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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 29549
FORM 10-K
- -------------------------------------------------------------------------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
Commission File Number 0-11448
- -------------------------------------------------------------------------------
LSB BANCSHARES, INC.
One LSB Plaza
Lexington, North Carolina 27292
(336) 248-6500
Incorporated in the State of North Carolina
IRS Employer Identification No. 56-1348147
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, Par Value $5.00 Per Share
LSB Bancshares, Inc. has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file
such reports) and has been subject to such filing requirements for the past 90
days.
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
The aggregate market value (average of the bid and asked prices) of the
voting stock held by nonaffiliates of the registrant as of January 31, 2000 was
$137,354,571 and the number of shares outstanding was 8,452,589.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the year ended
December 31, 1999 are incorporated by reference into Parts I and II of this
report. Portions of the registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held April 19, 2000 are incorporated by reference into Part
III of this report.
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FORM 10-K CROSS-REFERENCE INDEX
This 1999 Annual Report and Form 10-K of the registrant incorporates into a
single document the 1999 Annual Report to Shareholders and the Annual Report on
Form 10-K for the year ended December 31, 1999 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 2000 Annual
Meeting of Shareholders as is reflected in the following Cross-Reference Index.
INCORPORATED BY REFERENCE INTO THE FOLLOWING ITEMS INFORMATION APPEARING ON
OF FORM 10-K THE FOLLOWING PAGES OF THE:
- -------------------------------------------------------------------------------- ---------------------------------------------
Annual Report Proxy Statement
PART I
Item 1. Business ............................................................. 12,15-24
Item 2. Properties ........................................................... 12,31,35 (Notes 5 and 16)
Item 3. Legal Proceedings .................................................... 32 (Note 8)
Item 4. Submission of Matters to a Vote of Security Holders (None)............
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters .................................................. 45
Item 6. Selected Financial Data .............................................. 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................ 15-24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ........... 16-22, 33 (Note 13)
Item 8. Financial Statements and Supplementary Data .......................... 25-36
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure (None) ......................................
PART III
Item 10. Directors and Executive Officers of the Registrant ................... 41, 42
Item 11. Executive Compensation ............................................... 7-9
Item 12. Security Ownership of Certain Beneficial Owners and
Management ........................................................... 4-5
Item 13. Certain Relationships and Related Transactions ....................... 17
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K:
(a) The following documents to be filed as part of the Form 10-K:
(1) Financial Statements:
Independent Accountants' Audit Report ......................... 37
Consolidated Balance Sheets - December 31, 1999 and 1998 ...... 25
Consolidated Statements of Income - Years Ended
December 31, 1999, 1998 and 1997 ............................. 26
Consolidated Statements of Changes in Shareholders' Equity
Years Ended December 31, 1999, 1998 and 1997 ................. 27
Consolidated Statements of Cash Flows - Years Ended
December 31, 1999, 1998 and 1997 ............................. 28
Notes to Consolidated Financial Statements .................... 29-36
(2) Financial Statement Schedules (None) ..........................
(3) Exhibits:
3.1 Articles of Incorporation of LSB Bancshares, Inc., as
amended, which are incorporated by reference to Exhibit 4.2
of the registrant's Registration Statement on Form S-8
filed with the Securities and Exchange Commission on
November 17, 1992 (File No. 33-54610).
3.2 Bylaws of LSB Bancshares, Inc., as amended, which are
incorporated by reference to Exhibit 3.2 of the
registrant's Annual Report on Form 10-K for the year ended
December 31, 1995.
39
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FORM 10-K CROSS-REFERENCE INDEX (CONT'D)
INCORPORATED BY REFERENCE INTO THE FOLLOWING ITEMS
OF FORM 10-K
PART IV
Item 14. 4.1 Specimen certificate of common stock, $5.00 par value,
(cont'd) which is incorporated by reference to Exhibit 4 of
the registrant's Registration Statement on Form S-1
(File No. 2-99312).
4.2 Rights Agreement dated as of February 10, 1998 by
and between LSB Bancshares, Inc. and Wachovia Bank,
N.A., as Rights Agent, which is incorporated by
reference to Exhibit 1 of the Registrant's
Registration Statement on Form 8-A filed with the
Securities and Exchange Commission on March 6, 1998.
10.1 1996 Omnibus Stock Incentive Plan, which is
incorporated by reference to Exhibit 10.2 of the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995.
10.2 1996 Management Plan, which is incorporated by
reference to Exhibit 10.3 of the Registrant's Annual
Report on Form 10-K for the year ended December 31,
1995.
10.3 1994 Director Stock Option Plan of LSB Bancshares,
Inc., which is incorporated by reference to Exhibit
4 of the registrant's Registration Statement on Form
S-8 filed with the Securities and Exchange
Commission on July 15, 1994 (File No. 33-81664).
10.4 Employment Continuity Agreement effective as of
December 24, 1997 between LSB Bancshares, Inc. and
Nicholas A. Daves, which is incorporated by
reference to Exhibit 10.7 of the Registrant's Annual
Report on Form 10-K for the year ended December 31,
1997.
10.5 Employment Continuity Agreement effective as of June
9, 1998 between LSB Bancshares, Inc. and Robert F.
Lowe, which is incorporated by reference to Exhibit
10.8 of the Registrant's Annual Report on form 10-K
for the year ended December 31, 1998.
10.6 Employment Continuity Agreement effective as of June
9, 1998 between LSB Bancshares, Inc. and H. Franklin
Sherron, which is incorporated by reference to
Exhibit 10.9 of the Registrant's Annual Report on
form 10-K for the year ended December 31, 1998.
10.7 Employment Continuity Agreement effective as of June
9, 1998 between LSB Bancshares, Inc. and Monty J.
Oliver, which is incorporated by reference to
Exhibit 10.10 of the Registrant's Annual Report on
form 10-K for the year ended December 31, 1998.
10.8 Employment Continuity Agreement effective as of June
9, 1998 between LSB Bancshares, Inc. and Robin A.
Huneycutt, which is incorporated by reference to
Exhibit 10.11 of the Registrant's Annual Report on
form 10-K for the year ended December 31, 1998.
10.9 Employment Continuity Agreement effective as of June
9, 1998 between LSB Bancshares, Inc. and Ronald W.
Sink, which is incorporated by reference to Exhibit
10.12 of the Registrant's Annual Report on form 10-K
for the year ended December 31, 1998.
10.10 Employment Continuity Agreement effective as of June
9, 1998 between LSB Bancshares, Inc. and Ronald E.
Coleman, which is incorporated by reference to
Exhibit 10.13 of the Registrant's Annual Report on
form 10-K for the year ended December 31, 1998.
10.11 Employment Continuity Agreement effective as of June
9, 1998 between LSB Bancshares, Inc. and D. Gerald
Sink, which is incorporated by reference to Exhibit
10.14 of the Registrant's Annual Report on form 10-K
for the year ended December 31, 1998.
10.12 Employment Continuity Agreement effective as of June
9, 1998 between LSB Bancshares, Inc. and Joe W.
Carroll, which is incorporated by reference to
Exhibit 10.15 of the Registrant's Annual Report on
form 10-K for the year ended December 31, 1998.
10.13 Employment Continuity Agreement effective as of June
9, 1998 between LSB Bancshares, Inc. and Suzanne J.
Bullotta, which is incorporated by reference to
Exhibit 10.16 of the Registrant's Annual Report on
form 10-K for the year ended December 31, 1998.
13 1999 Annual Report to Shareholders.
21. List of Subsidiaries at December 31, 1999.
23. Consent of Turlington and Company, L.L.P.
27. Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K: No reports on Form 8-K were filed by the
registrant during the last quarter covered by this report.
40
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DESCRIPTION OF BUSINESS
REGISTRANT
LSB Bancshares, Inc. ("Bancshares") is a bank holding company headquartered in
Lexington, North Carolina and registered under the Bank Holding Company Act of
1956, as amended. Bancshares' principal business is providing banking and other
financial services through its banking subsidiary. Incorporated on July 1,
1983, Bancshares is the parent holding company of Lexington State Bank ("LSB"),
a North Carolina-chartered commercial bank. The principal assets of Bancshares
are all outstanding shares of LSB common stock. At December 31, 1999,
Bancshares and its subsidiary had consolidated assets of $727 million and 340
employees.
SUBSIDIARY BANK
LSB is chartered under the laws of the state of North Carolina to engage in the
business of general banking. Founded in 1949, LSB offers a complete array of
services in commercial banking including accepting deposits, corporate cash
management, discount brokerage, IRA plans, secured and unsecured loans and
trust functions through twenty-one offices in twelve communities located in
Davidson, Forsyth and Stokes counties in North Carolina. LSB operates the only
independent trust department in Davidson County, providing estate planning,
estate and trust administration, IRA trusts, personal investment accounts and
pension and profit-sharing trusts.
NON-BANK SUBSIDIARIES
LSB has two wholly-owned non-bank subsidiaries: Peoples Finance Company of
Lexington, Inc. ("Peoples Finance") and LSB Financial Services, Inc. ("LSB
Financial Services"). Peoples Finance was acquired by LSB on January 1, 1984
and operates as a finance company licensed under the laws of the state of North
Carolina. Peoples Finance operates from one office located in Lexington, North
Carolina with 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 was incorporated under the laws of the state of North
Carolina in 1994 and began operations on December 1, 1994. It offers a full
range of uninsured, nondeposit investment products, including mutual funds,
annuities, stocks and bonds. LSB Financial Services operates from offices
located within LSB's home office and the Stratford Road office with five
employees. LSB Financial Services offers products through Uvest Investment
Services, an independent broker-dealer, which is a member of the National
Association of Securities Dealers and the Securities Investor Protection
Corporation. Investments are neither deposits nor obligations of Lexington
State Bank, nor are they guaranteed or insured by any depository institution,
the FDIC, or any other government agency.
COMPETITION
Commercial banking in LSB's service area is highly competitive. LSB actively
competes with national and state banks, thrift institutions, credit unions,
investment brokers, mortgage and finance companies. Competition of community
banks with regional and national banks has intensified significantly as a
result of deregulation of the financial industry.
REGULATION
As a bank holding company, Bancshares is subject to supervision, examination
and regulation by the Board of Governors of the Federal Reserve System. LSB is
chartered by the state of North Carolina and as such is subject to supervision,
examination and regulation by the North Carolina State Banking Commission. LSB
is also a member of the Federal Deposit Insurance Corporation and is therefore
subject to supervision and examination by that agency.
YEAR 2000 ISSUE
In 1998, Bancshares established a Year 2000 Project Management Plan with board
oversight and senior management direction. The plan addressed the Year 2000
issue and its potential impact on business. Bancshares' schedule for conclusion
of the Year 2000 project was met with no adverse effects on operations.
PROPERTIES
Bancshares' principal executive offices are located at One LSB Plaza,
Lexington, North Carolina. This five-story office building totals 74,800 square
feet and also serves as the home office of LSB. A majority of the major staff
functions are located within this office complex, which is owned by LSB.
In addition, LSB operates twenty-one branch offices and seven off-premise
automated teller locations. Ten branches are owned by LSB, while eleven
branches and the off-premise ATM locations are leased. LSB's leased properties
are subject to leases that expire on various dates from February 1, 2000 to
February 28, 2010. Peoples Finance operates from an 1,800 square foot,
one-story building located at 203 East 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.
12
5
SUMMARY OF
SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31
(In thousands, except per share data and ratios) 1999 1998 1997 1996 1995
- ------------------------------------------------ -------- -------- -------- -------- --------
SUMMARY OF OPERATIONS
Interest income ........................... $ 52,441 $ 49,657 $ 45,467 $ 40,192 $ 32,333
Interest expense .......................... 22,373 21,682 19,547 16,536 13,426
-------- -------- -------- -------- --------
Net interest income ....................... 30,068 27,975 25,920 23,656 18,907
Provision for loan losses ................. 780 770 785 805 367
-------- -------- -------- -------- --------
Net interest income
after provision for loan losses .......... 29,288 27,205 25,135 22,851 18,540
Noninterest income ........................ 7,187 6,585 5,389 4,639 3,599
Noninterest expense ....................... 23,068 21,151 20,426 17,907 15,091
-------- -------- -------- -------- --------
Income before income taxes ................ 13,407 12,639 10,098 9,583 7,048
Income taxes .............................. 3,927 3,959 3,336 2,718 1,888
-------- -------- -------- -------- --------
Net income ................................ $ 9,480 $ 8,680 $ 6,762 $ 6,865 $ 5,160
======== ======== ======== ======== ========
Cash dividends declared ................... $ 4,775 $ 3,658 $ 2,712 $ 2,158 $ 2,061
======== ======== ======== ======== ========
SELECTED YEAR - END ASSETS AND LIABILITIES
Investment securities ..................... $128,819 $143,843 $105,616 $128,101 $144,639
Loans, net of unearned income ............. 506,078 436,014 396,991 355,893 297,264
Assets .................................... 726,828 679,006 616,265 551,845 493,433
Deposits .................................. 605,422 567,327 503,025 464,921 428,032
Shareholders' equity ...................... 70,724 73,430 67,527 62,862 58,355
RATIOS (AVERAGES)
Net income to total assets ................ 1.35% 1.35% 1.16% 1.32% 1.23%
Net income to shareholders' equity ........ 13.14 12.30 10.31 11.36 10.19
Dividend payout ........................... 50.36 42.14 40.11 31.43 39.94
Shareholders' equity to total assets ...... 10.28 10.96 11.21 11.62 12.05
PER SHARE DATA(*)
Earnings Per Share:
Basic ................................... $ 1.11 $ 1.00 $ .78 $ .80 $ .66
Diluted ................................. 1.09 .98 .77 .79 .65
Cash dividends declared ................... .56 .42 .35 .25 .24
Book value at end of year ................. 8.38 8.42 7.79 7.29 6.80
* Per share data have been restated in this table to give effect to the five for
four stock splits paid February 16, 1998 and February 15, 1996.
13
6
AVERAGE BALANCES AND
NET INTEREST INCOME ANALYSIS
Table 1
Fully taxable equivalent basis(1) (In thousands)
1999 1998 1997
Interest Interest Interest
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Yield/Rate Balance Expense Yield/Rate Balance Expense Yield/Rate
-------------------------------------------------------------------------------------------
Earning assets:
Loans and leases
receivable, net(2) ........... $473,675 $42,520 8.98% $415,463 $39,112 9.41% $379,672 $35,692 9.40%
Taxable securities ............ 95,490 5,455 5.71 96,486 5,544 5.75 83,133 5,077 6.11
Tax exempt securities ......... 35,317 2,579 7.30 33,116 2,550 7.70 31,202 2,498 8.01
Federal Home Loan
Bank ......................... 2,096 157 7.49 2,228 165 7.41 2,464 179 7.26
Interest-Bearing Bank
Balances ..................... 9,714 459 4.73 21,876 1,087 4.97 1,760 95 5.40
Federal funds sold and
securities purchased under
resale agreements ............ 39,120 1,975 5.05 33,956 1,903 5.60 48,279 2,639 5.47
-------- ------- -------- ------- -------- -------
Total earning assets ......... 655,412 53,145 8.11 603,125 50,361 8.35 546,510 46,180 8.45
Non-earning assets:
Cash and due from banks........ 32,446 25,322 22,657
Premises and equipment......... 11,461 11,516 11,333
Other assets................... 7,706 9,103 9,016
Reserve for loan losses........ (5,211) (4,799) (4,468)
-------- ------- -------- ------- -------- -------
Total assets ................... $701,814 $53,145 $644,267 $50,361 $585,048 $46,180
======== ======= ======== ======= ======== =======
Interest-bearing liabilities:
Savings and time
deposits ..................... $516,346 $20,314 3.93% $466,874 $19,727 4.23% $425,489 $17,917 4.21%
Securities sold under
agreements to
repurchase .................. 3,852 154 4.00 6,027 234 3.88 5,637 234 4.15
Borrowings from Federal
Home Loan Bank .............. 34,790 1,905 5.48 30,731 1,721 5.60 23,303 1,396 5.99
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities ................. 554,988 22,373 4.03 503,632 21,682 4.31 454,429 19,547 4.30
Other liabilities and
shareholders' equity:
Demand deposits ................ 70,904 65,271 61,148
Other liabilities .............. 3,749 4,779 3,900
Shareholders' equity ........... 72,173 70,585 65,571
-------- ------- -------- ------- -------- -------
Total liabilities and
shareholders'
equity ....................... $701,814 $22,373 $644,267 $21,682 $585,048 $19,547
======== ======= ======== ======= ======== =======
Net interest income and
net interest margin(3)......... $30,772 4.70% $28,679 4.76% $26,633 4.87%
======= ==== ======= ==== ======= ====
Interest rate spread(4)........ 4.08% 4.04% 4.15%
==== ==== ====
(1) Income related to securities and loans exempt from federal income taxes is
stated on a fully taxable-equivalent basis, assuming a federal income tax
rate of 34%, and is then reduced by the non-deductible portion of interest
expense.
(2) The average loans and leases receivable balances include non-accruing
loans. Loan fees of $1,619, $1,606 and $1,382 for 1999, 1998 and 1997,
respectively, are included in interest income.
(3) Net interest margin is computed by dividing net interest income by average
earning assets.
(4) Earning assets yield minus interest-bearing liability rate.
14
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
Management's discussion as presented herein is intended to provide 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 1999, 1998 and 1997. The consolidated
financial statements also include the accounts and results of operations of
LSB's wholly owned subsidiaries, Peoples Finance Company of Lexington, Inc.
("Peoples Finance") and LSB Financial Services, Inc. ("LSB Financial
Services"). This discussion and analysis is intended to provide pertinent
information in the areas of liquidity, capital resources, results of operation,
financial position, asset quality and interest sensitivity. It should be read
in conjunction with the audited financial statements, notes and supplemental
tables provided herein.
Management's discussion contains certain forward-looking statements related to
anticipated future operating and financial performance. These forward-looking
statements are based on estimates, beliefs and assumptions made by management
and are not guarantees of future performance. Actual results may differ from
those expressed or implied as the result of various factors, among which are
movements in interest rates, competitive product pressures, changes in economic
conditions and changes in regulatory policies.
SUMMARY
Bancshares' net income for 1999 increased 9.2% over 1998's results. Net income
for the year ended December 31, 1999 was $9,480,000, or $1.09 per diluted
share, compared to $8,680,000 in 1998, or $.98 per diluted share, and
$6,762,000 in 1997, or $.77 per diluted share.
Return on average assets for 1999 and 1998 was 1.35%, compared to 1.16% for
1997. Return on average shareholders' equity was 13.14% for 1999 compared to
12.30% for 1998 and 10.31% for 1997.
Interest rates for the first half of 1999 remained at the 1998 year-end level.
In July 1999, the prime interest rate increased 25 basis points to 8.00%,
followed by additional 25 basis point increases in August and November. The
prime interest rate at year end was 8.50% compared to 7.75% and 8.50% in 1998
and 1997, respectively.
Bancshares' increase in net interest income in 1999 was $2,093,000 or 7.5%
compared to $2,055,000 or 7.9% in 1998. The loan loss provision necessary to
maintain an adequate reserve in 1999 was sustained at nearly the same level as
1998, reflecting strong loan portfolio quality. Noninterest income in 1999
increased $602,000 or 9.1% compared to 1998, which was up $1,196,000 or 22.2%
over 1997. Noninterest expense in 1999 increased $1,917,000 or 9.1% compared to
$725,000 or 3.5% in 1998.
Asset growth for 1999 was $47,822,000 or 7.0% compared to an increase of
$62,741,000 or 10.2% in 1998. Total loans for 1999 increased $70,064,000 or
16.1% compared to $39,023,000 or 9.8% in 1998. During 1999 approximately
$26,000,000 in commercial loans were sold. Deposit growth in 1999 posted a gain
of $38,095,000 or 6.7% compared to a gain of $64,302,000 or 12.8% in 1998.
VOLUME AND RATE VARIANCE ANALYSIS
Table 2
1999 1998
Volume Rate Total Volume Rate Total
Fully taxable equivalent basis(1) (In thousands) Variance(2) Variance(2) Variance Variance(2) Variance(2) Variance
----------------------------------------------------------------------------
Interest income:
Loans receivable ................................. $ 5,264 $(1,856) $ 3,408 $ 3,382 $ 38 $ 3,420
Taxable investment securities .................... (53) (36) (89) 780 (313) 467
Tax exempt investment securities ................. 165 (136) 29 150 (98) 52
Federal Home Loan Bank ........................... (10) 2 (8) (18) 4 (14)
Interest-Bearing Bank Balances ................... (578) (50) (628) 1,000 (8) 992
Federal funds sold ............................... 271 (199) 72 (798) 62 (736)
------- ------- ------- ------- ----- -------
Total interest income ......................... 5,059 (2,275) 2,784 4,496 (315) 4,181
------- ------- ------- ------- ----- -------
Interest expense:
Savings and time deposits ........................ 2,030 (1,443) 587 1,726 84 1,810
Securities sold under agreements to repurchase ... (87) 7 (80) 16 (16) 0
Borrowings from Federal Home Loan Bank ........... 222 (38) 184 421 (96) 325
------- ------- ------- ------- ----- -------
Total interest expense ........................ 2,165 (1,474) 691 2,163 (28) 2,135
------- ------- ------- ------- ----- -------
Increase (decrease) in net interest income ....... $ 2,894 $ (801) $ 2,093 $ 2,333 $(287) $ 2,046
======= ======= ======= ======= ===== =======
(1) Income related to securities and loans exempt from federal income taxes
is stated on a fully taxable-equivalent basis, assuming a federal
income tax rate of 34%, and is then reduced by the non-deductible
portion of interest expense.
(2) The volume/rate variance for each category has been allocated on a
consistent basis between rate and volume variances, based on the
percentage of rate, or volume, variance to the sum of the two absolute
variances.
15
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MARKET RISK MANAGEMENT
The objectives of market risk management are to ensure long-range profitability
performance and minimize risk, adhere to proper liquidity and maintain sound
capital. To meet these goals, the process of asset/liability management
monitors the exposure to interest rate risk, balance sheet trends, pricing
policies and liquidity position.
Profitability and performance are affected by balance sheet composition and
interest rate movements. Management's responsibility for both liquidity and
interest sensitivity reside with a designated Asset/Liability Management
Committee ("ALCO"). The ALCO Committee as a part of its asset/liability
management decision-making process evaluates all market conditions, interest
rate trends and the economic environment. Based upon its view of existing and
expected market conditions, the ALCO Committee adopts balance sheet strategies
intended to optimize net interest income to the extent possible while
minimizing the risk associated with unanticipated changes in interest rates.
Cash and cash equivalents, maturing investments and loans, and securities
available for sale are principal sources of liquidity for LSB. Correspondent
relationships are also maintained with several large banks in order to have
access to federal funds purchases as a secondary source of liquidity. LSB also
has available lines of credit maintained with the Federal Home Loan Bank of
Atlanta ("FHLB") which can be used for funding and/or liquidity needs. This
credit is collateralized by a blanket lien on qualifying loans secured by first
mortgages on 1-4 family residences. LSB has also executed a retail CD brokerage
agreement, which provides an additional source of liquidity for funding needs.
Asset/Liability management includes analyzing interest sensitivity, which
pertains to possible changes in the rates of certain assets and liabilities
before their scheduled maturities. The 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 1999'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, 1999 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, 1999, the one-year cumulative interest sensitivity gap was a
negative $213,079,000, for a ratio of interest-sensitive assets to
interest-sensitive liabilities of .58.
INTEREST SENSITIVITY ANALYSIS(1)
Table 3
December 31, 1999
Total
(In thousands) 1 - 90 91 - 180 181-365 Sensitive 1 - 5 Over
Day Day Day Within Year 5-Year
Sensitive Sensitive Sensitive One Year Sensitive Sensitive Total
---------------------------------------------------------------------------
Interest-earning assets:
Loans, net of unearned income ...................... $ 134,513 $ 32,743 $63,734 230,990 $222,403 $ 52,685 $506,078
U.S. Treasury securities ........................... 1,501 4,005 2,996 8,502 18,989 27,491
U.S. government agencies obligations ............... 1,998 430 2,428 59,795 2,000 64,223
Obligations of states and political subdivisions ... 750 2,765 3,515 6,215 25,117 34,847
Interest-bearing bank balances ..................... 14,527 14,527 14,527
Federal Home Loan Bank ............................. 2,258 2,258 2,258
Federal funds sold ................................. 27,270 27,270 27,270
--------- -------- ------- -------- -------- -------- --------
Total interest-earning assets ................... $ 180,819 $ 41,511 $67,160 $289,490 $307,402 $ 79,802 $676,694
========= ======== ======= ======== ======== ======== ========
Interest-bearing liabilities:
N.O.W. account deposits ............................ $ 109,003 $109,003 $109,003
Money market deposits .............................. 154,796 154,796 154,796
Regular savings deposits ........................... 34,167 34,167 34,167
Time deposits ...................................... 71,579 $ 59,218 $59,807 190,604 $ 42,936 233,540
Securities sold under agreements to repurchase ..... 1,299 1,299 1,299
Borrowing from Federal Home Loan Bank .............. 7,650 5,050 12,700 27,450 $ 5,000 45,150
--------- -------- ------- -------- -------- -------- --------
Total interest-bearing liabilities .............. $ 378,494 $ 59,218 $64,857 $502,569 $ 70,386 $ 5,000 $577,955
========= ======== ======= ======== ======== ======== ========
Interest sensitivity gap ........................... $(197,675) $(17,707) $ 2,303 $(213,079)
Ratio of interest-sensitive assets/
interest-sensitive liabilities ................... .48 .70 1.04 .58
(1) Interest sensitivity is computed using assets and liabilities having
interest rates that can be adjusted during the period indicated.
16
9
SUMMARY OF INVESTMENT SECURITIES PORTFOLIO
Table 4
December 31, 1999 December 31, 1998 December 31, 1997
(In thousands) Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
---------------------- ---------------------- ----------------------
U.S. Treasury securities ........................... $ 27,622 $ 27,405 $ 36,668 $ 37,510 $ 35,308 $ 35,328
U.S. government agencies obligations ............... 64,630 62,577 66,558 66,683 35,109 35,084
Mortgage-backed obligations ........................ 436 430 716 713 1,017 1,017
Obligations of state and political subdivisions .... 34,848 34,482 36,642 38,247 31,769 33,092
Federal Home Loan Bank ............................. 2,258 2,258 2,169 2,169 2,413 2,413
-------- -------- -------- -------- -------- --------
Total securities ................................. $129,794 $127,152 $142,753 $145,322 $105,616 $106,934
======== ======== ======== ======== ======== ========
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 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 $14,059,000 in 1999 compared to $3,137,000 in 1998 and
$8,307,000 in 1997. Details of cash flows for the years 1999, 1998 and 1997 are
provided in the Consolidated Statements of Cash Flows.
NET INTEREST INCOME
Net interest income, on a fully taxable basis, amounted to $30,772,000 in 1999
compared to $28,679,000 in 1998 and $26,633,000 in 1997. Tax-equivalent net
interest income as a percentage of average earning assets, or net interest
margin, amounted to 4.70% in 1999, 4.76% in 1998 and 4.87% in 1997. The
interest margin is computed by dividing tax-equivalent net interest income by
average earning assets. The major components of tax-equivalent net interest
income for the three years ended December 31, 1999, are shown in Table 1.
The drop in interest rates in 1998 occurred in rapid succession in the fourth
quarter and kept rates low for the first half of 1999. The increase in interest
rates in 1999 was during the second half of the year with three increases in
the prime interest rate. This interest rate environment primarily affected loan
yields, which declined 43 basis points in 1999 compared to 1998. Overall the
average yield on earning assets declined 24 basis points in 1999 while the
average rate on interest-bearing liabilities decreased 28 basis points. This
placed the interest rate spread at 4.08% for 1999 compared to 4.04% for 1998
and 4.15% for 1997.
Average loan yield in 1999 declined from that of 1998, while loan volume
increased producing favorable results for Bancshares' net interest income.
Average total earning assets in 1999 increased $52,287,000 or 8.7% compared to
1998, while average total interest-bearing liabilities increased $51,356,000 or
10.2% during the same period. The increase in the net interest margin in 1999
was principally due to a more rapid decline in the average rate paid on
interest-bearing liabilities than that experienced on average yield on earning
assets. A more detailed discussion of the volume and rate variance is held
under the sections of Earning Assets and Interest-Bearing liabilities. An
analysis of volume and rate changes is presented in Table 2.
EARNING ASSETS
As reported in Table 1, the gain in average earning assets for 1999 was
$52,287,000 or 8.7% compared to $56,615,000 or 10.4% for 1998. The average
balance of the loan portfolio for 1999 increased $58,212,000 or 14.0% compared
to 1998, which posted a gain of $35,791,000 or 9.4% over 1997.
As shown in Table 2, the 1999 increase in loan balances accounted for a volume
related income increase of $5,264,000 compared to 1998's gain of $3,382,000.
The decline in the average yield on loans for 1999 to 8.98% compared to 9.41%
in 1998 resulted in the rate variance being a negative $1,856,000.
The average balance of the taxable investment securities portfolio decreased
slightly in 1999 to $95,490,000 compared to $96,486,000 in 1998. The average
balance of the tax-exempt investment securities portfolio increased 6.6%
17
10
in 1999 to $35,317,000 from $33,116,000 in 1998. Overall, the average balance
of the total investment securities portfolio in 1999 was $130,807,000 compared
to $129,602,000 in 1998. At December 31, 1999, investment securities
held-to-maturity totaled $68,551,000 an increase of $8,644,000 or 14.4%
compared to 1998. The investment portfolio of available-for-sale securities at
December 31, 1999 was $60,268,000, a decrease of $23,668,000 or 28.2% from
1998. As shown in the Volume and Rate Variance Analysis, Table 2, the decline
in average taxable investment securities produced a negative volume variance of
$53,000. Yields on taxable investment securities decreased just four basis
points in 1999, creating a negative rate variance of $36,000. The gain in
average tax-exempt investment securities in 1999 of $2,201,000 or 6.6% over
1998 produced a positive volume variance of $165,000. The decline in average
yield on tax-exempt investment securities of 40 basis points in 1999 produced a
negative rate variance of $136,000.
The investment in the Federal Home Loan Bank, on average, declined in 1999
producing a negative volume variance of $10,000, while an increase of eight
basis points in the yield resulted in a positive $2,000 rate variance.
Balances of short-term investments in interest bearing accounts with bank
approved institutions were reduced during 1999 to accommodate strong loan
growth. The average balance of these short-term investments was $9,714,000 in
1999 compared to $21,876,000 in 1998.
INVESTMENT SECURITIES PORTFOLIO MATURITY SCHEDULE
Table 5
December 31, 1999
Weighted
(In thousands) Carrying Average
Value Yield(1)
-------- ---------
U.S. Treasury securities:
Within one year ................................ $ 8,510 6.34%
One to five years .............................. 19,112 6.33
--------
Total ......................................... 27,622 6.34
--------
U.S. government agencies obligations:
Within one year ................................ 2,000 6.30
One to five years .............................. 60,630 6.09
Five to ten years .............................. 2,000 7.61
--------
Total ......................................... 64,630 6.14
--------
Mortgage-backed obligations ..................... 436 5.10
--------
Obligations of states and political
subdivisions:
Within one year ................................ 3,516 11.40
One to five years .............................. 6,211 9.78
Five to ten years .............................. 13,406 8.36
After ten years ................................ 11,715 7.56
--------
Total ......................................... 34,848 8.65
--------
Federal Home Loan Bank .......................... 2,258 7.49
--------
Total securities ................................ $129,794 6.87
========
(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.
Overnight investments in federal funds sold and securities purchased under
resale agreements increased in average balances during 1999 by $5,164,000 or
15.2% compared to 1998. This resulted in a positive volume variance of
$271,000, while the decline of 55 basis points in the 1999 yield resulted in a
negative rate variance of $199,000.
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
The gain in average interest-bearing liabilities for 1999 was $51,356,000 or
10.2% compared to $49,203,000 or 10.8% in 1998. Interest rates paid on
liabilities declined 28 basis points in 1999 compared to an increase of one
basis point in 1998.
The majority of LSB's interest-bearing liabilities consist of savings and time
deposits. The increase in these deposits for 1999 was $49,472,000 or 10.6%
compared to $41,385,000 or 9.7% for 1998. The increase in interest-bearing
deposits for 1999 resulted in a volume variance of $2,030,000, while the 30
basis point decrease in average rates paid resulted in a negative rate variance
of $1,443,000. The schedule for average deposits is presented in Table 6 for
years 1999, 1998 and 1997. Average interest rates paid on money market deposits
decreased five basis points in 1999 compared to 1998. Average balances for
money market deposits in 1999 increased $42,346,000 or 37.2% over 1998, after
increasing $29,024,000 or 34.2% over 1997. Time deposit average interest rates
decreased 58 basis points in 1999 compared to 1998, while the average balances
increased $8,217,000 or 3.9%. N.O.W. account average interest rates declined 35
basis points in 1999 compared to 1998, while N.O.W. account balances
experienced a gain of $6,602,000 or 6.8%. Average interest rates paid on
regular savings deposits decreased 11 basis points in 1999 while average
balances decreased $7,693,000 or 17.4%.
Securities sold under agreements to repurchase account for a small proportion
of total interest-bearing liabilities. The average volume of these liabilities
decreased $2,175,000 in 1999 following an increase of $390,000 in 1998. Average
borrowed funds from the FHLB in 1999 were $34,790,000, an increase of
$4,059,000 or 13.2% over 1998. Additional borrowed funds were used to fund
strong loan growth and provide cash for Y2K purposes. As shown in the Volume
and Rate Variance Analysis, Table 2, this produced a volume variance of
$222,000. A decrease of 12 basis points in the average interest rate paid on
the borrowings from the FHLB produced a negative rate variance of $38,000.
18
11
AVERAGE TOTAL DEPOSITS
Table 6
1999 1998 1997
(In thousands) Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------------------- -------------------- -------------------
Demand deposits ................... 70,904 $ 65,271 $ 61,148
N.O.W. account deposits ........... 103,411 2.09% 96,809 2.44% 89,640 2.58%
Money market deposits ............. 156,144 4.00 113,798 4.05 84,774 3.61
Regular savings deposits .......... 36,592 1.66 44,285 1.77 38,447 2.19
Time deposits ..................... 220,199 5.07 211,982 5.65 212,628 5.50
-------- -------- --------
Total deposits(1) ................ $587,250 $532,145 $486,637
======== ======== ========
December 31, 1999
Over 3 Over 6
3 Months Through Through Over 12
Or Less 6 months 12 months Months Total
-----------------------------------------------------------------
Time deposit maturity schedule:(2)
Time deposits of $100,000 or more...... $28,324 $21,925 $10,226 $612 $61,087
(1) The bank has no deposits in foreign offices.
(2) The bank has no other time deposits of $100,000 or more issued by
domestic offices.
CAPITAL RESOURCES AND SHAREHOLDERS' EQUITY
The Board of Directors ("Board") of Bancshares approved a stock repurchase
program in November of 1998 for up to 300,000 shares of its common stock. This
represented approximately 3.4% of its outstanding shares at that time. The
Board authorized the repurchase of shares of common stock in the open market or
privately negotiated transactions on a time-to-time and ongoing basis,
depending upon market conditions and subject to compliance with all applicable
securities laws and regulations. The repurchase plan assisted in the goal of
building shareholder value and maintaining appropriate capital levels. In
August 1999, the Board approved an extension of the stock repurchase program
for up to an additional 300,000 shares of Bancshares' common stock, or
approximately 3.5% of the outstanding shares. During 1999, Bancshares
repurchased 361,498 shares of its common stock at an average cost of $18.99 per
share. Accordingly, at December 31, 1999, shareholders' equity was $70,724,000,
a decrease of 3.7% compared to December 31, 1998. Average shareholders' equity
as a percentage of average total assets amounted to 10.28% in 1999, 10.96% in
1998, and 11.21% in 1997.
Regulatory guidelines require minimum levels of capital based on a risk
weighting of each asset category and off balance sheet contingencies.
Regulatory agencies divide capital into Tier 1 or core capital and total
capital. Tier 1 capital, as defined by regulatory agencies, consists primarily
of common shareholders' equity less goodwill and certain other intangible
assets. Total capital consists of Tier 1 capital plus the allowable portion of
the reserve for loan losses and certain long-term debt. At December 31, 1999,
based on these measures, Bancshares' had a Tier 1 capital ratio of 14.80%
compared to the regulatory requirement of 4% and a total capital ratio of
15.90% compared to an 8% regulatory requirement.
Additional regulatory capital measures include the Tier 1 leverage ratio. Tier
1 leverage ratio is defined as Tier 1 capital divided by average total assets
less goodwill and certain other intangibles and has a regulatory minimum of
3.0%, with most institutions required to maintain a ratio of at least 4.0% to
5.0%, depending primarily upon risk profiles. At December 31, 1999, Bancshares'
Tier 1 leverage ratio was 9.76%.
Cash dividends paid to shareholders were $.56 per share in 1999, compared to
$.42 per share in 1998, a 33.3% increase. A five for four stock split was also
paid in 1998. Participants in Bancshares' dividend reinvestment plan total
1,569 representing 25.1% of total shareholders and held a total of 694,563
shares.
NONINTEREST INCOME
Noninterest income for 1999 increased $602,000 or 9.1% compared to an increase
of $1,196,000 or 22.2% in 1998 and an increase of $750,000 or 16.2% in 1997.
Service charges on deposit accounts for 1999 increased $455,000 or 16.8%
compared to increases of $166,000 or 6.5% in 1998 and $49,000 or 2.0% in 1997.
The realized gains from the sale of mortgage loans in 1999 totaled $273,000
compared to $328,000 in 1998 and $186,000 in 1997. Other operating income
increased $202,000 or 5.7% in 1999 compared to increases of $856,000 or 31.9%
in 1998 and $629,000 or 30.6% in 1997. Financial statement Note 9 details
material items contained in other operating income. Bankcard income generated
in 1999 increased $319,000 or 36.3% compared to $319,000 or 57.1% in 1998 and
$183,000 or 48.7% in 1997. Fee income generated from the servicing of mortgage
loans sold and customer related service fees increased $78,000 or 10.8% in
1999, $148,000 or 25.7% in 1998 and $162,000 or 39.1% in 1997. Commissions
generated by LSB Financial
19
12
Services declined in 1999 primarily due to staff attrition. Proper staffing was
accomplished during the year to expand future markets of LSB Financial
Services. Commissions from the subsidiary for 1999 decreased $216,000 or 26.3%
compared to increases of $364,000 or 79.6% in 1998 and $146,000 or 46.9% in
1997. Trust income for 1999 increased $33,000 or 6.6% compared to $56,000 or
12.6% in 1998 and $35,000 or 8.6% in 1997.
NONINTEREST EXPENSE
Total noninterest expense, excluding merger-related costs totaled $23,068,000
in 1999, $20,991,000 in 1998 and $18,932,000 in 1997. These amounts represent
increases of $2,077,000 or 9.9% in 1999 over 1998 and $2,059,000 or 10.9% in
1998 over 1997.
Personnel expense represented the largest dollar increase of noninterest
expense. Personnel expense, consisting of both employee salaries and benefits,
increased $1,153,000 or 10.3% in 1999 compared to $785,000 or 7.6% in 1998.
These increases are attributable to normal increases in compensation and
increases in the number of full-time equivalent employees. In 1999, full-time
equivalent employees totaled 340 compared to 328 in 1998.
In 1999 occupancy expense increased $23,000 or 1.8% compared to an increase of
$36,000 or 2.9% in 1998. Equipment depreciation and maintenance expense for
1999 increased $76,000 or 6.2% following an increase of $41,000 or 3.5% in
1998. Other operating expenses in 1999 increased $825,000 or 11.3% compared to
an increase of $1,197,000 or 19.5% in 1998. Financial statement Note 9 details
the material items contained in other operating expenses. In 1999, automated
services expense decreased slightly compared to increases of $133,000 or 10.0%
in 1998 and $211,000 or 18.9% in 1997. The increases in 1997 and 1998 were the
result of LSB's expanded automation program to enhance customer service and
improve operating efficiencies. Bankcard expense increased $272,000 or 38.7% in
1999 compared to $256,000 or 57.3% in 1998 and $152,000 or 51.5% in 1997. The
increases are attributable to the volume of growth in the bankcard portfolio.
Legal and professional expense for 1999 increased $104,000 or 10.1% over 1998,
which was up $307,000 or 42.4% from 1997. The increase in legal and
professional expense in 1998 was primarily due to additional regulatory
compliance attributable to asset growth of the company. As a normal course of
business, other expenses increased $288,000 or 11.4% in 1999 compared to
$465,000 or 22.6% in 1998 and $348,000 or 20.3% in 1997.
SUMMARY OF LOAN PORTFOLIO
Table 7
December 31
(In thousands)
1999 1998 1997 1996 1995
----------------------------------------------------------------
Commercial, financial and agricultural ... $153,252 $144,955 $132,181 $131,235 $129,972
Real estate - construction ............... 28,130 19,131 12,978 10,493 9,319
Real estate - mortgage ................... 250,173 206,068 185,384 145,845 96,690
Installment loans to individuals ......... 65,882 62,747 62,909 60,181 53,753
Lease financing .......................... 820 978 792 678 0
Other .................................... 7,821 2,135 2,747 7,461 7,530
-------- -------- -------- -------- --------
Total loans, net of unearned income ...... $506,078 $436,014 $396,991 $355,893 $297,264
======== ======== ======== ======== ========
(*) The bank has no foreign loan activity.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
December 31, 1999
Commercial,
financial Real estate -
and agricultural construction Total
--------------------------------------------
Due in 1 year or less.......... $ 49,675 $ 28,130 $ 77,805
Due after 1 year through
5 years:
Fixed interest rates......... 61,186 61,186
Floating interest rates...... 8,951 8,951
Due after 5 years:
Fixed interest rates......... 22,144 22,144
Floating interest rates...... 11,296 11,296
-------- -------- --------
Total....................... $153,252 $ 28,130 $181,382
======== ======== ========
20
13
ANALYSIS OF RESERVE FOR LOAN LOSSES
Table 8
As of Or For the Years Ended
December 31
(In thousands)
1999 1998 1997 1996 1995
-------------------------------------------------------------
Average amount of loans outstanding, net of unearned income .... $473,675 $415,463 $379,672 $324,195 $245,032
Amount of loans outstanding, net of unearned income ............ 506,078 436,014 396,991 355,893 297,264
Reserve for loan losses:
BALANCE ON JANUARY 1 ......................................... $ 5,048 $ 4,601 $ 4,075 $ 3,711 $ 3,013
-------- -------- -------- -------- --------
Loans charged off:
Secured by real estate ....................................... 0 0 0 57 49
Commercial and industrial .................................... 259 65 382 225 169
Installment .................................................. 291 285 330 197 147
Credit card .................................................. 198 101 139 93 58
-------- -------- -------- -------- --------
Total charge-offs .......................................... 748 451 851 572 423
-------- -------- -------- -------- --------
Recoveries of loans previously charged off:
Secured by real estate ....................................... 6 0 0 0 11
Commercial and industrial .................................... 16 9 486 20 28
Installment .................................................. 108 91 89 86 78
Credit card .................................................. 36 28 17 25 17
-------- -------- -------- -------- --------
Total recoveries ........................................... 166 128 592 131 134
-------- -------- -------- -------- --------
Net loans charged off .......................................... 582 323 259 441 289
-------- -------- -------- -------- --------
Provision for loan losses ...................................... 780 770 785 805 367
-------- -------- -------- -------- --------
Acquired bank's allowance at date of acquisition ............... 0 0 0 0 620
-------- -------- -------- -------- --------
BALANCE ON DECEMBER 31 ....................................... $ 5,246 $ 5,048 $ 4,601 $ 4,075 $ 3,711
======== ======== ======== ======== ========
Ratio of net charge-offs of loans to average loans outstanding
during the year ............................................ .12% .08% .07% .14% .12%
ASSET QUALITY AND PROVISION FOR LOAN LOSSES
The reserve for loan losses was $5,246,000 or 1.04% of loans outstanding at
December 31, 1999 compared to $5,048,000 or 1.16% of loans outstanding at
December 31, 1998. Net charge offs for 1999 were $582,000 or .12% of average
loans outstanding, compared to 1998 net charge offs of $323,000 or .08% of
average loans outstanding. Net charge offs in 1997 were $259,000 or .07% of
average loans outstanding. The 1999 provision for loan losses was comparable to
that of the previous year, reflecting the quality of the loan portfolio.
Adequate provisions and allowances for loan loss reserves are based on numerous
factors including the growth of the loan portfolio, delinquencies, net
charge-offs, non-performing loans and collateral values. Additional information
regarding the reserve for loan losses is contained in Table 8, "Analysis of
Reserve for Loan Losses".
Nonperforming assets, which include nonaccrual loans, restructured loans, other
real estate acquired through foreclosed properties and accruing loans ninety
days or more past due, totaled $2,090,000 at December 31, 1999, $1,912,000 at
December 31, 1998, and $2,155,000 at December 31, 1997. Nonperforming assets as
a percentage of loans outstanding at the end of the year amounted to .41% in
1999, .44% in 1998, and .54% in 1997. Bancshares had $96,000 in nonaccrual
loans at December 31, 1999 compared to no nonaccrual loans at December 31, 1998
and $127,000 in nonaccrual loans at December 31, 1997. Accruing loans past due
90 days totaled $821,000 at December 31, 1999 compared to $759,000 at December
31, 1998 and $334,000 at December 31, 1997. 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,
1999, the reserve for loan losses was 2.51 times nonperforming loans compared
to 2.64 times nonperforming loans at December 31, 1998. 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
1999 reflected in Table 10 accurately reflects the inherent risks associated
with each of the various lending categories.
As a part of credit administration, management regularly reviews and grades its
loan portfolio for purposes of determining asset quality and the need to make
additional provisions for loan losses. The review process is performed both
internally and externally, through the employment of independent credit review
professionals. The reserve for loan losses represents management's estimate of
an amount adequate to provide for the risk of future losses inherent in
21
14
the loan portfolio. In its on-going analysis of the reserve for loan losses and
its adequacy, management considers LSB's historic loan loss experience,
economic risks associated with each of the lending categories, amount of past
due and nonperforming loans, underlying collateral values securing loans and
credit concentrations and other factors which might affect potential credit
losses.
LSB is also subject to regulatory examinations and determinations as to the
adequacy of its reserve for loan losses, which may take into account such
factors as the methodology used to calculate the reserve and the size of the
reserve in comparison to peer banks identified by the regulatory agencies.
During 1999, all credit relationships of $50,000 or more were reviewed as a
part of LSB's credit administration. A review of large credits was conducted by
a regulatory agency examination revealing that there were no material problem
credits that had not been previously identified by management.
There are, however, additional risks of future losses that cannot be quantified
precisely or attributed to particular loans or classes of loans. Because these
risks include the state of the economy and factors affecting particular
borrowers, management's judgment as to the adequacy of the reserve for loan
losses is necessarily approximate and imprecise. In its oversight of the credit
review process, management has not identified any undue economic risks
associated with the various lending categories, nor any significant credit
concentrations within these categories.
Loans classified for regulatory purposes as loss, doubtful, 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 serious doubts as to the
ability of such borrowers to comply with the loan repayment terms.
INCOME TAXES
Income tax expense is recorded based on amounts currently payable and deferred.
Income tax expense was $3,927,000 in 1999 compared to $3,959,000 in 1998 and
$3,336,000 in 1997. Bancshares' effective tax rate decreased to 29.3% in 1999
from 31.3% in 1998 compared to 33.0% in 1997. Financial statement Note 10
provides a reconciliation between the amount of taxes computed using the
statutory tax rate and the actual tax expense. The decrease in Bancshares'
effective tax rate for 1999 was primarily the result of the exercise of
nonqualified stock options.
NONPERFORMING ASSETS
Table 9
December 31
(In thousands)
1999 1998 1997 1996 1995
---------------------------------------------------------
Nonaccrual loans:
Secured by real estate ........................................... $ 0 $ 0 $ 0 $ 424 $ 990
Commercial and industrial ........................................ 96 0 127 187 390
Restructured loans ................................................ 137 232 502 259 289
Other real estate acquired through foreclosed properties .......... 1,036 921 1,192 1,151 988
Accruing loans which are contractually past due 90 days or more ... 821 759 334 369 206
------ ------ ------ ------ ------
Total nonperforming assets ........................................ $2,090 $1,912 $2,155 $2,390 $2,863
====== ====== ====== ====== ======
Nonperforming assets to:
Loans outstanding at end of year ................................. .41% .44% .54% .67% .96%
Total assets at end of year ...................................... .29 .28 .35 .43 .58
Loss of interest income associated with nonperforming loans at
December 31:
Years Ended December 31
1999 1998 1997 1996 1995
----------------------------------------------------------
Interest income that would have been recorded in accordance
with original terms .......................................... $ 15 $ 0 $ 1 $ 52 $ 34
Less interest income actually recorded ........................ 0 0 0 3 7
------ ------ ------ ------ ------
Loss of interest income ....................................... $ 15 $ 0 $ 1 $ 49 $ 27
====== ====== ====== ====== ======
22
15
ALLOCATION OF RESERVE FOR LOAN LOSSES(*)
Table 10
1999 1998 1997 1996 1995
Loans Loans Loans Loans Loans
(In thousands) % % % % %
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
--------------- --------------- --------------- --------------- ---------------
Commercial, financial
and agricultural ... $1,420 30.3% $1,330 33.2% $1,212 33.3% $1,075 36.9% $1,100 43.7%
Real estate -
construction ....... 566 5.6 555 4.4 506 3.3 450 2.9 346 3.1
Real estate -
mortgage ........... 2,100 49.4 2,000 47.4 1,815 46.7 1,529 41.0 1,390 32.5
Installment loans to
individuals ........ 908 13.0 913 14.3 828 15.8 766 16.9 675 18.2
Lease financing ..... 60 .2 60 .2 55 .2 55 .2 0 .0
Other ............... 92 1.5 90 .5 85 .7 110 2.1 110 2.5
Unallocated ......... 100 .0 100 .0 100 .0 90 .0 90 .0
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total .............. $5,246 100.0% $5,048 100.0% $4,601 100.0% $4,075 100.0% $3,711 100.0%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
(*) The reserve for loan losses has been allocated only on an approximate
basis. The entire amount of the reserve is available to absorb losses
occurring in any category. The allocation is not necessarily indicative of
future losses.
INFLATION
For financial institutions, the effects of inflation and governmental programs
to control it tend to vary from non-bank companies. The impact is more likely to
be felt by banking institutions in interest rates associated with earning assets
and interest bearing liabilities. Reduced inflation tends to improve interest
margins associated with interest-bearing assets and liabilities.
Broad-ranged economic conditions such as inflation, and governmental efforts to
spur economic growth, are difficult for individual companies to respond to
effectively. Consistent long-term management is the key to dealing with such
conditions. The objective of management in such times is to remain positioned
for growth when the economy rebounds. Management seeks to do this through its
long-range budget and profit-planning process.
ACCOUNTING AND REGULATORY
ISSUES
In June 1998, FASB issued Statement No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities". SFAS 133 establishes accounting
and reporting standards for derivative instruments, including derivative
instruments that are embedded in other contracts and for hedging activities.
SFAS 133 requires that all derivatives be recognized as either assets or
liabilities on the balance sheet at their fair value. Requirements of SFAS 133
could affect the amount of an institution's recorded assets, liabilities, equity
as well as its regulatory capital levels. As defined under SFAS 133, derivatives
carry a designation of (a) no hedge designation, (b) fair value hedge, (c) cash
flow hedge, or (d) foreign currency hedge. SFAS 133 was originally effective for
fiscal periods, both years and quarters, beginning after June 15, 1999, but has
now been extended to June 15, 2000. Bancshares does not presently have any
derivative instruments within the definition of SFAS 133 and, as such, does not
anticipate any material effect on its financial position and operating results
from adoption of the standard.
In October 1998, FASB issued Statement No. 134 ("SFAS 134"), "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise". SFAS 134 amends Statement 65
("SFAS 65"), "Accounting for Certain Mortgage Banking Activities" to require
entities engaged in mortgage banking activities to classify mortgage-backed
securities resulting from the securitization of mortgage loans held for sale,
based on its ability and intent to sell or hold those investments.
Classification of any retained mortgage-backed securities would be in accordance
with the provisions of Statement 115 ("SFAS 115"), "Accounting for Certain
Investments in Debt and Equity Securities." Any retained mortgage-backed
securities that an entity commits to sell before or during the securitization
process must be classified as trading. Bancshares does not presently securitize
any of its mortgage loans within the definition of SFAS 134 and, as such, does
not anticipate any material effect on its financial position and operating
results from adoption of the standard.
In May 1997, the Federal Financial Institutions Examination Council (FFIEC)
issued an Interagency Statement "Year 2000 Project Management Awareness" to
emphasize critical issues that needed to be addressed to implement an effective
Year 2000 project management plan. The FFIEC Statement identified five phases of
the Year 2000 project management process. In the awareness phase, the
corporation was to define the issues and potential challenges associated with
the Year 2000 problem. In the assessment phase, an evaluation was to be
conducted to
23
16
QUARTERLY FINANCIAL DATA
Table 11
(In thousands, except per share data) 1999 1998
4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
-------------------------------------------------------------------------------------
Interest income ................ $ 13,578 $ 13,338 $ 12,993 $ 12,532 $ 12,657 $ 12,732 $ 12,351 $ 11,917
Interest expense ............... 5,962 5,668 5,422 5,321 5,525 5,441 5,426 5,290
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income ............ 7,616 7,670 7,571 7,211 7,132 7,291 6,925 6,627
Provision for loan losses ...... 165 215 235 165 250 180 175 165
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income after
provision for loan losses .... 7,451 7,455 7,336 7,046 6,882 7,111 6,750 6,462
-------- -------- -------- -------- -------- -------- -------- --------
Noninterest income ............. 1,890 1,704 1,862 1,731 1,751 1,667 1,671 1,496
-------- -------- -------- -------- -------- -------- -------- --------
Noninterest expense ............ 5,914 5,874 5,773 5,507 5,121 5,268 5,317 5,445
-------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes ..... 3,427 3,285 3,425 3,270 3,512 3,510 3,104 2,513
Income taxes ................... 1,080 884 951 1,012 1,126 1,122 935 776
-------- -------- -------- -------- -------- -------- -------- --------
Net income ..................... $ 2,347 $ 2,401 $ 2,474 $ 2,258 $ 2,386 $ 2,388 $ 2,169 $ 1,737
======== ======== ======== ======== ======== ======== ======== ========
Earnings per share:
Basic ......................... $ .28 $ .28 $ .29 $ .26 $ .27 $ .27 $ .25 $ .21
Diluted ....................... .27 .28 .28 .26 .27 .27 .24 .20
determine the size and complexity of ensuring Year 2000 readiness. During the
renovation phase, required system upgrades were to be made. In the validation
phase, testing of all computer systems and software would be done to meet the
corporation's Y2K compatibility standards. The final step established was the
implementation phase, which incorporated Year 2000 ready systems into day-to-day
operations.
The "Year 2000 problem" resulted from the inability of computer systems to
identify the change from the years of the 1900's to the year 2000. This came
about because most computer hardware and software systems had historically used
only two digits to identify the applicable year. Hence, as the turn of the
century approached, the systems would be unable to distinguish between 1900 and
2000 resulting in possible errors and system failures causing wide spread
disruption to business operations.
Bancshares acknowledged the importance of this issue and established a Year 2000
Project Team (Y2K) to ensure Year 2000 compliance. Bancshares' Year 2000 Plan
followed the guidelines outlined by the Federal Financial Institutions
Examination Council. For the millennium project, a Y2K Team was established
consisting of senior officers within the company's operations area, information
systems area, audit department, corporate area and senior management. Senior
management, with Board of Directors' approval and oversight, established the
commitment of resources and prioritization.
Bancshares completed the Y2K conversion with no significant systems problems
relative to its critical systems, including branches, subsidiaries and
operations. Following the beginning of the year 2000, Bancshares' customers have
had normal and complete access to their accounts through the branch offices,
ATM's and telebanking. Bancshares experienced no disruptions resulting from
third party relationships, vendors or major customers. In order to ensure that
business remains normal Bancshares has maintained the status of its Y2K Team.
The estimated cost of Bancshares' Year 2000 project was approximately $400,000.
As of December 31, 1999, a cumulative total of $181,000 had been expensed
relating to the Y2K issue. These costs were totally funded through operation
cash flows, with no material effect on operations.
Bancshares' continues to maintain its business resumption plans with their goal
being the resumption of business in the event there is a disruption of critical
systems necessary to operate. These contingency plans continue to include the
use of alternative service providers, off-site processing, consolidation of
customer services, alternative communications support and other contingency
service suppliers.
Although the Year 2000 project was given management's top priority, there have
been no serious delays to other information technology projects. To a great
extent this was due to Bancshares third party processing by Fiserv, which has
provided added support in meeting Year 2000 project goals as well as ongoing
information technology projects. As such, there have been no delays in
information technology projects that would have an adverse effect on Bancshares'
financial condition and results of operations.
24
17
CONSOLIDATED BALANCE SHEETS
December 31
(In thousands, except for shares) 1999 1998
- -------------------------------------------------------------------------------------------------
ASSETS
Cash and Due from Banks (Note 2) ............................ $ 33,971 $ 33,292
Interest-Bearing Bank Balances .............................. 14,527 9,862
Federal Funds Sold and Securities Purchased
Under Resale Agreements ................................... 27,270 40,595
Investment Securities (Note 3):
Held to Maturity, Market Value $66,884 and $61,386 ........ 68,551 59,907
Available for Sale ........................................ 60,268 83,936
Loans (Notes 4 and 11) ...................................... 506,078 436,014
Less, Reserve for Loan Losses (Note 4) ...................... (5,246) (5,048)
--------- ---------
Net Loans .............................................. 500,832 430,966
Premises and Equipment (Note 5) ............................. 11,215 11,528
Other Assets ................................................ 10,194 8,920
--------- ---------
Total Assets ........................................... $ 726,828 $ 679,006
========= =========
LIABILITIES
Deposits:
Demand .................................................... $ 73,916 $ 71,867
Savings, N.O.W. and Money Market Accounts ................. 297,966 287,315
Certificates of Deposit of less than $100,000 (Note 6) .... 172,453 158,664
Certificates of Deposit of $100,000 or more (Note 6) ...... 61,087 49,481
--------- ---------
Total Deposits ......................................... 605,422 567,327
Securities Sold Under Agreements to Repurchase (Note 6) ..... 1,299 5,537
Borrowings from the Federal Home Loan Bank (Note 7) ......... 45,150 28,842
Other Liabilities ........................................... 4,233 3,870
--------- ---------
Total Liabilities ...................................... 656,104 605,576
--------- ---------
SHAREHOLDERS' EQUITY
Preferred Stock, Par Value $.01 Per Share:
Authorized 10,000,000 shares; none issued .............. 0 0
Common Stock, Par Value $5 Per Share:
Authorized 50,000,000 Shares; Issued 8,442,918
Shares in 1999 and 8,722,895 Shares in 1998 ............ 42,215 43,614
Paid-In Capital ............................................. 10,151 14,903
Retained Earnings ........................................... 18,953 14,248
Accumulated Other Comprehensive Income ...................... (595) 665
--------- ---------
Total Shareholders' Equity ................................ 70,724 73,430
--------- ---------
Total Liabilities and Shareholders' Equity ............. $ 726,828 $ 679,006
========= =========
Commitments and Contingencies (Note 8)
Notes to consolidated financial statements are an integral part hereof.
25
18
CONSOLIDATED STATEMENTS
OF INCOME
Years Ended December 31
(In thousands, except for shares and per share amounts) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and Fees on Loans ........................... $ 42,520 $ 39,112 $ 35,692
Interest on Investment Securities:
Taxable ............................................. 5,455 5,544 5,077
Tax Exempt .......................................... 1,875 1,846 1,785
Interest-Bearing Bank Balances ....................... 616 1,252 274
Federal Funds Sold and Securities Purchased Under
Resale Agreements .................................. 1,975 1,903 2,639
---------- ---------- -----------
Total Interest Income .............................. 52,441 49,657 45,467
---------- ---------- -----------
INTEREST EXPENSE
Deposits ............................................. 20,314 19,727 17,917
Securities Sold Under Agreements to Repurchase ....... 154 234 234
Borrowings from the Federal Home Loan Bank ........... 1,905 1,721 1,396
---------- ---------- -----------
Total Interest Expense ............................. 22,373 21,682 19,547
---------- ---------- -----------
Net Interest Income ..................................... 30,068 27,975 25,920
Provision for Loan Losses (Note 4) ...................... 780 770 785
---------- ---------- -----------
Net Interest Income after Provision for Loan Losses ..... 29,288 27,205 25,135
---------- ---------- -----------
NONINTEREST INCOME
Service Charges on Deposit Accounts .................. 3,171 2,716 2,550
Gains on Sales of Mortgages .......................... 273 328 186
Losses on Sales of Investment Securities ............. 0 0 (32)
Other Operating Income (Note 9) ...................... 3,743 3,541 2,685
---------- ---------- -----------
Total Noninterest Income ........................... 7,187 6,585 5,389
---------- ---------- -----------
NONINTEREST EXPENSE
Personnel Expense .................................... 12,325 11,172 10,387
Occupancy Expense .................................... 1,282 1,259 1,223
Equipment Depreciation and Maintenance ............... 1,302 1,226 1,185
Other Operating Expense (Note 9) ..................... 8,159 7,334 6,137
Merger Related Costs (Note 14) ....................... 0 160 1,494
---------- ---------- -----------
Total Noninterest Expense ........................... 23,068 21,151 20,426
---------- ---------- -----------
Income Before Income Taxes .............................. 13,407 12,639 10,098
Income Taxes (Note 10) .................................. 3,927 3,959 3,336
---------- ---------- -----------
Net Income .............................................. $ 9,480 $ 8,680 $ 6,762
========== ========== ===========
Earnings Per Share:
Basic ................................................ $ 1.11 $ 1.00 $ .78
Diluted .............................................. 1.09 .98 .77
Weighted Average Shares Outstanding:
Basic ................................................ 8,547,905 8,703,274 8,637,394
Diluted .............................................. 8,693,681 8,887,631 8,815,878
Notes to consolidated financial statements are an integral part hereof.
26
19
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
Accumulated
Common Stock Other Total
------------------ Paid-In Retained Comprehensive Shareholders'
(In thousands, except for shares) Shares Amount Capital Earnings Income Equity
- --------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996.................. 6,886,496 $34,432 $ 14,671 $ 13,866 $ (107) $ 62,862
Net income..................................... 6,762 6,762
Change in unrealized gain on securities
available for sale, net of deferred
income taxes.................................. 281 281
--------
Comprehensive income....................... 7,043
Cash dividends declared on common
stock........................................ (2,712) (2,712)
Common stock issued for stock
options exercised............................ 47,215 233 114 347
Fractional shares purchased.................... (676) (13) (13)
---------------------------------------------------------------------
Balances at December 31, 1997.................. 6,933,035 34,665 14,772 17,916 174 67,527
Net income..................................... 8,680 8,680
Change in unrealized gain on securities
available for sale, net of deferred
income taxes................................. 491 491
--------
Comprehensive income....................... 9,171
Cash dividends declared on common
stock........................................ (3,658) (3,658)
Common stock issued for stock
options exercised............................ 60,468 302 199 501
Common stock issued in five-for-four
stock split, including cash for
fractional shares............................ 1,734,392 8,672 (8,690) (18)
Common stock acquired.......................... (5,000) (25) (68) (93)
---------------------------------------------------------------------
Balances at December 31, 1998.................. 8,722,895 43,614 14,903 14,248 665 73,430
NET INCOME..................................... 9,480 9,480
CHANGE IN UNREALIZED LOSS ON SECURITIES
AVAILABLE FOR SALE, NET OF DEFERRED
INCOME TAXES................................. (1,260) (1,260)
--------
COMPREHENSIVE INCOME........................ 8,220
CASH DIVIDENDS DECLARED ON COMMON
STOCK........................................ (4,775) (4,775)
COMMON STOCK ISSUED FOR STOCK
OPTIONS EXERCISED............................ 81,521 408 307 715
COMMON STOCK ACQUIRED.......................... (361,498) (1,807) (5,059) (6,866)
---------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1999.................. 8,442,918 $42,215 $10,151 $18,953 $ (595) $ 70,724
=====================================================================
Notes to consolidated financial statements are an integral part hereof.
27
20
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
(In thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES
Net Income ...................................................................... $ 9,480 $ 8,680 $ 6,762
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................ 1,319 1,241 1,217
Securities premium amortization and discount accretion, net .................. 58 (104) (21)
(Increase) decrease in loans held for sale ................................... 2,191 (7,276) (237)
Deferred income taxes ........................................................ 14 180 115
Income taxes payable ......................................................... 127 81 (117)
Increase in income earned but not received ................................... (99) (463) ( 12)
Increase (decrease) in interest accrued but not paid ......................... 253 (16) (367)
Provision for loan losses .................................................... 780 770 785
Loss on sale of investment securities ........................................ 0 0 116
(Gain) loss on sale of premises and equipment ................................ (64) 44 66
-------- -------- --------
Net cash provided by operating activities .................................. 14,059 3,137 8,307
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of securities held to maturity ........................................ (15,520) (24,983) (1,184)
Proceeds from maturities of securities held to maturity ......................... 6,869 20,005 15,454
Proceeds from sales of securities held to maturity .............................. 0 0 1,954
Purchases of securities available for sale ...................................... (223) (64,650) (17,453)
Proceeds from maturities of securities available for sale ....................... 21,776 32,311 14,720
Proceeds from sales of securities available for sale ............................ 0 0 9,323
Net increase in loans made to customers ......................................... (72,838) (32,071) (41,112)
Purchases of premises and equipment ............................................. (1,057) (1,604) (1,513)
Proceeds from sale of premises and equipment .................................... 115 52 233
Net (increase) decrease in federal funds sold and securities purchased
under resale agreements ...................................................... 13,325 19,745 (33,620)
(Increase) decrease in other assets ............................................. (544) 280 (503)
-------- -------- --------
Net cash used by investing activities ...................................... (48,097) (50,915) (53,701)
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Net increase in demand deposits, N.O.W.,
money market and savings accounts ............................................ 12,700 64,687 37,212
Net increase (decrease) in time deposits ........................................ 25,395 (385) 891
Net increase (decrease) in securities sold under agreements to repurchase ....... (4,238) (2,726) 2,154
Proceeds from long-term debt .................................................... 30,000 0 37,200
Payments on long-term debt ...................................................... (13,692) (4,916) (17,517)
Dividends paid .................................................................. (4,775) (3,658) (2,712)
Net increase in other liabilities ............................................... 143 45 152
Proceeds from issuance of common stock .......................................... 715 501 347
Common stock repurchased ........................................................ (6,866) (93) 0
Fractional shares purchased ..................................................... 0 (18) (13)
-------- -------- --------
Net cash provided by financing activities .................................... 39,382 53,437 57,714
-------- -------- --------
Increase in cash and cash equivalents ............................................. 5,344 5,659 12,320
Cash and cash equivalents at the beginning of the years ........................... 43,154 37,495 25,175
-------- -------- --------
Cash and cash equivalents at the end of the years ................................. $ 48,498 $ 43,154 $(37,495)
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during the years for:
Interest ..................................................................... $ 22,121 $ 21,712 $ 19,916
Income taxes ................................................................. 4,214 3,803 3,314
SUPPLEMENTAL DISCLOSURE OF
NON CASH TRANSACTIONS
Transfer of loans to other real estate owned .................................... $ 412 $ 100 $ 372
Unrealized gain (loss) on securities available for sale:
Change in securities available for sale ...................................... (2,064) 805 447
Change in deferred income taxes .............................................. 804 (314) (166)
Change in shareholders' equity ............................................... (1,260) 491 281
Notes to consolidated financial statements are an integral part hereof.
28
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF OR FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and financial reporting policies of LSB Bancshares, Inc.
("Bancshares") and its subsidiaries conform to generally accepted
accounting principles and prevailing industry practices. The following is
a description of significant accounting policies.
Nature of Operations
Bancshares is a bank holding company organized under the laws of the State of
North Carolina and registered under the Bank Holding Company Act of 1956, as
amended. Bancshares conducts its domestic financial services business through
Lexington State Bank ("Bank") and two non-bank subsidiaries, Peoples Finance
Company of Lexington, Inc. (Peoples) and LSB Financial Services, Inc.
Bancshares serves customers primarily in Davidson, Forsyth, and Stokes
Counties, North Carolina.
Consolidation
The consolidated financial statements include the accounts of Bancshares and
its wholly-owned subsidiaries, after eliminating inter-company balances and
transactions. Securities and other property held in a fiduciary or agency
capacity are not included in the consolidated balance sheets since these are
not assets or liabilities of Bancshares. Certain prior year amounts have been
reclassified to conform to current year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Bancshares considers cash and due from banks and interest-bearing bank
balances as cash and cash equivalents for purposes of the consolidated
statements of cash flows. Due from bank balances and interest-bearing bank
balances are maintained in other financial institutions.
Securities Purchased Under Resale Agreements
Bancshares' policy is that securities purchased under resale agreements will
be collateralized by U.S. Treasury and other U.S. Government agency
obligations.
Investment Securities
Management determines the appropriate classification of investment securities
at the time of purchase. Securities that may be sold in response to or in
anticipation of changes in interest rates or other factors are classified as
available for sale and carried at market value. The unrealized gains and
losses on these securities are reported net of applicable taxes in a separate
component of shareholders' equity. Securities that Bancshares has the
positive intent and ability to hold to maturity are carried at amortized
cost. Bancshares does not have any securities held for trading. Interest
income on securities, including amortization of premiums and accretion of
discounts, is recognized using the interest method. Gains and losses on the
sale of securities are recognized on a specific identification basis.
Loans
Loans are generally carried at the principal amount outstanding, net of
deferred loan fees and certain direct origination costs on originated loans
and unamortized discounts and premiums on purchased loans. Mortgage loans
held for sale are carried at the lower of cost or market value, as determined
by outstanding commitments from investors. Loan origination fees are
capitalized and recognized as an adjustment of the yield of the related loan.
Discounts and premiums on any purchased residential real estate loans are
amortized to income using the interest method over the remaining period to
contractual maturity, adjusted for anticipated prepayments. Discounts and
premiums on any purchased consumer loans are recognized over the expected
lives of the loans using methods that approximate the interest method.
Interest is accrued and credited to income based on the principal amount
outstanding. The accrual of interest on impaired loans is discontinued when,
in management's opinion, the borrower may be unable to meet payments of
principal and interest as they become due.
Reserve for Loan Losses
The reserve for loan losses is that amount which is considered adequate to
provide for potential losses in the portfolio. Management's evaluation of the
adequacy of the reserve is based on several factors, including an analysis of
the loss experience in relation to outstanding amounts, a review of impaired
loans, regular examinations and appraisals of the portfolio, and current
conditions.
Foreclosed Real Estate
Foreclosed real estate only includes formally foreclosed property. At the
time of foreclosure, foreclosed real estate is recorded at the lower of the
Bank's cost or the asset's fair value less costs to sell, which becomes the
property's new basis. Any write-downs based on the asset's fair value at the
date of acquisition are charged to the reserve for loan losses. After
foreclosure, these assets are carried at the lower of their new cost basis or
fair value less cost to sell. Costs incurred in maintaining foreclosed real
estate and subsequent write-downs to reflect declines in the fair value of
the property are charged to operations.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation is computed by use of the straight-line method,
using the following estimated lives: buildings, 20 to 40 years; equipment, 3
to 10 years; vaults, 10 to 40 years. Leasehold improvements are amortized by
use of the straight-line method over the lesser of the estimated useful lives
of the improvements or the terms of the respective leases.
Stock-Based Compensation
Bancshares accounts for its stock-based compensation plans using the
accounting prescribed by Accounting Principles Board Opinion Number 25,
"Accounting for Stock Issued to Employees". In October 1995, Statement of
Financial Accounting Standards Number 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation," was issued and encourages, but does not require
adoption of a fair value method of accounting for employee stock-based
compensation plans. As permitted by SFAS 123, Bancshares has elected to
disclose the pro forma net income and earnings per share as if the fair value
method had been applied in measuring compensation cost.
Intangible Assets
The excess of cost over net assets and identifiable intangible assets,
including deposit based intangibles of acquired businesses, is amortized on a
straight-line basis over the estimated periods benefitted.
Income Taxes
The provision for income taxes is based on income and expenses and assets and
liabilities for financial statement purposes. Deferred income taxes are
computed under the provisions of Statement of Financial Accounting Standards
Number 109, "Accounting for Income Taxes".
Earnings Per Share
Earnings per share is computed by dividing net income by the weighted average
shares outstanding and diluted share equivalents outstanding. All references
to shares outstanding have been adjusted to give effect to stock splits that
occurred during the periods.
29
22
NOTE 2 - REGULATORY RESTRICTIONS
Bancshares and its subsidiary bank are subject to certain requirements imposed
by state and federal banking statutes and regula