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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 29549
FORM 10-K
- --------------------------------------------------------------------------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
Commission File Number 0-11448
- --------------------------------------------------------------------------------
LSB BANCSHARES, INC.
One LSB Plaza
Lexington, North Carolina 27292
(336) 248-6500
Incorporated in the State of North Carolina
IRS Employer Identification No. 56-1348147
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g)OF THE ACT:
Common Stock, Par Value $5.00 Per Share
LSB Bancshares, Inc. has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports)
and has been subject to such filing requirements for the past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
The aggregate market value (average of the bid and asked prices) of the voting
stock held by nonaffiliates of the registrant as of January 31, 1999 was
$164,680,011 and the number of shares outstanding was 8,667,369.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the year ended
December 31, 1998 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 21, 1999 are incorporated by reference into Part
III of this report.
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STATEMENT OF MANAGEMENT RESPONSIBILITY
The management of LSB Bancshares, Inc. and subsidiaries is responsible for the
preparation of the financial statements, related financial data and other
information in this annual report. The financial statements are prepared in
accordance with 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 controls that are designed to provide
reasonable assurances that transactions are authorized and recorded in
accordance with established procedures, assets are safeguarded, and proper and
reliable records are maintained.
The Corporation maintains a professional staff of internal auditors who
independently assess the effectiveness of the internal controls and recommend
possible improvements thereto. The Audit Committee of the Board of Directors is
composed solely of outside directors who are responsible for overseeing the
accounting policies employed by management and that the system of internal
controls is adequately reviewed and maintained. The independent auditors,
internal auditors and banking regulators have direct access to the Audit
Committee with or without management present.
The financial statements have been audited by Turlington and Company, L.L.P.,
independent auditors, who render an independent, professional opinion on
management's financial statements. Their report expresses an opinion as to the
fairness of the financial position and results of operations of LSB Bancshares,
Inc. and subsidiaries based on their audit conducted in accordance with
generally accepted auditing standards.
LSB Bancshares, Inc.
February 1, 1999
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, 1998 and 1997, 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, 1998. 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 statements of income, changes in shareholders' equity, and cash
flows for the year ended December 31, 1996, 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 financial
statements of Old North State Bank, which reflect total assets of $130,244,607
as of December 31, 1996 and total revenues of $10,610,397 for the year then
ended. 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 for the year 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, 1998 and 1997, and the consolidated results
of their operations, and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
Turlington and Company, L.L.P.
Lexington, North Carolina
February 1, 1999
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FORM 10-K CROSS-REFERENCE INDEX
This 1998 Annual Report and Form 10-K of the registrant incorporates into a
single document the 1998 Annual Report to Shareholders and the Annual Report on
Form 10-K for the year ended December 31, 1998 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 1999 Annual Meeting
of Shareholders as is reflected in the following Cross-Reference Index.
INCORPORATED BY REFERENCE INTO THE FOLLOWING ITEMS INFORMATION APPEARING ON
OF FORM 10-K THE FOLLOWING PAGES OF THE:
-------------------------------------------------- -------------------------------------
ANNUAL REPORT PROXY STATEMENT
PART I
Item 1. Business........................................................... 12, 15-24........................
Item 2. Properties......................................................... 12, 31, 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 7A. Quantitative and Qualitative Disclosures About Market Risk......... 16-20, 33 (Note 13)..............
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............................................. ............................. 7-9
Item 12. Security Ownership of Certain Beneficial Owners and
Management......................................................... ..............................4-5
Item 13. Certain Relationships and Related Transactions..................... .............................. 16
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, 1998 and 1997..... 25...............................
Consolidated Statements of Income - Years Ended
December 31, 1998, 1997 and 1996............................ 26...............................
Consolidated Statements of Changes in Shareholders' Equity
Years Ended December 31, 1998, 1997 and 1996................ 27...............................
Consolidated Statements of Cash Flows - Years Ended
December 31, 1998, 1997 and 1996............................ 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).
3.2 Bylaws of LSB Bancshares, Inc., as amended, which are
incorporated by reference to Exhibit 3.2 of the registrant's
Annual Report on Form 10-K for the year ended December 31,
1995.
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FORM 10-K CROSS-REFERENCE INDEX (CONT'D)
Incorporated by Reference into the Following Items
of Form 10-K
- -------------------------------------------------------------------------------
PART IV
Item 14. 4.1 Specimen certificate of common stock, $5.00 par value,
(cont'd) which is incorporated by reference to Exhibit 4 of the
registrant's Registration Statement on Form S-1
(File No. 2-99312).
4.2 Rights Agreement dated as of February 10, 1998 by and
between LSB Bancshares, Inc. and Wachovia Bank, N.A., as
Rights Agent, which is incorporated by reference to Exhibit
1 of the Registrant's Registration Statement on Form 8-A
filed with the Securities and Exchange Commission on March
6, 1998.
10.1 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 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).
10.5 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).
10.6 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).
10.7 Employment Continuity Agreement effective as of December
24, 1997 between LSB Bancshares, Inc. and Nicholas A.
Daves, which is incorporated by reference to Exhibit 10.7
of the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.
10.8 Employment Continuity Agreement effective as of June 9,
1998 between LSB Bancshares, Inc. and Robert F. Lowe.
10.9 Employment Continuity Agreement effective as of June 9,
1998 between LSB Bancshares, Inc. and H. Franklin Sherron.
10.10 Employment Continuity Agreement effective as of June 9,
1998 between LSB Bancshares, Inc. and Monty J. Oliver.
10.11 Employment Continuity Agreement effective as of June 9,
1998 between LSB Bancshares, Inc. and Robin A. Huneycutt.
10.12 Employment Continuity Agreement effective as of June 9,
1998 between LSB Bancshares, Inc. and Ronald W. Sink.
10.13 Employment Continuity Agreement effective as of June 9,
1998 between LSB Bancshares, Inc. and Ronald E. Coleman.
10.14 Employment Continuity Agreement effective as of June 9,
1998 between LSB Bancshares, Inc. and D. Gerald Sink.
10.15 Employment Continuity Agreement effective as of June 9,
1998 between LSB Bancshares, Inc. and Joe W. Carroll.
10.16 Employment Continuity Agreement effective as of June 9,
1998 between LSB Bancshares, Inc. and Suzanne J. Bullotta.
13 1998 Annual Report to Shareholders.
21. List of Subsidiaries at December 31, 1998.
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.
40
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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 9th day of February,
1999.
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 9, 1999 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 (56) Chairman, President and Chief Executive Officer and a
Director of Bancshares and the Bank, joined the Bank in 1970 and was elected
Vice President in 1973. He was elected Senior Vice President in 1980 and
Executive Vice President of the Bank and Bancshares in 1982. In 1983, Mr. Lowe
was elected a Director of Bancshares and the Bank. On January 1, 1984, he was
elected President and Chief Executive Officer of Bancshares and the Bank, and on
January 1, 1990, Mr. Lowe was elected Chairman of both Bancshares and the Bank.
Mr. Lowe also serves as Chairman, President and a Director of Peoples Finance
Company of Lexington, Inc., a subsidiary of the Bank and President and a
Director of LSB Financial Services, Inc., a subsidiary of the Bank.
H. Franklin Sherron, Jr. (43), Vice President of Bancshares, joined the Bank in
1990 as Senior Vice President. He was elected Executive Vice President of the
Bank in 1996. Mr. Sherron is also Vice President and a Director of Peoples
Finance Company of Lexington, Inc., a subsidiary of the Bank, and Senior Vice
President of LSB Financial Services, Inc., a subsidiary of the Bank.
Monty J. Oliver (57), Secretary and Treasurer of Bancshares, joined the Bank as
Vice President in 1978. He was elected Cashier of the Bank in 1980; and in 1986,
he was elected Senior Vice President of the Bank and in 1996 elected Executive
Vice President. Mr. Oliver is also Secretary and a Director of Peoples Finance
Company of Lexington, Inc., a subsidiary of the Bank, and Secretary and
Assistant Treasurer of LSB Financial Services, Inc., a subsidiary of the Bank.
41
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DIRECTORS OF LSB BANCSHARES, INC. AND LEXINGTON STATE BANK
[PHOTO: PEOPLE STANDING]
Executive Committee, seated, left to right: Robert B. Smith, Jr.; Burr W.
Sullivan; Robert F. Lowe, Chairman of the Board, President & Chief Executive
Officer; David A. Smith and; Julius S. Young, Jr.
Directors, standing, left to right: Margaret Lee W. Crowell, Emeritus; Walter A.
Hill, Sr.; Roberts E. Timberlake; Clifford A. Erickson, Emeritus; Dothan D.
Reece, Emeritus; Samuel R. Harris; L. Klynt Ripple, Emeritus; Archie M. Sink,
Emeritus; Lloyd G. Walter, Jr.; Marvin D. Gentry; Michael S. Albert; L. Ardell
Lanier, Emeritus; Leonard H. Beck; Archie L. Hodges, Emeritus; Peggy B.
Barnhardt; A. Lonnie Davis, Emeritus and; Sue H. Hunter (Not present; Russell J.
Gabrielson, Emeritus and; J. Smith Young, Emeritus)
MICHAEL S. ALBERT DAVID A. SMITH
President, CEO and Director of Billings Freight Owner, Red Acres Dairy Farm
Systems, Inc.; Treasurer of Cargo Carriers, Inc.;
Vice President of Metro Motor Express, Inc.
ROBERT B. SMITH, JR.
PEGGY B. BARNHARDT Attorney
Retired since 1996; former 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.
MARVIN D. GENTRY LLOYD G. WALTER, JR., FAIA
President and Chief Executive Officer, The New Fortis Vice President & Chairman, Walter, Robbs, Callahan and
Corporation, a wholly-owned subsidiary of K. Pierce, Architects, P.A.
Hovnanian Enterprises
JULIUS S. YOUNG, JR.
SAMUEL R. HARRIS, M.D. President, Jay Young Management, Inc.
Physician
(*) Elected to fill the unexpired term of Margaret Lee W. Crowell.
WALTER A. HILL, SR.
President, Hill Oil Company, Inc.; Vice President and DIRECTORS EMERITI
Secretary, NorthCo, Inc. (construction development)
Margaret Lee W. Crowell(**)
SUE H. HUNTER(*) A. Lonnie Davis
President, Thomasville Emporium, Inc.; Clifford A. Erickson
Vice President, Sidestreet Cafe, Inc.; former Davidson Russell J. Gabrielson
County Commissioner & Vice Chairperson Archie L. Hodges
L. Ardell Lanier
ROBERT F. LOWE Dothan D. Reece
Chairman, President and CEO of Bancshares, the L. Klynt Ripple
Bank and Peoples Finance Company of Lexington, Archie M. Sink
Inc., a subsidiary of the Bank; President and a J. Smith Young
director of LSB Financial Services, Inc., a subsidiary
of the Bank (**) Retired from active directorship December 31, 1998.
42
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SUMMARY OF
SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31
(In thousands, expect per share data and ratios) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Interest income $ 49,657 $ 45,467 $ 40,192 $ 32,333 $ 27,338
Interest expense 21,682 19,547 16,536 13,426 9,858
-------- -------- -------- -------- --------
Net interest income 27,975 25,920 23,656 18,907 17,480
Provision for loan losses 770 785 805 367 282
-------- -------- -------- -------- -------
Net interest income
after provision for loan losses 27,205 25,135 22,851 18,540 17,198
Noninterest income 6,585 5,389 4,639 3,599 2,851
Noninterest expense 21,151 20,426 17,907 15,091 13,710
-------- -------- -------- -------- --------
Income before income taxes 12,639 10,098 9,583 7,048 6,339
Income taxes 3,959 3,336 2,718 1,888 1,578
-------- -------- -------- -------- --------
Net income $ 8,680 $ 6,762 $ 6,865 $ 5,160 $ 4,761
-------- -------- -------- -------- --------
Cash dividends declared $ 3,658 $ 2,712 $ 2,158 $ 2,061 $ 1,905
======== ======== ======== ======== ========
SELECTED YEAR-END ASSETS AND LIABILITIES
Investment securities $143,843 $105,616 $128,101 $144,639 $125,417
Loans, net of unearned income 436,014 396,991 355,893 297,264 232,632
Assets 679,006 616,265 551,845 493,433 403,840
Deposits 567,327 503,025 464,921 428,032 351,587
Shareholders' equity 73,430 67,527 62,862 58,355 48,437
RATIOS (AVERAGES)
Net income to total assets 1.35% 1.16% 1.32% 1.23% 1.22%
Net income to shareholders' equity 12.30 10.31 11.36 10.19 10.11
Dividend payout 42.14 40.11 31.43 39.94 40.01
Shareholders' equity to total assets 10.96 11.21 11.62 12.05 12.04
PER SHARE DATA
Earnings Per Share:
Basic $ 1.00 $ .78 $ .80 $ .66 $ .61
Diluted .98 .77 .79 .65 .60
Cash dividends declared .42 .35 .25 .24 .24
Book value at end of year 8.42 7.79 7.29 6.80 6.23
13
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AVERAGE BALANCES AND
NET INTEREST INCOME ANALYSIS
Table 1
Fully taxable equivalent basis(1) (In thousands)
1998 1997 1996
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, net(2)............ $415,463 $39,112 9.41% $379,672 $35,692 9.40% $324,195 $30,576 9.43%
Taxable securities............. 96,486 5,544 5.75 83,133 5,077 6.11 106,870 6,512 6.09
Tax exempt securities.......... 33,116 2,550 7.70 31,202 2,498 8.01 30,753 2,668 8.68
Federal Home Loan
Bank.......................... 2,228 165 7.41 2,464 179 7.26 1,678 122 7.27
Interest-Bearing Bank
Balances...................... 21,876 1,087 4.97 1,760 95 5.40 850 48 5.65
Federal funds sold and
securities purchased under
resale agreements............. 33,956 1,903 5.60 48,279 2,639 5.47 19,620 1,033 5.27
-------- ------- -------- ------- -------- -------
Total earning assets.......... 603,125 50,361 8.35 546,510 46,180 8.45 483,966 40,959 8.46
Non-earning assets:
Cash and due from banks 25,322 22,657 19,790
Premises and equipment 11,516 11,333 11,277
Other assets................... 9,103 9,016 8,678
Reserve for loan losses........ (4,799) (4,468) (3,812)
-------- ------- -------- ------- -------- -------
Total assets.................. $644,267 $50,361 $585,048 $46,180 $519,899 $40,959
======== ======= ======== ======= ======== =======
Interest-bearing liabilities:
Savings and time
deposits...................... $466,874 $19,727 4.23% $425,489 $17,917 4.21% $387,072 $15,831 4.09%
Securities sold under
agreements to
repurchase................... 6,027 234 3.88 5,637 234 4.15 3,269 168 5.14
Borrowings from Federal
Home Loan Bank............... 30,731 1,721 5.60 23,303 1,396 5.99 9,300 537 5.77
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities.................. 503,632 21,682 4.31 454,429 19,547 4.30 399,641 16,536 4.14
Other liabilities and
shareholders' equity:
Demand deposits................ 65,271 61,148 56,559
Other liabilities.............. 4,779 3,900 3,264
Shareholders' equity........... 70,585 65,571 60,435
-------- ------- -------- ------- -------- -------
Total liabilities and
shareholders'
equity....................... $644,267 $21,682 $585,048 $19,547 $519,899 $16,536
======== ======= ======== ======= ======== =======
Net interest income and
net interest margin(3)......... $28,679 4.76% $26,633 4.87% $24,423 5.05%
======= ==== ======= ==== ======= =====
Interest rate spread(4)........ 4.04% 4.15% 4.32%
==== ==== =====
(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 $1,606, $1,382 and $1,145 for 1998, 1997 and 1996,
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.
14
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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 operations for LSB Bancshares, Inc.
("Bancshares") and its wholly-owned subsidiary, Lexington State Bank ("LSB") for
the years 1998, 1997 and 1996. 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.
SUMMARY
With the completion of the Old North State Bank merger in 1997, Bancshares
expanded its franchise in the central Piedmont area of North Carolina to cover
Davidson, Forsyth and Stokes counties. This expanded customer base served by
twenty-one offices, along with Bancshares' emphasis on increasing revenues while
controlling non-interest expense, increased Bancshares' 1998 net income 28.4%
over 1997's results. Net income for the year ended December 31, 1998 was
$8,680,000, or $.98 per diluted share, compared to $6,762,000 in 1997, or $.77
per diluted share, and $6,865,000 in 1996, or $.79 per diluted share.
Return on average assets for 1998 was 1.35%, compared to 1.16% for 1997 and
1.32% for 1996. Return on average share-holders' equity was 12.30% for 1998
compared to 10.31% for 1997 and 11.36% for 1996.
Interest rates remained relatively steady during 1998 until the fourth quarter.
In October 1998 the prime interest rate made two adjustments of 25 basis points
each followed by a third decline of 25 basis points in November. The prime
interest rate ended 1998 at 7.75% while remaining steady at 8.50% in 1997 and
8.25% in 1996.
Bancshares' increase in net interest income in 1998 was $2,055,000 or 7.9%
compared to $2,264,000 or 9.6% in 1997. The loan loss provision necessary to
maintain an adequate reserve in 1998 was sustained at nearly the same level as
1997, reflecting a strong loan portfolio quality. Noninterest income in 1998
increased $1,196,000 or 22.2% compared to 1997, which was up $750,000 or 16.2%
over 1996. Noninterest expense in 1998 increased $725,000 or 3.5% compared to
$2,519,000 or 14.1% in 1997.
Asset growth for 1998 was $62,741,000 or 10.2% compared to an increase of
$64,420,000 or 11.7% in 1997. Total loans for 1998 increased $39,023,000 or 9.8%
compared to $41,098,000 or 11.5% in 1997. In 1998, deposit growth outpaced loan
growth by posting a gain of $64,302,000 or 12.8% compared to 1997. Deposit
growth in 1997 was $38,104,000 or 8.2% compared to 1996.
VOLUME AND RATE VARIANCE ANALYSIS
1998 1997
Table 2 VOLUME RATE TOTAL Volume Rate Total
Fully taxable equivalent basis(1) (In thousands) VARIANCE(2) VARIANCE(2) VARIANCE Variance(2) Variance(2) Variance
---------- ---------- --------- ----------- ----------- ---------
Interest income:
Loans receivable.................................. $ 3,382 $ 38 $ 3,420 $ 5,214 $ (98) $ 5,116
Taxable investment securities..................... 780 (313) 467 (1,456) 21 (1,435)
Tax exempt investment securities.................. 150 (98) 52 39 (209) (170)
Federal funds sold................................ (798) 62 (736) 1,565 41 1,606
Federal Home Loan Bank............................ (18) 4 (14) 57 0 57
Interest-Bearing Bank Balances.................... 1,000 (8) 992 49 (2) 47
---------------------------------------------------------------------------
Total interest income.......................... 4,496 (315) 4,181 5,468 (247) 5,221
---------------------------------------------------------------------------
Interest expense:
Savings and time deposits......................... 1,726 84 1,810 1,610 476 2,086
Securities sold under agreements to repurchase.... 16 (16) 0 103 (37) 66
Borrowings from Federal Home Loan Bank............ 421 (96) 325 838 21 859
---------------------------------------------------------------------------
Total interest expense......................... 2,163 (28) 2,135 2,551 460 3,011
---------------------------------------------------------------------------
Increase (decrease) in net interest income........ $ 2,333 $ (287) $ 2,046 $ 2,917 $ (707) $ 2,210
===========================================================================
(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.
15
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MARKET RISK MANAGEMENT
The objectives of market risk 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"). The ALCO Committee as a part of its asset/liability
management decision-making process evaluates all market conditions, interest
rate trends and the economic environment. Based upon its view of existing and
expected market conditions, the ALCO Committee adopts balance sheet strategies
intended to optimize net interest income to the extent possible while minimizing
the risk associated with unanticipated changes in interest rates.
Cash and cash equivalents, maturing investments and loans, and securities
available for sale are principal sources of liquidity for LSB. Correspondent
relationships are also maintained with several large banks in order to have
access to federal funds purchases as a secondary source of liquidity. At
December 31, 1998, LSB also had available credit from the Federal Home Loan Bank
of Atlanta ("FHLB") totaling $60,000,000, of which $31,158,000 remained
available. This credit is collateralized by a blanket lien on qualifying loans
secured by first mortgages on 1-4 family residences. These funds could be drawn
upon to satisfy liquidity needs or for other purposes deemed appropriate.
During 1998, management's balance sheet strategy was to emphasize deposit growth
to fund projected loan demand. Borrowings from the FHLB were reduced through
regularly scheduled repayments to a balance at year-end of $28,842,000. This
strategy met management's objectives of growth 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 1998'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, 1998 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, 1998, the one-year
cumulative interest sensitivity gap was a negative $196,285,000, for a ratio of
interest-sensitive assets to interest-sensitive liabilities of .58.
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
INTEREST SENSITIVITY ANALYSIS (1)
DECEMBER 31, 1998
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.................... $ 128,044 $ 26,378 $ 52,660 $ 207,082 $183,707 $ 45,225 $ 436,014
U.S. Treasury securities......................... 4,784 2,001 2,998 9,783 27,671 37,454
U.S. government agencies obligations............. 2,284 549 2,833 64,696 67,529
Obligations of states and political subdivisions. 650 901 1,551 6,839 28,301 36,691
Federal Home Loan Bank........................... 2,169 2,169 2,169
Interest-Bearing Bank Balances .................. 9,862 9,862 9,862
Federal funds sold............................... 40,595 40,595 40,595
--------- -------- -------- --------- -------- -------- ---------
Total interest-earning assets................. $ 188,388 $ 29,829 $ 55,658 $ 273,875 $282,913 $ 73,526 $ 630,314
========= ======== ======== ========= ======== ======== =========
Interest-bearing liabilities:
N.O.W. account deposits.......................... $ 107,593 $ 107,593 $ 107,593
Money market deposits............................ 143,039 143,039 143,039
Regular savings deposits......................... 36,683 36,683 36,683
Time deposits.................................... 75,361 $ 52,496 $ 45,760 173,617 $ 34,754 208,371
Securities sold under agreements to repurchase... 5,536 5,536 5,536
Borrowing from Federal Home Loan Bank ........... 1,975 834 883 3,692 20,150 $ 5,000 28,842
--------- -------- -------- --------- -------- -------- ---------
Total interest-bearing liabilities............ $ 370,187 $ 53,330 $ 46,643 $ 470,160 $ 54,904 $ 5,000 $ 530,064
========= ======== ======== ========= ======== ======== =========
Interest sensitivity gap......................... $(181,799) $(23,501) $ 9,015 $(196,285)
Ratio of interest-sensitive assets/
interest-sensitive liabilities................. .51 .56 1.19 .58
(1) Interest sensitivity is computed using assets and liabilities having
interest rates that can be adjusted during the period indicated.
16
11
SUMMARY OF INVESTMENT SECURITIES PORTFOLIO
Table 4
(In thousands)
DECEMBER 31, 1998 December 31, 1997 December 31, 1996
CARRYING MARKET Carrying Market Carrying Market
VALUE VALUE Value Value Value Value
-------------------- -------------------- ----------------------
U.S. Treasury securities......................... $ 36,668 $ 37,510 $ 35,308 $ 35,328 $ 36,809 $ 36,772
U.S. government agencies obligations............. 66,558 66,683 35,109 35,084 47,401 47,330
Mortgage-backed obligations...................... 716 713 1,017 1,017 8,888 8,856
Obligations of state and political subdivisions.. 36,642 38,247 31,769 33,092 30,486 31,584
Other............................................ 0 0 0 0 2,804 2,790
Federal Home Loan Bank........................... 2,169 2,169 2,413 2,413 1,713 1,713
--------- --------- -------- -------- --------- --------
Total securities............................... $ 142,753 $ 145,322 $105,616 $106,934 $ 128,101 $129,045
========= ========= ======== ======== ========= ========
As of the latest reported period, the registrant is not aware of any issuer, and
the aggregate book value and aggregate market value of the securities of such
issuer, when the aggregate book value of such securities exceeds 10% of the
registrant's shareholders' equity.
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 $3,137,000 in 1998 compared to $8,307,000 in 1997 and
$5,549,000 in 1996. Details of cash flows for the years 1998, 1997 and 1996 are
provided in the Consolidated Statements of Cash Flows.
NET INTEREST INCOME
Net interest income, on a fully taxable basis, amounted to $28,679,000 in 1998
compared to $26,633,000 in 1997 and $24,423,000 in 1996. Tax-equivalent net
interest income as a percentage of average earning assets, or net interest
margin, amounted to 4.76% in 1998, 4.87% in 1997 and 5.05% in 1996. 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, 1998, are shown in Table 1.
Interest rates began to decline in the fourth quarter of 1998 following a
relatively stable interest rate environment during the two previous years. The
decline in interest rates in the fourth quarter of 1998 primarily affected
securities and short-term investments, while the average loan yield for 1998 was
up one basis point from 1997. Overall, the average yield on earning assets
declined ten basis points in 1998 while the average rate on interest-bearing
liabilities increased one basis point. This placed the interest rate spread at
4.04% for 1998 compared to 4.15% for 1997 and 4.32% for 1996.
Average loan yield in 1998 remained comparable to that of 1997, while loan
volume increased producing favorable results for Bancshares' net interest
income. Average total earning assets in 1998 increased $56,615,000 or 10.4%
compared to 1997, while average total interest-bearing liabilities increased
$49,203,000 or 10.8% during the same period. The decrease in the net interest
margin in 1998 was principally due to a more rapid decline in the average yield
on earning assets than that experienced on the average rate paid on
interest-bearing liabilities. A more detailed discussion of the volume and rate
variance is held under the sections of Earning Assets and Interest-Bearing
liabilities. An analysis of volume and rate changes is presented in Table 2.
EARNING ASSETS
As reported in Table 1 the gain in average earning assets for 1998 was
$56,615,000 or 10.4% compared to $62,544,000 or 12.9% for 1997. The average
balance of the loan portfolio for 1998 increased $35,791,000 or 9.4% compared to
1997, which posted a gain of $55,477,000 or 17.1% over 1996.
As shown in Table 2, the 1998 increase in loan balances accounted for a volume
related income increase of $3,382,000 compared to 1997's gain of $5,214,000. As
the average yield on loans for 1998 was 9.41% compared to 9.40% for 1997, the
rate variance accounted for only $38,000 of the total loan variance.
The average balance of the taxable investment securities portfolio in 1998 was
$96,486,000, which was an increase of $13,353,000 or 16.1% compared to 1997. The
tax-exempt investment securities portfolio has grown modestly during 1998, 1997
and 1996. At December 31, 1998, total investment securities available-for-sale
was $83,936,000, an increase of $33,211,000 or 65.5% from 1997. Investment
securities held-to-maturity at December 31, 1998 totaled $59,907,000, an
increase of $5,016,000 or 9.1%. As shown in the Volume and Rate Variance
Analysis, Table 2, these gains produced a positive volume variance of $780,000
for taxable investment securities. Yields on taxable investment securities
decreased 36 basis points in 1998, creating a negative rate variance of
$313,000. The increase in average tax-exempt investment securities in 1998 of
$1,914,000 or 6.1% over 1997 produced a positive volume variance of $150,000.
The decline in average yield on tax-exempt investment securities of 31 basis
points in 1998 produced a negative rate variance of $98,000.
17
12
In 1998 some short-term investments were made in interest bearing accounts with
bank approved institutions. These investments were used along with federal funds
sold to maintain LSB's liquidity position. The average balance of these
short-term investments was increased $5,557,000 or 10.6% in 1998 primarily for
management of the bank's liquidity position.
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 gain in average interest-bearing liabilities for 1998 was $49,203,000 or
10.8% compared to $54,788,000 or 13.7% in 1997. Interest rates paid on
liabilities increased one basis point in 1998 compared to an increase of 16
basis points in 1997.
The majority of LSB's interest-bearing liabilities consist of savings and time
deposits. The increase in these deposits for 1998 was $41,385,000 or 9.7%
compared to $38,417,000 or 9.9% for 1997. The increase in interest-bearing
deposits for 1998 resulted in a volume variance of $1,726,000, while a one basis
point increase in average rates paid added an $84,000 rate variance. The
schedule for average deposits is presented in Table 6 for years 1998, 1997 and
1996. Average interest rates paid on money market deposits increased 44 basis
points in 1998 compared to 1997. Average balances for money market deposits in
1998 increased $29,024,000 or 34.2% over 1997. Time deposit average interest
rates increased 15 basis points in 1998 compared to 1997, while the average
balances remained relatively flat year to year. N.O.W. account average interest
rates declined 14 basis points in 1998 compared to 1997, while N.O.W. account
balances experienced a gain of $7,169,000 or 8.0%. Average interest rates paid
on regular savings deposits decreased 42 basis points in 1998 as average
balances increased $5,838,000 or 15.2%.
Securities sold under agreements to repurchase account for a small proportion of
total interest-bearing liabilities. The average volume of these liabilities
increased $390,000 in 1998 and $2,368,000 in 1997. Average borrowed funds from
the FHLB in 1998 was $30,731,000, an increase of $7,428,800 or 31.9% over 1997.
As shown in the Volume and Rate Variance Analysis, Table 2, this produced a
volume variance of $421,000. A decrease of 39 basis points in the average
interest rate paid on borrowings from the FHLB produced a negative rate variance
of $96,000.
INVESTMENT SECURITIES
PORTFOLIO MATURITY SCHEDULE
DECEMBER 31, 1998
Table 5 WEIGHTED
(In thousands) CARRYING AVERAGE
VALUE YIELD (1)
--------- ---------
U.S. Treasury securities:
Within one year...................................... $ 8,996 6.21%
One to five years.................................... 27,672 5.84
--------
Total............................................... 36,668 5.93
--------
U.S. government agencies obligations:
Within one year...................................... 1,862 5.98
One to five years.................................... 64,696 5.63
--------
Total............................................... 66,558 5.64
--------
Mortgage-backed obligations........................... 716 5.50
--------
Obligations of states and political subdivisions:
Within one year...................................... 1,551 9.32
One to five years.................................... 6,839 10.52
Five to ten years.................................... 14,849 8.82
After ten years...................................... 13,403 7.76
--------
Total............................................... 36,642 8.76
--------
Federal Home Loan Bank................................ 2,169 7.43
--------
Total securities...................................... $142,753 6.53
--------
(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.
CAPITAL RESOURCES AND SHAREHOLDERS' EQUITY
At December 31, 1998, shareholder's equity was $73,430,000, an increase of 8.7%
compared to December 31, 1997, following an increase of 7.4% over 1996. Average
shareholders' equity as a percentage of average total assets amounted to 10.96%
in 1998, 11.21% in 1997, and 11.62% in 1996.
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, 1998, based on these
measures, Bancshares' had a Tier 1 capital ratio of 16.94% compared to the
regulatory requirement of 4% and a total capital ratio of 18.13% compared to an
8% regulatory requirement.
Additional regulatory capital measures include the Tier 1 leverage ratio. Tier 1
leverage ratio is defined as Tier 1 capital divided by average total assets less
goodwill and certain other intangibles and has a regulatory minimum of 3.0%,
with most institutions required to maintain a ratio of at least 4.0% to 5.0%,
depending primarily upon risk profiles. At December 31, 1998, Bancshares' Tier 1
leverage ratio was 11.15%.
In November of 1998, the Board of Directors ("Board") approved a stock
repurchase program for up to 300,000 shares of its common stock, or
approximately 3.4% of its outstanding shares. The Board authorized the
repurchase of shares of common stock in the open market or privately negotiated
transactions on a time-to-time and ongoing basis, depending upon market
conditions and subject to compliance with all applicable
18
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AVERAGE TOTAL DEPOSITS
Table 6
(In thousands)
1998 1997 1996
AVERAGE AVERAGE Average Average Average Average
BALANCE RATE Balance Rate Balance Rate
------------------- -------------------- ----------------------
Demand deposits............................... $ 65,271 $ 61,148 $ 56,559
N.O.W. account deposits....................... 96,809 2.44% 89,640 2.58% 80,840 2.50%
Money market deposits......................... 113,798 4.05 84,774 3.61 72,539 3.35
Regular savings deposits...................... 44,285 1.77 38,447 2.19 39,024 2.27
Time deposits................................. 211,982 5.65 212,628 5.50 194,669 5.39
--------- --------- --------
Total deposits(1)............................ $ 532,145 $ 486,637 $443,631
========= ========= ========
DECEMBER 31, 1998
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........... $29,449 $11,542 $7,631 $859 $49,481
(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.
securities laws and regulations. The repurchase plan is intended to help
Bancshares achieve its goal of building shareholder value and maintaining
appropriate capital levels.
The number of shareholders holding Bancshares stock totaled approximately 6,240
at December 31, 1998. Participants in Bancshares' dividend reinvestment plan
total 1,565 representing 25.1% of total shareholders.
NONINTEREST INCOME
Noninterest income for 1998 increased $1,196,000 or 22.2% compared to an
increase of $750,000 or 16.2% in 1997 and an increase of $1,040,000 or 28.9% in
1996. Service charges on deposit accounts for 1998 increased $166,000 or 6.5%
compared to 1997, which was virtually unchanged compared to 1996. The gain
realized from the sales of mortgage loans in 1998 totaled $328,000 compared to
$186,000 in 1997 and $119,000 in 1996. Other operating income increased $856,000
or 31.9% in 1998 compared to increases of $629,000 or 30.6% in 1997 and $590,000
or 40.2% in 1996. Financial statement Note 9 details material items contained in
other operating income. Bankcard income generated in 1998 increased $319,000 or
57.1% compared to $183,000 or 48.7% in 1997 and $89,000 or 31.0% in 1996. Fee
income generated from the servicing of sold mortgage loans and customer related
service fees increased $148,000 or 25.7% in 1998, $162,000 or 39.1% in 1997 and
$166,000 or 66.9% in 1996. Commissions generated by LSB Financial Services
attained the largest percentage and dollar increase in 1998. Commissions from
the subsidiary for 1998 increased $364,000 or 79.6% compared to $146,000 or
46.9% in 1997 and $219,000 or 238.0% in 1996. Trust income for 1998 increased
$56,000 or 12.6% compared to $35,000 or 8.6% in 1997 and $93,000 or 29.5% in
1996.
NONINTEREST EXPENSE
Total noninterest expense, excluding merger-related costs and restructuring
charges, totaled $20,991,000 in 1998, $18,932,000 in 1997 and $17,385,000 in
1996. These amounts represent increases of $2,059,000 or 10.9% in 1998 over 1997
and $1,547,000 or 8.9% in 1997 over 1996.
Personnel expense represented the largest dollar increase of non-interest
expense. Personnel expense, consisting of both employee salaries and benefits,
increased $785,000 or 7.6% in 1998 compared to $284,000 or 2.8% in 1997. These
increases are attributable to normal increases in compensation and increases in
the number of full-time equivalent employees. In 1998, full-time equivalent
employees totaled 328 compared to 315 in 1997.
Occupancy expense increased $36,000 or 2.9% in 1998 compared to a decrease of
$20,000 or 1.6% in 1997. Equipment depreciation and maintenance expense for 1998
increased $41,000 or 3.5% following an increase of $190,000 or 19.1% in 1997.
The increase in 1997 is attributable to enhancement of LSB's technological
capabilities. Other operating expenses in 1998 increased $1,197,000 or 19.5%
compared to an increase of $1,093,000 or 21.7% in 1997. Financial statement Note
9 details the material items contained in other operating expenses. Automated
services expense in 1998 increased $133,000 or 10.0% compared to increases of
$211,000 or 18.9% in 1997 and $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 $256,000 or 57.3% in
1998 compared to $152,000 or 51.5% in 1997 and $63,000 or 27.7% in 1996. These
increases are attributable to growth in the bankcard portfolio. Legal and
professional expense increased $307,000 or 42.4% in 1998 over 1997, which was up
$26,000 or 3.7% from 1996. The 1998 increase in legal and professional expense
is primarily due to additional regulatory compliance attributable to asset
growth of the company. As a normal course of business, other expenses increased
$465,000 or 22.6% in 1998 compared to $348,000 or 20.3% in 1997 and $237,000 or
16.1% in 1996.
19
14
ASSET QUALITY AND PROVISION FOR LOAN LOSSES
The reserve for loan losses was $5,048,000 or 1.16% of loans outstanding at
December 31, 1998 compared to $4,601,000 or 1.16% of loans outstanding at
December 31, 1997. Net charge offs for 1998 were $323,000 or .08% of average
loans outstanding, compared to 1997 net charge offs of $259,000 or .07% of
average loans outstanding. Net charge offs in 1996 were $441,000 or .14% of
average loans outstanding. The 1998 provision for loan losses was slightly less
than that of the previous year, reflecting the total coverage of the reserve in
relation to outstanding loans and the quality of the loan portfolio. 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 $1,912,000 at December 31, 1998, $2,155,000 at
December 31, 1997, and $2,390,000 at December 31, 1996. Nonperforming assets as
a percentage of loans outstanding at the end of the year amounted to .44% in
1998, .54% in 1997, and .67% in 1996. Bancshares had no nonaccrual loans at
December 31, 1998 compared to $127,000 at December 31, 1997 and $611,000 at
December 31, 1996. Accruing loans past due 90 days totaled $759,000 at December
31, 1998 compared to $334,000 at December 31, 1997 and $369,000 at December 31,
1996. 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, 1998, the reserve for loan losses was 2.64 times nonperforming
loans compared to 2.14 times nonperforming loans at December 31, 1997. Based on
the current loan portfolio and levels of current problem assets and potential
problem loans, management believes the provision for loan losses to be adequate.
In management's judgment, the allocation of the reserve for loan losses for 1998
shown in Table 10, accurately reflects the inherent risks associated with each
of the various lending categories.
As a part of credit administration, management regularly reviews and grades its
loan portfolio for purposes of determining asset quality and the need to make
additional provisions for loan losses. The review process is performed both
internally and externally, through the employment of independent credit review
professionals. The reserve for loan losses represents
SUMMARY OF LOAN PORTFOLIO
Table 7
(In thousands)
1998 1997 1996 1995 1994
--------------------------------------------------------------
Commercial, financial and agricultural.................... $144,955 $132,181 $131,235 $129,972 $ 98,471
Real estate - construction................................ 19,131 12,978 10,493 9,319 6,760
Real estate - mortgage.................................... 206,068 185,384 145,845 96,690 71,520
Installment loans to individuals.......................... 62,747 62,909 60,181 53,753 48,451
Lease financing........................................... 978 792 678 0 0
Other..................................................... 2,135 2,747 7,461 7,530 7,430
-------- -------- -------- -------- --------
Total loans, net of unearned income....................... $436,014 $396,991 $355,893 $297,264 $232,632
======== ======== ======== ======== ========
(*) The bank has no foreign loan activity.
MATURITIES AND SENSITIVITIES OF
LOANS TO CHANGES IN INTEREST RATES
DECEMBER 31, 1998
COMMERCIAL,
FINANCIAL REAL ESTATE -
AND AGRICULTURAL CONSTRUCTION TOTAL
-------------------------------------------------
Due in 1 year or less.............. $ 32,986 $19,131 $ 52,117
Due after 1 year through
5 years:
Fixed interest rates............. 55,468 55,468
Floating interest rates.......... 11,033 11,033
Due after 5 years:
Fixed interest rates............. 20,119 20,119
Floating interest rates.......... 25,349 25,349
--------- ------- --------
Total........................... $ 144,955 $19,131 $164,086
========= ======= ========
20
15
ANALYSIS OF RESERVE FOR LOAN LOSSES
Table 8
AS OF OR FOR THE YEARS ENDED
(In thousands) DECEMBER 31
1998 1997 1996 1995 1994
--------------------------------------------------------
Average amount of loans outstanding, net of unearned income ... $415,463 $379,672 $324,195 $245,032 $227,666
Amount of loans outstanding, net of unearned income ........... 436,014 396,991 355,893 297,264 232,632
Reserve for loan losses:
Balance on January 1 .......................................... $ 4,601 $ 4,075 $ 3,711 $ 3,013 $ 3,096
-------- -------- -------- -------- --------
Loans charged off:
Secured by real estate ........................................ 0 0 57 49 0
Commercial and industrial ..................................... 65 382 225 169 299
Installment ................................................... 285 330 197 147 127
Credit card ................................................... 101 139 93 58 28
-------- -------- -------- -------- --------
Total charge-offs ........................................... 451 851 572 423 454
-------- -------- -------- -------- --------
Recoveries of loans previously charged off:
Secured by real estate ........................................ 0 0 0 11 7
Commercial and industrial ..................................... 9 486 20 28 10
Installment ................................................... 91 89 86 78 56
Credit card ................................................... 28 17 25 17 15
-------- -------- -------- -------- --------
Total recoveries ............................................ 128 592 131 134 88
-------- -------- -------- -------- --------
Net loans charged off ........................................... 323 259 441 289 366
-------- -------- -------- -------- --------
Provision for loan losses ....................................... 770 785 805 367 283
-------- -------- -------- -------- --------
Acquired bank's allowance at date of acquisition ................ 0 0 0 620 0
-------- -------- -------- -------- --------
Balance on December 31 ........................................ $ 5,048 $ 4,601 $ 4,075 $ 3,711 $ 3,013
======== ======== ======== ======== ========
Ratio of net charge-offs of loans to average loans outstanding
during the year ............................................. .08% .07% .14% .12% .16%
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, credit concentrations and other factors which might affect
potential credit losses.
LSB is also subject to regulatory examinations and determinations as to the
adequacy of its reserve for loan losses, which may take into account such
factors as the methodology used to calculate the reserve and the size of the
reserve in comparison to peer banks identified by the regulatory agencies.
During 1998, all credit relationships of $50,000 or more were reviewed as a part
of LSB's credit administration. 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 decreased to 31.3% in 1998 from 33.0% in 1997
compared to 28.4% in 1996. Financial statement Note 10 provides a reconciliation
between the amount of taxes computed using the statutory tax rate and the actual
tax expense. The decrease in Bancshares' effective tax rate for 1998 was
primarily the result of fewer non-deductible merger expenses.
INFLATION
For financial institutions, the effects of inflation and governmental programs
to control it tend to vary from non-bank companies. The impact is more likely to
be felt by banking institutions in 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
21
16
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, FASB issued Statement No. 129 ("SFAS 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 after December 31, 1997, with no material
effect on its financial position and operating results.
In June 1997, FASB issued Statement No. 130 ("SFAS 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
non-owner sources 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 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 ("SFAS 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
NONPERFORMING ASSETS
Table 9
(In thousands) DECEMBER 31
1998 1997 1996 1995 1994
----------------------------------------------
Nonaccrual loans:
Secured by real estate .......................................... $ 0 $ 0 $ 424 $ 990 $ 0
Commercial and industrial ....................................... 0 127 187 390 0
Restructured loans ............................................... 232 502 259 289 0
Other real estate acquired through foreclosed properties ......... 921 1,192 1,151 988 1,059
Accruing loans which are contractually past due 90 days or more... 759 334 369 206 1,108
------ ------ ------ ------ ------
Total nonperforming assets ....................................... $1,912 $2,155 $2,390 $2,863 $2,167
====== ====== ====== ====== ======
Nonperforming assets to:
Loans outstanding at end of year ................................ .44% .54% .67% .96% .93%
Total assets at end of year ..................................... .28 .35 .43 .58 .54
Loss of interest income associated with nonperforming loans at
December 31:
YEARS ENDED DECEMBER 31
1998 1997 1996 1995 1994
----------------------------------------------
Interest income that would have been recorded in accordance
with original terms ............................................. $ 0 $ 1 $ 52 $ 34 $ 71
Less interest income actually recorded ........................... 0 0 3 7 0
------ ------ ------ ------ ------
Loss of interest income .......................................... $ 0 $ 1 $ 49 $ 27 $ 71
====== ====== ====== ====== ======
22
17
ALLOCATION OF RESERVE FOR LOAN LOSSES (*)
Table 10 1998 1997 1996 1995 1994
LOANS LOANS LOANS LOANS LOANS
(In thousands) % % % % %
TOTAL TOTAL TOTAL TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
--------------- --------------- --------------- --------------- ---------------
Commercial, financial
and agricultural ..... $1,330 33.2% $1,212 33.3% $1,075 36.9% $1,100 43.7% $ 780 42.3%
Real estate -
construction ......... 555 4.4 506 3.3% 450 2.9 346 3.1 251 2.9
Real estate -
mortgage ............. 2,000 47.4 1,815 46.7% 1,529 41.0 1,390 32.5 1,130 30.8
Installment loans to
individuals .......... 913 14.3 828 15.8% 766 16.9 675 18.2 652 20.8
Lease financing ....... 60 .2 55 .2% 55 .2 0 .0 0 .0
Other ................. 90 .5 85 .7% 110 2.1 110 2.5 110 3.2
Unallocated ........... 100 .0 100 .0% 90 .0 90 .0 90 .0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total ................ $5,048 100.0% $4,601 100.0% $4,075 100.0% $3,711 100.0% $3,013 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
(*) 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.
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.
Statement No. 132 ("SFAS 132"), "Employers' Disclosures about Pensions and Other
Postretirement Benefits" was issued by FASB effective for fiscal years beginning
after December 15, 1997. SFAS 132 supersedes disclosure requirements contained
in SFAS 87 "Employers' Accounting for Pensions", SFAS 88 "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits", and SFAS 106 "Employers' Accounting for Postretirement
Benefits Other Than Pensions". SFAS 132 standardizes disclosure requirements and
requires additional information concerning changes in benefit obligations and
the fair value of plan assets. Bancshares has adopted SFAS 132 for its financial
statements beginning January 1, 1998, with no material effect on its financial
position and operating results.
In June 1998, FASB issued Statement No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities". SFAS 133 establishes accounting
and reporting standards for derivative instruments, including derivative
instruments that are embedded in other contracts and for hedging activities.
SFAS 133 requires that all derivatives be recognized as either assets or
liabilities on the balance sheet at their fair value. Requirements of SFAS 133
could affect the amount of an institution's recorded assets, liabilities, equity
as well as its regulatory capital levels. As defined under SFAS 133 derivatives
carry a designation of (a) no hedge designation, (b) fair value hedge, (c) cash
flow hedge, or (d) foreign currency hedge. SFAS 133 is effective for fiscal
periods, both years and quarters, beginning after June 15, 1999. Bancshares does
not presently have any derivative instruments within the definition of SFAS 133
and, as such, does not anticipate any material effect on its financial position
and operating results from adoption of the standard.
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 identified five
phases of the Year 2000 project management process. In the awareness phase, the
corporation defines the issues and potential challenges associated with the Year
2000 problem. In the assessment phase, an evaluation is conducted to determine
the size and complexity of ensuring Year 2000 readiness. During the renovation
phase, required system upgrades would be made. In the validation phase, testing
of all computer systems and software would be done to meet the corporation's Y2K
compatibility standards. The final step is the implementation phase, which
incorporates Year 2000 ready systems into day-to-day operations.
The "Year 2000 problem" stems from the inability of computer systems to identify
the change from the years of the 1900's to the years 2000. This comes about
because most computer hardware and software systems have historically used only
two digits to identify the applicable year. Hence, as the turn of the century
approaches, these systems could be unable to distinguish between 1900 and 2000
resulting in possible errors and system failures causing wide spread disruption
to business operations.
Bancshares has acknowledged the importance of this issue and established a Year
2000 Project Team (Y2K) to ensure Year 2000 compliance. Bancshares' Year 2000
Plan follows the guidelines outlined by the Federal Financial Institutions
Examination Council. The Y2K Team consists of senior officers within the
company's operations area, information systems area, audit department, corporate
area and senior management. Senior management, with Board of Directors' approval
and oversight, establishes the commitment of resources and prioritization.
Bancshares has completed the awareness phase and the assessment phase of both
its information technology (computer
23
18
QUARTERLY FINANCIAL DATA
Table 11
(In thousands except per share data) 1998 1997
4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR. 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR.
------------------------------------- -------------------------------------
Interest income .............. $12,657 $12,732 $12,351 $11,917 $11,985 $11,510 $11,177 $10,795
Interest expense ............. 5,525 5,441 5,426 5,290 5,114 5,084 4,810 4,539
------- ------- ------- ------- ------- ------- ------- -------
Net interest income .......... 7,132 7,291 6,925 6,627 6,871 6,426 6,367 6,256
Provision for loan losses .... 250 180 175 165 318 159 190 118
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses... 6,882 7,111 6,750 6,462 6,553 6,267 6,177 6,138
------- ------- ------- ------- ------- ------- ------- -------
Noninterest income ........... 1,751 1,667 1,671 1,496 1,356 1,407 1,358 1,268
------- ------- ------- ------- ------- ------- ------- -------
Noninterest expense .......... 5,121 5,268 5,317 5,445 5,110 6,075 4,747 4,494
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes 3,512 3,510 3,104 2,513 2,799 1,599 2,788 2,912
Income taxes ................. 1,126 1,122 935 776 808 765 863 900
------- ------- ------- ------- ------- ------- ------- -------
Net income ................... $ 2,386 $ 2,388 $ 2,169 $ 1,737 $ 1,991 $ 834 $ 1,925 $ 2,012
======= ======= ======= ======= ======= ======= ======= =======
Earnings per share:
Basic ....................... $ .27 $ .27 $ .25 $ .21 $ .23 $ .10 $ .22 $ .23
Diluted ..................... .27 .27 .24 .20 .23 .09 .22 .23
systems) and non-information technology systems (heating, air condition systems,
elevator systems, calculators, etc.). Testing strategies and plans have been
completed and put in place. These first two phases were completed on schedule in
April of 1998.
Bancshares is presently on schedule with the renovation phase and validation
phase of its internal software with completion projected for mid 1999. Software
programs from the National Software Testing Laboratories (NSTL) are being
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 is participating with Fiserv's Testing Acceptance Group and the Client
Advisory Board in Year 2000 testing. The renovation phase and validation phase
of the Fiserv system has been completed and the implementation phase is in
progress.
Third party audits have been requested from all major vendors and suppliers to
assist in determining their ability to be Year 2000 compliant. Bancshares has
also conducted due diligence inquiries concerning vendors' Y2K readiness and
implemented appropriate internal testing and verification of vendors' products
and services. Major loan and deposit customers have also been identified to
assess the extent to which Bancshares is vulnerable to those third parties
should they fail to be Year 2000 ready. However, there can be no guarantee that
the systems of other organizations on which Bancshares operations rely will be
converted timely, or that a failure to convert by another organization, or a
conversion that is incompatible with Bancshares' systems, will not have an
adverse effect on Bancshares.
The estimated cost of Bancshares' Year 2000 project is currently $400,000 and is
being funded through operating cash flows. As of December 31, 1998, a cumulative
total of $94,000 has been expensed as it relates to the awareness and assessment
phases and preparation for the validation and implementation phases. The costs
of the Year 2000 project and the date on which Bancshares plans to complete Year
2000 modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third-party modification plans and other
factors. However, there can be no assurance that these estimates will be
achieved and actual results could differ materially from those plans.
Bancshares is currently developing contingency plans that outline emergency
response procedures that adhere to regulatory guidelines. The contingency plans
represent an enhancement of Bancshares' business resumption plans and have as
their goal the resumption of business in the event there is a disruption of
critical systems necessary to operate. The contingency plans include the use of
alternative service providers, off-site processing, consolidation of customer
services, alternative communications support and other contingency service
suppliers. Federal regulatory agencies periodically review Bancshares' Year 2000
conversion efforts and have had no adverse criticism on the progress to date or
its schedule to complete the Year 2000 project.
Although the Year 2000 project has been given management's top priority, there
have been no serious delays to other information technology projects. To a great
extent this is due to Bancshares third party processing by Fiserv, which has
provided added support in meeting Year 2000 project goals as well as ongoing
information technology projects. As such, there are no anticipated delays in
information technology projects that would have an adverse effect on Bancshares'
financial condition and results of operations.
Bancshares presently believes that with its Year 2000 project schedule and
contingency plan development, the Year 2000 issue can be mitigated. However, if
its Year 2000 project goals are not met or completed on a timely basis, or if
mission critical third-parties do not meet their own Year 2000 issues,
disruptions in operations could occur and could have a material adverse impact
on the financial position of Bancshares.
24
19
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
(In thousands, except for shares) 1998 1997
- ----------------------------------------------------------------------------------------------
ASSETS
Cash and Due from Banks (Note 2) ......................... $ 33,292 $ 25,368
Interest-Bearing Bank Balances ........................... 9,862 12,127
Federal Funds Sold and Securities Purchased
Under Resale Agreements ................................. 40,595 60,340
Investment Securities (Note 3):
Held to Maturity, Market Value $61,386 and $56,209 ...... 59,907 54,891
Available for Sale ...................................... 83,936 50,725
Loans (Notes 4 and 11) ................................... 436,014 396,991
Less, Reserve for Loan Losses (Note 4) ................... (5,048) (4,601)
--------- ---------
Net Loans ............................................. 430,966 392,390
Premises and Equipment (Note 5) .......................... 11,528 11,261
Other Assets ............................................. 8,920 9,163
--------- ---------
Total Assets .......................................... $ 679,006 $ 616,265
========= =========
LIABILITIES
Deposits:
Demand ................................................... $ 71,867 $ 67,256
Savings, N.O.W. and Money Market Accounts ................ 287,315 227,239
Certificates of Deposit of less than $100,000 (Note 6).... 158,664 154,566
Certificates of Deposit of $100,000 or more (Note 6) ..... 49,481 53,964
--------- ---------
Total Deposits ........................................ 567,327 503,025
Securities Sold Under Agreements to Repurchase (Note 6)... 5,537 8,263
Borrowings from the Federal Home Loan Bank (Note 7) ...... 28,842 33,758
Other Liabilities ........................................ 3,870 3,692
--------- ---------
Total Liabilities ..................................... 605,576 548,738
--------- ---------
SHAREHOLDERS' EQUITY
Preferred Stock, Par Value $.01 Per Share:
Authorized 10,000,000 shares; none issued ............. 0 0
Common Stock, Par Value $5 Per Share:
Authorized 50,000,000 Shares; Issued 8,722,895
Shares in 1998 and 8,667,426 Shares in 1997 ........... 43,614 34,665
Paid-In Capital .......................................... 14,903 14,772
Retained Earnings ........................................ 14,248 17,916
Accumulated Other Comprehensive Income ................... 665 174
--------- ---------
Total Shareholders' Equity ............................... 73,430 67,527
--------- ---------
Total Liabilities and Shareholders' Equity ........... $ 679,006 $ 616,265
========= =========
Commitments and Contingencies (Note 8)
Notes to consolidated financial statements are an integral part hereof.
25
20
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
(In thousands, except for shares and per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and Fees on Loans ................................ $ 39,112 $ 35,692 $ 30,576
Interest on Investment Securities:
Taxable .................................................. 5,544 5,077 6,512
Tax Exempt ............................................... 1,846 1,785 1,901
Interest-Bearing Bank Balances ............................ 1,252 274 170
Federal Funds Sold and Securities Purchased Under
Resale Agreements ....................................... 1,903 2,639 1,033
---------- ---------- ----------
Total Interest Income ................................... 49,657 45,467 40,192
---------- ---------- ----------
INTEREST EXPENSE
Deposits .................................................. 19,727 17,917 15,831
Securities Sold Under Agreements to Repurchase ............ 234 234 168
Borrowings from the Federal Home Loan Bank ................ 1,721 1,396 537
---------- ---------- ----------
Total Interest Expense .................................. 21,682 19,547 16,536
---------- ---------- ----------
Net Interest Income .......................................... 27,975 25,920 23,656
Provision for Loan Losses (Note 4) ........................... 770 785 805
---------- ---------- ----------
Net Interest Income after Provision for Loan Losses .......... 27,205 25,135 22,851
---------- ---------- ----------
NONINTEREST INCOME
Service Charges on Deposit Accounts ....................... 2,716 2,550 2,501
Gains on Sales of Mortgages ............................... 328 186 119
Losses on Sales of Investment Securities .................. 0 (32) (37)
Other Operating Income (Note 9) ........................... 3,541 2,685 2,056
---------- ---------- ----------
Total Noninterest Income ................................ 6,585 5,389 4,639
---------- ---------- ----------
NONINTEREST EXPENSE
Personnel Expense ......................................... 11,172 10,387 10,103
Occupancy Expense ......................................... 1,259 1,223 1,243
Equipment Depreciation and Maintenance .................... 1,226 1,185 995
Other Operating Expense (Note 9) .......................... 7,334 6,137 5,044
Restructuring Charges and Merger Related Costs (Note 14)... 160 1,494 522
---------- ---------- ----------
Total Noninterest Expense ................................ 21,151 20,426 17,907
---------- ---------- ----------
Income Before Income Taxes ................................... 12,639 10,098 9,583
Income Taxes (Note 10) ....................................... 3,959 3,336 2,718
---------- ---------- ----------
Net Income ................................................... $ 8,680 $ 6,762 $ 6,865
========== ========== ==========
Earnings Per Share:
Basic ..................................................... $ 1.00 $ .78 $ .80
Diluted ................................................... .98 .77 .79
Weighted Average Shares Outstanding:
Basic ..................................................... 8,703,274 8,637,394 8,607,627
Diluted ................................................... 8,887,631 8,815,878 8,713,705
Notes to consolidated financial statements are an integral part hereof.
26
21
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ACCUMULATED
COMMON STOCK OTHER TOTAL
------------ PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
(In thousands, except for shares) SHARES AMOUNT CAPITAL EARNINGS INCOME EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1995................... 5,773,770 $28,869 $13,588 $15,551 $346 $58,354
Net income...................................... 6,865 6,865
Change in unrealized loss on securities
available for sale, net of deferred
income taxes................................... (453) (453)
----------
Comprehensive income ....................... 6,412
Cash dividends declared on common
stock......................................... (2,158) (2,158)
Common stock issued for stock
options exercised............................. 36,765 183 83 266
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
Change in unrealized gain on securities
available for sale, net of deferred
income taxes.................................. 281 281
----------
Comprehensive income........................ 7,043
Cash dividends declared on common
stock......................................... (2,712) (2,712)
Common stock issued for stock
options exercised............................. 47,215 233 114 347
Fractional shares purchased..................... (676) (13) (13)
----------------------------------------------------------------------------------
Balances at December 31, 1997................... 6,933,035 34,665 14,772 17,916 174 67,527
Net income...................................... 8,680 8,680
Change in unrealized gain on securities
available for sale, net of deferred
income taxes.................................. 491 491
----------
Comprehensive income........................ 9,171
Cash dividends declared on common
stock......................................... (3,658) (3,658)
Common stock issued for stock
options exercised............................. 60,468 302 199 501
Common stock issued in five-for-four
stock split, including cash for
fractional shares............................. 1,734,392 8,672 (8,690) (18)
Common stock acquired........................... (5,000) (25) (68) (93)
----------------------------------------------------------------------------------
Balances at December 31, 1998................... 8,722,895 $43,614 $14,903 $14,248 $665 $73,430
==================================================================================
Notes to consolidated financial statements are an integral part hereof.
27
22
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES
Net Income ...................................................................... $ 8,680 $ 6,762 $ 6,865
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................ 1,241 1,217 1,150
Securities premium amortization and discount accretion, net .................. (104) (21) 6
Increase in loans held for sale .............................................. (7,276) (237) (3,594)
Deferred income taxes ........................................................ 180 115 (30)
Income taxes payable ......................................................... 81 (117) 56
(Increase) decrease in income earned but not received ........................ (463) (12) 131
Increase (decrease) in interest accrued but not paid ......................... (16) (367) 132
Provision for loan losses .................................................... 770 785 805
Loss on sale of investment securities ........................................ 0 116 37
(Gain) loss on sale of premises and equipment ................................ 44 66 (9)
-------- -------- --------
Net cash provided by operating activities .................................. 3,137 8,307 5,549
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of securities held to maturity ........................................ (24,983) (1,184) (4,854)
Proceeds from maturities of securities held to maturity ......................... 20,005 15,454 18,898
Proceeds from sales of securities held to maturity .............................. 0 1,954 0
Purchases of securities available for sale ...................................... (64,650) (17,453) (32,348)
Proceeds from maturities of securities available for sale ....................... 32,311 14,720 26,805
Proceeds from sales of securities available for sale ............................ 0 9,323 7,306
Net increase in loans made to customers ......................................... (32,071) (41,112) (55,285)
Purchases of premises and equipment ............................................. (1,604) (1,513) (1,182)
Proceeds from sale of premises and equipment .................................... 52 233 45
Net (increase) decrease in federal funds sold and securities purchased
under resale agreements ...................................................... 19,745 (33,620) (14,930)
(Increase) decrease in other assets ............................................. 280 (503) (559)
-------- -------- --------
Net cash used by investing activities ...................................... (50,915) (53,701) (56,104)
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Net increase in demand deposits, N.O.W.,
money market and savings accounts ............................................ 64,687 37,212 11,415
Net increase (decrease) in time deposits ........................................ (385) 891 25,535
Net increase (decrease) in securities sold under agreements to repurchase ....... (2,726) 2,154 2,518
Proceeds from long-term debt .................................................... 0 37,200 14,908
Payments on long-term debt ...................................................... (4,916) (17,517) (833)
Dividends paid .................................................................. (3,658) (2,712) (2,158)
Net increase in other liabilities ............................................... 45 152 611
Proceeds from issuance of common stock .......................................... 501 347 266
Common stock repurchased ........................................................ (93) 0 0
Fractional shares purchased ..................................................... (18) (13) (12)
-------- -------- --------
Net cash provided by financing activities .................................... 53,437 57,714 52,250
-------- -------- --------
Increase in cash and cash equivalents ............................................. 5,659 12,320 1,695
Cash and cash equivalents at the beginning of the years ........................... 37,495 25,175 23,480
-------- -------- --------
Cash and cash equivalents at the end of the years ................................. $ 43,154 $ 37,495 $ 25,175
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during the years for:
Interest ..................................................................... $ 21,712 $ 19,916 $ 16,696
Income taxes ................................................................. 3,803 3,314 2,720
SUPPLEMENTAL DISCLOSURE OF
NONCASH TRANSACTIONS
Transfer of loans to other real estate owned .................................... $ 100 $ 372 $ 331
Unrealized gain (loss) on securities available for sale:
Change in securities available for sale ...................................... 805 447 (688)
Change in deferred income taxes .............................................. (314) (166) 235
Change in shareholders' equity ............................................... 491 281 (453)
Notes to consolidated financial statements are an integral part hereof.
28
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF OR FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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. 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 inter-company balances and
transactions. Securities and other property held in a fiduciary or agency
capacity are not included in the consolidated balance sheets since these are
not assets or liabilities of Bancshares. Certain prior year amounts have been
reclassified to conform to current year presentation.
Use of Estimates
The preparation of financial statements in conformity with 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.
Securities Purchased Under Resale Agreements
Bancshares' policy is that securities purchased under resale agreements will be
collateralized by U.S. Treasury and other U.S. Government agency obligations.
Investment Securities
Management determines the appropriate classification of investment securities
at the time of purchase. Securities that may be sold in response to or in
anticipation of changes in interest rates or other factors are classified as
available for sale and carried at market value. The unrealized gains and losses
on these securities are reported net of applicable taxes 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.
Stock-Based Compensation
Bancshares accounts for its stock-based compensation plans using the accounting
prescribed by Accounting Principles Board Opinion Number 25, "Accounting for
Stock Issued to Employees". In October 1995, Statement of Financial Accounting
Standards Number 123, ("SFAS 123") "Accounting for Stock-Based Compensation,"
was issued and encourages, but does not require adoption of a fair value method
of accounting for employee stock-based compensation plans. As permitted by SFAS
123, Bancshares has elected to disclose the pro forma net income and earnings
per share as if the fair value method had been applied in measuring
compensation cost.
Intangible Assets
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.
29
24
NOTE 2 - REGULATORY RESTRICTIONS
Bancshares and its subsidiary bank are subject to certain requirements imposed
by state and federal banking statutes and regulations.
The Bank is required to maintain a certain weekly average clearing account
balance with the Federal Reserve Bank of Richmond. The required weekly average
clearing account balance for the years ended December 31, 1998 and 1997 was
$18,025,000. 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, 1998, the Bank had available retained
earnings of $47,950,367 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, 1998, the Bank
owned $2,168,900 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, 1998, 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 has changed Bancshares' or the Bank's
well capitalized status. Management believes that Bancshares and the Bank meet
all capital adequacy requirements to which they are subject.
The Bank's capital amounts and ratios approximate Bancshares' capital amounts
and ratios that are summarized as follows (In thousands):
Minimum Ratios
--------------
For
Capital Amount Ratio Capital To Be
-------------- ----- Adequacy Well
1998 1997 1998 1997 Purposes Capitalized(*)
---- ---- ---- ---- -------- --------------
Total capital
To risk-weighted
assets ......... $76,762 $70,754 18.13% 19.22% 8.00% 10.00%
Tier 1 capital
To risk-weighted
assets ......... 71,714 66,153 16.94 17.97 4.00 6.00
Tier 1 capital
To average
assets ......... 71,714 66,153 11.15 11.33 3.00 5.00
(*)under Prompt Corrective Action provisions
NOTE 3 - INVESTMENT SECURITIES
The valuations of investment securities as of December 31, 1998 and 1997 were as
follows (In thousands):
1998 - Securities Held to Maturity
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
US Treasury and
other US government
agency obligations .......... $24,120 $ 55 $133 $24,042
State, county and
municipal securities ........ 35,787 1,663 106 37,344
------- ------ ---- -------
Total ....................... $59,907 $1,718 $239 $61,386
======= ====== ==== =======
1998 - Securities Available for Sale
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
US Treasury and
other US government
agency obligations ....... $79,106 $1,095 $51 $80,150
State, county and
municipal securities ..... 855 49 0 904
Mortgage backed
securities ............... 716 0 3 713
Equity securities ......... 2,169 0 0 2,169
------- ------ --- -------
Total .................... $82,846 $1,144 $54 $83,936
======= ====== === =======
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 Available for Sale
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
======= ====== === =======
The following is a maturity schedule of investment securities at December 31,
1998 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 ............ $ 6,868 $ 6,894 $ 6,859 $ 6,915
Due after one year
through five years . 27,846 28,162 72,247 73,235
Due after five years
through ten years .. 12,234 12,979 411 432
Due after ten years . 12,959 13,351 444 472
------- ------- ------- -------
Total debt securities 59,907 61,386 79,961 81,054
Mortgage backed
securities ......... 0 0 716 713
Equity securities ... 0 0 2,169 2,169
------- ------- ------- -------
Total securities ... $59,907 $61,386 $82,846 $83,936
======= ======= ======= =======
Lexington State Bank owned stock in the Federal Home Loan Bank of Atlanta with
book and market values of $2,168,900 at December 31, 1998 and 1997. This stock
is included in equity securities and classified as available for sale.
30
25
A recap of the sales and maturities of held to maturity securities follows (In
thousands):
Years Ended December 31
1998 1997 1996
---- ---- ----
Proceeds from sales and
maturities ........... $20,005 $ 17,408 $18,898
Gross realized gains .. 0 0 0
Gross realized losses . 0 (40) 0
In 1997, 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 Bank's 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
1998 1997 1996
----- ---- ----
Proceeds from sales and
maturities ........... $32,311 $ 24,043 $ 34,111
Gross realized gains .. 0 24 17
Gross realized losses . 0 (100) (54)
In 1997, 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. Cost of the securities was determined using the
specific identification method.
Investment securities with amortized costs of $93,681,039 and $82,029,438 and
market values of $95,860,966 and $83,230,080 as of December 31, 1998 and 1997,
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
1998 1997
---- ----
Commercial, financial, and agricultural $144,955 $132,181
Real estate-construction .............. 19,131 12,978
Real estate-mortgage .................. 206,068 185,384
Installment loans to individuals ...... 62,747 62,909
Lease financing ....................... 978 792
Other ................................. 2,135 2,747
-------- --------
Total loans, net of unearned income ... $436,014 $396,991
======== ========
Nonperforming assets are summarized as follows (In thousands):
December 31
1998 1997
---- ----
Nonaccrual loans ...................... $ 0 $ 127
Restructured loans .................... 232 502
Loans past due 90 days or more ........ 759 334
-------- --------
Total nonperforming loans ............ 991 963
Foreclosed real estate ................ 921 1,192
-------- --------
Total nonperforming assets ........... $ 1,912 $ 2,155
======== ========
Impaired loans and related information are summarized in the following two
tables (In thousands):
December 31
1998 1997 1996
---- ---- ----
Loans specifically identified
as impaired ....................... $4,174 $2,570 $3,103
====== ====== ======
Allowance for loan losses
associated with impaired loan ..... $ 620 $ 329 $ 565
====== ====== ======
Years Ended December 31
1998 1997 1996
---- ---- ----
Average balances of impaired
loans for the years .............. $3,644 $2,702 $4,127
====== ====== ======
Interest income recorded for
impaired loans ................... $ 362 $ 283 $ 418
====== ====== ======
An analysis of the changes in the reserve for loan losses follows (In
thousands):
Years Ended December 31
1998 1997 1996
---- ---- ----
Balances at beginning of years ...... $ 4,601 $ 4,075 $ 3,711
Provision for loan losses ........... 770 785 805
Recoveries of amounts previously
charged off ........................ 128 592 131
Loans charged off ................... (451) (851) (572)
------- ------- -------
Balances at end of years ............ $ 5,048 $ 4,601 $ 4,075
======= ======= =======
Bancshares' policy for impaired loan accounting subjects all loans to impairment
recognition except for large groups of smaller balance homogeneous loans such as
credit card, residential mortgage and consumer loans. Bancshares generally
considers loans 90 days or more past due and all nonaccrual loans to be
impaired.
At December 31, 1998, Bancshares had no significant commitments to
loan additional funds to the borrowers of impaired loans.
NOTE 5 - PREMISES AND EQUIPMENT
Following is a summary of premises and equipment (In thousands):
December 31
1998 1997
---- ----
Land ............................. $ 2,059 $ 2,046
Buildings ........................ 8,222 8,301
Equipment ........................ 8,871 8,242
Other ............................ 14 13
Leasehold improvements ........... 696 389
------- -------
Total costs ...................... 19,862 18,991
Less, accumulated depreciation and
amortization .................... 8,334 7,730
------- -------
Total ........................... $11,528 $11,261
======= =======
NOTE 6 - TIME DEPOSITS AND SHORT-TERM
BORROWED FUNDS
At December 31, 1998, the scheduled maturities of time deposits are as follows
(In thousands):
Year Amount
---- ------
1999 $166,505
2000 18,820
2001 15,649
2002 223
2003 and After 6,948
--------
$208,145
========
Short-term borrowed funds outstanding consisted of securities sold under
agreements to repurchase. These short-term borrowings by the subsidiary bank are
collateralized by U.S. Treasury and other U.S. Government agency obligations
with amortized cost of $13,515,103 and market value of $13,677,738 at December
31, 1998. The securities collateralizing the short-term borrowings have been
delivered to a third party custodian for safekeeping. The
31
26
following table presents certain information for securities sold under
agreements to repurchase (In thousands):
1998 1997 1996
---- ---- ----
Balance at December 31 .......... $5,537 $8,263 $6,109
Average daily balance outstanding
during the year ................ 6,027 5,637 3,269
Average interest rate paid during
the year ....................... 3.88% 4.15% 5.14%
NOTE 7 - BORROWINGS
The Bank has a $60,000,000 secured credit availability with the Federal Home
Loan Bank. At December 31, 1998 and 1997, the outstanding balances under this
arrangement were $28,841,667 and $33,758,333, respectively. For 1998 and 1997,
the effective interest rates incurred were 5.51% and 5.99%, respectively.
Maturities are as follows (In thousands):
Year Amount
---- ------
1999 $ 3,692
2000 2,700
2001 2,150
2002 300
2003 and later 20,000
--------
$ 28,842
========
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 management's credit evaluation. Collateral held varies but
may include accounts receivable, inventory, property and equipment, and
income-producing commercial properties. Unfunded commitments to extend credit
were $55,515,000 at December 31, 1998.
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 $2,896,000
at December 31, 1998.
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 $32,754,753 in excess of Federal Deposit Insurance limits
and has federal funds sold of $20,595,000.
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
1998 1997 1996
---- ---- ----
Other operating income:
Bankcard income ................... $ 878 $ 559 $ 376
Fee income ........................ 724 576 414
Financial services commissions .... 821 457 311
Insurance commissions ............. 286 263 248
Trust income ...................... 499 443 408
Other income ...................... 333 387 299
------ ------ ------
$3,541 $2,685 $2,056
====== ====== ======
Other operating expenses:
Advertising ....................... $ 358 $ 361 $ 207
Automated services ................ 1,459 1,326 1,115
Bankcard expense .................. 703 447 295
FDIC assessments .................. 61 61 8
Legal and professional fees ....... 1,034 727 701
Postage ........................... 496 462 379
Stationery, printing and supplies . 699 694 628
Other expenses .................... 2,524 2,059 1,711
------ ------ ------
$7,334 $6,137 $5,044
====== ====== ======
NOTE 10 - INCOME TAXES
The components of income tax expense (benefits) are as follows (In thousands):
Years Ended December 31
1998 1997 1996
---- ---- ----
Current ................. $ 4,139 $ 3,451 $ 2,688
------- ------- -------
Deferred:
Reserve for loan losses 209 279 222
Depreciation ........... (21) 35 (51)
Pension ................ (106) (52) 13
Deferred compensation .. 15 99 193
Net operating loss carry
forwards .............. (59) (192) (192)
Deferred income ........ (240) (331) (30)
Other .................. 22 47 (125)
------- ------- -------
Subtotal ............... (180) (115) 30
------- ------- -------
Total ................. $ 3,959 $ 3,336 $ 2,718
======= ======= =======
A reconciliation of the federal statutory tax rate to the effective federal tax
rate follows:
Years Ended December 31
1998 1997 1996
---- ---- ----
Federal statutory tax rate 34.0% 34.0% 34.0%
Tax exempt interest income (5.8) (6.8) (6.8)
Disallowed interest expense .6 .7 .7
Other ..................... 2.5 5.1 .5
---- ---- ----
Effective federal tax rate 31.3% 33.0% 28.4%
==== ==== ====
32
27
The components of the net deferred tax asset follow (In thousands):
December 31
1998 1997
------- -------
Unrealized gain on securities
available for sale ............. $ (424) $ (111)
Reserve for loan losses ......... 1,646 1,437
Depreciation .................... (464) (443)
Pension ......................... (193) (87)
Deferred compensation ........... 457 442
Net operating loss carry forwards 0 59
Deferred income ................. (744) (504)
Other ........................... 119 97
------- -------
Subtotal ........................ 397 890
Valuation allowance ............. 0 0
-------- -------
Total .......................... $ 397 $ 890
======= =======
NOTE 11 - RELATED PARTY TRANSACTIONS
The Bank had loans outstanding to executive officers and Directors and their
affiliated companies of approximately $7,024,000 and $7,726,000 at December 31,
1998 and 1997, respectively.
An analysis of the activity with respect to such aggregate loans to related
parties is as follows (In thousands):
Balance at January 1, 1998 .................. $ 7,726
New loans during the year ................... 1,595
Repayments during the year .................. (2,297)
-------
Balance at December 31, 1998 ................ $ 7,024
=======
NOTE 12 - MORTGAGE SERVICING RIGHTS
Bancshares accounts for mortgage servicing rights under Statement of 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
1998 1997 1996
-------- ------- -------
Balances at beginning of years $ 195 $ 102 $ 0
Mortgage servicing rights originated 196 136 119
Amortization of rights (86) (43) (17)
-------- ------- -------
Balances at end of years $ 305 $ 195 $ 102
======== ======= =======
Total loans serviced at end of years $ 73,955 $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, 1998. The fair value
of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties.
The estimated fair values of Bancshares' financial instruments are as follows
(In thousands):
December 31
1998 1997
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Financial assets:
Cash and short
term investments .... $ 83,749 $ 83,749 $ 97,835 $ 97,835
Investment
securities ......... 143,843 143,152 105,616 103,504
Loans ................ 436,014 428,335 396,991 398,171
Less reserve for
loan losses ........ (5,048) (4,601)
-------- -------
Net loans ........... 430,966 428,335 392,390 398,171
Financial liabilities:
Deposits ............ 567,327 569,064 503,025 503,384
Securities sold under
agreements to
repurchase ......... 5,537 5,537 8,263 8,266
Borrowings from
Federal Home Loan
Bank ............... 28,842 28,983 33,758 34,155
Unrecognized financial
instruments:
Commitments to
extend credit ...... 0 0 0 0
Standby letters of
credit ............. 8 8 9 9
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
33
28
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
1998, Bancshares recognized $159,982 of costs related to the merger. These costs
include data processing of $40,117, printing cost of $41,115, computer cost of
$3,750 and personnel expense of $75,000.
Certain income information for Bancshares and Old North State Bank prior to
restatement for the pooling of interests is summarized for the year ended
December 31, 1996, as follows (In thousands):
Old North
Bancshares State Bank Total
---------- ---------- -----
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
======= ====== =======
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.
Following are reconciliations of the pension benefit obligation and the value of
plan assets for 1998 and 1997 (In thousands):
December 31
1998 1997
------- -------
Pension Benefit Obligation
- --------------------------
Balance, beginning of year .. $ 4,618 $ 4,089
Service cost ................ 277 153
Interest cost ............... 340 300
Benefits paid to participants (227) (219)
------- -------
Balance, end of year ........ $ 5,008 $ 4,323
======= =======
1998 1997
------- -------
Plan Assets
- -----------
Fair value, beginning of year $ 4,356 $ 3,682
Actual return on assets ..... 472 462
Company contributions ....... 516 431
Benefits paid to participants (227) (219)
------- -------
Fair value, end of year ..... $ 5,117 $ 4,356
======= =======
Net pension cost consisted of the following components (In thousands):
Years Ended December 31
1998 1997 1996
---- ---- ----
Service cost for benefits
earned during the periods $ 277 $ 153 $ 140
Interest cost on projected
benefit obligation ...... 340 300 279
Return on plan assets .... (346) (288) (250)
Amortization of
unrecognized net assets . (8) (8) (8)
Amortization of prior
service cost ............ (37) (37) (37)
Amortization of
unrecognized loss ....... 30 27 23
----- ----- -----
Net pension cost ......... $ 256 $ 147 $ 147
===== ===== =====
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
1998 1997
---- ----
Actuarial present value of accumulated
benefit obligation, including vested
benefits of $3,599 in 1998, and $3,252
in 1997 .................................. $ 3,705 $ 3,322
======= =======
Actuarial present value of projected
benefit obligation for services
rendered to date ......................... $(5,072) $(4,377)
Plan assets at fair market value, primarily
U.S. government securities, listed
securities and deposits in banks ......... 5,117 4,356
------- -------
Projected benefit obligation in excess of
plan assets .............................. 45 (21)
Unrecognized net assets ................... (23) (30)
Unrecognized prior service cost ........... (209) (209)
Unrecognized net loss ..................... 786 635
------- -------
Prepaid pension cost ...................... $ 599 $ 375
======= =======
To determine the actuarial present value of the projected benefit obligation, a
discount rate of 7.5% was used for 1998, 1997 and 1996. A rate of increase in
future compensation levels of 5.5% was used for 1998, 1997 and 1996. 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 year's service. Participating
employees may contribute a percentage of their compensation to the Plan, with
the Bank and its subsidiaries matching a portion of the employee contribution.
Total expense under this Plan was $173,661, $152,326 and $111,675 for 1998, 1997
and 1996 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 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
1998 1997 1996
---- ---- ----
Service cost ............. $24 $14 $ 20
Interest cost ............ 48 45 60
Amortization of transition
obligation over 20 years 25 24 37
--- --- ----
Net postretirement benefit
cost .................... $97 $83 $117
=== === ====
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
1998 1997
----- -----
Accumulated postretirement benefit
obligation:
Retirees .................................. $(318) $(369)
Currently eligible active plan participants (60) (24)
Other active plan participants ............ (236) (183)
----- -----
Total ..................................... (614) (576)
Unrecognized net loss ..................... 138 124
Unrecognized net transition obligation .... 284 303
----- -----
Accrued postretirement benefit cost ....... $(192) $(149)
===== =====
34
29
The annual assumed rate of increase in health care costs for the plan is 10.0%
and 11.0% for 1998 and 1997, 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 $48,053 and
$41,759 as of December 31, 1998 and 1997, respectively, and the aggregate of the
service and interest cost of the net periodic postretirement benefit cost by
$7,940 and $5,931, respectively. Decreasing the assumed health care cost trend
rates by one percentage point would decrease the accumulated postretirement
benefit obligation for the plan by $42,403 as of December 31, 1998 and the
aggregate of the service and interest costs of the net periodic postretirement
benefit cost by $8,526. The discount rate used in determining the accumulated
postretirement benefit obligation was 8.0% for 1998 and 1997.
NOTE 16 - LEASES
The Bank is obligated under several lease agreements which expire in 1999
through 2010. The leased property is for land and building use. Rental payments
under these leases amounted to $333,650, $331,379 and $332,144 for the years
ended December 31, 1998, 1997 and 1996, respectively.
A summary of noncancelable lease commitments for the Bank follows
(In thousands):
Years Ended December 31 Lease Commitments
----------------------- -----------------
1999 $ 334
2000 317
2001 279
2002 226
2003 and later 1,272
------
$2,428
======
NOTE 17 - CAPITAL STOCK
The preferred stock may be issued by the Board of Directors in one or more
classes or series. The Board of Directors has the authority to determine and
vary the voting rights, designations, preferences, qualifications, privileges,
limitations, options, conversion rights and other special rights of each series,
including, but not limited to, dividend rates and manner of payment,
preferential amounts payable upon voluntary or involuntary liquidation, voting
rights, conversion rights, redemption prices, terms and conditions and sinking
fund and stock purchase prices, terms and conditions.
The common stock represents voting shares, and dividends on the common stock are
paid at the discretion of the Board of Directors.
During 1998, the corporation repurchased 5,000 shares of common stock pursuant
to a share repurchase authorization by the Board of Directors. The share
repurchase authorization was for up to 300,000 shares of common stock.
A Shareholder Rights Plan was adopted by the corporation on February 10, 1998.
Under this Plan, one right was issued for each share of common stock to
shareholders of record on March 10, 1998. As long as the rights are attached to
the common stock, each new share of common stock issued after this date will
also have attached to it one right. Currently, the Rights are not exercisable
but do trade automatically with the common stock shares. The rights will become
exercisable (i) ten business days after a person or group acquires 20% or more
of the corporation's shares; (ii) ten business days after a person or group
announces an offer, the consummation of which would result in such person or
group owning 20% or more of the shares; or (iii) ten business days after the
Board of Directors declares a person or group to be an adverse person (which
may occur when a person or group owns 10% or more of the shares and the Board of
Directors determines that such ownership may have a detrimental effect on the
corporation). Any person who is a part of either of these three events will be
known as an adverse person and all rights that are, or were, beneficially owned
by the adverse person shall be null and void. After the rights become
exercisable, each right may then be exercised to purchase .01 of a share of
common stock at a purchase price per full share of $100. If an adverse person
acquires 25% or more of the corporation's stock or the Board declares a person
to be an adverse person, the rights holder will have the right to receive common
stock having a value equal to two times the exercise price. If the corporation
is acquired by another company at any time after a person or group has acquired
20% or more of the corporation's shares, the rights holder will have the right
to buy a number of shares of common stock of the acquiring company having a
market value of twice the exercise price of each right. The rights will expire
on December 31, 2007, and may be redeemed by the corporation at any time prior
to the acquisition by a person or group of 20% or more of the common stock at a
price of $.01 per right.
At December 31, 1998, Bancshares had five 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
1998 1997 1996
---- ---- ----
Net income As reported $8,680 $6,762 $6,865
(In thousands) Pro forma 8,190 6,479 6,640
Basic earnings As reported 1.00 .78 .80
per share Pro forma .94 .75 .77
Diluted earnings As reported .98 .77 .79
per share Pro forma .92 .73 .76
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 1998, 1997
and 1996, respectfully: dividend yield of 2.54%, 2.40% and 2.40%; expected
volatility of 56.60%, 62.30% and 62.30%; risk-free interest rates of 4.55%,
6.00% and 6.00%; and expected years until exercise of 4.66, 4.63 and 4.63.
Bancshares has a 1986 Qualified Incentive Stock Option Plan which could have
granted 468,750 shares of common stock to its key employees. The exercise price
of each option was the market price of Bancshares' common stock on the date of
the grant. Options vest in equal annual installments on each of the next five
anniversaries of the date of grant and expire ten years from date of grant. At
December 31, 1998, 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 96,731 shares of common stock to key employees of a corporation acquired
by Bancshares. The exercise price of each option was $7.75. All of the options
are fully vested and expire ten years from the date of grant. At December 31,
1998, no additional options are available for grant under the plan.
Bancshares has a 1990 Qualified Incentive Stock Option Plan which could have
granted 79,287 shares of common stock to key employees of a corporation acquired
by Bancshares. The exercise price of each option was $4.65. All of the options
are fully vested and expire ten years from the date of grant. At December 31,
1998, no additional options are available for grant under the plan.
35
30
Bancshares has a 1994 Nonqualified Stock Option Plan which may grant 156,250
shares of common stock to the Directors of Bancshares. The exercise price of
each option is the market price of Bancshares' common stock on the date of
grant. Options vest immediately and expire five years from the date of grant.
Bancshares has a 1996 Qualified Incentive Stock Option Plan which may grant
312,500 shares of common stock to its key employees. The exercise price of each
option is the market price of Bancshares' common stock on the date of grant.
Options vest in equal annual installments on each of the next five anniversaries
of the date of grant and expire ten years from the date of grant.
At December 31, 1998, Bancshares had warrants outstanding to purchase 47,296
shares of its common stock. These warrants were issued to organizers and
founders of a corporation acquired by Bancshares, are immediately exercisable at
$7.75 per share, and expire on April 16, 2000.
The following table summarizes information about outstanding and exercisable
stock options and warrants at December 31, 1998:
WEIGHTED WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICES EXERCISABLE PRICES
------ ----------- --------- --------- ----------- -------
$ 7.168-$ 7.752 145,686 1.86 $ 7.550 145,686 $ 7.550
9.728- 9.728 61,323 4.36 9.728 61,323 9.728
11.520- 11.520 60,545 6.34 11.520 35,533 11.520
12.160- 12.800 75,701 4.72 12.731 61,632 12.716
13.000- 13.000 49,936 6.79 13.000 22,746 13.000
15.200- 15.400 51,873 7.71 15.227 15,623 15.288
20.750- 22.500 60,625 8.75 20.985 8,125 22.500
------- -------
505,689 350,668
======= =======
A summary of the status of Bancshares' stock based compensation plans and
warrants as of December 31, 1998 and 1997 and changes during the years then
ended is presented below:
1998 1997
-------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------ -------- ------- ---------
Outstanding at beginning
of year .......... 507,296 $ 10 521,509 $10
Granted ........... 60,625 21 55,310 15
Exercised ......... (62,232) 8 (59,018) 7
Forfeited ......... (0) (8,005) 13
Expired ........... (0) (2,500) 13
------- -------
Outstanding at end
of year .......... 505,689 12 507,296 10
------- -------
Options exercisable
at end of year ... 350,668 10 346,798 9
======= =======
NOTE 18 - LSB BANCSHARES, INC. (PARENT COMPANY) The parent company's condensed
balance sheets as of December 31, 1998 and 1997, and the related condensed
statements of income and cash flows for the years ended December 31, 1998, 1997
and 1996, are as follows (In thousands):
CONDENSED BALANCE SHEETS
December 31
1998 1997
---- ----
Assets:
Cash ............................... $ 443 $ 238
Investment in wholly-owned
subsidiary ........................ 71,912 66,735
Other assets ....................... 932 806
------- -------
Total assets ...................... $73,287 $67,779
======= =======
Liabilities and Shareholders' equity:
Other liabilities .................. $ 522 $ 426
Shareholders' equity ............... 72,765 67,353
------- -------
Total liabilities and
Shareholders' equity ............. $73,287 $67,779
======= =======
CONDENSED STATEMENTS OF INCOME
Years Ended December 31
1998 1997 1996
---- ---- ----
Dividends from subsidiary $3,672 $2,787 $2,230
------ ------ ------
Professional fees ....... 0 0 10
Other operating expense . 169 131 78
------ ------ ------
169 131 88
------ ------ ------
Income before equity in
earnings of subsidiary . 3,503 2,656 2,142
Equity in earnings
of subsidiary .......... 5,177 4,106 3,697
------ ------ ------
Net income .............. $8,680 $6,762 $5,839
====== ====== ======
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31
1998 1997 1996
---- ---- ----
Cash Flow From Operating
Activities:
Net income ........................ $ 8,680 $ 6,762 $ 5,839
Adjustments to reconcile net income
to net cash provided by operating
activities:
Increase in investment in wholly-
owned subsidiary ................. (5,177) (4,106) (3,697)
------- ------- -------
Net cash provided by operating
activities ....................... 3,503 2,656 2,142
------- ------- -------
Cash Flow From Investing
Activities:
Increase in other assets .......... (126) (112) (57)
------- ------- -------
Cash Flow From Financing
Activities:
Sale of capital stock ............. 408 203 219
Dividends paid .................... (3,676) (2,712) (2,158)
Increase (decrease) in other
liabilities ...................... 96 65 (62)
------- ------- -------
Net cash used by financing
activities ....................... (3,172) (2,444) (2,001)
------- ------- -------
Increase in cash .................. 205 100 84
Cash at beginning of years ........ 238 138 54
------- ------- -------
Cash at end of years .............. $ 443 $ 238 $ 138
======= ======= =======
36
31
ADVISORY BOARD MEMBERS OF LEXINGTON STATE BANK
FORSYTH COUNTY NORTH DAVIDSON PATSY R. MABE
Former Danbury Banker
ANN B. ADAMS JUDY H. HARTMAN
President, The Golden Apple, Inc. Developer; Corporate Secretary, Forsyth J. ELWOOD PRIDDY
Water and Sewer Construction, Inc. Owner, Priddy's Store
J. DAVID BRANCH, M.D.
Opthalmologist THOM C. HEGE RICHARD E. STOVER
Owner, Robana Farms Attorney, Stover Cromer & Bennett
ROBERT C. CLARK
President, Fiber & Textile Services, Inc. RONNIE V. LAUTEN JOHN F. WATTS
Supervisor, R. J. Reynolds Tobacco Owner, Watts Realty, Inc.
Company
NICHOLAS A. DAVES
Senior Vice President & Area Executive- JOHN H. WATTS
Forsyth & Stokes Counties, Lexington JAMES H. MCALPINE Retired General Superintendent,
State Bank Owner, Midway General Store A. Watts, Inc. (general contractor)
PATRICIA S. PATTERSON
EUNICE M. DUDLEY Secretary-Treasurer, Patterson Textiles
Chief Financial Officer, Dudley
Products, Inc.
A. N. SMITH THOMASVILLE
Owner, A. N. Smith and Sons Building
DAVID W. GOOGE Company RICK T. BATTEN
Owner, Googe Financial Services President, Black Lumber Company
HERBERT A. SNYDER
GLEN D. HART Owner, Snyder's Fuel Oil Service; Part- HOLLIS S. BLAIR
Owner, Hart Properties Owner, Snyder, Snyder and Associates President, Elliot Florist & Greenhouse,
Inc.
DONALD G. HAVER GREGG W. STABLER
Retired Vice President-Community Manager, Davidson Water, Inc.
Affairs, R. J. Reynolds Tobacco Company JOE W. CARROLL
Senior Vice President & City Executive-
Thomasville, Lexington State Bank
LEWIS E. HUBBARD, SR.
President, Hubbard Realty of STOKES COUNTY
Winston-Salem, Inc. JOSEPH R. HEDGPETH, M.D.
JAMES R. BURROW Physician, Thomasville Ob-Gyn
Owner, James R. Burrow Surveying and Associates, P. A.
CALVERT B. JEFFERS, JR., DVM Mapping Company
Veterinarian, Boulevard Animal Hospital
JAMES E. HUNTER, M.D.
LEWIS N. CARROLL Physician, Thomasville Medical
SANDRA K. MITCHELL Owner, Carroll Signs & Advertising Associates, Inc.
President, Utility Auditing, Inc.
W. FRANK FOWLER, DDS HUBERT M. LEONARD
DALE R. PINILIS Retired Dentist Major General, U.S. Army (Retired)
President, Winston-Salem Speedway, Inc.
EUGENE A. LYONS KEVIN C. YATES
ROBERT S. SIMON Retired Principal, North Stokes H.S.; President, Carolina Veneer of
President, Windsor Jewelers, Inc. Stokes County Commissioner Thomasville, Inc.
43
32
OFFICERS OF LSB BANCSHARES, INC.
ROBERT F. LOWE H. FRANKLIN SHERRON, JR. MONTY J. OLIVER ROBIN A. HUNEYCUTT
Chairman, President Vice President Secretary & Treasurer Assistant Secretary
& Chief
Executive Officer
OFFICERS OF LEXINGTON STATE BANK
ROBERT F. LOWE LYNN B. COLLINS KEARNEY H. ANDREWS KIMBERLY M. WEHRLE
Chairman, President Vice President, Operations Assistant Vice President, Assistant Vice President
& Chief Marketing & Assistant Secretary
Executive Officer DONNA G. HENCH
Vice President & Auditor DEBBIE C. FANARY MARTHA Y. LEONARD
H. FRANKLIN SHERRON, JR. Assistant Vice President, Banking Officer
Executive Vice President BRENDA M. HOUSER Mortgage Loans
Vice President SALLY C. THOMASON
MONTY J. OLIVER & Trust Officer JEAN P. GOOCH Banking Officer
Executive Vice President Assistant Vice President,
& Cashier ROBIN A. HUNEYCUTT Corporate Accounting TENA C. YOUNTZ
Vice President & Secretary Banking Officer
RONALD E. COLEMAN R. CARLTON JONES, JR.
Senior Vice President, P. WAYNE KIMBRELL, JR. Assistant Vice President, JACQUELINE K. AURICH
Commercial Loans Vice President, Revolving Commercial Loans Assistant Marketing
& Consumer Credit Officer
R. CLARK DILLON SHERRILL B. JONES
Senior Vice President PAMELA S. LAWSON Assistant Vice President, THOMAS J. BEIGHLEY
& Trust Officer Vice President Operations Assistant Auditor
& Assistant Auditor
CHARLES N. REYNOLDS JOHN R. CRANOR
Senior Vice President, E. WARREN MACKINSTRY BARBARA C. KESLER Information Systems
Credit Administration Vice President, Assistant Vice President, Officer
Commercial Loans Staff Development
D. GERALD SINK KATHY L. JOHNSON
Senior Vice President, KATHY V. RICHARDSON KATHRYN C. OAKLEY Assistant Secretary
Operations Vice President & Assistant Vice President,
Branch Administrator Human Resources TEDDY L. JONES
RONALD W. SINK Assistant Secretary
Senior Vice President, W. EARL SNIPES REBECCA JO PEOPLES
Human Resources Vice President, Assistant Vice President CATHY B. MARION
Commercial Loans & Assistant Human Resource &
H. KENT BECK Branch Administrator Assistant Security
Vice President, JAMES J. TOBIN Officer
Mortgage Loans Vice President, SHIRLEY V. PUTNAM
Commercial Loans Assistant Vice President, ROCKY S. TAYLOR
CORETTA J. BIGELOW Mortgage Operations Security Officer &
Vice President, STEPHEN V. WEEKS Loan Recovery Officer
Credit Administration Vice President,
Consumer Loans REBEKAH C. TUCKER
CRAIG L. CALL Assistant Vice President,
Vice President, JACQUES S. YOUNGBLOOD Consumer Loans
Corporate Accounting Vice President,
Information Systems JOSEPH T. WALLACE
TED A. CARTER Assistant Vice President
Vice President, & Compliance Officer
Mortgage Loans
OFFICES OF LEXINGTON STATE BANK AND SUBSIDIARIES
DAVIDSON COUNTY: TALBERT BOULEVARD RUBY D. MORRIS WANDA S. MERSCHEL
ARCADIA OFFICE OFFICE Consumer Loan Officer Vice President &
JANET B. YATES LEWIS N. TERRELL Secretary
Assistant Vice Assistant Vice President WEST SIDE OFFICE Assistant
President SHEILA S. DANIELS C. FRANK GAMBLE
THOMASVILLE Banking Officer Vice President,
SHARON C. PIERCE NATIONAL HIGHWAY OFFICE Mortgage Loans
Branch Officer JOE W. CARROLL BETTY R. HARTMAN
Senior Vice President FORSYTH COUNTY: Assistant Vice President
CENTER STREET OFFICE & City Executive, KERNERSVILLE OFFICE
TERESA A. GREGG Thomasville Offices DEBORAH S. COOK STOKES COUNTY:
Banking Officer JOYCE A. OVERSTREET Vice President DANBURY OFFICE
Banking Officer, ARTHUR A. SMITH
LEXINGTON LOAN CENTER Mortgage Loans RURAL HALL OFFICE Assistant Vice President
JIM D. THOMASON LOLA R. FRY
Vice President THOMASVILLE Assistant Vice President KING OFFICE
TAMARA M. HUNT PIEDMONT RETIREMENT ROBIN S. THOMAS R. STANLEY SOUTHERN
Assistant Secretary CENTER OFFICE Assistant Branch Officer Vice President
DAVIDA L. BECK & City Executive
MIDWAY OFFICE Office Manager WALKERTOWN OFFICE KENT L. TEAGUE
EDWARD A. POTTS, JR. PAMELA B. TUTTLE Vice President,
Vice President, THOMASVILLE Banking Officer Commercial Loans
Mortgage Loans RANDOLPH STREET OFFICE WADE N. GENTRY
WENDY L. NORRIS E. BROOKS NASH, JR. WINSTON-SALEM Assistant Vice President
Assistant Vice President Vice President, SHERWOOD PLAZA OFFICE CARLA W. HOOKER
Commercial Loans LINDA H. MAYNARD Assistant Vice President
NORTH LEXINGTON OFFICE DAREN C. FULLER Assistant Vice President
PATTIE S. BAYLIFF Assistant Vice President LSB FINANCIAL
Banking Officer WINSTON-SALEM SERVICES, INC.
WALLBURG OFFICE STRATFORD ROAD OFFICE PATRICIA A. ROZANSKI
SOUTH LEXINGTON OFFICE THOMAS B. PHELPS NICHOLAS A. DAVES Vice President
NANCY S. SEAFORD Assistant Vice President Senior Vice President & Program Manager
Assistant Vice President ANN B. WARREN & Area Executive,
RANDALL C. BULLIN Assistant Branch Officer Forsyth & Stokes Counties
Assistant Branch Officer, SUZANNE J. BULLOTTA PEOPLES FINANCE COMPANY
Mortgage Loans WELCOME OFFICE Senior Vice President, OF LEXINGTON, INC.
MARY SUE STALLINGS Commercial Loans KEITH O. FRAZIER
SOUTH MAIN STREET Vice President DENICE C. ALLEN Vice President
OFFICE DEBBIE W. KEPLEY Vice President, DANNY G. SPURRIER
CATHY F. WILKERSON Assistant Branch Officer, Commercial Loans Branch Officer
Banking Officer Mortgage Loans
44
33
DIVIDEND REINVESTMENT
Registered holders of LSB Bancshares, Inc. common stock are eligible to
participate in the Corporation's Dividend Reinvestment and Stock Purchase Plan,
a convenient and economical way to acquire additional shares of Bancshares
common stock by reinvesting dividends without the payment of service charges or
brokerage fees. For further information, contact Bancshares' Corporate Office.
STOCK LISTING (LXBK)
The common stock of LSB Bancshares, Inc. is traded on the Nasdaq National
Market(R) and is quoted electronically through the National Association of
Securities Dealers Automated Quotations System (NASDAQ/NMS) under the symbol
LXBK.
TRANSFER AGENT AND REGISTRAR
Wachovia Shareholder Services
Boston EquiServ, L.P.
Post Office Box 8217
Boston, Massachusetts 02266-8217
800/633-4236
FINANCIAL INQUIRIES
Analysts and investors seeking financial information about LSB Bancshares, Inc.
should contact Monty J. Oliver, Executive Vice President, at the address or
telephone number listed on the back cover.
Shareholders needing information concerning transfer requirements, lost
certificates and changes of address should contact Bancshares' transfer agent or
Bancshares' Corporate Office.
EQUAL OPPORTUNITY EMPLOYER
LSB Bancshares, Inc. is an equal opportunity employer. All matters regarding
recruiting, hiring, training, compensation, benefits, promotions, transfers and
all other personnel policies will remain free from discriminatory practices.
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
1998 High Low Close Declared
- ----------------------------------------------------------------------
First Quarter ....... $24.40 $19.20 $22.00 .10
Second Quarter ...... 22.75 19.50 19.50 .10
Third Quarter ....... 20.75 15.50 17.00 .10
Fourth Quarter ...... 19.50 15.62 19.25 .12
1997
- ----------------------------------------------------------------------
First Quarter ....... $16.60 $14.40 $16.00 .088
Second Quarter ...... 16.80 15.20 15.80 .088
Third Quarter ....... 17.20 15.60 16.40 .088
Fourth Quarter ...... 24.80 17.00 20.80 .088
The following firms make a market in LSB Bancshares' common stock:
Robinson Humphrey Co., Inc.
Interstate/Johnson Lane Cp
Wheat First Securities, Inc.
Scott & Stringfellow, Inc.
Morgan Keegan & Co., Inc.
BT Alex. Brown, Inc.
Legg Mason Wood Walker, Inc.
ANNUAL MEETING
The Annual Meeting of Shareholders of LSB Bancshares, Inc. will be held at 1:00
p.m., Wednesday, April 21, 1999 at the J. Smith Young YMCA located at 119 West
Third Avenue, Lexington. All shareholders are cordially invited to attend.
ANNUAL DISCLOSURE STATEMENT
This statement has not been reviewed for accuracy or relevance by the Federal
Deposit Insurance Corporation.
45
34
LSB BANCSHARES, INC. &
LSB CORPORATE OFFICE:
- ---------------------
One LSB Plaza/38 West First Avenue
P.O. Box 867
Lexington, NC27293-0867
336/248-6500
www.lsbbancshares.com
LSB OFFICES & SUBSIDIARIES:
- --------------------------
Davidson County...
Arcadia(*)
3500 Old Salisbury Road
Center Street(*)
27 West Center Street
Lexington Loan Center
300 East Center Street
Midway(*)
11492 Old U.S. Highway 52
National Highway(*)
724 National Highway, Thomasville
North Lexington
1109 Winston Road
Piedmont Retirement Center
100 Hedrick Drive, Thomasville
Randolph Street(*)
941 Randolph Street, Thomasville
South Lexington(*)
926 Cotton Grove Road
South Main Street
701 South Main Street
Talbert Boulevard(*) [PHOTO: People Standing]
285 Talbert Boulevard
Wallburg(*)
10335 North N.C. Highway 109
Welcome(*)
6123 Old U.S. Highway 52
West Side(*)
60 New U.S. Highway 64 West
Forsyth County...
Kernersville(*)
131 East Mountain Street
Rural Hall(*)
8055 Broad Street
Sherwood Plaza(*)
3384 Robinhood Road, Winston-Salem
Stratford Road(*)
161 S. Stratford Road, Winston-Salem
Walkertown(*)
3000 Old Hollow Road
Stokes County...
Danbury(*)
Highways 8 & 89, Old Walnut Cove Road
King(*)
647 S. Main Street
(*) ATM available at this location.
LSB Financial Services
29 West Center Street
Peoples Finance Company
203 E. Center Street
LSC01-AR-99
35
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
LSB BANCSHARES, INC.
Date: February 9, 1999 By /s/ Robert F. Lowe
----------------------------------
Robert F. Lowe, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Capacity Date
- --------- -------- ----
/s/ Robert F. Lowe President and Director February 9, 1999
- --------------------------- (Principal Executive Officer)
Robert F. Lowe
/s/ Monty J. Oliver Secretary and Treasurer February 9, 1999
- --------------------------- (Principal Financial Officer)
Monty J. Oliver
/s/ Michael S. Albert Director February 9, 1999
- ---------------------------
Michael S. Albert
/s/ Peggy B. Barnhardt Director February 9, 1999
- ---------------------------
Peggy B. Barnhardt
/s/ Leonard H. Beck Director February 9, 1999
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Leonard H. Beck
/s/ Director February 9, 1999
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Marvin D. Gentry
/s/ Samuel R. Harris Director February 9, 1999
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Samuel R. Harris
/s/ Walter A. Hill, Sr. Director February 9, 1999
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Walter A. Hill, Sr.
/s/ Sue H. Hunter Director February 9, 1999
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Sue H . Hunter
/s/ Davis A. Smith Director February 9, 1999
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Davis A. Smith
/s/ Robert B. Smith, Jr. Director February 9, 1999
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Robert B. Smith, Jr.
/s/ Burr W. Sullivan Director February 9, 1999
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Burr W. Sullivan
/s/ Roberts E. Timberlake Director February 9, 1999
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Roberts E. Timberlake
/s/ Lloyd G. Walter, Jr. Director February 9, 1999
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Lloyd G. Walter, Jr.
/s/ Julius S. Young, Jr. Director February 9, 1999
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Julius S. Young, Jr.