<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 29549
FORM 10-K/A
----------------------------------------------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
Commission File Number 0-11448
----------------------------------------------------
LSB BANCSHARES, INC.
One LSB Plaza
Lexington, North Carolina 27292
(910)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, 1997 was
$102,667,241 and the number of shares outstanding was 5,403,539.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the year
ended December 31, 1996 are incorporated by reference into Parts I and II of
this report. Portions of the registrant's Proxy Statement for the Annual Meeting
of Stockholders to be held April 16, 1997 are incorporated by reference in Part
III of this report.
<PAGE> 2
FORM 10-K CROSS-REFERENCE INDEX
...........................................................
This 1996 Annual Report and Form 10-K of the registrant incorporates into a
single document the 1996 Annual Report to Shareholders and the Annual Report on
Form 10-K for the year ended December 31, 1996 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 1997 Annual Meeting
of Shareholders as is reflected in the following Cross-Reference Index.
<TABLE>
<CAPTION>
INCORPORATED BY REFERENCE INTO THE FOLLOWING ITEMS INFORMATION APPEARING ON THE
OF FORM 10-K FOLLOWING PAGES OF THE:
- --------------------------------------------------------- -------------------------------
ANNUAL REPORT PROXY STATEMENT
PART 1
<S> <C> <C> <C>
Item 1. Business........................................................ 10, 13-23......................
Item 2. Properties...................................................... 10, 32 (Note 8)................
Item 3. Legal Proceedings............................................... 32, 33 (Note 9)................
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..................................... 43.............................
Item 6. Selected Financial Data......................................... 11.............................
Item 7. Management's Discussion and Analysis of Operations and
Financial Condition............................................. 13-23..........................
Item 8. Financial Statements and Supplementary Data..................... 23-35..........................
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.............. 40, 41.....................2, 3
Item 11. Executive Compensation.......................................... ..........................6 - 9
Item 12. Security Ownership of Certain Beneficial Owners and Management.. ...........................3, 4
Item 13. Certain Relationships and Related Transactions.................. .............................12
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................... 36.............................
Consolidated Balance Sheets - December 31, 1996
and 1995............................................... 24.............................
Conlidated Statements of Income - Years Ended
December 31, 1996, 1995 and 1994..................... 25.............................
Consolidated Statements of Changes in Shareholders' Equity
- Years Ended December 1996, 1995 and 1994............ 26.............................
Consolidated Statements of Cash Flows - Years Ended
December 31, 1996, 1995 and 1994..................... 27.............................
Notes to Consolidated Financial Statements............ 28 - 35........................
(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 of
Form S-8 filed with the Securities and Exchange
Commission on November 17, 1992 (file No. 33-54610).
</TABLE>
<PAGE> 3
FORM 10-K CROSS-REFERENCE INDEX (CONT'D)
.............................................
<TABLE>
<CAPTION>
INCORPORATED BY REFERENCE INTO THE FOLLOWING ITEMS
OF FORM 10-K
- ------------------------------------------------------------------------------------
<S> <C>
PART IV
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.
4 Specimen certificate of common stock, $5.00 par value, which is
incorporated by reference to Exhibit 4 of the registrant's
Registration Statement on Form S-1 (File No. 2-99312).
10.1 1986 Employee Incentive Stock Option Plan of LSB
Bancshares, Inc., as amended, which is incorporated by
reference to the registrant's Registration Statement on Form
S-8 filed with the Securities and Exchange Commission on
November 17, 1992 (File No. 33-54610).
10.2 1996 Omnibus Stock Incentive Plan, which is incorporated
by reference to Exhibit 10.2 of the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1995.
10.3 1996 Management Plan, which is incorporated by reference
to Exhibit 10.3 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1995.
10.4 Employment Continuity Agreement effective as of July 9,
1996 between LSB Bancshares, Inc. and Robert F. Lowe, which is
incorporated by reference to the registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996.
10.5 Employment Continuity Agreement effective as of July 9,
1996 between LSB Bancshares, Inc. and H. Franklin Sherron,
Jr., which is incorporated by reference to the registrant's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1996.
10.6 Employment Continuity Agreement effective as of July 9,
1996 between LSB Bancshares, Inc. and Monty J. Oliver, which
is incorporated by reference to the registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996.
Exhibits 10.1 through 10.6 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).
21 List of Subsidiaries at December 31, 1996.
23 Consent of Turlington and Company, L.L.P.
27 Financial Data Schedule (for SEC use only).
</TABLE>
(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.
<PAGE> 4
SIGNATURES
............
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 2nd day of
July, 1997.
LSB BANCSHARES, INC.
.......................
Registrant
Robert F. Lowe
Chairman, President and Chief Executive Officer
Pursuant to the requirements by the Securities Exchange Act of 1934, this report
has been signed on July 2, 1997 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 41.
EXECUTIVE OFFICERS OF THE REGISTRANT
........................................
Robert F. Lowe (54) Chairman, President and Chief Executive Officer and a
Director of Bancshares and the Bank. Prior to becoming President on January 1,
1984, Mr. Lowe had served as Executive Vice President of Bancshares and of the
Bank. Mr. Lowe joined the Bank in 1970 and was elected Vice President in 1973.
He was elected Senior Vice President in 1980 and Executive Vice President in
1982. In 1983, he was elected a Director. Mr. Lowe is also President of Peoples
Finance Company of Lexington, Inc., which is a subsidiary of the Bank and
President and a director of LSB Financial Services, Inc., a subsidiary of the
Bank.
H. Franklin Sherron, Jr. (41) Vice President and Assistant Secretary of
Bancshares joined the Bank in 1990 as Senior Vice President. He was elected
Executive Vice President of the Bank in 1996. Prior to joining the Bank, Mr.
Sherron served as President of J. J. Barnes, Inc., a mechanical contracting
firm, from 1981 to 1990. From 1977 to 1981, he served as Assistant Cashier with
Peoples Bank & Trust Company.
Monty J. Oliver (55) Secretary and Treasurer of Bancshares joined the Bank as
Vice President in 1978, with 13 years of banking experience. He was elected
Cashier of the Bank in 1980 and Vice President and Treasurer of Bancshares in
1983. In 1986, he was elected Senior Vice President of the Bank and in 1996
elected Executive Vice President.
<PAGE> 5
1996 DIRECTORS OF LSB BANCSHARES, INC. AND LEXINGTON STATE BANK
.......................................................................
[PHOTO]
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: Clifford A. Erickson, Emeritus; L. Ardell
Lanier, Emeritus; Peggy B. Barnhardt; Samuel R. Harris; Walter A. Hill, Sr.;
Michael S. Albert; L. Klynt Ripple, Emeritus; Archie M. Sink, Emeritus; J. Smith
Young, Emeritus; Roberts E. Timberlake; Russell J. Gabrielson, Emeritus;
Margaret Lee W. Crowell; Haynes F. Sherron, Emeritus (deceased); A. Lonnie
Davis, Emeritus; Archie L. Hodges, Emeritus and; Leonard H. Beck.
(Not Present; Dothan D. Reece, Emeritus.)
MICHAEL S. ALBERT
President, CEO and Director of Billings Freight Systems, Inc.; Treasurer of
Cargo Carriers, Inc.; Assistant Finance Manager of Metro Motor Express, Inc.
PEGGY B. BARNHARDT
Retired since 1996; formerly Deputy Superintendent, Davidson County Schools
LEONARD H. BECK
President, Green Printing Company; Director of the National Association of
Printers and Lithographers
MARGARET LEE W. CROWELL
Retired since 1986; formerly Finance Officer of Lexington City Schools
SAMUEL R. HARRIS
Physician; Director and Treasurer,
Lexington Clinic for Women, P.A.
WALTER A. HILL, SR.
President, Hill Oil Company, Inc.;
Vice President and Secretary, NorthCo, Inc. (construction development)
ROBERT F. LOWE
Chairman, President and CEO of Bancshares, the Bank and Peoples Finance Company
of Lexington, Inc., a subsidiary of the Bank; President and a director of LSB
Financial Services, Inc., a subsidiary of the Bank.
DAVID A. SMITH
Owner, Red Acres Dairy Farm
ROBERT B. SMITH, JR.
Attorney
BURR W. SULLIVAN
President, Dorsett Printing and Lithographic Corporation
ROBERTS E. TIMBERLAKE
Artist/Designer; President, The Bob Timberlake Gallery, Inc.
(art gallery and distributorship);
President, The Land Company (real estate);
Secretary/Treasurer, The Bob Timberlake Collection
(gallery, art, furniture and accessories)
JULIUS S. YOUNG, JR.
President, Jay Young Management, Inc.
DIRECTORS EMERITI
A. LONNIE DAVIS
CLIFFORD A. ERICKSON
RUSSELL J. GABRIELSON
ARCHIE L. HODGES
L. ARDELL LANIER
DOTHAN D. REECE
L. KLYNT RIPPLE
ARCHIE M. SINK
J. SMITH YOUNG
<PAGE> 6
DESCRIPTION OF BUSINESS
.........................
REGISTRANT
LSB Bancshares, Inc.("Bancshares'") is a bank holding company headquartered in
Lexington, North Carolina and registered under the Bank Holding Company Act of
1956, as amended. Bancshares' principal business is providing banking and other
financial services through its banking subsidiary. It was incorporated on July
1, 1983. Bancshares is the parent holding company of Lexington State Bank
("LSB"), a North Carolina-chartered commercial bank. The principal assets of
Bancshares are all of the outstanding shares of common stock of LSB. At December
31, 1996, Bancshares and its subsidiary had consolidated assets of $421 million
and 239 full-time equivalent employees.
SUBSIDIARY BANK
LSB is chartered under the laws of the state of North Carolina to engage in
general banking business. Founded in 1949, LSB offers a complete array of
services in the commercial banking, savings and trust fields through 14 offices
in six communities located in Davidson County, North Carolina. LSB provides a
full range of financial services including the acceptance of deposits, corporate
cash management, discount brokerage, IRA plans, secured and unsecured loans and
trust functions. LSB operates the only independent trust department in Davidson
County, providing estate planning, estate and trust administration, IRA trusts,
personal investment accounts and pension and profit-sharing trusts.
NON-BANK SUBSIDIARIES
LSB has two wholly-owned non-bank subsidiaries: Peoples Finance Company of
Lexington, Inc. ("Peoples Finance") and LSB Financial Services, Inc. ("LSB
Financial Services"). Peoples Finance was acquired by LSB on January 1, 1984 and
operates as a finance company licensed under the laws of the State of North
Carolina. Peoples Finance operates from one office located in Lexington, North
Carolina with four employees. As a finance company, Peoples Finance offers
secured and unsecured loans to individuals up to a maximum of $10,000, as well
as dealer originated loans.
LSB Financial Services is incorporated under the laws of the State of North
Carolina and offers a full range of uninsured, nondeposit investment products,
including mutual funds, annuities, stocks and bonds. LSB Financial Services
operates from offices located within LSB's main office. LSB Financial Services
offers products through Liberty Securities Corporation, an independent
broker-dealer, which is a member of the National Association of Securities
Dealers and the Securities Investor Protection Corporation. Investments are
neither deposits nor obligations of Lexington State Bank, nor are they
guaranteed or insured by any depository institution, the FDIC, or any other
government agency. LSB Financial Services began operation on December 1, 1994.
COMPETITION
Commercial banking in LSB's service area of Davidson County, North Carolina is
highly competitive. LSB competes not only with major commercial banks but also
with thrift institutions, credit unions, investment brokers, mortgage and
finance companies. North Carolina permits state-wide branching, which is widely
practiced. In recent years, competition between large major banks and smaller
independent banks has intensified significantly as a result of deregulation of
the financial industry. In addition to in-state competition, banks such as LSB
have a high degree of competition from out-of-state financial service companies
offering mutual funds.
The North Carolina Employment Security Commission projects the State's economy
to remain sound in 1997, with low unemployment and low inflation. North
Carolina's unemployment rate has continued to remain near the lowest of the 11
large states surveyed by the Federal Government. Davidson County had a labor
force of approximately 76,060 in 1996 with an unemployment rate in the 3.0%
range.
REGULATION
As a bank holding company, Bancshares is subject to supervision, examination and
regulation by the Board of Governors of the Federal Reserve System. LSB is
chartered by the State of North Carolina and as such is subject to supervision,
examination and regulation by the North Carolina State Banking Commission. LSB
is also a member of the Federal Deposit Insurance Corporation and is therefore
subject to supervision and examination by that agency.
PROPERTIES
Bancshares' principal executive offices are located at One LSB Plaza, Lexington,
North Carolina. This five-story office building totals 74,800 square feet and
also serves as the home office of LSB. A majority of the major staff functions
are located within this office complex.
In addition, LSB operates fourteen branch offices and four off-premise automated
teller locations. Six of LSB's branch offices are located within Lexington. The
remaining branch offices are located in the communities of Thomasville, Welcome,
Midway, Arcadia and Wallburg, all of which are located within Davidson County,
North Carolina.
Bancshares' principal office and seven branches are owned by LSB, while six
branches and the off-premise ATM locations are leased. LSB's leased properties
are subject to leases which expire on various dates from January 31, 1997 to
June 30, 2004. Peoples Finance operates from an 1,800 square foot, one-story
building located at 203 Center Street in Lexington, which it owns. LSB Financial
Services leases 800 square feet within the principal office building of LSB.
Except as described herein, Bancshares, LSB, Peoples Finance and LSB Financial
Services own all properties free and clear of encumbrances.
<PAGE> 7
SUMMARY OF SELECTED FINANCIAL DATA
......................................
<TABLE>
<CAPTION>
Years Ended December 31
(In thousands, expect per share data and ratios) 1996 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
<S> <C> <C> <C> <C> <C> <C>
Interest income ............................. $ 30,292 $ 28,051 $ 24,393 $ 22,916 $ 24,468 $ 26,917
Interest expense ............................ 12,152 11,448 8,695 8,048 9,931 14,566
-------- -------- -------- -------- -------- --------
Net interest income ......................... 18,140 16,603 15,698 14,868 14,537 12,351
Provision for loan losses ................... 562 252 219 941 843 1,041
-------- -------- -------- -------- -------- --------
Net interest income
after provision for loan losses ........... 17,578 16,351 15,479 13,927 13,694 11,310
Noninterest income .......................... 4,113 3,244 2,603 3,214 2,612 2,540
Noninterest expense ......................... 13,529 13,112 12,198 11,436 10,166 9,373
-------- -------- -------- -------- -------- --------
Income from continuing operations before
income taxes .............................. 8,162 6,483 5,884 5,705 6,140 4,477
Income taxes ................................ 2,323 1,701 1,422 1,349 1,736 947
-------- -------- -------- -------- -------- --------
Net income .................................. $ 5,839 $ 4,782 $ 4,462 $ 4,356 $ 4,404 $ 3,530
======== ======== ======== ======== ======== ========
Cash dividends declared ..................... $ 2,158 $ 2,061 $ 1,876 $ 1,766 $ 1,620 $ 1,512
======== ======== ======== ======== ======== ========
SELECTED YEAR-END ASSETS
AND LIABILITIES
Investment securities ....................... $ 90,617 $108,968 $109,912 $ 90,614 $ 94,451 $ 93,023
Loans, net of unearned income................ 272,044 226,667 205,252 196,172 183,878 171,033
Assets ...................................... 421,600 375,026 357,092 342,980 323,490 312,975
Deposits .................................... 354,820 323,289 309,906 296,903 281,291 273,782
Shareholders' equity ........................ 51,687 48,110 44,475 42,036 39,289 36,417
RATIOS (AVERAGES)
Net income to total assets .................. 1.48% 1.30% 1.27% 1.32% 1.38% 1.14%
Net income to shareholders' equity .......... 11.73 10.34 10.29 10.69 11.62 9.98
Dividend payout ratio ....................... 36.96 43.09 42.05 40.52 36.78 42.83
Shareholders' equity to total assets ratio... 12.59 12.61 12.34 12.32 11.91 11.40
PER SHARE DATA*
Net income$ ................................. $ 1.08 $ .89 $ .84 $ .82 $ .83 $ .67
Cash dividends declared...................... .40 .38 .35 .33 .31 .29
Book value at year end ...................... 9.57 8.95 8.32 7.90 7.40 6.87
</TABLE>
*Per share data have been restated in this table to give effect to the
five-for-four stock splits paid February 15, 1996, March 31, 1994 and March 31,
1992.
<PAGE> 8
AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS
...................................................
Table 1
Fully taxable equivalent basis(l) (In thousands)
<TABLE>
<CAPTION>
1996 1995
AVERAGE INTEREST AVERAGE Average Interest Average
BALANCE INCOME/EXPENSE YIELD/RATE Balance Income/Expense Yield/Rate
- -------------------------------------------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Loans and leases
receivable, net(2) ... $246,998 $ 23,104 9.35% $214,380 $20,290 9.46%
Investment securities:
Taxable ................... 71,346 4,266 5.98 76,433 4,767 6.24
Tax exempt ................ 30,093 2,620 8.71 30,295 2,725 8.99
Federal Home Loan Bank .... 1,111 90 8.10
Federal funds sold ........ 18,328 966 5.27 18,256 1,066 5.84
-------- ------- ------- ------
Total earning assets ...... 367,876 31,046 8.44 339,364 28,848
Non-earning assets:
Cash and due from banks .... 16,160 15,618
Premises and equipment ..... 8,834 8,883
Other assets ............... 5,557 5,660
Reserve for loan losses .... (2,807) (2,686)
-------- ------- ------- ------
Total assets .............. $395,620 $ 31,046 $366,839 $28,848
======== ======= ======== =======
Interest-bearing liabilities:
Savings and time
deposits .................. $295,076 $ 11,776 3.99% $278,525 $11,402 4.09%
Securities sold under
agreements to
repurchase ................ 3,269 104 3.18 1,262 46 3.65
Borrowings from Federal
Home Loan Bank ............ 4,258 272 6.39
-------- ------- ------- ------
Total Interest-bearing
liabilities ............ 302,6O3 12,152 4.02 279,787 11,448 4.09
Other liabilities and
shareholders' equity:
Demand deposits ............ 41,134 38,925
Other liabilities .......... 2,094 1,882
Shareholders' equity ....... 49,789 46,245
-------- ------- ------- ------
Total liabilities and
shareholders'
equity .................. $395,620 $ 12,152 $366,839 $11,448
======== ======= ======= ======
Net interest income and
net interest mare(3)........ $ 18,894 5.14% $17,400 5.13%
======= ==== ====== ====
Interest rate spread(4) .... 4.42% 4.41%
==== ====
</TABLE>
AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS
...................................................
Table 1
Fully taxable equivalent basis(l) (In thousands)
<TABLE>
<CAPTION>
1994
Average Interest Average
Balance Income/Expense Yield/Rate
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earning assets:
Loans and leases
receivable, net(2) ... $202,589 $17,245 8.51%
Investment securities:
Taxable ................... 69,858 4,263 6.10
Tax exempt ................ 29,617 2,788 9.41
Federal Home Loan Bank ....
Federal funds sold ........ 22,579 943 4.18
------- ------
Total earning assets ...... 324,643 25,239 7.77
Non-earning assets:
Cash and due from banks .... 15,576
Premises and equipment ..... 9,316
Other assets ............... 4,673
Reserve for loan losses .... ( 2,789)
------
Total assets .............. $351,419 $25,239
======= ======
interest-bearing liabilities:
Savings and time
deposits .................. $265,716 $ 8,622 3.24%
Securities sold under
agreements to
repurchase ................ 2,317 73 3.15
Borrowings from Federal
Home Loan Bank ............ ------- ------
Total Interest-bearing
liabilities ............ 268,033 8,695 3.24
Other liabilities and
shareholders' equity-
Demand deposits ............ 38,203
Other liabilities .......... 1,830
Shareholders' equity ....... 43,353
Total liabilities and ------- ------
shareholders'
equity ................ $351,419 $ 8,695
======= ======
Net interest income and
net interest mare .......... $16,544 5.10%
====== ====
Interest rate spread(4) .... 4.53%
====
</TABLE>
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 $916 $495 and $574 for 1996, 1995 and 1994,
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-hearing liability rate.
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATIONS AND FINANCIAL CONDITION
........................................
Management's discussion as presented herein provides an overview of the changes
in financial condition and results of operation for LSB Bancshares, Inc.
("Bancshares") and its wholly-owned subsidiary, Lexington State Bank ("LSB") for
the years 1996, 1995 and 1994. 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, footnotes and supplemental tables provided herein.
MERGER
On January 21, 1997, Bancshares announced the signing of a Letter of Intent
under which LSB and Old North State Bank of Winston-Salem, North Carolina would
merge. Under the terms of the Letter of Intent, Old North State Bank
shareholders would receive LSB Bancshares, Inc. common stock in exchange for
their Old North State Bank holdings. The value of the transaction would be $30
million based on Bancshares' recent trading price of $20.00 per share at the
time of the announcement. The transaction is anticipated to result in earnings
per share dilution to Bancshares in the year in which the transaction closes due
to one-time merger-related expenses, but become accretive in the following
years. In connection with the signing of the Letter of Intent, Old North State
granted Bancshares an option to purchase 265,675 shares of its stock at the
exercise price of $8.00 per share, exercisable in certain events. LSB has a
dominant position in Davidson County, while Old North State has a strong and
growing presence in Forsyth and Stokes Counties, which are the contiguous
counties north of Davidson County. The merger is subject to the execution of a
Definitive Agreement between the two institutions as well as regulatory and
shareholder approvals and is expected to be completed by mid-1997.
Operating in a highly competitive market, LSB has traditionally been liability
sensitive. ONSB, with offices in adjoining counties and similar markets, has
also tended to be liability sensitive. Each bank has used their membership in
the Federal Home Loan Bank ("FHLB") to actively manage it's sensitivity
position. In addressing the impact of the proposed merger, LSB borrowed $10
million on April 30, 1997 from the FHLB, with a two year maturity, for
investment in Federal funds sold. This borrowing effectively increased LSB's
interest-earning assets and thereby improved the bank's cumulative gap
position. In addition, LSB becomes asset sensitive in the one-to-five year term
with 86% of the over one year earning assets repricing in this period.
The foregoing statements regarding the merger of LSB with Old North State Bank,
including the projected earnings per share dilution in 1997 and accretive effect
of the merger in subsequent years, and the expected timing of the consummation
of the transaction are "forward looking statement" as defined in the Private
Securities Litigation Reform Act of 1995. As forward-looking statements, they
are necessarily based upon various uncertain
VOLUME AND RATE VARIANCE ANALYSIS
---------------------------------
<TABLE>
<CAPTION>
December 31
Table 2 1996 1995
Fully taxable equivalent basis(l) (In thousands) Volume Rate Total Volume Rate Total
Variance(2) Variance(2) Variance Variance(2) Variance(2) Variance
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable ............................. $ 3,052 $(238) $ 2,814 $ 1,043 $ 2,002 $ 3,045
Taxable ...................................... (308) (193) (501) 405 99 504
Tax exempt ................................... (19) (86) (105) 63 (126) (63)
Federal funds sold ........................... 4 (104) (100) (204) 327 123
Federal Home Loan Bank ....................... 90 90
------- ----- ------- ------- ------- -------
Total interest income .................... 2,819 (621) 2,198 1,307 2,302 3,609
------- ----- ------- ------- ------- -------
Interest expense:
Savings and time deposits .................... 660 (286) 374 431 2,349 2,780
Securities sold under agreements to repurchase 65 (7) 58 (37) 10 (27)
Borrowings from Federal Home Loan Bank ....... 272 272
------- ----- ------- ------- ------- -------
Total interest expense ................... 997 (293) 704 394 2,359 2,753
------- ----- ------- ------- ------- -------
Increase (decrease) in net interest income ... $ 1,822 $(328) $ 1,494 $ 913 $ (57) $ 856
======= ===== ======= ======= ======= =======
</TABLE>
(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.
<PAGE> 10
INTEREST SENSITIVITY ANALYSIS(1)
...............................
<TABLE>
<CAPTION>
December 31, 1996
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
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net of unearned income ...................... $ 105,016 $ 15,366 $ 31,109 $151,491 $111,172 $ 9,381 $272,044
U.S. Treasury securities ........................... 3,547 2,000 3,008 8,555 22,983 31,538
U.S. government agencies obligations ............... 3,455 1,996 5,451 59,451 22,019 27,470
Obligations of states and political subdivisions ... 1,220 581 151 1,952 11,093 17,441 30,486
Federal Home Loan Bank ............................. 1,123 1,123 1,123
Federal funds sold ................................. 26,720 26,720 26,720
--------- -------- -------- -------- -------- -------- --------
Total interest-earning assets ................. $ 141,081 $ 17,947 $ 36,264 $195,292 $167,267 $ 26,822 $389,381
========= ======== ======== ======== ======== ======== ========
Interest-bearing liabilities:
N.O.W account deposits ............................. $ 70,790 $ 70,790 $ 70,790
Money market deposits .............................. 61,806 61,806 61 806
Regular savings deposits ........................... 33,482 33,482 33,482
Time deposits ...................................... 57,458 $ 37,740 $ 22,878 118,076 $ 26,679 144,755
Securities sold under agreements to repurchase ..... 3,285 3,285 3,285
Borrowing from Federal Home Loan Bank .............. 833 833 1,667 3,333 5,834 9,167
--------- -------- -------- -------- -------- -------- --------
Total interest-bearing liabilities ............ $ 227,654 $ 38,573 $ 24,545 $290,772 $ 32,513 $323,285
========= ======== ======== ======== ======== ======== ========
Interest sensitivity gap ........................... $ (86,573) $(20,626) $ 11,719 $(95,480)
Ratio of interest-sensitive assets/
interest-sensitive liabilities ................ .62 .47 1.48 .67
</TABLE>
(1) Interest sensitivity is computed using assets and liabilities having
interest rates that can be adjusted during the period indicated.
factors, including, but not limited to, the completion of the parties' due
diligence reviews and negotiations, projections of costs to be incurred in
connection with the merger and the parties' financial performance in the future.
Because of such uncertainties, the actual timing and results of the merger may
differ significantly from the forward-looking statements contained herein.
SUMMARY
Bancshares had net income for the year ended December 31, 1996 of $5,839,000
compared to $4,782,000 in 1995 and $4,462,000 in 1994. Net income for 1996
increased $1,057,000 or 22.1% compared to 1995, following an increase of
$320,000 or 7.2% in 1995 compared to 1994.
Return on average assets for 1996 was 1.48% compared to 1.30% in 1995 and 1.27%
in 1994. Bancshares' return on average shareholders' equity for 1996 was
11.73% compared to 10.34% for 1995 and 10.29% for 1994.
Earnings per share of $1.08 for 1996 was up 21.3% compared to $.89 per share
for 1995. Earnings per share increased 6.0% in 1995 from the $.84 earned in
1994.
Net interest income was up significantly in 1996 compared to 1995 as loan
growth nearly doubled under a favorable interest rate environment. Interest
rates remained steady throughout 1996, contributing to a solid net interest
margin for the Bank. The prime interest rate, which is used as an interest rate
indicator by banks, made one adjustment in February of 1996 compared to three
adjustments in 1995 and five adjustments in 1994.
The increase in net interest income in 1996 was $1,537,000 or 9.3% compared to
$905,000 or 5.8% in 1995. The loan loss provision necessary to maintain an
adequate reserve was increased during 1996 in recognition of the strong loan
growth experienced. Noninterest income in 1996 increased $869,000 or 26.8%
compared to 1995, which was up $641,000 or 24.6% over 1994. On the other hand,
the increase in noninterest expense in 1996 of $417,000 or 3.2% compared to
1995 was less than half the $914,000 or 7.5% increase experienced in 1995 over
1994.
Growth in assets in 1996 was more than double the growth experienced in 1995.
Asset growth for 1996 was $46,574,000 or 12.4% compared to an increase of
$17,934,000 or 5.0% in 1995. Likewise, deposit growth in 1996 was over twice
that experienced in 1995. In 1996, deposits grew $31,531,000 or 9.8% compared
to 1995, which was up $13,383,000 or 4.3% over 1994. Loan growth increased at
an even faster pace in 1996 with a gain of $45,377,000 or 20.0% compared to
1995, which was up $21,415,000 or 10.4% from 1994. To accommodate the loan
growth experienced in 1996, the securities portfolio was reduced, and
specifically matched borrowings were secured from the Federal Home Loan Bank.
<PAGE> 11
Likewise, deposit growth in 1996 was over twice that experienced in 1995. In
1996, deposits grew $31,531,000 or 9.8% compared to 1995, which was up
$13,383,000 or 4.3% over 1994. Loan growth increased at an even faster pace in
1996 with a gain of $45,377,000 or 20.0% compared to 1995, which was up
$21,415,000 or 10.4% from 1994. To accommodate the loan growth experienced in
1996, the securities portfolio was reduced, and specifically matched borrowings
were secured from the Federal Home Loan Bank.
<PAGE> 12
SUMMARY OF INVESTMENT SECURITIES PORTFOLIO
..........................................
<TABLE>
<CAPTION>
Table 4 DECEMBER 31, 1996 December 31, 1995 December 31, 1994
CARRYING MARKET Carrying Market Carrying Market
(In thousands) VALUE VALUE Value Value Value Value
-------------------- ----------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities ......................... $ 31,538 $ 31,501 $34,265 $34,394 $ 40,684 $ 39,731
U.S. government agencies obligations ............. 27,470 27,399 41,749 41,731 39,176 37,863
Obligations of state and political subdivisions .. 30,486 31,584 31,883 33,529 30,052 30,112
Federal Home Loan Bank ........................... 1,123 1,123 1,071 1,071
-------- -------- -------- ------- -------- --------
Total securities .............................. $ 90,617 $ 91,607 $108,968 $110,725 $109,912 $107,706
======== ======== ======== ======== ======== ========
</TABLE>
(1) 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.
ASSET/LIABILITY MANAGEMENT
The objectives of asset/liability management are to ensure long-range
profitability performance and minimize risk, adhere to proper liquidity and
maintain sound capital. To meet these goals, the process of asset/liability
management monitors the exposure to interest rate risk, balance sheet trends,
pricing policies and liquidity position.
Profitability and performance are affected by balance sheet composition and
interest rate movements. Management responsibility for both liquidity and
interest sensitivity resides with a designated Asset/Liability Management
Committee ("ALCO"). Market conditions, interest rate trends and the economic
environment are all evaluated by the ALCO Committee as a part of its
asset/liability management decision-making process. Based upon its view of
existing and expected market conditions, the ALCO Committee adopts balance
sheet strategies intended to optimize net interest income to the extent
possible while minimizing the risk associated with unanticipated changes in
interest rates. Core deposits have historically been the primary funding
sources for asset growth. Correspondent relationships have also been
maintained with several large banks in order to have access to federal
funds purchases when needed. LSB also has available lines of credit maintained
with the Federal Home Loan Bank ("FHLB") which can be used for funding loans
and/or liquidity needs.
The extremely strong loan demand experienced in 1996 coupled with slightly
slower deposit growth, while producing increased earnings, began to show signs
of pressure on bank ratios. To improve the bank's balance sheet position,
management decided to draw on its line of credit with the FHLB in the
amount of $10,000,000. The borrowing was executed in July as a principal
reducing credit ("PRC") with a term of three years. This strategy serves to
improve the bank's balance sheet ratios and gives the bank the ability to
service the strong loan demand being experienced while allowing deposit growth
to build.
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 1996'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, 1996 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, 1996, the
one-year cumulative interest sensitivity gap was a negative $95,480,000, for a
ratio of interest-sensitive assets to interest-sensitive liabilities of .67.
The investment securities portfolio at December 31, 1996 was down 16.8% from
December 31, 1995. Management deployed funds from maturing securities to the
loan portfolio as the strong loan demand continued. The mix of the investment
securities portfolio was also adjusted during this time period as securities
matured and new purchases were made. The percentage of held-to-maturity
securities dropped to 73.9% at December 31, 1996 from 76.1% at December 31,
1995. LSB management feels that with these strategies, along with being asset
sensitive in the one-to-five year term, the bank's interest sensitivity
position can be effectively managed.
Asset/liability management also addresses liquidity positioning. Liquidity
management is required in order to fund current and future extensions of credit,
meet deposit withdrawals, maintain reserve requirements and otherwise sustain
operations. As such, it is related to interest rate sensitivity management, in
that each is affected by maturing assets and liabilities. While interest
sensitivity management is concerned with repricing intervals of assets and
liabilities, liquidity management is concerned with the maturities of those
respective balances. An appropriate liquidity position is further accomplished
through deposit growth and access to sources of funds other than deposits, such
as the federal funds market. Traditionally, LSB has been a seller of excess
investable funds in the federal funds market and uses these funds as a part
of its liquidity management. Net cash provided by operating activities, a
primary source of liquidity, was $3,876,000 in 1996 compared to $4,579,000 in
1995 and $4,305,000 in 1994. Details of cash flows for the years 1996, 1995 and
1994 are provided in the Consolidated Statements of Cash Flows.
<PAGE> 13
NET INTEREST INCOME
Interest rates remained very steady during 1996, producing an extremely
favorable environment for growth in net interest income. The prime interest
rate, which is used as an interest rate indicator by banks, made one adjustment
in February of 1996 compared to three adjustments in 1995 and five adjustments
in 1994.
The stable interest rate environment experienced in 1996 resulted in an
increase of one basis point in the interest rate spread compared to a decline of
12 basis points in 1995 and a decline of 16 basis points in 1994. This placed
the interest spread at 4.42% for 1996 compared to 4.41% for 1995 and 4.53% for
1994. Table 1 provides an average balance and net interest income analysis for
the years 1996, 1995 and 1994.
The net interest margin, also shown in Table 1, is computed by dividing net
interest income by average earning assets and provides an indication of LSB's
efficiency in generating income from earning assets. With the favorable
interest rate environment of 1996, LSB's net interest margin increased one
basis point to 5.14% from the 5.13% posted in 1995. Increased loan volume
significantly contributed to the gain in LSB's net interest income. The gain
in taxable equivalent net interest income for 1996 was $1,494,000 or 8.6%
compared to a gain of $856,000 or 5.2% in 1995. 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 variance is
presented in Table 2.
Interest rates on interest-bearing liabilities decreased seven basis points in
1996, while the interest yields on earning assets decreased six basis points.
Interest expense for the current year increased $704,000 or 6.1%, while
interest income increased $2,198,000 or 7.6%.
EARNING ASSETS
As reported in Table 1, the gain in average earning assets for 1996 was nearly
twice that of the previous year. Total earning assets for 1996 increased
$28,512,000 or 8.4% compared to 1995, which posted a gain of $14,721,000 or 4.5%
over 1994. The 1994 gain in earning assets was $22,601,000 or 7.5%.
Loan portfolio growth in 1996 was exceptionally strong. The average balance of
the loan portfolio increased $32,618,000 or 15.2% in 1996 compared to gains of
$11,791,000 or 5.8% in 1995 and $12,816,000 or 6.8% in 1994. As shown in Table
2, the 1996 increase in loan balances accounted for an income gain related to
volume of $3,052,000 compared to 1995's gain of $1,043,000. The negative rate
variance in 1996 of $238,000 resulted from the decline of eleven basis points in
average loan yields.
INVESTMENT SECURITIES PORTFOLIO MATURITY SCHEDULE
..................................................
<TABLE>
<CAPTION>
December 31, 1996
Table 5 Weighted
(In thousands) Carrying Average
Value Yield (1)
---------------------
<S> <C> <C>
U.S. Treasury securities:
Within one year ................................... $ 8,510 6.53%
One to five years ................................. 23,028 5.94
--------
Total ............................................ 31 ,538 6.10
--------
U.S. government agencies obligations:
Within one year ................................... 5,496 5.22
One to five years ................................. 21,974 5.90
--------
Total ............................................ 27,470 5.76
--------
Obligations of states and political subdivisions:
Within one year ................................... 1,952 11.36
One to five years ................................. 1 ,094 10.60
Five to ten years ................................. 7,856 8.68
After ten years ................................... 9,584 8.55
--------
Total ............................................ 30,486 9.50
--------
Federal Home Loan Bank .............................. 1,123 7.25
--------
Total portfolio ..................................... $ 90,617 7.48
</TABLE> ========
(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.
<PAGE> 14
AVERAGE TOTAL DEPOSITS
......................
Table 6
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
AVERAGE AVERAGE Average Average Average Average
BALANCE RATE Balance Rate Balance Rate
------------------- -------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits........... $ 41,134 $ 38,925 $ 38,203
N.O.W. account deposits... 68,836 2.68% 61,669 2.85% 38,765 2.13%
Money market deposits..... 60,732 3.42 63,566 3.63 81,815 2.96
Regular savings deposits.. 33,792 2.29 33,897 2.59 32,912 2.67
Time deposits............. 131,716 5.37 119,393 5.41 112,224 4.00
------- ------- -------
Total deposits(1)....... $ 336,210 $ 317,450 $ 303,919
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
OVER 3 OVER 6
3 MONTHS THROUGH THROUGH OVER 12
OR LESS 6 MONTHS 12 MONTHS MONTHS TOTAL
=======================================================================
<S> <C> <C> <C> <C> <C>
Time deposit maturity schedule:(2)
Time deposits of $100,000 or more.......... $24,718 $15,149 $3,508 $363 $43,738
</TABLE>
Both the taxable and the tax exempt investment securities portfolios were
decreased in 1996 to accommodate the significant growth in the loan portfolio.
As a result, the average balance as reported in Table 1 shows a decline in 1996
compared to 1995. Average balances of taxable investment securities were
decreased by $5,087,000 or 6.7% and tax exempt investment securities were
decreased $202,000 or .7%. As shown in Table 2, this produced negative volume
variances of $308,000 for taxable securities and $19,000 for tax exempt
securities. Yields on taxable investments decreased 26 basis points in 1996
creating a negative rate variance of $193,000, while a decline of 28 basis
points in the yields on tax exempt investments created a negative rate variance
of $86,000. The average funds invested in federal funds sold in 1996 remained
near the 1995 level and produced a modest $4,000 volume variance. Yields on
these investments decreased 57 basis points in 1996, creating a negative rate
variance of $104,000. In 1995 LSB joined the Federal Home Loan Bank ("FHLB").
The average investment in the FHLB in 1996 was $1,111,000 and produced interest
income of $90,000. 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
Growth in average interest-bearing liabilities for 1996 was significantly higher
than that of the previous year. The volume increase in interest-bearing
liabilities for 1996 was $22,816,000 or 8.2% compared to increases of
$11,754,000 or 4.4% in 1995 and $14,522,000 or 5.7% in 1994. Interest rates paid
on liabilities declined seven basis points in 1996 compared to an increase of 85
basis points in 1995 and an increase of seven basis points in 1994. The majority
of LSB's interest-bearing liabilities consist of savings and time deposits. The
increase in these deposits for 1996 was $16,551,000 or 5.9% compared to gains of
$12,809,000 or 4.8% in 1995 and $14,214,000 or 5.7% in 1994. The volume variance
produced by 1996's gain in interest-bearing deposits, as shown in Table 2, was a
positive $660,000. The negative rate variance in 1996 of $286,000 resulted from
the decline of ten basis points in the average rate paid on interest-bearing
deposits.
Securities sold under agreements to repurchase account for a small proportion of
total interest-bearing liabilities. The average volume of these liabilities
increased $2,007,000 in 1996 while the interest rates paid decreased 47 basis
points. These factors accounted for a positive volume variance in 1996 of
$65,000 and a negative rate variance of $7,000.
Table 1 shows an average balance for 1996 of borrowings from the Federal Home
Loan Bank of $4,258,000 and an interest expense related to those borrowings
of $272,000. These amounts are the result of a principal reducing credit
("PRC") borrowing from the FHLB that was executed in July of 1996. These funds
were secured to service the strong loan demand experienced in 1996.
Average deposits are presented in Table 6 by type and rate for the years 1996,
1995 and 1994. Average interest rates paid on all interest-bearing
<PAGE> 15
deposits decreased from 1995 to 1996. Time deposit interest rates declined a
marginal four basis points in 1996, after a dramatic increase of 141 basis
points in 1995 and a very modest increase of eight basis points in 1994. N.O.W.
account interest rates were down 17 basis points in 1996 after an increase of 72
basis points in 1995 and a decline of 14 basis points in 1994. The average rate
paid on money market deposits decreased 21 basis points in 1996 after increasing
67 basis points in 1995 and increasing 22 basis points in 1994. Interest rates
on regular savings deposits were reduced 30 basis points in 1996 after a drop of
eight basis points in 1995 and an increase of nine basis points in 1994.
LSB experienced its largest growth in time deposits in 1996. This category
gained $12,323,000 or 10.3% in 1996 following an increase of $7,169,000 or
6.4% in 1995 and an increase of $2,739.000 or 2.5% in 1994. In 1995, certain
large municipal deposit accounts with balances totaling approximately
$20 million transferred from money market to N.O.W. accounts. Growth in 1996
in N.O.W. accounts came from these municipal accounts. N.O.W. account deposits
gained $7,167,000 or 11.6% in 1996 compared to 1995. Money market deposits,
on the other hand, declined $2,834,000 or 4.5% in 1996. Regular savings
accounts posted a slight decline of $105,000 or .3% in 1996 compared to an
increase of $985,000 or 3.0% in 1995 and an increase of $4,411,000 or 15.5%
in 1994.
CAPITAL RESOURCES AND SHAREHOLDERS' EQUITY
Deregulation continues to place burdens on the banking industry's capital
position. Within this environment of regulatory change, sound capital adequacy
continues to represent a major safety factor for both shareholders and
depositors. A well-capitalized financial institution can withstand the pressures
of an uncertain economy. It is also in an excellent position to maximize growth
opportunities as economic conditions improve. It is primarily this safety factor
for which governmental regulators look.
Regulatory guidelines require minimum levels of capital based on a risk
weighting of each asset category and off balance sheet contingencies. At
December 31, 1996, based on these measures, Bancshares' ratio for Tier 1 capital
was 20.67% compared to the regulatory minimum risk-based capital ratio
requirement of 4%. Bancshares' Tier 2 capital ratio at this date was 21.90%
compared to the regulatory requirement of 8%.
SUMMARY OF LOAN PORTFOLIO
.........................
Table 7
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
===============================================================
<S> <C> <C> <C> <C> <C>
Loans secured by real estate:
Secured by real estate, excluding loans secured by 1-4
family residences.......................................... $ 29,905 $ 39,429 $ 42,811 $ 43,144 $ 41,181
Revolving credit secured by 1-4 family residences............ 23,997 22,066 18,699 17,983 16,832
Other loans secured by 1-4 family residences................. 125,753 81,365 68,461 67,384 62,580
------- ------- ------- ------- -------
Total loans secured by real estate....................... 179,655 142,860 129,971 128,511 120,593
Commercial, financial and agricultural....................... 30,843 28,170 22,952 20,742 23,939
Installment loans to individuals ............................ 53,653 48,107 44,943 41,949 34,852
All other loans.............................................. 7,893 7,530 7,386 4,970 4,494
------- ------- ------- ------- -------
Total loans, net of unearned income*..................... $272,044 $226,667 $205,252 $196,172 $ 183,878
======= ======= ======= ======= =======
</TABLE>
*The bank has no foreign loan activity.
<TABLE>
<CAPTION>
MATURITY SCHEDULE OF LOANS(1)
..............................
December 31, 1996
Commercial
and Industrial Mortgage Total
===============================================
<S> <C> <C> <C>
Due in 1 year or less................... $57,370 $28,592 $85,962
Due after 1 year through
5 years:
Fixed interest rates ............... 31,339 11,534 42,873
Floating interest rates............. 7,356 19,490 26,846
Due after 5 years:
Fixed interest rates................ 1,274 8,073 9,347
Floating interest rates............. 1,942 53,399 55,341
</TABLE>
(1) Excluding installment loans.
<PAGE> 16
ANALYSIS OF RESERVE FOR LOAN LOSSES
...................................
Table 8
(In thousands)
<TABLE>
<CAPTION>
As of Or For the Years Ended
December 31
1996 1995 1994 1993 1992
============================================================
<S> <C> <C> <C> <C> <C>
Average amount of loans outstanding, net of unearned income....... $246,998 $ 214,380 $ 202,589 $189,723 $177,561
Amount of loans outstanding, net of unearned income.............. 272,044 226,667 205,252 196,172 183,878
Reserve for loan losses:
BALANCE ON JANUARY 1........................................... $ 2,730 $ 2,641 $ 2,775 $ 2,704 $ 2,135
------- ------- -------- ------- -------
Loans charged off:
Secured by real estate......................................... 57 49 30
Commercial and industrial...................................... 16 15 284 861 111
Installment.................................................... 174 143 118 139 203
Credit card.................................................... 77 56 28 19 26
------- ------- -------- ------- -------
Total charge-offs............................................ 324 263 430 1,019 370
------- ------- -------- ------- -------
Recoveries of loans previously charged off:
Secured by real estate......................................... 11 7
Commercial and industrial...................................... 10 62 42
Installment.................................................... 83 75 45 74 42
Credit card.................................................... 24 14 15 13 12
------- ------- -------- ------- -------
Total recoveries............................................. 107 100 77 149 96
------- ------- -------- ------- -------
Net loans charged off............................................ 217 163 353 870 274
------- ------- -------- ------- -------
Provision for loan losses........................................ 562 252 219 941 843
------- ------- -------- ------- -------
BALANCE ON DECEMBER 31........................................... $ 3,075 $ 2,730 $ 2,641 $ 2,775 $2,704
======= ======= ======== ======= =======
Ratio of net charge-offs of loans to average loans
outstanding during the year................................... .09% .08% .17% .46% .15%
</TABLE>
In January of 1996, the Board of Directors announced a five-for-four stock split
payable February 15, 1996. This added 1,075,961 shares to Bancshares'
outstanding stock. During 1996, capital stock issued under Bancshares' stock
option benefit plan added an additional 28,504 shares to the company's
outstanding capital stock.
Following the stock split, Bancshares' Board of Directors voted to increase the
quarterly cash dividend to 10 cents per share, an increase of 4.4% over the
previously stated quarterly rate. Total cash dividends declared as a percentage
of net income amounted to 36.96% in 1996 compared to 43.09% in 1995 and 42.05%
in 1994. In 1996, shareholders' equity increased 7.4% compared to 8.2% in 1995
and 5.8% in 1994.
The number of shareholders holding Bancshares stock total approximately 3,000
at December 31, 1996. Participants in Bancshares' dividend reinvestment plan
total 1,040, representing 34.7% of total shareholders. The total number of
shares that are 100% reinvestment of dividends are 1,280,412 shares or 23.7% of
the outstanding stock.
NONINTEREST INCOME
Noninterest income for 1996 increased $869,000 or 26.8% compared to an increase
of $641,000 or 24.6% in 1995 and a decrease of $611,000 or 19.0% in 1994. The
decrease in 1994 resulted from mortgages LSB carried for sale to Freddie Mac in
the secondary market. These mortgages were marked held for sale at the lower of
cost or market value in accordance with the Financial Accounting Standards Board
Statement No. 65 (SFAS 65), "Accounting for Certain Mortgage Banking
Activities".
Fee income on service charges on deposit accounts for 1996 increased $216,000 or
11.9% while the 1995 income remained virtually unchanged compared to 1994. The
1994 increase in service charges on deposit accounts was $23,000 or 1.3%. The
gain in 1996 service charge income is the result of an increased fee structure
implemented by the Bank in November of 1995. The gain in other operating income
for 1996 was $542,000 or 38.2% compared to an increase of $310,000 or 27.9% in
1995 and an increase of $58,000 or 5.5% in 1994. Financial statement Note 11
details material items contained in other operating income. Fee income generated
in 1996 accounted for the majority of the increase in these items. This category
increased $153,000 or 64.8% in 1996 compared to 1995 following a modest gain of
$28,000 compared to 1994. Trust income for 1996 increased $93,000 or 29.5%
compared to 1995 after remaining relatively flat compared to 1994. Credit card
fee income in 1996 increased $71,000 or 24.7% compared to an increase of $68,000
or 31.1% in 1995 and an increase of $54,000 or 32.7% in 1994.
<PAGE> 17
NONINTEREST EXPENSE
Total noninterest expense for 1996 increased $417,000 or 3.2% compared to
$914,000 or 7.5% in 1995 and $762,000 or 6.7% in 1994.
Personnel expense represented the largest dollar increase of noninterest
expense. Personnel expense, consisting of both employee salaries and benefits,
increased $187,000 or 2.5% in 1996 compared to $523,000 or 7.5% in 1995 and
$385,000 or 5.9% in 1994. In 1996, full-time equivalent employees totaled 239,
for a net decrease of ten employees in the current year compared to a decrease
of five employees in 1995 and a gain of two employees in 1994. Restructuring
charges of $522,000 were incurred in 1996 as a part of LSB's strategic plan for
improving operation efficiencies. The restructuring plan included an offer for
early retirement to all employees 55 years of age with ten years of service. Of
this group, 68% opted for early retirement, which was effective March 31, 1996.
Occupancy expense has remained relatively stable during the past three years. In
1996, occupancy expense decreased $18,000 or 2.3% compared to an increase of
$22,000 or 2.9% in 1995 and a decrease of $12,000 or 1.6% in 1994. Equipment
depreciation and maintenance expense has increased slightly in each of the past
three years as LSB has added to its technological capability. In 1996, this
expense increased $74,000 or 11.2% compared to increases of $48,000 or 7.8% in
1995 and $90,000 or 17.2% in 1994.
Other operating expenses in 1996 decreased $348,000 or 8.3% compared to
increases of $321,000 or 8.3% in 1995 and $299,000 or 8.4% in 1994. Financial
statement Note 11 details the material items contained in other operating
expenses. Automated services expense for 1996 was $879,000, an increase of
$118,000 or 15.5% compared to $761,000 in 1995. The 1996 increase is the
result of the Bank's expanding automation program to enhance customer service
and improve operating efficiencies. Stationery, printing and supplies expense
for 1996 remained nearly the same as 1995 following a modest increase of 1994.
The Federal Deposit Insurance Corporation (FDIC) reduced its insurance premium
assessment in the third quarter of 1995 and also issued a refund for
overpayment of prior insurance premiums paid. Consequently, the FDIC
assessment decreased $355,000 or 99.4% in 1996 compared to a decrease of
$305,000 or 46.2% in 1995 and an increase of $32,000 or 5.1% in 1994.
NONPERFORMING ASSETS
.......................
Table 9
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
==============================================================
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Secured by real estate................................... 352 $ 990 $ 0 $1,284 $ 0
Commercial and industrial................................ 0 50 0 0 0
Restructured loans......................................... 259 289 0 0 960
Other real estate acquired through
foreclosed properties.................................... 1,125 988 1,059 59 74
Accruing loans which are contractually past
due 90 days or more...................................... 231 206 1,035 472 1,060
------- ------ ------ ------ ------
Total nonperforming assets................................. $ 1,967 $2,523 $2,094 $1,815 $2,094
======= ====== ====== ====== ======
Nonperforming assets to:
Loans outstanding at end of year......................... .72% 1.11% 1.02% .93% 1.14%
Total assets at end of year.............................. .47 .67 .59 .53 .65
The loss of interest income associated with
nonperforming loans at December 31:
<CAPTION>
1996 1995 1994 1993 1992
==============================================================
<S> <C> <C> <C> <C> <C>
Interest income that would have been recorded in
accordance with original terms.......................... $ 29 $ 17 $ 71 $ 162 $ 95
Less interest income actually recorded..................... 0 3 0 88 95
------- ------ ------ ------ ------
Loss of interest income.................................... $ 29 $ 14 $ 71 $ 74 $ 0
======= ====== ====== ====== ======
</TABLE>
<PAGE> 18
ALLOCATION OF RESERVE FOR LOAN LOSSES*
..........................................
<TABLE>
<CAPTION>
Table 10
(In thousands) 1996 1995 1994 1993 1992
LOANS Loans Loans Loans Loans
% % % % %
TOTAL Total Total Total Total
AMOUNT LOANS Amount Loans Amount Loans Amount Loans Amount Loans
--------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $1,467 35.8% $1,297 33.1% $1,254 29.7% $1,330 27.3% $1,682 28.2%
Mortgage 723 44.5% 642 45.3% 620 46.9% 625 49.6% 635 50.0%
Installment 766 18.5% 675 20.4% 652 22.3% 682 22.1% 287 21.8%
Credit card 29 1.2% 26 1.2% 25 1.1% 28 1.0%
Unallocated 90 90 90 110 100
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total $3,075 100.0% $2,730 100.0% $2,641 100.0% $2,775 100.0% $2,704 100.0%
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
* 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.
ASSET QUALITY AND PROVISION FOR LOAN LOSSES
The reserve for loan losses was $3,075,000 or 1.13% of loans outstanding at
December 31, 1996 compared to $2,730,000 or 1.20% of loans outstanding at
December 31, 1995. The provision for loan losses was increased $310,000 or
123.0% in 1996 to keep pace with the dramatic growth in the loan portfolio. In
1995, that increase over the 1994 provision to maintain an adequate loan loss
reserve was $33,000 or 15.1%. Net charge-offs for 1996 were $217,000 or .09% of
average loans outstanding, compared to 1995 net charge-offs of $163,000 or .08%
of average loans. Additional information regarding the reserve for loan losses
is contained in Table 8, "Analysis of Reserve for Loan Losses". Nonperforming
assets as of December 31, 1996 were down $556,000 compared to December 31, 1995
and represented .47% of total assets. Nonperforming assets include nonaccrual
loans, restructured loans, other real estate acquired through foreclosed
properties and accruing loans ninety days or more past due. Nonaccrual loans
totaling $352,000 at December 31, 1996 represented one loan secured by real
estate. Restructured loans at December 31, 1996 totaled $259,000. Accruing loans
past due 90 days or more were $231,000 at December 31, 1996, an increase of
12.1% from the level of $206,000 at December 31, 1995. 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, 1996,
the reserve for loan losses was 1.56 times nonperforming loans, up from 1.08
times nonperforming loans at December 31, 1995. 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 1996
reflected in Table 10 accurately reflects the inherent risks associated with
each of the various lending categories.
As a part of credit administration, management regularly reviews and grades its
loan portfolio for purposes of determining asset quality and the need to make
additional provisions for loan losses. The reserve for loan losses represents
management's estimate of an amount adequate to provide for the risk of future
losses inherent in the loan portfolio. In its on-going analysis of the reserve
for loan losses and its adequacy, management considers LSB's historical loan
loss experience, the economic risks associated with each of the lending
categories, the amount of past due and nonperforming loans, underlying
collateral values securing loans and credit concentrations or other factors
which might affect potential credit losses.
LSB is also subject to regulatory examinations and determinations as to the
adequacy of its reserve for loan losses, which may take into account such
factors as the methodology used to calculate the reserve and the size of the
reserve in comparison to peer banks identified by the regulatory agencies.
During 1996, 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.
<PAGE> 19
QUARTERLY FINANCIAL DATA
...........................
<TABLE>
<CAPTION>
Table 11
(In thousands except per share data)
DECEMBER 31, 1996 December 31, 1995
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income............... $7,141 $7,141 $7,749 $8,261 $6,638 $6,971 $7,230 $7,212
Interest expense.............. 2,851 2,790 3,160 3,351 2,651 2,874 2,992 2,931
----- ----- ----- ----- ----- ----- ----- -----
Net interest income........... 4,290 4,351 4,589 4,910 3,987 4,097 4,238 4,281
Provision for loan losses..... 73 143 103 243 63 63 63 63
----- ----- ----- ----- ----- ----- ----- -----
Net interest income after
provision for loan losses. 4,217 4,208 4,486 4,667 3,924 4,034 4,175 4,218
----- ----- ----- ----- ----- ----- ----- -----
Noninterest income............ 955 1,128 999 1,031 736 755 804 949
----- ----- ----- ----- ----- ----- ----- -----
Noninterest expens............ 3,753 3,279 3,247 3,250 3,294 3,355 3,208 3,255
----- ----- ----- ----- ----- ----- ----- -----
Income before income taxes.... 1,419 2,057 2,238 2,448 1,366 1,434 1,771 1,912
Income taxes.................. 345 555 666 757 328 345 463 565
----- ----- ----- ----- ----- ----- ----- -----
Net income.................... $1,074 $1,502 $1,572 $1,691 $1,038 $1,089 $1,308 $1,347
===== ===== ===== ===== ===== ===== ===== =====
Earnings per share*........... $ .20 $ .28 $ .29 $ .31 $ .19 $ .20 $ .24 $ .25
</TABLE>
* Earnings per share have been restated in this table to give effect to the
five-for-four stock split paid February 15, 1996.
There are, however, additional risks of future losses which cannot be quantified
precisely or attributed to particular loans or classes of loans. Because these
risks include the state of the economy and factors affecting particular
borrowers, management's judgment as to the adequacy of the reserve for loan
losses is necessarily approximate and imprecise. In its oversight of the credit
review process, management has not identified any undue economic risks
associated with the various lending categories, nor any significant credit
concentrations within these categories.
Loans classified for regulatory purposes as loss, doubtful, substandard or
special mention that have not been disclosed in Table 9, "Nonperforming
Assets", do not represent or result from trends or uncertainties which
management reasonably expects will materially impact future operating results,
liquidity, or capital resources, or represent material credits about which
management is aware of any information which causes management to have serious
doubts as to the ability of such borrowers to comply with the loan repayment
terms.
INCOME TAXES
Bancshares' effective tax rate increased to 28.5% in 1996 from 26.2% in 1995
compared to 24.2% in 1994. Financial statement Note 7 provides a reconciliation
between the amount of taxes computed using the statutory tax rate and the actual
tax expense. The increase in Bancshares' effective tax rate for 1996 was
primarily the result of higher taxable income.
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 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.
<PAGE> 20
ACCOUNTING AND REGULATORY ISSUES
The Financial Accounting Standards Board ("FASB") issued Statement No. 122
("SFAS 122") "Accounting for Mortgage Servicing Rights" in May 1995 effective
for financial years beginning after December 15, 1995. SFAS 122 was an amendment
to SFAS 65 "Accounting for Certain Mortgage Banking Activities". SFAS 122
amended SFAS 65 to eliminate the accounting distinction between purchased
mortgage servicing rights and originated mortgage servicing rights and required
that these assets, together known as mortgage servicing rights, be treated as a
single asset for financial statement purposes. In June 1996, FASB issued SFAS
125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" which becomes effective January 1, 1997 and
supersedes Statement No. 122. SFAS 125 applies an accounting treatment similar
to that outlined in SFAS 122 for mortgage servicing rights and extends it to
servicing assets on all financial assets. On December 18, 1996, the Federal
Financial Institutions Examination Council ("FFIEC") issued a press release
stating that for purposes of the Reports of Condition and Income ("Call
Reports"), banks must adopt the provisions of SFAS 125 for transfers and
servicing of financial assets occurring after December 31, 1996. SFAS 125 gives
accounting recognition to mortgage servicing contracts similar to that
prescribed in Statement No. 122 and extends that recognition to servicing
contracts for all types of financial assets. In addition, SFAS 125 eliminates
the current distinction between "normal" and "excess" servicing fees and will
generally reclassify these cash flows into two new types of assets: "servicing
assets" and certain related interest-only financial assets known as
"interest-only strips receivable." Under the FFIEC's regulatory capital guidance
the aggregated amount of mortgage servicing assets and purchased credit card
relationships would be limited to no more than 50 percent of Tier 1 capital. As
well, banking institutions would remain subject to the restriction limiting the
amount of mortgage servicing assets and purchased credit card relationships that
may be recognized for Tier 1 capital purposes. While Bancshares originates
mortgages for sale in the secondary market to Freddie Mac, which result in
mortgage servicing rights, the servicing rights resulting from this activity is
relatively small. Consequently, the effect on Bancshares' financial position and
operating results from the adoption of SFAS 122 and the subsequent adoption of
SFAS 125 is anticipated to be minimal.
In November 1995, the Federal Reserve Board issued a Supplement to Supervisory
Release ("SR") 95-51 "Rating the Adequacy of Risk Management Processes and
Internal Controls at State Member Bank and Bank Holding Companies." SR 95-51
instructed Federal Reserve System examiners to assign a formal supervisory
rating to the adequacy of an institution's risk management processes, including
its internal controls. The specific rating of risk management and internal
controls gave significant weight to examiners' evaluation of management under
the bank (CAMEL) and bank holding company (BOPEC) rating systems. The formal
rating of risk management was intended to highlight and incorporate both the
quantitative and qualitative aspects of an examiner's review of an institution's
overall process of identifying, measuring, monitoring and controlling risk and
to facilitate appropriate follow-up action. SR 95-51 placed emphasis on the
roles of senior management and the board of directors, adequate policies and
limits, accurate and independent measurement procedures and assessments of risk
and strong internal controls. Risk management ratings under SR 95-51 became
effective for examinations and inspections commencing on or after January 2,
1996. On December 20, 1996, the FDIC Board of Directors adopted a revised
Federal Financial Institutions Examination Council ("FFIEC") policy statement on
"Uniform Financial Institutions Rating System" ("UFIRS"), replacing the 1979
statement of policy. This is an internal rating system used by both federal and
state regulators for assessing the soundness of a financial institution. The
major change under UFIRS, as adopted by the FDIC, is an increased emphasis on
the quality of risk management practices and the addition of a sixth component
to the CAMEL rating system of Sensitivity to market risk. The sixth component is
intended to address the degree to which changes in interest rates affect an
institution's earnings or capital and the institution's ability to monitor and
manage its market risk. Adoption of this examination policy by the regulatory
agencies will not affect the financial position and operating results of
Bancshares.
<PAGE> 21
CONSOLIDATED BALANCE SHEETS
..............................
<TABLE>
<CAPTION>
December 31
-----------------------------------
(In thousands) 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Due from Banks (Note 2)..................................... $ 20,611 $ 17,581
-------- --------
Federal Funds Sold................................................... 26,720 10,025
-------- --------
Investment Securities (Note 3):
Held to Maturity, Market value $67,981 and $84,679................. 66,991 82,922
-------- --------
Available for Sale, Market value $23,626 and $26,046............... 23,626 26,046
-------- --------
Loans (Note 10):
Commercial....................................................... 97,431 74,980
Installment...................................................... 53,525 48,972
Mortgage......................................................... 121,088 102,715
-------- --------
Total Loans.................................................. 272,044 226,667
Less, Reserve for Loan Losses (Note 4)........................... (3,075) (2,730)
-------- --------
Net Loans...................................................... 268,969 223,937
-------- --------
Premises and Equipment (Note 5)...................................... 8,840 8,733
-------- --------
Other Assets......................................................... 5,843 5,782
-------- --------
Total Assets................................................... $421,600 $375,026
======== ========
LIABILITIES
Deposits:
Demand........................................................... $ 43,987 $ 42,660
Savings, N.O.W. and Money Market Accounts........................ 166,077 159,894
Certificates of Deposit of less than $100,000.................... 101,018 97,757
Certificates of Deposit of $100,000 or more...................... 43,738 22,978
-------- --------
Total Deposits................................................. 354,820 323,289
Securities Sold Under Agreements to Repurchase....................... 3,285 1,494
Borrowings from Federal Home Loan Bank............................... 9,167
Other Liabilities.................................................... 2,641 2,133
-------- --------
Total Liabilities.............................................. 369,913 326,916
-------- --------
SHAREHOLDERS' EQUITY
Capital Stock: Common, authorized 10,000,000 shares, Par Value $5,
issued 5,403,539 shares in 1996 and 5,375,035 shares in 1995.... 27,018 21,495
Paid-In Capital...................................................... 11,331 11,255
Retained Earnings.................................................... 13,337 15,048
Unrealized Gain on Securities Available for Sale, Net of Taxes....... 1 312
-------- --------
Total Shareholders' Equity..................................... 51,687 48,110
-------- --------
Total Liabilities and Shareholders' Equity..................... $421,600 $375,026
======== ========
</TABLE>
Commitments and Contingencies (Note 9)
Notes to consolidated financial statements are an integral part hereof.
<PAGE> 22
CONSOLIDATED STATEMENTS OF INCOME
.....................................
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------------------
(In thousands, except per share amounts) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans.................................................. $ 23,104 $ 20,290 $ 17,245
Interest on Investment Securities:
Taxable................................................................... 4,266 4,767 4,263
Tax Exempt................................................................ 1,866 1,928 1,942
Federal Home Loan Bank...................................................... 90 0 0
Federal Funds Sold.......................................................... 966 1,066 943
-------- -------- --------
Total Interest Income................................................... 30,292 28,051 24,393
-------- -------- --------
INTEREST EXPENSE
Deposits.................................................................... 11,776 11,402 8,622
Securities Sold Under Agreements to Repurchase.............................. 104 46 73
Borrowings from Federal Home Loan Bank...................................... 272 0 0
-------- -------- --------
Total Interest Expense.................................................. 12,152 11,448 8,695
-------- -------- --------
NET INTEREST INCOME............................................................. 18,140 16,603 15,698
PROVISION FOR LOAN LOSSES (NOTE 4).............................................. 562 252 219
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES............................. 17,578 16,351 15,479
-------- -------- --------
NONINTEREST INCOME
Service Charges on Deposit Accounts......................................... 2,032 1,816 1,812
Gains (Losses) on Sales of Mortgages........................................ 119 8 (368)
Gains on Sales of Investment Securities..................................... 0 0 49
Other Operating Income (Note 11)............................................ 1,962 1,420 1,110
-------- -------- --------
Total Noninterest Income................................................ 4,113 3,244 2,603
-------- -------- --------
NONINTEREST EXPENSE
Personnel Expense........................................................... 7,656 7,469 6,946
Occupancy Expense........................................................... 766 784 762
Equipment Depreciation and Maintenance...................................... 734 660 612
Other Operating Expense (Note 11)........................................... 3,851 4,199 3,878
Restructuring Charges (Note 16)............................................. 522 0 0
-------- -------- --------
Total Noninterest Expense................................................. 13,529 13,112 12,198
-------- -------- --------
INCOME BEFORE INCOME TAXES...................................................... 8,162 6,483 5,884
Income Taxes (Note 7)........................................................... 2,323 1,701 1,422
-------- -------- --------
NET INCOME...................................................................... $ 5,839 $ 4,782 $ 4,462
======== ======== ========
EARNINGS PER SHARE:
Based on 5,393,813 for 1996, 5,365,497 for 1995 and 5,338,545 for 1994
average shares outstanding adjusted for five-for-four stock split paid
February 15, 1996 and March 31, 1994..................................... $ 1.08 $ .89 $ .84
</TABLE>
Notes to consolidated financial statements are an integral part hereof
<PAGE> 23
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
................................................................
<TABLE>
<CAPTION>
Common Stock Net Unrealized Gain (Loss) Total
--------------- Paid-In Retained on Securities Shareholders'
Shares Amount Capital Earnings Available for Sale Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993.............. 3,398,526 $16,993 $11,040 $14,003 $42,036
Net income................................ 4,462 4,462
Cash dividends declared on
common stock............................ (1,876) (1,876)
Common stock issued in five-for-four
stock split, including cash for
fractional shares....................... 850,053 4,250 (4,262) (12)
Common stock issued for stock
options exercised....................... 19,119 95 83 178
Unrealized gain on securities
available for sale, impact of
accounting change at January 1,
1994, net of deferred income taxes...... $ 95 95
Unrealized loss on securities
available for sale, net of
deferred income taxes................... (408) (408)
--------- ------- ------- ------- ----- -------
Balance at December 31, 1994.............. 4,267,698 21,338 11,123 12,327 (313) 44,475
Net income................................ 4,782 4,782
Cash dividends declared on
common stock............................ (2,061) (2,061)
Common stock issued for stock
options exercised....................... 31,376 157 132 289
Unrealized gain on securities
available for sale, net of
deferred income taxes................... 625 625
--------- ------- ------- ------- ----- -------
Balance at December 31, 1995.............. 4,299,074 21,495 11,255 15,048 312 48,110
NET INCOME................................ 5,839 5,839
CASH DIVIDENDS DECLARED ON
COMMON STOCK............................ (2,158) (2,158)
COMMON STOCK ISSUED IN FIVE-FOR-FOUR
STOCK SPLIT, INCLUDING CASH FOR
FRACTIONAL SHARES....................... 1,075,961 5,380 (5,392) (12)
COMMON STOCK ISSUED FOR STOCK
OPTIONS EXERCISED....................... 28,504 143 76 219
UNREALIZED LOSS ON SECURITIES
AVAILABLE FOR SALE, NET OF
DEFERRED INCOME TAXES................... (311) (311)
--------- ------- ------- ------- ----- -------
BALANCE AT DECEMBER 31, 1996.............. 5,403,539 $27,018 $11,331 $13,337 $ 1 $51,687
========= ======= ======= ======= ===== =======
</TABLE>
Notes to consolidated financial statements are an integral part hereof.
<PAGE> 24
CONSOLIDATED STATMENTS OF CASH FLOWS
.........................................
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------
(In thousands) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net Income........................................................................ $ 5,839 $ 4,782 $ 4,462
Adjustments to reconcile net income to net cash:
Depreciation and amortization................................................. 755 706 685
Securities premium amortization and discount accretion, net................... 46 ( 252) ( 258)
Increase in loans held for sale............................................... ( 3,594) ( 914) ( 690)
Deferred income tax........................................................... ( 406) 453 ( 1)
Income taxes payable.......................................................... 217 ( 361) 171
(Increase) decrease in income earned but not received......................... 161 ( 297) ( 219)
Increase (decrease) in interest accrued but not paid.......................... 305 212 ( 9)
Provision for loan losses..................................................... 562 252 219
Gain on sale of investment securities......................................... ( 49)
Gain on sale of premises and equipment........................................ ( 9) ( 2) ( 6)
-------- ------- ---------
Net cash provided by operating activities................................. 3,876 4,579 4,305
-------- ------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of securities held to maturity.......................................... ( 3,000) (17,324) ( 26,944)
Proceeds from maturities of securities held to maturity........................... 18,898 21,456 20,122
Proceeds from sales of securities held to maturity................................ 4,026
Purchases of securities available for sale........................................ (10,564) (11,988) ( 23,216)
Proceeds from maturities of securities available for sale......................... 12,500 10,000 2,500
Proceeds from sales of securities available for sale.............................. 4,047
Net increase in loans made to customers........................................... (41,999) (20,666) ( 8,742)
Purchases of premises and equipment............................................... ( 898) ( 505) ( 249)
Proceeds from sale of premises and equipment...................................... 45 75 36
Net (increase) decrease in federal funds sold..................................... (16,695) 2,250 12,725
Increase in other assets.......................................................... ( 195) ( 27) ( 974)
-------- ------- ---------
Net cash used by investing activities..................................... (41,908) (16,729) ( 16,669)
-------- ------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Net increase in demand deposits, N.O.W.,
money market and savings accounts............................................. 7,510 1,821 11,724
Net increase in time deposits..................................................... 24,021 11,562 1,279
Net increase (decrease) in securities sold under
agreements to repurchase...................................................... 1,790 787 ( 1,372)
Proceeds from issuance of long-term debt.......................................... 10,000
Payments on long-term debt........................................................ ( 833)
Dividends and fractional shares paid.............................................. ( 2,170) ( 2,061) ( 1,888)
Net increase (decrease) in other liabilities...................................... 526 7 ( 142)
Common stock issued............................................................... $ 218 289 178
-------- ------- ---------
Net cash provided by financing activities................................. 41,062 12,405 9,779
-------- ------- ---------
Increase (decrease) in cash and cash equivalents...................................... $ 3,030 255 ( 2,585)
Cash and cash equivalents at beginning of years....................................... 17,581 17,326 19,911
-------- ------- --------
Cash and cash equivalents at end of years............................................. $ 20,611 $ 17,581 $ 17,326
======== ======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the years for:
Interest...................................................................... $ 12,071 $ 11,236 $ 8,669
Income taxes.................................................................. 2,512 1,618 1,265
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS......................................
Transfer of loans to other real estate owned...................................... $ 331 $ 354 $ 1,072
Unrealized gain (loss) on securities available for sale:
Change in securities available for sale....................................... 471 947 ( 474)
Change in deferred income taxes............................................... 160 322 ( 161)
Change in shareholders' equity................................................ 311 625 ( 313)
</TABLE>
Notes to consolidated financial statements are an integral part hereof.
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
..............................................
As of or for the Years Ended December 31, 1996, 1995 and 1994
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 service
business through Lexington State Bank ("Bank") and two non-bank
subsidiaries, Peoples Finance Company of Lexington, Inc. ("Peoples") and
LSB Financial Services, Inc. Bancshares serves customers primarily in
Davidson County, North Carolina.
Consolidation
The consolidated financial statements include the accounts of Bancshares
and its wholly-owned subsidiaries, after eliminating intercompany
balances and transactions. Securities and other property held in a
fiduciary or agency capacity are not included in the consolidated balance
sheets since these are not assets or liabilities of Bancshares.
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 as cash and cash equivalents
for purposes of the consolidated statements of cash flows. Due from bank
balances are maintained in other financial institutions.
Investment Securities
Effective January 1, 1994, Bancshares adopted Statement of Financial
Accounting Standards Number 115 "Accounting for Certain Investments in Debt
and Equity Securities". 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. Mortgage loans held for sale are carried at the lower
of cost or market value, as determined by outstanding commitments from
investors. Interest income is recognized using the interest method. Net
deferred loan fees are amortized into income over the term of the loan. 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
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, 5 to 10 years; vaults, 10 to 40 years. Leasehold
improvements are being 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.
<PAGE> 26
Income Taxes
The provision for income taxes is based on income and expense 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".
NOTE 2 - REGULATORY RESTRICTIONS
Bancshares and its subsidiary bank are subject to certain requirements
imposed by state and federal banking statutes and regulations. The Bank is
required to maintain a certain weekly average clearing account balance with
the Federal Reserve Bank of Richmond. The required weekly average clearing
account balance at December 31, 1996 and 1995 was $13,300,000 and
$11,200,000, respectively. The amounts are negotiated by the Bank with the
Federal Reserve Bank of Richmond. Certain regulatory requirements restrict
the lending of funds by and between Bancshares and the Bank and the amount
of dividends which can be paid to Bancshares by the Bank. On December 31,
1996, the Bank had available retained earnings of $38,138,671 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 1-4 family residential loans. At December 31, 1996,
the Bank owned $1,123,000 of FHLB common stock.
The Bank is subject to regulatory guidelines that require minimum
levels of capital based on a risk weighting of each asset category and off
balance sheet contingencies. At December 31, 1996, based on these measures,
the Bank's ratio for Tier 1 capital was 20.7% compared to the regulatory
minimum risk-based capital ratio requirement of 4%. The Bank's Tier 2
capital ratio at this date was 21.9% compared to the regulatory requirement
of 8%.
NOTE 3 - INVESTMENT SECURITIES
The valuations of investment securities as of December 31, 1996 and
1995, were as follows (in thousands):
1996 - Securities Held to Maturity
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
U.S. Treasury
and other U.S.
government agency
obligations $36,505 $ 0 $ 108 $36,397
State, county and
municipal
securities 30,486 1,098 0 31,584
------- ------- ------ -------
Total $66,991 $ 1,098 $ 108 $67,981
======= ======= ======= =======
</TABLE>
1996 - Securities Available for Sale
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury
and other U.S.
government agency
obligations $22,501 $ 47 $ 45 $22,503
State, county
and municipal
securities 0 0 0 0
Federal Home Loan
Bank Stock 1,123 0 0 1,123
------- -------- --------- -------
Total $23,624 $ 47 $ 45 $23,626
======= ======== ========= =======
</TABLE>
1995 - Securities Held to Maturity
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
U.S. Treasury
and other U.S.
government agency
obligations $51,039 $ 130 $ 19 $51,150
State, county and
municipal
securities 31,883 1,646 0 33,529
------- ------- ------ -------
Total $82,922 $ 1,776 $ 19 $84,679
======= ======= ====== =======
</TABLE>
1995 - Securities Available for Sale
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
======= ======== ========= =======
and other U.S.
government agency
obligations $24,502 $ 473 $ 0 $24,975
State, county
and municipal
securities 0 0 0 0
Federal Home Loan
Bank Stock 1,071 0 0 1,071
------- -------- --------- -------
Total $25,573 $ 473 $ 0 $26,046
======= ======== ========= =======
</TABLE>
The following is a maturity schedule of investment securities at
December 31, 1996 by contractual maturity (in thousands):
<TABLE>
<CAPTION>
Securities Held Securities Available
To Maturity For Sale
Amortized Market Amortized Market
Cost Value Cost Value
--------- ------ --------- ------
<S> <C> <C> <C> <C>
Debt securities:
Due in one
year or less $13,456 $13,490 $ 2,501 $ 2,502
Due after one
year through
five years 36,095 36,596 20,000 20,001
Due after five
years through
ten years 7,856 8,132 0 0
Due after ten
years 9,584 9,763 0 0
------- ------- ------- -------
Total debt
securities 66,991 67,981 22,501 22,503
Equity securities: 0 0 1,123 1,123
------- ------- ------- -------
Total securities $66,991 $67,981 $23,624 $23,626
======= ======= ======= =======
</TABLE>
<PAGE> 27
Lexington State Bank owned stock in the Federal Home Loan Bank of
Atlanta with book and market values of $1,123,000 and $1,071,000 at
December 31, 1996 and 1995, respectively, which is included in equity
securities and classified as available for sale.
A recap of the sales and maturities of held to maturity securities
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Proceeds from sales and
maturities $18,898 $21,456 $24,148
Gross realized gains 0 0 24
Gross realized losses 0 0 0
</TABLE>
Two securities classified as held to maturity were sold during 1994.
These securities, with sales proceeds of $4,026,000 and amortized cost of
$4,002,000, resulted in a realized gain of $24,000. The specific
identification method was the basis on which cost was determined. The sales
helped to fund some of the growth the Bank is experiencing in its
commercial and installment loan portfolios. The two securities were within
three months of maturity and changes in market interest rates would not
have a material effect on the security's market value.
A recap of the sales and maturities of available for sale securities
follows (In thousands):
<TABLE>
<CAPTION>
Years Ended December 31
1996 1995 1994
------- ------- ------
<S> <C> <C> <C>
Proceeds from sales and
maturities $12,500 $10,000 $6,547
Gross realized gains 0 0 25
Gross realized losses 0 0 0
</TABLE>
Three securities classified as available for sale were sold during
1994. These securities, with sales proceeds of $4,047,000 and amortized
cost of $4,022,000, resulted in a realized gain of $25,000. The specific
identification method was the basis on which cost was determined.
Investment securities with amortized cost of $66,358,672 and
$49,582,562 as of December 31, 1996 and 1995, respectively, were pledged to
secure public deposits and for other purposes.
NOTE 4 - RESERVE FOR LOAN LOSSES
An analysis of the changes in the reserve for loan losses follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Balances at beginning of years $2,730 $2,641 $2,775
Provision for loan losses 562 252 219
Recoveries of amounts
previously charged off 107 100 77
Loan losses ( 324) ( 263) ( 430)
------ ------ ------
Balances at end of years $3,075 $2,730 $2,641
====== ====== ======
</TABLE>
Effective January 1, 1995, Bancshares adopted Statement of Financial
Accounting Standards Number 114 "Accounting by Creditors for Impairment of
a Loan" and amended by Statement of Financial Accounting Standards Number
118 "Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures". These standards require creditors to establish a
valuation allowance when it is probable that all principal and interest due
under the contractual terms of a loan will not be collected. Impairment is
measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate, the observable market
value of a loan or the fair value of collateral if the loan is collateral
dependent. The creditor continues to use existing methods for recognizing
interest income on impaired loans. 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
most loans 90 days or more past due and all nonaccrual loans to be
impaired. The adoption of these standards did not have a material effect on
Bancshares' financial position or results of operations and required no
increase to the reserve for loan losses. Bancshares had loans specifically
classified as impaired totaling $2,139,361 and $3,809,985 at December 31,
1996 and 1995, respectively. The average balances of these loans were
$3,182,568 and $3,514,912 for the years ended December 31, 1996 and 1995,
respectively. The reserve for loan losses related to impaired loans totaled
$287,327 and $488,649 at December 31, 1996 and 1995, respectively.
Banchares has no commitments to loan additional funds to the borrowers of
impaired loans. Bancshares had loans that have been restructured of
$259,000 and $289,000 at December 31, 1996 and 1995, respectively. Interest
income on nonperforming loans that would have been recorded in accordance
with the original terms of the notes was $29,000, $17,000 and $71,000 for
the years ended December 31, 1996, 1995 and 1994, respectively. The actual
amount of interest income received from the loans was $0, $3,000 and $0.
<PAGE> 28
NOTE 5 - PREMISES AND EQUIPMENT
Following is a summary of premises and equipment (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
------ ------
<S> <C> <C>
Land......................................... $ 1,648 $ 1,435
Buildings.................................... 7,202 7,198
Equipment.................................... 5,436 4,855
Other........................................ 13 13
Leasehold improvements....................... 389 389
------- -------
Total cost............................... 14,688 13,890
Less, accumulated depreciation
and amortization........................... 5,848 5,157
------- -------
Total.................................... $ 8,840 $ 8,733
======= =======
</TABLE>
NOTE 6 - PENSION AND EMPLOYEE BENEFIT PLANS
The Bank and its subsidiaries have a noncontributory defined benefit
pension plan which covers substantially all employees. The benefits are
based on years of service and the average highest five consecutive years of
compensation paid during the ten years preceding normal retirement.
Contributions are made on an annual basis, with the total amount of such
contributions being between the minimum required for funding standard
account purposes and the maximum deductible for federal income tax
purposes.
Net pension cost consisted of the following components (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1996 1995 1994
------------- -------------- ------------
<S> <C> <C> <C>
Service cost for benefits
earned during the periods........... $ 140 $ 150 $ 127
Interest cost on projected
benefit obligation.................. 279 226 184
Return on plan assets................. ( 250) ( 199) ( 179)
Amortization of
unrecognized net assets............. ( 8) ( 8) ( 8)
Amortization of prior
service cost........................ ( 37) ( 37) ( 37)
Amortization of
unrecognized loss................... 23 24 3
-------- -------- --------
Net pension cost...................... $ 147 $ 156 $ 90
======== ======== ========
</TABLE>
The following table sets forth the funded status and amounts recognized
for the defined benefit pension plan in the Consolidated Balance Sheets (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
-------- --------
<S> <C> <C>
Actuarial present value of accumulated
benefit obligation, including vested
benefits of $2,989 in 1996 and $2,124
in 1995............................................ $ 3,067 $ 2,194
Actuarial present value of projected ======= =======
benefit obligation for services
rendered to date................................... $(4,068) $(3,162)
Plan assets at fair market value, primarily
U.S. government securities, listed
securities and deposits in banks................... 3,682 3,241
Projected benefit obligation in excess of ------- -------
plan assets........................................ ( 386) 79
Unrecognized net assets.............................. ( 38) ( 46
Unrecognized prior service cost ..................... ( 246) ( 283)
Unrecognized net loss................................ 761 391
------- -------
Prepaid pension cost................................. $ 91 $ 141
======= =======
</TABLE>
To determine the actuarial present value of the projected benefit
obligation, a discount rate of 7.5% was used for 1996, 8% for 1995 and 7.5%
for 1994. A rate of increase in future compensation levels of 5.5% was used
for 1996, 1995 and 1994. 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
$111,675, $108,039 and $84,497 for 1996, 1995 and 1994, 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):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Service cost.......................................... $ 20 $ 17 $ 14
Interest cost......................................... 60 35 29
Amortization of transition obligation over 20 years... 37 19 19
----- ----- -----
Net postretirement benefit cost....................... $ 117 $ 71 $ 62
===== ===== =====
</TABLE>
The following table sets forth the status of the plan and amounts
recognized for postretirement benefits in the Consolidated Balance Sheets
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
------ ------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees........................................... $(508) $(202)
Currently eligible active plan participants........ ( 23) ( 66)
Other active plan participants..................... (238) (196)
----- -----
Total.............................................. (769) (464)
Unrecognized net loss.............................. 312 41
Unrecognized net transition obligation............. 322 341
----- -----
Accrued postretirement benefit cost................ $(135) $( 82)
===== =====
</TABLE>
The annual assumed rate of increase in health care costs for the plan is
11.5% and 12.0% for 1996 and 1995, respectively, and is assumed
<PAGE> 29
to decrease gradually to 6% in 2007 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 $59,761,and $41,672 as of December 31, 1996 and
1995, respectively, and the aggregate of the service and interest cost of the
net periodic postretirement benefit cost by $8,750 and $6,750, respectively.
The discount rate used in determining the accumulated postretirement benefit
obligation was 8.0% for 1996 and 1995.
NOTE 7 - INCOME TAXES
The components of income tax expense (benefits) are as follows (In thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current .................................. $2,569 $1,570 $1,262
------ ------ ------
Deferred:
Reserve for loan losses ................. (233) (26) 45
Depreciation ............................ 41 (3) 33
Pension ................................. (13) 84 86
Deferred compensation ................... (189) 6 (35)
Fee and servicing income ................ 208 63 25
Self insurance .......................... (27) 1 11
Other ................................... (33) 6 (5)
------ ------ ------
(246) 131 160
------ ------ ------
Total ................................ $2,323 $1,701 $1,422
====== ====== ======
</TABLE>
A reconciliation of the federal statutory tax rate to the effective federal
tax rate follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal statutory tax rate .................. 34.0% 34.0% 34.0%
Tax-exempt interest income .................. (7.8) (10.4) (11.4)
Disallowed interest expense ................. .9 1.0 .9
Other........................................ 1.4 1.6 .7
---- ---- ----
Effective federal tax rate .................. 28.5% 26.2% 24.2%
==== ==== ====
</TABLE>
The components of the net deferred tax asset follow (In thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
---- ----
<S> <C> <C>
Investment securities ........... $ (81) $(225)
Reserve for loan losses ......... 887 653
Depreciation .................... (385) (344)
Pension ......................... (35) (48)
Deferred compensation ........... 339 150
Other ........................... (21) 112
----- -----
704 298
Valuation allowance ............. 0 0
----- -----
Total ........................... $ 704 $ 298
===== =====
</TABLE>
NOTE 8 - LEASES
The Bank is obligated under several lease agreements which expire in 1997
through 2004. The leased property is for land and building use. Rental
payments under these leases amounted to $80,263, $75,570 and $71,287 for the
years ended December 31, 1996, 1995 and 1994, respectively.
A summary of noncancelable lease commitments for the Bank follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 LEASE COMMITMENTS
<S> <C>
1997........................... $ 76
1998........................... 59
1999........................... 54
2000........................... 42
2001 and later................. 73
---
$304
====
</TABLE>
NOTE 9 - 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. Unfunded
commitments to extend credit were $60,794,887 at December 31, 1996.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved is essentially the same as that involved in extending loan
commitments to customers. Standby letters of credit were $1,774,460 at
December 31, 1996.
Lexington State Bank has a $30,000,000 line of credit from the Federal Home
Loan Bank of Atlanta of which $20,833,000 was unused at December 31, 1996.
Borrowings under this line of credit are secured by the Bank's stock in the
Federal Home Loan Bank of Atlanta as well as one-to-four family mortgage
loans.
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
<PAGE> 30
risk by maintaining cash balances with other banks which are $10,914,716 in
excess of Federal Deposit Insurance limits and has federal funds sold of
$26,720,000.
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 10 - RELATED PARTY TRANSACTIONS
The Bank had loans outstanding to executive officers and Directors and their
affiliated companies of approximately $6,200,000 and $5,228,000 at December
31, 1996 and 1995, respectively. Such loans were made substantially on the
same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with other borrowers and do not involve
more than the normal risk of collectibility.
An analysis of the activity with respect to such aggregate loans to related
parties is as follows (in thousands):
<TABLE>
<S> <C>
Balance at January 1, 1996 ........... $5,228
New loans during the year ............ 4,902
Repayments during the year ........... (3,930)
------
Balance at December 31, 1996 ......... $6,200
======
</TABLE>
NOTE 11 - SUPPLEMENTARY INCOME STATEMENT INFORMATION
The following is an analysis of material items in other operating income and
other operating expenses as shown on the Consolidated Statements of Income (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Other operating income:
Insurance commissions ............. $237 $221 $256
Trust income ...................... 408 315 314
Credit cards ...................... 358 287 219
Fee income ........................ 389 236 208
Other operating expenses:
Automated services ................ 879 761 765
Stationery, printing and
supplies .......................... 535 533 492
FDIC assessment ................... 2 357 663
Legal and professional expense .... 544 573 529
</TABLE>
NOTE 12 - LSB BANCSHARES, INC. (PARENT
COMPANY)
The parent company's condensed balance sheets as of December 31, 1996 and
1995, and the related condensed statements of income and cash flows for the
years ended December 31, 1996, 1995 and 1994, are as follows (in thousands):
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS DECEMBER 31
1996 1995
-------- --------
<S> <C> <C>
Assets:
Cash ............................ $ 138 $ 54
Investment in wholly-owned
subsidiary .................... 51,215 47,518
Other assets .................... 694 637
-------- --------
Total assets .................. $ 52,047 $ 48,209
======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
---- ----
<S> <C> <C>
Liabilities and shareholders' equity:
Due to wholly-owned subsidiary ........ $ 0 $ 76
Other liabilities ..................... 362 335
Shareholders' equity .................. 51,685 47,798
-------- -------
Total liabilities and
shareholders' equity .......... $ 52,047 $48,209
======== =======
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Dividends from subsidiary .............. $2,230 $2,060 $1,906
------ ------ ------
Professional fees ....................... 10 174 110
Other operating expense ................. 78 164 147
------ ------ ------
88 338 257
------ ------ ------
Income before equity in
earnings of subsidiary ............. 2,142 1,722 1,649
Equity in earnings
of subsidiary ...................... 3,697 3,060 2,813
------ ------ ------
Net income ............................. $5,839 $4,782 $4,462
====== ====== ======
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOW FROM OPERATING
ACTIVITIES:
Net income ............................. $ 5,839 $ 4,782 $ 4,462
Adjustments to reconcile net
income to net cash:
Increase in investment in
wholly-owned subsidiary .......... ( 3,697) ( 3,060) ( 2,812)
-------- -------- --------
Net cash provided by
operating activities ............... 2,142 1,722 ( 1,650)
-------- -------- --------
CASH FLOW FROM INVESTING
ACTIVITIES:
(Increase) decrease in other assets .... ( 57) ( 131) 3
-------- -------- --------
CASH FLOW FROM FINANCING
ACTIVITIES:
Sale of capital stock .................. 219 289 178
Dividends and fractional
shares paid ........................ ( 2,170) ( 2,061) ( 1,888)
Increase (decrease) in other
liabilities ........................ ( 50) 83 13
-------- -------- --------
Net cash used by
financing activities ............... ( 2,001) ( 1,689) ( 1,697)
-------- -------- --------
Increase (decrease) in cash ............ 84 (98) ( 44)
Cash at beginning of years ............. 54 152 196
-------- -------- --------
Cash at end of years ................... $ 138 $ 54 $ 152
======== ======== ========
</TABLE>
NOTE 13 - STOCK BASED COMPENSATION PLANS
At December 31, 1996, Bancshares has two stock-based compensation plans in
force and one stock-based compensation plan which has expired. Bancshares
accounts for the plans 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:
<PAGE> 31
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1996 1995
---- ----
<S> <C> <C>
Net Income As Reported......... $5,839 $4,782
(in thousands) Pro Forma........... 5,702 4,702
Primary Earnings As Reported......... 1.08 .89
Per Share Pro Forma........... 1.06 .88
Fully Diluted Earnings As Reported......... 1.03 .85
Per Share Pro Forma........... 1.01 .84
</TABLE>
Bancshares has two stock-based compensation plans in force at December 31,
1996 and one plan which expired during the year. Under the 1986 Employee
Incentive Stock Option Plan (" 1986 Plan "), which expired during 1996,
Bancshares could have granted 375,000 shares of common stock to its key
employees. 23,679 shares not granted expired at the plan's expiration. Under
the 1994 Director Stock Option Plan (" 1994 Plan "), Bancshares may grant
options to its directors for up to 125,000 shares of common stock. Under the
1996 Omnibus Stock Incentive Plan (" 1996 Plan "), Bancshares may grant
options, stock appreciation rights, or stock awards to its employees for up to
250,000 shares of common stock, with a maximum of 125,000 shares granted as
stock awards.
Under the 1986 Plan and the 1994 Plan, the exercise price of each option
equals the market price of Bancshares' stock on the date of grant. Under the
1996 plan, the exercise price of each incentive stock option must be no less
than the market price of Bancshares' stock on the date of grant; for other
awards, the exercise price cannot be less than 85% of the market price on the
date of grant. An option's maximum term under the 1986 Plan and the 1996 Plan
is ten years; under the 1994 Plan it is five years.
Under the 1994 Plan, options are granted at the close of business of
Bancshares on the date of the annual shareholders' meeting and vest
immediately. Under the 1986 Plan and the 1996 Plan, options are granted at a
date determined by the Stock Compensation Committee of the Board of Directors
and vest in equal annual installments on each of the next five anniversaries
of the date of grant.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995: dividend yield of 2.4 percent
for all years; expected volatility of 62.3% for all years; risk-free interest
rates of 6.0 percent for all years; and expected lives of five years, six
years, seven years, and eight years for the 1986 Plan options and two years,
three years, and four years for the 1994 Plan options and nine years for the
1996 Plan options.
The following table summarizes information about outstanding and exercisable
stock options at December 31, 1996:
<TABLE>
<CAPTION>
Weighted
Average Remaining
Number of Life of Outstanding Number of
Exercise Price Outstanding Options Options Exercisable Options
- -------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
$ 8.96 50,941 5.4 40,632
12.16 57,817 6.3 35,329
14.40 51,568 8.4 10,318
15.20 5,500 3.3 5,500
15.60 5,500 2.3 5,500
16.00 57,818 7.4 23,136
16.25 44,250 8.8 5,500
------- -------
273,394 7.0 125,915
======= =======
</TABLE>
A summary of the status of Bancshares' stock-based compensation plans as of
December 31, 1996 and 1995 and changes during the years then ended is
presented below:
<TABLE>
<CAPTION>
1996 1995
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at
beginning of year ....... 259,580 $12 241,733 $11
Granted ................... 44,250 16 57,068 14
Exercised ................. 30,436 7 39,221 7
Outstanding at end
of year ................. 273,394 14 259,580 12
Options exercisable
at end of year .......... 125,915 12 100,766 11
Weighted-average
fair value of
options granted
during the year.......... $ 16.35 $ 14.48
</TABLE>
NOTE 14 - 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.
<PAGE> 32
Deposit Liabilities
The fair value of demand deposits, savings accounts and certain money market
deposits is the amount payable on demand at December 31, 1996. 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):
<TABLE>
<CAPTION>
December 31
1996 1995
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term
investments............ $ 47,331 $ 47,331 $ 27,606 $ 27,606
-------- -------- -------- --------
Investment securities..... 90,617 90,484 108,968 108,257
-------- -------- -------- --------
Loans..................... 272,044 271,272 226,667 224,503
Less reserve for loan
losses................. (3,075) (2,730)
-------- -------- -------- --------
Net loans................. 268,969 271,272 223,937 224,503
Financial liabilities:
Deposits.................. 354,820 355,178 323,289 323,167
Securities sold under
agreements to
repurchase............ 3,285 3,285 1,494 1,492
Borrowings from
Federal Home Loan Bank.... 9,167 9,169
Unrecognized financial
instruments:1
Commitments to
extend credit........... 0 0 0 0
Standby letters of
credit.................... 7 7 7 7
</TABLE>
1The amounts shown under "Carrying Amount" represent fees arising from these
unrecognized financial instruments.
NOTE 15 - SUBSEQUENT EVENTS
On January 20, 1997, LSB Bancshares, Inc. signed a letter of intent with Old
North State Bank of Winston-Salem, NC under which the two banks would merge.
Under the terms of the letter of intent, each of the Old North State Bank
shares outstanding would be exchanged for 0.948 shares of LSB Bancshares, Inc.
stock, subject to adjustment based on the price of LSB Bancshares, Inc. stock
at the time the merger is completed.
The merger is subject to the execution of a definitive agreement between the
two institutions as well as regulatory and shareholder approvals and is
expected to be completed by mid-1997.
NOTE 16 - RESTRUCTURING CHARGES
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 totaled
$522,000 in 1996, consisting of $490,000 for retirement benefits, $27,000 for
severance benefits and $5,000 for professional fees.
NOTE 17 - MORTGAGE SERVICING RIGHTS
Bancshares adopted Statement of Financial Accounting Standards Number 122,
"Accounting for Mortgage Servicing Rights", on a prospective basis only, on
January 1, 1996. 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 determined quarterly based principally on a disaggregated,
discounted cash flow method. The loans and associated servicing rights are
segmented by risk characteristics to include loan type, investor and interest
rate. Appropriate carrying value of the unamortized deferred excess servicing
fee balance is determined quarterly, based principally on an aggregated
discounted method. If such values are less than such balances, the differences
are included as a reduction of Gains (Losses) on Sales of Mortgages.
During 1996, mortgage servicing rights of $119,168 were originated,
amortization was $16,899 and the balance at December 31, 1996 was $102,269.
Total loans serviced approximated $58,414,179 on December 31, 1996.
<PAGE> 33
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.
<TABLE>
<CAPTION>
Prices Cash
--------------------------- Dividends
1996 High Low Close Declared
================================================================================
<S> <C> <C> <C> <C>
First Quarter........................ $15.75 $15.25 $16.13 .10
Second Quarter....................... 17.00 15.00 15.75 .10
Third Quarter........................ 16.75 15.00 15.25 .10
Fourth Quarter....................... 20.75 14.75 19.50 .10
1995.................................
===============================================================================
First Quarter........................ $16.00 $14.40 $14.80 .095
Second Quarter....................... 16.00 14.40 15.60 .095
Third Quarter........................ 16.40 14.60 15.60 .095
Fourth Quarter....................... 16.80 14.80 15.80 .095
</TABLE>
*Stock and dividend amounts have been adjusted for the five-for-four stock
split paid February 15, 1996.
<PAGE> 34
STATEMENT OF MANAGEMENT RESPONSIBILITY
...........................................
Management is responsible for the financial statements included in the annual
report. The financial statements are prepared in accordance with generally
accepted accounting principles. Other information in the annual report is
consistent with the financial statements.
In fulfilling its responsibility, management relies on a system of internal
controls designed to safeguard Bancshares' assets from material loss or misuse.
The system has been designed to ensure that transactions are properly
authorized and recorded in Bancshares' financial records.
Through its Audit Committee, which is comprised of outside directors, the Board
of Directors fulfills its oversight responsibility for determining that the
accounting policies employed by management are reasonable and that the system
of internal controls is adequately reviewed and maintained. Bancshares'
independent certified public accountants meet periodically with and have full
and free access to the Committee, privately or with management, to discuss
financial reporting matters. The Committee reports periodically to the full
Board.
LSB Bancshares, Inc.
January 31, 1997
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, 1996 and 1995, 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, 1996. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of LSB Bancshares,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the consolidated
results of their operations, and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
As described in Notes One and Three to the consolidated financial statements,
during the year ended December 31, 1994, the Corporation changed its method of
accounting for certain investment securities.
Turlington and Company, L.L.P.
Lexington, North Carolina
January 31, 1997
<PAGE> 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, thereto duly authorized.
LSB BANCSHARES, INC.
Date: July 2, 1997 By /s/ Robert F. Lowe
----------------------------------
Robert F. Lowe, President and
Chief Executive Officer
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.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
<S> <C> <C>
/s/ Robert F. Lowe Chairman of the Board, President July 2, 1997
- ------------------------------- and Chief Executive Officer
Robert F. Lowe (Principal Executive Officer)
/s/ Monty J. Oliver Secretary, Treasurer and July 2, 1997
- ------------------------------- Chief Financial Officer
Monty J. Oliver (Principal Financial Officer and
Principal Accounting Officer)
/s/ Michael S. Albert Director July 2, 1997
- -------------------------------
Michael S. Albert
Director
- -------------------------------
Peggy B. Barnhardt
/s/ Leonard H. Beck Director July 2, 1997
- -------------------------------
Leonard H. Beck
Director
- -------------------------------
Margaret Lee W. Crowell
Director
- -------------------------------
Samuel R. Harris
Director
- -------------------------------
Walter A. Hill, Sr.
/s/ David A. Smith Director July 2, 1997
- -------------------------------
David A. Smith
/s/ Robert B. Smith, Jr. Director July 2, 1997
- -------------------------------
Robert B. Smith, Jr.
/s/ Burr W. Sullivan Director July 2, 1997
- -------------------------------
Burr W. Sullivan
/s/ Robert E. Timberlake Director July 2, 1997
- -------------------------------
Robert E. Timberlake
Director
- -------------------------------
Julius S. Young, Jr.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 20,263
<INT-BEARING-DEPOSITS> 348
<FED-FUNDS-SOLD> 26,720
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 23,626
<INVESTMENTS-CARRYING> 66,991
<INVESTMENTS-MARKET> 67,981
<LOANS> 272,044
<ALLOWANCE> 3,075
<TOTAL-ASSETS> 421,600
<DEPOSITS> 354,820
<SHORT-TERM> 3,285
<LIABILITIES-OTHER> 2,641
<LONG-TERM> 9,167
0
0
<COMMON> 27,018
<OTHER-SE> 24,669
<TOTAL-LIABILITIES-AND-EQUITY> 421,600
<INTEREST-LOAN> 23,104
<INTEREST-INVEST> 7,188
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 30,292
<INTEREST-DEPOSIT> 11,776
<INTEREST-EXPENSE> 12,152
<INTEREST-INCOME-NET> 18,140
<LOAN-LOSSES> 562
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 13,529
<INCOME-PRETAX> 8,162
<INCOME-PRE-EXTRAORDINARY> 8,162
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,839
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.08
<YIELD-ACTUAL> 8.44
<LOANS-NON> 352
<LOANS-PAST> 231
<LOANS-TROUBLED> 259
<LOANS-PROBLEM> 2,139
<ALLOWANCE-OPEN> 2,730
<CHARGE-OFFS> 324
<RECOVERIES> 107
<ALLOWANCE-CLOSE> 3,075
<ALLOWANCE-DOMESTIC> 3,075
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
