SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from _______ to _______
Commission file number 0-25070.
LSB FINANCIAL CORP.
(Exact Name of Small Business Issuer as Specified in its Charter)
Indiana 35-1934975
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Main Street, Lafayette, Indiana 47902
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (765) 742-1064
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve months (or for
such shorter period that the Issuer was required to file such reports), and (2)
has been subject to such requirements for the past 90 days. YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The Issuer had $13.9 million in gross income for the year ended
December 31, 1996.
As of March 24, 1997, there were issued and outstanding 900,166 shares
of the Issuer's Common Stock. The aggregate market value of the voting stock
held by non-affiliates of the Issuer, computed by reference to the average of
the closing bid and asked price of such stock as of March 24, 1997, was
approximately $15.7 million. (The exclusion from such amount of the market value
of the shares owned by any person shall not be deemed an admission by the Issuer
that such person is an affiliate of the Issuer.)
DOCUMENTS INCORPORATED BY REFERENCE
PARTS II and IV of Form 10-KSB--1996 Annual Report to Stockholders.
PART III of Form 10-KSB--Proxy Statement for the 1996 Annual Meeting of
Stockholders.
- -------------------------------------------------------------------------------
PART I
Item 1. Description of Business
General
LSB Financial Corp. ("LSB" or the "Company") is an Indiana corporation
which was organized in 1994 by Lafayette Savings Bank, FSB ("Lafayette" or the
"Bank") for the purpose of becoming a thrift institution holding company.
Lafayette is a federally chartered stock savings bank headquartered in
Lafayette, Indiana. Originally organized in 1869, the Bank converted to a
federal savings bank in 1984. Its deposits are insured up to the applicable
limits by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation ("FDIC"). In February 1995, the Bank converted to the stock form of
organization through the sale and issuance of 1,029,576 shares of its common
stock to the Company. The principal asset of the Company is the outstanding
stock of the Bank, its wholly owned subsidiary. The Company presently has no
separate operations and its business consists only of the business of the Bank.
All references to the Company, unless otherwise indicated, at or before February
3, 1995 refer to the Bank.
LSB has been, and intends to continue to be, a community-oriented
financial institution. The principal business of the Company consists of
attracting retail deposits from the general public and investing those funds
primarily in permanent first mortgage loans secured by owner-occupied, one- to
four-family residences, and to a lesser extent, non-owner occupied one- to
four-family residential, commercial real estate, multi-family, construction and
development, consumer and commercial business loans. The Company currently
serves Tippecanoe County, Indiana (the "primary market area") through its three
retail banking offices. At December 31, 1996, LSB had total assets of $184.6
million, deposits of $116.9 million and shareholders' equity of $16.8 million.
The Company's revenues are derived principally from interest on
mortgage and other loans and interest on securities.
Since the Bank, unlike most savings associations, is insured by the
BIF, it benefitted from a reduction in the deposit insurance rate charged by the
FDIC effective June 1, 1995. In addition, the Bank was not subject to the
federal legislation passed on September 30, 1996, requiring virtually all
SAIF-insured institutions to pay a one-time special assessment. See "Regulation
- - Insurance of Accounts and Regulation by the FDIC."
The executive offices of the Company are located at 101 Main Street,
Lafayette, Indiana 47902. Its telephone number at that address is (765)
742-1064.
Lending Activities
General. The principal lending activity of the Company is the
origination of conventional mortgage loans for the purpose of purchasing,
constructing, or refinancing owner-occupied one- to four-family residential real
estate located in the Company's primary market area. The Company also originates
non-owner occupied one- to four-family residential, commercial real estate,
multi-family, consumer and commercial business loans.
2
In the mid 1980's, the Company began originating adjustable rate
mortgages ("ARMs") for retention in its portfolio in an effort to increase the
percentage of loans with more frequent repricing than traditional long term,
fixed-rate loans. As a result of continued consumer demand for long-term, fixed
rate loans, the Company has continued to originate such loans. LSB underwrites
these mortgage loans utilizing secondary market guidelines allowing them to be
saleable, without recourse, primarily to the Federal Home Loan Mortgage
Corporation ("FHLMC"). The sale of such loans results in additional short-term
income and improves the Company's interest rate risk position. The Company
generally retains servicing rights on loans sold in the secondary market.
Furthermore, in order to limit its potential exposure to increasing interest
rates caused by its traditional emphasis on originating single family mortgage
loans, the Company has diversified its portfolio by increasing its emphasis on
the origination of short-term commercial real estate, business and consumer
loans. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset/Liability Management" in the Annual Report to
Stockholders filed as Exhibit 13 hereto ("Annual Report").
Loan officers and certain executive officers of the Company have
approval authority on loans depending on the type and amount of the loan. All
owner-occupied residential loans greater than $200,000 and all non-owner
occupied residential loans and commercial business loans of $250,000 or more
must be approved by the loan committee of the Board of Directors. Any loan or
aggregate of loans to one borrower of $600,000 or more must be approved by a
majority of the full Board of Directors.
At December 31, 1996, the maximum amount which the Bank could have
loaned to any one borrower and the borrower's related entities was $2.3 million.
At that date, the Bank had a group of loans to a single borrower with
outstanding balances totaling approximately $2.4 million. The Bank inadvertently
made these loans to the Bennett Funding Group in 1995 in violation of its loans-
to-one-borrower limitation. See "Non-Performing Assets - Non-Accruing Loans."
The Bank's next largest lending relationship to a single borrower or a group of
related borrowers totaled $2.3 million at December 31, 1996, consisting of
multiple loans to a single borrower secured by multi-family dwellings used as
student housing and by land intended to be developed for additional multi-family
dwellings. These loans were performing in accordance with their terms at
December 31, 1996. The third largest lending relationship to a single borrower
or a group of related borrowers totaled $2.2 million, consisting of multiple
loans to a single borrower secured by one- to four-family and multi-family
rental properties and a commercial property. These loans were also performing in
accordance with their terms at December 31, 1996. At December 31, 1996, the
Company had 19 other loans or lending relationships to a single borrower or
group of related borrowers with a principal balance in excess of $1.0 million,
all of which were performing in accordance with their repayment terms.
3
Loan Portfolio Composition. The following table sets forth information
concerning the composition of the Company's loan portfolio (including loans held
for sale) in dollar amounts and in percentages of the total loan portfolio
(before deductions for loans in process, deferred fees and discounts and
allowances for losses) as of the dates indicated.
December 31,
-----------------------------------------------------------------------------
1994 1995 1996
----------------------- --------------------- ---------------------
Amount Percent Amount Percent Amount Percent
---------- ------- --------- ------- --------- -------
(Dollars in Thousands)
Real Estate Loans:
One- to four-family................ $ 69,139 68.53% $ 86,231 62.40% $ 96,987 57.72%
Multi-family....................... 7,643 7.57 12,044 8.72 19,610 11.67
Commercial......................... 10,712 10.62 15,034 10.88 19,032 11.33
Construction....................... 3,251 3.22 10,379 7.51 14,447 8.60
Land and land development.......... 2,915 2.89 3,880 2.81 3,334 1.98
---------- ------- --------- ------- --------- -------
Total real estate loans........ 93,660 92.83 127,568 92.32 153,410 91.30
---------- ------- --------- ------- --------- ------
Other Loans:
Consumer Loans:
Home equity....................... 3,393 3.36 4,124 2.98 7,415 4.41
Home improvement.................. 184 0.18 53 0.04 212 0.13
Automobile........................ 380 0.38 794 0.57 792 0.47
Deposit account................... 330 0.33 144 0.10 238 0.14
Other............................. 333 0.33 933 0.68 1,151 0.68
--------- -------- --------- ------- --------- --------
Total consumer loans........... 4,620 4.58 6,048 4.37 9,808 5.83
Commercial business loans.......... 2,614 2.59 4,570 3.31 4,825 2.87
--------- -------- --------- ------- --------- --------
Total other loans................. 7,234 7.17 10,618 7.68 14,633 8.70
--------- -------- --------- ------- --------- --------
Total loans.................... 100,894 100.00% 138,186 100.00% 168,043 100.00%
--------- ====== --------- ====== --------- ======
Less:
Loans in process................... 1,095 4,516 6,755
Deferred fees and discounts........ 271 315 357
Allowance for losses............... 926 922 1,715
--------- --------- ---------
Total loans receivable, net........ $ 98,602 $132,433 $159,216
========= ======== ========
4
The following table shows the composition of the Company's loan
portfolio (including loans held for sale) by fixed- and adjustable-rate at the
dates indicated.
December 31,
-----------------------------------------------------------------------------
1994 1995 1996
----------------------- --------------------- ---------------------
Amount Percent Amount Percent Amount Percent
---------- ------- --------- ------- --------- -------
(Dollars in Thousands)
Fixed-Rate Loans:
Real estate:
One- to four-family(1)............ $ 32,212 31.93% $ 41,222 29.83% $ 48,204 28.69%
Multi-family...................... 56 0.06 457 0.33 401 0.24
Commercial........................ 2,532 2.51 2,096 1.52 2,791 1.66
Construction...................... 3,251 3.22 10,379 7.51 14,447 8.60
Land and land development......... --- --- --- --- 762 0.45
Total real estate loans........ 38,051 37.72 54,154 39.19 66,605 39.64
Consumer........................... 1,063 1.05 1,619 1.17 2,393 1.42
Commercial business................ 2,012 1.99 4,570 3.31 4,103 2.44
---------- ------- --------- ------- --------- -------
Total fixed-rate loans......... 41,126 40.76 60,343 43.67 73,101 43.50
---------- ------- --------- ------- --------- -------
Adjustable-Rate Loans:
Real estate:
One- to four-family............... 36,927 36.60 45,009 32.57 48,783 29.03
Multi-family...................... 7,587 7.52 11,587 8.39 19,209 11.43
Commercial........................ 8,180 8.11 12,938 9.36 16,241 9.66
Construction...................... --- --- --- --- --- ---
Land and land development......... 2,915 2.89 3,880 2.81 2,572 1.53
---------- ------- --------- ------- --------- -------
Total real estate loans........ 55,609 55.12 73,414 53.13 86,805 51.66
Consumer loans..................... 3,557 3.52 4,429 3.21 7,415 4.41
Commercial business................ 2,915 .60 --- --- 722 0.43
---------- ------- --------- ------- --------- -------
Total adjustable-rate loans.... 59,768 59.24 77,843 56.33 94,942 56.50
--------- ------- -------- ------ - --------- ------
Total loans.................... 100,894 100.00% 138,186 100.00% 168,043 100.00%
---------- ------- --------- ------- --------- -------
Less:
Loans in process................... 1,125 4,516 6,755
Deferred fees and discounts........ 221 315 357
Allowance for loan losses.......... 922 922 1,715
---------- --------- ---------
Total loans receivable, net..... $ 78,158 $132,433 $159,216
========== ========= =========
- -------------
(1) Includes $0, $7.0 million and $14.7 million of loans at December 31,
1994, 1995 and 1996, respectively, which carry a fixed rate of interest
for the initial five or seven years and then convert to an adjustable
rate of interest for the remaining term of the loan.
5
The following schedule illustrates the maturities of the Company's loan
portfolio at December 31, 1996. Loans which have adjustable or renegotiable
interest rates are shown as maturing in the period during which the contract is
due. The schedule does not reflect the effects of possible prepayments or
enforcement of due-on-sale clauses.
Real Estate
----------------------------------------------------------------------
Multi-family and Construction, Land
One-to Four-Family Commercial and Land Developmen
-------------------- ------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Due During
Years Ending
December 31,
------------
1997(1)................ $ 2,007 9.37% $ 807 9.46% $15,962 8.57%
1998................... 616 7.38 1 8.75 1,754 9.01
1999................... 567 8.95 697 8.60 46 8.65
2000 and 2001.......... 3,256 8.03 1,116 8.72 9 9.25
2002 to 2006........... 5,641 8.33 1,738 8.59 10 10.94
2007 to 2016........... 23,981 8.04 25,552 8.65 --- ---
2017 and following..... 60,919 7.81 8,731 6.69 --- ---
------- ------- -------
TOTAL................. $96,987 7.94% $38,642 8.67% $17,781 8.62%
======= ======= =======
Commercial
Consumer Business Total
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------ -------- ------ -------- ------ --------
Due During
Years Ending
December 31,
------------
1997(1)................ $ 577 9.26% $1,987 9.69% $ 21,340 8.80%
1998................... 210 10.71 43 8.27 2,624 8.75
1999................... 236 9.87 315 9.03 1,861 8.94
2000 and 2001.......... 7,089 8.85 2,480 9.59 13,950 8.78
2002 to 2006........... 1,696 9.75 --- --- 9,085 8.67
2007 to 2016........... --- --- --- --- 49,533 8.35
2017 and following..... --- --- --- --- 69,650 7.92
------ ------ --------
TOTAL................. $9,808 9.09% $4,825 9.58% $168,043 8.29%
====== ====== ========
- ----------
(1) Includes demand loans, loans having no stated maturity and
overdraft loans.
The total amount of loans due to mature after December 31, 1997 which
have predetermined interest rates is $57.2 million, and which have adjustable or
renegotiable interest rates is $89.5 million.
6
One- to Four-Family Residential Real Estate Lending
The Company focuses its lending program on the origination of permanent
loans secured by mortgages on owner-occupied, one- to four-family residences.
The Company also originates loans secured by nonowner-occupied, one- to
four-family residences. At December 31, 1996, $97.0 million, or 57.72% of the
Company's total loan portfolio consisted of permanent loans secured by one- to
four-family residences. Substantially all of these loans were secured by
properties located in the Company's primary market area. The Company originates
a variety of residential loans, including conventional 15 and 30 year fixed-rate
loans, ARMs and balloon loans.
The Company's one- to four-family residential ARMs are fully amortizing
loans with contractual maturities of up to 30 years. The interest rates on
substantially all of the ARMs originated by the Company are subject to
adjustment at one or three year intervals. The Company's ARM products generally
carry interest rates which are reset to a stated margin over the weekly average
of the one or three year U.S. Treasury rates. Increases or decreases in the
interest rate of the Company's one-year ARMs are generally limited to 2%
annually with a lifetime interest rate cap of 6% over the initial rate.
Increases or decreases in the interest rate of three-year ARMs are limited to a
3% adjustment cap with a 5% lifetime interest rate cap over the initial rate.
The Company's one-year ARMs may be convertible into fixed-rate loans after the
first year and before the sixth year upon payment of a fee, do not contain
prepayment penalties and do not produce negative amortization. Initial interest
rates offered on the Company's ARMs may be below the fully indexed rate.
Borrowers are qualified at 2% over the initial interest rate for the Company's
one-year ARMS and at the initial interest rate for the Company's three-year
ARMs. At December 31, 1996, the total balance of one- to four- family ARMs was
$48.7 million, or 29.03% of the Company's gross loan portfolio. The Company
generally retains ARMs in its portfolio pursuant to its asset/liability
management strategy. Three-year ARMs represented $39.6 million and one-year ARMs
represented $9.1 million of the Company's total ARMs at December 31, 1996.
The Company also offers fixed-rate mortgage loans to owner occupants
with maturities up to 30 years and which conform to FHLMC standards. LSB
currently sells in the secondary market the majority of long-term, conforming,
fixed-rate loans with terms over 15 years it originates. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Asset/Liability Management" in the Annual Report. Interest rates charged on
these fixed-rate loans are priced on a daily basis in accordance with FHLMC
pricing standards. These loans do not include prepayment penalties.
In 1995, the Company expanded its product line to better compete for
residential mortgage loan customers by offering 30 year, fixed-rate mortgage
loans which, after five or seven years convert to the Company's standard
one-year ARM for the remainder of the term. The Company had $14.7 million in
five-year and seven-year convertible residential mortgage loans at December 31,
1996 (currently categorized by the Company as fixed-rate loans).
The Company had $26.6 million in nonowner-occupied one- to four-family
residential loans at December 31, 1996. These loans are underwritten using the
same criteria as owner-occupied, one- to four-family residential loans, but are
provided at higher rates than owner-occupied loans. The Company offers
fixed-rate, adjustable-rate and convertible rate loans, with terms of up to 30
years.
7
The Company originates residential mortgage loans with loan-to-value
ratios of up to 95% for owner-occupied residential loans and up to 80% for
nonowner-occupied residential loans. LSB requires private mortgage insurance in
an amount intended to reduce the Company's exposure to 80% or less of the lesser
of the purchase price or appraised value of the underlying collateral.
In underwriting one- to four-family residential real estate loans, LSB
evaluates both the borrower's ability to make monthly payments and the value of
the property securing the loan. Properties securing owner-occupied one- to
four-family residential real estate loans made by LSB are appraised by
independent fee appraisers. LSB requires borrowers to obtain title insurance and
fire, extended coverage casualty and flood insurance (if appropriate). Real
estate loans originated by the Company contain a "due on sale" clause allowing
the Company to declare the unpaid principal balance due and payable upon the
sale of the security property.
Multi-Family and Commercial Real Estate Lending
LSB originates permanent loans secured by multi-family and commercial
real estate. At December 31, 1996, the Company's multi-family and commercial
real estate loan portfolio totaled $38.6 million, or 23.00% of the Company's
total loan portfolio, compared to $27.1 million and $18.4 million, or 19.60% and
18.19%, at December 31, 1995 and 1994, respectively. The increase in the
commercial and multi-family loan portfolio is due to the hiring during 1994 of
an experienced commercial loan officer to further develop this portfolio.
The Company's permanent multi-family and commercial real estate loan
portfolio includes loans secured by apartment buildings, office buildings,
churches, warehouses, retail stores, shopping centers, small business facilities
and farm properties, most of which are located within the Company's primary
market area.
Permanent multi-family and commercial real estate loans are originated
as three-year and five-year ARMs with up to a 24 year amortization. To a
substantially lesser extent, such loans are originated as 10 year fixed-rate
loans. The ARMs are tied to an index based on the weekly average of the
three-year or five-year U.S. Treasury rate, respectively, plus a margin of 3%.
Multi-family loans and commercial real estate loans have been written in amounts
of up to 75% of the lesser of the appraised value of the property or the
purchase price, and borrowers are generally personally liable for all or part of
the indebtedness.
Appraisals on properties securing multi-family and commercial real
estate loans originated in excess of $100,000 by the Company are performed by
independent appraisers designated by the Company at the time the loan is made
and reviewed by management. In addition, the Company's underwriting procedures
generally require verification of the borrower's credit history, income and
financial statements, banking relationships and income projections for the
property.
Multi-family and commercial real estate loans generally present a
higher level of risk than loans secured by one- to four-family residences. This
greater risk is due to several factors, including the concentration of principal
in a limited number of loans and borrowers, the effects of general economic
conditions on income producing properties and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multi-family and
8
commercial real estate is typically dependent upon the successful operation of
the related real estate project. If the cash flow from the project is reduced
(for example, if leases are not obtained or renewed, or a bankruptcy court
modifies a lease term, or a major tenant is unable to fulfill its lease
obligations), the borrower's ability to repay the loan may be impaired.
Construction, Land and Land Development Lending
The Company makes construction loans to individuals for the
construction of their residences as well as to builders and developers for the
construction of one- to four-family residences, multi-family dwellings and
commercial real estate projects. At December 31, 1996, substantially all of
these loans were secured by property located within the Company's primary market
area. At December 31, 1996, the Company had $14.4 million in construction loans
outstanding, representing 8.60% of the Company's total loan portfolio.
Construction loans to individuals for their residences typically run
six to eight months and are generally structured to be converted to permanent
loans at the end of the construction phase. These construction loans are
fixed-rate loans, with interest rates higher than those offered on one- to
four-family loans by the Company. During the construction phase, the borrower
pays interest only. Residential construction loans are underwritten pursuant to
the same guidelines used for originating permanent residential loans. At
December 31, 1996, the Company had $4.2 million of construction loans to
borrowers intending to live in the properties upon completion of construction.
Construction loans to builders of one- to four-family residences have
terms of six to eight months and require the payment of interest only at a
fixed-rate for the loan term. The Company limits builders to one home at a time
but would consider requests for more than one if the homes are presold. At
December 31, 1996, the Company had $3.8 million of construction loans to
builders of one- to four-family residences.
Construction loans are made to builders of multi-family dwellings and
commercial projects with terms up to one year and requiring payment of interest
only at a fixed rate for the construction phase of the loan. These loans are
generally structured to be converted to one of the Company's permanent
commercial loan products at the end of the construction phase. At December 31,
1996, the Company had $6.4 million of loans to finance the construction of
multi-family dwellings and commercial projects.
The Company also makes loans to builders for the purpose of developing
one- to four-family lots and residential condominium projects. These loans
typically have terms of two to three years with interest rates tied to the
Company's base rate which is determined by a rate survey of a cross section of
local banks. The maximum loan to value ratio is 75%. The principal in these
loans is typically paid down as lots or units are sold. These loans may be
structured as revolving lines of credit with maturities of generally two years
or less. At December 31, 1996, the Company had $2.3 million of development loans
to builders. The Company also makes a limited number of land acquisition and
commercial real estate construction loans. At December 31, 1996, the Company had
$1.0 million in loans secured by land.
9
Construction and development loans are obtained principally through
continued business from developers and builders who have previously borrowed
from the Company, as well as referrals from existing customers and realtors, and
walk-in customers. The application process includes a submission to the Company
of accurate plans, specifications and costs of the project to be
constructed/developed which are used as a basis to determine the appraised value
of the subject property. Loans are based on the lesser of current appraised
value and/or the cost of construction (land plus building).
At December 31, 1996, the Company's largest construction and
development loan was a construction loan for a sports center with a $1.1 million
commitment and an aggregate outstanding balance of $357,000. The Company had no
non-performing construction loans at December 31, 1996.
Construction and land development loans generally present a higher
level of risk than loans secured by one- to four-family residences. Because of
the uncertainties inherent in estimating land development and construction costs
and the market for the project upon completion, it is relatively difficult to
evaluate accurately the total loan funds required to complete a project, the
related loan-to-value ratios and the likelihood of ultimate success of the
project. Construction and land development loans to borrowers other than
owner-occupants also involve many of the same risks discussed above regarding
multi-family and commercial real estate loans and tend to be more sensitive to
general economic conditions than many other types of loans.
Consumer Lending
The Company originates a variety of different types of consumer loans,
including home equity loans, direct automobile loans, home improvement loans,
credit card loans, deposit account loans and other secured and unsecured loans
for household and personal purposes. At December 31, 1996, consumer loans
totaled $9.8 million or 5.83% of total loans outstanding.
Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. The largest component
of consumer lending is home equity loans which totaled $7.4 million or 4.41% of
the total loan portfolio at December 31, 1996. The Company is currently offering
a revolving line of credit home equity loan on which the total commitment amount
may not exceed 95% of the appraised value of the property, with a five year term
and minimum monthly payment requirement of interest due only. The Company's home
equity loan portfolio also contains equity loans which were written so that the
total commitment amount, when combined with the balance of the first mortgage
lien, would not exceed 80% of the appraised value of the property. These loans
were revolving lines of credit with adjustable rates and had a ten year term
with a minimum monthly payment requirement of 2% of the unpaid balance; however,
as of July 1995 the Company was no longer originating such loans. At December
31, 1996, the Company had $7.8 million of unused credit available under its home
equity line of credit program.
The underwriting standards employed by the Company for consumer loans
include a determination of the applicant's payment history on other debts and
ability to meet existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is of primary consideration, the underwriting
process also includes a comparison of the value of the
10
security, if any, in relation to the proposed loan amount. Consumer loans may
entail greater credit risk than do residential mortgage loans, particularly in
the case of consumer loans which are unsecured or are secured by rapidly
depreciable assets, such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. In addition, consumer loan collections are
dependent on the borrower's continuing financial stability, and thus are more
likely to be affected by adverse personal circumstances. Furthermore, the
application of various federal and state laws, including bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans.
Commercial Business Lending
At December 31, 1996, $4.8 million or 2.87% of the Company's total
loans were comprised of commercial business loans. LSB's current commercial
business lending activities encompass predominantly unsecured lines of credit
and purchased leases secured by small business equipment such as copy and
facsimile machines. At December 31, 1996, the Company had $2.4 million of loans
secured by purchased leases through Bennett Funding Group ("Bennett"). See " -
Non- Performing Assets - Non-Accruing Loans." At December 31, 1996, the Company
had $499,000 of unsecured lines of credit outstanding with $253,000 of unused
credit available. During the early part of 1994, the Company hired an
experienced commercial loan officer to develop this area of lending, as well as
its commercial real estate portfolio. At December 31, 1996, the Company's
commercial business loans totaled $2.4 million compared to $1.3 million at
December 31, 1994 (excluding Bennett). The Company intends to continue to
increase its portfolio of commercial business loans.
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her employment and
other income and which are secured by real property the value of which tends to
be more easily ascertainable, commercial business loans typically are made on
the basis of the borrower's ability to make repayment from the cash flow of the
borrower's business. As a result, the availability of funds for the repayment of
commercial business loans may be substantially dependent on the success of the
business itself (which, in turn, is likely to be dependent upon the general
economic environment). The Company's commercial business loans are sometimes,
but not always, secured by business assets. However, the collateral securing the
loans may depreciate over time, may be difficult to appraise and may fluctuate
in value based on the success of the business.
The Company recognizes the generally increased risks associated with
commercial business lending. LSB's commercial business lending policy emphasizes
credit file documentation and analysis of the borrower's character, capacity to
repay the loan, the adequacy of the borrower's capital and collateral as well as
an evaluation of the industry conditions affecting the borrower. Analysis of the
borrower's past, present and future cash flows is also an important aspect of
LSB's credit analysis.
11
Loan Originations, Purchases and Sales
Real estate loans are originated by LSB's staff of salaried loan
officers and its residential mortgage loan originator who receive applications
from existing customers, walk-in customers, and referrals from realtors. All
types of loans may be originated in any of the Company's four offices.
While the Company originates both adjustable-rate and fixed-rate loans,
its ability to originate loans is dependent upon the relative customer demand
for loans in its market. Demand is affected by the interest rate environment.
Currently, all conforming fixed-rate residential mortgage loans with maturities
of 15 years and over are originated for sale in the secondary market. The
Company currently sells such loans primarily to FHLMC while retaining the
servicing rights. These loans are originated to satisfy customer demand and to
generate fee income and are sold to achieve the goals of the Company's
asset/liability management program.
When loans are sold, the Company retains the responsibility for
collecting and remitting loan payments, inspecting the properties, making
certain that insurance and real estate tax payments are made on behalf of
borrowers, and otherwise servicing the loans. The Company receives a servicing
fee for performing these services. The amount of servicing fees received by the
Company varies but is generally calculated at 3/8 of 1% per annum for ARMs, and
1/4 of 1% per annum for fixed-rate mortgage loans based on the outstanding
principal amount of the loans serviced. The Company services for others mortgage
loans that it originated and sold amounting to $39.1 million at December 31,
1996.
The Company purchases a limited amount of participation interests in
real estate loans from other financial institutions outside its primary market
area. The Company currently has loan participations in Indianapolis, Indiana,
Michigan and Illinois. The Company carefully reviews and underwrites all loans
to be purchased to insure that they meet the Company's underwriting standards.
In periods of rising interest rates, the Company's ability to originate
large dollar volumes of real estate loans may be substantially reduced or
restricted, with a resultant decrease in related fee income and operating
earnings. In addition, the Company's ability to sell loans may substantially
decrease as potential buyers reduce their purchasing activities.
12
The following table shows the loan and mortgage-backed security
origination, purchase, sale and repayment activities of the Company for the
periods indicated.
Year Ended December 31,
------------------------------
1994 1995 1996
---- ---- ----
(In Thousands)
Originations by type:
Adjustable rate:
Real estate - one- to four-family ..................... $ 12,361 $ 17,535 $ 15,050
- multi-family .......................... 3,274 5,544 7,872
- commercial ............................ 3,536 4,787 3,690
- construction, land and land development 1,310 1,710 48
Non-real estate - consumer ............................ 870 1,704 4,909
- commercial business ................... 631 -- 375
-------- -------- --------
Total adjustable-rate .......................... 21,982 31,280 31,944
-------- -------- --------
Fixed-rate:
Real estate - one- to four-family(1) .................. 8,458 18,009 21,538
- multi-family .......................... -- -- 344
- commercial ............................ 667 30 878
- construction, land and land development 5,526 14,661 14,117
Non-real estate - consumer ............................ 2,274 1,282 3,111
- commercial business ................... 999 3,565 5,778
-------- -------- --------
Total fixed-rate ............................... 17,924 37,547 45,766
-------- -------- --------
Total loans originated ......................... 39,906 68,827 77,710
-------- -------- --------
Purchases:
Real estate - one- to four-family ..................... -- -- 406
- multi-family .......................... -- 550 --
- commercial ............................ 600 416 51
Non-real estate - consumer ............................ -- -- --
- commercial business ................... -- -- --
-------- -------- --------
Total loans purchased .......................... 600 966 457
-------- -------- --------
Mortgage-backed securities (excluding
REMICs and CMOs) ..................................... 1,054 -- --
REMICs and CMOs ....................................... -- -- --
-------- -------- --------
Total mortgage-backed securities
purchased ..................................... 1,054 -- --
-------- -------- --------
Total purchases ................................ 1,654 966 457
-------- -------- --------
Sales and Repayments:
Real estate - one- to four-family ..................... 3,026 7,748 14,288
- multi-family .......................... -- -- --
- commercial ............................ -- 225 --
Non-real estate - consumer ............................. -- -- --
- commercial business ................... -- -- --
-------- -------- --------
Total loans sold ............................... 3,026 7,973 14,288
Principal repayments .................................. 16,861 28,301 37,062
-------- -------- --------
Total loans sold and repayments ................ 19,887 36,274 51,350
Mortgage-backed securities:
Principal repayments .................................. 3,079 714 738
Increase (decrease) in other items, net ................. (231) 249 (34)
-------- -------- --------
Net increase ................................... $ 18,363 $ 33,054 $ 26,045
======== ======== ========
- -------------
(1) Includes $0, $8.4 million and $6.8 million of loans originated during
1994, 1995 and 1996, respectively, which carry a fixed rate of interest
for the initial five or seven years and then convert to an adjustable
rate of interest for the remaining term of the loan.
13
Asset Quality
When a borrower fails to make a required payment on a loan, the Company
attempts to cause the delinquency to be cured by contacting the borrower. In the
case of residential loans, a late notice is sent for accounts seven or more days
delinquent. If the delinquency is not cured by the 15th day, the borrower will
be assessed a late charge. Additional written and oral contacts may be made with
the borrower between 20 and 30 days after the due date. If the delinquency
continues for a period of 60 days, the Company usually sends a default letter to
the borrower and, after 90 days, institutes appropriate action to foreclose on
the property. If foreclosed, the property is sold at public auction and may be
purchased by the Company. Delinquent consumer loans are handled in a generally
similar manner. The Company's procedures for repossession and sale of consumer
collateral are subject to various requirements under Indiana consumer protection
laws. The Company's levels of delinquent loans have not been significant in
recent years.
Delinquent Loans. The following table sets forth information concerning
delinquent loans at December 31, 1996, in dollar amounts and as a percentage of
each category of the Company's loan portfolio. The amounts presented represent
the total remaining principal balances of the related loans, rather than the
actual payment amounts which are overdue.
Loans Delinquent For:
--------------------------------------------------------------
60-89 Days 90 Days and Over Total Delinquent Loans
--------------------------- --------------------------- ---------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
Real Estate:
One- to four-family...... 4 $339 0.35% 2 $ 93 0.10% 6 $ 432 0.45%
Consumer.................. 2 10 0.10 --- --- --- 2 10 0.10
Commercial business........ --- --- --- 1 2,391 49.55 1 2,391 49.55
--- ------ --- ------- --- -------
Total 6 $349 0.21% 3 $2,484 1.48% 9 $2,833 1.69%
=== ==== === ====== === ======
14
Non-Performing Assets. The table below sets forth the amounts and
categories of non-performing assets. Interest income on loans is accrued over
the term of the loans based upon the principal outstanding except where serious
doubt exists as to the collectibility of a loan, in which case the accrual of
interest is discontinued. For all years presented, the Company has had no
troubled debt restructurings (which involve forgiving a portion of interest or
principal on any loans or making loans at a rate or with a maturity less than
that customary in the Company's market). Foreclosed assets include assets
acquired in settlement of loans. The loan amounts shown do not reflect reserves
set up against such assets. See "- Allowance for Loan Losses."
December 31,
-------------------------------------------------------------
1992 1993 1994 1995 1996
-------------------------------------------------------------
(Dollars in Thousands)
Non-accruing loans:
One- to four-family ...................... $ 194 $ 39 $ 39 $ -- $ 93
Construction ............................. 22 -- -- -- --
Consumer ................................. 7 7 6 -- --
Commercial business ...................... -- -- -- -- 2,391(1)
-------- -------- -------- ------------ --------
Total ............................... 223 46 45 -- 2,484
-------- -------- -------- ------------ --------
Accruing loans delinquent more than 90 days:
One- to four-family ...................... -- 21 -- -- --
-------- -------- -------- ------------ --------
Total ................................. -- 21 -- -- --
-------- -------- -------- ------------ --------
Total non-performing assets ................ $ 223 $ 67 $ 45 $ -- $ 2,484
======== ======== ======== ============ ========
Total as a percentage of total assets ...... 0.21% 0.06% 0.04% ---% 1.35%
======== ======== ======== ============ ========
Total assets ............................... $106,303 $110,697 $124,339 $ 158,973 $184,607
======== ======== ======== ============ ========
- -----------------
(1) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Comparison of Operating Results for the Years Ended December 31,
1995 and December 31, 1996 - Provision for Loan Losses" in the Annual Report for
a discussion on Bennett.
For the year ended December 31, 1996, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms was $185,000, none of which was included in interest
income.
Classified Assets. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities considered by the
Office of Thrift Supervision ("OTS") to be of lesser quality, as "substandard,"
"doubtful" or "loss." An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized by
the "distinct possibility" that the insured institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as "doubtful" have all
of the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the institution to sufficient risk to warrant
classification in one of the
15
aforementioned categories but possess weaknesses are required to be designated
"special mention" by management.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the OTS and the FDIC, which may order the establishment of
additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Bank regularly
reviews the problem assets in its portfolio to determine whether any assets
require classification in accordance with applicable regulations. At December
31, 1996, the Bank had classified $1.5 million of its loans as substandard
$844,000 as doubtful and none as loss. At December 31, 1996, the Bank had
designated $1.2 million in loans as special mention.
Other Loans of Concern. Included in other loans of concern are certain
potential problem loans which are classified as substandard or have been
categorized as special mention that management believes are adequately secured
and for which no material loss is expected, but as to which certain
circumstances may cause the borrowers to be unable to comply with the present
loan repayment terms at some future date. Such potential problem loans consist
primarily of (i) a single family residence and a multi-family residential rental
property to a single borrower with outstanding balances of $362,000 at December
31, 1996, to which management has concerns as to the cash flow of the borrower;
(ii) multiple loans to a single borrower secured by a retail store and the
personal residence of the borrower with an outstanding balance of $304,000 at
December 31, 1996 (which was restructured during 1988 whereby interest past due
was written as a separate note due and payable when the borrower's other
outstanding debt has been paid off), where the retail store is experiencing cash
flow problems; and (iii) multiple loans to a single borrower secured by one- to
four-family residential rental property and a multi-family residential rental
property with an outstanding balance of $297,000 at December 31, 1996, where
management has concerns about the cash flow of the borrower. The majority of the
remaining classified assets are single loans to borrowers for residential
property.
Allowance for Loan Losses. The Company establishes an allowance for
loan losses based on a systematic analysis of risk factors in the loan
portfolio. This analysis includes evaluation of concentrations of credit, past
loss experience, current economic conditions, amount and composition of the loan
portfolio, estimated fair value of the underlying collateral, loan commitments
outstanding, delinquencies, industry standards and other factors. Because the
Company has had only nominal loan losses during its recent past, management also
considers the loss experience of similar portfolios in comparable lending
markets as well as using the services of a consultant to assist in the
evaluation of its growing commercial real estate and business loan portfolios.
Management's analysis results in the allocation of allowance amounts to each
loan type. Although, management
16
believes it uses the best information available to make such determinations,
future adjustments to reserves may be necessary, and net income could be
significantly affected, if circumstances differ substantially from the
assumptions used in making the initial determinations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Results of Operations Provision for Loan Losses."
The following table sets forth an analysis of the Company's allowance
for loan losses.
Year Ended December
----------------------------------
1994 1995 1996
--------- ---------- ---------
(Dollars in Thousands)
Balance at beginning of period ....... $ 922 $ 926 $ 922
Charge-offs:
Consumer ........................... -- 6 7
------ ------ ------
Total Charge-offs ............... -- 6 7
------ ------ ------
Recoveries:
One- to four-family ................ 15 -- --
Consumer ........................... 4 2 --
------ ------ ------
Total recoveries ................ 19 2 --
------ ------ ------
Net charge-offs (recoveries) ......... (19) 4 7
Additions charged to operations ...... (15) -- 800
------ ------ ------
Balance at end of period ............. $ 926 $ 922 $1,715
====== ====== ======
Net charge-offs to average loans ..... -- -- ---%
outstanding
Allowance for loan losses to non- .... 2057.8% -- 60.5%
performing loans
Allowance for loan losses to net loans
at end of period .................... 0.94% 0.70% 1.08%
The allocation of the Company's allowance for losses on loans at the
dates indicated is summarized as follows:
17
December 31,
----------------------------------------------------------------------------------------------------
1994 1995 1996
------------------------------- ------------------------------- -------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- -------- -------- --------- -------- -------- --------- -------- --------
(Dollars in Thousands)
Real estate:
One- to four-family...... $ 221 $ 69,139 68.53% $ 262 $ 86,231 62.40% $ 146 $ 96,987 57.72
Multi-family............. 76 7,643 7.58 120 12,044 8.72 99 19,610 11.67
Commercial real estate... 138 10,712 10.62 181 15,034 10.88 128 19,032 11.33
Land and land
development............. 18 2,915 2.89 28 3,880 2.81 39 3,334 1.98
Construction............. 22 3,251 3.22 40 10,379 7.51 7 14,447 8.60
Consumer................. 32 4,620 4.58 36 6,048 4.37 51 9,808 5.84
Commercial business...... 29 2,614 2.59 51 4,570 3.31 997 4,825 2.87
Unallocated.............. 390 --- --- 204 --- --- 248 --- ---
----- -------- ------ ----- -------- ------ ------ -------- ------
Total................. $ 926 $100,894 100.00% $ 922 $138,186 100.00% $1,715 $168,043 100.00%
===== ======== ====== ===== ======== ====== ====== ======== ======
Investment Activities
LSB must maintain minimum levels of securities that qualify as liquid
assets under OTS regulations. Liquidity may increase or decrease depending upon
the availability of funds and comparative yields on investments in relation to
the return on loans. Historically, the Company has maintained liquid assets at
levels above the minimum requirements imposed by the OTS regulations and above
levels believed adequate to meet the requirements of normal operations,
including potential deposit outflows. Cash flow projections are regularly
reviewed and updated to assure that adequate liquidity is maintained. At
December 31, 1996 the Company's liquidity ratio (liquid assets as a percentage
of net withdrawable savings deposits and current borrowings) was 7.31%. The
Company's level of liquidity is a result of management's asset/liability
strategy. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset/Liability Management" and "-Liquidity and Capital
Resources" in the Annual Report and "Regulation - Liquidity."
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in investment grade
commercial paper and corporate debt securities and mutual funds whose assets
conform to the investments that a federally chartered savings institution is
otherwise authorized to make directly.
18
Generally, the investment policy of the Company is to invest funds
among various categories of investments and maturities based upon the Company's
asset/liability management policies, concern for the highest investment quality,
liquidity needs and performance objectives.
At December 31, 1996, the Company's securities portfolio (excluding
FHLB Stock) totaled $12.0 million, or 6.48% of total assets. As of such date,
the Bank also had a $2.6 million investment in the common stock of the Federal
Home Loan Bank ("FHLB") of Indianapolis in order to satisfy the requirement for
membership in such institution. It is the Company's general policy to purchase
securities which are U.S. Government securities, investment grade municipal and
corporate bonds, commercial paper, federal agency obligations, and
interest-bearing deposits with the FHLB.
The Company owned $4.0 million of mortgage-backed securities at
December 31, 1996, all of which were insured or guaranteed by the Federal
National Mortgage Association ("FNMA") or the FHLMC. Accordingly, management
believes that the Company's mortgage-backed securities are generally more
resistant to credit problems than loans, which generally lack such insurance or
guarantees. Because these securities represent a passthrough of principal and
interest from underlying individual 30-year mortgages, such securities do
present prepayment risk. Any such individual security contains mortgages that
can be prepaid at any time over the life of the security. In a rising interest
rate environment the underlying mortgages are likely to extend their lives
versus a stable or declining rate environment. A declining rate environment can
result in rapid prepayment. There is no certainty as to the security life or
speed of prepayment. The geographic makeup and correlated economic conditions of
the underlying mortgages also play an important role in determining prepayment.
In addition to prepayment risk, interest rate risk is inherent in holding any
debt security. As interest rates rise the value of the security declines and
conversely as interest rates decline values rise. Adjustable-rate
mortgage-backed securities have the advantage of moving their interest rate
within limits with the contractual index used, subject to the risk of
prepayment. Interest rate adjustments to $1.7 million of the Company's
adjustable-rate mortgage-backed securities are tied to a lagging index, the 11th
District cost of funds index, while $1.7 million are tied to a current index,
specifically, the six month or twelve month Treasury bill rates or the one month
or three month LIBOR rates. At December 31, 1996, 84.35% of the Company's
mortgage-backed securities consisted of adjustable-rate mortgage-backed
securities.
Mortgage-backed securities can serve as collateral for borrowings and,
through sales and repayments, as a source of liquidity. Under the Bank's
risk-based capital requirement, mortgage- backed securities have a risk weight
of 20% in contrast to the 50% risk weight carried by residential loans. See
"Regulation."
19
The following table sets forth the composition of the Company's
securities portfolio at the dates indicated.
December 31,
----------------------------------------------------------------------------
1994 1995 1996
----------------------- ------------------------ ---------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
-------- ----- -------- ----- -------- -----
Debt securities
Available for sale:
U.S. government securities................ $3,879 49.48% $1,994 22.25% $1,003 19.40%
Federal agency obligations................ 1,475 18.81 1,007 11.24 354 6.85
Municipal bonds........................... --- --- 1,703 19.00 984 19.03
Corporate bonds........................... --- --- 1,268 14.15 255 4.93
Commercial paper.......................... --- --- 1,489 16.62 --- ---
------- ------- ------- ------- ------ ------
Subtotal............................... 5,354 68.29 7,461 83.26 2,596 50.20
------- ------- ------- ------- ------ ------
Held to maturity:
Municipal bonds........................... 1,493 19.04 --- --- --- ---
Corporate bonds........................... 300 3.83 --- --- --- ---
------- ------- ------- ------- ------ ------
Subtotal............................... 1,793 22.87 --- --- --- ---
------- ------- ------- ------- ------ ------
FHLB stock.................................. 693 8.84 1,500 16.74 2,575 49.80
------- ------- ------- ------- ------ ------
Total debt securities and FHLB stock........ $7,840 100.00% $8,961 100.00% $5,171 100.00
====== ====== ====== ====== ====== ======
Average remaining life of debt securities... 1.02 years .58 years .58 years
Other interest-earning assets:
Interest-bearing deposits with FHLB....... $4,994 100.00% $3,595 100.00% $ 5,410 100.00%
====== ====== ====== ====== ======= ======
Mortgage-backed securities
Available for sale:
FNMA certificates......................... $2,910 52.46% $2,598 53.74% $ 2,166 54.84%
FHLMC certificates........................ 1,721 31.03 2,236 46.26 1,784 45.16
------- ------- ------- ------- ------ ------
Subtotal................................ 4,631 83.49 4,834 100.00 3,950 100.00
Held to maturity:
FHLMC certificates........................ 916 16.51 --- --- --- ---
------- ------- ------- ------- ------ ------
Total mortgage-backed securities....... $5,547 100.00% $4,834 100.00% $ 3,950 100.00%
====== ====== ====== ====== ======= =======
20
The following table sets forth the composition and contractual
maturities of the Company's securities portfolio at December 31, 1996. At
December 31, 1996, all of the Company's securities were classified as available
for sale. The weighted average yields on tax exempt obligations have been
computed on a tax equivalent basis.
December 31, 1996
-----------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over Total Investment
1 Year Years Years 10 Years Securities
-------- ------- ------- -------- -----------
Carrying Carrying Carrying Carrying Carrying Market
Value Value Value Value Value Value
-------- ------- ------- -------- -------- ------
(Dollars in Thousands)
U.S. government securities............ $ --- $1,003 $ --- $ --- $1,003 $1,003
Federal agency obligations............ 354 --- --- --- 354 354
Municipal bonds....................... 256 478 --- 250 984 984
Corporate bonds....................... 255 --- --- --- 255 255
FNMA certificates..................... --- --- --- 2,166 2,166 2,166
FHLMC certificates.................... --- 584 --- 1,200 1,784 1,784
-------- ------ ------- ------ ------ ------
Total investment securities............ $ 865 $2,065 $ --- 3,616 $6,546 $6,546
======== ====== ======= ===== ====== ======
Weighted average yield................. 5.71% 5.92% ---% 6.48% 6.01% 6.01%
Sources of Funds
General. The Company's primary sources of funds are deposits, repayment
and prepayment of loans, interest earned on or maturation of investment
securities and short-term investments, borrowings and funds provided from
operations.
Deposits. LSB offers a variety of deposit accounts. The Company's
deposits consist of passbook and statement savings accounts, money market
accounts, NOW accounts and certificate accounts. The Company only solicits
deposits from its primary market area and does not use brokers to obtain
deposits. The Company relies primarily on competitive pricing policies,
advertising, and customer service to attract and retain these deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition. The variety of deposit accounts offered by the Company has allowed
it to be competitive in obtaining funds and to respond with flexibility to
changes in consumer demand. The Company manages the pricing of its deposits in
keeping with its asset/liability management, profitability and growth
objectives. Based on its experience, the Company believes that its savings,
interest and noninterest-bearing checking accounts are relatively stable sources
of deposits. However, the ability of the Company to attract and maintain
certificates of deposit, and the rates paid on these deposits, has been and will
continue to be significantly affected by market conditions.
21
The following table sets forth the savings flows at the Company during
the periods indicated.
Year Ended December 31,
-------------------------------------
1994 1995 1996
--------- --------- ---------
(Dollars in Thousands)
Opening balance ........... $ 100,242 $ 107,764 $ 109,977
Deposits .................. 249,784 350,521 472,666
Withdrawals ............... (245,919) (353,169) (469,506)
Interest credited ......... 3,657 4,861 3,812
--------- --------- ---------
Ending balance ............ $ 107,764 $ 109,977 $ 116,949
========= ========= =========
Net increase (decrease) ... $ 7,522 $ 2,213 $ 6,972
========= ========= =========
Percent increase (decrease) 7.50% 2.05% 6.34%
========= ========= =========
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Company at the dates
indicated.
December 31
-----------------------------------------------------------------
1994 1995 1996
---------------------- ------------------ -----------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------- -------- ------ -------- ------ --------
(Dollars in Thousands)
Transaction and Savings Deposits:
Noninterest-bearing..................................... $ 2,517 2.33 $ 3,106 2.82% $ 4,127 3.53%
Savings accounts (3.05% at December 31, 1996).......... 20,676 19.17 12,050 10.95 12,538 10.71
NOW Accounts (0-2.47% at December 31, 1996)............. 8,513 7.89 11,341 10.30 11,664 9.97
Money Market Accounts (3.35-3.67% at
December 31, 1996).................................... 11,347 10.52 10,272 9.33 9,052 7.74
-------- ------- -------- ------- -------- ------
Total Non-Certificates.................................. 43,053 39.91 36,769 33.41 37,381 31.94
-------- ------- -------- ------- -------- ------
Certificates:
0.00 - 1.99%.......................................... --- --- --- --- --- ---
2.00 - 3.99%.......................................... 8,461 7.84 5 0.00 64 0.05
4.00 - 5.99%.......................................... 40,689 37.72 43,076 39.14 48,677 41.60
6.00 - 7.99%.......................................... 15,276 14.16 30,120 27.37 30,820 26.34
8.00 - and greater..................................... 285 0.26 7 0.01 7 0.01
-------- ------- -------- ------- -------- ------
Total certificates..................................... 64,711 59.99 73,208 66.52 79,568 67.99
Accrued interest....................................... 98 0.09 85 0.08 73 0.06
-------- ------- -------- ------- -------- ------
Total deposits......................................... $107,862 100.00 $110,062 100.00 $117,022 100.00%
======== ======= ======== ====== ======== ======
22
The following table shows rate and maturity information for the
Company's certificates of deposit as of December 31, 1996.
2.00- 4.00- 6.00- 8.00- Percent
3.99% 5.99% 7.99% or greater Total of Total
------- ------- ------- ----------- ------- ---------
(Dollars in Thousands)
Certificate accounts maturing
in quarter ending:
March 31, 1997...................... $ 25 $10,124 $2,337 $ --- $12,486 15.69%
June 30, 1997....................... 39 9,745 3,182 --- 12,966 16.30
September 30, 1997.................. --- 7,298 3,942 --- 11,240 14.13
December 31, 1997................... --- 5,039 2,047 --- 7,086 8.91
March 31, 1998...................... --- 3,539 1,449 --- 4,988 6.27
June 30, 1998....................... --- 4,212 2,038 --- 6,250 7.85
September 30, 1998.................. --- 2,826 7,537 --- 10,363 13.02
December 31, 1998................... --- 1,395 1,386 7 2,788 3.50
March 31, 1999...................... --- 1,571 277 --- 1,848 2.32
June 30, 1999....................... --- 438 3,621 --- 4,059 5.10
September 30, 1999.................. --- 618 689 --- 1,307 1.64
December 31, 1999................... --- 361 862 --- 1,223 1.54
Thereafter.......................... --- 1,511 1,453 --- 2,964 3.73
---- -------- ------- ----- ------- ------
Total............................ $ 64 $ 48,677 $30,820 $ 7 $79,568 100 00%
==== ======== ======= ===== ======= ======
Percent of total................. 0.08% 61.18% 38.73% 0.01% 100.00%
==== ===== ===== ==== ======
The following table indicates the amount of the Company's certificates
of deposit by time remaining until maturity as of December 31, 1996.
Maturity
-------------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
---------- -------- --------- ----------- -------
(In Thousands)
Certificates of deposit less than $100,000....... $12,360 $10,597 $17,533 $27,476 $67,966
Certificates of deposit of $100,000 or more...... 115 1,228 793 8,314 10,450
Public funds(1).................................. 11 1,141 --- --- 1,152
------- ------- ------- ------- -------
Total certificates of deposit.................... $12,486 $12,966 $18,326 $35,790 $79,568
======= ======= ======= ======= =======
- ----------
(1) Deposits from governmental and other public entities.
Borrowings. LSB's other available sources of funds include borrowings
from the FHLB of Indianapolis and other borrowings. As a member of the FHLB of
Indianapolis, the Company is required to own capital stock in the FHLB and is
authorized to apply for borrowings from the
23
FHLB. Each FHLB credit program has its own interest rate, which may be fixed or
variable, and have a range of maturities. The FHLB of Indianapolis may prescribe
the acceptable uses for these, as well as limitations on the size of the
borrowings and repayment provisions.
The Company utilizes FHLB borrowings as part of its asset/liability
management strategy in order to cost effectively extend the maturity of its
liabilities. The Company may be required to pay a commitment fee upon
application and may be subject to a prepayment fee if the advance is prepaid by
the Company. At December 31, 1996, the Company had $50.0 million in advances
from the FHLB and the capacity to borrow up to an additional $9.8 million. At
that date $32.0 million of such advances have scheduled maturities in 1997;
$15.0 million in 1998; and $3.0 million in 1999.
The following table sets forth the maximum month-end balance and
average balance of FHLB advances and other borrowings for the periods indicated.
Year Ended December 31,
----------------------------------------------
1994 1995 1996
------ ------ ------
(In Thousands)
Maximum Balance:
FHLB advances........................................... $ 7,500 $ 29,364 $ 50,000
Other borrowings........................................ 302 276 243
Average Balance:
FHLB advances........................................... $ 3,375 $ 17,947 $ 39,000
Other borrowings........................................ 291 263 234
The following table sets forth certain information as to the Company's
borrowings at the dates indicated.
Year Ended December 31,
----------------------------------------------
1994 1995 1996
------ ------ ------
(In Thousands)
FHLB advances........................................... $ 7,500 $29,364 $ 50,000
Other borrowings........................................ 278 250 220
--------- --------- ---------
Total borrowings................................... $ 7,778 $ 29,614 $ 50,220
======== ======== ========
Weighted average interest rate of FHLB advances......... 5.95% 5.90% 5.65%
Weighted average interest rate of other borrowings...... 5.50% 5.50% 5.50%
24
Subsidiary and Other Activities
Federal associations generally may invest up to 2% of their assets in
service corporations, plus an additional 1% of assets for community purposes. In
addition, federal associations may invest, in an amount up to 50% of their total
capital, in conforming loans to their service corporations in which they own
more than 10% of the capital stock. Federal associations are also permitted to
invest an unlimited amount in operating subsidiaries engaged solely in
activities which a federal association may engage in directly.
The Bank owns a single service corporation, L.S.B. Service Corporation
("LSBSC"). In April 1994, the Company made an initial investment of $51,000 in
L.S.B. Service Corporation when it became a 14.16% limited partner in a
low-income housing project in Lafayette, Indiana, pursuant to a 10 year
commitment totaling $500,000. In February 1995, the Company made a second
scheduled investment of $71,000 in the same project, followed by a third
scheduled investment of $67,000 in February of 1996. During 1996, LSBSC received
$39,000 in tax credit related to its investment in the low income housing
project discussed above and recorded a net profit of $18,000. At December 31,
1996, the Bank's total investment in LSBSC was $189,000.
The Bank formed Lafayette Insurance and Investments, Inc. ("LIII"), an
Indiana corporation, on December 31, 1996. LIII did not engage in any operations
during 1996; however, LIII is expected to begin offering various insurance,
annuity and investment products and services to the Bank's customers during
1997.
Competition
LSB faces strong competition, both in originating real estate and other
loans and in attracting deposits. Competition in originating real estate loans
comes primarily from other savings institutions, commercial banks, credit unions
and mortgage bankers making loans secured by real estate located in Tippecanoe
County, the Company's primary market area. Other savings institutions,
commercial banks, credit unions and finance companies provide vigorous
competition in consumer lending.
The Company attracts all of its deposits through its branch offices,
primarily from the communities in which those branch offices are located;
therefore, competition for those deposits is principally from other savings
institutions, commercial banks and credit unions located in the same communities
as well as mutual funds and other financial intermediaries. The Company competes
for these deposits by offering a variety of deposit accounts at competitive
rates, convenient business hours and convenient branch locations with
interbranch deposit and withdrawal privileges.
There are 12 other savings institutions and banks in LSB's primary
market area. The Company estimates its share of the savings market and mortgage
loans in Tippecanoe County to both be approximately 7%.
25
REGULATION
General
Lafayette is a federally chartered savings bank, the deposits of which
are federally insured and backed by the full faith and credit of the United
States Government. Accordingly, Lafayette is subject to broad federal regulation
and oversight extending to all its operations. Lafayette is a member of the FHLB
of Indianapolis and is subject to certain limited regulation by the Board of
Governors of the Federal Reserve System ("Federal Reserve Board"). As the thrift
holding company of Lafayette, the Company also is subject to federal regulation
and oversight. The purpose of the regulation of the Company and other holding
companies is to protect subsidiary savings associations. Lafayette is a member
of the BIF and the deposits of Lafayette are insured by the FDIC. As a result,
the FDIC has certain regulatory and examination authority over Lafayette.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations
The OTS has extensive authority over the operations of savings
associations. As part of this authority, Lafayette is required to file periodic
reports with the OTS and is subject to periodic examinations by the OTS and the
FDIC. The last regular OTS and FDIC examinations of Lafayette were as of
December 1994 and March 1992, respectively. When these examinations are
conducted by the OTS and the FDIC, the examiners may require Lafayette to
provide for higher general or specific loan loss reserves. All savings
associations are subject to a semi-annual assessment, based upon the savings
association's total assets, to fund the operations of the OTS. Lafayette's OTS
assessment for the year ended December 31, 1996 was $48,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including Lafayette and the Company.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of
Lafayette is prescribed by federal laws, and it is prohibited from engaging in
any activities not permitted by such laws. For instance, no savings institution
may invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also generally authorized
to branch nationwide. Lafayette is in compliance with the noted restrictions.
26
Lafayette's general permissible lending limit for loans-to-one-borrower
is equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
December 31, 1996, Lafayette's lending limit under this restriction was $2.3
million. See "Lending Activities - General."
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan. A failure to submit a plan or to comply
with an approved plan will subject the institution to further enforcement
action. The OTS and other federal banking agencies have also proposed additional
guidelines on asset quality and earnings standards. No assurance can be given as
to whether or in what form the proposed regulations will be adopted.
Insurance of Accounts and Regulation by the FDIC
Lafayette is a member of the BIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the United States Government. As insurer,
the FDIC imposes deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC-insured institutions. It also
may prohibit any FDIC-insured institution from engaging in any activity the FDIC
determines by regulation or order to pose a serious risk to the BIF or the
Savings Association Insurance Fund (the "SAIF"). The FDIC also has the authority
to initiate enforcement actions against savings associations, after giving the
OTS an opportunity to take such action, and may terminate the deposit insurance
if it determines that the institution has engaged in unsafe or unsound
practices, or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period.
As is the case with the SAIF, the FDIC is authorized to adjust the
insurance premium rates for banks that are insured by the BIF, such as
Lafayette, in order to maintain the reserve ratio of the BIF at 1.25% of BIF
insured deposits. As a result of the BIF reaching its statutory reserve ratio
the FDIC revised the premium schedule for BIF insured institutions to provide a
range of .04% to .31% of deposits effective in the third quarter of 1995. In
addition, the BIF rates were further revised, effective January 1996, to provide
a range of 0% to .27% with a minimum annual assessment of $2,000. The insurance
premiums paid by institutions insured by the SAIF were not adjusted,
27
however, and remained at the range previously applicable to both BIF and SAIF
insured institutions which was .23% to .31% of deposits. In addition, BIF
insured institutions are required to contribute to the cost if financial bonds
issued to finance the cost of resolving thrift failures in the 1980s. Until the
earlier of the year 2000 or when the BIF and SAIF are merged BIF deposits will
only be assessed at a rate of 20% of the rate for SAIF deposits. The rate
currently set for BIF and SAIF deposits is 1.3 basis points and 6.5 basis
points, respectively.
On September 30, 1996 federal legislation was enacted that required the
SAIF to be recaptalized with a one-time assessment on virtually all SAIF insured
institutions, equal to 65.7 basis points on SAIF insured deposits maintained by
those institutions as of March 31, 1995.
Regulatory Capital Requirements
Federally insured savings associations, such as Lafayette, are required
to maintain a minimum level of regulatory capital. The OTS has established
capital standards, including a tangible capital requirement, a leverage ratio
(or core capital) requirement and a risk-based capital requirement applicable to
such savings associations. These capital requirements must be generally as
stringent as the comparable capital requirements for national banks. The OTS is
also authorized to impose capital requirements in excess of these standards on
individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets. Tangible capital generally includes common stockholders'
equity and retained income, and certain noncumulative perpetual preferred stock
and related income. In addition, all intangible assets, other than a limited
amount of purchased mortgage servicing rights, must be deducted from tangible
capital. At December 31, 1996, the Company did not have any significant
intangible assets.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. The Bank had no
such excludable investments at December 31, 1996.
At December 31, 1996, Lafayette had tangible capital of $15.1 million,
or 8.23% of adjusted total assets, which is $12.4 million above the minimum
requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At December 31, 1996,
Lafayette had no intangibles which were subject to these tests.
28
At December 31, 1996, Lafayette had core capital equal to $15.1
million, or 8.23% of adjusted total assets, which is $9.6 million above the
minimum leverage ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At December 31, 1996, Lafayette had
no capital instruments that qualify as supplementary capital and $1.5 million of
general loss reserves, all of which currently qualifies as supplementary
capital.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. Lafayette had no such
exclusions from capital and assets at December 31, 1996
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.
OTS regulations also require that every savings association with more
than normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings association, greater than 2% of the present value of its
assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule will not become effective until the OTS
evaluates the process by which savings associations may appeal an interest rate
risk deduction determination. It is uncertain as to when this evaluation may be
completed. Any savings association with less than $300 million in assets and a
total capital ratio in excess of 12% is exempt from this requirement unless the
OTS determines otherwise.
On December 31, 1996 Lafayette had total capital of $16.6 million
(including $15.1 million in core capital and $1.5 million in qualifying
supplementary capital) and risk-weighted assets of $133.6 million (including
$13.6 million in converted off-balance sheet assets); or total capital of 12.44%
of risk-weighted assets. This amount was $5.9 million above the 8% requirement
in effect on that date.
29
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized.
Any undercapitalized association is also subject to the general
enforcement authority of the OTS and the FDIC, including the appointment of a
conservator or a receiver. The OTS is also generally authorized to reclassify an
association into a lower capital category and impose the restrictions applicable
to such category if the institution is engaged in unsafe or unsound practices or
is in an unsafe or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on
Lafayette may have a substantial adverse effect on Lafayette's operations and
profitability and the value of its common stock. Company shareholders do not
have preemptive rights, and therefore, if the Company is directed by the OTS or
the FDIC to issue additional shares of common stock, such issuance may result in
the dilution in the percentage of ownership of the Company.
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions on savings associations
with respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit a
savings association from declaring or paying any dividends or from repurchasing
any of its stock if, as a result, the regulatory capital of the association
would be reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to stock conversion.
30
Generally, savings associations, such as Lafayette, that before and
after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of their net income for the most recent four quarter
period. However, an association deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted by the OTS.
The Bank may pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distributions need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not, meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day notice period based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
supervisory concern, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
Liquidity
All savings associations, including Lafayette, are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. For a discussion of what the Company
includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
in the Annual Report to Stockholders. This liquid asset ratio requirement may
vary from time to time (between 4% and 10%) depending upon economic conditions
and savings flows of all savings associations. At the present time, the minimum
liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio
31
requirement. At December 31, 1996, Lafayette was in compliance with both
requirements, with an overall liquid asset ratio of 7.31% and a short-term
liquid assets ratio of 6.36%.
Qualified Thrift Lender Test
All savings associations, including Lafayette, are required to meet a
qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings association to have at least 65% of its
portfolio assets (as defined by regulation) in qualified thrift investments on a
monthly average for nine out of every 12 months on a rolling basis. As an
alternative, the savings association may maintain 60% of its assets in those
assets specified in Section 7701(a)(19) of the Internal Revenue Code of 1986, as
amended, (the "Code"). Under either test, such assets primarily consist of
residential housing related loans and investments. At December 31, 1996,
Lafayette met the test and has always met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of
Lafayette, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by Lafayette.
An unsatisfactory rating may be used as the basis for the denial of an
application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA in 1995. Due to the heightened attention being given to
the CRA in the past few years, the Bank may be required to
32
devote additional funds for investment and lending in its local community. The
Bank was examined for CRA compliance in April 1996 and received a rating of
outstanding.
Transactions with Affiliates
Generally, transactions between a savings association or its
subsidiaries and its affiliates are required to be on terms as favorable to the
association as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the association's capital. Affiliates of Lafayette include the Company and any
company which is under common control with Lafayette. In addition, a savings
association may not lend to any affiliate engaged in activities not permissible
for a bank holding company or acquire the securities of most affiliates.
Lafayette's subsidiaries are not deemed affiliates, however; the OTS has the
discretion to treat subsidiaries of savings associations as affiliates on a case
by case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation
The Company is a unitary thrift holding company subject to regulatory
oversight by the OTS. As such, the Company is required to register and file
reports with the OTS and is subject to regulation and examination by the OTS. In
addition, the OTS has enforcement authority over the Company and its non-savings
association subsidiaries which also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
association.
As a unitary thrift holding company, the Company generally is not
subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple thrift
holding company, and the activities of the Company and any of its subsidiaries
(other than Lafayette or any other savings association) would become subject to
such restrictions unless such other associations each qualify as a QTL and were
acquired in a supervisory acquisition.
If Lafayette fails the QTL test, the Company must obtain the approval
of the OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
thrift holding companies or their subsidiaries. In addition, within one year of
such failure the Company must register as, and will become subject to, the
restrictions applicable to bank holding companies. The activities authorized for
a bank holding company are more limited than are the activities authorized for a
unitary or multiple thrift holding company. See "--Qualified Thrift Lender
Test."
The Company must obtain approval from the OTS before acquiring control
of any savings association. Such acquisitions are generally prohibited if they
result in a multiple thrift holding company controlling savings associations in
more than one state. However, such interstate
33
acquisitions are permitted based on specific state authorization or in a
supervisory acquisition of a failing savings association.
Federal Securities Law
The stock of the Company is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is
subject to the information, proxy solicitation, insider trading restrictions and
other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to
maintain non-interest-bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts).
At December 31, 1996, Lafayette was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements that
may be imposed by the OTS. See "--Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
Lafayette is a member of the FHLB of Indianapolis, which is one of 12
regional FHLBs, that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures, established
by the board of directors of the FHLB which are subject to the oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.
As a member, Lafayette is required to purchase and maintain stock in
the FHLB of Indianapolis. At December 31, 1996, Lafayette had $2.6 million in
FHLB stock, which was in compliance with this requirement. In past years,
Lafayette has received substantial dividends on its FHLB stock. Over the past
five calendar years such dividends have averaged 8.03% and were 7.67% for
calendar year 1996. For the year ended December 31, 1996, dividends paid by the
FHLB of
34
Indianapolis to Lafayette totaled $157,000, which constitutes a $77,000 increase
from the amount of dividends received in calendar year 1995.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies
targeted for community investment and low- and moderate-income housing projects.
These contributions have affected adversely the level of FHLB dividends paid and
could continue to do so in the future. These contributions could also have an
adverse effect on the value of FHLB stock in the future. A reduction in value of
Lafayette's FHLB stock may result in a corresponding reduction in Lafayette's
capital.
Federal and State Taxation
Savings associations such as the Bank that meet certain definitional
tests relating to the composition of assets and other conditions prescribed by
the Code had been permitted to establish reserves for bad debts and to make
annual additions thereto which may, within specified formula limits, be taken as
a deduction in computing taxable income for federal income tax purposes. The
amount of the bad debt reserve deduction for "non-qualifying loans" was computed
under the experience method. The amount of the bad debt reserve deduction for
"qualifying real property loans" (generally loans secured by improved real
estate) may be computed under either the experience method or the percentage of
taxable income method (based on an annual election).
Under the experience method, the bad debt reserve deduction was an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
The percentage of specially computed taxable income that was used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") was 8%. The
percentage bad debt deduction thus computed was reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permits qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction).
Under the percentage of taxable income method, the percentage bad debt
deduction cannot exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for "non-qualifying loans" equals the amount by
which 12% of the amount comprising savings accounts at year-end exceeds the sum
of surplus, undivided profits and reserves at the beginning of the year.
In August 1996, legislation was enacted that repeals the reserve
method of accounting (including the percentage of taxable income method) used by
many thrifts, including the Bank, to calculate their bad debt reserve for
federal income tax purposes. As a result, thrifts such as the Bank
35
must recapture that portion of the reserve that exceeds the amount that could
have been taken under the specific charge-off method for post 1987 tax years.
The legislation also requires thrifts to account for bad debts for federal
income tax purposes on the same basis as commercial banks for tax years
beginning after December 31, 1995. The recapture will occur over a six year
period, the commencement of which will be delayed until the first taxable year
beginning after December 31, 1997, provided the institution meets certain
residential lending requirements. The management of the Company does not believe
that the legislation will have a material impact on the Company or the Bank.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of December 31, 1995, the Bank's Excess for tax purposes totaled
approximately $2.3 million.
The Company with the Bank and its subsidiary files consolidated
federal income tax returns on a calendar year basis using the accrual method of
accounting. Savings associations that file federal income tax returns as part of
a consolidated group are required by applicable Treasury regulations to reduce
their taxable income for purposes of computing the percentage bad debt deduction
for losses attributable to activities of the non-savings association members of
the consolidated group that are functionally related to the activities of the
savings association member.
Neither the Company or the Bank have been audited by the IRS during the
last five fiscal years.
Indiana Taxation. The State of Indiana imposes an 8.5% franchise tax on
corporations transacting the business of a financial institution in Indiana,
exempting them from gross income, supplemental net income and intangible taxes.
Included in the definition of corporation's transacting the business of a
financial institution in Indiana are holding companies of thrift institutions,
as well as thrift institutions. Net income for franchise tax purposes will
constitute federal taxable income before net operating loss deductions and
special deductions, adjusted for certain items, including
36
Indiana income taxes and bad debts. Other applicable Indiana taxes include
sales, use and property taxes.
Executive Officers
The following information as to the business experience during the past
five years is supplied with respect to executive officers of the Company. Except
as otherwise indicated, the persons named have served as officers of the Company
since it became the holding company of the Bank and all positions described
below are with the Bank. There are no arrangements or understandings between the
persons named and any other person pursuant to which such officers were
selected.
John W. Corey. Mr. Corey, age 62 was elected as President, Chief
Executive Officer and Director of the Bank in 1991. From 1987 to 1991, he was
President and Chief Executive Officer of Ludington Savings Bank, FSB in
Ludington, Michigan.
Harry A. Dunwoody. Mr. Dunwoody, age 50, has served as Senior Vice
President of the Bank since 1989 and was elected as a Director in 1993. He is
responsible for the lending functions of the Bank.
Mary Jo David. Ms. David, age 47, is Vice President, Chief Financial
Officer and Secretary-Treasurer of the Bank, positions she has held since 1992.
She joined the Bank in 1985.
Employees
At December 31, 1996, the Company had a total of 63 employees,
including five part-time employees. The Company's employees are not represented
by any collective bargaining group. Management considers its employee relations
to be good.
Item 2. Description of Property
The Company conducts its business at its main office and three other
locations in Lafayette and West Lafayette, Indiana. The Company owns its main
office and two branch offices. The second branch office is leased. The total net
book value of the Company's premises and equipment (including land, building and
leasehold improvements and furniture, fixtures and equipment) at December 31,
1996 was approximately $4.6 million. The Company believes that its current
facilities are adequate to meet the present and foreseeable needs of the
Company. See Note 5 of the Notes to Consolidated Financial Statements in the
Annual Report.
The Company maintains an on-line data base of depositor and borrower
customer information. The net book value of the data processing and computer
equipment and software utilized by the Company at December 31, 1996 was
$362,000.
Item 3. Legal Proceedings
LSB, from time to time, is involved as plaintiff or defendant in
various legal actions arising in the normal course of business. While the
ultimate outcome of these proceedings cannot be
37
predicted with certainty, it is the opinion of management, after consultation
with counsel representing LSB in the proceedings, that the resolution of any
prior and pending proceedings should not have a material effect on the Company's
financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1996.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Inside back cover of the Company's 1996 Annual Report to Stockholders
is herein incorporated by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
Pages 4 through 17 of the Company's 1996 Annual Report to Stockholders
is herein incorporated by reference.
Item 7. Financial Statements
Pages 18 through 42 of the Company's 1996 Annual Report to Stockholders
are herein incorporated by reference.
Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change in
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
Item 9. Directors and Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Directors
Information concerning Directors of the Company is incorporated herein
by reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in April 1997, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
38
Executive Officers
Information concerning Executive Officers is contained in Part I of
this Form 10-KSB.
Compliance with Section 16(a)
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10% of
a registered class of the Company's equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Officers, directors and greater than
10% stockholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file.
To the Corporation's knowledge, based solely on a review of the copies
of such reports furnished to the Corporation and written representations that no
other reports were required, all Section 16(a) filing requirements applicable to
its officers, directors and greater than 10 percent beneficial owners were
complied with during the fiscal year ended December 31, 1996, except for
Director Shen who failed to file on a timely basis a Form 4 reporting his
acquisitions of 1,000 shares of Common Stock on November 24, 1995. In April
1996, Director Shen filed the required form to correct this oversight.
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held in April 1997, a copy of which will be filed not
later than 120 days after the close of the fiscal year.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Company's definitive
Proxy Statement for the Annual Meeting of Stockholders to be held in April 1997,
a copy of which will be filed not later than 120 days after the close of the
fiscal year.
Item 12. Certain Relationships and Related Transactions
Information concerning certain relationships and transactions is
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders to be held in April 1997, a copy of which
will be filed not later than 120 days after the close of the fiscal year.
39
PART IV
Item 13. Exhibits and Reports on 8-K
(a) Exhibits:
Reference to
Prior Filing
Regulation or Exhibit
S-K Exhibit Number Attached
Number Document Hereto
- ----------- -------- ---------------
2 Plan of acquisition, reorganization, arrangement, liquid, or succession None
3 Articles of Incorporation and Bylaws.................................... *
4 Instruments defining the rights of security holders,
including indentures:
Common Stock Certificate............................................... *
9 Voting trust agreement.................................................. None
10 Material contracts:
Employee Stock Ownership Plan.......................................... *
Stock Option and Incentive Plan........................................ *
Severance Agreements................................................... *
Recognition and Retention Plan......................................... *
401(k) Retirement/Savings Plan......................................... *
11 Statement re computation of per share earnings.......................... **
13 Annual Report to Security Holders....................................... 13
16 Letter on change in certifying accountant............................... None
18 Letter on change in accounting principles............................... None
21 Subsidiaries of Registrant.............................................. 21
22 Published report regarding matters submitted to vote of security holders None
23 Consent of Experts and Counsel.......................................... 23
24 Power of Attorney....................................................... Not required
27 Financial Data Schedule................................................. 27
99 Additional Exhibits None
- --------------------
*Filed on September 21, 1994 as exhibits to the Registrant's
Registration Statement No. 33-84266 on Form S-1. All of such previously filed
documents are hereby incorporated herein by reference in accordance with Item
601 of Regulation S-B.
**See Note 13 of the Notes to Consolidated Financial Statements
included in the Annual Report under Exhibit 13.
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the three-month period
ended December 31, 1996.
40
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LSB FINANCIAL CORP.
Date: March 28, 1997 By: (s) John W. Corey
-------------------- -----------------------------------------
John W. Corey, President, Chief Executive
Officer and Director
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Mariellen M. Neudeck /s/ John W. Corey
- --------------------------------------------------- ---------------------------------------------
Mariellen M. Neudeck, Chairman of the Board John W. Corey, President, Chief Executive
Officer and Director
(Principal Executive and Operating Officer)
Date: March 28, 1997 Date: March 28, 1997
---------------------------------------------- -----------------------------------------
/s/ Harry A. Dunwoody
- --------------------------------------------------- -----------------------------------------------
Harry A. Dunwoody, Senior Vice President James A. Andrew, Director
and Director
Date: March 28, 1997 Date:
---------------------------------------------- -----------------------------------------
/s/ Philip W. Kemmer /s/ Peter Neisel
- --------------------------------------------------- -----------------------------------------------
Philip W. Kemmer, Director Peter Neisel, Director
Date: March 28, 1997 Date: March 28, 1997
---------------------------------------------- -----------------------------------------
/s/ Jeffrey A. Poxon /s/ Thomas L. Ryan
- --------------------------------------------------- -----------------------------------------------
Jeffrey A. Poxon, Director Thomas L. Ryan, Director
Date: March 28, 1997 Date: March 28, 1997
---------------------------------------------- -----------------------------------------
/s/ John C. Shen /s/ C. Wesley Shook
- --------------------------------------------------- -----------------------------------------------
John C. Shen, Director C. Wesley Shook, Director
Date: March 28, 1997 Date: March 28, 1997
---------------------------------------------- -----------------------------------------
/s/ Mary Jo David
- ---------------------------------------------------
Mary Jo David, Vice President, Chief Financial
Officer and Secretary-Treasurer
(Principal Financial and Accounting Officer)
Date: March 28, 1997
-----------------------------------------------
INDEX TO EXHIBITS
Exhibit
Number
11 Statement re Computation of Earnings Per Share (See Note 13 of
the Notes to Consolidated Financial Statements included in the
Annual Report to Security Holders attached hereto as Exhibit
13)
13 Annual Report to Security Holders
21 Subsidiaries of the Registrant
23 Consents of Experts and Counsel
27 Financial Data Schedule