LSB FINANCIAL CORP.
TABLE OF CONTENTS
Letter to Stockholders............................. 2
Selected Financial Information..................... 3
Management's Discussion and Analysis .............. 5
Auditors' Report . ................................ 19
Consolidated Financial Statements.................. 20
Directors and Executive Officers................... 39
Stockholder Information ........................... 40
FINANCIAL HIGHLIGHTS
December 31, 1996
(Dollars in Thousands)
Total assets............................... $184,607
Total loans................................ 159,216
Securities and other
earning assets............................ 11,956
Deposits................................... 116,949
Borrowings................................. 50,220
Net income................................. 876
Shareholders' equity....................... 16,796
Shareholders' equity as percent of
assets.................................... 9.10%
------------------------------------
ANNUAL MEETING
The Annual Meeting of Stockholders of LSB
Financial Corp. will be held April 16, 1997 at 9:00
A.M. at the Riehle Plaza, located at 200 N. Second
Street, Lafayette, Indiana.
------------------------------------
LSB
FINANCIAL [LOGO]
CORP.
March 18, 1997
Dear Fellow Shareholder:
We are pleased to send you this annual report containing the results
of our second year as a stock company. To effectively utilize the capital
invested by our shareholders, our strategy continues to be to prudently grow the
size of the Bank. This is being done by increasing our loan portfolio using both
funds deposited by our customers as well as additional borrowings when needed to
take advantage of lending opportunities. The success of this strategy in 1996
was demonstrated as assets increased 16.7% since December 31, 1995, and net
interest income increased 18.9% over 1995.
Our continuing goal is to maximize long-term shareholder value by
appropriately balancing profitability, growth, quality and productivity. We
believe that we can best accomplish this goal as an independent,
community-oriented financial institution. We will continue working to earn the
support of Tippecanoe County and the Greater Lafayette area, investing locally
to stimulate community progress, providing an attractive and stable work
environment, and by using bank staff who are members of this community to make
decisions concerning our customers in this community.
The Company's stock performed well in 1996. We experienced, however, a
small setback in our plan to increase our post-conversion return on equity due
to a loan secured by equipment leases which had to be placed in non-accrual
status. We increased the Bank's allowance for loan losses to provide for our
estimate of the potential loss on such leases and believe 1997 will show an
acceptable resolution to this problem. We're pleased to note that the asset
quality of the remainder of our loan portfolio remains high, with non-performing
loans totaling only 0.2% of total assets.
A primary strategy this year will be to fund more of our new loans
with deposits from our customers and correspondingly less with other borrowings.
To that end, our efforts will be directed toward increasing our market share of
deposits in the community while managing the overall cost of money. We offer a
very competitive menu of deposit products. I invite you, as stockholders with a
vested interest, to give us the opportunity to work with you regarding your
savings and investment needs.
To further enhance shareholder value, we are in the process of
completing our third stock repurchase program. This repurchase involves the
repurchase of over 45,000 shares and should further increase shareholder value.
Overall, our core earnings continue to grow and we look forward to continued
progress.
Thank you for your continuing support.
Sincerely,
/s/ John W. Corey
- ----------------------------------------
John W. Corey
President and Chief Executive Officer
1
SELECTED FINANCIAL INFORMATION
The following financial information does not purport to be complete
and is qualified in its entirety by reference to the more detailed financial
information contained elsewhere herein.
December 31,
-------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Selected Financial Condition Data:
Total assets......................................... $106,303 $110,685 $124,339 $158,973 $184,607
Loans receivable, net................................ 73,490 78,158 98,602 132,433 159,216
Available-for-sale securities........................ --- --- 9,985 12,295 6,546
Short-term investments............................... 28,871 25,674 7,703 3,595 5,410
Deposits............................................. 97,213 100,242 107,764 109,977 116,949
Total borrowings..................................... 1,700 2,005 7,778 29,614 50,220
Shareholders' equity (net)........................... 6,942 7,819 8,208 18,068 16,796
December 31,
-------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Selected Operations Data:
Total interest income................................ $ 8,414 $ 7,851 $ 7,979 $ 10,744 $ 13,247
Total interest expense............................... 5,391 4,618 4,442 5,937 7,530
-------- -------- -------- -------- --------
Net interest income............................... 3,023 3,233 3,537 4,807 5,717
Provision for loan losses............................ (107) --- (15) --- 800(1)
-------- -------- -------- -------- --------
Net interest income after provision for loan losses.. 3,130 3,233 3,552 4,807 4,917
Deposit account service charges...................... 85 84 154 239 326
Gain (loss) on sales of mortgage loans............... 116 259 13 68 184
Gain (loss) on sales of securities................... --- --- 6 --- 7
Other non-interest income............................ 150 137 117 322 178
-------- -------- -------- -------- --------
Total non-interest income............................ 351 480 290 629 695
Total non-interest expense........................... 2,321 2,597 3,012 3,470 4,186
-------- -------- -------- -------- --------
Income before taxes and accounting change............ 1,160 1,116 830 1,966 1,426
Taxes................................................ 379 414 265 724 550
Accounting change.................................... --- 175 --- --- ---
-------- -------- -------- -------- --------
Net income........................................... $ 781 $ 877 $ 565 $ 1,242 $ 876
======== ======== ======= ======= ========
- --------
1See "Provision for Loan Losses" for discussion of Bennett Funding Group.
2
December 31,
--------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income
to average total assets)........................... 0.75% 0.80% 0.49% 0.87% 0.51%
Return on equity (ratio of
net income to average equity)...................... 11.82 11.65 7.07 7.30 5.16
Earnings per share N/A N/A N/A 1.30 1.00
Interest rate spread information:
Average during period............................... 2.70 2.87 3.15 3.17 3.27
Net interest margin(1).............................. 2.98 3.07 3.26 3.56 3.52
Operating expense to average total
assets............................................. 2.22 2.38 2.61 2.43 2.43
Average interest-earning assets to
average interest-bearing liabilities............... 1.05x 1.05x 1.02x 1.09x 1.05x
Quality Ratios:
Non-performing assets to total assets
at end of period................................... 0.21% 0.06% 0.04% 0.00% 1.53%
Allowance for loan losses to
non-performing loans............................... 410.76 1376.12 2057.78 N/A 60.54
Allowance for loan losses to loans
receivable, net.................................... 1.23 1.17 0.94 0.70 1.08
Capital Ratios:
Shareholders' equity to total assets
at end of period.................................... 6.53 7.06 6.60 11.37 9.10
Average shareholders' equity to
average total assets................................ 6.33 6.88 6.92 11.92 9.88
Other Data:
Number of full-service offices....................... 2 3 3 3 4
(1) Net interest income divided by average interest-earning assets.
3
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
On February 3, 1995, LSB Financial Corp. ("LSB" or the "Company"), an
Indiana corporation, became the holding company of Lafayette Savings Bank, FSB
("Lafayette" or the "Bank"). Lafayette is a federally chartered stock savings
bank headquartered in Lafayette, Indiana. The principal asset of the Company is
the outstanding stock of the Bank, its wholly-owned subsidiary. The Company
presently has no separate operations and its business consists only of the
business of the Bank. All references to the Company, unless otherwise indicated,
at or before February 3, 1995, refer to the Bank.
Forward Looking Statements
Certain statements in this report that relate to LSB Financial Corp.'s
plans, objectives or future performance may be deemed to be forward-looking
statements within the meaning of the Private Securities Litigation Act of 1995.
Such statements are based on Management's current expectations. Actual
strategies and results in future periods may differ materially from those
currently expected because of various risks and uncertainties. Additional
discussion of factors affecting LSB Financial's business and prospects is
contained in the Company's periodic filings with the Securities and Exchange
Commission.
Business Strategy
LSB has been, and intends to continue to be, a community-oriented
financial institution. The primary business of the Company consists of
attracting deposits from the general public and using these deposits to provide
financing for the purchase and construction of residential and other properties.
The Company's results of operations, therefore, are dependent primarily on net
interest income, which is the difference between the interest income earned on
the Company's loan, mortgage-backed and investment securities portfolios and its
cost of funds, which consists of interest expense incurred on deposits and
borrowings. Net interest income is directly affected by the relative amounts of
interest-earning assets and interest-bearing liabilities and the interest rates
earned or paid on such amounts. The Company's operating results are also
affected by the level of the provision for loan losses, by the level of
non-interest income, including gains and losses on the sale of loans, and
non-interest expenses. The Company's non-interest expenses consist principally
of employee compensation, occupancy expenses, and other general and
administrative expenses.
Significant external factors impacting the Company's results of
operations include the general economic environment, changes in the level of
market interest rates, government policies, actions by regulatory authorities
and competition. LSB's cost of funds is influenced by interest rates on
competing investments and general market rates of interest. Lending activities
are influenced by the demand for real estate loans and other types of loans,
which are in turn affected by the interest rates
4
at which such loans are made, general economic conditions affecting loan demand
and the availability of funds for lending activities.
The Company's basic mission is to maintain its focus as an
independent, community oriented financial institution serving customers in its
market area. The Board of Directors has sought to accomplish this mission
through the adoption of a strategy intended to maintain a strong capital
position and high asset quality, manage the Company's vulnerability to changes
in interest rates, optimize the Company's net interest margin and achieve
controlled asset growth. Key components of this strategy have been (i)
emphasizing one- to four-family residential mortgage lending, (ii) supplementing
residential lending with multi-family, consumer and construction loans, (iii)
expanding commercial business lending functions, (iv) emphasizing adjustable
rate and/or short term loans and investments and (v) gradually building its core
deposit base.
The results of the Company's business strategy may be illustrated as
follows:
o One- to four-family loans increased from $69.1 million at
December 31, 1994 to $97.0 million at December 31, 1996.
o Multi-family, land and land development, construction and consumer
loans increased from $18.5 million at December 31, 1994 to
$47.2 million at December 31, 1996.
o Commercial real estate and commercial business loans increased from
$13.3 million at December 31, 1994 to $23.9 million at
December 31, 1996.
o At December 31, 1996, 65.26% of the Company's gross loan portfolio
had adjustable interest rates.
o Non-certificate savings, checking and NOW accounts (excluding
money market accounts and after being adjusted for $6.9 million in
stock subscription funds held at December 31, 1994) remained at
nearly 25% of deposits, decreasing slightly from 24.54% of total
deposits at December 31, 1994 to 24.21% at December 31, 1996.
Financial Condition
The size of the Company's loan portfolio increased from $98.6 million
at December 31, 1994 to $159.2 million at December 31, 1996, an increase of
61.46%. Part of this increase was due to the Bank aggressively seeking to
attract new residential mortgage borrowers. This was accomplished by offering
attractive loan products at competitive rates; establishing good working
relationships with local realtors; and providing efficient, personal service
with all decisions made locally. Another reason for the success of the Company's
strategy was the continued focus on commercial and consumer loan production. The
Company sold $8.0 million of fixed-rate loans in the secondary market in 1995
and $14.3 million in 1996 based upon asset/liability management considerations.
See "-Asset/ Liability Management." Adjustable rate loans were retained in the
Company's loan portfolio. The Company retains the servicing rights on all loans
sold in the secondary market.
5
The Company's portfolio of securities and short-term investments
decreased from $17.7 million at from December 31, 1994 to $11.9 million at
December 31, 1996, as maturing securities were used to fund the growth in the
Company's loan portfolio.
Deposit accounts increased by 15.99% or $16.1 million from December
31, 1994 to December 31, 1996, excluding the $6.9 million in stock subscription
funds held at December 31, 1994 in connection with the Bank's conversion to
stock form. Checking accounts with no monthly fees and no minimum balance
requirements attracted new depositors, as well as the Bank's continuing effort
to offer innovative and competitive certificate of deposit products. .
The Company utilizes advances available through the Federal Home Loan
Bank ("FHLB") to provide additional funding for loan growth as well as for
asset/liability management purposes. At December 31, 1996, the Company had $50.0
million in FHLB advances outstanding, an increase of $21.5 million from December
31, 1995 and $42.5 million from December 31, 1994.
Shareholders' equity decreased $1.3 million, or 7.04%, during 1996
primarily as a result of the Company's stock repurchases and the payment of
dividends on Common Stock. The Company repurchased 9.00% of its Common Stock,
92,660 shares, under a stock repurchase program completed February 27, 1996, and
5.00% of its Common Stock, 48.235 shares, under a stock repurchase program
completed July 2, 1996. In addition , the Company is currently in the process of
repurchasing an additional 5%, or 45,888 shares, of its Common Stock, and as of
December 31, 1996 has repurchased 15,000 shares under this program. As of
December 13, 1996, a total of 155,895 shares of the Company's Common Stock had
been repurchased at a cost of approximately $2.6 million, or $16.87 per share.
Shareholders' equity to total assets was 9.10% at December 31, 1996 compared to
11.37% at December 31, 1995.
Results of Operations
The Company's results of operations depend primarily on the levels of
net interest and non-interest income and its control of operating expenses. Net
interest income is dependent upon the volume of interest-earning assets and
interest-bearing liabilities and upon the interest rate which is earned or paid
on these items. The Company's results of operations are also affected by the
level of the provision for loan losses as well as non-interest income.
6
Average Balances, Interest Rates and Yields
The following table presents for the periods indicated the total
dollar amount of interest income from average interest earning assets and the
resultant yields, as well as the interest expense on average interest-bearing
liabilities, expressed both in dollars and rates. No tax equivalent adjustments
were made. All average balances are monthly average balances. Non-accruing loans
and have been included in the table as loans carrying a zero yield.
Year Ended December 31,
---------------------------------------------------------------------
1994 1995
----------------------------------- --------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
----------- -------- ------ ----------- -------- ------
Assets:
Interest-Earning Assets:
Loans receivable(1).......................... $ 88,723 $7,105 8.01% $114,518 $ 9,595 8.38%
Mortgage-backed securities................... 6,266 273 4.36 5,147 313 6.08
Other investments............................ 12,958 561 4.33 14,227 756 5.32
FHLB stock................................... 693 40 5.77 1,030 80 7.77
-------- ------ --------- -------
Total interest-earning assets............... 108,640 7,979 7.34 134,922 10,744 7.96
------ -------
Non-interest earning assets................... 6,801 7,794
-------- ---------
Total assets................................. $115,441 $142,716
======== ========
Liabilities and Shareholders' Equity
Interest-Bearing Liabilities:
Savings deposits............................. $ 13,838 400 2.89 13,166 391 2.97
Demand and NOW deposits...................... 22,821 564 2.47 23,341 614 2.63
Time deposits................................ 65,750 3,299 5.02 69,300 3,856 5.56
Borrowings................................... 3,666 179 4.89 18,210 1,076 5.91
-------- ------ --------- -------
Total interest-bearing liabilities.......... 106,075 4,442 4.19 124,017 5,937 4.79
------ -------
Other liabilities............................ 1,378 1,688
-------- ---------
Total liabilities........................... 107,453 125,705
Shareholders' equity.......................... 7,988 17,011
-------- --------
Total liabilities and shareholders' equity . $115,441 $142,716
======== ========
Net interest income........................... $3,537 $ 4,807
====== =======
Net interest rate spread...................... 3.15% 3.17%
==== ====
Net earning assets............................ $ 2,565 $ 10,905
======== ========
Net yield on average interest-earning assets.. 3.26% 3.56%
==== ====
Average interest-earning assets to
average interest-bearing liabilities......... 1.02x 1.09x
======= ====
At
------------------------------------ December 31,
1996 1996
------------------------------------ ------------
Average Interest
Outstanding Earned/ Yield/ Yield/
Balance Paid Rate Rate
------------ -------- -------- -------
Assets:
Interest-Earning Assets:
Loans receivable(1)......................... $149,502 $12,467 8.34% 8.16%
Mortgage-backed securities.................. 4,299 260 6.05 6.70
Other investments........................... 6,517 363 5.57 5.97
FHLB stock.................................. 2,046 157 7.67 7.85
--------- -------
Total interest-earning assets.............. 162,364 13,247 8.16 7.96
-------
Non-interest earning assets.................. 9,586
--------
Total assets................................ $171,950
========
Liabilities and Shareholders' Equity
Interest-Bearing Liabilities:
Savings deposits............................ $ 12,207 368 3.01 3.05
Demand and NOW deposits..................... 25,272 601 2.38 2.66
Time deposits............................... 77,211 4,355 5.64 5.36
Borrowings.................................. 39,234 2,206 5.62 5.66
-------- -------
Total interest-bearing liabilities......... 153,924 7,530 4.89 5.07
-------
Other liabilities........................... 1,039
--------
Total liabilities.......................... 154,963
Shareholders' equity......................... 16,987
--------
Total liabilities and shareholders' equity $171,950
========
Net interest income.......................... $ 5,717
=======
Net interest rate spread..................... 3.27% 2.89%
==== ====
Net earning assets........................... $ 8,440
========
Net yield on average interest-earning assets. 3.52%
====
Average interest-earning assets to
average interest-bearing liabilities........ 1.05x
=====
- -----------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
7
Rate/Volume Analysis of Net Interest Income
The following table presents the dollar amount of changes in interest
income and interest expense for the major categories of interest-earning assets
and interest-bearing liabilities. The change in total interest income and total
interest expense is allocated between those related to changes in the
outstanding balances and those due to changes in interest rates. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and change due to rate.
December 31,
------------------------------------------------------------------------------
1994 vs. 1995 1995 vs. 1996
---------------------------------------- -----------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
------------------------- Increase ------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
---------- -------- ---------- ---------- ------ ------------
Interest-earning assets:
Loans receivable...................... $2,148 $342 $2,490 $2,918 $(46) $2,872
Mortgage-backed securities............ (55) 95 40 (51) (2) (53)
Other investments..................... 59 136 195 (428) 35 (393)
FHLB stock............................ 23 17 40 78 (1) 77
------ ---- ------ ------ ---- ------
Total interest-earning assets....... $2,175 $590 2,765 $2,516 $(14) 2,503
====== ==== ------ ====== ==== ------
Interest-bearing liabilities:
Savings deposits...................... $ (20) $ 11 (9) $ (29) $ 6 (23)
Demand deposits....................... 13 37 50 49 (62) (13)
Time deposits......................... 185 372 557 446 53 499
Borrowings............................ 853 44 897 1,185 (55) 1,130
------ ---- ------ ------ ---- ------
Total interest-bearing liabilities.. $1,030 $465 1,495 $1,651 $(57) 1,593
====== ==== ------ ====== ==== ------
Net interest income.................... $1,270 $ 910
====== ======
8
Comparison of Operating Results for the Years Ended December 31, 1995 and
December 31, 1996.
General. Net income for the year ended December 31, 1996 was $876,000,
a decrease of $366,000 or 29.47% compared to net income for the year ended
December 31, 1995. This decrease was primarily due to an $800,000 provision for
loan losses, which was recorded by management to cover the possibility of losses
on the $2.4 million of purchased equipment leases placed on non-accrual status
by the Bank during 1996 due to the bankruptcy filing by the Bennett Funding
Group, the originator of the leases. The increased provision for loan losses was
substantially offset by the net of a $910,000 increase in net interest income, a
$716,000 increase in all non-interest expenses and a $174,000 decrease in income
tax expenses.
Net Interest Income. Net interest income for the year ended December
31, 1996 increased $910,000 or 18.93% over the same period in 1995. This
increase was primarily attributable to the success of management's continuing
efforts to restructure the Company's balance sheet by investing new funds and
shifting existing funds into higher-yielding commercial and consumer loans from
lower yielding investment and mortgage-backed securities. The Company's net
interest margin (net interest income divided by average interest-earning assets)
decreased slightly from 3.56% for the year ended December 31, 1995, to 3.52% for
the year ended December 31, 1996.
Interest income on loans increased $2.9 million for the year ended
1996 compared to the year ended December 31, 1995 primarily the result of an
increase of $35.0 million in average loans outstanding. This increase was
primarily due to an active residential real estate market in 1996 due to
continued relatively low interest rates and a strong local economy, and the
ongoing success of the Company's focus on commercial and consumer loan
production. This increase in volume was slightly offset by a decrease in yield
on loans from 8.38% for the year ended December 31, 1995 to 8.34% for the year
ended December 31, 1996 caused primarily by the increasing competitiveness of
the local loan origination market.
Both the net interest margin and the average yield on loans were
negatively impacted by the placement of the Bennett Funding leases on
non-accrual status effective April 1, 1996. Management estimates that interest
lost during 1996 from those leases was approximately $170,000.
Interest earned on mortgage-backed securities decreased by $53,000 due
primarily to an $848,000 decrease in the average balance of the Company's
mortgage-backed securities.
Interest earned on other investments and FHLB stock decreased by
$316,000 for the year 1996 compared to 1995. This was the result of a decrease
of $7.7 million in the average balance of other investments, primarily due to
the Company's efforts to restructure its balance sheet by channeling funds into
higher yielding loans. The decrease was partially offset by interest earned on a
$1.0 million increase in the average balance of FHLB stock required to
facilitate borrowings from the Federal Home Loan Bank, as well as by an increase
in the yield on other investments from 5.32% for the year ended December 31,
1995 to 5.57% for the year ended December 31, 1996.
Interest expense for the year ended 1996 increased $1.6 million or
26.83% over the same period in 1995. This increase was primarily due to an
increase of $29.9 million in average interest-bearing liabilities, consisting of
9
an additional $8.9 million in the average balance of customer deposit accounts
and a $21.0 million increase in the average balance of Federal Home Loan Bank
advances drawn to fund loan demand. The increase was also due to an increase in
the rate paid on interest bearing liabilities from 4.79% in 1995 to 4.89% in
1996 reflecting the intense competition for deposits, in spite of a decrease in
the interest rate paid on borrowings from 5.91% in 1995 to 5.62% in 1996.
Provision for Loan Losses. The Company establishes its provision for
loan losses based on a systematic analysis of risk factors in the loan
portfolio. The analysis includes evaluation of concentration of credit, past
loss experience, current economic conditions, the amount and composition of the
loan portfolio, estimated fair value of the underlying collateral, loan
commitments outstanding , delinquencies, industry standards and other factors.
Because the Company has realized only nominal losses during its recent past,
management also considers the loss experience of similar portfolios in
comparable lending markets, in addition to using the services of a consultant to
assist in the evaluation of its growing commercial loan portfolio. Management's
analysis results in the allocations of allowance amounts for each loan type.
Based on this analysis, during the year ended December 31, 1996 the Company
recorded an $800,000 provision for loan losses primarily in response to the
situation involving Bennett Funding Group (Bennett) of Syracuse, New York
through which the Company owns $2.4 million of equipment leases. On March 29,
1996, the Securities and Exchange Commission filed civil and criminal complaints
against an officer of Bennett and shortly thereafter, Bennett sought Chapter 11
bankruptcy protection. The Bank has been paid interest through March 31, 1996.
Based upon the bankruptcy filing and the uncertainty about when principal and
interest payments might resume, the leases were placed in non-accrual status as
of April 1, 1996 and the Bank has allocated $970,000 of its $1.7 million
allowance for loan losses to these receivables. The Bank's $2.4 million
investment is comprised of numerous small dollar equipment leases. While
management believes that the Bank holds original lease documents, the complaint
alleges various fraudulent actions including that Bennett may have sold the same
leases to two or more buyers. To date management has not been notified of
duplication of any leases it owns. Management is currently evaluating settlement
offers and believes that its reserve allocation will be sufficient to cover any
losses. At December 31, 1996, the Company's allowance equals 1.08% of net loans
receivable. Non-performing loans totaled $2.8 million at December 31, 1996,
representing 1.53% of total assets. The Bank had no non-performing loans at
December 31, 1995.
Non-Interest Income. Non-interest income for the year ended December
31, 1996 increased by $66,000, or 10.49% over the same period in 1995. This was
primarily due to an $87,000 increase in service charges and fees on deposit
accounts due to the increasing number of these accounts, and a $116,000 increase
in the gain on the sale of mortgage loans in the secondary market, partially
offset by a non-recurring $165,000 state tax refund received in 1995. The
increase in the gain on the sale of loans resulted from the increased sales
activity and a change in accounting for such sales. Beginning in 1996, the basis
of loans sold with servicing retained was allocated between the loan and the
originated servicing right. $129,000 of the $184,000 of gains on the sale of
loans can be attributed to establishing the originated servicing right asset
which will be amortized over the lives of the related loans. In addition, in
December 1996, the Company transferred approximately $10.3 million fixed rate
mortgage loans to the held for sale portfolio. These loans were sold in
December, 1996, and January, 1997, and are part of management's strategy to
further diversify the loan portfolio.
10
Non-Interest Expense. Non-interest expense for the year ended December
31, 1996 increased $716,000 over the same period in 1995. The major components
of this increase included a $404,000 increase in salaries and employee benefits
and a $139,000 increase in occupancy and equipment expense, offset by a $118,000
decrease in FDIC insurance premiums (since the Bank, unlike most thrifts, is
insured by the Bank Insurance Fund of the FDIC and benefitted from a reduction
in the deposit insurance rate effective June 1, 1995). The increase in salaries
and employee benefits, and occupancy and equipment expenses were incurred in
connection with the opening of the Company's fourth branch. In addition, salary
and employee benefit expenses included expenses related to the Employee Stock
Ownership Plan ("ESOP"), which was formed at the time of the Bank's stock
conversion, and expenses related to the Recognition and Retention Plan ("RRP")
which was approved by shareholders in August 1995. These two plans resulted in a
combined expense of $151,000 in 1995 and $233,000 in 1996 and, effectively,
replaced the Company's discretionary contribution to its 401(k) plan which was
$54,000 in 1994. See Note 10 of the Notes to Consolidated Financial Statements
included herein.
Income Tax Expense. The Company's income tax provision decreased by
$174,000 for the year ended December 31, 1996 compared to the year ended
December 31, 1995. This was primarily due to the decrease in income before
income taxes.
11
Comparison of Operating Results for the Years Ended December 31, 1995 and
December 31, 1994.
General. Net income for the year ended December 31, 1995 was $1.2
million, an increase of $677,000 or 119.82% over net income for the year ended
December 31, 1994. This increase was primarily due to a $1.3 million increase in
net interest income, an $85,000 increase in deposit account service charges and
fees, a $165,000 non-recurring state tax refund related to a change in Indiana
tax law in the late 1980s, and a $108,000 decrease in FDIC insurance expense.
These changes were partially offset by a $565,000 increase in all other
operating expenses and by a $459,000 increase in income tax expense.
Net Interest Income. Net interest income for the year ended December
31, 1995 increased $1.3 million or 35.91% over the same period in 1994. This
increase was primarily attributable to the success of management's continuing
efforts to leverage the Company by channeling funds into the Company's
higher-yielding loan portfolio. The Company's net interest margin, net interest
income divided by average interest-earning assets, increased from 3.26% for the
year ended December 31, 1994, to 3.56% for the year ended December 31, 1995.
Interest income on loans increased $2.5 million for the year ended
1995 compared to the year ended December 31, 1994 primarily due to an increase
of $25.8 million in average loans outstanding. This increase was primarily due
to the Bank taking advantage of the opportunity to attract new residential
mortgage borrowers to the Bank afforded by an active market for refinance and
purchase residential properties in 1995 due to continued low mortgage interest
rates and a strong local economy, and the ongoing success of the Company's focus
on commercial loan production. This increase in volume was supplemented by an
increase in yield on loans from 8.01% for the year ended December 31, 1994 to
8.38% for the year ended December 31, 1995 caused primarily by the upward
adjustment of the Company's existing ARMs as well as by the increased amount of
higher yielding commercial loans.
Interest earned on mortgage-backed securities increased by $40,000 as
the increase in yield from 4.36% to 6.08% on the primarily adjustable rate
securities more than offset the $1.1 decline in the average balance of the
Company's mortgage-backed securities.
Interest earned on other investments increased by $195,000 for the
year 1995 compared to 1994. This was the result of an increase of $1.3 million
in the average balance of other investments, primarily due to the investment of
stock proceeds upstreamed to the Holding Company, as well as by in increase in
yield from 4.33% for the year ended December 31, 1994 to 5.32% for the year
ended December 31, 1995 due to higher interest rates on securities purchased in
1995.
Interest expense for the year ended 1995 increased $1.5 million or
33.66% over the same period in 1994. This increase was primarily due to an
increase of $17.9 million in average interest-bearing liabilities, consisting of
an additional $3.4 million in the average balance of customer deposit accounts
and a $14.5 million increase in the average balance of Federal Home Loan Bank
advances drawn to fund loan demand. The increase was also due to an increase in
the rate paid on interest bearing liabilities from 4.19% in 1994 to 4.79% in
1995 reflecting the general increase in interest rates during the period.
12
Provision for Loan Losses. The Company establishes its provision for
loan losses based on a systematic analysis of risk factors in the loan
portfolio. The analysis includes evaluation of concentration of credit, past
loss experience, current economic conditions, the amount and composition of the
loan portfolio, estimated fair value of the underlying collateral, loan
commitments outstanding , delinquencies, industry standards and other factors.
Because the Company has realized only nominal losses during its recent past,
management also considers the loss experience of similar portfolios in
comparable lending markets, in addition to using the services of a consultant to
assist in the evaluation of its growing commercial loan portfolio. Management's
analysis results in the allocations of allowance amounts for each loan type.
During the years 1995 and 1994, the Company made no additional
provision for loan losses. The Company, during 1994, recovered $15,000 on a loan
that had previously been charged off. The Company had no non-performing loans
(non-accruing plus accruing loans 90 days or more past due) at December 31, 1995
and $45,000 in non-performing loans at December 31, 1994, representing .04% of
total assets.
Non-Interest Income. Non-interest income for the year ended December
31, 1995 increased by $339,000, or 116.90% over the same period in 1995. This
was primarily due to the previously mentioned $165,000 state tax refund, an
$85,000 increase in service charges and fees on deposit accounts due to the
increasing number of these accounts, and a $55,000 increase in the gain on the
sale of mortgage loans in the secondary market as the Company took advantage of
the relatively stable mortgage loan rates to sell fixed-rate mortgages, thereby
helping to control interest rate risk.
Non-Interest Expense. Non-interest expense for the year ended December
31, 1995 increased $458,000 over the same period in 1994. The major components
of this increase included a $312,000 increase in salaries and employee benefits,
an $86,000 increase in occupancy and equipment expense, and a $60,000 increase
in other operating expenses. Many of these expenses were incurred filling the
Company's staffing and equipment needs to effectively leverage the Bank. The
Bank also benefitted from a $108,000 decrease in FDIC insurance premiums
resulting from a decrease in the premium charged. The Bank, unlike most thrifts,
is insured by the Bank Insurance Fund of the FDIC and benefitted from a
reduction in the deposit insurance rate effective June 1, 1995. In addition ,
1995's salary and employee benefit expense included expenses related to the
Employee Stock Ownership Plan ("ESOP"), which was formed at the time of the
Bank's stock conversion, and related to the Recognition and Retention Plan
("RRP") approved in August, 1995. LSB records ESOP expense based on the fair
value of the shares earned by participants during the year. During 1995,
participants earned 8,504 shares with a cost of $85,000 and a fair value of
$123,000. The RRP awarded 27,793 share to certain directors and officers of the
Company. The cost of these shares is being amortized over the 60 month vesting
period and totaled $28,000 for 1995. These two plans resulted in a combined
expense of $151,000 in 1995 and, effectively, replaced the Company's
discretionary contribution to its 401(k) plan which was $54,000 in 1994.
Income Tax Expense. The Company's income tax provision increased by
$459,000 for the year ended December 31, 1995 compared to the year ended
December 31, 1994. This was primarily due to the increase in income before
income taxes.
13
Asset/Liability Management
Lafayette, like other financial institutions, is subject to interest
rate risk to the extent that its interest-bearing liabilities reprice on a
different basis than its interest-earning assets. Office of Thrift Supervision
("OTS") regulations provide a Net Portfolio Value ("NPV") approach to the
quantification of interest rate risk. In essence, this approach calculates the
difference between the present value of expected cash flows from assets and the
present value of expected cash flows from liabilities, as well as cash flows
from off balance sheet contracts. Under OTS regulations, an institution's
"normal" level of interest rate risk in the event of an assumed change in
interest rates is a decrease in the institution's NPV in an amount not exceeding
2% of the present value of its assets. Thrift institutions with greater than
"normal" interest rate exposure must take a deduction from their total capital
available to meet their risk-based capital requirement. The amount of the
deduction is one-half of the difference between (a) the institution's actual
calculated exposure to a 200 basis point interest rate increase or decrease
(whichever results in the greater pro forma decrease in NPV) and (b) its
"normal" level of exposure which is defined as 2% of the present value of its
assets. The regulation, however, 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. Furthermore, the Bank, due to its asset size and level of risk-based
capital is exempt from this requirement. Notwithstanding the foregoing,
utilizing this measuring concept, as of December 31, 1996, a change in interest
rates of positive 200 basis points would have resulted in a 1.21% decrease (as a
percentage of the net present value of the Bank's assets) in the Bank's NPV
while a change in interest rates of negative 200 basis points would have
resulted in an .11% increase (as a percentage of the net present value of the
Bank's assets) in the Bank's NPV. Accordingly, the Bank's interest rate risk was
considered normal under OTS regulations and no additional risk-based capital
would have been required at December 31, 1996.
It has been and continues to be a priority of the Company's Board of
Directors and management to manage interest rate risk and thereby limit any
negative effect of the Company's NPV. The Company's asset/liability policy,
established by the Board of Directors, sets forth acceptable limits on the
amount of change in NPV given certain changes in interest rates. The Company has
an asset/liability management committee which meets weekly to review interest
rate positions, and a Board investment committee which meets quarterly to review
the Company's interest rate risk position and other related matters and to make
recommendations for adjusting such position to the full Board of Directors. In
addition, the investment committee meets semi-annually with the Company's
investment advisor to review the Company's investment portfolio and strategies
relating to interest rate risk. Specific strategies have included the sale of
long-term, fixed rate loans to reduce the average maturity of the Company's
interest-earning assets and the use of FHLB advances to lengthen the effective
maturity of its interest-bearing liabilities. In the future, the Company's
community banking emphasis, including the origination of commercial business
loans, is intended to further increase the Company's portfolio of short-term
and/or adjustable rate loans.
14
Presented below, as of December 31, 1995 and 1996, is an analysis of
the Company's interest rate risk as measured by changes in NPV for instantaneous
and sustained parallel shifts in the yield curve, in 100 basis point increments,
up and down 300 basis points and compared to Board policy limits. Assumptions
used in calculating the amounts in this table are OTS assumptions.
At December 31, 1995 At December 31, 1996
Change in Board Limit ----------------------------- ------------------------------
Interest Rate % Change $ Change % Change $ Change % Change
------------- ----------- ----------- ----------- -------------- -----------
(Basis Points) (Dollars in (Dollars in
Thousands) Thousands)
300 -40.00 -3,171 -17% -3,207 -23%
200 -18.00 -1,726 - 9% -1,996 -14%
100 -10.00 - 637 -3% -1,015 -6%
0 0.00 0 0% 0 0%
-100 -10.00 120 1% 1,411 3%
-200 -18.00 -63 0% 2,475 3%
-300 -40.00 85 0% 2,687 3%
In evaluating the Company's exposure to interest rate risk, certain
shortcomings inherent in the method of analysis presented in the foregoing table
must be noted. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Further, in the event of a change in interest rates, prepayments and
early withdrawal levels would likely deviate significantly from those assumed in
calculating the table. Finally, the ability of many borrowers to service their
debt may decrease in the event of an interest rate increase. As a result, the
actual effect of changing interest rates may differ from that presented in the
foregoing table.
The Company also makes use of "gap" analysis which measures the
difference between the amount of interest-earning assets which are anticipated
to mature or reprice within a particular period and the amount of interest
bearing liabilities which are expected to reprice in that same period. The
Company relies on certain assumptions, such as the amount and timing of loan
prepayments in the measurement of the interest rate sensitivity gap. Similar
shortcomings to those experienced with NPV analysis are also inherent in the gap
method of analysis.
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits, repayment and
prepayment of loans, interest earned on or maturation of investment securities
and short-term investments, borrowings and funds provided from operations. While
maturities and the scheduled amortization of loans, investments and
mortgage-backed securities are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by the general market interest
rates, economic conditions and competition.
15
The primary investing activities of the Bank are the origination of loans
and the purchase of securities. During the years ended December 31, 1994, 1995
and 1996, the Bank originated loans totaling $39.9 million, $68.8 million and
$77.7 million respectively.
During the years ended December 31, 1994, 1995 and 1996, these investment
activities were funded primarily by principal repayments and prepayments on
loans and maturities of investment securities totaling $25.1 million, $30.8
million, and $43.8 million, respectively. The proceeds from the sale of loans
totaled $3.0 million, $8.0 million and $14.3 million for the years ended
December 31, 1994, 1995 and 1996, respectively. Sales of available-for-sale
securities in 1994, 1995 and 1996 generated proceeds of $1.1 million, $510,000
and $1.8 million, respectively.
The major sources of cash from financing activities in the years ended
December 31, 1994, 1995 and 1996 were increases in deposits of $7.5 million,
$2.2 million and $7.0 million, respectively. In the years ended December 31,
1994, 1995 and 1996, financing also was provided by net borrowings of $5.8
million, $21.8 million and $20.6 million, respectively. The Bank had available
lines of credit from the FHLB, at December 31, 1996, equal to $1.5 million. The
Bank currently uses, and intends to continue to use, FHLB advances as a source
of funding for loans when advantageous interest rate risk matches can be found.
Liquidity management is both a daily and long-term function for the
Bank's senior management. The Bank adjusts its investment strategy, within the
limits established by the investment policy, based upon assessments of expected
loan demand, expected cash flows, FHLB advance opportunities, market yields and
objectives of its asset/liability management program. Base levels of liquidity
have generally been invested in interest-earning overnight and time deposits
with the FHLB of Indianapolis. Funds for which a demand is not foreseen in the
near future are invested in investment and other securities for the purpose of
yield enhancement and asset/liability management.
The Bank is required to maintain minimum levels of liquidity as defined
by regulatory agencies. The liquidity requirement, which can vary, is based upon
a percentage of deposits and short term borrowings and is currently 5.0%. The
Bank's internal policy for liquidity is approximately 8%. The Company's
liquidity ratios at December 31, 1994, 1995, 1996 were 14.35%, 14.04% and 7.31%,
respectively. Proceeds from the sale of fixed rate mortgage loans in early 1997
were used to restore the Company's liquidity ratio to above its policy level.
The Bank anticipates that it will have sufficient funds available to meet
current loan commitments. At December 31, 1996, the Bank had outstanding
commitments to originate loans and available lines of credit totaling $15.8
million and commitments to provide funds to complete current construction
projects in the amount of $6.8 million. Certificates of deposit which will
mature in one year or less at December 31, 1996 totaled $43.8 million. Based on
its experience, the Bank's certificates of deposit have been a relatively stable
source of long-term funds as such certificates are generally renewed upon
maturity since the Bank has established long-term banking relationships with its
customers. Therefore, management believes a significant portion of such deposits
will remain with the Bank, although this cannot be assured.
16
At December 31, 1996, the Bank exceeded all of the OTS capital
requirements on a fully phased in basis. See Note 9 of the Notes to Consolidated
Financial Statements for a summary of the Bank's regulatory capital
requirements.
The Company also has a need for, and sources of liquidity. Liquidity is
required to fund its operating expenses, fund stock repurchase programs, as well
as for the payment of dividends to shareholders. At December 31, 1996 the
Company had $797,000 in liquid assets on hand. The primary source of liquidity
on an ongoing basis is dividends from the Bank. Dividends totaling $1.0 million
were paid from the Bank to the Company during the year ended December 31, 1996.
For the year ended December 31, 1996, the Company paid dividends to shareholders
totaling $213,000 and repurchased 127,865 shares of common stock at a total cost
of $2.2 million. The Company has regulatory approval to repurchase an additional
30,888 shares of Company stock at December 31, 1996.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto which are
presented herein have been prepared in accordance with generally accepted
accounting principals, which require the measurement of financial position and
the results of operations in terms of historical dollars without considering the
change in the relative purchasing power of money over time due to inflation. The
impact of inflation is reflected in the increased cost of the Company's
operations. Unlike most industrial companies, virtually all the Company's assets
and liabilities are monetary in nature. As a result, interest rates have a
greater impact on the Company's performance than do the effects of the general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same degree as the price of goods and services.
Impact of Accounting Standards
Financial Accounting Standard No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities, was issued by
the Financial Accounting Standards Board in 1996. It revises the accounting for
transfers of financial assets, such as loans and securities, and for
distinguishing between sales and secured borrowings. It is effective for some
transactions in 1997 and others in 1998. Management does not expect the effect
on the Company's financial position and results of operations to be significant.
17
REPORT OF INDEPENDENT AUDITORS
Board of Directors
LSB Financial Corp.
Lafayette, Indiana
We have audited the accompanying consolidated statements of financial condition
of LSB Financial Corp. as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the years in the three year period ended December 31, 1996.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of LSB Financial Corp.
as of December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the years in the three year period ended December 31, 1996 in
conformity with generally accepted accounting principles.
As discussed in Note 1, LSB Financial Corp. changed its method of accounting for
originated mortgage servicing rights in 1996.
/s/ Crowe, Chizek and Company LLP
---------------------------------
Crowe, Chizek and Company LLP
Indianapolis, Indiana
January 29, 1997
- -------------------------------------------------------------------------------
18
LSB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1995 and 1996
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
1995 1996
---- ----
ASSETS
Cash and due from banks $ 4,200 $ 4,388
Short-term investments 3,595 5,410
--------- ---------
Cash and cash equivalents 7,795 9,798
Available-for-sale securities (Note 2) 12,295 6,546
Loans held for sale 968 6,230
Total loans (Note 3) 132,387 154,701
Less: Allowance for loan losses (Note 4) (922) (1,715)
--------- ---------
Loans, net 131,465 152,986
Office properties and equipment - net (Note 5) 3,205 4,570
Federal Home Loan Bank stock, at cost 1,500 2,575
Accrued interest receivable 905 1,006
Other assets 840 896
--------- ---------
$ 158,973 $ 184,607
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits (Note 6) $ 109,977 $ 116,949
Short term borrowings 864 --
Advances from Federal Home Loan Bank (Note 7) 28,500 50,000
Note payable (Note 8) 250 220
Accrued interest payable 159 197
Advances from borrowers for taxes and insurance 203 178
Other liabilities 952 267
--------- ---------
140,905 167,811
Commitments and contingent liabilities (Note 11)
Shareholders' equity (Notes 1 and 9)
Common stock ($.01 par value - 7,000,000 shares
authorized; 1,057,369 and 1,058,655 shares issued) 11 11
Additional paid-in capital 10,063 10,143
Retained earnings 9,626 10,289
Unamortized cost of recognition and retention plan (399) (332)
Unearned shares held by employee stock ownership plan (739) (653)
Treasury stock (28,000 and 155,895 shares, at cost) (466) (2,629)
Unrealized loss on available-for-sale securities,
net of tax of $19 and $22 (28) (33)
--------- ---------
18,068 16,796
--------- ---------
$ 158,973 $ 184,607
========= =========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
19
LSB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1994, 1995 and 1996
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
1994 1995 1996
---- ---- ----
Interest income
Loans, including related fees $ 7,105 $ 9,595 $12,467
Short-term investments 91 311 156
Securities
Taxable 730 756 586
Tax exempt 53 82 38
------- ------- -------
Total interest income 7,979 10,744 13,247
Interest expense
Deposits 4,263 4,861 5,324
Federal Home Loan Bank advances 163 1,062 2,193
Other borrowings 16 14 13
------- ------- -------
Total interest expense 4,442 5,937 7,530
------- ------- -------
Net interest income 3,537 4,807 5,717
Provision for loan losses (Note 4) (15) -- 800
------- ------- -------
Net interest income after provision for loan losses 3,552 4,807 4,917
------- ------- -------
Noninterest income
Deposit account service charges and fees 154 239 326
Net gain on sale of mortgage loans 13 68 184
Net gain on securities 6 -- 7
Other 117 322 178
------- ------- -------
290 629 695
Noninterest expense
Salaries and employee benefits (Note 10) 1,366 1,678 2,082
Occupancy and equipment expense, net 443 529 668
Computer service 217 169 244
Deposit insurance 228 120 2
Advertising 178 251 274
Other 580 723 916
------- ------- -------
3,012 3,470 4,186
------- ------- -------
Income before income taxes 830 1,966 1,426
Income tax provision (Note 12) 265 724 550
------- ------- -------
Net income $ 565 $ 1,242 $ 876
======= ======= =======
Net income per share (Note 13) N/A $ 1.30 $ 1.00
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
20
LSB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1994, 1995 and 1996
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Net
Unrealized
Additional Loss on
Common Paid-in Retained Available-for- Benefit Treasury
Stock Capital Earnings Sale Securities Plans Stock Total
----- ------- -------- --------------- ----- ----- -----
Balance, January 1, 1994 $ -- $ -- $ 7,819 $ -- $ -- $ -- $ 7,819
Net income -- -- 565 -- -- -- 565
Change in net unrealized loss -- -- -- (176) -- -- (176)
-------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1994 -- -- 8,384 (176) -- -- 8,208
Issuance of common stock (Note 1) 10 9,599 -- -- -- -- 9,609
Formation of employee stock
ownership plan -- -- -- -- (824) -- (824)
Formation of recognition and
retention plan (RRP) 1 426 -- -- (427) -- --
RRP amortization expense -- -- -- -- 28 -- 28
Acquisition of treasury stock
(28,000 shares) -- -- -- -- -- (466) (466)
Employee stock ownership
shares earned -- 38 -- -- 85 -- 123
Net income -- -- 1,242 -- -- -- 1,242
Change in net unrealized loss -- -- -- 148 -- -- 148
-------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1995 11 10,063 9,626 (28) (1,138) (466) 18,068
Issuance of shares for RRP -- 22 -- -- (22) -- --
RRP amortization expense -- -- -- -- 90 -- 90
Employee stock ownership
shares earned -- 58 -- -- 85 -- 143
Acquisition of treasury stock
(127,895 shares) -- -- -- -- -- (2,163) (2,163)
Dividends paid ($.24 per share) -- -- (213) -- -- -- (213)
Net income -- -- 876 -- -- -- 876
Change in net unrealized loss -- -- -- (5) -- -- (5)
-------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1996 $ 11 $ 10,143 $ 10,289 $ (33) $ (985) $ (2,629) $ 16,796
======== ======== ======== ======== ======== ======== ========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
21
LSB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1994, 1995 and 1996
(Dollars in thousands)
- --------------------------------------------------------------------------------
1994 1995 1996
---- ---- ----
Cash flows from operating activities
Net income $ 565 $ 1,242 $ 876
Adjustments to reconcile net income to net cash from operating activities
Depreciation 196 214 276
Net amortization on securities 229 83 54
Provision for loan losses (15) - 800
Gain on securities (6) - (7)
Gain on sale of loans (13) (68) (184)
Loans originated for sale, net of sales proceeds 5,527 (900) (242)
Deferred loan fees, net 50 44 42
Employee stock ownership plan - shares earned - 123 143
Changes in assets and liabilities
Accrued interest receivable 56 (295) (101)
Other assets (758) 475 37
Accrued interest payable 17 42 38
Other liabilities (87) 702 (684)
-------- -------- ---------
Net cash from operating activities 5,761 1,662 1,048
Cash flows from investing activities
Net change in interest-bearing balances with financial institutions 251 - -
Proceeds from the maturity and paydown of available-for- sale securities 9,819 7,191 7,578
Proceeds from the maturity and paydown of held-to-maturity securities 1,515 1,437 -
Purchase of available-for-sale securities (3,592) (8,075) (3,687)
Purchase of held-to-maturity securities (647) (501) -
Proceeds from sales of available-for-sale securities 1,051 510 1,802
Purchase of Federal Home Loan Bank stock - (807) (1,075)
Loans made to customers net of payments received (25,993) (32,907) (32,645)
Proceeds from the sale of loans - - 5,446
Purchase of premises and equipment (400) (159) (1,641)
-------- -------- ---------
Net cash from investing activities (17,996) (33,311) (24,222)
Cash flows from financing activities
Net change in deposits 7,522 2,213 6,972
Net change in short term borrowings - 864 (864)
Proceeds from Federal Home Loan Bank advances 12,500 31,500 42,500
Payments on advances from Federal Home Loan Bank (6,700) (10,500) (21,000)
Net change in advances from borrowers for taxes and insurance 40 9 (25)
Payments on note payable (27) (28) (30)
Net proceeds from sale of common stock, net of ESOP debt - 8,785 -
Dividends paid - - (213)
Purchase of treasury stock - (466) (2,163)
-------- -------- ---------
Net cash from financing activities 13,335 32,377 25,177
-------- -------- ---------
Net change in cash and cash equivalents 1,100 728 2,003
Cash and cash equivalents at beginning of period 5,967 7,067 7,795
-------- -------- ---------
Cash and cash equivalents at end of period $ 7,067 $ 7,795 $ 9,798
======== ======== =========
Cash paid during the period for:
Interest $ 4,425 $ 5,895 $ 7,492
Income taxes 322 126 1,037
Non cash investing activities:
Amortized cost of held-to-maturity securities transferred to
available-for-sale 17,757 1,753 -
Book value of portfolio loans transferred to held-for-sale - - 10,282
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
22
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994, 1995 and 1996
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements as of and for the
years ended December 31, 1995 and 1996 include the accounts of LSB Financial
Corp. (LSB or the Company) and its wholly-owned subsidiary, Lafayette Savings
Bank, FSB (Bank) and the Bank's wholly-owned subsidiary, LSB Service Corporation
(LSBSC). The 1994 financial statements include the accounts of the Bank and
LSBSC. All significant intercompany transactions and balances have been
eliminated.
Stock Issuance and Conversion: On February 3, 1995, pursuant to a Plan of
Conversion adopted May 16, 1994, LSB completed the issuance of 1,029,576 shares
of common stock, at a price of $10 per share raising net proceeds of $9,609. In
accordance with its Plan of Conversion, $4,805 of the proceeds were utilized to
purchase 100% of the stock of the Bank in conjunction with its conversion from a
mutual to a stock form of organization. The transaction was accounted for in a
manner similar to the pooling of interests method of accounting for a business
combination. Accordingly, the assets and liabilities of the Bank are presented
in these consolidated financial statements at historical cost and earnings per
share have been computed as if the common stock had been outstanding since
January 1, 1995.
Description of Business: LSB operates primarily in the banking industry which
accounts for more than 90% of its revenues, operating income and assets. LSB
generates mortgage and consumer loans and receives deposits from customers
located primarily in Tippecanoe county in Indiana. A substantial portion of the
loan portfolio is secured by single and multi-family residential mortgages.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Estimates
most susceptible to change in the near term include the allowance for loan
losses and the fair value of securities.
Statement of Cash Flows: For purposes of the statement of cash flows, cash and
cash equivalents include cash on hand, amounts due from banks and short-term
investments. The Bank reports net cash flows for customer loan transactions and
deposit transactions and for changes in interest-bearing balances with other
financial institutions.
- --------------------------------------------------------------------------------
(Continued)
23
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994, 1995 and 1996
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities: Securities are classified as held-to-maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available-for-sale when they might be
sold before maturity. Available-for-sale securities are carried at fair value,
with unrealized holding gains and losses reported separately in shareholders'
equity, net of tax. Securities are written down to fair value when a decline in
fair value is not temporary. Premium amortization is deducted from and discount
accretion is added to interest income. Gains and losses on the sale of
available-for-sale securities are determined using the specific identification
method.
Inventory of Loans Held for Sale: The Bank sells a portion of its mortgage loan
production in the secondary market. Whenever loan cost exceeds market value on a
net aggregate basis, a valuation reserve is recorded and the loans are carried
at the lower of cost or market. At December 31, 1996 and 1995, the market value
of such loans exceeded their cost. During December 1996, the Bank transferred
approximately $10,282 of fixed rate mortgage loans from the loan portfolio to
the held for sale portfolio. This transfer was done to diversify the loan
portfolio and as part of management's strategic plan to expand the Bank's
consumer and commercial loan portfolios. Approximately 50% of these loans were
sold in December 1996 and the balance in January 1997.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance required
based on past loan loss experience, known and inherent risks in the portfolio,
information about specific borrower situations and estimated collateral values,
economic conditions, and other factors. Allocations of the allowance may be made
for specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged-off.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated collectively for smaller-balance loans of
similar nature such as residential mortgage, consumer, and credit card loans,
and on an individual loan basis for other loans. If a loan is impaired, a
portion of the allowance is allocated so that the loan is reported, net, at the
present value of estimated future cash flows using the loan's existing rate.
Loans are evaluated for impairment when payments are delayed, typically 90 days
or more, or when the internal grading system indicates a doubtful
classification.
- --------------------------------------------------------------------------------
(Continued)
24
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994, 1995 and 1996
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses (Continued): The carrying values of impaired loans are
periodically adjusted to reflect cash payments, revised estimates of future cash
flows, and increases in the present value of expected cash flows due to the
passage of time. Cash payments representing interest income are reported as
such. Other cash payments are reported as reductions in carrying value, while
increases or decreases due to changes in estimates of future payments and due to
the passage of time are reported as provision for loan losses expense.
Recognition of Income on Loans: Interest income on loans is accrued over the
term of the loans. Uncollectible interest on loans that are past due is
charged-off or an allowance is established based on management's periodic
evaluation. Loan fees, net of direct loan origination costs, are deferred and
recognized over the contractual life of the loan as an adjustment to interest
income using the interest method.
Servicing Rights: Prior to adopting Financial Accounting Standard No. 122 on
January 1, 1996, servicing right assets were recorded only for purchased rights
to service mortgage loans. Subsequent to adopting this standard, servicing
rights represent both purchased rights and the allocated value of servicing
rights retained on loans sold. Servicing rights are expensed in proportion to,
and over the period of, estimated net servicing revenues. Impairment is
evaluated based on the fair value of the rights, using groupings of the
underlying loans as to interest rates and then, secondarily, as to geographic
and prepayment characteristics. A valuation allowance is recorded to reflect the
impairment of a grouping.
Real Estate Owned: Real estate acquired through foreclosure or
deed-in-lieu-of-foreclosure is carried at the lower of cost (fair value at
foreclosure) or fair value less estimated selling costs. Future declines in
value, if any, are charged to operations through a provision for loss on real
estate owned. The costs of holding the real estate are charged to operations
while major improvements are capitalized.
Office Properties and Equipment: Office properties and equipment are stated at
cost less accumulated depreciation. Depreciation is computed by straight-line
and accelerated methods over estimated useful lives.
Retirement Plans: The Bank maintains a profit sharing plan, pursuant to Section
401 of the Internal Revenue Code. The plan covers substantially all full time
employees. Participants may contribute a percentage of their compensation,
subject to certain limits. The plan allows the Bank, at the Board's discretion,
to make contributions.
- --------------------------------------------------------------------------------
(Continued)
25
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994, 1995 and 1996
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Retirement Plans (Continued): Coincident with conversion to the stock form of
organization, the Bank established an Employee Stock Ownership Plan (ESOP)
covering substantially all full time employees. The expense recognized as ESOP
shares are earned by participants is based on the fair value of such shares. The
difference between the cost of ESOP shares earned, and their market value, is
reflected as an addition to (or deduction from) additional paid-in capital.
Stock Compensation: Expense for employee compensation under stock option plans
is reported only if options are granted below market price at grant date. Pro
forma disclosures of net income and earnings per share are provided as if the
fair value method of Financial Accounting Standard No. 123 were used for
stock-based compensation.
Income Taxes: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
Fair Values of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed separately. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments, and
other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the
estimates. The fair value estimates of existing on- and off-balance sheet
financial instruments does not include the value of anticipated future business
or the values of assets and liabilities not considered financial instruments.
Reclassifications: Certain items in the 1995 financial statements have been
reclassified to be consistent with presentation in the 1996 financial
statements.
- --------------------------------------------------------------------------------
(Continued)
26
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994, 1995 and 1996
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 2 - AVAILABLE-FOR-SALE SECURITIES
The amortized cost and fair value of available-for-sale securities at December
31, 1995 and 1996 are as follows:
1995
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Obligations of the U.S.
Government and its agencies $ 3,008 $ - $ (7) $ 3,001
Mortgage-backed securities 4,896 - (62) 4,834
Obligations of states and political
subdivisions 1,687 16 - 1,703
Corporate securities and
commercial paper 2,751 6 - 2,757
------------- ------------- ------------- -------------
$ 12,342 $ 22 $ (69) $ 12,295
============= ============= ============= =============
1996
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Obligations of the U.S.
Government and its agencies $ 1,355 $ 7 $ (5) $ 1,357
Mortgage-backed securities 4,007 36 (93) 3950
Obligations of states and political
subdivisions 984 - - 984
Corporate securities and
commercial paper 255 - - 255
------------- ------------- ------------- -------------
$ 6,601 $ 43 $ (98) $ 6,546
============= ============= ============= =============
- --------------------------------------------------------------------------------
(Continued)
27
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994, 1995 and 1996
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 2 - AVAILABLE-FOR-SALE SECURITIES (Continued)
The amortized cost and fair value of available-for-sale securities at December
31, 1996, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because issuers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
---- -----
Due in one year or less $ 868 $ 865
Due after one year through five years 1,476 1,481
Due after ten years 250 250
Mortgage-backed securities 4,007 3,950
-------------- -------------
$ 6,601 $ 6,546
============== =============
The sale of available-for-sale securities during 1994, 1995 and 1996 generated
gross gains of $6, $0 and $9 and gross losses of $0, $0 and $2.
NOTE 3 - LOANS RECEIVABLE
Total loans consisted of the following:
December 31,
------------
1995 1996
---- ----
Mortgage loans secured by:
One-to-four family residences $ 85,263 $ 90,757
Multi-family residences 12,044 19,610
Commercial real estate 18,914 19,032
Construction and development 10,379 17,781
Home equity lines of credit 4,124 7,415
Commercial business loans 4,570 4,825
Consumer loans 1,924 2,393
-------------- -------------
Gross loans receivable 137,218 161,813
Undisbursed portion of loans in process (4,516) (6,755)
Deferred loan fees, net (315) (357)
-------------- -------------
$ 132,387 $ 154,701
============== =============
- --------------------------------------------------------------------------------
(Continued)
28
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994, 1995 and 1996
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE (Continued)
Mortgage loans serviced principally for the Federal Home Loan Mortgage
Corporation are not included in the accompanying statements of financial
condition. The unpaid principal balances of such loans was $28,801 and $39,108
at December 31, 1995 and 1996, respectively.
Activity for capitalized mortgage servicing rights during 1996 was as follows:
Beginning of year $ 4
Additions 129
Amortized to expense (5)
--------------
End of year $ 128
==============
No valuation allowance was deemed necessary at December 31, 1996.
The balance of loans not accruing interest was $0 and $2,484 at December 31,
1995 and 1996.
Certain of the executive officers and directors are loan customers of the Bank.
Activity for those loans was as follows:
Balance at January 1, 1996 $ 685
New loans and advances 604
Repayments (220)
--------------
Balance at December 31, 1996 $ 1,069
==============
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows:
Year ended December 31,
-----------------------
1994 1995 1996
---- ---- ----
Beginning balance $ 922 $ 926 $ 922
Provision for loan losses (15) - 800
Loan charge-offs - (6) (7)
Recoveries 19 2 -
--------- ----------- ----------
Ending balance $ 926 $ 922 $ 1,715
========= =========== ==========
- --------------------------------------------------------------------------------
(Continued)
29
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994, 1995 and 1996
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 4 - ALLOWANCE FOR LOAN LOSSES (Continued)
Information about impaired loans is as follows:
1995 1996
---- ----
Year-end loans with no allowance for loan losses allocated $ - $ -
Year-end loans with allowance for loan losses allocated - 2,391
Amount of the allowance allocated - 970
Average of impaired loans during the year - 1,793
Interest income recognized during impairment - -
Cash-basis interest income recognized - -
NOTE 5 - OFFICE PROPERTIES AND EQUIPMENT
A summary of office properties and equipment is as follows at December 31:
1995 1996
---- ----
Land $ 520 $ 756
Office buildings and improvements 2,489 3,397
Furniture and equipment 1,401 1,898
-------------- -------------
4,410 6,051
Less accumulated depreciation and amortization 1,205 1,481
-------------- -------------
$ 3,205 $ 4,570
============== =============
- --------------------------------------------------------------------------------
(Continued)
30
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994, 1995 and 1996
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 6 - DEPOSITS
Deposits at December 31 are summarized as follows:
1995 1996
---- ----
Amount Percent Amount Percent
------ ------- ------ -------
Non interest-bearing deposits $ 3,106 2.8% $ 4,127 3.5%
NOW accounts 21,613 19.7 20,716 17.8
Savings accounts 12,050 10.9 12,538 10.7
------------ ------- ------------ --------
36,769 33.4 37,381 32.0
------------ ------- ------------ --------
Certificates of deposit
2.00% to 3.99% 5 - 64 .1
4.00% to 5.99% 43,076 39.2 48,677 41.6
6.00% to 7.99% 30,120 27.4 30,820 26.3
8.00% to 9.99% 7 - 7 -
------------ ------- ------------ --------
73,208 66.6 79,568 68.0
------------ ------- ------------ --------
$ 109,977 100.0% $ 116,949 100.0%
============ ======= ============ ========
At December 31, 1996, scheduled maturities of certificates of deposit are as
follows:
1997 $ 43,778
1998 24,389
1999 8,437
2000 1,664
2001 and thereafter 1,300
------------
$ 79,568
============
The aggregate amount of certificates of deposit in denominations of $100 or more
was $8,735 and $10,450 at December 31, 1995 and 1996, respectively. Individual
certificate amounts in excess of $100 are not insured by the FDIC.
- --------------------------------------------------------------------------------
(Continued)
31
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994, 1995 and 1996
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 7 - ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank (FHLB) are due in full at final
maturity, require monthly interest payments and are secured by a blanket pledge
of the Bank's eligible securities and mortgage loans.
At December 31, 1996, the scheduled maturity and weighted average interest rate
of FHLB advances were as follows:
Weighted
Interest Principal
Year Average Balance
---- ------- -------
1997 5.50% $ 32,000
1998 5.89 15,000
1999 5.90 3,000
-----------
$ 50,000
===========
NOTE 8 - NOTE PAYABLE
During 1993, the Bank acquired the property for a second branch from two
individuals. In addition to cash, a ten year mortgage note, secured by the
branch property, was issued in the amount of $328. The note bears interest at an
annual rate of 5.5%. Payments, including interest, are $4 per month with a final
maturity of January 2003.
NOTE 9 - CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS
At the time of its conversion to a stock form of organization, LSB established a
liquidation account in an amount equal to its total net worth as of the date of
the latest statement of financial condition appearing in the final prospectus,
which was $8,066. The liquidation account is maintained for the benefit of
eligible depositors who continue to maintain their accounts at the Company after
the conversion. The liquidation account declines annually to the extent that
eligible depositors have reduced their qualifying deposits. Subsequent increases
will not restore an eligible account holder's interest in the liquidation
account. In the event of a complete liquidation, each eligible depositor will be
entitled to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts then
held. The balance allocated to the liquidation account is not available for
payment of dividends.
- --------------------------------------------------------------------------------
(Continued)
32
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994, 1995 and 1996
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 9 - CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS (Continued)
The Bank has qualified under provisions of the Internal Revenue Code which
permit it to deduct from taxable income a provision for bad debts that differs
from the provision for such losses charged against income in the financial
statements, if any. This portion of retained earnings is considered to be
restricted because if, in the future, this portion of retained earnings is used
for any purpose other than to absorb bad debt losses, federal income taxes would
be imposed at the then applicable rates. In accordance with Financial Accounting
Standard 109, LSB has not recorded a liability for the portion of the tax
reserve established prior to January 1, 1988, which totals $1,861. At current
tax rates, the tax liability for such amount would be $744.
The Bank is subject to various regulatory capital requirements administered by
its primary regulator, the Office of Thrift Supervision (OTS) and by the Federal
Deposit Insurance Corporation (FDIC). Failure to meet minimum capital
requirements can result in certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the financial statements. These guidelines and the regulatory
framework for prompt corrective action involve quantitative measures of capital,
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices as well as qualitative judgments by the
regulators about components, risk weightings, and other factors. LSB's deposit
insurance premium rate is also based, in part, on these requirements. At
December 31, 1995 and 1996, the Bank's actual and required minimum capital
ratios were as follows:
FDIC
----
OTS To Be Well
--- Capitalized Under
For Capital Corrective Action
Actual Adequacy Purposes Provisions
------ ----------------- ----------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total Capital (to Risk
Weighted Assets)
1995 $ 15,976 15.03% $ 8,504 8.0% $ 10,630 10.0%
1996 $ 16,623 12.44% $ 10,687 8.0% $ 13,359 10.0%
Tier I Capital (to Risk
Weighted Assets)
1995 $ 15,054 14.16% $ 4,252 4.0% $ 6,378 6.0%
1996 $ 15,122 11.32% $ 5,344 4.0% $ 8,015 6.0%
Tier 1 (Core) Capital
(to Adjusted Assets)
1995 $ 15,054 9.58% $ 4,713 3.0% $ 7,857 5.0%
1996 $ 15,122 8.23% $ 5,509 3.0% $ 9,182 5.0%
Tangible Capital
(to Adjusted Assets)
1995 $ 15,054 9.58% $ 2,357 1.5% N/A
1996 $ 15,122 8.23% $ 2,755 1.5% N/A
- --------------------------------------------------------------------------------
(Continued)
33
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994, 1995 and 1996
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 9 - CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS (Continued)
Risk-based capital differs from tangible and core capital due to the inclusion
of the Bank's general valuation allowance which totaled $922 and $1,501 at
December 31, 1995 and 1996.
At December 31, 1996, the Bank's capital ratios result in its being designated a
well capitalized institution.
NOTE 10 - BENEFIT PLANS
The Bank maintains a 401(k) plan for the benefit of eligible employees. Employer
contributions are discretionary. Expense recognized for this plan was $54, $0
and $0 in 1994, 1995 and 1996.
In August 1995, LSB shareholders approved a Stock Option Plan which reserved
102,957 shares of Common Stock for granting options to directors and officers of
the Companies. Under the terms of the Plan, options can be granted at values not
less than the fair market value of the shares at the date of the grant. Options
vest at each anniversary date over a five year period and must be exercised
within ten years of grant.
Financial Accounting Standard No. 123, which became effective for 1996, requires
pro forma disclosures for companies that do not adopt its fair value accounting
method for stock-based employee compensation. Accordingly, the following pro
forma information presents net income and earnings per share had the Standard's
fair value method been used to measure compensation cost for stock option plans.
Compensation cost actually recognized for stock options was $0 for both 1995 and
1996.
1995 1996
---- ----
Net income as reported $ 1,242 $ 876
Pro forma net income 1,224 821
Earnings per share as reported 1.30 1.00
Pro forma earnings per share 1.29 .93
- --------------------------------------------------------------------------------
(Continued)
34
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994, 1995 and 1996
(Dollars in thousands, except per share date)
- --------------------------------------------------------------------------------
NOTE 10 - BENEFIT PLANS (Continued)
Weighted-Average Weighted-Average
Number Per Share Per Share
of Options Exercise Price Fair Value of Grants
---------- -------------- --------------------
Outstanding, January 1, 1995 -
Granted 74,112 $ 15.375 $ 4.45
Exercised -
Forfeited -
Expired -
------------
Outstanding, end of 1995 74,112 15.375 4.45
Granted -
Exercised -
Forfeited -
Expired -
------------
Outstanding, end of 1996 74,112 15.375 4.45
Options exercisable at year-end are as follows:
Number Weighted-Average
of Options Exercise Price
---------- --------------
1995 - $ -
1996 14,822 $ 15.375
The fair value of options granted during 1995 is estimated using the following
weighted-average information: risk-free interest rate of 6.34%, expected life of
7 years, expected volatility of stock price of .15 and expected dividends of
1.56% per year.
At year-end 1996, options outstanding were as follows:
Number of options 74,112
Exercise price $15.375/share
Weighted-average exercise price 15.375/share
Weighted-average remaining option life 8.7 years
For options now exercisable: Number 14,822
Weighted-average exercise price $15.375/share
- --------------------------------------------------------------------------------
(Continued)
35
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994, 1995 and 1996
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 10 - BENEFIT PLANS (Continued)
In August 1995, LSB shareholders approved a Recognition and Retention Plan (RRP)
that awarded 27,793 shares of stock to certain officers and directors of the
Company. An additional 1,286 shares were awarded during 1996. The stock awarded
under the Plan is restricted as to certain rights at the time of issuance. These
restrictions are removed over a 5 year period. The cost of these shares is
amortized over the vesting period. Expense recorded for the RRP totalled $28 and
$90 in 1995 and 1996.
In conjunction with the conversion, the Bank established an ESOP which purchased
8%, or 82,366 shares, of the stock offered in the conversion. The funds used by
the ESOP to purchase the stock were provided by an $824 loan from LSB which will
be repaid by contributions to the ESOP by the Bank in the future. Pursuant to
the ESOP, the shares are to be allocated to participants annually, over a 12
year period. The ESOP covers substantially all employees and shares are
allocated based upon employee compensation levels during the year. ESOP expense
is based on the fair value of shares committed to be released and, for 1995 and
1996, totaled $123 and $143. During 1995 and 1996, 8,504 and 8,540 shares were
earned by and committed to be released to participants. The number of shares
earned each year is determined by the ESOP loan agreement. Shares no longer
required to be held as collateral for that loan are committed to be released and
are earned by participants. At December 31, 1996, 65,322 unreleased shares with
a fair value of $1,274 were held by the ESOP. The ESOP also held 8,504 shares
which were allocated to participants' accounts and 8,540 shares which were
released for allocation. Dividends paid on shares that are not allocated to
participants' accounts are used to service debt.
NOTE 11 - COMMITMENTS AND CONTINGENT LIABILITIES
The Bank leases branch and office facilities under operating leases that expire
in 1999 and 2000. Total expense for leased premises was $26, $34, and $54 for
the years ended December 31, 1994, 1995 and 1996. Future minimum lease payments
at December 31, 1996 are as follows:
1997 $ 47
1998 47
1999 33
2000 15
2001 -
--------------
$ 142
==============
- --------------------------------------------------------------------------------
(Continued)
36
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994, 1995 and 1996
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 11 - COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
In the ordinary course of business, the Bank has loans, commitments and
contingent liabilities, such as guarantees and commitments to extend credit,
which are not reflected in the accompanying consolidated statements of financial
condition. The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial guarantees is represented by the contractual
amounts of those instruments. The Bank uses the same credit policy to make such
commitments as it uses for on-balance-sheet items.
At December 31, 1995 and 1996 these financial instruments are summarized as
follows:
1995 1996
---- ----
Commitments to extend credit:
Fixed rate $ 1,188 $ 1,280
Variable rate 3,386 1,141
Unused portions of lines of credit 9,838 13,413
Standby letters of credit 833 423
The commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established under the contract.
Generally, such commitments are for no more than 60 days. At December 31, 1996,
the fixed rate loan commitments were at rates ranging from 7.5% to 8.375%. The
lines of credit are commercial and home equity lines of credit and are variable
rate.
Since many commitments to make loans expire without being used, the amounts do
not necessarily represent future cash commitments. Collateral obtained upon
exercise of the commitment is determined using management's credit evaluation of
the borrower.
LSB and the Bank are party to various legal actions arising in the course of
business. In the opinion of management, the companies have adequate legal
defenses and/or insurance coverage with respect to these actions and their
resolution will not materially affect the operations or financial position of
LSB or the Bank.
The Bank is party to an agreement with a third party service organization which
provides data processing services to the Bank until the year 2000. Should the
Bank terminate the contract prior to completion of the term, it would incur a
penalty based on 80% of the expected remaining payments under the agreement.
- --------------------------------------------------------------------------------
(Continued)
37
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994, 1995 and 1996
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 12 - INCOME TAXES
An analysis of the income tax provision is as follows:
Year ended December 31,
-----------------------
1994 1995 1996
---- ---- ----
Current provision $ 277 $ 645 $ 692
Deferred provision (benefit) (12) 79 (142)
------------- -------------- -------------
$ 265 $ 724 $ 550
============= ============== =============
The difference between the financial statement income tax provision and the
amount computed by applying the statutory federal tax rate of 34% to income
before income taxes is reconciled as follows:
Year ended December 31,
-----------------------
1994 1995 1996
---- ---- ----
Income tax provision computed at statutory rate $ 282 $ 668 $ 485
Add (subtract) tax effect of
Low income housing credit (37) (49) (36)
Tax exempt income (16) (24) (10)
State tax expense (net) 29 116 89
Other 7 13 22
------------- -------------- -------------
$ 265 $ 724 $ 550
============= ============== =============
The net deferred tax asset recorded at December 31, 1995 and 1996 is comprised
of the following:
1995 1996
---- ----
Deferred tax assets from:
Bad debt deductions $ 138 $ 460
Loan fee income 125 28
Net unrealized loss on available-for-sale securities 19 22
-------------- -------------
282 510
Deferred tax liability from:
Fixed asset depreciation (71) (133)
Other - (21)
-------------- -------------
(71) (154)
Valuation allowance for deferred tax assets - -
-------------- -------------
Net deferred tax asset $ 211 $ 356
============== =============
- --------------------------------------------------------------------------------
(Continued)
38
LSB FINANCIAL CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1994, 1995 and 1996
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 13 - EARNINGS PER SHARE
Earnings per share are based on the weighted average number of shares
outstanding during the period, adjusted, if the effect is significant, for
common stock equivalents. The stock options outstanding are considered common
stock equivalents. To evaluate the potential dilutive effect of these common
stock equivalents, actual weighted average shares outstanding are increased by
the number of shares issuable under the options, assuming full exercise, and
reduced by the number of shares that could, hypothetically, be reacquired using
the proceeds from the exercise of those options. For 1995 and 1996, the dilutive
effect of the stock options was not significant and earnings per share were
computed based upon weighted average shares outstanding which were 958,566 in
1995 and 877,411 for 1996.
Unreleased shares held by the ESOP are not considered to be outstanding for the
purpose of computing earnings per share, whereas shares awarded under the RRP
are considered to be outstanding.
NOTE 14 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
LSB is required to disclose the estimated fair value of its financial
instruments. The following methods and assumptions were used to estimate the
fair value of each class of financial instruments:
Cash, Short-term Investments and Federal Home Loan Bank Stock: The carrying
amount of these instruments is a reasonable estimate of fair value.
Securities: Fair values are based on quoted market prices or dealer quotes. If a
quoted market price is not available, fair value is estimated using quoted
market prices for similar instruments.
Loans: The fair value of loans is based on estimates of the difference in
interest rates that LSB would charge borrowers for similar loans with similar
maturities applied for an estimated time period until the loan is assumed to
reprice or be paid. Loan prepayments are considered when estimating the likely
time period until repayment.
Deposits: The fair value of demand deposits, savings accounts and certain money
market deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
- --------------------------------------------------------------------------------
(Continued)
39
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994, 1995 and 1996
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 14 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Federal Home Loan Bank Advances: The fair value of these advances was estimated
based upon the current rates charged for advances with similar terms.
Other Borrowings: The carrying amount of other borrowings is a reasonable
estimate of fair value.
Off-Balance Sheet Items: Carrying value is a reasonable estimate of fair value.
These instruments are generally variable rate and short-term in nature, with
minimal fees charged.
The estimated fair values of the LSB's financial instruments are as follows:
1995 1996
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Financial assets
Cash and short-term
investments $ 7,795 $ 7,795 $ 9,798 $ 9,798
Available-for-sale securities 12,295 12,295 6,546 6,546
Federal Home Loan Bank stock 1,500 1,500 2,575 2,575
Loans (net) 132,433 136,859 159,216 160,012
Financial liabilities
Deposits (109,977) (110,514) (116,949) (116,838)
Federal Home Loan Bank
advances (28,500) (28,669) (50,000) (49,975)
Other borrowings (1,114) (1,114) (220) (220)
Off balance sheet items - - - -
- --------------------------------------------------------------------------------
(Continued)
40
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994,1995and 1996
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS
Presented below are the condensed balance sheet and the related condensed
statements of income and cash flows for the parent company.
CONDENSED BALANCE SHEETS
December 31, 1995 and 1996
1995 1996
---- ----
ASSETS
Short-term investments $ 1,068 $ 797
Investment in the Bank 15,013 15,102
Available-for-sale securities 1,236 250
Loan to ESOP 755 686
Other assets 24 3
------------- -------------
$ 18,096 $ 16,838
============= =============
LIABILITIES $ 28 $ 42
SHAREHOLDERS' EQUITY 18,068 16,796
------------- -------------
$ 18,096 $ 16,838
============= =============
CONDENSED STATEMENTS OF INCOME
For the years ended December 31, 1995 and 1996
1995 1996
---- ----
Operating income
Dividends from the Bank $ - $ 1,000
Other operating income 133 83
------------- ------------
Total operating income 133 1,083
Operating expenses 32 82
------------- ------------
Income before taxes and equity in
undistributed income of the Bank 101 1,001
Income tax provision 26 (3)
------------- ------------
Income before equity in undistributed
income of the Bank 75 1,004
Equity in undistributed income of the Bank 1,167 (128)
------------- ------------
Net income $ 1,242 $ 876
============= ============
- --------------------------------------------------------------------------------
(Continued)
41
LSB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994, 1995 and 1996
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS (Continued
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1995 and 1996
1995 1996
---- ----
Cash flows from operating activities
Net income $ 1,242 $ 876
Adjustments to reconcile net income to net cash from operating
activities
Equity in undistributed income of the Bank (1,167) 128
Amortization of premiums paid for securities 36 1
Gain on sale of securities - (9)
Change in other assets (24) 21
Change in other liabilities 28 23
------------- -------------
Net cash from operating activities 115 1,040
Cash flows from investing activities
Investment in the Bank (5,102) -
Proceeds from the sale of available-for-sale securities 510 814
Purchase of available-for-sale securities (4,370) (840)
Proceeds from the maturity of available-for-sale securities 1,100 1,000
Proceeds from repayment of the loan to ESOP 69 69
------------- -------------
Net cash from investing activities (7,793) 1,043
Cash flows from financing activities
Proceeds from issuance of stock, net of ESOP debt 8,785 -
Issuance of RRP shares 427 22
Dividends paid - (213)
Repurchase of treasury stock (466) (2,163)
------------- -------------
Net cash from financing activities 8,746 (2,354)
------------- -------------
Net changes in cash equivalents 1,068 (271)
Cash equivalents at beginning of year - 1,068
------------- -------------
Cash equivalents at end of year $ 1,068 $ 797
============= =============
Taxes paid during 1995 and 1996 were $0 and $0.
NOTE 16 - PENDING CHANGES IN ACCOUNTING POLICIES
Financial Accounting Standard No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities," was issued by the
Financial Accounting Standards Board in 1996. It revises the accounting for
transfers of financial assets, such as loans and securities, and for
distinguishing between sales and secured borrowings. It is effective for some
transactions in 1997 and others in 1998. Management does not expect the effect
on LSB's financial position and results of operations to be significant.
- --------------------------------------------------------------------------------
42
LSB FINANCIAL CORP.
and
LAFAYETTE SAVINGS BANK, FSB
DIRECTORS AND EXECUTIVE OFFICERS
Directors
John W. Corey Peter Neisel
President and Chief Executive President and CE0, Schwab Corp.
Officer, LSB and Lafayette Bank
Mariellen M. Neudeck Jeffrey A. Poxon
Chairman of the Board, LSB and Investment Vice President, The Lafayette
Lafayette Bank Life Insurance Company
Vice President, St. Elizabeth
Hospital Medical Center
James A. Andrew Thomas L. Ryan
President and Owner, Henry Poor Partner, Stuart & Branigin
Lumber Co.
Harry A. Dunwoody John C. Shen
Senior Vice President of LSB and Developer and Sole Owner,
Lafayette Bank Crestview Apartments and Crestview North Apartments
Philip W. Kemmer C. Wesley Shook
Business Administrator, Secretary-Treasurer,
First Assembly of God Church The Shook Agency
Executive Officers
John W. Corey Mary Jo David
President and Chief Executive Officer Vice President, Chief Financial Officer and
Secretary-Treasurer
Harry A. Dunwoody
Senior Vice President
43
STOCKHOLDER INFORMATION
Corporate Profile
LSB is an Indiana corporation which was organized in 1994 by the Bank
for the purpose of becoming a thrift institution holding company. The Bank was
organized in 1869 and converted to a federal savings bank in 1984. On February
3, 1995, the Bank converted to the stock form of organization and concurrently
became the wholly-owned subsidiary of LSB through the sale and issuance of
1,029,576 shares of Common Stock. The principal asset of LSB is the outstanding
stock of the Bank, its wholly owned subsidiary. The Bank's primary business
consists of attracting deposits from the general public and using these deposits
to provide financing for the purchase and construction of residential and, to a
lesser extent, other properties.
Corporate Office Branch Offices
101 Main Street 1020A Sagamore Parkway W.
Lafayette, Indiana 47902 West Lafayette, Indiana
1501 Sagamore Parkway W.
Lafayette, Indiana
833 Twyckenham Blvd.
Lafayette, IN 47905
Independent Auditors Local Counsel
Crowe, Chizek and Company LLP Stuart & Branigin
2100 Market Tower 300 Main Street, Suite 800
10 W. Market Street Lafayette, Indiana 47902
Indianapolis, Indiana 46204-2976
Transfer Agent Special Counsel
American Securities Transfer, Inc. Silver, Freedman & Taff, L.L.P.
1825 Lawrence Street 1100 New York Avenue, N.W.
Denver, Colorado 80202 Washington, D.C. 20005
Form 10-K Report
A copy of LSB's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 including financial statements, as filed with the SEC will be
furnished without charge to stockholders of LSB upon written request to the
Secretary, LSB Financial Corp., 101 Main Street, P.O. Box 1628, Lafayette,
Indiana 47902.
44
Commnon Stock
As of December 31, 1996, there were approximately 654 holders of record
of LSB Common Stock and 902,760 shares of issued and outstanding common stock.
LSB's stock is quoted on the Nasdaq National Stock Market under the symbol
"LSBI."
The following table sets forth, for the periods shown, the high and low
prices of the common stock and cash dividends per share declared. The common
stock began trading on Nasdaq on February 5, 1995, the date the Bank converted
from a mutual to stock company.
The prices reflect inter-dealer quotations without retail mark-up,
mark-down or commissions and do not necessarily represent actual transactions.
Cash
Dividends
Quarter Ended High Low Declared
------------- ---- --- --------
March 31, 1995 $12.50 $10.75 $0.00
June 30, 1995 14.25 11.75 0.00
September 30, 1995 16.75 13.50 0.00
December 31, 1995 17.25 16.00 0.00
March 31, 1996 17.375 16.50 0.00
June 30, 1996 16.50 15.50 0.08
September 30, 1996 17.25 15.00 0.08
December 31, 1996 19.50 17.25 0.08
Dividend payment decisions are made with consideration of a variety of factors
including earnings, financial condition, market considerations and regulatory
restrictions. Restrictions on dividend payments are described in Note 9 of the
Notes to Consolidated Financial Statements included in this Annual Report.