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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 29549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
Commission File Number 0-11448
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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, 1998 was
$202,130,558 and the number of shares outstanding was 6,940,105.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the year ended
December 31, 1997 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 15, 1998 are incorporated by reference into Part
III of this report.
2
FORM 10-K CROSS-REFERENCE INDEX
This 1997 Annual Report and Form 10-K of the registrant incorporates into a
single document the 1997 Annual Report to Shareholders and the Annual Report on
Form 10-K for the year ended December 31, 1997 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 1998 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:
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ANNUAL REPORT PROXY STATEMENT
PART I
Item 1. Business............................................................. 12, 15-24.......................
Item 2. Properties........................................................... 12, 32, 35 (Notes 5 and 16).....
Item 3. Legal Proceedings.................................................... 32 (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.................................................. 45..............................
Item 6. Selected Financial Data.............................................. 13..............................
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 15-24...........................
Item 8. Financial Statements and Supplementary Data.......................... 25-36
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................... 41, 42..........................
Item 11. Executive Compensation............................................... ...............................7
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................................... .............................4-5
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, 1997 and 1996..... 25..............................
Consolidated Statements of Income - Years Ended
December 31, 1997, 1996 and 1995........................... 26..............................
Consolidated Statements of Changes in Shareholders' Equity
- Years Ended December 31, 1997, 1996 and 1995............. 27..............................
Consolidated Statements of Cash Flows - Years Ended
December 31, 1997, 1996 and 1995........................... 28..............................
Notes to Consolidated Financial Statements................... 29-36...........................
(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
FORM 10-K CROSS-REFERENCE INDEX (CONT'D)
INCORPORATED BY REFERENCE INTO THE FOLLOWING ITEMS
OF FORM 10-K
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PART IV
Item 14. 3.2 Bylaws of LSB Bancshares, Inc., as amended, which are incorporated by
(cont'd) reference to Exhibit 3.2 of the registrant's Annual Report on Form 10-K for the year
ended December 31, 1995.
4. Specimen certificate of common stock, $5.00 par value, which is incorporated by
reference to Exhibit 4 of the registrant's Registration Statement on Form S-1
(File No. 2-99312).
10.1 1986 Employee Incentive Stock Option Plan of LSB Bancshares, Inc., as amended,
which is incorporated by reference to the registrant's Registration Statement on
Form S-8 filed with the Securities and Exchange Commission on November 17, 1992
(File No. 33-54610).
10.2 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.
10.3 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.
10.4 Employment Continuity Agreement effective as of July 9, 1996 between LSB Bancshares,
Inc. and Robert F. Lowe, which is incorporated by reference to the registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996.
10.5 Employment Continuity Agreement effective as of July 9, 1996 between LSB Bancshares,
Inc. and H. Franklin Sherron, Jr., which is incorporated by reference to the registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.
10.6 Employment Continuity Agreement effective as of July 9, 1996 between LSB Bancshares,
Inc. and Monty J. Oliver, which is incorporated by reference to the registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996.
10.7 Employment Continuity Agreement effective as of December 24, 1997 between LSB
Bancshares, Inc. and Nicholas A. Daves.
10.8 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).
10.9 Old North State Bank 1990 Incentive Stock Option Plan, as assumed by LSB, which is
incorporated by reference to the registrant's Registration Statement on Form S-8 with the
Securities and Exchange Commission on November 19, 1997 (File No. 333-27021).
10.10 Piedmont Bancshares Corp. Stock Option Plan, which is incorporated by reference to
the registrant's Registration Statement on Form S-8 filed with the Securities and
Exchange Commission on November 19, 1997 (File No. 33-54610).
Exhibits 10.1 through 10.10 are management contracts or compensatory plans and
arrangements required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c).
13 1997 Annual Report to Shareholders.
21. List of Subsidiaries at December 31, 1997.
23. Consent of Turlington and Company, L.L.P.
27. Financial Data Schedule (for SEC use only).
(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.
4
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, thereunto duly authorized on the 10th day of
February, 1998.
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 10, 1998 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 42.
EXECUTIVE OFFICERS OF THE REGISTRANT
Robert F. Lowe (55) Chairman, President and Chief Executive Officer and a
Director of Bancshares and the Bank. Prior to becoming President on January 1,
1984, Mr. Lowe had served as Executive Vice President of Bancshares and of the
Bank. Mr. Lowe joined the Bank in 1970 and was elected Vice President in 1973.
He was elected Senior Vice President in 1980 and Executive Vice President in
1982. In 1983, he was elected a Director. Mr. Lowe is also President of Peoples
Finance Company of Lexington, Inc., which is a subsidiary of the Bank and
President and a Director of LSB Financial Services, Inc., a subsidiary of the
Bank.
H. Franklin Sherron, Jr. (42), Vice President of Bancshares, joined the Bank in
1990 as Senior Vice President. He was elected Executive Vice President of the
Bank in 1996. Prior to joining the Bank, Mr. Sherron served as President of J.
J. Barnes, Inc., a mechanical contracting firm, from 1981 to 1990. From 1977 to
1981, he served as Assistant Cashier with Peoples Bank & Trust Company.
Monty J. Oliver (56), Secretary and Treasurer of Bancshares, joined the Bank as
Vice President in 1978, with 13 years of banking experience. He was elected
Cashier of the Bank in 1980 and Vice President and Treasurer of Bancshares in
1983. In 1986, he was elected Senior Vice President of the Bank and in 1996
elected Executive Vice President.
5
1997 DIRECTORS OF LSB BANCSHARES, INC. AND LEXINGTON STATE BANK
[PICTURE]
EXECUTIVE COMMITTEE, seated, left to right: David A. Smith; Burr W. Sullivan;
Robert F. Lowe, Chairman of the Board, President & Chief Executive Officer;
Julius S. Young, Jr. and; Robert B. Smith, Jr.
DIRECTORS, standing, left to right: L. Klynt Ripple, Emeritus; Clifford A.
Erickson, Emeritus; Walter A. Hill, Sr.; Roberts E. Timberlake; L. Ardell
Lanier, Emeritus; Margaret Lee W. Crowell; Samuel R. Harris; Archie M. Sink,
Emeritus; Lloyd G. Walter, Jr.; Michael S. Albert; Peggy B. Barnhardt; Dothan
D. Reece, Emeritus; Archie L. Hodges, Emeritus; Russell J. Gabrielson,
Emeritus; Leonard H. Beck and; A. Lonnie Davis, Emeritus (Not present; Marvin
D. Gentry and; J. Smith Young, Emeritus)
MICHAEL S. ALBERT
President, CEO and Director of Billings Freight Systems, Inc.; DAVID A. SMITH
Treasurer of Cargo Carriers, Inc.; Assistant Finance Manager Owner, Red Acres Dairy Farm
of Metro Motor Express, Inc.
ROBERT B. SMITH, JR.
PEGGY B. BARNHARDT Attorney
Retired since 1996; formerly Deputy Superintendent,
Davidson County Schools BURR W. SULLIVAN
President, Dorsett Printing and Lithograph Corporation
LEONARD H. BECK
President, Green Printing Company; Director of the ROBERTS E. TIMBERLAKE
National Association of Printers and Lithographers Artist/Designer; Chairman, Bob Timberlake, Inc.
MARGARET LEE W. CROWELL LLOYD G. WALTER, JR., FAIA
Retired since 1986; formerly Finance Officer of Lexington Vice-President & Chairman, Walter, Robbs, Callahan and
City Schools Pierce, Architects, P.A.
MARVIN D. GENTRY JULIUS S. YOUNG, JR.
President and Chief Executive Officer, The New Fortis President, Jay Young Management, Inc.
Corporation, a wholly-owned subsidiary of K. Hovnanian
Enterprises
SAMUEL R. HARRIS, M.D. DIRECTORS EMERITI
Physician; Director and Treasurer, Lexington Clinic for
Women, P.A. A. LONNIE DAVIS
CLIFFORD A. ERICKSON
WALTER A. HILL, SR. RUSSELL J. GABRIELSON
President, Hill Oil Company, Inc.; Vice President and ARCHIE L. HODGES
Secretary, Northco, Inc. (construction development) L. ARDELL LANIER
DOTHAN D. REECE
ROBERT F. LOWE L. KLYNT RIPPLE
Chairman, President and CEO of Bancshares, the Bank ARCHIE M. SINK
and Peoples Finance Company of Lexington, Inc., a J. SMITH YOUNG
subsidiary of the Bank; President and a Director of LSB
Financial Services, Inc., a subsidiary of the Bank
6
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
the outstanding shares of common stock of LSB. At December 31, 1997, Bancshares
and its subsidiary had consolidated assets of $616 million and 315 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 the acceptance of deposits, corporate
cash management, discount brokerage, IRA plans, secured and unsecured loans and
trust functions through twenty-one offices in twelve communities located in
Davidson, Forsyth and Stokes 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 Financial Services, Inc. ("LSB
Financial 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 one office located in Lexington, 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 Financial Services is incorporated under the laws of the State of North
Carolina and offers a full range of uninsured, nondeposit investment products,
including mutual funds, annuities, stocks and bonds. LSB Financial Services
operates from offices located within LSB's main office, with four employees, and
also from the Stratford Office in Winston Salem, with two employees. LSB
Financial 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 governmental agency.
COMPETITION
Commercial banking in LSB's service area is highly competitive. LSB competes not
only with major commercial banks but also with thrift institutions, credit
unions, investment brokers, mortgage and finance companies. North Carolina
permits state-wide branching, which is widely practiced. In recent years,
competition between large major banks and smaller independent banks has
intensified significantly as a result of deregulation of the financial
industry. In addition to in-state competition, banks such as LSB have a high
degree of competition from out-of-state financial service companies offering
mutual funds.
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.
RECENT DEVELOPMENTS
Effective August 11, 1997, LSB consummated a merger with Old North State Bank,
headquartered in Winston-Salem, North Carolina. Old North State Bank, which
merged into Lexington State Bank, had seven branch offices with $138 million in
total assets and $114 million in total deposits on the effective date of the
merger. Under the terms of the merger agreement, LSB exchanged 1,507,045 shares
of its common stock for all of the outstanding shares of Old North State Bank.
YEAR 2000 ISSUE
Bancshares has established a Year 2000 Project Management Plan with board
oversight and senior management direction. This Plan addresses the Year 2000
issue and the impact that it may have on business. The Year 2000 Plan has an
internal completion date of December 31, 1998 and an external service provider
completion date of June 30, 1999, with there being no material affect on
Bancshares' products, services or competitive condition.
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.
In addition, LSB operates twenty-one branch offices and four off-premise
automated teller locations. Nine branches are owned by LSB, while twelve
branches and the off-premise ATM locations are leased. LSB's leased properties
are subject to leases which expire on various dates from January 31, 1998 to
February 28, 2010.
Peoples Finance operates from an 1,800 square foot, one-story building which it
owns, and which is located at 203 East Center Street in Lexington. LSB
Financial Services leases 800 square feet within the principal office building
of LSB. Except as described herein, Bancshares, LSB, Peoples Finance and LSB
Financial Services own all properties free and clear of encumbrances.
7
SUMMARY OF
SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31
(In thousands, expect per share data and ratios) 1997 1996 l995 1994 1993
===============================================================================================================
SUMMARY OF OPERATIONS
Interest income ............................... $ 45,467 $ 40,192 $ 32,333 $ 27,338 $ 25,210
Interest expense .............................. 19,547 16,536 13,426 9,858 9,005
-------- -------- -------- -------- ---------
Net interest income ........................... 25,920 23,656 18,907 17,480 16,205
Provision for loan losses ..................... 785 805 367 282 1,061
-------- -------- -------- -------- ---------
Net interest income
after provision for loan losses.............. 25,135 22,851 18,540 17,198 15,144
Noninterest income ............................ 5,389 4,639 3,599 2,851 3,448
Noninterest expense ........................... 20,426 17,907 15,091 13,710 12,673
-------- -------- -------- -------- ---------
Income before income taxes..................... 1O,098 9,583 7,048 6,339 5,919
Income taxes .................................. 3,336 2,718 1,888 1,578 1,319
-------- -------- -------- -------- ---------
Net income .................................... 6,762 $ 6,865 $ 5,160 $ 4,761 $ 4,600
======== ======== ======== ======== =========
Cash dividends declared ....................... $ 2,712 $ 2,158 $ 2,061 $ 1,905 $ 1,766
======== ======== ======== ======== =========
SELECTED YEAR-END ASSETS
AND LIABILITIES
Investment securities ......................... $105,616 $128,101 $144,639 $125,417 $ 100,000
Loans, net of unearned income ................. 396,991 355,893 297,264 232,632 219,464
Assets ........................................ 616,265 551,845 493,433 403,840 379,201
Deposits ...................................... 503,025 464,921 428,032 351,587 329,170
Shareholders' equity .......................... 67,527 62,862 58,355 48,437 45,651
RATIOS (AVERAGES)
Net income to total assets .................... 1.16% 1.32% 1.23% 1.22% 1.27%
Net income to shareholders' equity ............ 10.31 11.36 10.19 10.11 10.40
Dividend payout ............................... 40.11 31.43 39.94 40.01 38.39
Shareholders' equity to total assets .......... 11.21 11.62 12.05 12.04 12.19
PER SHARE DATA
Earnings Per Share:
Basic........................................ $ .98 $ 1.00 $ .84 $ .79 $ .76
Diluted...................................... .96 .98 .82 .77 .75
Cash dividends declared ....................... .44 .40 .38 .35 .33
Book value at end of year ..................... 9.74 9.13 8.52 8.02 7.58
8
AVERAGE BALANCES AND
NET INTEREST INCOME ANALYSIS
Table 1
Fully taxable equivalent basis(1) (In thousands)
1997 1996 1995
INTEREST Interest Interest
AVERAGE INCOME AVERAGE Average Income/ Average Average Income/ Average
BALANCE EXPENSE YIELD/RATE Balance Expense Yield/Rate Balance Expense Yield/Rate
========================================================================================================
Earning assets:
Loans and leases
receivable, nets(2) ... $ 379,672 $35,692 9.40% $ 324,195 $ 30,576 9.43% $245,032 $ 23,360 9.53%
Taxable securities ..... 83,133 5,077 6.11 106,870 6,512 6.09 93,519 5,865 6.27
Tax exempt securities .. 31,202 2,498 8.01 30,753 2,668 8.68 30,597 2,748 8.98
Federal funds sold ..... 48,279 2,639 5.47 19,620 1,033 5.27 19,765 1,155 5.84
Federal Home Loan
Bank .................. 2,464 179 7.26 1,678 122 7.27 110 8 7.27
Deposits with
Federal Home
Loan Bank ......... 1,760 95 5.40 850 48 5.65
--------- ------- --------- --------- -------- -------
Total earning assets .. 546,510 46,180 8.45 483,966 40,959 8.46 389,023 33,136 8.52
Non-earning assets:
Cash and due
from banks ........ 22,657 19,790 17,270
Premises and equipment . 11,333 11,277 10,562
Other assets ........... 9,016 8,678 6,473
Reserve for loan losses. (4,468) (3,812) (3,059)
------- ------- --------- --------- -------- -------
Total assets .......... $ 585,048 $46,180 $ 519,899 $ 40,959 $420,269 $33,136
======= ======= ========= ========= -------- -------
Interest-bearing liabilities:
Savings and time
deposits .............. $ 425,489 $17,917 4.21% $ 387,072 $ 15,831 4.09% 319,539 $13,349 4.18%
Securities sold under
agreements to
repurchase ........... 5,637 234 4.15 3,269 168 5.14 1,262 50 3.96
Borrowings from Federal
Home Loan Bank ....... 23,303 1,396 5.99 9,300 537 5.77 460 27 5.87
--------- ------- --------- --------- ------- -------
Total interest-bearing
liabilities .......... 454,429 19,547 4.30 399,641 16,536 4.14 321,261 13,426 4.18
Other liabilities and
shareholders' equity:
Demand deposits ........ 61,148 56,559 45,875
Other liabilities ...... 3,900 3,264 2,501
Shareholders' equity ... 65,571 60,435 50,632
--------- ------- --------- --------- ------- -------
Total liabilities and
shareholders'
equity ............... $ 585,048 $19,547 $ 519,899 $ 16,536 $420,269 $13,426
========= ======= ========= ========= ======== =======
Net interest income and
net interest margin(3).. $26,633 4.87% $ 24,423 5.05% $19,710 5.07%
======= ==== ========= ==== ======== ======= ====
Interest rate
spread(4).......... 4.15% 4.32% 4.34%
==== ==== ====
(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 $1,382, $1,145 and $590 for 1997, 1996 and 1995,
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.
9
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF OPERATIONS AND
FINANCIAL CONDITION
Management's discussion as presented herein provides an overview of the changes
in financial condition and results of operation for LSB Bancshares, Inc.
("Bancshares") and its wholly-owned subsidiary, Lexington State Bank ("LSB") for
the years 1997, 1996 and 1995. The consolidated financial statements also
include the accounts and results of operations of LSB's wholly-owned
subsidiaries, Peoples Finance Company of Lexington, Inc. ("Peoples Finance") and
LSB Financial Services, Inc. ("LSB Financial Services"). This discussion and
analysis is intended to provide pertinent information in the areas of liquidity,
capital resources, results of operation, financial position, asset quality and
interest sensitivity. It should be read in conjunction with the audited
financial statements, notes and supplemental tables provided herein.
MERGER
Effective August 11, 1997, LSB consummated a merger with Old North State Bank
headquartered in Winston-Salem, North Carolina. Old North State Bank had seven
branch offices with $138 million in total assets and $114 million in total
deposits on the effective date of the merger. Under the terms of the merger
agreement, LSB exchanged 1,507,045 shares of its common stock for the
outstanding shares of Old North State Bank.
SUMMARY
The merger of Old North State Bank was accounted for as a pooling-of-interests,
and, accordingly, all financial statements presented include the accounts of
these two organizations.
Bancshares had net income for the year ended December 31, 1997 of $6,762,000
compared to $6,865,000 in 1996 and $5,160,000 in 1995. The decrease in 1997
earnings compared to 1996 was due to the one-time merger related costs of
$1,494,000, which were of a nonrecurring nature. Net income for
1996 increased $1,705,000 or 33.0% compared to 1995.
Excluding the effects of the merger-related expense, basic earnings per share
for 1997 totaled $1.15 on a pro forma basis. Basic earnings per share was $.98
in 1997 compared to $1.00 in 1996 and $.84 in 1995. Diluted earnings per share
for 1997 was $.96 compared to $.98 for 1996 and $.82 for 1995.
Excluding the effects of the merger-related expense, return on average assets
for 1997 was 1.36% on a pro forma basis. Computed on net income, the return on
average assets for 1997 was 1.16% compared to 1.32% for 1996 and 1.23% for 1995.
Return on average shareholders' equity for 1997 was 10.31% compared to 11.36%
for 1996 and 10.19% for 1995.
Interest rates remained steady throughout 1997, contributing to another solid
gain in net interest income for Bancshares. The prime interest rate, which is
used as an interest rate indicator by banks, made one adjustment in 1997, as it
did in 1996, compared to three adjustments in 1995. These changes
VOLUME AND RATE VARIANCE ANALYSIS
TABLE 2 1997 1996
Fully taxable equivalent basis (1) in thousands VOLUME RATE TOTAL Volume Rate Total
VARIANCE(2) VARIANCE(2) VARIANCE Variance(2) Variance(2) Variance
--------------------------------- ---------------------------------
Interest income:
Loans receivable ............................. $ 5,214 $ (98) $ 5,116 $ 7,464 $(248) $ 7,216
Taxable ...................................... (1,456) 21 (1,435) 819 (172) 647
Tax exempt ................................... 39 (209) (170) 14 (94) (80)
Federal funds sold ........................... 1,565 41 1,606 (9) (113) (122)
Federal Home Loan Bank ....................... 57 0 57 114 0 114
Deposits with Federal Home Loan Bank ......... 49 (2) 47 48 0 48
------- ----- ------- ------- ----- -------
Total interest income ...................... 5,468 (247) 5,221 8,450 (627) 7,823
------- ----- ------- ------- ----- -------
Interest expense:
Savings and time deposits .................... 1,610 476 2,086 2,775 (293) 2,482
Securities sold under agreements to repurchase 103 (37) 66 99 19 118
Borrowings from Federal Home Loan Bank ....... 838 21 859 510 0 510
------- ----- ------- ------- ----- -------
Total interest expense ..................... 2,551 460 3,011 3,384 (274) 3,110
------- ----- ------- ------- ----- -------
Increase (decrease) in net interest income ... $ 2,917 $(707) $ 2,210 $ 5,066 $(353) $ 4,713
======= ===== ======= ======= ===== =======
(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
variances.
10
INTEREST SENSITIVITY ANALYSIS(1)
DECEMBER 31, 1997
TABLE 3 TOTAL
(In thousands) 1 - 90 91 - 180 181-365 SENSITIVE 1 - 5 OVER
DAY DAY DAY WITHIN YEAR 5-YEAR
SENSITIVE SENSITIVE SENSITIVE ONE YEAR SENSITIVE SENSITIVE TOTAL
-------------------------------------------------------------------------------
Interest-earning assets:
Loans, net of unearned income ................... $ 144,952 $ 27,090 $52,330 $224,372 $ 143,776 $ 28,843 $ 396,991
U.S. Treasury securities ........................ 3,281 2,499 1,999 7,779 27,529 35,308
U.S. government agencies obligations ............ 1,012 6,000 3,250 10,262 23,895 1,969 36,126
Obligations of states and political subdivisions 102 1,841 50 1,993 10,174 19,602 31,769
Federal Home Loan Bank .......................... 2,413 2,413 2,413
Deposits with Federal Home Loan Bank ............ 12,127 12,127 12,127
Federal funds sold .............................. 60,340 60,340 60,340
--------- -------- ------- --------- -------- -------- ---------
Total interest-earning assets .............. $ 224,227 $ 37,430 $57,629 $ 319,286 $205,374 $ 50,414 $ 575,074
========= ======== ======= ========= ======== ======== =========
Interest-bearing liabilities:
N.O.W. account deposits ......................... $ 94,693 $ 94,693 $ 94,693
Money market deposits ........................... 95,379 95,379 95,379
Regular savings deposits ........................ 37,167 37,167 37,167
Time deposits ................................... 86,048 $ 56,201 $45,303 187,552 $ 20,978 208,530
Securities sold under agreements to repurchase .. 8,263 8,263 8,263
Borrowing from Federal Home Loan Bank ........... 1,125 833 1,758 3,716 30,042 $ 33,758
--------- -------- ------- --------- -------- -------- ---------
Total interest-bearing liabilities ......... $ 322,675 $ 57,034 $47,061 $ 426,770 $ 51,020 $ 0 $ 477,790
========= ======== ======= ========= ======== ======== =========
Interest sensitivity gap ........................ $ (98,448) $(19,604) $10,568 $(107,484)
Ratio of interest-sensitive assets/
interest-sensitive liabilities ................ .69 .66 1.22 .75
(1) Interest sensitivity is computed using assets and liabilities hailing
interest rates that can be adjusted during the period indicated.
resulted in the prime interest rate dropping 25 basis points in 1996, increasing
25 basis points in 1997 and ending the year at 8.50%, the same rate as year-end
1995.
The increase in net interest income in 1997 was $2,264,000 or 9.6% compared to
$4,749,000 or 25.1% in 1996. The loan loss provision necessary to maintain an
adequate reserve in 1997 was maintained at nearly the same level as 1996,
reflecting a strong loan portfolio quality. Noninterest income in 1997 increased
$750,000 or 16.2% compared to 1996, which was up $1,040,000 or 28.9% over 1995.
The increase in noninterest expense was the result of general growth and
expansion in business together with nonrecurring expenses related to the merger
mentioned above. Excluding merger-related costs, the increase in noninterest
expense in 1997 was $1,025,000 or 5.7% compared to $2,816,000 or 18.7% in 1996.
Asset growth for 1997 was $64,420,000 or 11.7% compared to an increase of
$58,412,000 or 11.8% in 1996. Deposit growth in 1997 was $38,104,000 or 8.2%
compared to $36,889,000 or 8.6% in 1996. Loan growth increased at a faster pace
during the two years being compared. In 1997, total loans increased $41,098,000
or 11.5% compared to $58,629,000 or 19.7% in 1996.
ASSET/LIABILITY MANAGEMENT
The objectives of asset/liability management are to ensure long-range
profitability performance and minimize risk, adhere to proper liquidity and
maintain sound capital. To meet these goals, the process of asset/liability
management monitors the exposure to interest rate risk, balance sheet trends,
pricing policies and liquidity position.
Profitability and performance are affected by balance sheet composition and
interest rate movements. Management responsibility for both liquidity and
interest sensitivity reside with a designated Asset/Liability Management
Committee ("ALCO"). Market conditions, interest rate trends and the economic
environment are all evaluated by the ALCO Committee as a part of its
asset/liability management decision-making process. 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. At
December 31, 1997, LSB also had available credit from the Federal Home Loan Bank
of Atlanta ("FHLB") totaling $60,000,000, of which $26,242,000 remained
available. This credit is collateralized by a blanket lien on qualifying loans
secured by first mortgages on one-to-four family residences. These funds could
be drawn upon to satisfy liquidity needs or for other purposes deemed
appropriate.
During 1997, management's balance sheet strategies included
11
SUMMARY OF INVESTMENT SECURITIES PORTFOLIO
TABLE 4 DECEMBER 31, 1997 December 31, 1996 December 31, 1995
(In thousands) CARRYING MARKET Carrying Market Carrying Market
VALUE VALUE Value Value Value Value
-------------------- --------------------- ---------------------
U.S. Treasury securities ...................... $ 35,308 $ 35,328 $36,809 $ 36,772 $44,716 $ 44,845
U.S. government agencies obligations .......... 35,109 35,084 47,401 47,330 57,217 57,199
Mortgage-backed obligations ................... 1,017 1,017 8,888 8,856 7,650 7,617
Obligations of state and political subdivisions 31,769 33,092 30,486 31,584 32,183 33,827
Other ......................................... 0 0 2,804 2,790 1,515 1,515
Federal Home Loan Bank ........................ 2,413 2,413 1,713 1,713 1,358 1,358
-------- -------- -------- -------- -------- --------
Total securities ......................... $105,616 $106,934 $128,101 $129,045 $144,639 $146,361
======== ======== ======== ======== ======== ========
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
registrants shareholders' equity.
Increasing borrowings from the FHLB to $33,758,000 by year end, selling $8.3
million in loans into the secondary market, and reducing the investment
securities portfolio by $22,485,000 or 17.6%. These strategies met the strong
loan demand experienced in 1997, while maintaining the Bank's balance sheet
ratios and profitability.
The asset/liability management process also 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 1997's performance can be found under the headings of
earning assets and interest-bearing liabilities. The interest sensitivity
schedule analyzing the interest rate risk as of December 31, 1997 is presented
in Table 3. As interest sensitivity is continually changing, the table 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, 1997, the one-year
cumulative interest sensitivity gap was a negative $107,484,000, for a ratio of
interest-sensitive assets to interest-sensitive liabilities of .75.
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 $8,307,000 in 1997 compared to $5,549,000 in 1996 and
$55,509,000 in 1995. Details of cash flows for the years 1997, 1996 and 1995
are provided in the Consolidated Statements of Cash Flows.
NET INTEREST INCOME
Net interest income, on a fully taxable equivalent basis, amounted to
$26,633,000 in 1997 compared to $24,423,000 in 1996 and $19,710,000 in 1995.
Tax-equivalent net interest income as a percentage of average earning assets, or
net interest margin, amounted to 4.87% in 1997, 5.05% in 1996 and 5.07% in 1995.
The net interest margin is computed by dividing net interest income by average
earning assets. The major components of tax-equivalent net interest income for
the three years ended December 31,1997, are shown in Table 1.
The growth in tax-equivalent net interest income in 1997 was primarily the
result of an increase of $62,544,000 or 12.9% in the volume of average earning
assets, as the net yield on earning assets declined to 4.87% in 1997 from 5.05%
in 1996. The decline in the net yield on earning assets was principally due to
the increased cost related to interest-bearing deposits. The average rate paid
on interest-bearing deposits increased .16% in 1997 compared to 1996 while the
yield on average earning assets decreased .01%. The volume of average
interest-bearing liabilities in 1997 increased $54,788,000 or 13.7% compared to
1996 with the largest growth coming from money market deposits and time
deposits. These were also the two deposit categories that experienced the
biggest gain in average rates paid. The effects on tax-equivalent net interest
income from volume and rate changes are summarized in Table 2.
EARNING ASSETS
The average balance of the loan portfolio was $379,672,000 in 1997, an increase
of $55,477,000 or 17.1% over 1996. This compares to a growth in average loans
during 1996 of $79,163,000 or 32.3% over 1995. At December 31,1997, loans
totaled $396,991,000, which represented an increase of $41,098,000 or 11.5% over
December 31,1996. At year-end 1996, loans totaled $355,893,000, which was
$58,629,000 or 19.7% higher than December 31,1995. The growth experienced during
the past two years has resulted from increases in commercial and mortgage loans,
much of which is secured by real estate.
12
This gain in loan volume resulted in the major portion of the increase in
tax-equivalent net interest income over the past two years. As shown in the
Volume and Rate Variance Analysis, Table 2, the 1997 and 1996 increases in loan
balances accounted for all of the income gain for each year. The variances
resulting from interest rates during that two-year period produced negative
results.
The average balance of the taxable investment securities portfolio in 1997 was
$83,133,000, which was a decrease of $23,737,000 or 22.2% compared to 1996. This
decline in average taxable securities was primarily the result of higher loan
demand and management's redeployment of these funds to higher yielding assets.
The tax-exempt investment securities portfolio remained relatively unchanged
during 1997, 1996 and 1995. At December 31, 1997, total investment securities
available-for-sale totaled $50,725,000, a decrease of $6,239,000 or 11.0% from
1996. Investment securities held-to-maturity at December 31, 1997 totaled
$54,891,000, a decrease of $16,246,000 or 22.8%. The decrease is the result of
funds from maturing securities within the held-to-maturity investment portfolio
being made available for the growing loan portfolio during 1997.
As shown in the Volume and Rate Variance Analysis, Table 2, this produced a
negative volume variance of $1,456,000 for taxable investment securities. Yields
on taxable investment securities increased .02% in 1997, creating a positive
rate variance of $21,000. The slight gain in average tax-exempt investment
securities in 1997 of $449,000 or 1.5% over 1996 produced a positive volume
variance of $39,000. The decline in average yield on tax-exempt investment
securities to 8.01% in 1997 from 8.68% in 1996 produced a negative rate
variance of $209,000.
The average funds invested in federal funds sold in 1997 was increased
$28,659,000 or 146.1%, primarily for management of the Bank's liquidity
position. At December 31, 1997, the total of federal funds sold was $60,340,000
compared to $26,720,000 at December 31, 1996. 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 ten percent of the registrant's
shareholders' equity.
INTEREST-BEARING LIABILITIES
The average balance of interest-bearing liabilities for 1997 was $454,429,000,
an increase of $54,788,000 or 13.7% over 1996. This compares to a growth in
average interest-bearing liabilities during 1996 of 578,380,000 or 24.4%.
Average total deposits increased $43,006,000 or 9.7% in 1997 compared to an
increase of $78,217,000 or 21.4% in 1996. At December 31, 1997, deposits totaled
$503,025,000, which represented an increase of $38,104,000 or 8.2% over 1996. At
year-end 1996, deposits totaled $464,921,000, which was $36,889,000 or 8.6%
higher than December 31, 1995. The growth experienced in the past two years has
come primarily from money market deposits and time deposits, which have also
experienced the biggest increase in interest rates paid.
INVESTMENT SECURITIES PORTFOLIO
MATURITY SCHEDULE
DECEMBER 31, 1997
TABLE 5 WEIGHTED
(In thousands) CARRYING AVERAGE
VALUE YIELD(1)
-----------------------
U.S. Treasury securities:
Within one year ................................. $ 7,498 5.31%
One to five years ............................... 27,810 6.17
---------
Total ......................................... 35,308 5.99
---------
U.S. government agencies obligations:
Within one year ................................. 9,249 5.39
One to five years ............................... 25,860 6.17
---------
Total ......................................... 35,109 5.96
---------
Mortgage-backed obligations ....................... 1,017 5.35
---------
Obligations of states and political subdivisions:
Within one year ................................. 1,993 10.29
One to five years ............................... 10,174 10.53
Five to ten years ............................... 10,914 8.45
After ten years ................................. 8,688 8.48
---------
Total ......................................... 31,769 9.22
---------
Federal Home Loan Bank ............................ 2,413 7.25
---------
Total securities .................................. $ 105,616 7.31
=========
(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.
13
AVERAGE TOTAL DEPOSITS
TABLE 6
(In thousands)
1997 1996 1995
AVERAGE AVERAGE Average Average Average Average
BALANCE RATE Balance Rate Balance Rate
----------------- ------------------- -------------------
Demand deposits.......................... $ 61,148 $ 56,559 $ 45,875
N.O.W. account deposits.................. 89,640 2.58% 80,840 2.50% 66,174 2.77%
Money market deposits.................... 84,774 3.61 72,539 3.35 69,320 3.57
Regular savings deposits................. 38,447 2.19 39,024 2.27 36,342 2.57
Time deposits............................ 212,628 5.50 194,669 5.39 147,703 5.49
-------- -------- --------
Total deposits(1)................... $486,637 $443,631 $365,414
======== ======== ========
DECEMBER 31, 1997
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....... $ 30,632 $13,123 $8,885 $1,324 $53,964
(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.
The increase in interest-bearing deposits for 1997 resulted in a volume variance
of $1,610,000, while a .12% increase in average rates paid added a $476,000 rate
variance. The schedule for average deposits is presented in Table 6 for years
1997, 1996 and 1995. Average interest rates paid on money market deposits
increased .26% in 1997 compared to 1996. Average balances for money market
deposits in 1997 increased $12,235,000 or 16.9% over 1996. Time deposit average
interest rates increased .11% in 1997 compared to 1996, while the average
balances grew by $17,959,000 or 9.2%. N.O.W. account average interest rates were
up .08% in 1997 compared to 1996, with a gain in average balances of $8,800,000
or 10.9%. Average interest rates paid on regular savings deposits decreased .08%
and average balances were down $557,000 or 1.5%.
Securities sold under agreements to repurchase account for a small proportion of
total interest-bearing liabilities. The average volume of these liabilities
increased $2,368,000 in 1997 and $2,007,000 in 1996. Increased borrowings from
the FHLB resulted in 1997 average balances of $23,303,000, an increase of
$14,003,800 or 150.6% over 1996. As shown in the Volume and Rate Variance
Analysis, Table 2, this produced a volume variance of $838,000. Increased
average interest rates on the borrowings from the FHLB produced a rate variance
of $21,000.
CAPITAL RESOURCES AND SHAREHOLDERS' EQUITY
At December 31, 1997, shareholders' equity was $67,527,000, an increase of 7.4%
compared to December 31, 1996. At year-end 1996, shareholders' equity was
$62,862,000, an increase of 7.7% over year-end 1995. Average shareholders'
equity as a percentage of average total assets amounted to 11.2% in 1997, 11.6%
in 1996 and 12.0% in 1995.
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, 1997,
based on these measures, Bancshares had a Tier 1 capital ratio of 17.97%
compared to the regulatory requirement of 4% and a total capital ratio of 19.22%
compared to an 8% regulatory requirement.
Additional regulatory capital measures include the Tier 1 leverage ratio. The
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, 1997, Bancshares'
Tier 1 leverage ratio was 11.33%.
The number of shareholders holding Bancshares stock totaled approximately 5,230
at December 31, 1997. Participants in Bancshares' dividend reinvestment plan
total 1,484, representing 28.4% of total shareholders.
NONINTEREST INCOME
Noninterest income for 1997 increased $750,000 or 16.2% compared to an increase
of $1,040,000 or 28.9% in 1996. Fee income consisting of service charges on
deposit accounts for 1997 remained virtually unchanged compared to 1996. The
1996 increase in service charges on deposit accounts was $371,000 or 17.4%
compared to 1995. The gain in other operating income for 1997 was $629,000 or
30.6% compared to an increase of $590,000 or 40.2% in 1996. Financial statement
Note 9 details material items contained in other operating
14
income. Bankcard income generated in 1997 represented the largest dollar and
percentage increase. This category increased $183,000 or 48.7% in 1997 compared
to an increase of $89,000 or 31.0% in 1996. Fee income generated from the
servicing of sold mortgage loans, loan fees and customer related service fees
increased $162,000 or 39.1% in 1997 compared to an increase of $166,000 or 66.9%
in 1996. Commissions generated by LSB's financial services subsidiary increased
$146,000 or 46.9% in 1997 compared to an increase of $219,000 or 238.0% in
1996. Trust income for 1997 increased $35,000 or 8.6% compared to 1996 and
$93,000 or 29.5% in 1996 compared to 1995.
NONINTEREST EXPENSE
Total noninterest expense, excluding merger-related costs and restructuring
charges, totaled $18,932,000 in 1997, $17,385,000 in 1996, and $15,091,000 in
1995. These amounts represent increases of $1,547,000 or 8.9% in 1997 over 1996
and $2,294,000 or 15.2% in 1996 over 1995.
Personnel expense represented the largest dollar increase of noninterest
expense. Personnel expense, consisting of both employee salaries and benefits,
increased $284,000 or 2.8% in 1997 compared to $1,577,000 or 18.5% in 1996.
These increases are attributable to normal increases in compensation and
increases in the number of full-time equivalent employees. In 1997, full-time
equivalent employees totaled 315. This increase in the number of full-time
equivalent employees was principally due to the acquisition of Old North State
Bank.
Occupancy expense decreased $20,000 or 1.6% in 1997 compared to an increase of
$291,000 or 30.6% in 1996. Equipment depreciation and maintenance expense has
increased in each of the past two years as LSB has added to its technological
capability. In 1997, this expense increased $190,000 or 19.1% compared to an
increase of $199,000 or 25.0% in 1996.
Other operating expenses in 1997 increased $1,093,000 or 21.7% compared to an
increase of $227,000 or 4.7% in 1996. Financial statement Note 9 details the
material items contained in other operating expenses. Advertising expense
increased $154,000 or 74.4% in 1997 as LSB began marketing to a larger service
area. Automated services expense in 1997 increased $211,000 or 18.9% compared
to an increase of $156,000 or 16.3% in 1996. These increases are the result of
LSB's expanding automation program to enhance customer service and improve
operating efficiencies. Bankcard expense increased $152,000 or 51.5% in 1997
compared to an increase
SUMMARY OF LOAN PORTFOLIO
TABLE 7
(In thousands)
1997 1996 1995 1994 1993
-------------------------------------------------------------
Commercial, financial and agricultural ... $ 98,473 $ 99,527 $100,264 $70,763 $65,672
Real estate - construction ............... 12,978 10,493 9,319 6,760 6,354
Real estate - mortgage ................... 219,092 177,553 126,398 99,228 96,291
Installment loans to individuals ......... 62,909 60,181 53,753 48,451 45,935
Lease financing .......................... 792 678 0 0 0
Other .................................... 2,747 7,461 7,530 7,430 5,212
-------- -------- -------- -------- --------
Total loans, net of unearned income ...... $396,991 $355,893 $297,264 $232,632 $219,464
======== ======== ======== ======== ========
*The bank has no foreign loan activity
MATURITIES AND SENSITIVITIES OF
LOANS CHANGES IN INTEREST RATES (1)
DECEMBER 31, 1997
COMMERCIAL
FINANCIAL REAL ESTATE-
AND AGRICULTURAL CONSTRUCTION TOTAL
--------------------------------------------
Due in 1 year or less ................ $48,420 $12,978 $61,398
Due after 1 year through
5 years:
Fixed interest rates ............. 33,319 33,319
Floating interest rates .......... 14,129 14,129
Due after 5 years:
Fixed interest rates ............. 830 830
Floating interest rates .......... 1,775 l,775
------- ------- -------
Total ......................... $98,473 $12,978 $111,451
======= ======= ========
15
ANALYSIS OF RESERVE FOR LOAN LOSSES
TABLE 8
(In thousands)
AS OF OR FOR THE YEARS ENDED
DECEMBER 31
1997 1996 1995 1994 1993
--------------------------------------------------------
Average amount of loans outstanding, net of unearned income. $379,672 $324,195 $245,032 $227,666 $210,817
Amount of loans outstanding, net of unearned income ........ 396,991 355,893 297,264 232,632 219,464
Reserve for loan losses:
BALANCE ON JANUARY 1 ....................................... $ 4,075 $ 3,711 $ 3,013 $ 3,096 $ 2,922
-------- -------- -------- -------- --------
Loans charged off:
Secured by real estate ..................................... 0 57 49 0 0
Commercial and industrial .................................. 382 225 169 299 866
Installment ................................................ 330 197 147 127 169
Credit card ................................................ 139 93 58 28 19
-------- -------- -------- -------- --------
Total charge-offs ...................................... 851 572 423 454 1,054
-------- -------- -------- -------- --------
Recoveries of loans previously charged off:
Secured by real estate ..................................... 0 0 11 7 0
Commercial and industrial .................................. 486 20 28 10 67
Installment ................................................ 89 86 78 56 87
Credit card ................................................ 17 25 17 15 13
-------- -------- -------- -------- --------
Total recoveries ....................................... 592 131 134 88 167
-------- -------- -------- -------- --------
Net loans charged off ........................................ 259 441 289 366 887
-------- -------- -------- -------- --------
Provision for loan losses .................................... 785 805 367 283 1,061
-------- -------- -------- -------- --------
Acquired bank's allowance at date of acquisition ............. 0 0 620 0 0
-------- -------- -------- -------- --------
BALANCE ON DECEMBER 31 ..................................... $ 4,601 $ 4,075 $ 3,711 $ 3,013 $ 3,096
======== ======== ======== ======== ========
Ratio of net charge-offs of loans to average loans
outstanding during the year ................................ .07% .14% .12% .16% .42%
of $63,000 or 27.2% in 1996. These increases are attributable to the growth in
the bankcard portfolio.
RESTRUCTURING CHARGES AND MERGER-RELATED COSTS
On January 9, 1996, Bancshares approved a plan to restructure the operations of
the Bank, which would enhance the quality of service to customers and reduce
future operating costs. Restructuring charges to implement the plan totaled
$522,000, consisting of $490,000 for retirement benefits, $27,000 for severance
benefits and $5,000 for professional fees.
On August 11, 1997, LSB merged with Old North State Bank, in a transaction
accounted for as a pooling-of-interests business combinations. During 1997, LSB
recognized $1,493,591 of costs related to the merger. These costs include
professional fees of $611,918, personnel expense of $384,811, regulatory filings
and printing of $82,322, a data processing cancellation fee of $168,000, loss on
sale of securities of $83,410 and other of $163,130.
ASSET QUALITY AND PROVISION FOR LOAN LOSSES
The reserve for loan losses was $4,601,000 or 1.16% of loans outstanding at
December 31, 1997 compared to $4,075,000 or 1.15% of loans outstanding at
December 31, 1996. Net charge offs for 1997 were $259,000 or .07% of average
loans outstanding, compared to 1996 net charge offs of $441,000 or .14% of
average loans. This improvement in net charge offs is primarily the result of
one large recovery in the second quarter of 1997, related to a loan previously
charged off. The 1997 provision for loan losses was slightly less than that of
the previous year, reflecting the second quarter charge-off recovery and the
total coverage of the reserve in relation to outstanding loans. Additional
information regarding the reserve for loan losses is contained in Table 8,
"Analysis of Reserve for Loan Losses".
Nonperforming assets, which include nonaccrual loans, restructured loans, other
real estate acquired through foreclosed properties and accruing loans ninety
days or more past due, totaled $2,155,000 at December 31, 1997, $2,390,000 at
December 31, 1996, and $2,863,000 at December 31, 1995. Nonperforming assets as
a percentage of loans outstanding at the end of the year amounted to .54% in
1997, .67% in 1996, and .96% in 1995. Nonaccrual loans totaled $127,000 at
December 31, 1997, $611,000 at December 31, 1996, and $1,380,000 at December 31,
1995. Accruing loans past due 90 days or more have remained relatively unchanged
in the three years being compared. The accrual of interest is generally
discontinued on all loans that become 90 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. Table 9, "Nonperforming Assets", discloses the
components of nonperforming assets. At December 31, 1997, the reserve for loan
losses was 2.14 times nonperforming assets compared to 1.71 times nonperforming
assets at December 31, 1996. Based on the current loan portfolio and levels of
current problem assets and potential problem loans,
16
management believes the provision for loan losses to be adequate.
In management's judgment, the allocation of the reserve for loan losses for 1997
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 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 LSB's 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, or 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.
During 1997, all credit relationships of $50,000 or more were reviewed as a part
of LSB's credit administration program. 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.
There are, however, additional risks of future losses which 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, substandard 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
Bancshares' effective tax rate increased to 33.0% in 1997 from 28.4% in 1996
compared to 26.8% in 1995. Financial statement Note 10 provides a reconciliation
between the amount of taxes computed using the statutory tax rate and the actual
tax expense. The increase in Bancshares' effective tax rate for 1997 was
primarily the result of higher nondeductible merger-related costs.
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
NONPERFORMING ASSETS
TABLE 9
(In thousands)
DECEMBER 31
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Nonaccrual loans:
Secured by real estate .......................................... $ 0 $ 424 $ 990 $ 0 $ 1,284
Commercial and industrial ....................................... 127 187 390 0 0
Restructured loans ................................................ 502 259 289 0 0
Other real estate acquired through foreclosed properties .......... 1,192 1,151 988 1,059 178
Accruing loans which are contractually past due 90 days or more ... 334 369 206 1,108 472
------- ------- ------- ------- -------
Total nonperforming assets ........................................ $ 2,155 $ 2,390 $ 2,863 $ 2,167 $ 1,934
======= ======= ======= ======= =======
Nonperforming assets to:
Loans outstanding at end of year ................................ .54% .67% .96% .93% .88%
Total assets at end of year ..................................... .35 .43 .58 .54 .51
Loss of interest income associated with nonperforming loans at December 31:
YEARS ENDED DECEMBER 31
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Interest income that would have been recorded in accordance
with original terms ............................................. $ 1 $ 52 $ 34 $ 71 $ 162
Less interest income actually recorded ............................ 0 3 7 0 88
------- ------- ------- ------- -------
Loss of interest income ........................................... $ 1 $ 49 $ 27 $ 71 $ 74
======= ======= ======= ======= =======
17
ALLOCATION OF RESERVE FOR LOAN LOSSES*
TABLE 10
(In thousands)
1997 1996 1995 1994 1993
LOANS Loans Loans Loans Loans
% % % % %
TOTAL Total Total Total Total
AMOUNT LOANS Amount Loans Amount Loans Amount Loans Amount Loans
--------------- --------------- --------------- --------------- ---------------
Commercial, financial $1,212 24.8% $1.075 27.8% $1,100 33.9% $ 780 30.4% $ 750 29.9%
and agricultural ...
Real estate -
construction ....... 506 3.3 450 3.0 346 3.1 251 2.9 314 2.9
Real estate -
mortgage ........... 1,815 55.2 1,529 50.0 1,390 42.5 1,130 42.7 1,160 43.9
Installment loans to
individuals ........ 828 15.8 766 16.9 675 18.0 652 20.8 682 20.9
Lease financing ..... 55 .2 55 .2 0 .0 0 .0 0 .0
Other ............... 85 .7 110 2.1 110 2.5 110 3.2 80 2.4
Unallocated ......... 100 .0 90 .0 90 .0 90 .0 110 0
------ ----- ------ ------ ------ ----- ------ ----- ------ ------
Total ............. $4,601 100.0% $4,075 100.0% $3,711 100.0% $3,013 100.0% $ 3,096 100.0%
====== ===== ====== ====== ====== ===== ====== ===== ======= ======
*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.
institutions in the interest rate 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 March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128 ("SFAS 128"), "Earnings per Share". SFAS 128 establishes
standards for computing and presenting earnings per share ("EPS"). It applies to
entities with publicly held common stock or potential common stock such as
options, warrants, convertible securities, or contingent stock agreements. It
was FASB's intent that SFAS 128 simplify the standards for computing EPS
previously found in Accounting Principles Board ("APB") Opinion No. 15,
"Earnings per Share", and make them comparable to international EPS standards as
set forth in International Accounting Standard 33, "Earnings per Share". SFAS
128 replaces the presentation of primary EPS with a presentation of basic
earnings per share and requires a presentation of both basic and diluted
earnings per share on the face of the income statement. Basic EPS excludes
dilution and is derived by dividing income by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. SFAS 128 is effective for
financial statements for both interim and annual periods ending after December
15, 1997. After the effective date, all prior-period EPS data presented must be
restated to conform with the provisions of SFAS 128. Bancshares has adopted
SFAS 128 for its financial statements beginning December 31, 1997, with no
material effect on its financial position and operating results.
In March 1997, FASB issued Statement No. 129 "Disclosure of Information about
Capital Structure." SFAS 129 establishes standards for disclosing information
about a company's capital structure. It consolidates the disclosure requirements
that were previously covered in APB-10 "Omnibus Opinion-1996," APB-15 "Earnings
per Share" and SFAS 47 "Disclosure of Long-Term Obligations". SFAS 129 requires
that information about an entity's capital structure be disclosed in three
separate categories of securities, liquidation preference of preferred stock and
redeemable stock. Further, SFAS 129 specifies that the entity shall provide
within its financial statements a summary explanation of the pertinent rights
and privileges of the various securities that are outstanding. SFAS 129 is
effective for financial statements for periods ending after December 15, 1997.
Bancshares has adopted SFAS 129 for its financial statements beginning December
31, 1997, with no material effect on its financial position and operating
results.
In June 1997, FASB issued Statement No. 130 "Reporting of Comprehensive Income",
which requires entities to report comprehensive income in their basic financial
statements. As such, SFAS 130 establishes standards of disclosure and financial
statement display for reporting total comprehensive income. Comprehensive income
is defined as the change in equity of a business during a period from
transactions and other events and circumstances from nonowner sources.
Comprehensive income is inclusive of net income. Under SFAS 130, financial
statement presentation of comprehensive income may be presented in a separate
statement of comprehensive income, in the statement of changes in equity, or
below the total of net income in the income statement. SFAS
18
QUARTERLY FINANCIAL DATA
TABLE 11
(In thousands except per share data) 1997 1996
4TH QTR. 3RD QTR. 2ND QTR. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
------- ------- ------- ------- ------- ------- ------- -------
Interest income .............. $11,985 $11,510 $11,177 $10,795 $11,002 $10,180 $ 9,522 $ 9,488
Interest expense ............. 5,114 5,084 4,810 4,539 4,424 4,293 3,870 3,949
------- ------- ------- ------- ------- ------- ------- -------
Net interest income .......... 6,871 6,426 6,367 6,256 6,578 5,887 5,652 5,539
Provision for loan losses .... 318 159 190 118 306 163 203 133
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses .. 6,553 6,267 6,177 6,138 6,272 5,724 5,449 5,406
------- ------- ------- ------- ------- ------- ------- -------
Noninterest income ........... 1,356 1,407 1,358 1,268 889 1,231 1,312 1,207
------- ------- ------- ------- ------- ------- ------- -------
Noninterest expense .......... 5,110 6,075 4,747 4,494 4,565 4,257 4,300 4,785
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes .. 2,799 1,599 2,788 2,912 2,596 2,698 2,461 1,828
Income taxes ................ 808 765 863 900 788 811 656 463
------- ------- ------- ------- ------- ------- ------- -------
Net income .................. $ 1,991 $ 834 $ 1,925 $ 2,012 $ 1,808 $ 1,887 $1,805 $ 1,365
======= ======= ======= ======= ======= ======= ======= =======
Earnings per share:
Basic $ .29 $ .12 $ .28 $ .29 $ .26 $ .27 $ .26 $ .21
Diluted .28 .11 .28 .29 .25 .27 .26 .20
130 is effective for fiscal years beginning after December 15, 1997. The
Statement must be adopted as of the beginning of the entity's fiscal year with
any prior period financial statements presented for comparative purposes to be
reclassified to reflect the provisions of SFAS 130. Bancshares has adopted SFAS
130 for its financial statements beginning January 1, 1998. No material effect
on its financial position and operating results is anticipated.
Statement No. 131 "Disclosures about Segments of an Enterprise and Related
Information" was issued by FASB in June 1997. It replaces SFAS 14 "Financial
Reporting for Segments of a Business Enterprise" and its amendments. SFAS 131
requires entities to report certain information about their operating segments
in a complete set of financial statements to shareholders. Further, SFAS 131
requires that certain entity-wide information about products and services,
activities in different geographic areas, and reliance on major customers to be
disclosed. Separate disclosure of information is required about an operating
segment that meets any of the following thresholds: a) its reported revenue,
including both sales to external customers and inter-segment sales or transfers,
is 10% or more of the combined internal and external revenue of all reported
operating segments; b) the absolute amount of its reported profit or loss is 10%
or more of the greater, in absolute amount, or (i) the combined reported profit
of all operating segments that do not report a loss or (ii) the combined
reported loss of all operating segments that did report a loss; c) its assets
are 10% or more of the combined assets of all operating segments. Bancshares
operates in a single industry segment and therefore does not meet any of the
threshold requirements of SFAS 131.
In May 1997, the Federal Financial Institutions Examination Council (FFIEC)
issued an Interagency Statement "Year 2000 Project Management Awareness" to
emphasize the critical issues that need to be addressed to implement an
effective Year 2000 project management plan. The FFIEC Statement identifies five
phases of the Year 2000 project management process. Bancshares has acknowledged
the importance of this issue and established a Year 2000 Project Team (Y2K) to
ensure that it will be Year 2000 compliant. The Y2K Team consists of senior
officers within the company's operations area, information systems area, audit
department, corporate area and senior management. Management, with Board of
Directors' approval and oversight establishes the commitment of resources and
prioritization. Software programs from the National Software Testing
Laboratories (NSTL) are utilized to test all personal computers and computer
servers for compliance. Data processing of Bancshares is through FiServ in an
RJE environment. As such, the Bank will participate with FiServ in Year 2000
testing. Third party audits will be requested from all major vendors and
suppliers to assist in determining their ability to be Year 2000 compliant. The
Y2K Team will also conduct due diligence inquiries concerning Y2K readiness and
implement appropriate internal testing and verification of vendor's products and
services. Bancshares' Y2K Plan incorporates the development of contingency plans
for all mission critical vendor applications should the vendor not complete its
conversion efforts on time. The timetable for completing the Y2K project plan is
the fourth quarter of 1998. Bancshares estimates the cost to remedy its Year
2000 issues at $100,000 to $150,000 and that it will not have a material effect
on its financial position or operating results.
19
CONSOLIDATED BALANCE SHEET
DECEMBER 31
(In thousands) 1997 1996
- --------------------------------------------------------------------------------------------------
ASSETS
Cash and Due from Banks (Note 2) ...................................... $ 25,368 $ 24,672
Interest-Bearing Bank Balances ........................................ 12,127 503
Federal Funds Sold .................................................... 60,340 26,720
Investment Securities (Note 3):
Held to Maturity, Market Value $56,209 and $72,081 ................... 54,891 71,137
Available for Sale ................................................... 50,725 56,964
Loans (Notes 4 and 11) ................................................ 396,991 355,893
Less, Reserve for Loan Losses (Note 4) ................................ (4,601) (4,075)
--------- ---------
Net Loans ........................................................... 392,390 351,818
Premises and Equipment (Note 5) ....................................... 11,261 11,264
Other Assets .......................................................... 9,163 8,767
--------- ---------
Total Assets ........................................................ $ 616,265 $ 551,845
========= =========
LIABILITIES
Deposits:
Demand ................................................................ $ 67,256 $ 62,519
Savings, N.O.W. and Money Market Accounts ............................. 227,239 194,704
Certificates of Deposit of less than $100,000 (Note 6) ................ 154,566 148,902
Certificates of Deposit of $100,000 or more (Note 6) .................. 53,964 58,796
--------- ---------
Total Deposits ...................................................... 503,025 464,921
Securities Sold Under Agreements to Repurchase ......................... 8,263 6,109
Borrowings from Federal Home Loan Bank (Note 7) ........................ 33,758 14,075
Other Liabilities ...................................................... 3,692 3,878
--------- ---------
Total Liabilities ................................................... 548,738 488,983
--------- ---------
SHAREHOLDERS EQUITY
Capital Stock: Common, authorized 10,000,000 shares, Par Value $5,
issued 6,933,035 shares in 1997 and 6,886,496 shares in 1996 ....... 34,665 34,432
Paid-In Capital ....................................................... 14,772 14,671
Retained Earnings ..................................................... 17,916 13,866
Unrealized Gain (Loss) on Securities Available for Sale, Net of Taxes 174 (107)
--------- ---------
Total Shareholders' Equity .......................................... 67,527 62,862
--------- ---------
Total Liabilities and Shareholders' Equity .......................... $ 616,265 $ 551,845
========= =========
Commitments and Contingencies (Note 8)
Notes to consolidated financial statements are an integral part hereof.
20
CONSOLIDATED STATEMENTS
OF INCOME
YEARS ENDED DECEMBER 31
(In thousands, except per share amounts) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and Fees on Loans ............................... $ 35,692 $ 30,576 $ 23,368
Interest on Investment Securities:
Taxable ................................................ 5,077 6,512 5,865
Tax Exempt ............................................. 1,785 1,901 1,945
Federal Home Loan Bank ................................... 274 170 0
Federal Funds Sold ....................................... 2,639 1,033 1,155
----------- ----------- -----------
Total Interest Income .................................. 45,467 40,192 32,333
----------- ----------- -----------
INTEREST EXPENSE
Deposits ................................................. 17,917 15,831 13,349
Securities Sold Under Agreements to Repurchase ........... 234 168 50
Borrowings from Federal Home Loan Bank ................... 1,396 537 27
----------- ----------- -----------
Total Interest Expense ................................. 19,547 16,536 13,426
----------- ----------- -----------
Net Interest Income ........................................ 25,920 23,656 18,907
Provision for Loan Losses (Note 4) ......................... 785 805 367
----------- ----------- -----------
Net Interest Income after Provision for Loan Losses ........ 25,135 22,851 18,540
----------- ----------- -----------
NONINTEREST INCOME
Service Charges on Deposit Accounts ...................... 2,550 2,501 2,130
Gains on Sales of Mortgages .............................. 186 119 8
Losses on Sales of Investment Securities ................. (32) (37) (5)
Other Operating Income (Note 9) .......................... 2,685 2,056 1,466
----------- ----------- -----------
Total Noninterest Income ............................... 5,389 4,639 3,599
----------- ----------- -----------
NONINTEREST EXPENSE
Personnel Expense ........................................ 10,387 10,103 8,526
Occupancy Expense ........................................ 1,223 1,243 952
Equipment Depreciation and Maintenance ................... 1,185 995 796
Other Operating Expense (Note 9) ......................... 6,137 5,044 4,817
Restructuring Charges and Merger Related Costs (Note 14).. 1,494 522 0
----------- ----------- -----------
Total Noninterest Expense .............................. 20,426 17,907 15,091
----------- ----------- -----------
Income Before Income Taxes ................................. 10,098 9,583 7,048
Income Taxes (Note 10) ..................................... 3,336 2,718 1,888
----------- ----------- -----------
Net Income ................................................. $ 6,762 $ 6,865 $ 5,160
=========== =========== ===========
Earnings Per Share:
Basic .................................................... $ .98 $ 1.00 $ .84
Diluted .................................................. .96 .98 .82
Weighted Average Shares Outstanding:
Basic .................................................... 6,903,003 6,873,236 6,127,976
Diluted .................................................. 7,060,513 6,985,577 6,256,652
Notes to consolidated financial statements are an integral part hereof.
21
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
NET UNREALIZED
COMMON STOCK GAIN (LOSS) TOTAL
------------------ PAID-IN RETAINED ON SECURITIES SHAREHOLDERS'
(In thousands, except for shares) SHARES AMOUNT CAPITAL EARNINGS AVAILABLE FOR SALE EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1994 ............ 4,630,722 $ 23,154 $ 13,435 $ 12,452 ($604) $ 48,437
Net income ............................... 5,160 5,160
Cash dividends declared on
common stock ............................ (2,061) (2,061)
Common stock issued for stock
options exercised ...................... 31,376 157 132 289
Unrealized gain on securities
available for sale, net of deferred
income taxes ........................... 950 950
Common stock issued in 1.922-for-1
stock split, including cash for
fractional shares ...................... 334,708 1,673 (1,677) (4)
Stock issued for acquisition ............. 776,964 3,885 1,698 5,583
--------- -------- ---------- ---------- ----- ----------
Balances at December 31, 1995 ............ 5,773,770 28,869 13,588 15,551 346 58,354
Net income ............................... 6,865 6,865
Cash dividends declared on
common stock ........................... (2,158) (2,158)
Common stock issued for stock
options exercised ...................... 36,765 183 83 266
Unrealized loss on securities
available for sale, net of
deferred income taxes .................. (453) (453)
Common stock issued in five-for-four
stock split, including cash for
fractional shares ........................ 1,075,961 5,380 (5,392) (12)
Transfer of capital ....................... 1,000 (1,000)
--------- -------- ---------- ---------- ----- ----------
Balances at December 31, 1996 ............. 6,886,496 34,432 14,671 13,866 (107) 62,862
NET INCOME ................................ 6,762 6,762
CASH DIVIDENDS DECLARED ON
COMMON STOCK ............................. (2,712) (2,712)
COMMON STOCK ISSUED FOR STOCK
OPTIONS EXERCISED ........................ 47,215 233 114 347
UNREALIZED GAIN ON SECURITIES
AVAILABLE FOR SALE, NET OF
DEFERRED INCOME TAXES .................... 281 281
FRACTIONAL SHARES PURCHASED ............... (676) (13) (13)
--------- -------- ---------- ---------- ----- ----------
BALANCES AT DECEMBER 31, 1997. ............ 6,933,035 $ 34,665 $ 14,772 $ 17,916 $ 174 $ 67,527
========= ======== ========== ========== ===== ==========
Notes to consolidated financial statements are an integral part hereof.
22
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
(In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES
Net Income ........................................................... $ 6,762 $ 6,865 $ 5,160
Adjustments to reconcile net income to net cash:
Depreciation and amortization ...................................... 1,217 1,150 840
Securities premium amortization and discount accretion, net ........ (21) 6 (268)
Increase in loans held for sale .................................... (237) (3,594) (914)
Deferred income taxes .............................................. 115 (30) (6)
Income taxes payable ............................................... (117) 56 115
(Increase) decrease in income earned but not received .............. (12) 131 (416)
Increase (decrease) in interest accrued but not paid ............... (367) 132 628
Provision for loan losses .......................................... 785 805 367
Loss on sale of investment securities .............................. 116 37 5
(Gain) loss on sale of premises and equipment ...................... 66 (9) (2)
-------- -------- --------
Net cash provided by operating activities ........................ 8,307 5,549 5,509
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of securities held to maturity ............................. (1,184) (4,854) (17,324)
Proceeds from maturities of securities held to maturity .............. 15,454 18,898 21,456
Proceeds from sales of securities held to maturity ................... 1,954 0 0
Purchases of securities available for sale ........................... (17,453) (32,348) (19,428)
Proceeds from maturities of securities available for sale ............ 14,720 26,805 14,603
Proceeds from sales of securities available for sale ................. 9,323 7,306 2,750
Net increase in loans made to customers .............................. (41,112) (55,285) (27,875)
Purchases of premises and equipment .................................. (1,513) (1,182) (641)
Proceeds from sale of premises and equipment ......................... 233 45 75
Net (increase) decrease in federal funds sold ........................ (33,620) (14,930) 1,385
Increase in other assets ............................................. (503) (559) (107)
-------- -------- --------
Net cash used by investing activities .............................. (53,701) (56,104) (25,106)
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Net increase in demand deposits, N.O.W.,
money market and savings accounts .................................. 37,212 11,415 4,865
Net increase in time deposits ........................................ 891 25,535 18,493
Net increase in securities sold under agreements to repurchase ....... 2,154 2,518 488
Proceeds from long-term debt ......................................... 37,200 14,908 0
Payments on long-term debt ........................................... (17,517) (833) (375)
Dividends paid ....................................................... (2,712) (2,158) (2,061)
Net increase (decrease) in other liabilities ......................... 152 599 (20)
Proceeds from issuance of common stock ............................... 334 266 2,538
-------- -------- --------
Net cash provided by financing activities .......................... 57,714 52,250 23,928
-------- -------- --------
Increase in cash and cash equivalents .................................. 12,320 1,695 4,331
Cash and cash equivalents at the beginning of the years ................ 25,175 23,480 19,149
-------- -------- --------
Cash and cash equivalents at the end of the years ...................... $ 37,495 $ 25,175 $ 23,480
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during the years for:
Interest ........................................................... $ 19,916 $ 16,696 $ 12,798
Income taxes ....................................................... 3,314 2,720 1,887
SUPPLEMENTAL DISCLOSURE OF
NONCASH TRANSACTIONS
Transfer of loans to other real estate owned ......................... $ 372 $ 331 $ 354
Net noncash assets acquired for common stock ......................... 0 0 2,110
Unrealized gain (loss) on securities available for sale:
Change in securities available for sale ............................ 447 (688) 1,439
Change in deferred income taxes .................................... (166) 235 (489)
Change in shareholders' equity ..................................... 281 (453) 950
Notes to consolidated financial statements are an integral part hereof.
23
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
AS OF OR FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and financial reporting policies of LSB Bancshares, Inc.
("Bancshares") and its subsidiaries conform to generally accepted accounting
principles 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 Financial Services, Inc.
Bancshares serves customers primarily in Davidson, Forsyth, and Stokes
Counties, North Carolina.
Consolidation
The consolidated financial statements include the accounts of Bancshares and
its wholly-owned subsidiaries, after eliminating intercompany 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 generally accepted
accounting principles 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.
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 in 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 cost 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; 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.
Capital Structure
All shares of capital stock represent voting shares and dividends on the
capital stock are paid at the discretion of the Board of Directors.
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, "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 FASB 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.
24
Intangible Assets
The excess of cost over net assets and identifiable intangible assets,
including deposit based intangibles of acquired businesses, is amortized on a
straight-line basis over the estimated periods benefitted.
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. 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 at December 31, 1997 and 1996 was $18,025,000 and
$13,510,000, respectively. The amounts are negotiated by the Bank with the
Federal Reserve Bank of Richmond.
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, 1997, the Bank had available retained
earnings of $42,773,784 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, 1997, the Bank
owned $2,412,700 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.
At December 31, 1997, the most recent notifications from regulatory authorities
categorized Bancshares and the Bank as well capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events since
that notification that management believes have 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
1997 1996 1997 1996 PURPOSES CAPITALIZED*
---- ---- ---- ---- -------- ------------
Total capital
To risk-
weighted
assets ........ $70,754 $65,791 19.22% 19.37% 8.00% 10.00%
Tier 1 capital
To risk-
weighted
assets ........ 66,153 61,715 17.97% 18.17% 4.00 6.00
Tier 1 capital
To averages
assets ........ 66,153 61,715 11.33% 11.77% 3.00 5.00
*under Prompt Corrective Action provisions
NOTE 3 - INVESTMENT SECURITIES
The valuations of investment securities as of December 31, 1997 and
1996 were as follows (In thousands):
1997 - SECURITIES HELD TO MATURITY
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
US Treasury and
other US government
agency obligations....... $24,004 $ 0 $5 $23,999
State, county and
municipal securities..... 30,887 1,323 0 32,210
------- ------ -- -------
Total ................... $54,891 $1,323 $5 $56,209
======= ====== == =======
1997 - SECURITIES HELD TO MATURITY
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
US Treasury and
other US government
agency obligations....... $46,137 $ 281 $26 $46,392
State, county and
municipal securities..... 856 26 0 882
Mortgage backed
securities .............. 1,035 3 0 1,038
Equity securities ........ 2,413 0 0 2,413
------- ------ --- -------
Total ................... $50,441 $ 310 $26 $50,725
======= ====== === =======
1997 - SECURITIES HELD TO MATURITY
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
US Treasury and
other US government
agency obligations ... $37,505 $ 0 $108 $37,397
State, county and
municipal securities.. 30,486 1,098 0 31,584
Mortgage backed
securities ........... 1,745 0 32 1,713
Other securities ...... 1,401 3 17 1,387
------- ------ ---- -------
Total ................ $71,137 $1,101 $157 $72,081
======= ====== ==== =======
1997 - SECURITIES HELD TO MATURITY
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
US Treasury and
other US government
agency obligations....... $46,808 $ 109 $212 $46,705
State, county and
municipal securities..... 0 0 0 0
Mortgage backed
securities .............. 7,206 31 94 7,143
Other securities ......... 1,108 5 1 1,112
Equity securities ........ 2,004 0 0 2,004
------- ------ ---- -------
Total ................... $57,126 $ 145 $307 $56,964
======= ====== ==== =======
25
The following is a maturity schedule of investment securities at December 31,
1997 by contractual maturity. Maturities may differ from scheduled maturities of
mortgage backed securities because the mortgages underlying the securities may
be called or prepaid without penalty. Therefore, these securities are not
included in the maturity categories in the following maturity summary (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 ................ $16,991 $16,982 $ 1,750 $ 1,749
Due after one year
through five years...... 19,180 19,697 44,387 44,664
Due after five years
through ten years ...... 10,492 10,986 412 422
Due after ten years...... 8,228 8,544 444 460
------- ------- ------- -------
Total debt securities... 54,891 56,209 46,993 47,295
------- ------- ------- -------
Mortgage backed
securities ............. 0 0 1,035 1,017
------- ------- ------- -------
Equity securities ....... 0 0 2,413 2,413
------- ------- ------- -------
Total securities ....... $54,891 $56,209 $50,441 $50,725
======= ======= ======= =======
Lexington State Bank owned stock in the Federal Home Loan Bank of Atlanta with
book and market values of $2,412,700 and $1,713,000 at December 31, 1997 and
1996, respectively. The Bank owned stock in the Federal Reserve Bank of Richmond
with book and market values of $291,200 at December 31, 1996. 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
1997 1996 1995
-------- ------ -------
Proceeds from sales and
maturities ................ $ 17,408 $18,898 $21,456
Gross realized gains ........ 0 0 0
Gross realized losses ....... (40) 0 0
Securities with sales proceeds of $1,953,881 and amortized cost of $1,993,581
resulted in a realized loss of $39,700 which is included in merger costs. Cost
of the securities was determined using the specific identification method. The
sales were necessary to maintain the Banks existing interest rate risk at the
merger of Lexington State Bank and Old North State Bank.
A recap of the sales and maturities of available for sale securities follows
(In thousands):
YEARS ENDED DECEMBER 31
1997 1996 1995
-------- ------ -------
Proceeds from sales and
maturities ................ $ 24,043 $34,111 $17,353
Gross realized gains ........ 24 17 17
Gross realized losses ....... (100) (54) (22)
Securities with sales proceeds of $9,322,882 and amortized cost of $9,398,958
resulted in a net, realized loss of $76,076, of which $43,710 is included in
merger costs. Securities classified as available for sale were sold during 1996
and 1995 with sales proceeds of $7,306,448 and $2,750,000, and amortized costs
of $7,343,409 and $2,755,174, respectively, resulting in net realized losses for
1996 and 1995 of $36,961 and $5,174. Cost of all securities was determined using
the specific identification method.
Investment securities with amortized cost of $83,028,436 and $80,861,672 as of
December 31, 1997 and 1996, respectively, were pledged to secure public deposits
and for other purposes.
NOTE 4 - LOANS AND RESERVE FOR LOAN LOSSES
Loans are summarized as follows (In thousands):
DECEMBER 31
1997 1996
-------- --------
Commercial, financial, and agricultural $ 98,473 $ 99,527
Real estate-construction ............... 12,978 10,493
Real estate-mortgage ................... 219,092 177,553
Installment loans to individuals ....... 62,909 60,181
Lease financing ........................ 792 678
Other .................................. 2,747 7,461
-------- --------
Total loans, net of unearned income .... $396,991 $355,893
======== ========
Nonperforming assets are summarized as follows (In thousands):
DECEMBER 31
1997 1996
------ -------
Nonaccrual loans ........................... $ 127 $ 611
Restructured loans ......................... 502 259
Loans past due 90 days or more ............. 334 369
------ -------
Total nonperforming loans ................ 963 1,239
Foreclosed and repossessed properties ...... 1,192 1,151
------ -------
Total nonperforming assets ............... $2,155 $ 2,390
====== =======
Loans specifically identified as impaired... $2,570 $ 3,103
====== =======
Allowance for loan losses
associated with impaired loans ........... $ 329 $ 565
====== =======
Average balances of impaired loans for
the years ................................ $2,702 $ 4,127
====== =======
The loss of interest income associated with nonaccrual loans is summarized as
follows (In thousands):
DECEMBER 31
1997 1996
----- -------
Interest income that would have been
recorded in accordance with original
terms ................................. $ 1 $ 52
===== =======
Interest income actually recorded on
cash basis ............................ $ 0 $ 3
===== =======
An analysis of the changes in the reserve for loan losses follows (In
thousands):
YEARS ENDED DECEMBER 31
1997 1996 1995
------- ------- -------
Balances at beginning of years.... $ 4,075 $ 3,711 $ 3,013
Provision for loan losses ........ 785 805 367
Recoveries of amounts previously
charged off .................... 592 131 134
Additions from acquisitions ...... 0 0 620
Loans charged off ................ (851) (572) (423)
------- ------- -------
Balances at end of years ......... $ 4,601 $ 4,075 $ 3,711
======= ======= =======
Effective January 1, 1995, Bancshares adopted Statement of Financial Accounting
Standards Number 114 Accounting by Creditors for Impairment of a Loan and
amended by Statement of Financial Accounting Standards Number 118 Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures. These
standards require creditors to establish a valuation allowance when it is
probable that all principal and interest due under the contractual terms of a
loan will not be collected. Impairment is measured based on the present value of
collateral if the loan is collateral dependent. The creditor continues to use
existing methods for recognizing interest income on impaired loans.
26
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. The adoption of these standards did not have a material effect on
Bancshares' financial position or results of operations and required no increase
to the reserve for loan losses. Bancshares has no 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
1997 1996
------- -------
Land ............................. $ 2,046 $ 2,056
Buildings ........................ 8,301 8,461
Equipment ........................ 8,242 7,298
Other ............................ 13 13
Leasehold improvements ........... 389 389
------- -------
Total costs .................... 18,991 18,217
------- -------
Less, accumulated depreciation and
amortization ................... 7,730 6,953
------- -------
Total .......................... $11,261 $11,264
======= =======
NOTE 6 - TIME DEPOSITS
At December 31, 1997, the scheduled maturities of time deposits are as follows
(In thousands):
YEAR AMOUNT
---- --------
1998 $181,250
1999 16,241
2000 10,531
2001 191
2002 and After 317
--------
$208,530
========
NOTE 7 - BORROWINGS
The Bank has a $60,000,000 secured credit availability with the Federal Home
Loan Bank. At December 31, 1997 and 1996 the outstanding balances under this
arrangement were $33,758,333 and $14,075,000, respectively. For 1997 and 1996,
the effective interest rates incurred were 5.99% and 6.05%, respectively.
Maturities are as follows (In thousands):
YEAR AMOUNT
---- -------
1998 $ 3,717
1999 24,891
2000 2,700
2001 2,150
2002 300
-------
$33,758
=======
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.
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 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 managements 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 $96,428,000 at December 31, 1997.
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 were $2,221,000
at December 31, 1997.
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 does have a concentration of credit risk by maintaining cash balances with
other banks which are $26,322,349 in excess of Federal Deposit Insurance limits
and has federal funds sold of $60,340,000.
Neither Bancshares nor any of its subsidiaries is involved in any legal
proceedings that would have a material 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
1997 1996 1995
------ ------ ------
Other operating income:
Bankcard income ..................... $ 559 $ 376 $ 287
Fee income .......................... 576 414 248
Financial services commissions ...... 457 311 92
Insurance commissions ............... 263 248 231
Trust income ........................ 443 408 315
Other income ........................ 387 299 293
------ ------ ------
$2,685 $2,056 $1,466
====== ====== ======
Other operating expenses:
Advertising ......................... $ 361 $ 207 $ 212
Automated services .................. 1,326 1,115 959
Bankcard expense .................... 447 295 232
FDIC assessments .................... 61 8 408
Legal and professional fees ......... 727 701 634
Postage ............................. 462 379 342
Stationery, printing and supplies ... 694 628 556
Other expenses ...................... 2,059 1,711 1,474
------ ------ ------
$6,137 $5,044 $4,817
====== ====== ======
27
NOTE 10 - INCOME TAXES
The components of income tax expense (benefits) are as follows (In thousands):
YEARS ENDED DECEMBER 31
1997 1996 1995
------- ------- -------
Current .................... $ 3,451 $ 2,688 $ 1,882
------- ------- -------
Deferred:
Reserve for loan losses .. 279 222 202
Depreciation ............. 35) (51) (18)
Pension .................. (52) 13) (85)
Deferred compensation .... 99) 193) (5)
Net operating loss carry
forwards ............... (192) (192) 0
Other .................... (284) (155) (88)
------- ------- -------
(115) 30 6
------- ------- -------
Total .................... $ 3,336 $ 2,718 $ 1,888
======= ======= =======
A reconciliation of the federal statutory tax rate to the effective federal tax
rate follows:
YEARS ENDED DECEMBER 31
1997 1996 1995
---- ---- ----
Federal statutory tax rate .. 34.0% 34.0% 34.0%
Tax exempt interest income .. (6.8) (6.8) (9.6)
Disallowed interest expense . .7% .7% 1.0%
Other ....................... 5.1% .5% 1.4%
---- ---- ----
Effective federal tax rate .. 33.0% 28.4% 26.8%
==== ==== ====
The components of the net deferred tax asset follow (In thousands):
DECEMBER 31
1997 1996 1995
------- ------- -----
Unrealized gain (loss) on
securities available for sale ... $ (111) $ 55 $(180)
Reserve for loan losses ........... 1,437) 1,158) 936)
Depreciation ...................... (443) (478) (427)
Pension ........................... (87) (35) (48)
Deferred compensation ............. 442 343 150
Net operating loss carry forwards . 59 251 443
Other ............................. (407) (123 32
------- ------- -----
890 1,171 906
Valuation allowance ............... 0 0 0
------- ------- -----
Total ............................. $ 890 $ 1,171 $ 906
======= ======= =====
NOTE 11 - RELATED PARTY TRANSACTIONS
The Bank had loans outstanding to executive officers and Directors and their
affiliated companies of approximately $7,726,000 and $9,220,000 at December 31,
1997 and 1996, respectively. Such loans were made substantially on the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other borrowers and do not involve more than
the normal risk of collectibility.
An analysis of the activity with respect to such aggregate loans to related
parties is as follows (In thousands):
Balance at January 1, 1997 ......... $ 9,220)
New loans during the year .......... 6,707)
Repayments during the year ......... (8,201)
-------
Balance at December 31, 1997 ....... $ 7,726)
=======
NOTE 12 - MORTGAGE SERVICING RIGHTS
Bancshares accounts for mortgage servicing rights under Financial Accounting
"Standards Number 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities". When 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
1997 1996
-------- --------
Balances at beginning of years ......... $ 102 $ 0
Mortgage servicing rights originated ... 136 119
Amortization of rights ................. (43) (17)
-------- --------
Balances at end of years ............... $ 195) $ 102)
======== ========
Total loans serviced at end of years ... $ 65,552) $ 58,414)
======== ========
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, 1997. 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.
28
The estimated fair values of Bancshares financial instruments are as follows (In
thousands):
DECEMBER 31
1997 1996
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------- --------- -------- ----------
Financial assets:
Cash and short
term investments ...... $ 97,835 $ 97,835 $ 51,895 $ 51,895
Investment
securities ............ 105,616 103,504 128,101 127,922
Loans .................. 396,991 398,171 355,893 354,563
Less reserve for
loan losses ........... (4,601) (4,075)
--------- -------
Net loans .............. 392,390 398,171 351,818 354,563
Financial liabilities:
Deposits ............... 503,025 503,384 464,921 465,535
Securities sold under
agreements to
repurchase ............ 8,263 8,266 6,109 6,110
Borrowings from
Federal Home Loan
Bank .................. 33,758 34,155 14,075 13,802
Unrecognized financial
instruments:
Commitments to
extend credit ......... 0 0 0 0
Standby letters of
credit ................ 9 9 7 7
NOTE 14 - RESTRUCTURING CHARGES AND BUSINESS
COMBINATION
On January 9, 1996, Bancshares approved a plan to restructure the operations of
the Corporation to enhance the quality of service to customers and reduce future
operating costs. The major element of the plan was a reduction in the number of
employees. Restructuring charges to implement the plan totalled $522,000 in
1996, consisting of $490,000 for retirement benefits, $27,000 for severance
benefits and $5,000 for professional fees.
On August 11, 1997, LSB merged with Old North State Bank (ONSB), a full-service
commercial bank based in Winston-Salem, North Carolina. The merger was accounted
for as a pooling of interests, and accordingly, the accompanying consolidated
financial statements have been restated to include the accounts of ONSB for all
periods presented. Based on an exchange ratio of .938 shares of Bancshares
common stock for each outstanding share of ONSB common stock, Bancshares issued
1,507,045 shares of common stock. ONSB had total assets of $138,311,289 at the
date of acquisition. The consolidated statement of income for the year ended
December 31, 1997, includes $6,844,136 of total income, $3,406,287 of net
interest income and $424,007 of net income related to the operations of ONSB
prior to the date of merger. During 1997, Bancshares recognized $1,493,591 of
costs related to the merger. These costs include professional fees of $611,918,
personnel expense of $384,811, regulatory filings and printing of $82,322, data
processing cancellation fee of $168,000, loss on sale of securities of $83,410
and other expenses of $163,130.
Certain income information for Bancshares and Old North State Bank prior to
restatement for the pooling of interests is summarized for the years ended
December 31 as follows (In thousands):
OLD NORTH
BANCSHARES STATE BANK TOTAL
---------- ---------- -----
1996
Interest income ..... $30,301 $9,891 $40,192
======= ====== =======
Net interest income . $18,154 $5,502 $23,656
======= ====== =======
Net income .......... $ 5,839 $1,026 $ 6,865
======= ====== =======
1995
Interest income ..... $28,051 $4,282 $32,333
======= ====== =======
Net interest income . $16,603 $2,304 $18,907
======= ====== =======
Net income .......... $ 4,782 $ 378 $ 5,160
======= ====== =======
NOTE 15 - 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.
Net pension cost consisted of the following components (In thousands):
YEARS ENDED DECEMBER 31
1997 1996 1995
----- ----- -----
Service cost for benefits
earned during the periods ... $ 153) $ 140) $ 150)
Interest cost on projected
benefit obligation .......... 300) 279) 226)
Return on plan assets ........ (288) (250) (199)
Amortization of
unrecognized net assets ..... (8) (8) (8)
Amortization of prior
service cost ................ (37) (37) (37)
Amortization of
unrecognized loss ........... 27 23 24
----- ----- -----
Net pension cost ............. $ 147 $ 147 $ 156
===== ===== =====
The following table sets forth the funded status and amounts recognized for the
defined benefit pension plan in the Consolidated Balance Sheets (In thousands):
DECEMBER 31
1997 1996
------- -------
Actuarial present value of accumulated
benefit obligation, including vested
benefits of $3,252 in 1997, and $2,989
in 1996 ................................... $ 3,322 $ 3,067
======= =======
Actuarial present value of projected
benefit obligation for services
rendered to date .......................... $(4,377) $(4,068)
Plan assets at fair market value, primarily
U.S. government securities, listed
securities and deposits in banks .......... 4,356) 3,682)
------- -------
Projected benefit obligation in excess of
plan assets ............................... (21) (386)
Unrecognized net assets ..................... (30) (38)
Unrecognized prior service cost ............. (209) (246)
Unrecognized net loss ....................... 635 761
------- -------
Prepaid pension cost ........................ $ 375 $ 91
======= =======
To determine the actuarial present value of the projected benefit obligation, a
discount rate of 7.5% was used for 1997 and 1996 and 8.0% for 1995. A rate of
increase in future compensation levels of 5.5% was used for 1997, 1996 and 1995.
The expected long-range rate of return on plan assets was 7.5% for each of the
three years.
The Bank and its subsidiaries have an Employees Savings Plus Plan covering
substantially all employees with one years 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. Total expense
under this Plan was $152,326, $111,675 and $108,039 for 1997, 1996 and 1995,
respectively.
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
29
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.
Net postretirement benefit cost consisted of the following components (In
thousands):
YEARS ENDED DECEMBER 31
1997 1996 1995
---- ---- ----
Service cost ................. $14 $ 20 $17
Interest cost ................ 45 60 35
Amortization of transition
obligation over 20 years ... 24 37 19
--- ---- ---
Net postretirement benefit
cost ....................... $83 $117 $71
=== ==== ===
The following table sets forth the status of the plan and amounts recognized for
postretirement benefits in the Consolidated Balance Sheets (In thousands):
DECEMBER 31
1997 1996
----- -----
Accumulated postretirement benefit obligation:
Retirees ....................................... $(369) $(508)
Currently eligible active plan participants .... (24) (23)
Other active plan participants ................. (183) (238)
----- -----
Total .......................................... (576) (769)
Unrecognized net loss .......................... 124) 312)
Unrecognized net transition obligation ......... 303) 322)
----- -----
Accrued postretirement benefit cost ............ $(149) $(135)
===== =====
The annual assumed rate of increase in health care costs for the plan is 11.0%
and 11.5% for 1997 and 1996, respectively, and is assumed to decrease gradually
to 4.5% in 2004 and remain at that level thereafter. The health care cost trend
rate assumption has a significant effect on the amounts reported. Increasing the
assumed health care cost trend rates by one percentage point would increase the
accumulated postretirement benefit obligation for the plan by $41,759 and
$59,761 as of December 31, 1997 and 1996, respectively, and the aggregate of the
service and interest cost of the net periodic postretirement benefit cost by
$5,931 and $8,750, respectively. The discount rate used in determining the
accumulated postretirement benefit obligation was 8.0% for 1997 and 1996.
NOTE 16 - LEASES
The Bank is obligated under several lease agreements which expire in 1998
through 2010. The leased property is for land and building use. Rental payments
under these leases amounted to $331,379, $332,144 and $122,442 for the years
ended December 31, 1997, 1996 and 1995, respectively.
A summary of noncancelable lease commitments for the Bank follows (In
thousands):
Years Ended December 31 Lease Commitments
----------------------- -----------------
1998 $ 325
1999 314
2000 294
2001 262
2002 and later 1,508
------
$2,703
======
NOTE 17 - STOCK BASED COMPENSATION
PLANS AND WARRANTS
At December 31, 1997, Bancshares had six stock based compensation plans,
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
1997 1996
------ ------
Net income As reported $6,762 $6,865
(In thousands) Pro forma 6,479 6,640
Basic earnings As reported .98 1.00
per share Pro forma .94 .97
Diluted earnings As reported .96 .98
per share Pro forma .92 .95
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
with the following weighted-average assumptions used for grants in 1997 and
1996: dividend yield of 2.4% for all years; expected volatility of 62.3% for all
years; risk-free interest rates of 6.0% for all years; and expected lives of two
through nine years for the various plans.
Bancshares has a 1986 Qualified Incentive Stock Option Plan which could have
granted 375,000 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. At
December 31, 1997, this plan had expired and no additional options are available
for grant under the plan.
Bancshares has a 1989 Nonqualified Stock Option Plan which could have granted
63,418 shares of common stock to the directors of a corporation acquired by
Bancshares. All options granted under this plan were vested and have been
exercised. At December 31, 1997, this plan had expired and no additional options
are available for grant under the plan.
Bancshares has a 1989 Nonqualified Employee Stock Option Plan which could have
granted 77,385 shares of common stock to key employees of a corporation acquired
by Bancshares. The exercise price of each option was $9.69. All of the options
are fully vested and expire ten years from the date of grant. At December 31,
1997, no additional options are available for grant under the plan.
Bancshares has a 1990 Qualified Incentive Stock Option Plan which could have
granted 63,430 shares of common stock to key employees of a corporation
acquired by Bancshares. The exercise price of each option was $5.81. All of
the options are fully vested and expire ten years from the date of grant. At
December 31, 1997, no additional options are available for grant under the
plan.
Bancshares has a 1994 Nonqualified Stock Option Plan which may grant 125,000
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
250,000 shares of common stock to
30
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.
At December 31, 1997, Bancshares had warrants outstanding to purchase 37,838
shares of its common stock. These warrants were issued to organizers and
founders of a corporation acquired by Bancshares, are immediately exercisable at
$9.69 per share, and expire on April 16, 2000.
The following table summarizes information about outstanding and exercisable
stock options and warrants at December 31, 1997:
WEIGHTED
AVERAGE
EXERCISE NUMBER REMAINING NUMBER
PRICE OUTSTANDING LIFE EXERCISABLE
- -------- ----------- --------- -----------
$ 5.81 14,439 2.7 14,439
8.96 45,940 4.4 45,940
9.69 88,469 1.9 88,469
12.16 57,505 5.3 46,885
14.40 50,631 7.4 20,636
15.20 4,000 2.3 4,000
15.60 4,500 1.3 4,500
16.00 57,194 6.4 34,704
16.25 41,450 7.8 12,450
19.00 36,250 9.4 0
19.25 5,500 4.7 5,500
------- -------
405,878 277,523
======= =======
A summary of the status of Bancshares stock based compensation plans and
warrants as of December 31, 1997 and 1996 and changes during the years then
ended is presented below:
1997 1996
---------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------- -------- ------- --------
Outstanding at beginning
of year .............. 417,216 $12 420,750 $12
Granted ................ 44,250 19 44,250 16
Exercised .............. (47,215) 9 (38,697) 7
Forfeited .............. (6,373) 16 0
Expired ................ (2,000) 16 (9,087) 15
------- -------
Outstanding at end
of year .............. 405,878 13 417,216 12
======= =======
Options exercisable
at end of year ....... 277,523 12 241,081 11
======= =======
NOTE 18 - LSB BANCSHARES, INC. (PARENT COMPANY)
"The parent company's condensed balance sheets as of December 31, 1997 and 1996,
and the related condensed statements of income and cash flows for the years
ended December 31, 1997, 1996 and 1995, are as follows (In thousands):
CONDENSED BALANCE SHEETS
DECEMBER 31
1997 1996
------- -------
Assets:
Cash ................................ $ 238 $ 138
Investment in wholly-owned
subsidiary ........................ 66,735 51,215
Other assets ........................ 806 694
------- -------
Total assets ...................... $67,779 $52,047
======= =======
Liabilities and Shareholders equity:
Other liabilities ................... $ 426 $ 362
Shareholders equity ................. 67,353 51,685
------- -------
Total liabilities and
Shareholders equity ............. $67,779 $52,047
======= =======
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
1997 1996 1995
------ ------ ------
Dividends from subsidiary ... $2,787 $2,230 $2,060
------ ------ ------
Professional fees ........... 0 10 174
Other operating expense ..... 131 78 164
------ ------ ------
131 88 338
------ ------ ------
Income before equity in
earnings of subsidiary .... 2,656 2,142 1,722
Equity in earnings
of subsidiary ............. 4,106 3,697 3,060
------ ------ ------
Net income .................. $6,762 $5,839 $4,782
====== ====== ======
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
1997 1996 1995
------- ------- -------
Cash Flow From Operating
Activities:
Net income ........................... $ 6,762 $ 5,839 $ 4,782
Adjustments to reconcile net income
to net cash:
Increase in investment in wholly-
owned subsidiary ................... (4,106) (3,697) (3,060)
------- ------- -------
Net cash provided by operating
activities ......................... 2,656 2,142 1,722
------- ------- -------
Cash Flow From Investing
Activities:
Increase in other assets ............. (112) (57) (131)
------- ------- -------
Cash Flow From Financing
Activities:
Sale of capital stock ................ 203 219 289
Dividends paid ....................... (2,712) (2,158) (2,061)
Increase (decrease) in other
liabilities ........................ 65 (62) 83
------- ------- -------
Net cash used by financing
activities ......................... (2,444) (2,001) (1,689)
------- ------- -------
Increase (decrease) in cash .......... 100 84 (98)
Cash at beginning of years ........... 138 54 152
------- ------- -------
Cash at end of years ................. $ 238 $ 138 $ 54
======= ======= =======
NOTE 19 - SUBSEQUENT EVENT
On January 13, 1998, Bancshares declared a five-for-four stock split to be paid
on February 16, 1998 to shareholders of record on February 2, 1998.
STOCK AND 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
1997 HIGH LOW CLOSE DECLARED
- ------------------------------------------------------------------------
First Quarter................... $20.75 $18.00 $20.00 .11
Second Quarter.................. 21.00 19.00 19.75 .11
Third Quarter................... 21.50 19.50 20.50 .11
Fourth Quarter.................. 31.00 21.25 26.00 .11
1996
- ------------------------------------------------------------------------
First Quarter................... $15.75 $15.25 $16.13 .10
Second Quarter.................. 17.00 15.00 15.75 .10
Third Quarter................... 16.75 15.00 15.25 .10
Fourth Quarter.................. 20.75 14.75 19.50 .10
31
STATEMENT OF MANAGEMENT RESPONSIBILITY
The management of LSB Bancshares, Inc. and subsidiaries is responsible for the
preparation of financial statements, related financial data and other
information in this annual report. The financial statements are prepared in
accordance with generally accepted accounting principles 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 control structures 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
generally accepted auditing standards.
LSB Bancshares, Inc.
January 31, 1998
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, 1997 and 1996, 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, 1997. 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.
The consolidated balance sheet as of December 31, 1996, and the related
statements of income, changes in shareholders' equity, and cash flows for each
of the years ended December 31, 1996 and 1995, have been restated to reflect
the pooling of interests with Old North State Bank as described in Note 14 to
the consolidated financial statements. We did not audit the 1996 or 1995
financial statements of Old North State Bank, which statements reflect total
assets of $130,244,607 as of December 31, 1996, and total revenues of
$10,610,397 and $4,637,117 for the years ended December 31, 1996 and 1995,
respectively. Those statements were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to the amounts
included for Old North State Bank as of December 31, 1996 and 1995, and for the
years then ended, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. 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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to in the first paragraph present
fairly, in all material respects, the financial position of LSB Bancshares,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the consolidated
results of their operations, and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Turlington and Company, L.L.P.
Lexington, North Carolina
January 31, 1998
32
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, thereto duly authorized.
LSB BANCSHARES, INC.
By /s/ Robert F. Lowe
--------------------------------
Robert F. Lowe, President
Date: February 10, 1998
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 10, 1998
- --------------------------- (Principal Executive
Robert F. Lowe Officer)
/s/ Monty J. Oliver Secretary and Treasurer February 10, 1998
- --------------------------- (Principal Financial
Monty J. Oliver Officer and Principal
Accounting Officer)
/s/ Michael S. Albert Director February 10, 1998
- ---------------------------
Michael S. Albert
/s/ Peggy B. Barnhardt Director February 10, 1998
- ---------------------------
Peggy B. Barnhardt
/s/ Leonard H. Beck Director February 10, 1998
- ---------------------------
Leonard H. Beck
/s/ Margaret Lee W. Crowell Director February 10, 1998
- ---------------------------
Margaret Lee W. Crowell
Director February 10, 1998
- ---------------------------
Marvin D. Gentry
/s/ Samuel R. Harris Director February 10, 1998
- ---------------------------
Samuel R. Harris
/s/ Walter A. Hill, Sr. Director February 10, 1998
- ---------------------------
Walter A. Hill, Sr.
/s/ David A. Smith Director February 10, 1998
- ---------------------------
David A. Smith
/s/ Robert B. Smith, Jr. Director February 10, 1998
- ---------------------------
Robert B. Smith, Jr.
33
SIGNATURE CAPACITY DATE
/s/ Burr W. Sullivan Director February 10, 1998
- ---------------------------
Burr W. Sullivan
/s/ Roberts E. Timberlake Director February 10, 1998
- ---------------------------
Roberts E. Timberlake
/s/ Lloyd G. Walter, Jr. Director February 10, 1998
- ---------------------------
Lloyd G. Walter, Jr.
/s/ Julius S. Young, Jr. Director February 10, 1998
- ---------------------------
Julius S. Young, Jr.