.19% 1,146 44.80%
Freddie Mac certificates ...................... 1,456 43.80 707 32.81 1,411 55.20
------- ------- ------- ------- ------- -------
Total mortgage-backed securities ............ $ 3,324 100.00% $ 2,154 100.00% $ 2,557 100.00%
======= ======= ======= ======= ======= =======
</TABLE>
The following table sets forth the composition and contractual maturities
of our securities portfolio at December 31, 1999. At December 31, 1999, 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, 1999
----------------------------------------------------------------------------------
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 .............. $ 1,003 $ -- $ -- $ -- $ 1,003 $ 1,003
Federal agency obligations .............. -- 984 491 -- 1,475 1,475
Municipal bonds ......................... 285 2,185 206 238 2,914 2,914
Corporate bonds ......................... 500 2,255 -- -- 2,755 2,755
Fannie Mae certificates ................. -- 1,146 -- -- 1,146 1,146
Freddie Mac certificates ................ -- 1,048 363 -- 1,411 1,411
------- ------- ------- ------- ------- -------
Total investment securities .............. $ 1,788 $ 7,618 $ 1,060 $ 238 $10,704 $10,704
======= ======= ======= ======= ======= =======
Weighted average yield ................... 5.94% 5.76% 5.81% 6.00% 5.80% 5.80%
</TABLE>
20
<PAGE>
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, on-line and off-line 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.
The following table sets forth our savings flows during the periods
indicated.
Year Ended December 31,
---------------------------------------
1997 1998 1999
========= ========= =========
(Dollars in Thousands)
Opening balance ................... $ 116,949 $ 137,686 $ 161,781
Deposits .......................... 559,910 746,241 832,042
Withdrawals ....................... (543,396) (727,504) (824,922)
Interest credited ................. 4,223 5,358 5,715
--------- --------- ---------
Ending balance .................... $ 137,686 $ 161,781 $ 174,617
========= ========= =========
Net increase (decrease) ........... $ 20,737 $ 24,095 $ 12,836
========= ========= =========
Percent increase (decrease) ....... 17.73% 17.50% 7.93%
========= ========= =========
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.
21
<PAGE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------
1997 1998 1999
-------------------------------------------------------------------------
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 ................................ $ 5,097 3.70% $ 7,592 4.69% $ 8,599 4.92%
Savings accounts (2.50% at December 31, 1999) ..... 13,958 10.13 14,868 9.18 16,159 9.25
NOW Accounts (0 - 2.00% at December 31, 1999) ...... 15,214 11.04 18,936 11.71 20,693 11.85
Money Market Accounts (2.85 - 3.67% at
December 31, 1999) ............................... 8,254 5.99 7,239 4.47 8,860 5.07
-------- ------ -------- ------ -------- ------
Total Non-Certificates ............................. 42,523 30.86 48,635 30.05 54,311 31.09
-------- ------ -------- ------ -------- ------
Certificates:
2.00 - 3.99% ...................................... 95 0.07 617 0.38 2,042 1.17
4.00 - 5.99% ...................................... 51,847 37.64 79,983 49.41 102,556 58.71
6.00 - 7.99% ...................................... 43,214 31.37 32,546 20.11 15,708 8.99
8.00 - and greater ................................ 7 0.01 -- -- -- --
-------- ------ -------- ------ -------- ------
Total certificates ................................ 95,163 69.09 113,146 69.91 120,306 68.88
Accrued interest .................................. 62 0.05 56 0.04 54 0.03
-------- ------ -------- ------ -------- ------
Total deposits ................................. $137,748 100.00% $161,837 100.00% $174,671 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
The following table shows rate and maturity information for our
certificates of deposit as of December 31, 1999.
<TABLE>
<CAPTION>
2.00- 4.00- 6.00- Percent
3.99% 5.99% 7.99% Total of Total
-----------------------------------------------------------
(Dollars in Thousands)
Certificate accounts
maturing in quarter
ending:
<S> <C> <C> <C> <C> <C>
March 31, 2000 ....... $ 1,859 $ 19,631 $ 3,480 $ 24,970 20.76%
June 30, 2000 ........ 156 23,834 2,475 26,465 22.00
September 30, 2000 ... 27 14,166 1,040 15,233 12.66
December 31, 2000 .... -- 6,168 103 6,271 5.21
March 31, 2001 ....... -- 4,750 522 5,272 4.38
June 30, 2001 ........ -- 9,786 510 10,296 8.56
September 30, 2001 ... -- 6,343 254 6,597 5.48
December 31, 2001 .... -- 4,274 514 4,788 3.98
March 31, 2002 ....... -- 2,463 2,470 4,933 4.10
June 30, 2002 ........ -- 3,905 2,164 6,069 5.04
September 30, 2002 ... -- 1,944 1,543 3,487 2.90
December 31, 2002 .... -- 521 322 843 0.70
Thereafter ........... -- 4,771 311 5,082 4.23
-------- -------- -------- -------- ------
Total ............. $ 2,042 $102,556 $ 15,708 $120,306 100.00%
======== ======== ======== ======== ======
Percent of total .. 1.70% 85.25% 13.06% 100.00% 100.00%
==== ===== ===== ====== ======
</TABLE>
22
<PAGE>
The following table indicates the amount of our certificates of deposit by
time remaining until maturity as of December 31, 1999:
<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 $ 20,575 $ 21,177 $ 16,579 $ 40,380 $ 98,711
Certificates of deposit of $100,000 or more 4,386 5,084 4,895 6,987 21,352
Public funds .............................. 9 204 30 -- 243
-------- -------- -------- -------- --------
Total certificates of deposit ............. $ 24,970 $ 26,465 $ 21,504 $ 47,367 $120,306
======== ======== ======== ======== ========
</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.
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,
---------------------------------
1997 1998 1999
------- ------- -------
(In Thousands)
Maximum Balance:
Federal Home Loan Bank advances ....... $50,000 $51,500 $61,758
Other borrowings ...................... 218 186 153
Average Balance:
Federal Home Loan Bank advances ....... $46,125 $50,667 $57,148
Other borrowings ...................... 204 171 137
23
<PAGE>
The following table sets forth certain information as to our borrowings
at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1998 1999
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Federal Home Loan Bank advances .................. $50,000 $51,500 $61,758
Other borrowings ................................. 189 156 121
------- ------- -------
Total borrowings ............................ $50,189 $51,656 $61,879
======= ======= =======
Weighted average interest rate of Federal Home
Loan Bank advances ............................ 5.94% 5.82% 5.85%
Weighted average interest rate of other borrowings 5.50% 5.50% 5.50%
</TABLE>
Subsidiaries 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 1999, L.S.B.
Service Corporation received a $58,000 tax credit related to its investment in
the project and recorded net income of $33,000. At December 31, 1999, our total
investment in L.S.B. Service Corporation was $336,000.
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, 1999, our total
investment in Lafayette Insurance and Investments, Inc. was $45,000. Lafayette
Insurance and Investments, Inc. recognized income of $14,000 during 1999.
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 branch locations and Internet banking with interbranch
deposit and withdrawal privileges.
24
<PAGE>
There are 13 other savings institutions, credit unions 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.
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 October 1999 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,
1999, our lending limit under this restriction was $2.9 million.
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'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
25
<PAGE>
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 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, 1999, we
had tangible capital of $18.8 million, or 7.31% of adjusted total assets, which
is $14.9 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, 1999, we had core capital equal to $18.8 million, or 7.31% of
adjusted total assets, which is $11.0 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, 1999 we had total capital of $19.7 million, including
$18.8 million in core capital and $894,000 in qualifying supplementary capital,
and risk-weighted assets of $171.5 million,
26
<PAGE>
including $20.7 million in converted off-balance sheet assets, or total capital
of 11.57% of risk- weighted assets. This amount was $6.1 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 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
27
<PAGE>
of residential housing related loans and investments. At December 31, 1999, 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
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.
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
28
<PAGE>
trading restrictions and other requirements of the SEC under the Securities
Exchange Act of 1934, as amended.
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, 1999, we had $3.1 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
7.99% for 1999.
Federal and State Taxation
Federal 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, 1999, the portion of our reserves subject to this
treatment for tax purposes totaled approximately $1.9 million.
29
<PAGE>
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 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 65, 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 53, 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 50, is Vice President, Chief Financial
Officer and Secretary- Treasurer of Lafayette Savings, positions she has held
since 1992. She joined Lafayette Savings in 1985 and was elected to the Board of
Directors in 1999.
Employees
At December 31, 1999, we had a total of 80 employees, including three
part-time employees. Our employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.
30
<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, 1999 was approximately $6.1
million. We purchased property in 1999 for a new branch location and plan to
start construction of this branch late in 2000. We have also purchased an office
building adjacent to the main office location as our growth rate has required
space for additional personnel and will for 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, 1999 was $468,000.
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,
1999.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Page 48 of our 1999 Annual Report to Stockholders is incorporated herein
by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
Pages 5 through 18 of our 1999 Annual Report to Stockholders are
incorporated herein by reference.
Item 7. Financial Statements
Pages 20 through 45 of our 1999 Annual Report to Stockholders are
incorporated herein by reference.
31
<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 2000, 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, 1999, all Section 16(a) filing
requirements applicable to our officers, directors and 10% beneficial owners
were complied with except as disclosed in our definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in April 2000 under the caption "Share
Ownership of LSB Financial Corp. Common Stock -- Section 16(a) Beneficial
Ownership Reporting Compliance" incorporated herein by reference and a copy of
which will be filed not later than 120 days after the close of the fiscal year.
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 2000, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
32
<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 2000, 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 2000, a copy of which will be
filed not later than 120 days after the close of the fiscal year.
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits:
See Index To Exhibits.
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the three-month period ended
December 31, 1999.
33
<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 27, 2000 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, John W. Corey, President, Chief Executive
Chairman of the Board and Director
Officer (Principal Executive and Operating Officer)
Date: March 27, 2000 Date: March 27, 2000
/s/ Harry A. Dunwoody /s/ James A. Andrew
- --------------------------- -------------------------------------------
Harry A. Dunwoody, James A. Andrew, Director
Senior Vice President
and Director
Date: March 27, 2000 Date: March 27, 2000
/s/ Philip W. Kemmer /s/ Peter Neisel
- --------------------------- -------------------------------------------
Philip W. Kemmer, Director Peter Neisel, Director
Date: March 27, 2000 Date: March 27, 2000
/s/ Jeffrey A. Poxon /s/ Thomas R. McCully
- --------------------------- -------------------------------------------
Jeffrey A. Poxon, Director Thomas R. McCully
Date: March 27, 2000 Date: March 27, 2000
34
<PAGE>
/s/ John C. Shen /s/ Charles W. Shook
- -------------------------------- -------------------------------------------
John C. Shen, Director Charles W. Shook, Director
Date: March 27, 2000 Date: March 27, 2000
/s/ Mary Jo David
- --------------------------------
Mary Jo David, Vice President,
Chief Financial Officer and
Secretary-Treasurer (Principal
Financial and Accounting Officer)
Date: March 27, 2000
<PAGE>
INDEX TO EXHIBITS
Regulation
S-K Exhibit
Number Document
------ --------------------------------------------------------------------
3 Articles of Incorporation and Bylaws, filed on September 21, 1994 as
exhibits to Registrant's Registration Statement on Form S-1 (File
No. 33-84266), are incorporated by reference.
4 Registrant's Specimen Stock Certificate, filed on September 21, 1994
as exhibits to Registrant's Registration Statement on Form S-1 (File
No. 33-84266), is incorporated by reference.
10.1 Registrant's 1995 Stock Option and Incentive Plan, filed on July 11,
1995 as Appendix A to Registrant's Proxy Statement on Schedule 14A
(File No. 0- 25070), is incorporated herein by reference.
10.2 Severance Agreement by and between the Registrant's operating
subsidiary and John W. Corey, filed on September 21, 1994 as
exhibits to Registrant's Registration Statement on Form S-1 (File
No. 33-84266), is incorporated by reference.
10.3 Registrant's 1995 Recognition and Retention Plan, filed on July 11,
1995 as Appendix B to Registrant's Proxy Statement on Schedule 14A
(File No. 0- 25070), is incorporated herein by reference.
11 Statement re computation of per share earnings (see Note 11 of the
Notes to Consolidated Financial Statements included in the Annual
Report to Stockholders filed as Exhibit 13 to this Annual Report on
Form 10-KSB).
13 Annual Report to Security Holders
21 Subsidiaries of the Registrant filed as Exhibit 21 to Registrant's
Report on Form 10-KSB for the fiscal year ended December 31, 1998
(File No. 0-25070), is incorporated herein by reference.
23 Consent of Accountants
27 Financial Data Schedule (electronic filing only)
LSB Financial Corp.
1999 Annual Report
<PAGE>
LSB FINANCIAL CORP.
Letter to Stockholders ........................................................2
Selected Financial Information ................................................3
Management's Discussion and Analysis...........................................5
Disclosure Regarding Forward-looking Statements...............................19
Auditors' Report . ..........................................................20
Consolidated Financial Statements ............................................21
Directors and Executive Officers .............................................46
Shareholder Information .....................................................47
FINANCIAL HIGHLIGHTS
December 31, 1999
(Dollars in Thousands)
Total assets....................................... $257,139
Total loans..........................................223,362
Securities and other earning assets...................18,204
Deposits.............................................174,616
Borrowings............................................61,879
Net income.............................................1,924
Shareholders' equity..................................19,810
Shareholders' equity as percent of assets..............7.70%
- --------------------------------------------------------------------------------
ANNUAL MEETING
The Annual Meeting of Stockholders of LSB
Financial Corp. will be held April 19, 2000 at 9:00
a.m. local time at the Riehle Plaza, located at 200
N. Second Street, Lafayette, Indiana.
- --------------------------------------------------------------------------------
<PAGE>
LSB FINANCIAL CORP.
March 17, 2000
Dear Fellow Shareholder:
Who we are and what we do at LSB Financial Corp. rang out loud and clear
as we and the rest of the world rang in the new year, century and millennium.
LSB literally took center stage as thousands gathered at the outdoor plaza
adjacent to our headquarters for a history-making New Year's Eve celebration.
More significantly, as LSB welcomed a new year, we noted that our
commitment to maximizing long-term shareholder value and our chosen role as a
community institution were well rewarded. Our 1999 successes included record
income, double digit growth and a competitive earnings-per-share return. We
appreciate your confidence in LSB, and we're pleased to report our positive
financial news.
LSB closed 1999, our fifth year as a stock company, with a 14.4 percent
increase in diluted earnings per share, a 10.6 percent increase in net income,
and an 11.6 percent increase in net interest income. Equally significant, we
transitioned to the critical Year 2000 date with fully prepared computer
systems. At the same time, we embraced technology's new opportunities and
launched our own Internet banking site, which has been well received by
customers who enjoy its convenience.
Believing that our financial performance and our role as a community bank
go hand-in-hand, LSB emphasizes our local presence and service. Our customers
know and appreciate that banking decisions are made at the local level. Our
employees volunteer for key organizations, working alongside community residents
and leaders. As a result, LSB enjoys a respected reputation.
Our plans for the coming year are to expand application of the formula
that's resulted in our current strength. We'll carry on with our community
presence and involvement. We'll work to grow our retail deposit base and our
residential and commercial loan portfolios. And we'll recommit ourselves to
delivering value to our shareholders.
Thank you for your continuing support of LSB Financial Corp.
Sincerely,
John W. Corey
President and Chief Executive Officer
2
<PAGE>
SELECTED FINANCIAL INFORMATION
The following financial information does not purport to be complete and is
qualified in its entirety by reference to the more detailed financial
information contained elsewhere herein.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data
Total assets ..................................................... $158,973 $184,607 $206,584 $232,811 $257,139
Loans receivable, net ............................................ 132,433 159,216 178,532 199,346 223,362
Available-for-sale securities .................................... 12,295 6,546 7,863 12,675 10,704
Short-term investments ........................................... 3,595 5,410 5,580 8,254 7,500
Deposits ......................................................... 109,977 116,949 137,685 161,781 174,617
Total borrowings ................................................. 29,614 50,220 50,189 51,656 61,879
Shareholders' equity (net) ....................................... 18,068 16,796 17,734 18,194 19,810
<CAPTION>
December 31,
----------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Total interest income .......................................... $ 10,744 $ 13,247 $ 15,249 $ 17,036 $ 18,492
Total interest expense ......................................... 5,937 7,530 8,708 9,827 10,444
-------- -------- -------- -------- --------
Net interest income ......................................... 4,807 5,717 6,541 7,209 8,048
Provision for loan losses ...................................... -- 800(1) 72 104 120
-------- -------- -------- -------- --------
Net interest income after provision for loan losses ............ 4,807 4,917 6,469 7,105 7,928
Deposit account service charges ................................ 239 326 445 551 590
Gain (loss) on sales of mortgage loans ......................... 68 184 243 425 159
Gain (loss) on sales of securities ............................. -- 7 -- 9 2
Other non-interest income ...................................... 322 178 236 339 486
-------- -------- -------- -------- --------
Total non-interest income ...................................... 629 695 924 1,324 1,237
Total non-interest expense ..................................... 3,470 4,186 4,787 5,497 6,014
-------- -------- -------- -------- --------
Income before taxes ............................................ 1,966 1,426 2,606 2,932 3,151
Income taxes ................................................... 724 550 1,040 1,192 1,227
Net income ..................................................... $ 1,242 $ 876 $ 1,566 $ 1,740 $ 1,924
======== ======= ======== ======== =======
Earnings per share .78 .60 1.15 1.30 1.47
Earnings per share, assuming dilution .78 .60 1.12 1.25 1.43
Dividends paid per share -- .145 .220 .274 .32
</TABLE>
- ----------
(1) See "Provision for Loan Losses" for discussion of Bennett Funding Group.
3
<PAGE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income
to average total assets) .......................................... 0.87% 0.51% 0.80% 0.78% 0.77%
Return on equity (ratio of
net income to average equity) ..................................... 7.30 5.16 9.09 9.54 10.13
Interest rate spread information:
Average during period .............................................. 3.17 3.27 3.39 3.24 3.15
Net interest margin(1) ............................................. 3.56 3.52 3.56 3.43 3.36
Operating expense to average total assets ........................... 2.43 2.43 2.45 2.48 2.41
Average interest-earning assets to
average interest-bearing liabilities .............................. 1.09x 1.05x 1.04x 1.04x 1.05x
Quality Ratios:
Non-performing assets to total assets
at end of period .................................................. 0.00% 1.53% 1.01% 1.17% 0.39%
Allowance for loan losses to
non-performing loans .............................................. N/A 60.54 70.59 57.80 90.03
Allowance for loan losses to loans
receivable, net ................................................... 0.70 1.08 0.83 0.79 0.40
Capital Ratios:
Shareholders' equity to total assets
at end of period ................................................... 11.37 9.10 8.58 7.81 7.70
Average shareholders' equity to
average total assets ............................................... 11.92 9.88 8.82 8.22 7.61
Other Data:
Number of full-service offices ..................................... 3 4 4 4 4
</TABLE>
- ----------
(1) Net interest income divided by average interest-earning assets.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
On February 3, 1995, LSB Financial Corp., an Indiana corporation, became
the holding company of Lafayette Savings Bank, FSB. LSB Financial Corp. has no
separate operations and its business consists only of the business of the
Lafayette Savings Bank. References in this Annual Report to "we," and "us" and
"our" refer to LSB Financial and/or Lafayette Savings as the context requires.
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. The 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 such amounts. Our operating results are
also affected by the level of the provision for loan losses, 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 such 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. Our Board
of Directors has sought to accomplish this mission through the adoption of a
strategy intended to maintain a strong capital position and high asset quality,
manage 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:
o One- to four-family loans increased from $113.2 million at December 31,
1998 to $128.7 million at December 31, 1999.
5
<PAGE>
o Multi-family, land and land development, construction and consumer loans
increased from $58.4 million at December 31, 1998 to $64.7 million at
December 31, 1999.
o Commercial real estate and commercial business loans increased from $34.0
million at December 31, 1998 to $35.0 million at December 31, 1999.
o At December 31, 1999, 74.73% of our gross loan portfolio had adjustable
interest rates.
o Total deposit accounts increased from $161.8 million at December 31, 1998
to $174.6 million at December 31, 1999.
Financial Condition
The size of our loan portfolio increased from $199.3 million at December
31, 1998 to $223.4 million at December 31, 1999, an increase of 12.05%. 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 on the secondary market with
servicing rights retained, $27.8 million in 1998 and $16.1 million in 1999 based
upon asset/liability management considerations. In addition, during 1998 and
1999 we originated and sold $6.3 million and $5.8 million, respectively, of
fixed-rate loans on the secondary market with servicing released. See "-Asset/
Liability Management." Adjustable rate loans were retained in our loan
portfolio.
Our portfolio of securities and short-term investments decreased from
$20.9 million at from December 31, 1998 to $18.2 million at December 31, 1999,
as maturing securities were used to fund the growth in the Company's loan
portfolio.
Deposit accounts increased by 7.93% or $12.8 million from December 31,
1998 to December 31, 1999. 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 ("FHLB")
to provide additional funding for loan growth as well as for asset/liability
management purposes. At December 31, 1999 we had $61.8 million in FHLB advances
outstanding, an increase of $10.3 million from the $50.5 million at December 31,
1998.
Shareholders' equity increased $1.6 million, or 8.88%, during 1999
primarily as a result of net income of $1.9 million partially offset by our
payment of dividends on common stock. We purchased 2,100 shares of our common
stock in 1999 to complete our latest 5.00% repurchase program. As of December
31, 1999, a total of 232,474 shares of our Common Stock had been repurchased at
a cost of approximately $4.7 million, or $20.05 per share. Shareholders' equity
to total assets was 7.81% at December 31, 1998 compared to 7.70% at December 31,
1999.
6
<PAGE>
Results of Operations
Our results of operations depend primarily on the levels of net interest
and non-interest income and our 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 earned on average interest- earning assets and the
resultant yields on such assets, as well as the interest expense paid on average
interest-bearing liabilities, and the rates paid on such liabilities. No tax
equivalent adjustments were made. All average balances are monthly average
balances. Non-accruing loans have been included in the table as loans carrying a
zero yield.
<TABLE>
<CAPTION>
Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------------------
1997 1998
- --------------------------------------------------------------------------------------------------------- -------------
Average Interest Average
Outstanding Earned/ Yield/ Outstanding
Balance Paid Rate Balance
----------- -------- ------ -----------
<S> <C> <C> <C> <C>
Assets:
Interest-Earning Assets:
Loans receivable(1) .......................................... $ 169,465 $14,384 8.49% $ 189,702
Mortgage-backed securities ................................... 3,597 238 6.62 2,724
Other investments ............................................ 7,855 420 5.35 14,922
FHLB stock ................................................... 2,592 207 7.99 2,731
--------- ------- ---------
Total interest-earning assets ............................... 183,509 15,249 8.31 210,079
Non-interest earning assets .................................. 11,835 ------- 1,793
--------- ---------
Total assets ................................................ $ 195,344 $ 221,872
========= =========
Liabilities and Shareholders' Equity
Interest-Bearing Liabilities:
Savings deposits ............................................. $ 13,347 401 3.00 $ 14,745
Demand and NOW deposits ...................................... 28,700 582 2.03 31,916
Time deposits ................................................ 88,688 4,981 5.62 104,411
Borrowings ................................................... 46,329 2,744 5.92 50,838
--------- ------- ---------
Total interest-bearing liabilities .......................... 177,064 8,708 4.92 201,910
Other liabilities ............................................ 1,045 1,724
--------- ------- ---------
Total liabilities ........................................... 178,109 203,634
Shareholders' equity ......................................... 17,235 18,238
--------- ---------
Total liabilities and shareholders' equity .................. $ 195,344 $ 221,872
========= =========
Net interest income .......................................... $ 6,541
=======
Net interest rate spread ..................................... 3.39%
====
Net earning assets ........................................... $ 6,445 $ 8,169
========= =========
Net yield on average interest-earning assets.................. 3.56%
====
Average interest-earning assets to
average interest-bearing liabilities ........................ 1.04x 1.04x
==== ====
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1999
- ----------------------------------------------------------------------------------------- ---------------------------------------
Interest Average Interest
Earned/ Yield/ Outstanding Earned/ Yield/
Paid Rate Balance Paid Rate
-------- ------ ----------- -------- ------
<S> <C> <C> <C> <C> <C>
Assets:
Interest-Earning Assets:
Loans receivable(1) .......................................... $15,954 8.41% $ 215,072 $17,376 8.08%
Mortgage-backed securities ................................... 180 6.61 2,466 149 6.04
Other investments ............................................ 684 4.58 18,894 724 3.83
FHLB stock ................................................... 218 7.98 3,040 243 7.99
------- --------- -------
Total interest-earning assets ............................... 17,036 8.11 239,472 18,492 7.72
Non-interest earning assets .................................. 10,018
------- --------- -------
Total assets ................................................ $ 249,490
=========
Liabilities and Shareholders' Equity
Interest-Bearing Liabilities:
Savings deposits ............................................. 441 2.99 $ 16,000 430 2.69
Demand and NOW deposits ...................................... 502 1.57 37,903 608 1.60
Time deposits ................................................ 5,843 5.60 117,320 6,116 5.21
Borrowings ................................................... 3,041 5.98 57,285 3,290 5.74
------- --------- -------
Total interest-bearing liabilities .......................... 9,827 4.87 228,508 10,444 4.57
Other liabilities ............................................ 1,994
------- --------- -------
Total liabilities ........................................... 230,502
Shareholders' equity ......................................... 18,988
---------
Total liabilities and shareholders' equity .................. $ 249,490
=========
Net interest income .......................................... $7,209 $ 8,048
======= =======
Net interest rate spread ..................................... 3.24% 3.15%
==== ====
Net earning assets ........................................... $ 10,694
========
Net yield on average interest-earning assets....... .......... 3.43% 3.36%
==== ====
Average interest-earning assets to
average interest-bearing liabilities ........................ 1.05x
====
</TABLE>
- ----------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
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. The change in total interest income and total
interest expense is allocated between those related to changes in the
outstanding balances and those due to changes in interest rates. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and change due to rate.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
1997 vs. 1998 1998 vs. 1999
-------------------------------------- --------------------------------------
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 .............................. $ 1,703 $ (133) $ 1,570 $ 2,069 $ (647) $ 1,422
Mortgage-backed securities .................... (58) 0 (58) (16) (15) (31)
Other investments ............................. 331 (67) 264 164 (124) 40
FHLB stock .................................... 11 0 11 25 0 25
------- ------- ------- ------- ------- -------
Total interest-earning assets ................ $ 1,987 $ (200) 1,787 $ 2,242 $ (786) 1,456
======= ======= ======= ======= ======= =======
Interest-bearing liabilities:
Savings deposits .............................. $ 42 $ (2) 40 $ 36 $ (47) (11)
Demand deposits ............................... 60 (140) (80) 96 10 106
Time deposits ................................. 882 (20) 862 691 (418) 273
Borrowings .................................... 269 28 297 374 (125) 249
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities ........... $ 1,253 $ (134) 1,119 $ 1,197 $ (580) 617
======= ======= ======= ======= ======= =======
Net interest income ............................ $ 668 $ 839
===== =====
</TABLE>
9
<PAGE>
Comparison of Operating Results for the Years Ended December 31, 1999 and
December 31, 1998.
General. Net income for the year ended December 31, 1999 was $1.9 million,
an increase of $184,000 or 10.57% compared to net income for the year ended
December 31, 1998. This increase was primarily due to an $839,000 increase in
net interest income, a $39,000 increase in deposit account service charges, and
a $147,000 increase in other non-interest income, partially offset by a $266,000
decrease in the net gain on sale of mortgage loans, a $517,000 increase in
non-interest expenses and a $35,000 increase in income tax expenses.
Our return on average assets was 0.77% for the year ended 1999, compared
to 0.78% for the year ended 1998. Return on equity was 10.13% for the year ended
1999, compared to 9.54% for 1998. Average shareholders' equity to average assets
was 7.61% for the year ended 1999, compared to 8.22% for the year ended 1998.
During 1999 we paid regular quarterly cash dividends on common stock totaling
$423,000 for the year, or $.32 per share, representing a dividend payout ratio,
dividends declared per share divided by net income per share, of approximately
22%.
Net Interest Income. Net interest income for the year ended December 31,
1999 increased $839,000 or 11.64% over the same period in 1998. This increase
was primarily volume driven as we succeeded in growing our balance sheet. Our
net interest margin (net interest income divided by average interest-earning
assets) decreased slightly from 3.43% for the year ended December 31, 1998, to
3.36% for the year ended December 31, 1999. This was primarily due to shrinking
interest rate spreads partially driven by the large number of loan refinancings
early in the year as borrowers took advantage of lower interest rates in the
economy to decrease the rates on their existing loans.
Interest income on loans increased $1.4 million for the year ended 1999
compared to the year ended December 31, 1998, primarily the result of an
increase of $25.4 million in average loans outstanding. This increase was
primarily the result of an active residential real estate market early in 1999
due to continued low interest rates and a strong local economy, and the ongoing
success of the Company's focus on commercial and consumer loan production. This
increase in volume was partially offset by a decrease in yield on loans from
8.41% for the year ended December 31, 1998 to 8.08% for the year ended December
31, 1999 caused primarily by the large percentage of borrowers who took the
opportunity to refinance their mortgages during the last few years of record low
mortgage rates.
Interest earned on mortgage-backed securities decreased by $31,000 due
primarily to a decrease in the average yield from 6.61% in 1998 to 6.04% in
1999, partially offset by a $248,000 increase in the average balance of the
Company's mortgage-backed securities.
Interest earned on other investments and FHLB stock increased by $65,000
for the year 1999 compared to 1998. This was the result of an increase of $4.0
million in the average balance of other investments, primarily due to the
Company's efforts to rebuild its liquidity portfolio with an eye toward
addressing its relatively high tax burden as well as the need for additional
liquidity as a part of its Year 2000 readiness preparations, partially offset by
a decrease in the yield on other investments from 4.58% in 1998 to 3.83% in
1999. The increase in interest earned was further augmented by interest earned
on a $544,000 increase in the average balance of FHLB stock required
10
<PAGE>
to facilitate borrowings from the Federal Home Loan Bank for the year ended
December 31, 1999 over the year ended December 31, 1998.
Interest expense for the year ended 1999 increased $617,000 or 6.28% over
the same period in 1998. This increase was primarily due to an increase of $26.6
million in average interest-bearing liabilities, consisting of an additional
$20.2 million in the average balance of customer deposit accounts and a $6.4
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 4.87% in 1998 to 4.57% in 1999
reflecting the generally lower interest rates over the period.
Provision for Loan Losses. We establish our 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 (Bennett)
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. In 1999, $1.4
million of the restructured balance of these leases was paid off, and the
remaining $671,000 was written off against loan loss reserves. We recorded a
$120,000 provision for loan losses during 1999 as a result of our analysis of
our current loan portfolios. There were $993,000 of non-performing loans at
December 31, 1999, consisting of $528,000 in single-family residences, $59,000
in consumer loans and $191,000 in commercial business loans. There was also a
$215,000 single-family residence in foreclosure. At December 31, 1999, the
Company's allowance for loan losses equaled 0.40% of net loans receivable
compared to 0.79% at December 31, 1998. Non-performing loans totaled $2.7
million at December 31, 1998.
Non-Interest Income. Non-interest income for the year ended December 31,
1999 decreased by $87,000, or 6.57% compared to the same period in 1998. This
was primarily due to a $266,000 decrease in the gain on the sale of mortgage
loans in the secondary market resulting from an $11.7 million decrease in loans
sold as well as an inability early in the year to timely commit and deliver
loans for sale due to problems with Year 2000 necessitated replacement loan
origination software. This decrease was partially offset by a $39,000 increase
in the service charges and fees on deposit accounts due to the increasing number
of these accounts and a $147,000 increase in other non-interest income, the two
largest components of which were a $44,000 increase in debit card fees and a
$37,000 increase in fee income from our insurance subsidiary. Beginning in 1996,
the basis of loans sold with servicing retained was allocated between the loan
and the originated servicing right. In 1998, $250,000 of $425,000 of gains on
the sale of loans and in 1999, $145,000 of the $159,000 of gains in 1999 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,
1999 increased $517,000 over the same period in 1998. The major components of
this increase included a $178,000
11
<PAGE>
increase in salaries and employee benefits and a $100,000 increase in
advertising expenses, predominantly related to development costs of a new
advertising campaign. These increases generally reflect the additional expenses
incurred in connection with the Company's continuing growth in asset size.
Income Tax Expense. The Company's income tax provision increased by
$35,000 for the year ended December 31, 1999 compared to the year ended December
31, 1998, due primarily to the increase in income before income taxes. The
effective tax rate declined to 39% in 1999 from 40% in 1998.
12
<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 an $668,000 increase in
net interest income, and a $106,000 increase in deposit account service charges,
and a $182,000 increase in the net gain on sale of mortgage loans, partially
offset by a $710,000 increase in 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 (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.
Interest income on loans increased $1.6 million for the year ended 1998
compared to 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 the Company's 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 our liquidity portfolio, 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 FHLB 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.
Provision for Loan Losses. As discussed earlier, during 1996 we recorded
an $800,000 provision for loan losses primarily in response to the situation
involving Bennett Funding Group (Bennett) of Syracuse, New York through which 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
13
<PAGE>
resulted in a write down of $319,000. We allocated $651,000 of our $1.6 million
allowance for loan losses to the remaining leases and the restructured loan to
provide for potential 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 compared to 0.83% in 1998. Non-performing loans totaled $2.1 million
at December 31, 1997.
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 the $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 benefits expense includes expenses
related to the Employee Stock Ownership Plan ("ESOP"), which was formed at the
time of Lafayette Savings Bank's stock conversion, and expenses related to the
Recognition and Retention Plan ("RRP") which was approved by shareholders in
August 1995. ESOP expenses rise and fall based on the change in the Company's
stock price. These two plans resulted in a combined expense of $274,000 in 1997
and $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.
14
<PAGE>
Asset/Liability Management
We, like other financial institutions, are 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 ("OTS")
regulations provide a Net Portfolio Value ("NPV") approach to the quantification
of interest rate risk. In essence, this approach calculates the difference
between the present value of expected cash flows from assets and the present
value of expected cash flows from liabilities, as well as cash flows from off
balance sheet contracts.
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 our interest rate position,
and a board investment committee which meets quarterly to review 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 outside investment advisors to
review our investment portfolio and strategies relating to interest rate risk.
Specific strategies have included the sale of long-term, fixed rate loans to
reduce the average maturity of 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 1999, is an analysis of our
interest rate risk as measured by the effect on NPV caused by 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. The Board policy
sets the lowest allowable limits for Net Portfolio Value after each interest
rate shock. Assumptions used in calculating the amounts in this table are OTS
assumptions.
<TABLE>
<CAPTION>
At December 31, 1998 At December 31, 1999
Change in Board-Limit --------------------------------- --------------------------------
Interest Rate Post-shock Post-shock Change Post-shock Change
------------- ---------- ---------- ------ ---------- ------
(Basis Points) NPV Ratio NPV Ratio NPV Ratio
---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
300 6.00 8.67 -79 bp 6.46 -224 bp
200 7.00 9.21 -26 bp 7.37 -133 bp
100 8.00 9.47 +1 bp 8.16 -55 bp
0 0.00 9.47 8.70
-100 8.00 9.29 -18 bp 8.92 +21 bp
-200 7.00 9.09 -37 bp 8.91 +21 bp
-300 6.00 9.07 -40 bp 8.79 +8 bp
</TABLE>
In evaluating our exposure to interest rate risk, certain shortcomings
inherent in the method of analysis presented in the foregoing table must be
noted. For example, although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different degrees to
changes in market interest rates. Also, the interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag
15
<PAGE>
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
NPV analysis are also inherent in the gap method of analysis.
Liquidity and Capital Resources
Ours primary sources of funds are deposits, repayment and prepayment of
loans, interest earned on or maturation of investment securities and short-term
investments, borrowings and funds provided from operations. While maturities and
the scheduled amortization of loans, investments and mortgage-backed securities
are a predictable source of funds, deposit flows and mortgage prepayments are
greatly influenced by 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, 1997, 1998 and 1999,
the Bank originated loans totaling $78.2 million, $93.0 million and $93.3
million respectively.
During the years ended December 31, 1997, 1998 and 1999, these investment
activities were funded primarily by principal repayments and prepayments on
loans and maturities of investment securities totaling $50.0 million, $59.0
million, and $57.3 million, respectively. The proceeds from the sale of loans
totaled $20.2 million, $34.1 million and $21.6 million for the years ended
December 31, 1997, 1998 and 1999, respectively. Sales of available-for-sale
securities in 1998 and 1999 generated proceeds of $1.0 million and $290,000,
respectively. There were no sales in 1997.
The major sources of cash from financing activities in the years ended
December 31, 1997, 1998 and 1999 were increases in deposits of $20.7 million,
$24.1 million and $12.8 million, respectively. In the years ended December 31,
1998 and 1999, financing also was provided by net borrowings of $1.5 million and
$10.3 million, respectively. We had available lines of credit from the Federal
Home Loan Bank at December 31, 1997 and 1998 equal to $1.5 million, and equal to
$1.0 million at December 31, 1999. 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 for our senior
management. 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 its 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
16
<PAGE>
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%. The
Bank's internal policy for liquidity is approximately 6% to 8%. Our liquidity
ratios at December 31, 1997, 1998 and 1999 were 7.76%, 11.77% and 8.79%,
respectively.
We anticipate that we will have sufficient funds available to meet current
loan commitments. At December 31, 1999, we had outstanding commitments to
originate loans and available lines of credit totaling $20.7 million and
commitments to provide funds to complete current construction projects in the
amount of $3.9 million. Certificates of deposit which will mature in one year or
less at December 31, 1999 totaled $72.9 million. Based on its experience, our
certificates of deposit have been a relatively stable source of long-term funds
as such certificates are generally renewed upon maturity since we have
established long-term banking relationships with its customers. Therefore, we
believe a significant portion of such deposits will remain with us, although
this cannot be assured.
LSB Financial also has a need for, and sources of liquidity. Liquidity is
required to fund its operating expenses, fund stock repurchase programs, as well
as for the payment of dividends to shareholders. At December 31, 1999 LSB
Financial had $247,000 in liquid assets on hand. The primary source of liquidity
on an ongoing basis is dividends from Lafayette Savings. Dividends totaling
$520,000 were paid from Lafayette Savings to LSB Financial during the year ended
December 31, 1999. For the year ended December 31, 1999, LSB Financial paid
dividends to shareholders totaling $423,000 and repurchased 2,100 shares of
common stock at a total cost of $60,000.
Impact of Inflation and Changing Prices
Consolidated Financial Statements and related Notes presented herein have
been prepared in accordance with generally accepted accounting principals, which
require the measurement of financial position and the results of operations in
terms of historical dollars without considering the change in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of 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 ("FASB") issues Financial
Accounting Standards ("FAS") that affect LSB.
FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
Effective January 1, 2001, FAS 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,
17
<PAGE>
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 on our financial condition or results of operations, however any such
effect will ultimately depend upon our derivative position at the time of
adoption.
18
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This document, including information included or incorporated by
reference, contains, and future filings by LSB Financial of Form 10-KSB, Form
10-QSB and Form 8_K and future oral and written statements by LSB Financial and
our management may contain, forward-looking statements about LSB Financial and
its subsidiaries which we believe are within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
include, without limitation, statements with respect to anticipated future
operating and financial performance, growth opportunities, interest rates, cost
savings and funding advantages expected or anticipated to be realized by
management. Words such as "may", "could", "should", "would", "believe",
"anticipate", "estimate", "expect", "intend", "plan" and similar expressions are
intended to identify forward-looking statements. Forward-looking statements by
LSB Financial and its management are based on beliefs, plans, objectives, goals,
expectations, anticipations, estimates and intentions of management and are not
guarantees of future performance. We disclaim any obligation to update or revise
any forward-looking statements based on the occurrence of future events, the
receipt of new information or otherwise. The important factors we discuss below
and elsewhere in this document, as well as other factors discussed under the
caption "Management's Discussion and Analysis of Financial Conditions and
Results of Operations" in this document and identified in our filings with the
SEC and those presented elsewhere by our management from time to time, could
cause actual results to differ materially from those indicated by the
forward-looking statements made in this document:
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
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 our products and services for the
products and services of our competitors;
o the success of Lafayette Savings 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.
19
<PAGE>
LSB FINANCIAL CORP.
Lafayette, Indiana
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
CONTENTS
REPORTS OF INDEPENDENT AUDITORS ............................................ 1
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION ........................... 2
CONSOLIDATED STATEMENTS OF INCOME ........................................ 3
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY .................................................... 4
CONSOLIDATED STATEMENTS OF CASH FLOWS .................................... 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ............................... 7
<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, 1999 and 1998, 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, 1999.
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, 1999 and 1998, and the results of its operations and its cash
flows for each of the years in the three year period ended December 31, 1999 in
conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Indianapolis, Indiana
January 28, 2000
- --------------------------------------------------------------------------------
20
<PAGE>
LSB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1998 and 1999
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,392 $ 3,494
Short-term investments 8,254 7,500
--------- ---------
Cash and cash equivalents 9,646 10,994
Available-for-sale securities 12,675 10,704
Loans held for sale 2,694 248
Loans, net of allowance ($1,578 and $894) 196,652 223,114
Office properties and equipment - net 5,805 6,060
Federal Home Loan Bank stock, at cost 2,825 3,138
Accrued interest receivable and other assets 2,514 2,881
--------- ---------
$ 232,811 $ 257,139
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits $ 161,781 $ 174,617
Advances from Federal Home Loan Bank 51,500 61,758
Note payable 156 121
Accrued interest payable and other liabilities 1,180 833
--------- ---------
214,617 237,329
Shareholders' equity
Common stock ($.01 par value - 7,000,000 shares
authorized; 919,686 and 1,381,118 shares issued) 9 14
Additional paid-in capital 8,064 8,205
Retained earnings 10,703 12,204
Unamortized cost of recognition and retention plan (152) (95)
Unearned shares held by employee stock ownership plan (492) (418)
Accumulated other comprehensive income/(loss) 62 (100)
--------- ---------
18,194 19,810
--------- ---------
$ 232,811 $ 257,139
========= =========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes.
21
<PAGE>
LSB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997, 1998 and 1999
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Interest income
Loans, including related fees $ 14,384 $ 15,954 $ 17,376
Taxable securities 645 734 776
Tax exempt securities 45 84 109
Other 175 264 231
-------- -------- --------
15,249 17,036 18,492
Interest expense
Deposits 5,964 6,786 7,154
Federal Home Loan Bank advances 2,733 3,031 3,282
Other 11 10 8
-------- -------- --------
8,708 9,827 10,444
-------- -------- --------
Net interest income 6,541 7,209 8,048
Provision for loan losses 72 104 120
-------- -------- --------
Net interest income after provision for loan losses 6,469 7,105 7,928
-------- -------- --------
Noninterest income
Deposit account service charges and fees 445 551 590
Net gain on sale of mortgage loans 243 425 159
Net gain on securities -- 9 2
Other 236 339 486
-------- -------- --------
924 1,324 1,237
Noninterest expense
Salaries and employee benefits 2,439 2,806 2,984
Occupancy and equipment, net 761 857 879
Computer service 246 265 253
Advertising 342 397 497
Other 999 1,172 1,401
-------- -------- --------
4,787 5,497 6,014
-------- -------- --------
Income before income taxes 2,606 2,932 3,151
Income tax provision 1,040 1,192 1,227
-------- -------- --------
Net income $ 1,566 $ 1,740 $ 1,924
======== ======== =======
Earnings per share $ 1.15 $ 1.30 1.47
Earnings per share, assuming dilution 1.12 1.25 1.43
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes.
22
<PAGE>
LSB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1997, 1998 and 1999
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained Benefit Treasury
Stock Capital Earnings Plans Stock
----- ------- -------- ----- -----
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $ 11 $ 10,143 $ 10,289 $ (985) $ (2,629)
Comprehensive income
Net income -- -- 1,566 -- --
Change in net unrealized gain (loss) -- -- -- -- --
Total comprehensive income -- -- -- -- --
Exercise of stock options (206 shares) -- 3 -- -- --
RRP amortization expense -- -- -- 90 --
Employee stock ownership plan-shares earned -- 101 -- 83 --
Acquisition of treasury stock (30,888 shares) -- -- -- -- (633)
Retirement of treasury stock (186,783 shares) (2) (3,260) -- -- 3,262
Dividends paid ($.22 per share) -- -- (311) -- --
Stock dividend (44,272 shares) -- 867 (867) -- --
-------- -------- -------- -------- --------
Balance, December 31, 1997 9 7,854 10,677 (812) --
Comprehensive income
Net income -- -- 1,740 -- --
Change in net unrealized gain (loss) -- -- -- -- --
Total comprehensive income -- -- -- -- --
Exercise of stock options (1,659 shares) -- 23 -- -- --
RRP amortization expense -- -- -- 90 --
Employee stock ownership plan-shares earned -- 173 -- 78 --
Acquisition and retirement of stock (43,591 shares) -- (1,345) -- -- --
Dividends paid ($.27 per share) -- -- (355) -- --
Stock dividend (45,268 shares) -- 1,359 (1,359) -- --
-------- -------- -------- -------- --------
Balance, December 31, 1998 9 8,064 10,703 (644) --
<CAPTION>
Accumulated
Other
Comprehensive
Income/(loss) Total
------------- -----
<S> <C> <C>
Balance, January 1, 1997 $ (33) $ 16,796
Comprehensive income
Net income -- 1,566
Change in net unrealized gain (loss) 39 39
--------
Total comprehensive income -- 1,605
Exercise of stock options (206 shares) -- 3
RRP amortization expense -- 90
Employee stock ownership plan-shares earned -- 184
Acquisition of treasury stock (30,888 shares) -- (633)
Retirement of treasury stock (186,783 shares) -- --
Dividends paid ($.22 per share) -- (311)
Stock dividend (44,272 shares) -- --
-------- --------
Balance, December 31, 1997 6 17,734
Comprehensive income
Net income -- 1,740
Change in net unrealized gain (loss) 56 56
--------
Total comprehensive income -- 1,796
Exercise of stock options (1,659 shares) -- 23
RRP amortization expense -- 90
Employee stock ownership plan-shares earned -- 251
Acquisition and retirement of stock (43,591 shares) -- (1,345)
Dividends paid ($.27 per share) -- (355)
Stock dividend (45,268 shares) -- --
-------- --------
Balance, December 31, 1998 62 18,194
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
23
<PAGE>
LSB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1996, 1998 and 1999
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained Benefit Treasury
Stock Capital Earnings Plans Stock
----- ------- -------- ----- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $ 9 $ 8,064 $ 10,703 $ (644) $ --
Comprehensive income
Net income -- -- 1,924 -- --
Change in net unrealized gain (loss) -- -- -- -- --
Total comprehensive income -- -- -- -- --
Adjustment for stock split (459,365 shares issued) 5 (5) -- -- --
Exercise of stock options (2,040 shares) -- 28 -- -- --
Grant of RRP shares (2,127 shares) -- 40 -- (40) --
RRP amortization expense -- -- -- 97 --
Employee stock ownership plan-shares earned -- 138 -- 74 --
Acquisition and retirement of treasury stock (2,100 shares) -- (60) -- -- --
Dividends paid ($.32 per share) -- -- (423) -- --
-------- -------- -------- -------- ------
Balance, December 31, 1999 $ 14 $ 8,205 $ 12,204 $ (513) $ --
======== ======== ======== ======== ======
<CAPTION>
Accumulated
Other
Comprehensive
Income/(loss) Total
------------- -----
<S> <C> <C>
Balance, December 31, 1998 $ 62 $ 18,194
Comprehensive income
Net income -- 1,924
Change in net unrealized gain (loss) (162) (162)
--------
Total comprehensive income -- 1,762
Adjustment for stock split (459,365 shares issued) -- --
Exercise of stock options (2,040 shares) -- 28
Grant of RRP shares (2,127 shares) -- --
RRP amortization expense -- 97
Employee stock ownership plan-shares earned -- 212
Acquisition and retirement of treasury stock (2,100 shares) -- (60)
Dividends paid ($.32 per share) -- (423)
-------- --------
Balance, December 31, 1999 $ (100) $ 19,810
======== ========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes.
24
<PAGE>
LSB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1998 and 1999
(Dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,566 $ 1,740 $ 1,924
Adjustments to reconcile net income to net cash from operating activities
Depreciation 348 395 446
Net amortization on securities 32 11 54
Provision for loan losses 72 104 120
Gain on securities -- (9) (2)
Employee stock ownership plan - shares earned 184 251 212
Changes in assets and liabilities
Loans held for sale 4,965 (1,429) 2,446
Accrued interest receivable and other assets (774) 277 (162)
Accrued interest payable and other liabilities 333 205 (347)
-------- -------- --------
Net cash from operating activities 6,726 1,545 4,691
Cash flows from investing activities
Proceeds from the maturity and paydown of available-for-sale securities 2,743 3,713 2,843
Purchase of available-for-sale securities (4,026) (9,442) (1,486)
Proceeds from sales of available-for-sale securities -- 1,009 292
Purchase of Federal Home Loan Bank stock (25) (225) (313)
Loans made to customers net of payments received (24,353) (19,489) (26,582)
Purchase of premises and equipment (690) (1,288) (701)
-------- -------- --------
Net cash from investing activities (26,351) (25,722) (25,947)
Cash flows from financing activities
Net change in deposits 20,737 24,095 12,836
Proceeds from Federal Home Loan Bank advances 39,000 17,500 46,500
Payments on advances from Federal Home Loan Bank (39,000) (16,000) (36,242)
Payments on note payable (31) (33) (35)
Dividends paid (311) (355) (423)
Stock options exercised 3 23 28
Purchase of treasury stock (633) (1,345) (60)
-------- -------- --------
Net cash from financing activities 19,765 23,885 22,604
-------- -------- --------
Net change in cash and cash equivalents 140 (292) 1,348
Cash and cash equivalents at beginning of period 9,798 9,938 9,646
-------- -------- --------
Cash and cash equivalents at end of period $ 9,938 $ 9,646 $ 10,994
======== ======== ========
Cash paid during the period for:
Interest $ 8,713 $ 9,805 $ 10,407
Income taxes 886 1,168 1,170
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes.
25
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
(Dollars in thousands)
- --------------------------------------------------------------------------------
1. 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 significantly past due. Payments received on such loans
are reported as principal reductions.
- --------------------------------------------------------------------------------
(Continued)
26
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
(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)
27
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
(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)
28
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Per Share Data: 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. Five percent stock dividends were distributed in
1997 and 1998. Effective June 4, 1999, a 3 for 2 stock split, in the form of a
fifty percent stock dividend, was distributed. Additional shares issued in 1997,
1998 and 1999, as a result of these transactions, were 44,272, 45,268 and
459,365. 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.
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, 2001, 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)
29
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 2 - AVAILABLE-FOR-SALE SECURITIES
Securities at year-end are as follows:
1998
----
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
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
======== ======== ======== ========
1999
----
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Obligations of the U.S.
Government and its agencies $ 2,497 $ 4 $ (23) $ 2,478
Mortgage-backed securities 2,628 -- (71) 2,557
States and political
subdivisions 2,941 -- (26) 2,915
Corporate securities and
commercial paper 2,804 -- (50) 2,754
-------- -------- -------- --------
$ 10,870 $ 4 $ (170) $ 10,704
======== ======== ======== ========
- --------------------------------------------------------------------------------
(Continued)
30
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 2 - AVAILABLE-FOR-SALE SECURITIES (Continued)
The amortized cost and fair value of available-for-sale securities at December
31, 1999, 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 $ 1,790 $ 1,788
Due after one year through five years 5,501 5,424
Due after five years through ten years 713 697
Due after ten years 238 238
Mortgage-backed securities 2,628 2,557
------- -------
$10,870 $10,704
======= =======
The sale of available-for-sale securities during 1997, 1998 and 1999 generated
gross gains of $0, $9 and $2. and gross losses of $0, $0 and $0.
NOTE 3 - LOANS RECEIVABLE
Year-end loans consisted of the following:
1998 1999
---- ----
Mortgage loans secured by:
One-to-four family residences $ 110,537 $ 128,470
Multi-family residences 25,530 28,870
Commercial real estate 26,342 31,010
Construction and development 18,394 19,692
Home equity lines of credit 10,572 11,685
Commercial business loans 7,627 3,974
Consumer loans 3,854 4,448
--------- ---------
Gross loans receivable 202,856 228,149
Undisbursed portion of loans in process (4,401) (3,927)
Deferred loan fees, net (225) (214)
Allowance for loan losses (1,578) (894)
--------- ---------
$ 196,652 $ 223,114
========= =========
- --------------------------------------------------------------------------------
(Continued)
31
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
(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 $61,316 and $64,428
at December 31, 1998 and 1999, respectively.
Activity for capitalized mortgage servicing rights was as follows:
1997 1998 1999
---- ---- ----
Beginning of year $ 128 $ 274 $ 423
Additions 182 250 145
Amortized to expense (36) (101) (87)
----- ----- -----
End of year $ 274 $ 423 $ 481
===== ===== =====
No valuation allowance was deemed necessary at December 31, 1999.
Certain executive officers and directors are loan customers of the Bank. Total
loans outstanding to these individuals or their associates were $295 and $390 at
December 31, 1998 and 1999.
Activity in the allowance for loan losses was as follows:
1997 1998 1999
---- ---- ----
Beginning balance $ 1,715 $ 1,478 $1,578
Provision for loan losses 72 104 120
Loan charge-offs (322) (4) (804)
Recoveries 13 -- --
------- ------- ------
Ending balance $ 1,478 $ 1,578 $ 894
======= ======= ======
- --------------------------------------------------------------------------------
(Continued)
32
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE (Continued)
Information about impaired loans is as follows:
1997 1998 1999
---- ---- ----
Year-end loans with no allowance
for loan losses allocated $ -- $ -- $ --
Year-end loans with allowance for
loan losses allocated 2,071 2,254 --
Amount of the allowance allocated 651 734 --
Average of impaired loans during the year 2,231 2,223 2,067
Interest income recognized during impairment 7 14 14
Cash-basis interest income recognized 7 14 14
NOTE 4 - OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment is as follows at year-end:
1998 1999
---- ----
Land $1,255 $1,326
Office buildings and improvements 4,364 4,705
Furniture and equipment 2,410 2,699
------ ------
8,029 8,730
Less accumulated depreciation and amortization 2,224 2,670
------ ------
$5,805 $6,060
====== ======
NOTE 5 - DEPOSITS
Deposits at year-end are summarized as follows:
1998 1999
---- ----
Amount Percent Amount Percent
------ ------- ------ -------
Non interest-bearing deposits $ 7,592 4.7% $ 8,599 4.9%
NOW accounts 26,175 16.2 29,553 16.9
Savings accounts 14,868 9.2 16,159 9.3
-------- ----- -------- -----
48,635 30.1 54,311 31.1
-------- ----- -------- -----
Certificates of deposit
2.00% to 3.99% 617 .4 2,042 1.2
4.00% to 5.99% 79,983 49.4 102,556 58.7
6.00% to 7.99% 32,546 20.1 15,708 9.0
-------- ----- -------- -----
113,146 69.9 120,306 68.9
-------- ----- -------- -----
$161,781 100.0% $174,617 100.0%
======== ===== ======== =====
- --------------------------------------------------------------------------------
(Continued)
33
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 5 - DEPOSITS (Continued)
At December 31, 1999, scheduled maturities of certificates of deposit are as
follows:
2000 $ 72,939
2001 26,953
2002 15,332
2003 4,215
2004 857
Thereafter 10
--------
$120,306
========
Time deposits of $100 or more were $14,617 and $21,352 at December 31, 1998 and
1999, 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, 1999, the year of final maturity and the
current weighted average interest rate of FHLB advances were as follows:
Weighted
Interest Principal
Year Average Balance
---- ------- -------
2000 5.85 $ 7,500
2001 6.41 8,500
2002 5.72 23,000
2003 6.15 12,000
2008 5.19 6,758
2009 5.21 4,000
-------
$61,758
=======
$19,000 of the advances due in 2002 and the advances due in 2009 may, at certain
dates, be converted to adjustable rate advances by the FHLB. If converted, the
advances may be prepaid without penalty. Except for the advances with a final
maturity of 2008, advances are due in full at maturity. These advances have
required principal payments during the next five years of $560 (2000), $813
(2001), $711 (2002), $622 (2003) and $544 (2004).
- --------------------------------------------------------------------------------
(Continued)
34
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
(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, 1998 and 1999, the Bank's actual and required minimum capital
ratios were as follows:
<TABLE>
<CAPTION>
FDIC
----
To Be Well
OTS Capitalized Under
For Capital Corrective Action
Actual Adequacy Purposes Provisions
------ ------------------ ----------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk
Weighted Assets)
1998 $ 18,069 11.15% $12,960 8.0% $16,201 10.0%
1999 19,686 11.57 13,607 8.0 17,008 10.0
Tier I Capital (to Risk
Weighted Assets)
1998 $ 17,028 10.51% $ 6,480 4.0% $ 9,720 6.0%
1999 18,792 11.05 6,803 4.0 10,205 6.0
Tier 1 (Core) Capital
(to Adjusted Assets)
1998 $ 17,028 7.34% $ 6,694 3.0% $11,607 5.0%
1999 18,792 7.31 7,709 3.0 12,848 5.0
Tangible Capital
(to Adjusted Assets)
1998 $ 17,028 7.34% $ 3,482 1.5% N/A N/A
1999 18,792 7.31 3,855 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 $1,041 and $894 at
December 31, 1998 and 1999.
At December 31, 1998 and 1999, the Bank's capital ratios result in its being
designated a well capitalized institution.
- --------------------------------------------------------------------------------
(Continued)
35
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
(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 lease
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 170,265 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.
1997 1998 1999
---- ---- ----
Pro forma net income $ 1,511 $ 1,678 $ 1,845
Pro forma earnings per share 1.11 1.25 1.41
Pro forma diluted earnings per share 1.09 1.21 1.37
- --------------------------------------------------------------------------------
(Continued)
36
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 8 - BENEFIT PLANS (Continued)
Information about stock options is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
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 81,058 $ 15.32 82,305 $ 14.64
Granted 4,320 27.50 -- 6,000 27.35
Exercised (206) 15.38 (1,659) 14.08 (2,040) 13.95
Forfeited (823) 15.38 (1,134) 13.95 (908) 13.95
Expired -- --
Adjustment for stock
dividend/split 3,655 4,040 43,246
------ ------ ------
End of year 81,058 15.32 82,305 14.64 128,603 10.36
====== ====== =======
Weighted average
remaining option life 7.9 years 7.0 years 6.116 years
Price range of options $14.64-$27.50/share $13.95-$26.49/share $9.30-$19.00/share
</TABLE>
Options exercisable at year-end are as follows:
Weighted-Average
Number Per Share
of Options Exercise Price
---------- --------------
1997 30,695 14.64
1998 47,349 14.19
1999 92,958 9.54
The fair values of options granted during 1997 and 1999 were $7.57 and $7.13 per
share which was estimated using the following weighted-average information:
risk-free interest rate of 5.50% and 5.38%, expected life of 7 and 7 years,
expected volatility of stock price of .15 and .15 and expected annual dividend
yield of 1.27% and 1.68%.
- --------------------------------------------------------------------------------
(Continued)
37
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 8 - BENEFIT PLANS (Continued)
The LSB Recognition and Retention Plan (RRP) has awarded 31,206 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, $90 and $97 for 1997,
1998 and 1999.
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>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Shares earned for the year 8,584 8,610 12,312
Shares allocated to participants at year-end 17,896 26,703 46,871
Shares committed to be released at year-end 8,584 8,610 12,312
Unreleased shares at year-end 60,004 54,326 69,168
Fair value of unreleased shares at year-end $ 1,710 $ 1,548 $ 908
Expense recognized for the year 184 251 212
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
38
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
(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:
1998 1999
---- ----
Commitments to extend credit:
Fixed rate $ 4,368 $ 59
Variable rate 2,782 875
Unused portions of lines of credit 20,521 19,756
Standby letters of credit 169 959
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, 1999,
the fixed rate loan commitments were at rates ranging from 8.25% to 10.25%.
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,
-----------------------
1997 1998 1999
---- ---- ----
Current provision $ 853 $ 1,294 $ 774
Deferred provision (benefit) 187 (102) 453
------- ------- -----
$ 1,040 $ 1,192 1,227
======= ======= =====
- --------------------------------------------------------------------------------
(Continued)
39
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
(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:
Year Ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
Income tax provision computed
at statutory rate $ 886 $ 997 $ 1,071
Add (subtract) tax effect of
Low income housing credit (17) (37) (49)
Tax exempt income (17) (25) (30)
State tax expense (net of federal tax benefit) 156 179 157
ESOP expense 34 59 47
Other (2) 19 31
------- ------- -------
$ 1,040 $ 1,192 $ 1,227
======= ======= =======
The net deferred tax asset/(liability) recorded at December 31, 1998 and 1999 is
comprised of the following:
1998 1999
---- ----
Deferred tax assets from:
Bad debt deductions $ 440 $ 206
Loan fee income 9 8
Deferred compensation 41 55
Net unrealized loss on securities -- 66
----- -----
490 335
Deferred tax liability from:
Fixed asset depreciation (146) (254)
Net unrealized gain on securities (42) --
Mortgage servicing rights (168) (190)
Other (131) (233)
----- -----
(487) (677)
Valuation allowance for deferred tax assets -- --
----- -----
Net deferred tax asset/(liability) $ 3 $(342)
===== =====
- --------------------------------------------------------------------------------
(Continued)
40
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
(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, 1999. 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
$50 annually for six years beginning in 1998.
NOTE 11 - EARNINGS PER SHARE
The following table presents the data used to compute earnings per share:
1997 1998 1999
---- ---- ----
Weighted average shares outstanding
during the year 1,363,095 1,335,451 1,305,149
Dilutive effect of potential shares 31,866 53,591 42,867
--------- --------- ---------
Shares used to compute diluted
earnings per share 1,394,961 1,389,042 1,348,016
========= ========= =========
At December 31, 1999, there were 13,544 options that were antidilutive and were
not considered in computing diluted earnings per share.
- --------------------------------------------------------------------------------
(Continued)
41
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 12 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments at year-end are as follows, in thousands.
<TABLE>
<CAPTION>
1998 1999
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Financial assets
Cash and short-term
investments $ 9,646 $ 9,646 $ 10,994 $ 10,994
Available-for-sale securities 12,675 12,675 10,704 10,704
Federal Home Loan Bank stock 2,825 2,825 3,138 3,138
Loans (net) 199,346 201,530 223,362 223,653
Accrued interest receivable 1,251 1,251 1,396 1,396
Financial liabilities
Deposits (161,781) (162,225) (174,617) (173,800)
Federal Home Loan Bank
advances (51,500) (51,995) (61,758) (61,305)
Note payable (156) (156) (121) (120)
Accrued interest payable (176) (176) (211) (211)
</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)
42
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
(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, 1998 and 1999
1998 1999
---- ----
ASSETS
Short-term investments $ 18 $ 247
Investment in the Bank 17,090 18,692
Available-for-sale securities 250 238
Loan to ESOP 583 480
Other assets 253 153
------- -------
$18,194 $19,810
======= =======
LIABILITIES -- --
SHAREHOLDERS' EQUITY 18,194 19,810
------- -------
$18,194 $19,810
======= =======
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
For the years ended December 31, 1997, 1998 and 1999
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Operating income
Dividends from the Bank $ 180 $ 1,840 $ 520
Other operating income 68 38 36
Operating expenses (59) (55) (132)
Income tax benefit 1 15 45
------- ------- -------
Income before equity in undistributed income of the Bank 190 1,838 469
Equity in undistributed income of the Bank 1,376 (98) 1,455
------- ------- -------
Net income $ 1,566 $ 1,740 1,924
======= ======= =====
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
43
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 13 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1998, and 1999
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,566 $ 1,740 $ 1,924
Adjustments to reconcile net income to net cash from operating
activities
Equity in undistributed income of the Bank (1,376) 98 (1,455)
Change in other assets 3 (253) 60
Change in other liabilities (18) (24) --
------- ------- -------
Net cash from operating activities 175 1,561 529
Cash flows from investing activities
Proceeds from the paydown of available-for-sale securities -- -- 12
Proceeds from repayment of the loan to ESOP 68 35 103
------- ------- -------
Net cash from investing activities 68 35 115
Cash flows from financing activities
Issuance of RRP shares -- -- 40
Dividends paid (311) (355) (423)
Stock options exercised 3 23 28
Repurchase of treasury stock (633) (1,345) (60)
------- ------- -------
Net cash from financing activities (941) (1,677) (415)
------- ------- -------
Net changes in cash equivalents (698) (81) 229
Cash equivalents at beginning of year 797 99 18
------- ------- -------
Cash equivalents at end of year $ 99 $ 18 $ 247
======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
44
<PAGE>
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 14 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows:
1997 1998 1999
---- ---- ----
Unrealized holding gains and losses on
available-for-sale securities $ 65 $ 103 $(268)
Less reclassification adjustments for gains
and losses later recognized in income -- (9) (2)
----- ----- -----
Net unrealized gains and losses 65 94 (270)
Tax effect (26) (38) 108
----- ----- -----
Other comprehensive income/(loss) $ 39 $ 56 (162)
===== ===== =====
- --------------------------------------------------------------------------------
45
<PAGE>
LSB FINANCIAL CORP.
and
LAFAYETTE SAVINGS BANK, FSB
DIRECTORS AND EXECUTIVE OFFICERS
Directors
John W. Corey
President and Chief Executive
Officer, LSB and Lafayette Bank
Mariellen M. Neudeck
Chairman of the Board, LSB and
Lafayette Bank
Vice President, Greater Lafayette
Health Services, Inc.
James A. Andrew
President and Owner, Henry Poor
Lumber Co.
Mary Jo David
Vice President, Chief Financial Officer
and Secretary-Treasurer of LSB and
Lafayette Bank
Harry A. Dunwoody
Senior Vice President of LSB and
Lafayette Bank
Philip W. Kemmer
Business Administrator, retired
First Assembly of God Church
Thomas R McCully
Partner, Stuart & Branigin
Peter Neisel
President and CEO, Schwab Corp
Jeffrey A. Poxon
Senior Vice President, Investments and
Chief Investment Officer, Lafayette Life
Insurance Company
John C. Shen
Developer and Sole Owner,
Crestview Apartments and Crestview
North Apartments
Charles W. Shook
Vice-President and co-manager,
Coldwell Banker/The Shook Agency
Executive Officers
John W. Corey
President and Chief Executive Officer
Harry A. Dunwoody
Senior Vice President
Mary Jo David
Vice President, Chief Financial Officer
and Secretary-Treasurer
Gregory A. Milakis
Vice President
46
<PAGE>
SHAREHOLDER INFORMATION
Corporate Office
101 Main Street
Lafayette, Indiana 47902
Independent Auditors
Crowe, Chizek and Company LLP
3815 River Crossing Parkway, Suite 300
P.O. Box 40977
Indianapolis, Indiana 46240-0977
Transfer Agent
American Securities Transfer, Inc.
1825 Lawrence Street
Denver, Colorado 80202
Branch Offices
1020A Sagamore Parkway W.
West Lafayette, Indiana 47906
1501 Sagamore Parkway W.
Lafayette, Indiana 47905
833 Twyckenham Blvd.
Lafayette, IN 47905
Local Counsel
Stuart & Branigin
300 Main Street, Suite 800
Lafayette, Indiana 47902
Special Counsel
Silver, Freedman & Taff, L.L.P.
1100 New York Avenue, N.W.
Washington, D.C. 20005
Form 10-KSB Report
A copy of LSB Financial's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1999 including financial statements, as filed with the SEC
will be furnished without charge to shareholders of LSB Financial upon written
request to the Secretary, LSB Financial Corp., 101 Main Street, P.O. Box 1628,
Lafayette, Indiana 47902.
47
<PAGE>
Common Stock
As of December 31, 1999, there were approximately 1,063 holders of record
of LSB Financial Common Stock and 1,381,118 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. All amounts
have been adjusted to reflect stock dividends and stock splits declared by the
Company to date.
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, 1998 22.00 17.83 0.067
June 30, 1998 22.00 20.00 0.067
September 30,1998 21.33 19.67 0.067
December 31, 1998 20.00 17.50 0.08
March 31, 1999 19.00 18.00 0.08
June 30, 1999 19.88 17.50 0.08
September 30, 1999 18.00 15.00 0.08
December 31, 1999 16.00 12.9375 0.08
Dividend payment decisions are made with consideration of a variety of
factors including earnings, financial condition, market considerations and
regulatory restrictions. Restrictions on dividend payments are described in Note
7 of the Notes to Consolidated Financial Statements included in this Annual
Report.
48
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 January 28, 2000, on the consolidated statements
of financial condition of LSB Financial Corp. as of December 31, 1999 and 1998
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,
1999, which report is included in Form 10-KSB of LSB Financial Corp. for the
year ended December 31, 1999.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Indianapolis, Indiana
March 27, 2000
<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, 1999 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-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,494
<INT-BEARING-DEPOSITS> 7,500
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,704
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 223,362
<ALLOWANCE> 894
<TOTAL-ASSETS> 257,139
<DEPOSITS> 174,617
<SHORT-TERM> 61,758
<LIABILITIES-OTHER> 833
<LONG-TERM> 121
0
0
<COMMON> 14
<OTHER-SE> 19,796
<TOTAL-LIABILITIES-AND-EQUITY> 257,139
<INTEREST-LOAN> 17,376
<INTEREST-INVEST> 885
<INTEREST-OTHER> 231
<INTEREST-TOTAL> 18,492
<INTEREST-DEPOSIT> 7,154
<INTEREST-EXPENSE> 10,444
<INTEREST-INCOME-NET> 8,048
<LOAN-LOSSES> 120
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,014
<INCOME-PRETAX> 3,151
<INCOME-PRE-EXTRAORDINARY> 3,151
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,924
<EPS-BASIC> 1.47
<EPS-DILUTED> 1.43
<YIELD-ACTUAL> 366.00
<LOANS-NON> 993
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,216
<ALLOWANCE-OPEN> 1,578
<CHARGE-OFFS> 804
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 894
<ALLOWANCE-DOMESTIC> 894
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 195
</TABLE>
