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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 29549
FORM 10-K
- --------------------------------------------------------------------------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2001
Commission File Number 0-11448
- --------------------------------------------------------------------------------
LSB BANCSHARES, INC.
One LSB Plaza
Lexington, North Carolina 27292
(336) 248-6500
Incorporated in the State of North Carolina
IRS Employer Identification No. 56-1348147
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g)OF THE ACT:
Common Stock, Par Value $5.00 Per Share
LSB Bancshares, Inc. has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports) and has been subject to such filing requirements for the past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
The aggregate market value (average of the bid and asked prices) of the voting
stock held by nonaffiliates of the registrant as of January 31, 2002 was
$122,406,767 and the number of shares outstanding was 8,441,846.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the year ended
December 31, 2001 are incorporated by reference into Parts I and II of this
report. Portions of the registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held April 17, 2002 are incorporated by reference into Part
III of this report.
38
Form 10-K Cross-Reference Index
This 2001 Annual Report and Form 10-K of the registrant incorporates into a
single document the 2001 Annual Report to Shareholders and the Annual Report on
Form 10-K for the year ended December 31, 2001 filed by the registrant with the
Securities and Exchange Commission. This Form 10-K Annual Report incorporates by
reference certain information contained in the Annual Report to Shareholders
and portions of the registrant's Proxy Statement relating to the 2002 Annual
Meeting of Shareholders as is reflected in the following Cross-Reference Index.
Incorporated by Reference into the Following Items Information Appearing on
of Form 10-K the Following Pages of the:
- ----------------------------------------------------------------------------- --------------------------------
Annual Report Proxy Statement
PART I
Item 1. Business .......................................................... 13, 16-25.......................
Item 2. Properties ........................................................ 13, 32, 34, 35 (Notes 5 and 15).
Item 3. Legal Proceedings ................................................. 32-33 (Note 8)..................
Item 4. Submission of Matters to a Vote of Security Holders (None).........
PART II
Item 5. Market for Registrant's Common Equity and Related .................
Shareholder Matters ............................................... 44............................
Item 6. Selected Financial Data ........................................... 14............................
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................... 16-25.........................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ........ 17-21, 34 (Note 13)...........
Item 8. Financial Statements and Supplementary Data ....................... 26-36
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure (None) ...................................
PART III
Item 10. Directors and Executive Officers of the Registrant ................ 12, 41........................
Item 11. Executive Compensation ............................................ ...........................6-8
Item 12. Security Ownership of Certain Beneficial Owners and
Management ........................................................ ...........................3-4
Item 13. Certain Relationships and Related Transactions .................... ............................15
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K:
(a) The following documents to be filed as part of the Form 10-K:
(1) Financial Statements:
Independent Accountants' Audit Report ....................... 37............................
Consolidated Balance Sheets - December 31, 2001 and 2000 .... 26............................
Consolidated Statements of Income - Years Ended
December 31, 2001, 2000 and 1999 ........................... 27............................
Consolidated Statements of Changes in Shareholders' Equity
Years Ended December 31, 2001, 2000 and 1999 ............... 28............................
Consolidated Statements of Cash Flows - Years Ended
December 31, 2001, 2000 and 1999 ........................... 29............................
Notes to Consolidated Financial Statements .................. 30-36.........................
(2) Financial Statement Schedules (None) .......................
(3) Exhibits:
3.1 Articles of Incorporation of LSB Bancshares, Inc., as amended, which are incorporated by
reference to Exhibit 4.2 of the registrant's Registration Statement on Form S-8 filed with
the Securities and Exchange Commission on November 17, 1992 (File No. 33-54610).
3.2 Bylaws of LSB Bancshares, Inc., as amended, which are incorporated by reference to Exhibit 3.2
of the registrant's Annual Report on Form 10-K for the year ended December 31, 1995.
39
FORM 10-K CROSS-REFERENCE INDEX (CONT'D)
Incorporated by Reference into the Following Items
of Form 10-K
------------------------------------------------------------------------------------------------------
PART IV
Item 14. 4.1 Specimen certificate of common stock, $5.00 par value, which is incorporated by reference to
(cont'd) Exhibit 4 of the registrant's Registration Statement on Form S-1 (File No. 2-99312).
4.2 Rights Agreement dated as of February 10, 1998 by and between LSB Bancshares, Inc. and
Wachovia Bank, N.A., as Rights Agent, which is incorporated by reference to Exhibit 1 of the
Registrant's Registration Statement on Form 8-A filed with the Securities and Exchange
Commission on March 6, 1998.
10.1 1996 Omnibus Stock Incentive Plan, which is incorporated by reference to Exhibit 10.2 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1995.
10.2 1996 Management Plan, which is incorporated by reference to Exhibit 10.3 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995.
10.3 1994 Director Stock Option Plan of LSB Bancshares, Inc., which is incorporated by reference
to Exhibit 4 of the registrant's Registration Statement on Form S-8 filed with the Securities
and Exchange Commission on July 15, 1994 (File No. 33-81664).
10.4 Employment Continuity Agreement effective as of December 24, 1997 between LSB Bancshares,
Inc. and Nicholas A. Daves, which is incorporated by reference to Exhibit 10.7 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1997.
10.5 Employment Continuity Agreement effective as of June 9, 1998 between LSB Bancshares, Inc. and
Robert F. Lowe, which is incorporated by reference to Exhibit 10.8 of the Registrant's Annual
Report on form 10-K for the year ended December 31, 1998.
10.6 Employment Continuity Agreement effective as of June 9, 1998 between LSB Bancshares, Inc. and
H. Franklin Sherron, which is incorporated by reference to Exhibit 10.9 of the Registrant's
Annual Report on form 10-K for the year ended December 31, 1998.
10.7 Employment Continuity Agreement effective as of June 9, 1998 between LSB Bancshares, Inc. and
Monty J. Oliver, which is incorporated by reference to Exhibit 10.10 of the Registrant's
Annual Report on form 10-K for the year ended December 31, 1998.
10.8 Employment Continuity Agreement effective as of June 9, 1998 between LSB Bancshares, Inc. and
Robin A. Huneycutt, which is incorporated by reference to Exhibit 10.11 of the Registrant's
Annual Report on form 10-K for the year ended December 31, 1998.
10.9 Employment Continuity Agreement effective as of June 9, 1998 between LSB Bancshares, Inc. and
Ronald W. Sink, which is incorporated by reference to Exhibit 10.12 of the Registrant's
Annual Report on form 10-K for the year ended December 31, 1998.
10.10 Employment Continuity Agreement effective as of June 9, 1998 between LSB Bancshares, Inc. and
Ronald E. Coleman, which is incorporated by reference to Exhibit 10.13 of the Registrant's
Annual Report on form 10-K for the year ended December 31, 1998.
10.11 Employment Continuity Agreement effective as of June 9, 1998 between LSB Bancshares, Inc. and
D. Gerald Sink, which is incorporated by reference to Exhibit 10.14 of the Registrant's
Annual Report on form 10-K for the year ended December 31, 1998.
10.12 Employment Continuity Agreement effective as of June 9, 1998 between LSB Bancshares, Inc. and
Joe W. Carroll, which is incorporated by reference to Exhibit 10.15 of the Registrant's
Annual Report on form 10-K for the year ended December 31, 1998.
10.13 Employment Continuity Agreement effective as of June 9, 1998 between LSB Bancshares, Inc. and
Suzanne J. Bullotta, which is incorporated by reference to Exhibit 10.16 of the Registrant's
Annual Report on form 10-K for the year ended December 31, 1998.
10.14 Employment Continuity Agreement effective as of March 1, 2001 between LSB Bancshares, Inc.
and Philip G. Gibson, which is incorporated by reference to Exhibit 10.17 of the Registrant's
Annual Report on form 10-K for the year ended December 31, 2001.
10.15 Employment Continuity Agreement effective as of April 23, 2001 between LSB Bancshares, Inc.
and Robert E. Lineback, Jr., which is incorporated by reference to Exhibit 10.18 of the
Registrant's Annual Report on form 10-K for the year ended December 31, 2001.
10.16 Employment Continuity Agreement effective as of October 15, 2001 between LSB Bancshares, Inc.
and M. Jack Smith, which is incorporated by reference to Exhibit 10.19 of the Registrant's
Annual Report on form 10-K for the year ended December 31, 2001.
13. 2001 Annual Report to Shareholders.
21. List of Subsidiaries at December 31, 2001.
23. Consent of Turlington and Company, L.L.P.
(b) Reports on Form 8-K: No reports on Form 8-K were filed by the
registrant during the last quarter covered by this report.
40
Description of Business
REGISTRANT
LSB Bancshares, Inc. ("Bancshares") is a bank holding company headquartered in
Lexington, North Carolina and registered under the Bank Holding Company Act of
1956, as amended. Bancshares' principal business is providing banking and other
financial services through its banking subsidiary. Incorporated on July 1, 1983,
Bancshares is the parent holding company of Lexington State Bank ("LSB"), a
North Carolina-chartered commercial bank. The principal assets of Bancshares are
all outstanding shares of LSB common stock. At December 31, 2001, Bancshares and
its subsidiary had consolidated assets of $833 million and 370 employees.
SUBSIDIARY BANK
LSB is chartered under the laws of the State of North Carolina to engage in the
business of general banking. Founded in 1949, LSB offers a complete array of
services in commercial banking including accepting deposits, corporate cash
management, discount brokerage, IRA plans, secured and unsecured loans and trust
functions through twenty-three offices in fourteen communities located in
Davidson, Forsyth, Stokes and Guilford counties in North Carolina. LSB operates
the only independent trust department in Davidson County, providing estate
planning, estate and trust administration, IRA trusts, personal investment
accounts and pension and profit-sharing trusts.
NON-BANK SUBSIDIARIES
LSB has two wholly-owned non-bank subsidiaries: Peoples Finance Company of
Lexington, Inc. ("Peoples Finance") and LSB Investment Services, Inc. ("LSB
Investment Services"). Peoples Finance was acquired by LSB on January 1, 1984
and operates as a finance company licensed under the laws of the State of North
Carolina. Peoples Finance operates from two offices located in Lexington and
King, North Carolina with five employees. As a finance company, Peoples Finance
offers secured and unsecured loans to individuals up to a maximum of $10,000, as
well as dealer originated loans.
LSB Investment Services was incorporated under the laws of the State of North
Carolina in 1994 and began operations on December 1, 1994. It offers a full
range of uninsured, nondeposit investment products, including mutual funds,
annuities, stocks and bonds. LSB Investment Services operates from offices
located within LSB's home office and the Stratford Road office with four
employees. LSB Investment Services offers products through Uvest Investment
Services, an independent broker-dealer, which is a member of the National
Association of Securities Dealers and the Securities Investor Protection
Corporation. Investments are neither deposits nor obligations of Lexington State
Bank, nor are they guaranteed or insured by any depository institution, the
FDIC, or any other government agency.
COMPETITION
Commercial banking in LSB's service area is highly competitive. LSB actively
competes with national and state banks, thrift institutions, credit unions,
investment brokers, mortgage and finance companies. Competition of community
banks with regional and national banks has intensified significantly as a result
of deregulation of the financial industry.
REGULATION
As a bank holding company, Bancshares is subject to supervision, examination and
regulation by the Board of Governors of the Federal Reserve System. LSB is
chartered by the State of North Carolina and as such is subject to supervision,
examination and regulation by the North Carolina State Banking Commission. LSB
is also a member of the Federal Deposit Insurance Corporation and is therefore
subject to supervision and examination by that agency.
PROPERTIES
Bancshares' principal executive offices are located at One LSB Plaza, Lexington,
North Carolina. This five-story office building totals 74,800 square feet and
also serves as the home office of LSB. A majority of the major staff functions
are located within this office complex, which is owned by LSB.
LSB operates twenty-three offices and eight off-premise automated teller
locations. Eleven branches are owned by LSB, while twelve branches and the
off-premise ATM locations are leased. LSB's leased properties are subject to
leases that expire on various dates from June 30, 2002 to February 28, 2010.
Peoples Finance operates from a 1,800 square foot, one-story building located at
203 East Center Street in Lexington, which it owns and a 500 square foot,
one-story building located at 607 South Main Street in King, which it leases.
LSB Investment Services leases 800 square feet within the principal office
building of LSB. Except as described herein, Bancshares, LSB, Peoples Finance
and LSB Investment Services own all properties free and clear of encumbrances.
13
Summary of
Selected Financial Data
Years Ended December 31
(In thousands, except per share data and ratios) 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Interest income ............................. $ 58,607 $ 60,943 $ 52,441 $ 49,657 $ 45,467
Interest expense ............................ 25,619 29,202 22,373 21,682 19,547
-------- -------- -------- -------- --------
Net interest income ......................... 32,988 31,741 30,068 27,975 25,920
Provision for loan losses ................... 1,862 2,550 780 770 785
-------- -------- -------- -------- --------
Net interest income
after provision for loan losses ............ 31,126 29,191 29,288 27,205 25,135
Noninterest income .......................... 9,758 8,063 7,187 6,585 5,389
Noninterest expense ......................... 27,311 24,540 23,068 21,151 20,426
-------- -------- -------- -------- --------
Income before income taxes .................. 13,573 12,714 13,407 12,639 10,098
Income taxes ................................ 4,421 3,919 3,927 3,959 3,336
-------- -------- -------- -------- --------
Net income .................................. $ 9,152 $ 8,795 $ 9,480 $ 8,680 $ 6,762
======== ======== ======== ======== ========
Cash dividends declared ..................... $ 4,727 $ 4,729 $ 4,775 $ 3,658 $ 2,712
======== ======== ======== ======== ========
SELECTED YEAR-END ASSETS
AND LIABILITIES
Investment securities ....................... $155,337 $125,332 $128,819 $143,843 $105,616
Loans, net of unearned income ............... 588,364 549,065 506,078 436,014 396,991
Assets ...................................... 833,327 795,570 727,759 679,006 616,265
Deposits .................................... 682,164 671,976 605,422 567,327 503,025
Shareholders' equity ........................ 79,343 74,243 70,724 73,430 67,527
RATIOS (AVERAGES)
Net income to total assets .................. 1.13% 1.13% 1.35% 1.35% 1.16%
Net income to shareholders' equity .......... 11.84 12.04 13.14 12.30 10.31
Dividend payout ............................. 51.65 53.78 50.36 42.14 40.11
Shareholders' equity to total assets ........ 9.56 9.41 10.28 10.96 11.21
PER SHARE DATA(*)
Earnings Per Share:
Basic ..................................... $ 1.08 $ 1.04 $ 1.11 $ 1.00 $ .78
Diluted ................................... 1.08 1.03 1.09 .98 .77
Cash dividends declared ..................... .56 .56 .56 .42 .35
Book value at end of year ................... 9.40 8.80 8.38 8.42 7.79
(*) Per share data has been restated in this table to give effect to the
five for four stock split paid February 16, 1998.
14
Average Balances And
Net Interest Income Analysis
Table 1
Fully taxable equivalent basis(1) (In thousands)
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
----------------------------- ----------------------------- ----------------------------
Earning assets:
Loans and leases
receivable, net(2) ............ $558,821 $48,584 8.69% $535,631 $49,440 9.23% $473,675 $42,520 8.98%
Taxable securities ............. 98,720 5,395 5.46 108,069 6,358 5.88 95,490 5,455 5.71
Tax exempt securities .......... 33,081 2,232 6.75 33,995 2,358 6.94 35,317 2,579 7.30
Federal Home Loan
Bank .......................... 2,652 179 6.75 2,411 188 7.80 2,096 157 7.49
Interest-bearing bank
balances ...................... 4,628 194 4.19 6,869 424 6.17 9,714 459 4.73
Federal funds sold and
securities purchased under
resale agreements ............. 66,980 2,608 3.89 43,820 2,775 6.33 39,120 1,975 5.05
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total earning assets .......... 764,882 59,192 7.74 730,795 61,543 8.42 655,412 53,145 8.11
Non-earning assets:
Cash and due from banks ........ 26,496 30,560 32,446
Premises and equipment ......... 12,054 11,452 11,461
Other assets ................... 10,638 8,517 7,706
Reserve for loan losses ........ (6,072) (5,538) (5,211)
-------- ------- -------- ------- -------- -------
Total assets .................. $807,998 $59,192 $775,786 $61,543 $701,814 $53,145
======== ======= ======== ======= ======== =======
Interest-bearing liabilities:
Savings and time
deposits ...................... $599,472 $22,859 3.81% $569,038 $25,664 4.51% $516,346 $20,314 3.93%
Securities sold under
agreements to
repurchase ................... 3,424 169 4.94 17,367 1,008 5.80 3,852 154 4.00
Borrowings from Federal
Home Loan Bank ............... 45,936 2,591 5.64 40,650 2,530 6.22 34,790 1,905 5.48
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities .................. 648,832 25,619 3.95 627,055 29,202 4.66 554,988 22,373 4.03
Other liabilities and
shareholders' equity:
Demand deposits................. 73,675 70,937 70,904
Other liabilities............... 8,206 4,767 3,749
Shareholders' equity ........... 77,285 73,027 72,173
-------- ------- -------- ------- -------- -------
Total liabilities and
shareholders'
equity ...................... $807,998 $25,619 $775,786 $29,202 $701,814 $22,373
======== ======= ======== ======= ======== =======
Net interest income and
net interest margin(3).......... $33,573 4.39% $32,341 4.43% $30,772 4.70%
======= ==== ======= ==== ======= ====
Interest rate spread(4)......... 3.79% 3.76% 4.08%
==== ==== ====
(1) Income related to securities and loans exempt from federal income taxes
is stated on a fully taxable-equivalent basis, assuming a federal
income tax rate of 34%, and is then reduced by the non-deductible
portion of interest expense.
(2) The average loans and leases receivable balances include non-accruing
loans. Loan fees of $1,953, $1,395 and $1,619 for 2001, 2000 and 1999,
respectively, are included in interest income.
(3) Net interest margin is computed by dividing net interest income by
average earning assets.
(4) Earning assets yield minus interest-bearing liability rate.
15
Management's Discussion and
Analysis of Operations and
Financial Condition
This report contains certain forward-looking statements related to anticipated
future operating and financial performance, and other similar statements of
expectations. These forward-looking statements are based on estimates, beliefs
and assumptions made by management and are not guarantees of future performance.
Actual results may differ from those expressed or implied as the result of
various factors, including: (1) the strength of the United States economy
generally and the strength of the local economies in which Bancshares conducts
operations may be different than expected resulting in, among other things, a
deterioration in credit quality or a reduced demand for credit, including the
resultant effect on Bancshares' loan portfolio and allowance for loan losses;
(2) the effects of, and changes in, trade, monetary and fiscal policies and
laws, including interest rate policies of the Board of Governors of the Federal
Reserve System; (3) inflation, interest rate, market and monetary fluctuations;
(4) adverse conditions in the stock market, the public debt market and other
capital markets (including changes in interest rate conditions) and the impact
of such conditions on Bancshares' capital markets and capital management
activities, including, without limitation, Bancshares' private equity investment
activities and brokerage activities; (5) the timely development of competitive
new products and services by Bancshares and the acceptance of these products and
services by new and existing customers; (6) the willingness of customers to
accept third party products marketed by Bancshares; (7) the willingness of
customers to substitute competitors' products and services for Bancshares'
products and services and vice versa; (8) the impact of changes in financial
services' laws and regulations (including laws concerning taxes, banking and
securities); (9) technological changes; (10) changes in consumer spending and
saving habits; (11) the effect of corporate restructurings, acquisitions and/or
dispositions, and the failure to achieve the expected revenue growth and/or
expense savings from such corporate restructurings, acquisitions and/or
dispositions; (12) the growth and profitability of Bancshares' noninterest or
fee income being less than expected; (13) unanticipated regulatory or judicial
proceedings; (14) the impact of changes in accounting policies by the Securities
and Exchange Commission; (15) adverse changes in financial performance and/or
condition of Bancshares' borrowers which could impact repayment of such
borrowers' outstanding loans; and (16) Bancshares' success at managing the risks
involved in the foregoing. Bancshares cautions that the foregoing list of
important factors is not exclusive. Bancshares does not undertake to update any
forward-looking statement, whether written or oral, that may be made from time
to time by or on behalf of Bancshares.
The discussion presented herein is intended to provide an overview of the
changes in financial condition and results of operations for LSB Bancshares,
Inc. ("Bancshares") and its wholly-owned subsidiary, Lexington State Bank
("LSB") for the years 2001, 2000 and 1999. The consolidated financial statements
include the accounts and results of operations of LSB's wholly owned
subsidiaries, Peoples Finance Company of Lexington, Inc. ("Peoples Finance") and
LSB Investment Services, Inc. ("LSB Investment Services"). The intent of the
discussion and
VOLUME AND RATE VARIANCE ANALYSIS
Table 2 2001 2000
Volume Rate Total Volume Rate Total
Fully taxable equivalent basis(1) (In thousands) Variance(2) Variance(2) Variance Variance(2) Variance(2) Variance
------------------------------------- ------------------------------------
Interest income:
Loans receivable ................................. $ 2,096 $(2,952) $ (856) $ 5,706 $ 1,214 $ 6,920
Taxable investment securities .................... (527) (436) (963) 737 166 903
Tax exempt investment securities ................. (62) (64) (126) (95) (126) (221)
Federal Home Loan Bank ........................... 18 (27) (9) 24 7 31
Interest-Bearing Bank Balances ................... (116) (114) (230) (154) 119 (35)
Federal funds sold ............................... 1,140 (1,307) (167) 257 543 800
------- ------- ------- ------- ------- -------
Total interest income ......................... 2,549 (4,900) (2,351) 6,475 1,923 8,398
------- ------- ------- ------- ------- -------
Interest expense:
Savings and time deposits ........................ 1,323 (4,128) (2,805) 2,187 3,163 5,350
Securities sold under agreements to repurchase ... (708) (131) (839) 757 97 854
Borrowings from Federal Home Loan Bank ........... 310 (249) 61 347 278 625
------- ------- ------- ------- ------- -------
Total interest expense ........................ 925 (4,508) (3,583) 3,291 3,538 6,829
------- ------- ------- ------- ------- -------
Increase (decrease) in net interest income ....... $ 1,624 $ (392) $ 1,232 $ 3,184 $(1,615) $ 1,569
======= ======= ======= ======= ======= =======
(1) Income related to securities and loans exempt from federal income taxes
is stated on a fully taxable-equivalent basis, assuming a federal
income tax rate of 34%, and is then reduced by the non-deductible
portion of interest expense.
(2) The volume/rate variance for each category has been allocated on a
consistent basis between rate and volume variances, based on the
percentage of rate, or volume, variance to the sum of the two absolute
16
analysis is to provide the reader with pertinent information about Bancshares
and its subsidiaries in the areas of liquidity, capital resources, results of
operations, financial position, asset quality and interest sensitivity. It
should be read in conjunction with the audited financial statements, notes and
supplemental tables provided herein.
SUMMARY
Bancshares reported net income for 2001 of $9.152 million or $1.08 per diluted
share compared to $8.795 million or $1.03 per diluted share for 2000 and $9.480
million or $1.09 per diluted share for 1999. During 2001, the nation experienced
unprecedented interest rate reductions as we first slipped into a recession,
then suffered the effects of the September terrorist attacks. Interest rates in
2001 dropped to levels not seen in decades. By the end of the year, the Federal
Reserve had lowered interest rates eleven times and the prime interest rate
had gone from 9.50% to 4.75%.
Within these confines, Bancshares' experienced a modest gain in net interest
income. Noninterest income, however, posted a much larger gain for the year,
primarily the result of a new product introduction in the fourth quarter of
2001. Noninterest expense increased over the prior year as preparations began
for two branch openings. Operating results for 2001 reflected solid revenue
growth which management believes will continue into 2002.
Net interest income for 2001 increased $1.247 million or 3.9% compared to $1.673
million or 5.6% in 2000 and $2.093 million or 7.5% in 1999. For the year 2001,
noninterest income increased $1.695 million or 21.0% compared to $876,000 or
12.2% in 2000 and $602,000 or 9.1% in 1999. As LSB prepared to open two new
branches, noninterest expense increased $2.771 million or 11.3% in 2001 compared
to $1.472 million or 6.4% in 2000 and $1.917 million or 9.1% in 1999.
Return on average assets was 1.13% for 2001 and 2000, compared to 1.35% for
1999. Return on average shareholders' equity was 11.84% for 2001 compared to
12.04% for 2000 and 13.14% for 1999.
Total consolidated assets for 2001 increased $37.757 million or 4.7% compared to
$67.811 million or 9.3% in 2000 and $48.753 million or 7.2% in 1999. Loan growth
for 2001 was $39.299 million or 7.2% compared to $42.987 million or 8.5% for
2000 and $70.064 million or 16.1% for 1999. Deposit growth in 2001 posted a
modest gain of $10.188 million or 1.5% compared to $66.554 million or 11.0% in
2000 and $38.095 million or 6.7% in 1999.
INTEREST SENSITIVITY ANALYSIS(1)
December 31, 2001
------------------------------------------------------------------------------
Total
TABLE 3 1-90 91-180 181-365 Sensitive 1-5 Over
Day Day Day Within Year 5-Year
(In thousands) Sensitive Sensitive Sensitive One Year Sensitive Sensitive Total
--------- --------- --------- ---------- --------- --------- --------
Interest-earning assets:
Loans, net of unearned income .................... $160,124 $ 27,808 $ 49,259 $ 237,191 $269,561 $ 81,612 $588,364
U.S. Treasury securities ......................... 4,011 3,056 4,096 11,163 3,104 0 14,267
U.S. government agencies obligations ............. 3,009 0 1,008 4,017 88,910 9,984 102,911
Obligations of states and political subdivisions.. 500 1,016 0 1,516 7,541 25,937 34,994
Federal Home Loan Bank ........................... 3,165 3,165 3,165
Interest-Bearing Bank Balances ................... 2,768 2,768 2,768
Federal funds sold ............................... 37,710 37,710 37,710
-------- -------- -------- --------- -------- -------- --------
Total interest-earning assets ................. $211,287 $ 31,880 $ 54,363 $ 297,530 $369,116 $117,533 $784,179
======== ======== ======== ========= ======== ======== ========
Interest-bearing liabilities:
N.O.W. account deposits .......................... $ 39,137 $ 39,137 $ 79,018 $ 118,155
Money market deposits(2) ......................... 45,118 45,118 155,877 200,995
Regular savings deposits(2) ...................... 2,069 2,069 30,592 32,661
Time deposits .................................... 101,956 $ 77,632 $ 37,225 216,813 31,347 248,160
Securities sold under agreements to repurchase ... 3,177 3,177 3,177
Borrowing from Federal Home Loan Bank ............ 300 300 35,000 $ 28,000 63,300
-------- -------- -------- --------- -------- -------- --------
Total interest-bearing liabilities ............ $191,757 $ 77,632 $ 37,225 $ 306,614 $331,834 $ 28,000 $666,448
======== ======== ======== ========= ======== ======== ========
Interest sensitivity gap ......................... $ 19,530 $(45,752) $ 17,138 $ (9,084)
Ratio of interest-sensitive assets/
interest-sensitive liabilities ................. 1.10 .41 1.46 .97
(1) Interest sensitivity is computed using assets and liabilities having
interest rates that can be adjusted during the period indicated.
(2) Maturity of deposits without a contractual maturity date was computed
using an asset/liability simulation model.
17
SUMMARY OF INVESTMENT SECURITIES PORTFOLIO
Table 4 December 31, 2001 December 31, 2000 December 31, 1999
--------------------- ---------------------- ----------------------
Amortized Market Amortized Market Amortized Market
(In thousands) Cost Value Cost Value Cost Value
--------- -------- --------- -------- --------- --------
U.S. Treasury securities ......................... $ 14,030 $ 14,338 $ 21,076 $ 21,188 $ 27,622 $ 27,405
U.S. government agencies obligations ............. 102,021 103,557 68,592 68,440 64,630 62,577
Mortgage-backed obligations ...................... 0 0 0 0 436 430
Obligations of state and political subdivisions .. 34,968 35,384 33,154 33,956 34,848 34,482
Federal Home Loan Bank ........................... 3,165 3,165 2,477 2,477 2,258 2,258
-------- -------- -------- -------- -------- --------
Total securities ............................... $154,184 $156,444 $125,299 $126,061 $129,794 $127,152
======== ======== ======== ======== ======== ========
As of the latest reported period, the registrant is not aware of any issuer, and
the aggregate book value and aggregate market value of the securities of such
issuer, when the aggregate book value of such securities exceeds 10% of the
registrant's shareholders' equity.
MARKET RISK MANAGEMENT
It is the design of market risk management to ensure long-range profitability
performance and minimize risk, adhere to proper liquidity and maintain sound
capital. To meet these objectives, the process of asset/liability management
monitors the exposure to interest rate risk, balance sheet trends, pricing
policies and liquidity position.
Interest rate movements and balance sheet composition affect profitability and
performance. Management's responsibility for both liquidity and interest
sensitivity reside with a designated Asset/Liability Management Committee
("ALCO"). As a part of its decision-making process, the ALCO Committee evaluates
market conditions, interest rate trends and the economic environment. Based
upon its view of existing and expected market conditions, the ALCO Committee
adopts balance sheet strategies intended to optimize net interest income to
the extent possible while minimizing the risk associated with unanticipated
changes in interest rates.
Cash and cash equivalents, maturing investments and loans, and securities
available for sale are principal sources of liquidity for LSB. Correspondent
relationships are also maintained with several large banks in order to have
access to federal funds purchases as a secondary source of liquidity. LSB also
has available lines of credit maintained with the Federal Home Loan Bank of
Atlanta ("FHLB") which can be used for funding and/or liquidity needs. This
credit is collateralized by a blanket lien on qualifying loans secured by first
mortgages on 1-4 family residences. LSB also has retail CD brokerage
agreements that provide additional sources of liquidity for funding needs.
Asset/Liability management includes analyzing interest sensitivity, which
pertains to possible changes in the rates of certain assets and liabilities
before their scheduled maturities. The ALCO process seeks to match maturities
and repricing opportunities of interest-sensitive assets and liabilities to
minimize risk of interest rate movements. Full discussion of the effects of
these respective portfolios on LSB's performance for 2001 can be found under the
headings of Earning Assets and Interest-Bearing Liabilities. The interest
sensitivity gap schedule analyzing the interest rate risk as of December 31,
2001 is presented in Table 3. Within this analysis, projected runoff of deposits
that do not have a contractual maturity date was computed using LSB's simulation
model. As interest sensitivity is continually changing, Table 3 reflects LSB's
balance sheet position at one point in time and is not necessarily indicative of
its position on other dates. On December 31, 2001 the one-year cumulative
interest sensitivity gap was a negative $9.084 million for a ratio of
interest-sensitive assets to interest-sensitive liabilities of .97.
Asset/liability management also addresses liquidity positioning. Liquidity
management is required in order to fund current and future extensions of credit,
meet deposit withdrawals, maintain reserve requirements and otherwise sustain
operations. As such, it is related to interest rate sensitivity management, in
that each is affected by maturing assets and liabilities. While interest
sensitivity management is concerned with repricing intervals of assets and
liabilities, liquidity management is concerned with the maturities of those
respective balances. An appropriate liquidity position is further accomplished
through deposit growth and access to sources of funds other than deposits, such
as the federal funds market. Traditionally, LSB has been a seller of excess
investable funds in the federal funds market and uses these funds as a part of
its liquidity management. Net cash provided by operating activities, a primary
source of liquidity, was $5.786 million in 2001 compared to $13.961 million in
2000 and $13.658 million in 1999. Details of cash flows for the years 2001, 2000
and 1999 are provided in the Consolidated Statements of Cash Flows.
NET INTEREST INCOME
Net interest income for LSB represents the dollar amount by which income
generated from earning assets exceeds its cost of funds. Net interest income is
the primary source of revenue for LSB. Interest-earning assets consist primarily
of loans and investment securities. These assets are subject to credit risk and
interest rate risk, which are discussed in detail in the Asset Quality and
Allowance for Loan Losses. Net interest income is
18
affected by various factors, among which are the volume of interest-earning
assets and interest-bearing liabilities and the interest rates earned and paid
on those assets and liabilities. Table 1 provides an analysis of average
volumes, yields and rates and net interest income on a tax-equivalent basis for
the three years ended December 31, 2001, 2000 and 1999. Tax-exempt income has
been adjusted so that it will be comparable to taxable income.
Net interest income on a tax-equivalent basis for 2001 totaled $33.573 million
compared to $32.341 million for 2000 and $30.772 million for 1999. The 2001
increase in net interest income was the result of larger growth in earning
assets over interest-bearing liabilities coupled with a steeper decline in the
cost of funds compared to the yield on earning assets.
The net interest margin, on a tax-equivalent basis, for 2001 was 4.39% compared
to 4.43% for 2000 and 4.70% for 1999. The net interest margin is calculated by
dividing tax-equivalent net interest income by average earning assets. The
Federal Reserve reduced interest rates eleven times during 2001 as they
attempted to revive the slowing economy. The reductions began on the third of
January, with a 50 basis point reduction. The Federal Reserve followed with
seven reductions of 50 basis points and three of 25 basis points. This rapidly
declining interest rate environment dropped the average yield on earning assets
by 68 basis points in 2001 and the average rate on interest-bearing liabilities
by 71 basis points. This allowed the interest rate spread to increase three
basis points in 2001 to 3.79% compared to 3.76% for 2000 and 4.08% for 1999.
INVESTMENT SECURITIES
PORTFOLIO MATURITY SCHEDULE
December 31, 2001
------------------------------
Table 5 Weighted
Amortized Average
(In thousands) Cost Yield(1)
--------- --------
U.S. Treasury securities:
Within one year ...................................... $ 11,021 6.25%
One to five years .................................... 3,009 5.81
---------
Total ............................................... 14,030 6.16
---------
U.S. government agencies obligations:
Within one year ...................................... 4,009 5.80
One to five years .................................... 88,012 5.55
Five to ten years .................................... 10,000 5.58
---------
Total ............................................... 102,021 5.56
---------
Obligations of states and political subdivisions:
Within one year ...................................... 1,516 9.58
One to five years .................................... 7,524 8.38
Five to ten years .................................... 12,447 7.93
After ten years ...................................... 13,481 7.32
---------
Total ............................................... 34,968 7.86
---------
Federal Home Loan Bank ................................ 3,165 6.75
---------
Total securities ...................................... $ 154,184 6.15
=========
(1) Income related to securities and loans exempt from federal income taxes
is stated on a fully taxable-equivalent basis, assuming a federal
income tax rate of 34%, and is then reduced by the non-deductible
portion of interest expense.
Average earning assets increased $34.087 million or 4.7% in 2001 compared to
$75.383 million or 11.5% in 2000 and $52.287 million or 8.7% in 1999. For 2001,
interest-bearing liabilities increased $21.777 million or 3.5% compared to
$72.067 million or 13.0% for 2000 and $51.356 million or 10.2% for 1999. A more
detailed discussion of the volume and rate variance is provided under the
sections of Earning Assets and Interest-Bearing Liabilities. An analysis of
volume and rate changes is presented in Table 2.
EARNING ASSETS
Volume and Rate Variance Analysis of earning assets and interest bearing
liabilities is presented in Table 2. This analysis distinguishes between the
changes in average outstanding balances of interest-earning assets and
interest-bearing liabilities (volume variance) and changes in average interest
rates (rate variance). Any changes attributable to both volume and rate have
been allocated proportionately.
The loan portfolio for 2001 had a modest increase of $39.299 million or 7.2%
compared to increases of $61.956 million or 13.1% in 2000 and $58.212 million or
14.0% in 1999. The down turn of the economy in 2001 and the dramatic reduction
in interest rates affected both growth and interest income. As shown in Table 2,
the loan portfolio's positive volume variance was more than offset by its
negative rate variance, which produced a total negative variance of $856,000.
The average yield on loan receivables decreased 54 basis points in 2001.
The average balance of the total investment securities portfolio in 2001 was
$134.453 million compared to $144.475 million in 2000. Investment securities
held-to-maturity at December 31, 2001 was $58.635 million compared to $72.828
million at December 31, 2000. The investment portfolio of available-for-sale
securities at December 31, 2001 was $ 96.702 million compared to $52.504
million at December 31, 2000. The taxable investment securities portfolio
declined $9.349 million in 2001 resulting in a negative volume variance of
$527,000. Yields on the portfolio declined 42 basis points in 2001 producing a
negative rate variance of $436,000. The total earnings variance for taxable
securities was a negative $963,000. The average balance of the tax-exempt
securities portfolio in 2001 declined $914,000 or 2.7% from 2000 levels, while
yields dropped 19 basis points in 2001 producing a negative total variance of
$126,000.
On average, the funds maintained with the Federal Home Loan Bank, increased
slightly in 2001 producing a positive volume variance of $18,000, while a
decline of 105 basis points in the yield resulted in a negative rate variance of
$27,000.
The average balance of short-term investments in interest bearing accounts
with bank approved institutions was reduced $2.241 million in 2001 creating a
negative volume variance of $116,000. Average yields on these investments
dropped 198 basis points resulting in a negative rate variance of $114,000.
19
AVERAGE TOTAL DEPOSITS
Table 6 2001 2000 1999
--------------------- --------------------- ----------------------
Average Average Average Average Average Average
(In thousands) Balance Rate Balance Rate Balance Rate
-------- ------- -------- ------- -------- -------
Demand deposits .............. $ 73,675 $ 70,937 $ 70,904
N.O.W. account deposits ...... 112,327 1.39% 110,556 2.02% 103,411 2.09%
Money market deposits ........ 187,995 3.54 168,160 4.65 156,144 4.00
Regular savings deposits ..... 32,965 1.13 34,307 1.83 36,592 1.66
Time deposits ................ 266,185 5.36 256,015 5.86 220,199 5.07
-------- -------- --------
Total deposits(1) ........... $673,147 $639,975 $587,250
========= ======== ========
December 31, 2001
----------------------------------------------------------
Over 3 Over 6
3 Months Through Through Over 12
Or Less 6 months 12 months Months Total
-------- -------- --------- ------- -------
Time deposit maturity schedule:(2)
Time deposits of $100,000 or more ...... $42,913 $25,093 $7,196 $150 $75,352
(1) The bank has no deposits in foreign offices.
(2) The bank has no other time deposits of $100,000 or more issued by
domestic offices.
Overnight investments in federal funds sold and securities purchased under
resale agreements increased in average balances during 2001 by $23.160 million
or 52.9%. This produced a positive volume variance of $1.140 million. Yields on
these overnight investments decreased 244 basis points in 2001 resulting in a
negative rate variance of $1.307 million and a total variance of negative
$167,000.
As of the latest period reported, LSB is not aware of any issuer (and the
aggregate book value and aggregate market value of the securities of such
issuer), where the aggregate book value of such securities exceeds ten percent
of the registrant's shareholders' equity.
INTEREST BEARING LIABILITIES
The average balance of interest-bearing liabilities in 2001 increased $21.777
million or 3.5% compared to $72.067 million or 13.0% in 2000 and $51.356
million or 10.2% in 1999. The average rate paid on interest-bearing liabilities
decreased 71 basis points in 2001.
Savings and time deposits account for the majority of LSB's interest-bearing
liabilities. In 2001 these deposits increased $30.434 million or 5.3% compared
to increases of $52.692 million or 10.2% in 2000 and $49.472 million or 10.6%
in 1999. The average rate paid on these deposits decreased 70 basis points in
2001. The growth of this portfolio produced a positive volume variance of
$1.323 million, while the dramatic decline in interest rates resulted in a
negative rate variance of $4.128 million. Total variance for savings and time
deposits in 2001 was a negative $2.805 million.
Table 6 contains the breakdown of average deposits for years 2001, 2000 and
1999. Gains were made in all deposit categories except regular savings
deposits, which declined $1.342 million or 3.9%. The average interest rate paid
on these deposits dropped 70 basis points in 2001. Money market deposits had the
largest increase in average balances for 2001 with a gain of $19.835 million or
11.8%. The average rate paid on money market deposits in 2001 decreased 111
basis points from the previous year. Time deposits grew $10.170 million or 4.0%
in average balances while the interest rate paid dropped 50 basis points on
average. In 2001, N.O.W. account deposits increased $1.770 million or 1.6% over
2000. The average rate paid on these deposits dropped 63 basis points in 2001.
Assisting the bank in core deposit growth, demand deposits were up $2.739
million or 3.9% in 2001.
Securities sold under agreements to repurchase account for a relatively small
proportion of total interest-bearing liabilities for LSB. This group of
liabilities was increased in 2000 with the purchase of brokered deposits. With
less costly sources of funds available in 2001, these brokered deposits were not
renewed at maturity. Total variance in 2001 for these liabilities was a negative
$839,000, with $708,000 attributable to volume variance and $131,000
attributable to rate variance.
Funds borrowed from the Federal Home Loan Bank averaged $45.936 million in 2001,
an increase of $5.286 million or 13.0% over 2000. As shown in Volume and Rate
Variance Analysis, Table 2, this resulted in a volume variance of $310,000. A 58
basis point decrease in the rate paid on these borrowings during 2001 created a
$249,000 negative rate variance.
20
CAPITAL RESOURCES AND SHAREHOLDERS' EQUITY
The Board of Directors ("Board") of Bancshares approved a stock repurchase
program in November of 1998 for up to 300,000 shares of its common stock or
approximately 3.4% of its outstanding shares at that time. The Board authorized
the repurchase of shares of common stock in the open market or privately
negotiated transactions on a time-to-time and ongoing basis, depending upon
market conditions and subject to compliance with all applicable securities
laws and regulations. The repurchase plan assisted in the goal of building
shareholder value and maintaining appropriate capital levels. In August 1999,
the Board approved an extension of the stock repurchase program for up to an
additional 300,000 shares of Bancshares' common stock, or approximately 3.5% of
the outstanding shares. In 2000, Bancshares repurchased 57,283 shares under the
plan at an average cost of $11.07. Total repurchase of shares under the plan, as
of December 31, 2000 was 423,781 at an average cost of $18.43 per share. No
shares were repurchased in calendar year 2001. Shareholders' equity at December
31, 2001, was $79.343 million, an increase of 6.9% compared to December 31,
2000. Average shareholders' equity as a percentage of average total assets at
December 31 was 9.56% in 2001 compared to 9.41% in 2000 and 10.28% in 1999.
Regulatory guidelines require minimum levels of capital based on a risk
weighting of each asset category and off balance sheet contingencies. Regulatory
agencies divide capital into Tier 1 or core capital and total capital. Tier 1
capital, as defined by regulatory agencies, consists primarily of common
shareholders' equity less goodwill and certain other intangible assets. Total
capital consists of Tier 1 capital plus the allowable portion of the reserve for
loan losses and certain long-term debt. At December 31, 2001, based on these
measures, Bancshares had a Tier 1 capital ratio of 14.16% compared to the
regulatory requirement of 4% and a total capital ratio of 15.33% compared to an
8% regulatory requirement.
Additional regulatory capital measures include the Tier 1 leverage ratio. Tier
1 leverage ratio is defined as Tier 1 capital divided by average total assets
less goodwill and certain other intangibles and has a regulatory minimum of
3.0%, with most institutions required to maintain a ratio of at least 4.0% to
5.0%, depending primarily upon risk profiles. At December 31, 2001, Bancshares'
Tier 1 leverage ratio was 9.35%.
The number of shareholders holding Bancshares stock totaled approximately 6,100
at December 31, 2001. Participants in Bancshares' dividend reinvestment plan
total 1,683 representing 27.6% of total shareholders and held a total of 754,094
shares.
SUMMARY OF LOAN PORTFOLIO
Table 7
(In thousands) 2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Commercial, financial and agricultural.. $212,731 $172,058 $153,252 $144,955 $132,181
Real estate - construction ............. 35,164 36,058 28,130 19,131 12,978
Real estate - mortgage ................. 271,375 267,735 250,173 206,068 185,384
Installment loans to individuals ....... 59,402 64,161 65,882 62,747 62,909
Lease financing ........................ 535 168 820 978 792
Other .................................. 9,157 8,885 7,821 2,135 2,747
-------- -------- -------- -------- --------
Total loans, net of unearned income .... $588,364 $549,065 $506,078 $436,014 $396,991
======== ======== ======== ======== ========
(*) The bank has no foreign loan activity.
MATURITIES AND SENSITIVITIES OF
LOANS TO CHANGES IN INTEREST RATES
December 31, 2001
---------------------------------------------------
Commercial,
financial Real estate -
and agricultural construction Total
---------------- -------------- ---------
Due in 1 year or less ............. $ 76,449 $ 35,164 $ 111,613
Due after 1 year through 5 years:
Fixed interest rates ............ 95,053 95,053
Floating interest rates ......... 19,922 19,922
Due after 5 years:
Fixed interest rates ............ 16,158 16,158
Floating interest rates ......... 5,149 5,149
--------- -------- ---------
Total .......................... $ 212,731 $ 35,164 $ 247,895
========= ======== =========
21
ANALYSIS OF RESERVE FOR LOAN LOSSES
Table 8 As of Or For the Years Ended
December 31
(In thousands) 2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Average amount of loans outstanding, net of unearned income ...... $558,821 $535,631 $473,675 $415,463 $379,672
Amount of loans outstanding, net of unearned income .............. 588,364 549,065 506,078 436,014 396,991
Reserve for loan losses:
BALANCE ON JANUARY 1 ........................................... $ 5,959 $ 5,246 $ 5,048 $ 4,601 $ 4,075
-------- -------- -------- -------- --------
Loans charged off:
Secured by real estate ......................................... 1 0 0 0 0
Commercial and industrial ...................................... 730 1,403 259 65 382
Installment .................................................... 859 343 291 285 330
Credit card .................................................... 302 300 198 101 139
-------- -------- -------- -------- --------
Total charge-offs ............................................ 1,892 2,046 748 451 851
-------- -------- -------- -------- --------
Recoveries of loans previously charged off:
Secured by real estate ......................................... 15 0 6 0 0
Commercial and industrial ...................................... 250 21 16 9 486
Installment .................................................... 123 128 108 91 89
Credit card .................................................... 123 60 36 28 17
-------- -------- -------- -------- --------
Total recoveries ............................................. 511 209 166 128 592
-------- -------- -------- -------- --------
Net loans charged off ............................................ 1,381 1,837 582 323 259
-------- -------- -------- -------- --------
Provision for loan losses ........................................ 1,862 2,550 780 770 785
-------- -------- -------- -------- --------
BALANCE ON DECEMBER 31 ......................................... $ 6,440 $ 5,959 $ 5,246 $ 5,048 $ 4,601
======== ======== ======== ======== ========
Ratio of net charge-offs of loans to average loans outstanding
during the year .............................................. .25% .34% .12% .08% .07%
NONINTEREST INCOME
Noninterest income increased $1.695 million or 21.0% in 2001 compared to
increases of $876,000 or 12.2% in 2000 and $602,000 or 9.1% in 1999. Fee income
from service charges on deposit accounts increased $998,000 or 27.6% in 2001
compared to $445,000 or 14.0% in 2000 and $455,000 or 16.8% in 1999. The
increase in fee income from service charges on deposit accounts for 2001 came
primarily from a new product introduction in the fourth quarter of the year.
Realized gains from the sale of mortgage loans in 2001 totaled $386,000 compared
to $145,000 in 2000 and $273,000 in 1999. This increase in 2001 of $241,000 or
166.2% is primarily the result of increased customer refinancing in the low
interest rate environment. In the second quarter of 2001, a gain of $541,000 was
realized from the sale of stock held in a corporation providing electronic
transaction processing to financial institutions. This resulted in a higher than
normal gain on sale of investment securities. Other operating income increased a
modest $102,000 or 2.5% in 2001 compared to $372,000 or 9.9% in 2000 and
$202,000 or 5.7% in 1999. Financial statement Note 9 details material items
contained in other operating income. Income generated from the bankcard division
increased $35,000 or 2.3% in 2001 compared to increases of $313,000 or 26.1% in
2000 and $319,000 or 36.3% in 1999. Fee income generated from the servicing of
mortgage loans sold and customer related service fees increased $117,000 or
12.6% in 2001 compared to $126,000 or 15.7% in 2000 and $78,000 or 10.8% in
1999. Investment instrument sales commissions generated by LSB's subsidiary, LSB
Investment Services, decreased in 2001 by $292,000 or 32.6% following an
increase in 2000 of $291,000 or 48.1% and a decrease of $216,000 or 26.3% in
1999. Trust income for 2001 increased $60,000 or 11.2% compared to $6,000 or
1.1% for 2000 and $33,000 or 6.6% for 1999.
NONINTEREST EXPENSE
Noninterest expense increased $2.771 million or 11.3% in 2001 compared to $1.472
million or 6.4% in 2000 and $2.077 million or 9.9% in 1999. Personnel expense
consisting of employee salaries and benefits increased $1.262 million or 9.3% in
2001 compared to increases of $1.291 million or 10.5% in 2000 and $1.153 million
or 10.3% for 1999. These increases are attributable to normal increases in
compensation and increases in the number of full-time equivalent employees.
Full-time equivalent employees totaled 370 in 2001 compared to 352 in 2000 and
340 in 1999. Occupancy expense for 2001 increased $78,000 or 6.0% compared to
increases of $13,000 or 1.0% in 2000 and $23,000 or 1.8% in 1999. Preparation
began in 2001 for two new banking offices, which accounted for the increase in
occupancy expense. Equipment depreciation and maintenance expense for 2001
increased $139,000 or 9.7% compared to $132,000 or 10.1% for 2000 and $76,000 or
6.2% for 1999. Other operating expenses for 2001 increased $1.292 million or
15.8% compared to $36,000 or 0.4% for 2000 and $825,000 or 11.3% for 1999.
Financial statement Note 9 details the material items contained in other
operating expenses. Advertising expense for 2001 increased $58,000 or 15.1%,
compared to a $25,000 or 6.1% increase in 2000 and a $52,000 or 14.5% increase
in 1999. LSB began preparation for
22
a branding and marketing campaign in the fourth quarter of 2001 contributing to
the increased expenses. This campaign will continue into 2002 with some
associated expenses. Legal and professional expense for 2001 increased $339,000
or 37.6% following a decrease of $236,000 or 20.7% in 2000 and an increase of
$104,000 or 10.1% in 1999. Other expenses, which had been down in 2000 by
$159,000 or 5.7%, increased $683,000 or 25.7% in 2001. This category increased
$288,000 or 11.4% in 1999.
ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES
In spite of the Federal Reserve's efforts to revive the economy through
unprecedented interest rate reductions, the nation's economic slow down
continued during 2001. The effects of September 11th further compounded this
economic down turn. While LSB's overall credit quality and underwriting
standards remain sound, the slowing economy did have an effect on its
nonperforming assets, in particular, accruing loans ninety days or more past
due.
Total nonperforming assets at December 31, 2001 were $4.551 million compared to
$2.984 million in 2000 and $2.090 million in 1999. Nonperforming assets are
defined as nonaccrual loans, restructured loans, other real estate acquired
through foreclosed properties and accruing loans ninety days or more past due.
The majority of the 2001 increase came from accruing loans past due ninety days,
which increased to $2.412 million at December 31, 2001 compared to $1.316
million at December 31, 2000 and $821,000 at December 31, 1999. Nonaccrual loans
at December 31, 2001 were $935,000 compared to $57,000 in 2000 and $96,000 in
1999. The accrual of interest is generally discontinued on all loans that become
ninety days past due as to principal or interest unless collection of both
principal and interest is assured by way of collateralization, guarantees or
other security and the loan is considered to be in the process of collection.
Nonperforming assets as a percentage of loans outstanding for years ended
December 31, 2001, 2000 and 1999 were 0.77%, 0.54% and 0.41%, respectively.
Numerous factors are taken into account in determining adequate provisions and
allowances for loan loss reserves including growth of the loan portfolio,
delinquencies, net charge-offs, non-performing loans and collateral values. As a
percentage of loans outstanding, the reserve for loan losses were $6.440 million
or 1.09% at December 31, 2001 compared to $5.959 million or 1.09% at December
31, 2000 and $5.246 million or 1.04% at December 31, 1999. Net charge offs for
2001 were $1.381 million or 0.25% of average loans outstanding, compared to net
charge offs of $1.837 million or 0.34% for 2000 and $582,000 or 0.12% for 1999.
The provision for loan losses charged to operations in 2001 totaled $1.862
million compared to $2.550 million in 2000 and $780,000 in 1999. At December 31,
2001, the reserve for loan losses was 1.42 times nonperforming loans compared to
2.00 times at December 31, 2000 and 2.51 times at December 31, 1999. Based on
analysis of the current loan portfolio and levels of current problem assets and
potential problem loans, management believes the provision for loan losses to be
adequate. In management's judgment, the allocation of the reserve for loan
losses for 2001, reflected in Table 10, accurately reflects the inherent risks
associated with each of the various lending categories.
As a part of credit administration, management regularly reviews and grades its
loan portfolio for purposes of determining asset quality and the need to make
additional provisions for loan losses. The review process is performed both
internally and externally, through the employment of independent credit review
professionals. As a part of the external credit review for 2001, samples were
reviewed of consumer loans, small-business
NONPERFORMING ASSETS
Table 9 December 31
------------------------------------------------------------
(In thousands) 2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Nonaccrual loans:
Secured by real estate .......................................... $ 747 $ 0 $ 0 $ 0 $ 0
Commercial and industrial ....................................... 188 57 96 0 127
Restructured loans ............................................... 324 338 137 232 502
Other real estate acquired through foreclosed properties ......... 880 1,273 1,036 921 1,192
Accruing loans which are contractually past due 90 days or more .. 2,412 1,316 821 759 334
-------- -------- -------- -------- --------
Total nonperforming assets ....................................... $ 4,551 $ 2,984 $ 2,090 $ 1,912 $ 2,155
======== ======== ======== ======== ========
Nonperforming assets to:
Loans outstanding at end of year ................................ .77% .54% .41% .44% .54%
Total assets at end of year ..................................... .55 .38 .29 .28 .35
Loss of interest income associated with nonperforming loans at
December 31: Years Ended December 31
------------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Interest income that would have been recorded in accordance
with original terms ............................................. $ 96 $ 11 $ 15 $ 0 $ 1
Less interest income actually recorded ........................... 18 0 0 0 0
-------- -------- -------- -------- --------
Loss of interest income .......................................... $ 78 $ 11 $ 15 $ 0 $ 1
======== ======== ======== ======== ========
23
ALLOCATION OF RESERVE FOR LOAN LOSSES(*)
Table 10 2001 2000 1999 1998 1997
---------------- ---------------- ---------------- ---------------- -----------------
Loans Loans Loans Loans Loans
(In thousands) % % % % %
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Commercial, financial
and agricultural ....... $1,823 36.2% $1,680 31.3% $1,420 30.3% $1,330 33.2% $1,212 33.3%
Real estate -
construction ........... 695 6.0 643 6.6 566 5.6 555 4.4 506 3.3
Real estate -
mortgage ............... 2,578 46.1 2,385 48.8 2,100 49.4 2,000 47.4 1,815 46.7
Installment loans to
individuals ............ 1,081 10.1 1,000 11.7 908 13.0 913 14.3 828 15.8
Lease financing ......... 44 .0 41 .0 60 .2 60 .2 55 .2
Other ................... 119 1.6 110 1.6 92 1.5 90 .5 85 .7
Unallocated ............. 100 .0 100 .0 100 .0 100 .0 100 .0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total .................. $6,440 100.0% $5,959 100.0% $5,246 100.0% $5,048 100.0% $4,601 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
(*) The reserve for loan losses has been allocated only on an approximate
basis. The entire amount of the reserve is available to absorb losses
occurring in any category. The allocation is not necessarily indicative of
future losses.
loans and commercial loans with balances of $200,000 or more. All loans on the
bank's watch list were reviewed as well. A review of large credits was conducted
by a regulatory agency examination revealing that there were no material problem
credits that had not been previously identified by management.
The reserve for loan losses represents management's estimate of an amount
adequate to provide for the risk of future losses inherent in the loan
portfolio. In its on-going analysis of the reserve for loan losses and its
adequacy, management considers historic loan loss experience, economic risks
associated with each of the lending categories, amount of past due and
nonperforming loans, underlying collateral values securing loans and credit
concentrations and other factors which might affect potential credit losses. LSB
is also subject to regulatory examinations and determinations as to the adequacy
of its reserve for loan losses, which may take into account such factors as the
methodology used to calculate the reserve and the size of the reserve in
comparison to peer banks identified by the regulatory agencies.
There are, however, additional risks of future losses that cannot be quantified
precisely or attributed to particular loans or classes of loans. Because these
risks include the state of the economy and factors affecting particular
borrowers, management's judgment as to the adequacy of the reserve for loan
losses is necessarily approximate and imprecise. In its oversight of the credit
review process, management has not identified any undue economic risks
associated with the various lending categories, nor any significant credit
concentrations within these categories.
Loans classified for regulatory purposes as loss, doubtful, sub-standard or
special mention that have not been disclosed in Table 9, Nonperforming Assets,
do not represent or result from trends or uncertainties which management
reasonably expects will materially impact future operating results, liquidity,
or capital resources, or represent material credits about which management is
aware of any information which causes management to have serious doubts as to
the ability of such borrowers to comply with the loan repayment terms.
INCOME TAXES
Financial statement Note 10 provides reconciliation between the amount of taxes
computed using the statutory tax rate and the actual tax expense. The expense
for income tax is recorded based on amounts currently payable. For 2001 income
tax expense was $4.421 million compared to $3.919 million in 2000 and $3.927
million in 1999. The effective tax rate for 2001 was 32.6%, compared to 30.8% in
2000 and 29.3% in 1999.
INFLATION
For financial institutions, the effects of inflation and governmental programs
to control it tend to vary from non-bank companies. The impact is more likely to
be felt by banking institutions in interest rates associated with earning assets
and interest bearing liabilities. Reduced inflation tends to improve interest
margins associated with interest-bearing assets and liabilities.
Broad-ranged economic conditions such as inflation, and governmental efforts to
spur economic growth, are difficult for individual companies to respond to
effectively. Consistent long-term management is the key to dealing with such
conditions. The objective of management in such times is to remain positioned
for growth when the economy rebounds. Management seeks to do this through its
long-range budget and profit-planning process.
ACCOUNTING AND REGULATORY ISSUES
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 establishes new
accounting and reporting requirements for derivative instruments embed-
24
QUARTERLY FINANCIAL DATA
Table 11
(In thousands except per share data) 2001 2000
------------------------------------------- -------------------------------------------
4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
-------- -------- -------- -------- -------- -------- -------- --------
Interest income .............. $13,814 $14,550 $14,951 $15,292 $16,111 $15,647 $15,057 $14,128
Interest expense ............. 5,184 5,942 6,874 7,619 7,974 7,751 7,042 6,435
------- ------- ------- ------- ------- ------- ------- -------
Net interest income .......... 8,630 8,608 8,077 7,673 8,137 7,896 8,015 7,693
Provision for loan losses .... 430 661 489 282 1,155 815 385 195
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses .. 8,200 7,947 7,588 7,391 6,982 7,081 7,630 7,498
------- ------- ------- ------- ------- ------- ------- -------
Noninterest income ........... 2,777 2,151 2,764 2,066 2,096 2,060 1,945 1,962
------- ------- ------- ------- ------- ------- ------- -------
Noninterest expense .......... 7,047 6,873 7,134 6,257 6,107 6,202 6,201 6,030
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes ... 3,930 3,225 3,218 3,200 2,971 2,939 3,374 3,430
Income taxes ................. 1,303 1,047 1,044 1,027 935 913 1,044 1,027
------- ------- ------- ------- ------- ------- ------- -------
Net income ................... $ 2,627 $ 2,178 $ 2,174 $ 2,173 $ 2,036 $ 2,026 $ 2,330 $ 2,403
======= ======= ======= ======= ======= ======= ======= =======
Earnings per share:
Basic ....................... $ .30 $ .26 $ .26 $ .26 $ .24 $ .24 $ .28 $ .28
Diluted ..................... .30 .26 .26 .26 .24 .24 .27 .28
ded in other contracts and hedging activities. In June 2000, the FASB issued
Statement of Financial Accounting Standards No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" (SFAS 138). SFAS 138
addresses issues related to the implementation of SFAS 133. Bancshares does not
presently have any derivative instruments within the definition of SFAS 133 and
does not anticipate any material effect on its financial position or operating
results from adoption of the standard.
In September 2000, the FASB issued Statement of Financial Accounting Standards
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" (SFAS 140) which replaces SFAS 125. SFAS 140
revises the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain additional disclosures
regarding these activities. SFAS 140 is effective for transfers and servicing of
financial assets or extinguishment of liabilities that occur after March 31,
2001. SFAS 140 was adopted by Bancshares with no resulting material effect on
its financial position or operating results.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
141, "Business Combinations" (SFAS 141). SFAS 141 supercedes APB Opinion Number
16, "Business Combinations". SFAS 141 eliminates the pooling-of-interests method
of accounting for business combinations and requires that all business
combinations in the scope of SFAS 141 be accounted for using the purchase method
of accounting. SFAS 141 is effective for business combinations initiated after
June 30, 2001. Bancshares has no current application for SFAS 141.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 142 requires that
goodwill and other intangible assets that have indefinite lives are to no longer
be amortized unless there is an impairment. SFAS 142 is effective for fiscal
years beginning after December 15, 2001. At December 31, 2001, Bancshares had
$490,330 in goodwill which will no longer be amortized, but will be monitored
for impairment annually.
25
Consolidated Balance Sheets
December 31
(In thousands, except for shares) 2001 2000
- -----------------------------------------------------------------------------------------------------------
ASSETS
Cash and Due from Banks (Note 2) ............................ $ 33,150 $ 26,916
Interest-Bearing Bank Balances .............................. 2,768 7,757
Federal Funds Sold and Securities Purchased
Under Resale Agreements .................................... 37,710 69,555
Investment Securities (Note 3):
Held to Maturity, Market Value $59,742 and $73,557 ......... 58,635 72,828
Available for Sale ......................................... 96,702 52,504
Loans (Notes 4 and 11) ...................................... 588,364 549,065
Less, Reserve for Loan Losses (Note 4) ...................... (6,440) (5,959)
--------- ---------
Net Loans ................................................ 581,924 543,106
Premises and Equipment (Note 5) ............................. 12,041 11,609
Other Assets ................................................ 10,397 11,295
--------- ---------
Total Assets ............................................. $ 833,327 $ 795,570
========= =========
LIABILITIES
Deposits:
Demand .................................................... $ 82,193 $ 75,588
Savings, N.O.W. and Money Market Accounts ................. 351,811 318,626
Certificates of Deposit of less than $100,000 (Note 6) .... 172,808 198,039
Certificates of Deposit of $100,000 or more (Note 6) ...... 75,352 79,723
--------- ---------
Total Deposits ......................................... 682,164 671,976
Securities Sold Under Agreements to Repurchase (Note 6) ..... 3,177 3,002
Borrowings from the Federal Home Loan Bank (Note 7) ......... 63,300 40,450
Other Liabilities ........................................... 5,343 5,899
--------- ---------
Total Liabilities ........................................ 753,984 721,327
========= =========
SHAREHOLDERS' EQUITY
Preferred Stock, Par Value $.01 Per Share:
Authorized 10,000,000 shares; none issued ................ 0 0
Common Stock, Par Value $5 Per Share:
Authorized 50,000,000 Shares; Issued 8,441,846
Shares in 2001 and 8,432,824 Shares in 2000 .............. 42,209 42,164
Paid-In Capital ............................................. 9,860 9,837
Directors' Deferred Plan .................................... (878) (797)
Retained Earnings ........................................... 27,444 23,019
Accumulated Other Comprehensive Income ...................... 708 20
--------- ---------
Total Shareholders' Equity ................................. 79,343 74,243
--------- ---------
Total Liabilities and Shareholders' Equity ............... $ 833,327 $ 795,570
========= =========
Commitments and Contingencies (Note 8)
Notes to consolidated financial statements are an integral part hereof.
26
Consolidated Statements
Of Income
Years Ended December 31
(In thousands, except for shares and per share amounts) 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and Fees on Loans ........................... $ 48,584 $ 49,440 $ 42,520
Interest on Investment Securities:
Taxable ............................................. 5,395 6,358 5,455
Tax Exempt .......................................... 1,647 1,758 1,875
Interest-Bearing Bank Balances ....................... 373 612 616
Federal Funds Sold and Securities Purchased Under
Resale Agreements ................................... 2,608 2,775 1,975
---------- ---------- ----------
Total Interest Income .............................. 58,607 60,943 52,441
---------- ---------- ----------
INTEREST EXPENSE
Deposits ............................................. 22,859 25,664 20,314
Securities Sold Under Agreements to Repurchase ....... 169 1,008 154
Borrowings from the Federal Home Loan Bank ........... 2,591 2,530 1,905
---------- ---------- ----------
Total Interest Expense ............................. 25,619 29,202 22,373
---------- ---------- ----------
Net Interest Income .................................... 32,988 31,741 30,068
Provision for Loan Losses (Note 4) ..................... 1,862 2,550 780
---------- ---------- ----------
Net Interest Income after Provision for Loan Losses .... 31,126 29,191 29,288
---------- ---------- ----------
NONINTEREST INCOME
Service Charges on Deposit Accounts .................. 4,614 3,616 3,171
Gains on Sales of Mortgages .......................... 386 145 273
Gains on Sales of Investment Securities .............. 541 187 0
Other Operating Income (Note 9) ...................... 4,217 4,115 3,743
---------- ---------- ----------
Total Noninterest Income ........................... 9,758 8,063 7,187
---------- ---------- ----------
NONINTEREST EXPENSE
Personnel Expense .................................... 14,878 13,616 12,325
Occupancy Expense .................................... 1,373 1,295 1,282
Equipment Depreciation and Maintenance ............... 1,573 1,434 1,302
Other Operating Expense (Note 9) ..................... 9,487 8,195 8,159
---------- ---------- ----------
Total Noninterest Expense .......................... 27,311 24,540 23,068
---------- ---------- ----------
Income Before Income Taxes ............................. 13,573 12,714 13,407
Income Taxes (Note 10) ................................. 4,421 3,919 3,927
---------- ---------- ----------
Net Income ............................................. $ 9,152 $ 8,795 $ 9,480
========== ========== ==========
Earnings Per Share:
Basic ................................................ $ 1.08 $ 1.04 $ 1.11
Diluted .............................................. $ 1.08 1.03 1.09
Weighted Average Shares Outstanding:
Basic ............................................... 8,438,981 8,448,433 8,547,905
Diluted ............................................. 8,479,288 8,501,523 8,693,801
Notes to consolidated financial statements are an integral part hereof.
27
Consolidated Statements Of
Changes In Shareholders' Equity
Accumulated
Common Stock Directors' Other Total
---------------------- Paid-In Deferred Retained Comprehensive Shareholders'
(In thousands, except for shares) Shares Amount Capital Plan Earnings Income Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998 ......... 8,722,895 $43,614 $14,903 $14,248 $ 665 $ 73,430
Net income ............................ 9,480 9,480
Change in unrealized loss on securities
available for sale, net of deferred
income taxes ........................ (1,260) (1,260)
---------
Comprehensive income .............. 8,220
Cash dividends declared on common
stock ............................... (4,775) (4,775)
Common stock issued for stock
options exercised ................... 81,521 408 307 715
Common stock acquired ................. (361,498) (1,807) (5,059) (6,866)
-------------------------------------------------------------------------------------
Balances at December 31, 1999 ......... 8,442,918 42,215 10,151 18,953 (595) 70,724
Net income ............................ 8,795 8,795
Change in unrealized gain on securities
available for sale, net of deferred
income taxes ........................ 615 615
---------
Comprehensive income .............. 9,410
Cash dividends declared on common
stock ............................... (4,729) (4,729)
Common stock issued for stock
options exercised ................... 47,189 236 152 388
Common stock acquired ................. (57,283) (287) (466) $(797) (1,550)
-------------------------------------------------------------------------------------
Balances at December 31, 2000 ......... 8,432,824 42,164 9,837 (797) 23,019 20 74,243
Net income ............................ 9,152 9,152
Change in unrealized gain on securities
available for sale, net of deferred
income taxes ........................ 688 688
---------
Comprehensive income .............. 9,840
Cash dividends declared on common
stock ............................... (4,727) (4,727)
Common stock issued for stock
options exercised ................... 9,022 45 23 68
Common stock acquired ................. (81) (81)
-------------------------------------------------------------------------------------
Balances at December 31, 2001 ......... 8,441,846 $42,209 $ 9,860 $(878) $27,444 $ 708 $ 79,343
=====================================================================================
Notes to consolidated financial statements are an integral part hereof.
28
Consolidated Statements
Of Cash Flows
Years Ended December 31
(In thousands) 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES
Net Income .................................................... $ 9,152 $ 8,795 $ 9,480
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization .............................. 1,484 1,371 1,319
Securities premium amortization and discount
accretion, net ........................................... 58 (282) 58
(Increase) decrease in loans held for sale ................. (6,113) 1,546 2,191
Deferred income taxes ...................................... (353) (255) 14
Income taxes payable ....................................... 361 (65) 127
(Increase) decrease in income earned but not received ...... 225 (447) (99)
Increase (decrease) in interest accrued but not paid ....... (1,115) 883 253
Net (increase) decrease in other assets .................... 495 (141) (544)
Net increase in other liabilities .......................... 296 196 143
Provision for loan losses .................................. 1,862 2,550 780
Gain on sale of investment securities ...................... (541) (187) 0
Gain on sale of premises and equipment ..................... (25) (3) (64)
-------- -------- --------
Net cash provided by operating activities ................ 5,786 13,961 13,658
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of securities held to maturity ................... (4,380) (15,132) (15,520)
Proceeds from maturities of securities held to maturity .... 18,579 10,879 6,869
Purchases of securities available for sale ................. (85,241) (90,375) (223)
Proceeds from maturities of securities available for sale .. 42,100 99,403 21,776
Proceeds from sales of securities available for sale ....... 555 189 0
Net increase in loans made to customers .................... (34,568) (46,369) (72,838)
Purchases of premises and equipment ........................ (1,963) (1,780) (1,057)
Proceeds from sale of premises and equipment ............... 59 18 115
Net (increase) decrease in federal funds sold .............. 31,845 (42,285) 13,325
-------- -------- --------
Net cash used by investing activities .................... (33,014) (85,452) (47,553)
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Net increase in demand deposits, N.O.W., money market
and savings accounts ..................................... 39,790 22,332 12,700
Net increase (decrease) in time deposits ................... (29,602) 44,222 25,395
Net increase (decrease) in securities sold under
agreements to repurchase ................................. 175 1,703 (4,238)
Proceeds from long-term debt ............................... 25,000 8,000 30,000
Payments on long-term debt ................................. (2,150) (12,700) (13,692)
Dividends paid ............................................. (4,727) (4,729) (4,775)
Proceeds from issuance of common stock ..................... 68 388 715
Common stock acquired ...................................... (81) (1,550) (6,866)
-------- -------- --------
Net cash provided by financing activities ................ 28,473 57,666 39,239
-------- -------- --------
Increase (decrease) in cash and cash equivalents ........... 1,245 (13,825) 5,344
Cash and cash equivalents at the beginning of the years .... 34,673 48,498 43,154
-------- -------- --------
Cash and cash equivalents at the end of the years .......... $ 35,918 $ 34,673 $ 48,498
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during the years for:
Interest ................................................. $ 26,734 $ 28,319 $ 22,121
Income taxes ............................................. 4,668 4,248 4,214
SUPPLEMENTAL DISCLOSURE OF
NONCASH TRANSACTIONS
Transfer of loans to other real estate owned ............... $ 1,594 $ 644 $ 412
Unrealized gain (loss) on securities available for sale:
Change in securities available for sale .................. 1,120 1,008 (2,064)
Change in deferred income taxes .......................... (432) (393) 804
Change in shareholders' equity ........................... 688 615 (1,260)
Notes to consolidated financial statements are an integral part hereof.
29
Notes To Consolidated
Financial Statements
AS OF OR FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and financial reporting policies of LSB Bancshares, Inc.
("Bancshares") and its subsidiaries conform to accounting principles generally
accepted in the United States and prevailing industry practices. The following
is a description of significant accounting policies.
Nature of Operations
Bancshares is a bank holding company organized under the laws of the
State of North Carolina and registered under the Bank Holding Company
Act of 1956, as amended. Bancshares conducts its domestic financial
services business through Lexington State Bank ("Bank") and two
non-bank subsidiaries, Peoples Finance Company of Lexington, Inc.
("Peoples") and LSB Investment Services, Inc. Bancshares serves
customers primarily in Davidson, Forsyth, Stokes, and Guilford
Counties, North Carolina.
Consolidation
The consolidated financial statements include the accounts of
Bancshares and its wholly-owned subsidiaries, after eliminating
inter-company balances and transactions. Securities and other property
held in a fiduciary or agency capacity are not included in the
consolidated balance sheets since these are not assets or liabilities
of Bancshares. Certain prior year amounts have been reclassified to
conform to current year presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure 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.
Cash and Cash Equivalents
Bancshares considers cash and due from banks and interest-bearing bank
balances as cash and cash equivalents for purposes of the consolidated
statements of cash flows. Due from bank balances and interest-bearing
bank balances are maintained in other financial institutions.
Securities Purchased Under Resale Agreements
Bancshares' policy is that securities purchased under resale
agreements will be collateralized by U.S. Treasury and other U.S.
Government agency obligations.
Investment Securities
Management determines the appropriate classification of investment
securities at the time of purchase. Securities that may be sold in
response to or in anticipation of changes in interest rates or other
factors are classified as available for sale and carried at market
value. The unrealized gains and losses on these securities are
reported net of applicable taxes as a separate component of
shareholders' equity. Securities that Bancshares has the positive
intent and ability to hold to maturity are carried at amortized cost.
Bancshares does not have any securities held for trading. Interest
income on securities, including amortization of premiums and accretion
of discounts, is recognized using the interest method. Gains and
losses on the sale of securities are recognized on a specific
identification basis.
Loans
Loans are generally carried at the principal amount outstanding, net
of deferred loan fees and certain direct origination costs on
originated loans and unamortized discounts and premiums on purchased
loans. Mortgage loans held for sale are carried at the lower of cost
or market value, as determined by outstanding commitments from
investors. Loan origination fees are capitalized and recognized as an
adjustment of the yield of the related loan. Discounts and premiums on
any purchased residential real estate loans are amortized to income
using the interest method over the remaining period to contractual
maturity, adjusted for anticipated prepayments. Discounts and premiums
on any purchased consumer loans are recognized over the expected lives
of the loans using methods that approximate the interest method.
Interest is accrued and credited to income based on the principal
amount outstanding. The accrual of interest on impaired loans is
discontinued when, in management's opinion, the borrower may be unable
to meet payments of principal and interest as they become due.
Reserve for Loan Losses
The reserve for loan losses is that amount which is considered
adequate to provide for potential losses in the portfolio.
Management's evaluation of the adequacy of the reserve is based on
several factors, including an analysis of the loss experience in
relation to outstanding amounts, a review of impaired loans, regular
examinations and appraisals of the portfolio, and current conditions.
Foreclosed Real Estate
Foreclosed real estate only includes formally foreclosed property. At
the time of foreclosure, foreclosed real estate is recorded at the
lower of the Bank's cost or the asset's fair value less costs to sell,
which becomes the property's new basis. Any write-downs based on the
asset's fair value at the date of acquisition are charged to the
reserve for loan losses. After foreclosure, these assets are carried
at the lower of their new cost basis or fair value less costs to sell.
Costs incurred in maintaining foreclosed real estate and subsequent
write-downs to reflect declines in the fair value of the property are
charged to operations.
Premises and Equipment
Premises and equipment are carried at cost less accumulated
depreciation and amortization. Depreciation is computed by use of the
straight-line method, using the following estimated lives: buildings,
20 to 40 years; equipment, 3 to 10 years; and vaults, 10 to 40 years.
Leasehold improvements are amortized by use of the straight-line
method over the lesser of the estimated useful lives of the
improvements or the terms of the respective leases.
Stock-Based Compensation
Bancshares accounts for its stock-based compensation plans using the
accounting prescribed by Accounting Principles Board Opinion Number
25, "Accounting for Stock Issued to Employees". In October 1995,
Statement of Financial Accounting Standards Number 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation," was issued and encourages,
but does not require adoption of a fair value method of accounting for
employee stock-based compensation plans. As permitted by SFAS 123,
Bancshares has elected to disclose the pro forma net income and
earnings per share as if the fair value method had been applied in
measuring compensation cost.
Intangible Assets
Intangible assets, excluding goodwill, are amortized on a
straight-line basis over the estimated periods benefitted. Goodwill is
not amortized, but is monitored for impairment annually.
Income Taxes
The provision for income taxes is based on income and expenses and
assets and liabilities for financial statement purposes. Deferred
income taxes are computed under the provisions of Statement of
Financial Accounting Standards Number 109, "Accounting for Income
Taxes".
Earnings Per Share
Earnings per share is computed by dividing net income by the weighted
average shares outstanding and diluted share equivalents outstanding.
The difference between basic and diluted earnings per share is the
result of dilutive options exercisable. All references to shares
outstanding have been adjusted to give effect to stock splits that
occurred during the periods.
NOTE 2 - REGULATORY RESTRICTIONS
Bancshares and its subsidiary bank are subject to certain requirements imposed
by state and federal banking statutes and regulations. The Bank is required to
maintain a certain weekly average clearing account balance with the Federal
Reserve Bank of Richmond. The required weekly average clearing account balance
for the years ended December 31, 2001 and 2000 was $36,400,000 and $10,500,000,
respectively. The amounts are negotiated by the Bank with the Federal Reserve
Bank of Richmond.
30
Certain regulatory requirements restrict the lending of funds by and between
Bancshares and the Bank and the amount of dividends which can be paid to
Bancshares by the Bank. On December 31, 2001, the Bank had available retained
earnings of $54,351,677 for the payment of dividends without obtaining prior
regulatory approval.
The Bank is a member of the Federal Home Loan Bank of Atlanta (FHLB). Member
institutions are required to maintain an investment in the common stock of the
FHLB based on the asset size of the member institution and the amount of
qualifying one-to-four family residential loans. At December 31, 2001, the Bank
owned $3,165,000 of FHLB common stock.
Bancshares and the Bank are subject to certain regulatory capital requirements
administered by federal and state banking agencies. Under the capital adequacy
guidelines and the regulatory framework for prompt corrective action,
Bancshares and the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices. Failure to
meet minimum capital requirements can initiate certain mandatory and possible
discretionary actions by regulators that, if undertaken, could have a direct,
material effect on Bancshares' financial statements.
The most recent notifications from regulatory authorities categorized
Bancshares and the Bank as well capitalized under the regulatory framework for
prompt corrective action at December 31, 2001. There are no conditions or
events since that notification that management believes has changed Bancshares'
or the Bank's well capitalized status. Management believes that Bancshares and
the Bank meet all capital adequacy requirements to which they are subject. The
Bank's capital amounts and ratios approximate Bancshares' capital amounts and
ratios that are summarized as follows (In thousands):
Minimum Ratios
--------------------------
For
Capital Amount Ratio Capital To Be
------------------------ --------------------- Adequacy Well
2001 2000 2001 2000 Purposes Capitalized*
------- ------- ----- ----- -------- ------------
Total capital
To risk-weighted assets ... $84,416 $79,374 15.33% 15.11% 8.00% 10.00%
Tier 1 capital
To risk-weighted assets ... 77,976 73,415 14.16 13.98 4.00 6.00
Tier 1 capital
To average assets ......... 77,976 73,415 9.35 9.21 3.00 5.00
* under Prompt Corrective Action provisions
NOTE 3 - INVESTMENT SECURITIES
The valuations of investment securities as of December 31, 2001 and 2000 were
as follows (In thousands):
2001 - Securities Held to Maturity
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- --------
US Treasury and
other US government agency obligations .. $25,022 $ 718 $ 0 $25,740
State, county and municipal securities ... 33,613 834 445 34,002
------- ------ ---- -------
Total .................................... $58,635 $1,552 $445 $59,742
======= ====== ==== =======
2001 - Securities Available for Sale
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -------
US Treasury and
other US government agency obligations .. $91,029 $1,267 $141 $92,155
State, county and municipal securities ... 1,355 38 11 1,382
Equity securities ........................ 3,165 0 0 3,165
------- ------ ---- -------
Total .................................... $95,549 $1,305 $152 $96,702
======= ====== ==== =======
2000 - Securities Held to Maturity
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -------
US Treasury and
other US government agency obligations .. $40,526 $ 218 $259 $40,485
State, county and municipal securities ... 32,302 913 143 33,072
------- ------ ---- -------
Total .................................... $72,828 $1,131 $402 $73,557
======= ====== ==== =======
2000 - Securities Available for Sale
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -------
US Treasury and
other US government agency obligations .. $49,142 $117 $116 $49,143
State, county and municipal securities ... 852 32 0 884
Equity securities ........................ 2,477 0 0 2,477
------- ---- ---- -------
Total .................................... $52,471 $149 $116 $52,504
======= ==== ==== =======
The following is a maturity schedule of investment securities at December 31,
2001 by contractual maturity, except for certain county and municipal
securities which are recorded at the pre-refunded date (In thousands):
Securities Held Securities Available
to Maturity for Sale
--------------------------- ---------------------------
Amortized Market Amortized Market
Cost Value Cost Value
--------- ------- --------- -------
Debt securities:
Due in one year or less .................... $ 5,533 $ 5,613 $11,013 $11,163
Due after one year through five years ...... 28,124 29,020 70,421 71,432
Due after five years through ten years ..... 12,199 12,591 10,248 10,242
Due after ten years ........................ 12,779 12,518 702 700
------- ------- ------- -------
Total debt securities ...................... 58,635 59,742 92,384 93,537
Equity securities .......................... 0 0 3,165 3,165
------- ------- ------- -------
Total securities ........................... $58,635 $59,742 $95,549 $96,702
======= ======= ======= =======
Lexington State Bank owned stock in the Federal Home Loan Bank of Atlanta with
book and market values of $3,165,000 and $2,477,000 at December 31, 2001 and
2000, respectively. This stock is included in equity securities and classified
as available for sale.
A recap of the sales and maturities of held to maturity securities follows (In
thousands):
Years Ended December 31
2001 2000 1999
------- ------- ------
Proceeds from sales and maturities ..... $18,579 $10,879 $6,869
Gross realized gains ................... 0 0 0
Gross realized losses .................. 0 0 0
A recap of the sales and maturities of available for sale securities follows
(In thousands):
Years Ended December 31
2001 2000 1999
------- ------- -------
Proceeds from sales and maturities ..... $42,655 $99,592 $21,776
Gross realized gains ................... 541 187 0
Gross realized losses .................. 0 0 0
Investment securities with amortized costs of $95,088,694 and $90,640,673 and
market values of $97,405,629 and $91,028,150 as of December 31, 2001 and 2000,
respectively, were pledged to secure public deposits and for other purposes.
31
NOTE 4 - LOANS AND RESERVE FOR LOAN LOSSES
Loans are summarized as follows (In thousands):
December 31
2001 2000
-------- --------
Commercial, financial, and agricultural .... $212,731 $172,058
Real estate-construction ................... 35,164 36,058
Real estate-mortgage ....................... 271,375 267,735
Installment loans to individuals ........... 59,402 64,161
Lease financing ............................ 535 168
Other ...................................... 9,157 8,885
-------- --------
Total loans, net of unearned income ........ $588,364 $549,065
======== ========
Nonperforming assets are summarized as follows (In thousands):
December 31
2001 2000
------ ------
Nonaccrual loans ....................... $ 935 $ 57
Restructured loans ..................... 324 338
Loans past due 90 days or more ......... 2,412 1,316
------ ------
Total nonperforming loans ............. 3,671 1,711
Foreclosed real estate ................. 880 1,273
------ ------
Total nonperforming assets ............ $4,551 $2,984
====== ======
Impaired loans and related information are summarized in the following tables
(In thousands):
December 31
2001 2000 1999
------ ------ ------
Loans specifically identified as impaired .... $6,033 $5,199 $3,740
====== ====== ======
Allowance for loan losses associated with
impaired loans ............................. $1,056 $ 893 $ 586
====== ====== ======
Years Ended December 31
2001 2000 1999
------ ------ ------
Average balances of impaired loans for the years ..... $5,133 $5,716 $3,839
====== ====== ======
Interest income recorded for impaired loans .......... $ 371 $ 432 $ 356
====== ====== ======
An analysis of the changes in the reserve for loan losses follows (In
thousands):
Years Ended December 31
2001 2000 1999
------- ------- -------
Balances at beginning of years .................. $ 5,959 $ 5,246 $ 5,048
Provision for loan losses ....................... 1,862 2,550 780
Recoveries of amounts previously charged off .... 511 209 166
Loans charged off ............................... (1,892) (2,046) (748)
------- ------- -------
Balances at end of years ........................ $ 6,440 $ 5,959 $ 5,246
======= ======= =======
Bancshares' policy for impaired loan accounting subjects all loans to
impairment recognition except for large groups of smaller balance homogeneous
loans such as credit card, residential mortgage and consumer loans. Bancshares
generally considers loans 90 days or more past due and all nonaccrual loans to
be impaired.
At December 31, 2001, Bancshares had no significant commitments to loan
additional funds to the borrowers of impaired loans.
NOTE 5 - PREMISES AND EQUIPMENT
Following is a summary of premises and equipment (In thousands):
December 31
2001 2000
------- -------
Land ................................................. $ 2,598 $ 2,574
Buildings ............................................ 8,907 8,687
Equipment ............................................ 11,438 9,963
Other ................................................ 0 14
Leasehold improvements ............................... 704 704
------- -------
Total costs .......................................... 23,647 21,942
Less, accumulated depreciation and amortization ...... 11,606 10,333
------- -------
Total ............................................... $12,041 $11,609
======= =======
NOTE 6 - TIME DEPOSITS AND SHORT-TERM BORROWED FUNDS
The scheduled maturities of time deposits at December 31, 2001 were as follows
(In thousands):
Year Amount
---- ---------
2002 $216,813
2003 16,670
2004 14,677
--------
$248,160
========
Short-term borrowed funds outstanding consisted of securities sold under
agreements to repurchase. These short-term borrowings by the Bank are
collateralized by U.S. Treasury and other U.S. Government agency obligations
with amortized cost of $7,997,906 and market value of $8,189,063 at December
31, 2001. The securities collateralizing the short-term borrowings have been
delivered to a third party custodian for safekeeping. The following table
presents certain information for securities sold under agreements to repurchase
(In thousands):
2001 2000 1999
------ ------- ------
Balances at December 31 .................. $3,177 $ 3,002 $1,299
====== ======= ======
Average daily balances outstanding
during the years ........................ $3,424 $17,367 $3,852
====== ======= ======
Average interest rates paid during
the years ............................... 4.93% 5.81% 4.01%
====== ======= ======
NOTE 7 - BORROWINGS
The Bank has established a secured credit availability with the Federal Home
Loan Bank at fourteen percent of Lexington State Bank's total assets. The
credit availability at year end was approximately $116,650,047. At December 31,
2001 and 2000 the outstanding balances under this arrangement were $63,300,000
and $40,450,000, respectively. For 2001 and 2000, the effective interest rates
incurred were 5.06% and 6.09%, respectively.
Maturities are as follows (In thousands):
Year Amount
---- ------
2002 $ 300
2003 5,000
2004 10,000
2005 10,000
2006 10,000
Thereafter 28,000
-------
$63,300
=======
Borrowings under this line of credit are secured by the Bank's stock in the
Federal Home Loan Bank of Atlanta and a blanket floating lien on certain
qualifying one-to-four family mortgage loans.
The bank has obtained a $10,000,000 irrevocable letter of credit which expires
on August 11, 2010. This letter of credit was issued by the Federal Home Loan
Bank of Atlanta in favor of the State of North Carolina to secure public
deposits.
NOTE 8 - COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Bank is a party to financial instruments
with off balance sheet risk. These financial instruments include commitments to
extend credit and standby letters of credit, both of which involve elements of
credit and interest rate risk not reflected in the Consolidated Balance Sheets.
The Bank uses the same credit policies in making commitments and issuing
standby letters of credit as it does for on balance sheet instruments. The
Bank's exposure to credit loss in the event of nonperformance by the party to
whom commitments and standby letters of credit have been extended is
represented by the contractual amount of the financial instrument.
Commitments to extend credit are agreements to lend to a customer
32
as long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates and may require payment of a
fee. Since many of the commitments are expected to expire without being drawn
upon or fully utilized, the total commitment amounts do not necessarily
represent future cash requirements. Collateral, if deemed necessary, is
determined on a case-by-case basis and is based on management's credit
evaluation. Collateral held varies but may include accounts receivable,
inventory, property and equipment, and income-producing commercial properties.
Unfunded commitments to extend credit were $50,792,000 at December 31, 2001.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Standby letters of
credit generally have fixed expiration dates and may require payment of a fee.
The credit risk involved is essentially the same as that involved in extending
loan commitments to customers. The Bank's policy for obtaining collateral, and
the nature of such collateral, is essentially the same as that involved in
making commitments to extend credit. Standby letters of credit totaled
$4,818,000 at December 31, 2001.
The Bank and Peoples together grant commercial, installment and mortgage loans
to customers throughout their service area. The Bank and Peoples have a
diversified loan portfolio with no specific concentration of credit risk. The
Bank has a concentration of credit risk by maintaining cash balances with other
banks which are $25,097,879 in excess of Federal Deposit Insurance limits and
has federal funds sold of $37,710,000 at December 31, 2001.
Neither Bancshares nor any of its subsidiaries are involved in any legal
proceedings that would have a materially adverse effect on their financial
condition or results of operations.
NOTE 9 - SUPPLEMENTARY INCOME STATEMENT INFORMATION
The following is an analysis of items in other operating income and other
operating expenses as shown on the Consolidated Statements of Income (In
thousands):
Years Ended December 31
2001 2000 1999
------ ------ ------
Other operating income:
Bankcard income .............................. $1,545 $1,510 $1,197
Fee income ................................... 1,045 928 802
Financial services commissions ............... 604 896 605
Insurance commissions ........................ 168 149 214
Trust income ................................. 598 538 532
Other income ................................. 257 94 393
------ ------ ------
$4,217 $4,115 $3,743
====== ====== ======
Other operating expenses:
Advertising .................................. $ 443 $ 385 $ 410
Automated services ........................... 1,687 1,639 1,449
Bankcard expense ............................. 1,164 1,132 975
FDIC assessments ............................. 123 125 66
Legal and professional fees .................. 1,241 902 1,138
Postage ...................................... 639 544 547
Stationery, printing and supplies ............ 854 815 762
Other expenses ............................... 3,336 2,653 2,812
------ ------ ------
$9,487 $8,195 $8,159
====== ====== ======
NOTE 10 - INCOME TAXES
The components of income tax expense (benefits) are as follows (In thousands):
Years Ended December 31
2001 2000 1999
------ ------ ------
Current ....................................... $4,068 $3,664 $3,941
------ ------ ------
Deferred:
Reserve for loan losses ...................... 186 427 224
Depreciation ................................. 43 49 (24)
Pension ...................................... 15 (92) (120)
Deferred compensation ........................ 20 (90) 88
Deferred income .............................. 59 (54) (200)
Other ........................................ 30 15 18
------ ------ ------
Subtotal ..................................... 353 255 (14)
------ ------ ------
Total ....................................... $4,421 $3,919 $3,927
====== ====== ======
A reconciliation of the federal statutory tax rate to the effective tax rate
follows:
Years Ended December 31
2001 2000 1999
------ ------ ------
Federal statutory tax rate .................... 34.0% 34.0% 34.0%
Tax exempt interest income .................... (4.8) (5.2) (5.6)
Nonqualified options exercised ................ (.1) (.8) (1.9)
Disallowed interest expense ................... .7 .8 .7
State taxes, net of federal tax
benefit .................................... 2.2 1.6 1.9
Other ......................................... .6 .4 .2
---- ---- ----
Effective tax rate ............................ 32.6% 30.8% 29.3%
==== ==== ====
The components of the net deferred tax asset follow (In thousands):
December 31
2001 2000
------ ------
Unrealized gain on securities
available for sale ........................... $ (445) $ (12)
Reserve for loan losses ....................... 2,483 2,297
Depreciation .................................. (396) (439)
Pension ....................................... (389) (404)
Deferred compensation ......................... 475 455
Deferred income ............................... (937) (996)
Other ......................................... 179 149
------ ------
Subtotal ...................................... 970 1,050
Valuation allowance ........................... 0 0
------ ------
Total ........................................ $ 970 $1,050
====== ======
NOTE 11 - RELATED PARTY TRANSACTIONS
The Bank had loans outstanding to executive officers and Directors and their
affiliated companies of approximately $10,001,000 and $6,318,000 at December 31,
2001 and 2000, respectively. An analysis of the activity with respect to such
aggregate loans to related parties is as follows (In thousands):
Balance at January 1, 2001 ................................. $ 6,318
New loans during the year .................................. 5,519
Repayments during the year ................................. (1,836)
-------
Balance at December 31, 2001 ............................... $10,001
=======
NOTE 12 - MORTGAGE SERVICING RIGHTS
Bancshares acquires mortgage servicing rights through the origination of
mortgage loans and sells those loans with servicing rights retained. The total
cost of the mortgage loans is allocated to the mortgage servicing rights and the
loans (without the mortgage servicing rights) based on their relative fair
values. Mortgage servicing fees are recorded on an accrual basis. Mortgage
servicing rights are amortized over the life of the related mortgages, in
proportion to estimated net servicing income. An appropriate carrying value of
the unamortized balance of such mortgage servicing rights is based principally
on a disaggregated, discounted cash flow method. The loans and associated
servicing rights are segmented by risk characteristic to include loan type,
investor, and interest rate. An appropriate carrying value of the unamortized
deferred excess servicing fee balance is based principally on an aggregated
discounted method. If the carrying values exceed fair values, the differences
are treated as a loss on sale of mortgages.
The following table summarizes information about mortgage servicing rights (In
thousands):
Years Ended December 31
2001 2000 1999
Balances at beginning of years ................ $ 348 $ 367 $ 305
Mortgage servicing rights originated .......... 79 100 191
Amortization of rights ........................ (138) (119) (129)
------- ------- -------
Balances at end of years ...................... $ 289 $ 348 $ 367
======= ======= =======
Total loans serviced at end of years .......... $70,827 $81,430 $79,414
======= ======= =======
33
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards Number 107, "Disclosures about Fair
Value of Financial Instruments", requires that Bancshares disclose estimated
fair values for its financial instruments. Fair value estimates, methods and
assumptions are set forth below for Bancshares' financial instruments:
Cash and Short-Term Investments
For cash and short-term investments, including federal funds sold, the
carrying amount is a reasonable estimate of fair value.
Investment Securities
For securities held as investments, fair value equals quoted market price, if
available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.
Loans Receivable
The fair value of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities.
Deposit Liabilities
The fair value of demand deposits, savings accounts and certain money market
deposits is the amount payable on demand at December 31, 2001. The fair value
of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties.
The estimated fair values of Bancshares' financial instruments are as follows
(In thousands):
December 31
2001 2000
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- --------- -------- ---------
Financial assets:
Cash and short term investments .............. $ 73,628 $ 73,628 $104,228 $104,228
Investment securities ......................... 155,337 156,444 125,332 126,061
Loans ......................................... 588,364 647,297 549,065 538,085
Less reserve for loan losses ................. (6,440) (5,959)
-------- --------
Net loans .................................... 581,924 647,297 543,106 538,085
Financial liabilities:
Deposits ..................................... 682,164 681,649 671,976 673,406
Securities sold under agreements
to repurchase ............................... 3,177 3,177 3,002 3,002
Borrowings from Federal Home
Loan Bank ................................... 63,300 64,721 40,450 40,781
Unrecognized financial instruments:
Commitments to extend credit ................. 0 0 0 0
Standby letters of credit .................... 10 10 10 10
NOTE 14 - PENSION AND EMPLOYEE BENEFIT PLANS
The Bank and its subsidiaries have a noncontributory defined benefit pension
plan which covers substantially all employees. The benefits are based on years
of service and the average highest five consecutive years of compensation paid
during the ten years preceding normal retirement. Contributions are made on an
annual basis, with the total amount of such contributions being between the
minimum required for funding standard account purposes and the maximum
deductible for federal income tax purposes.
The Bank and its subsidiaries have a plan to provide some health care benefits
and life insurance for employees for the period between early retirement and
normal retirement. Only those employees who retire after age 55 and have
completed 10 years of service will be eligible for these benefits. The benefits
are provided through a self-insured plan administered by an insurance company
whose premiums are based on claims paid during the year. Statement of Financial
Accounting Standards Number 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions", requires the accrual of nonpension benefits as
employees render service. The liability for postretirement benefits is unfunded.
The following tables set forth the changes in the projected benefit obligations
and the fair value of plan assets for the Bank's defined benefit pension plan
and postretirement benefits provided for certain retired employees and the
amounts recognized in the consolidated statements of condition at December 31:
Pension Postretirement
Benefits Benefits
-------------------- ----------------
2001 2000 2001 2000
------- ------- ----- -----
Benefit Obligations
Balances, beginning of years .................. $ 6,162 $ 5,364 $ 540 $ 619
Service cost .................................. 364 330 27 21
Interest cost ................................. 484 428 48 39
Actuarial gain (loss) ......................... 767 230 140 (108)
Participant contributions ..................... 0 0 4 1
Benefits paid to
participants ................................ (206) (190) (40) (32)
------- ------- ----- -----
Balances, end of years ........................ $ 7,571 $ 6,162 $ 719 $ 540
======= ======= ===== =====
Plan Assets
Fair value, beginning of years ................ $ 6,531 $ 6,037 $ 0 $ 0
Actual return on assets ....................... 33 108 0 0
Participant contributions ..................... 0 0 4 1
Company contributions ......................... 446 576 36 31
Benefits paid to participants ................. (206) (190) (40) (32)
------- ------- ----- -----
Fair value, end of years ...................... $ 6,804 $ 6,531 $ 0 $ 0
======= ======= ===== =====
(Prepaid) Accrued Benefit Cost
Funded status ................................. $ 767 $ (369) $ 719 $ 540
Unrecognized net loss ......................... (2,196) (1,000) (215) (82)
Unrecognized prior cost ....................... 61 98 0 0
Unrecognized transition
liability (asset) .......................... 0 8 (165) (179)
------- ------- ----- -----
(Prepaid) accrued benefit cost ................ $(1,368) $(1,263) $ 339 $ 279
======= ======= ===== =====
Plan expenses for 2001, 2000 and 1999 were comprised of the following (In
thousands):
Pension Benefits
2001 2000 1999
----- ----- -----
Components of net periodic benefit cost:
Service Cost ................................ $ 364 $ 330 $ 291
Interest Cost ............................... 484 428 376
Return on plan assets ....................... (500) (469) (405)
Amortization of unrecognized amounts:
Transition asset ............................ (8) (8) (8)
Prior service cost .......................... (37) (37) (37)
Net actuarial loss .......................... 38 3 21
----- ----- -----
Plan expense .................................. $ 341 $ 247 $ 238
===== ===== =====
Postretirement Benefits
2001 2000 1999
----- ----- -----
Components of net periodic benefit cost:
Service Cost ................................ $ 27 $ 21 $ 18
Interest Cost ............................... 49 39 42
Return on plan assets ....................... 0 0 0
Amortization of unrecognized amounts:
Transition liability ........................ 14 14 17
Prior service cost .......................... 0 0 0
Net actuarial loss .......................... 6 2 6
----- ----- -----
Plan expense .................................. $ 96 $ 76 $ 83
===== ===== =====
For 2001, 2000 and 1999 the following weighted-average rates were used:
Pension Benefits
2001 2000 1999
----- ----- -----
Discount rate on the benefit obligation ....... 7.25% 7.75% 7.50%
Rate of expected return on plan assets ........ 7.50 7.50 7.50
Rate of employee compensation increase ........ 5.50 5.50 5.50
Pension Benefits
2001 2000 1999
----- ----- -----
Postretirement Benefits
Discount rate on the benefit obligation ....... 7.25% 8.00% 8.00%
For the postretirement benefit plan, the annual assumed rate of increase in
health care cost for the plan is 8.0% for 2001 and 2000,
34
and is assumed to decrease gradually to 4.5% in 2005 and remain at that level
thereafter.
Assumed health care cost trend rates significantly impact reported amounts. The
effect of a one-percentage-point change in assumed rates would alter the amounts
of the benefits obligation and the sum of the service cost and interest cost
components of postretirement benefit expense as follows for 2001 (In thousands):
One-percentage-point
---------------------
Increase Decrease
-------- --------
Effect on the postretirement benefit obligation ...... $191 $(162)
==== =====
Effect on the sum of the service cost and
interest cost components ........................... $ 9 $ (8)
==== =====
The Bank and its subsidiaries have a defined contribution retirement plan
covering substantially all employees with one year's service. Participating
employees may contribute a percentage of their compensation to the plan, with
the Bank and its subsidiaries matching a portion of the employee contribution.
The Bank's matching contribution is invested in Bancshares common stock.
Bancshares' stock held by the plan as of December 31, 2001 and 2000 were 92,647
shares and 75,028 shares, respectively. Total expense under this plan was
$192,690, $213,713 and $182,370 for 2001, 2000 and 1999, respectively.
NOTE 15 - LEASES
The Bank is obligated under several lease agreements which expire in 2002
through 2010. The leased property is for land and building use. Rental payments
under these leases amounted to $383,512, $359,624 and $336,723 for the years
ended December 31, 2001, 2000 and 1999, respectively.
A summary of noncancelable lease commitments for the Bank follows (In
thousands):
Years Ended December 31 Lease Commitments
----------------------- -----------------
2002 $ 386
2003 315
2004 297
2005 251
2006 210
Thereafter 543
------
$2,002
======
NOTE 16 - CAPITAL STOCK
The preferred stock may be issued by the Board of Directors in one or more
classes or series. The Board of Directors has the authority to determine and
vary the voting rights, designations, preferences, qualifications, privileges,
limitations, options, conversion rights and other special rights of each series,
including, but not limited to, dividend rates and manner of payment,
preferential amounts payable upon voluntary or involuntary liquidation, voting
rights, conversion rights, redemption prices, terms and conditions and sinking
fund and stock purchase prices, terms and conditions.
The common stock represents voting shares, and dividends on the common stock are
paid at the discretion of the Board of Directors.
During 2000 and 1999, the corporation repurchased 57,283 shares and 361,498
shares, respectively, of common stock pursuant to share repurchase
authorizations by the Board of Directors for up to 600,000 shares of common
stock. No shares were repurchased under the plan during 2001.
A Shareholder Rights Plan was adopted by the corporation on February 10, 1998.
Under this Plan, one right was issued for each share of common stock to
shareholders of record on March 10, 1998. As long as the rights are attached to
the common stock, each new share of common stock issued after this date will
also have attached to it one right. Currently, the rights are not exercisable
but do trade automatically with the common stock shares. The rights will become
exercisable (i) ten business days after a person or group acquires 20% or more
of the corporation's shares; (ii) ten business days after a person or group
announces an offer, the consummation of which would result in such person or
group owning 20% or more of the shares; or (iii) ten business days after the
Board of Directors declares a person or group to be an adverse person (which may
occur when a person or group owns 10% or more of the shares and the Board of
Directors determines that such ownership may have a detrimental effect on the
corporation). Any person who is a part of either of these three events will be
known as an adverse person and all rights that are, or were, beneficially owned
by the adverse person shall be null and void. After the rights become
exercisable, each right may then be exercised to purchase .01 of a share of
common stock at a purchase price per full share of $100. If an adverse person
acquires 25% or more of the corporation's stock or the Board declares a person
to be an adverse person, the rights holder will have the right to receive common
stock having a value equal to two times the exercise price. If the corporation
is acquired by another company at any time after a person or group has
acquired 20% or more of the corporation's shares, the rights holder will have
the right to buy a number of shares of common stock of the acquiring company
having a market value of twice the exercise price of each right. The rights
will expire on December 31, 2007 and may be redeemed by the corporation at any
time prior to the acquisition by a person or group of 20% or more of the common
stock at a price of $.01 per right.
Bancshares has a deferred compensation plan for its active directors. On January
1, 2001, the directors could elect to defer current compensation to a trust,
which would then invest the deferred compensation in common stock of Bancshares.
At December 31, 2001, the trust owned 55,016 shares of common stock with a cost
of $878,770 and at December 31, 2000, the trust owned 49,073 shares of common
stock with a cost of $796,646. These amounts are presented as a reduction of
shareholders' equity.
Bancshares had four stock based compensation plans at December 31, 2001,
accounted for under Accounting Principles Board Opinion Number 25, under which
no compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with Statement of Financial Accounting Standards
Number 123, Bancshares' net income and earnings per share would have been
reduced to the following pro forma amounts:
Years Ended December 31
2001 2000 1999
------ ------ ------
Net income As reported $9,152 $8,795 $9,480
(In thousands) Pro forma 8,806 8,499 9,249
Basic earnings As reported 1.08 1.04 1.11
per share Pro forma 1.04 1.01 1.08
Diluted earnings As reported 1.08 1.03 1.09
per share Pro forma 1.04 1.00 1.06
To determine the above pro forma amounts, the fair value of each option grant is
estimated on the date of the grant using the Black-Scholes option-pricing model
and the following weighted-average assumptions:
Years Ended December 31
2001 2000 1999
----- ----- -----
Dividend yield ................................ 4.00% 4.72% 3.00%
Risk-free interest rate ....................... 3.50% 5.75% 6.38%
Expected stock volatility ..................... 47.22% 41.18% 13.11%
Expected years until exercise ................. 6.50 6.37 5.72
Bancshares has a 1986 Qualified Incentive Stock Option Plan which could have
granted 468,750 shares of common stock to its key employees. The exercise price
of each option was the market price of Bancshares' common stock on the date of
the grant. Options vest in equal annual installments on each of the next five
anniversaries of the date of grant and expire ten years from date of grant. No
additional options were available for grant under the plan at December 31, 2001.
35
Bancshares has a 1989 Nonqualified Employee Stock Option Plan which could have
granted 96,731 shares of common stock to key employees of a corporation acquired
by Bancshares. The exercise price of each option was $7.75. All of the options
were exercised and no additional options were available for grant under the plan
at December 31, 2001.
Bancshares has a 1994 Nonqualified Stock Option Plan which may grant 156,250
shares of common stock to the Directors of Bancshares. The exercise price of
each option is the market price of Bancshares' common stock on the date of
grant. Options vest immediately and expire five years from the date of grant.
Bancshares has a 1996 Qualified Incentive Stock Option Plan which may grant
1,062,500 shares of common stock to its key employees. The exercise price of
each option is the market price of Bancshares' common stock on the date of
grant. Options vest in equal annual installments on each of the next five
anniversaries of the date of grant and expire ten years from the date of grant.
Bancshares had warrants outstanding to purchase 27,159 shares of its common
stock at December 31, 1999. These warrants were issued to organizers and
founders of a corporation acquired by Bancshares, were immediately exercisable
at $7.75 per share, and were all exercised during 2000.
The following table summarizes information about outstanding and exercisable
stock options and warrants at December 31, 2001:
Weighted Weighted Weighted
Range of Average Average Average
Exercise Remaining Number Exercise Number Exercise
Prices Life Outstanding Prices Exercisable Prices
- ----------------- --------- ----------- -------- ----------- --------
$ 7.168 - $ 7.168 .36 34,764 $ 7.168 34,764 $ 7.168
9.728 - 9.728 1.36 56,779 9.728 56,779 9.728
11.063 - 12.040 3.73 59,607 11.532 56,107 11.518
12.800 - 12.800 2.36 59,997 12.800 59,997 12.800
13.000 - 13.000 4.39 40,937 13.000 40,937 13.000
13.550 - 13.550 9.39 65,000 13.550 0 N/A
14.250 - 15.063 7.30 70,000 14.911 27,000 14.668
15.200 - 15.400 4.68 49,374 15.228 40,622 15.234
20.000 - 20.000 6.70 61,875 20.000 29,625 20.000
20.750 - 22.500 5.73 59,375 20.989 38,875 21.116
------- -------
557,708 384,706
======= =======
A summary of the status of Bancshares' stock based compensation plans as of
December 31, 2001 and 2000 and changes during the years then ended is presented
below:
2001 2000
---------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------- -------- ------- --------
Outstanding at beginning of years ............. 500,165 $14 488,543 $14
Granted ....................................... 75,625 14 65,625 15
Exercised ..................................... (9,022) 8 (47,189) 8
Cancelled ..................................... (9,060) 14 (6,814) 17
------- -------
Outstanding at end of years ................... 557,708 14 500,165 14
======= =======
Options exercisable at end of years ........... 384,706 $13 345,159 $13
======= =======
NOTE 17 - LSB BANCSHARES, INC. (PARENT COMPANY)
The parent company's condensed balance sheets as of December 31, 2001 and 2000,
and the related condensed statements of income and cash flows for the years
ended December 31, 2001, 2000 and 1999, are as follows (In thousands):
CONDENSED BALANCE SHEETS
December 31
2001 2000
------- -------
Assets:
Cash ......................................... $ 552 $ 422
Investment in wholly-owned
subsidiary .................................. 78,313 73,775
Other assets ................................. 663 823
------- -------
Total assets ................................ $79,528 $75,020
======= =======
Liabilities and Shareholders' equity:
Other liabilities ............................ $ 894 $ 797
Shareholders' equity ......................... 78,634 74,223
------- -------
Total liabilities and
Shareholders' equity ....................... $79,528 $75,020
======= =======
CONDENSED STATEMENTS OF INCOME
Years Ended December 31
2001 2000 1999
------ ------ -------
Dividends from subsidiary ..................... $4,727 $5,482 $11,229
------ ------ -------
Operating expense ............................. 114 114 185
------ ------ -------
Income before equity in earnings of
subsidiary .................................. 4,613 5,368 11,044
Equity in earnings
of subsidiary ............................... 4,539 3,427 (1,564)
------ ------ -------
Net income .................................... $9,152 $8,795 $ 9,480
====== ====== =======
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31
2001 2000 1999
------- ------- --------
Cash Flow From Operating
Activities:
Net income .................................... $ 9,152 $ 8,795 $ 9,480
Adjustments to reconcile net income
to net cash provided by operating
activities:
Change in investment in wholly-
owned subsidiary ............................. (4,539) (3,427) 1,564
------- ------- --------
Net cash provided by operating
activities ................................... 4,613 5,368 11,044
------- ------- --------
Cash Flow From Investing
Activities:
(Increase) decrease in other assets ........... 160 232 (123)
------- ------- --------
Cash Flow From Financing
Activities:
Sale of capital stock ......................... 68 388 715
Dividends paid ................................ (4,727) (4,729) (4,775)
Common stock acquired ......................... (81) (1,550) (6,866)
Increase in other liabilities ................. 97 188 87
------- ------- --------
Net cash used by financing
activities ................................... (4,643) (5,703) (10,839)
------- ------- --------
Increase (decrease) in cash ................... 130 (103) 82
Cash at beginning of years .................... 422 525 443
------- ------- --------
Cash at end of years .......................... $ 552 $ 422 $ 525
======= ======= ========
36
STATEMENT OF MANAGEMENT RESPONSIBILITY
The management of LSB Bancshares, Inc. and subsidiaries is responsible for the
preparation of the financial statements, related financial data and other
information in this annual report. The financial statements are prepared in
accordance with accounting principles generally accepted in the United States
and include amounts that are based on management's estimates and judgment where
appropriate. Other information in the annual report is consistent with that
contained in the financial statements. In fulfilling its responsibility for the
integrity and fairness of these statements and information, management relies on
the accounting system and related internal controls that are designed to provide
reasonable assurances that transactions are authorized and recorded in
accordance with established procedures, assets are safeguarded, and proper and
reliable records are maintained.
The Corporation maintains a professional staff of internal auditors who
independently assess the effectiveness of the internal controls and recommend
possible improvements thereto. The Audit Committee of the Board of Directors is
composed solely of outside directors who are responsible for overseeing the
accounting policies employed by management and that the system of internal
controls is adequately reviewed and maintained. The independent auditors,
internal auditors and banking regulators have direct access to the Audit
Committee with or without management present.
The financial statements have been audited by Turlington and Company, L.L.P.,
independent auditors, who render an independent, professional opinion on
management's financial statements. Their report expresses an opinion as to the
fairness of the financial position and results of operations of LSB Bancshares,
Inc. and subsidiaries based on their audit conducted in accordance with auditing
standards generally accepted in the United States.
LSB Bancshares, Inc.
January 31, 2002
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Shareholders LSB Bancshares, Inc.
Lexington, North Carolina
We have audited the accompanying consolidated balance sheets of LSB Bancshares,
Inc. and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2001. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated 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 Bancshares,
Inc. and subsidiaries as of December 31, 2001 and 2000, and the consolidated
results of their operations, and their cash flows for each of the three years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.
Turlington and Company, L.L.P.
Lexington, North Carolina
January 31, 2002
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, there- unto duly authorized on the 12th day of
February, 2002.
LSB BANCSHARES, INC.
Registrant
Robert F. Lowe
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed on February 12, 2002 by the following persons in the capacities
indicated:
Robert F. Lowe
Chairman, President and Chief Executive Officer
Monty J. Oliver
Secretary and Treasurer
Chief Financial Officer
A majority of the Directors of the registrant, whose names appear on page 12.
EXECUTIVE OFFICERS OF THE REGISTRANT
Robert F. Lowe (59) Chairman, President and Chief Executive Officer and a
Director of Bancshares and the Bank, joined the Bank in 1970 and was elected
Vice President in 1973. He was elected Senior Vice President in 1980 and
Executive Vice President of the Bank and Bancshares in 1982. In 1983, Mr. Lowe
was elected a Director of Bancshares and the Bank. On January 1, 1984, he was
elected President and Chief Executive Officer of Bancshares and the Bank, and on
January 1, 1990, Mr. Lowe was elected Chairman of both Bancshares and the Bank.
Mr. Lowe also serves as Chairman, President and a Director of Peoples Finance
Company of Lexington, Inc., a subsidiary of the Bank and President and a
Director of LSB Investment Services, Inc., a subsidiary of the Bank.
H. Franklin Sherron, Jr. (46), Vice President of Bancshares, joined the Bank in
1990 as Senior Vice President. He was elected Executive Vice President of the
Bank in 1996. Mr. Sherron is also Vice President and a Director of Peoples
Finance Company of Lexington, Inc., a subsidiary of the Bank, and Senior Vice
President of LSB Investment Services, Inc., a subsidiary of the Bank.
Monty J. Oliver (60), Secretary and Treasurer of Bancshares, joined the Bank as
Vice President in 1978. He was elected Cashier of the Bank in 1980; and in 1986,
he was elected Senior Vice President of the Bank and in 1996 elected Executive
Vice President. Mr. Oliver is also Secretary and a Director of Peoples Finance
Company of Lexington, Inc., a subsidiary of the Bank, and Secretary and
Assistant Treasurer of LSB Investment Services, Inc., a subsidiary of the Bank.
41
ADVISORY BOARD MEMBERS OF LEXINGTON STATE BANK
CLEMMONS DALE R. PINILIS JUDY H. HARTMAN RICHARD E. STOVER
- -------- President, Winston-Salem Developer; Corporate Secretary, Attorney, Stover & Bennett
Speedway, Inc. Forsyth Water and Sewer
OLLIE H. CHERRY Construction, Inc. JOHN F. WATTS
Owner, Cherrie's Cafe ROBERT S. SIMON Owner, Watts Realty, Inc.
President, Windsor Jewelers, THOMAS E. HEDRICK, JR.
C. FRANK GAMBLE Inc. President, TJ's Construction JOHN H. WATTS
Retired Mortgage Banker Company Retired General
B. H. WILLIAMS Superintendent, A. Watts, Inc.
JACK H. HIGGINS President, Mari-Lu THOM C. HEGE (general contractor)
Retired General Partner, Enterprises, Inc. Owner, Robana Farms
Bingham Lumber Company THOMASVILLE
STEVEN L. SEXTON BARBARA B. LEONARD, ED.D
GEORGE E. WILSON President, Sexton Construction Associate Professor, High RICK T. BATTEN
Real Estate Agent, Vision Company Inc. Point University, Vice President, Black Lumber
Properties Chairman of Trustees, Davidson Company
HIGH POINT County Community College
FORSYTH COUNTY HOLLIS S. BLAIR
ROBERT A. BRINSON PATRICIA S. PATTERSON President, Elliot Florist &
ANN B. ADAMS Attorney, Roberson, Haworth & Secretary-Treasurer, Patterson Greenhouse, Inc.
President, The Golden Apple, Reese, PLLC Textiles
Inc. JOE W. CARROLL
H. BARRETT CHEEK, M.D. HERBERT A. SNYDER Senior Vice President & City
J. DAVID BRANCH, M.D. Physician, Carolina Cardiology Owner, Snyder's Fuel Oil Executive- Thomasville,
Ophthalmologist Associates Service; Part-Owner, Snyder, Lexington State Bank
Snyder and Associates
ROBERT C. CLARK ROBERT E. LINEBACK, JR. GABRIELLE K. CAUSBY
President, Fiber & Textile Senior Vice President & City GREGORY S. THEILER President and CEO, Thomasville
Services, Inc. Executive - High Point, President, DCH Construction Medical Center
Lexington State Bank Company, Inc.
NICHOLAS A. DAVES JOSEPH R. HEDGPETH, M.D.
Senior Vice President & Area RICHARD L. ORR, JR., M.D. STOKES COUNTY Retired Physician, Thomasville
Executive-Forsyth & Stokes Physician, Cornerstone Medical Ob-Gyn Associates, P. A.
Counties, Lexington State Bank Associates JAMES R. BURROW
Retired, Burrow Surveying and JAMES E. HUNTER, M.D.
EUNICE M. DUDLEY WILLIAM E. PRICE, JR. Mapping Company Physician, Thomasville Medical
Chief Financial Officer, Owner/Realtor, Ed Price & Associates, Inc.
Dudley Products, Inc. Associates, Realtors LEWIS N. CARROLL
Owner, Carroll Signs & HUBERT M. LEONARD
DAVID W. GOOGE DONALD A. SCARBOROUGH, ED.D. Advertising Mayor of Thomasville
Owner, Googe Financial Vice President of External
Services Relations, High Point W. FRANK FOWLER, DDS ROBERT C. LEONARD
University Retired Dentist President & Owner, Cranford
GLEN D. HART Silk Screen Process, Inc.
Owner, Hart Properties JOHN W. THOMAS, III DAVID C. HUNSUCKER
President & CEO, Thomas Built Owner, Dave's BP, Inc. KEVIN C. YATES
DONALD G. HAVER Buses President, Carolina Veneer of
Retired Vice President- EUGENE A. LYONS Thomasville, Inc.
Community Affairs, R. J. NORTH DAVIDSON Retired Principal, North
Reynolds Tobacco Company Stokes High School
JUDY Z. BUTLER
LEWIS E. HUBBARD, SR. Manager & Hygienist, Wallace PATSY R. MABE
President, Hubbard Realty of B. Butler, DDS Director, Former Danbury Banker
Winston-Salem, Inc. Lexington Memorial Hospital
Foundation HERSCHEL A. REDDING
CALVERT B. JEFFERS, JR., DVM President, Redding
Veterinarian, Boulevard Animal Construction Services, LLC
Hospital
SANDRA K. MITCHELL
President, Utility Auditing,
Inc.
OFFICERS OF LEXINGTON STATE BANK
ROBERT F. LOWE ROBIN A. HUNEYCUTT KEARNEY H. ANDREWS KATHRYN C. OAKLEY
Chairman, President & Chief Senior Vice President & Vice President, Marketing Vice President, Human
Executive Officer Secretary Resources
H. KENT BECK
H. FRANKLIN SHERRON, JR. E. WARREN MACKINSTRY Vice President, Mortgage Loans REBECCA J. PEOPLES
Executive Vice President & Senior Vice President, Vice President, Branch
Chief Operations Officer Commercial Loans LYNN B. COLLINS Administration
Vice President, Operations
MONTY J. OLIVER CHARLES N. REYNOLDS THOMAS B. PHELPS
Executive Vice President, Senior Vice President, Credit JOHN R. CRANOR Vice President, Commercial
Chief Financial Officer & Administration Vice President, Information Loans
Cashier Systems
KATHY V. RICHARDSON SHIRLEY V. PUTNAM
CORETTA J. BIGELOW Senior Vice President, Branch DEBBIE C. FANARY Vice President & Assistant
Senior Vice President, Credit Administration Vice President, Mortgage Loans Secretary, Mortgage Operations
Administration
D. GERALD SINK DAREN C. FULLER JOSEPH T. WALLACE
CRAIG L. CALL Senior Vice President, Vice President, Credit Vice President & Security,
Senior Vice President, Operations Administration Compliance & CRA Officer
Corporate Accounting
RONALD W. SINK DONNA G. HENCH STEPHEN V. WEEKS
RONALD E. COLEMAN Senior Vice President, Human Vice President & Auditor Vice President, Consumer Loans
Senior Vice President, Senior Resources
Credit Administrator BRENDA M. HOUSER JACQUES S. YOUNGBLOOD
W. EARL SNIPES Vice President & Trust Officer Vice President, Information
R. CLARK DILLON Senior Vice President, Systems
Senior Vice President & Trust Commercial Loans P. WAYNE KIMBRELL, JR.
Officer Vice President, Revolving & THOMAS J. BEIGHLEY
EDWARD C. SOPP Consumer Credit Assistant Vice President,
PHILIP G. GIBSON Senior Vice President, BankCard
Senior Vice President, Commercial Loans B. EUGENE KLUMP
Mortgage Loans Vice President JEAN P. GOOCH
PAMELA J. VARELA Assistant Vice President,
Senior Vice President, Corporate Accounting
Marketing
42
OFFICERS OF LEXINGTON STATE BANK, CONTINUED
GERALDINE J. HAND KAREN M. WUTTKE KATHY L. JOHNSON LISA H. SINK
Assistant Vice President, Assistant Vice President Loan Operations Officer & Banking Officer & Assistant
Operations Assistant Secretary Secretary
TENA C. YOUNTZ
RYAN S. JENKINS Assistant Vice President TEDDY L. JONES FAYE C. STAFFORD
Assistant Vice President, Assistant Secretary Banking Officer
Commercial Loans JENITHA A. BRACKETT
Banking Officer MARTHA Y. LEONARD SALLY C. THOMASON
SHERRILL B. JONES Banking Officer Banking Officer
Assistant Vice President, ALICE C. CARTRETTE
Operations Banking Officer TRACY M. LEONARD RODNEY E. WALSER
Banking Officer Banking Officer
A. MICHELLE MOORE ROBIN B. CECIL
Assistant Vice President Banking Officer CATHY B. MARION
Assistant Compliance Officer &
LEWIS N. TERRELL WENDY D. CLODFELTER Assistant Security Officer
Assistant Vice President, Banking Officer
Consumer Loans CINDY L. NORMAN
DAVINAN R. DAGENHARDT Banking Officer
KIMBERLY M. WEHRLE Mortgage Banking Officer
Assistant Vice President & GINGER H. RICHARDSON
Assistant Secretary DORIS M. GRIFFIN Mortgage Banking Officer
Banking Officer
CATHY F. WILKERSON
Assistant Vice President,
Branch Operations
OFFICES OF LEXINGTON STATE BANK AND SUBSIDIARIES
DAVIDSON COUNTY BRENT B. BRIDGES SHERRI B. BOWMAN MICHAEL D. JOHNSON
Vice President, Commercial Banking Officer Assistant Vice President,
ARCADIA OFFICE Loans Mortgage Loans
KERNERSVILLE OFFICE
JANET B. YATES ROY A. HYDE ALLISON W. THOMASON
Vice President Vice President MARGARET N. BERKEBILE Banking Officer & Assistant
Vice President Secretary
SHARON C. PIERCE KAREN M. BOHNER
Assistant Vice President Assistant Vice President ANDREA P. PIERCE GUILFORD COUNTY HIGH POINT
Banking Officer OFFICE
LEXINGTON LOAN CENTER THOMASVILLE PIEDMONT
RETIREMENT CENTER OFFICE RURAL HALL OFFICE ROBERT E. LINEBACK, JR.
JIM D. THOMASON Senior Vice President & City
Vice President DAVIDA L. BECK LOLA R. FRY Executive
Banking Officer Assistant Vice President
TAMARA M. HUNT SUSAN B. YOKELEY
Office Manager & Assistant THOMASVILLE RANDOLPH STREET ROBIN S. HORN Banking Officer
Secretary OFFICE Assistant Branch Officer
STOKES COUNTY DANBURY OFFICE
MIDWAY OFFICE JOYCE A. OVERSTREET WALKERTOWN OFFICE
Assistant Vice President PATRICIA A. MCCOY
WENDY L. NORRIS CARLA W. HOOKER Banking Officer
Vice President SHERYL P. LAMBETH Assistant Vice President
Banking Officer KING OFFICE
DEBBIE W. OVERBY PAMELA B. TUTTLE
Assistant Vice President, D. THOMAS NANCE Assistant Vice President R. STANLEY SOUTHERN
Mortgage Loans Mortgage Banking Officer Vice President & City
WYTHENE C. PALMER Executive
ROBIN G. CRUTCHFIELD WALLBURG OFFICE Banking Officer
Banking Officer KENT L. TEAGUE
GINGER FRITTS-TYSINGER WINSTON-SALEM SHERWOOD Vice President, Commercial
PENNY S. EVERHART Assistant Vice President PLAZA OFFICE Loans
Banking Officer
ANN B. WARREN LINDA H. MAYNARD ARTHUR A. SMITH
NORTH LEXINGTON OFFICE Assistant Vice President Assistant Vice President Assistant Vice President
PATTIE S. BAYLIFF WELCOME OFFICE WINSTON-SALEM STRATFORD ROAD J. DEREK EDWARDS
Banking Officer OFFICE Mortgage Loan Officer
MARY SUE STALLINGS
SOUTH LEXINGTON OFFICE Vice President NICHOLAS A. DAVES PAM L. BOLES
Senior Vice President & Area Assistant Secretary
NANCY S. SEAFORD RUBY D. MORRIS Executive, Forsyth & Stokes
Vice President Assistant Vice President Counties LSB INVESTMENT SERVICES,INC.
RANDALL C. BULLIN ELIZABETH J. KOLOSHINSKY SUZANNE J. BULLOTTA PATRICIA A. ROZANSKI
Assistant Vice President, Banking Officer Senior Vice President, Vice President & Program
Mortgage Loans Commercial Loans Manager, Winston-Salem Office
WEST SIDE OFFICE
SOUTH MAIN STREET OFFICE M. JACK SMITH PEOPLES FINANCE COMPANY OF
SHEILA A. SLAYDON Senior Vice President, LEXINGTON, INC.
DENISE B. HALTOM Assistant Vice President Commercial Loans
Office Manager KEITH O. FRAZIER
AMY J. NANCE E. HILDRETH CASSELL Vice President, Lexington
TALBERT BOULEVARD OFFICE Assistant Branch Officer Vice President, Commercial Office
Loans
REBEKAH C. TUCKER FORSYTH COUNTY CLEMMONS OFFICE DANNY G. SPURRIER
Assistant Vice President WANDA S. MERSCHEL Branch Officer, Lexington
REVETA J. GUNNELL Vice President & Assistant Office
THOMASVILLE NATIONAL HIGHWAY Vice President & City Secretary
OFFICE Executive CHRISTOPHER L. MICKEY
EDWARD A. POTTS, JR. Branch Officer, King Office
JOE W. CARROLL JOSEPH E. YAROZEWSKI Vice President, Mortgage Loans
Senior Vice President & City Assistant Vice President,
Executive, Thomasville Offices Commercial Loans BETTY R. HARTMAN
Assistant Vice President &
Assistant Secretary
43
DIVIDEND REINVESTMENT
Registered holders of LSB Bancshares, Inc. common stock are eligible to
participate in the Corporation's Dividend Reinvestment and Stock Purchase Plan,
a convenient and eco- nomical way to acquire additional shares of Bancshares
common stock by reinvesting divi- dends without the payment of service charges
or brokerage fees. For further information, contact Bancshares' Corporate
Office.
STOCK LISTING (LXBK)
The common stock of LSB Bancshares, Inc. is traded on the Nasdaq National
Market((R)) and is quoted electronically through the National Association of
Securities Dealers Automated Quotations System (NASDAQ/NMS) under the symbol
LXBK.
TRANSFER AGENT AND REGISTRAR
EquiServe Trust Company, N.A.
P.O.Box 43012
Providence, Rhode Island 02940-3010
800/633-4236
www.equiserve.com
FINANCIAL INQUIRIES
Analysts and investors seeking financial information about LSB Bancshares,
Inc. should contact Monty J. Oliver, Executive Vice President & Chief Financial
Officer, at the address or telephone number listed on the back cover.
Shareholders needing information concerning transfer requirements, lost
certificates and changes of address should contact Bancshares' transfer agent or
Bancshares' Corporate Office.
EQUAL OPPORTUNITY EMPLOYER
LSB Banchshares, Inc. is an equal opportunity employer. All matters regarding
recruiting, hiring, training, compensation, benefits, promotions, transfers
and all other personnel policies will remain free from discriminatory practices.
STOCKAND DIVIDEND INFORMATION
LSB Bancshares, Inc.'s common stock is traded on the NASDAQ National Market
under the symbol LXBK. The following table shows the high, low and closing sales
prices reported on the NASDAQ National Market and cash dividends declared per
share for the indicated periods.
Prices Cash
---------------------------- Dividends
2001 High Low Close Declared
- ------------------------------------------------------------------------------------
First Quarter ......................... $15.50 $10.75 $12.00 .14
Second Quarter ........................ 14.50 11.75 13.77 .14
Third Quarter ......................... 15.00 12.00 13.00 .14
Fourth Quarter ........................ 15.75 11.28 12.85 .14
2000
- ------------------------------------------------------------------------------------
First Quarter ......................... $16.63 $12.75 $14.00 .14
Second Quarter ........................ 15.75 12.06 12.25 .14
Third Quarter ......................... 14.00 11.88 11.88 .14
Fourth Quarter ........................ 13.64 10.38 11.13 .14
The following firms make a market in LSB Bancshares' common stock:
Sun Trust Capital Markets, Inc.
Spear, Leeds & Kellogg
BB&T Investment Services
Morgan Keegan & Co., Inc.
Moors & Cabot, Inc.
Midwest Research First Tennessee
Legg Mason Wood Walker, Inc.
Sherwood Securities Corp.
Friedman Billings Ramsey & Co.
Keffe, Bruyette & Woods, Inc.
ANNUAL MEETING
The Annual Meeting of Shareholders of LSB
Bancshares, Inc. will be held at 10:00 a.m.,
Wednesday, April 17, 2002 at One LSB Plaza, 5th
floor, Lexington. There will be a luncheon following
the meeting at 12:30 p.m. at the J. Smith Young
YMCA located at 119 West Third Avenue,
Lexington. All shareholders are cordially invited to
attend.
ANNUAL DISCLOSURE STATEMENT
This statement has not been reviewed for accuracy or relevance by the Federal
Deposit Insurance Corporation.
44
BOARD OF DIRECTORS
Executive Committee, seated, left to right: Robert B. Smith, Jr.; Burr W.
Sullivan; Robert F. Lowe, Chairman of the Board, President & Chief Executive
Officer; David A. Smith and; Julius S. Young, Jr.
Directors, standing, left to right: Margaret Lee W. Crowell, Emeritus; Walter A.
Hill, Sr.; Roberts E. Timberlake; Russell J. Gabrielson, Emeritus; Dothan D.
Reece, Emeritus; Samuel R. Harris; L. Klynt Ripple, Emeritus; Archie M. Sink,
Emeritus; Lloyd G. Walter, Jr.; Marvin D. Gentry; Michael S. Albert; L. Ardell
Lanier, Emeritus; Leonard H. Beck; Archie L. Hodges, Emeritus; Peggy B.
Barnhardt; A. Lonnie Davis, Emeritus and; Sue H.Hunter
Michael S. Albert Walter A. Hill, Sr. David A. Smith Julius S. Young, Jr.
President, CEO and Director of President, Hill Oil Company, Owner, Red Acres Dairy Farm President, Jay Young
Billings Freight Systems, Inc.; Vice President and Management, Inc., (asset
Inc.; Treasurer of Cargo Secretary, NorthCo, Inc. Robert B. Smith, Jr. management)
Carriers, Inc.; Vice President (construction development) Attorney, Smith and Gamblin
of Metro Motor Express, Inc. PLLC DIRECTORS EMERITI
Sue H. Hunter
Peggy B. Barnhardt President and co-owner of Burr W. Sullivan Margaret Lee W. Crowell
Retired since 1996; former Thomasville Emporium; Vice President, Dorsett Printing A. Lonnie Davis
Deputy Superintendent, President of Side Street Cafe; and Lithograph Corporation Russell J. Gabrielson
Davidson County Schools former Davidson County Archie L. Hodges
Commissioner & Vice Roberts E. Timberlake L. Ardell Lanier
Leonard H. Beck Chairperson; Member, City Artist/Designer; Chairman, Dothan D. Reece
President, Green Printing Council, Thomasville, North President and CEO of Bob L. Klynt Ripple
Company Carolina Timberlake, Inc. Archie M. Sink
Marvin D. Gentry Robert F. Lowe Lloyd G. Walter, Jr., FAIA
Retired; former President and Chairman, President and CEO of Architect; sole proprietor
CEO of The New Fortis Bancshares, the Bank and d/b/a LGW Consulting; former
Corporation, a wholly-owned Peoples Finance Company of CEO and Principal of Walter,
subsidiary of K. Hovnanian Lexington, Inc., a subsidiary Robbs, Callahan & Pierce
Enterprises of the Bank; President and a Architects, P.C.
director of LSB Investment
Samuel R. Harris, M.D. Services, Inc., a subsidiary
Physician, The Women's Center of the Bank
of Lexington
OFFICERS OF LSB BANCSHARES, INC.
Robert F. Lowe H. Franklin Sherron, Jr. Monty J. Oliver Robin A. Huneycutt
Chairman, President & Chief Vice President Secretary & Treasurer Assistant Secretary
Executive Officer
[PHOTO]
OFFICERS OF LEXINGTON STATE BANK
Robert F. Lowe
Chairman, President & Chief Executive Officer
H. Franklin Sherron, Jr.
Executive Vice President & Chief Operating Officer
Monty J. Oliver
Executive Vice President, Chief Financial Officer & Cashier
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
LSB BANCSHARES, INC.
Date: February 12, 2002 By /s/ ROBERT F. LOWE
---------------------------
Robert F. Lowe, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
/s/ ROBERT F. LOWE
- --------------------------, President and Director February 12, 2002
Robert F. Lowe (Principal Executive Officer)
/s/ MONTY J. OLIVER
- --------------------------, Secretary and Treasurer February 12, 2002
Monty J. Oliver (Principal Financial Officer)
/s/ MICHAEL S. ALBERT
- --------------------------, Director February 12, 2002
Michael S. Albert
/s/ PEGGY B. BARNHARDT
- --------------------------, Director February 12, 2002
Peggy B. Barnhardt
/s/ LEONARD H. BECK
- --------------------------, Director February 12, 2002
Leonard H. Beck
/s/ MARVIN D. GENTRY
- --------------------------, Director February 12, 2002
Marvin D. Gentry
/s/ SAMUEL R. HARRIS
- --------------------------, Director February 12, 2002
Samuel R. Harris
/s/ WALTER A. HILL, SR.
- --------------------------, Director February 12, 2002
Walter A. Hill, Sr.
/s/ SUE H. HUNTER
- --------------------------, Director February 12, 2002
Sue H. Hunter
/s/ DAVID A. SMITH
- --------------------------, Director February 12, 2002
David A. Smith
/s/ ROBERT B. SMITH, JR.
- --------------------------, Director February 12, 2002
Robert B. Smith, Jr.
/s/ BURR W. SULLIVAN
- --------------------------, Director February 12, 2002
Burr W. Sullivan
/s/ ROBERTS E. TIMBERLAKE
- --------------------------, Director February 12, 2002
Roberts E. Timberlake
/s/ LLOYD G. WALTER, JR.
- --------------------------, Director February 12, 2002
Lloyd G. Walter, Jr.
/s/ JULIUS S. YOUNG, JR.
- --------------------------, Director February 12, 2002
Julius S. Young, Jr.