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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, 2000
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, 2001 was
$122,275,948 and the number of shares outstanding was 8,432,824.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the year ended
December 31, 2000 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 18, 2001 are incorporated by reference into Part
III of this report.
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FORM 10-K CROSS-REFERENCE INDEX
This 2000 Annual Report and Form 10-K of the registrant incorporates into a
single document the 2000 Annual Report to Shareholders and the Annual Report on
Form 10-K for the year ended December 31, 2000 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 2001 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, 34 (Notes 5 and 15).....
Item 3. Legal Proceedings.................................................... 32 (Note 8).....................
Item 4. Submission of Matters to a Vote of Security Holders (None)...........
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters.................................................. 45..............................
Item 6. Selected Financial Data.............................................. 13..............................
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 15-24...........................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........... 16-20, 33 (Note 13).............
Item 8. Financial Statements and Supplementary Data.......................... 25-36
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure (None)......................................
PART III
Item 10. Directors and Executive Officers of the Registrant................... 41, 42..........................
Item 11. Executive Compensation............................................... .............................6-8
Item 12. Security Ownership of Certain Beneficial Owners and Management....... .............................3-5
Item 13. Certain Relationships and Related Transactions....................... ...........................17-18
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, 2000 and 1999..... 25..............................
Consolidated Statements of Income - Years Ended
December 31, 2000, 1999 and 1998........................... 26..............................
Consolidated Statements of Changes in Shareholders' Equity
Years Ended December 31, 2000, 1999 and 1998............... 27..............................
Consolidated Statements of Cash Flows - Years Ended
December 31, 2000, 1999 and 1998........................... 28..............................
Notes to Consolidated Financial Statements................... 29-36...........................
(2) Financial Statement Schedules (None).........................
(3) Exhibits:
3.1 Articles of Incorporation of LSB Bancshares, Inc., as amended,
which are incorporated by reference to Exhibit 4.2 of the registrant's
Registration Statement on Form S-8 filed with the Securities and Exchange
Commission on November 17, 1992 (File No. 33-54610).
3.2 Bylaws of LSB Bancshares, Inc., as amended, which are incorporated by
reference to Exhibit 3.2 of the registrant's Annual Report on Form 10-K for
the year ended December 31, 1995.
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FORM 10-K CROSS-REFERENCE INDEX (CONT'D)
INCORPORATED BY REFERENCE INTO THE FOLLOWING ITEMS
OF FORM 10-K
PART IV
Item 14. 4.1 Specimen certificate of common stock, $5.00 par
(cont'd) value, 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 2000 Annual Report to Shareholders.
21. List of Subsidiaries at December 31, 2000.
23. Consent of Turlington and Company, L.L.P.
(b) Reports on Form 8-K: No reports on Form 8-K were filed by the
registrant during the last quarter covered by this
report.
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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, 2000, Bancshares and
its subsidiary had consolidated assets of $796 million and 352 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-two offices in thirteen 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 Investment Services, Inc. ("LSB
Investment Services"). Peoples Finance was acquired by LSB on January 1, 1984
and operates as a finance company licensed under the laws of the State of North
Carolina. Peoples Finance operates from two offices located in Lexington and
King, North Carolina with seven employees. As a finance company, Peoples Finance
offers secured and unsecured loans to individuals up to a maximum of $10,000, as
well as dealer originated loans.
LSB Investment Services was incorporated under the laws of the State of North
Carolina in 1994 and began operations on December 1, 1994. It offers a full
range of uninsured, nondeposit investment products, including mutual funds,
annuities, stocks and bonds. LSB Investment Services operates from offices
located within LSB's home office, the National Highway office and the Stratford
Road office with five employees. LSB Investment Services offers products through
Uvest Investment Services, an independent broker-dealer, which is a member of
the National Association of Securities Dealers and the Securities Investor
Protection Corporation. Investments are neither deposits nor obligations of
Lexington State Bank, nor are they guaranteed or insured by any depository
institution, the FDIC, or any other government agency.
COMPETITION
Commercial banking in LSB's service area is highly competitive. LSB actively
competes with national and state banks, thrift institutions, credit unions,
investment brokers, mortgage and finance companies. Competition of community
banks with regional and national banks has intensified significantly as a result
of deregulation of the financial industry.
REGULATION
As a bank holding company, Bancshares is subject to supervision, examination and
regulation by the Board of Governors of the Federal Reserve System. LSB is
chartered by the State of North Carolina and as such is subject to supervision,
examination and regulation by the North Carolina State Banking Commission. LSB
is also a member of the Federal Deposit Insurance Corporation and is therefore
subject to supervision and examination by that agency.
PROPERTIES
Bancshares' principal executive offices are located at One LSB Plaza, Lexington,
North Carolina. This five-story office building totals 74,800 square feet and
also serves as the home office of LSB. A majority of the major staff functions
are located within this office complex, which is owned by LSB.
In addition, LSB operates twenty-two branch offices and seven off-premise
automated teller locations. Eleven 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, 2001 to
February 28, 2010. Peoples Finance operates from a 1,800 square foot, one-story
building located at 203 East Center Street in Lexington, which it owns and a 500
square foot, one-story building located at 607 South Main Street in King, which
it leases. LSB Investment Services leases 800 square feet within the principal
office building of LSB. Except as described herein, Bancshares, LSB, Peoples
Finance and LSB Investment Services own all properties free and clear of
encumbrances.
1
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SUMMARY OF
SELECTED FINANCIAL DATA
Years Ended December 31
(In thousands, except per share data and ratios) 2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Interest income .................................. $ 60,943 $ 52,441 $ 49,657 $ 45,467 $ 40,192
Interest expense ................................. 29,202 22,373 21,682 19,547 16,536
-------- -------- -------- -------- --------
Net interest income .............................. 31,741 30,068 27,975 25,920 23,656
Provision for loan losses ........................ 2,550 780 770 785 805
-------- -------- -------- -------- --------
Net interest income
after provision for loan losses ................ 29,191 29,288 27,205 25,135 22,851
Noninterest income ............................... 8,063 7,187 6,585 5,389 4,639
Noninterest expense .............................. 24,540 23,068 21,151 20,426 17,907
-------- -------- -------- -------- --------
Income before income taxes ....................... 12,714 13,407 12,639 10,098 9,583
Income taxes ..................................... 3,919 3,927 3,959 3,336 2,718
-------- -------- -------- -------- --------
Net income ....................................... $ 8,795 $ 9,480 $ 8,680 $ 6,762 $ 6,865
======== ======== ======== ======== ========
Cash dividends declared .......................... $ 4,729 $ 4,775 $ 3,658 $ 2,712 $ 2,158
======== ======== ======== ======== ========
SELECTED YEAR-END ASSETS
AND LIABILITIES
Investment securities ............................ $125,332 $128,819 $143,843 $105,616 $128,101
Loans, net of unearned income .................... 549,065 506,078 436,014 396,991 355,893
Assets ........................................... 795,570 727,759 679,006 616,265 551,845
Deposits ......................................... 671,976 605,422 567,327 503,025 464,921
Shareholders' equity ............................. 74,243 70,724 73,430 67,527 62,862
RATIOS (AVERAGES)
Net income to total assets ....................... 1.13% 1.35% 1.35% 1.16% 1.32%
Net income to shareholders' equity ............... 12.04 13.14 12.30 10.31 11.36
Dividend payout .................................. 53.78 50.36 42.14 40.11 31.43
Shareholders' equity to total assets ............. 9.41 10.28 10.96 11.21 11.62
PER SHARE DATA*
Earnings Per Share:
Basic ......................................... $ 1.04 $ 1.11 $ 1.00 $ .78 $ .80
Diluted ....................................... 1.03 1.09 .98 .77 .79
Cash dividends declared .......................... .56 .56 .42 .35 .25
Book value at end of year ........................ 8.80 8.38 8.42 7.79 7.29
*Per share data has been restated in this table to give effect to the five
for four stock splits paid February 16, 1998 and February 15, 1996.
2
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AVERAGE BALANCES AND
NET INTEREST INCOME ANALYSIS
Table 1
Fully taxable equivalent basis(1) (In thousands)
2000 1999 1998
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) .......... $ 535,631 $ 49,440 9.23% $473,675 $ 42,520 8.98% $415,463 $ 39,112 9.41%
Taxable securities ........... 108,069 6,358 5.88 95,490 5,455 5.71 96,486 5,544 5.75
Tax exempt securities ........ 33,995 2,358 6.94 35,317 2,579 7.30 33,116 2,550 7.70
Federal Home Loan
Bank ........................ 2,411 188 7.80 2,096 157 7.49 2,228 165 7.41
Interest-Bearing Bank
Balances .................... 6,869 424 6.17 9,714 459 4.73 21,876 1,087 4.97
Federal funds sold and
securities purchased under
resale agreements ........... 43,820 2,775 6.33 39,120 1,975 5.05 33,956 1,903 5.60
--------- -------- -------- -------- -------- --------
Total earning assets ........ 730,795 61,543 8.42 655,412 53,145 8.11 603,125 50,361 8.35
Non-earning assets:
Cash and due from banks ...... 30,560 32,446 25,322
Premises and equipment ....... 11,452 11,461 11,516
Other assets ................. 8,517 7,706 9,103
Reserve for loan losses ...... (5,538) (5,211) (4,799)
--------- -------- -------- -------- -------- --------
Total assets ................ $ 775,786 $ 61,543 $701,814 $ 53,145 $644,267 $ 50,361
========= ======== ======== ======== ======== ========
Interest-bearing liabilities:
Savings and time
deposits .................... $ 569,038 $ 25,664 4.51% $516,346 $ 20,314 3.93% $466,874 $ 19,727 4.23%
Securities sold under
agreements to
repurchase ................. 17,367 1,008 5.80 3,852 154 4.00 6,027 234 3.88
Borrowings from Federal
Home Loan Bank ............. 40,650 2,530 6.22 34,790 1,905 5.48 30,731 1,721 5.60
--------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities ................ 627,055 29,202 4.66 554,988 22,373 4.03 503,632 21,682 4.31
Other liabilities and
shareholders' equity:
Demand deposits ............. 70,937 70,904 65,271
Other liabilities ........... 4,767 3,749 4,779
Shareholders' equity ........ 73,027 72,173 70,585
--------- -------- -------- -------- -------- --------
Total liabilities and
shareholders'
equity .................... $ 775,786 $ 29,202 $701,814 $ 22,373 $644,267 $ 21,682
========= ======== ======== ======== ======== ========
Net interest income and
net interest margin(3) ....... $ 32,341 4.43% $ 30,772 4.70% $ 28,679 4.76%
======== ==== ======== ==== ======== ====
Interest rate spread(4) ...... 3.76% 4.08% 4.04%
==== ==== ====
(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 $1,395, $1,619 and $1,606 for 2000, 1999 and 1998,
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.
3
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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 2000, 1999 and 1998. 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 Investment Services, Inc. ("LSB Investment 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
Consolidated net income for 2000 totaled $8.795 million, which generated diluted
earnings per share of $1.03, compared to net income for 1999 of $9.480 million
or $1.09 diluted earnings per share. Net income for 1998 was $8.680 million or
diluted earnings per share of $.98. Higher provision for loan losses, as well as
an increased provision for employee health insurance affected earnings for the
year 2000. The loan loss provision for 2000 was increased $1.770 million over
1999 while the provision for employee health insurance was increased $355,000.
Excluding the effects of these charges, Bancshares' net income for 2000 would
have been $10.081 million or $1.19 per diluted share.
Bancshares' operating results for the year reflected strong revenue growth with
increases in net interest income of 5.6% and noninterest income of 12.2%, while
noninterest expenses were held to a 6.4% increase. Bancshares expects expense
growth to moderate going forward as it continues to initiate technology
enhancements.
Interest rates rose steadily during the first half of 2000, following increases
during the second half of 1999. In February 2000, the prime interest rate
increased 25 basis points to 8.75%, followed by an increase of 25 basis points
in March and a 50 basis point increase in May. The prime interest rate at
year-end was 9.50% compared to 8.50% and 7.75% in 1999 and 1998, respectively.
VOLUME AND RATE VARIANCE ANALYSIS
2000 1999
Table 2
Volume Rate Total Volume Rate Total
Fully taxable equivalent basis(1) (In thousands) Variance(2) Variance(2) Variance Variance(2) Variance(2) Variance
----------------------------------- -------------------------------------
Interest income:
Loans receivable ................................. $ 5,706 $ 1,214 $ 6,920 $ 5,264 $(1,856) $ 3,408
Taxable investment securities .................... 737 166 903 (53) (36) (89)
Tax exempt investment securities ................. (95) (126) (221) 165 (136) 29
Federal Home Loan Bank ........................... 24 7 31 (10) 2 (8)
Interest-Bearing Bank Balances ................... (154) 119 (35) (578) (50) (628)
Federal funds sold ............................... 257 543 800 271 (199) 72
------- ------- ------- ------- ------- -------
Total interest income ......................... 6,475 1,923 8,398 5,059 (2,275) 2,784
------- ------- ------- ------- ------- -------
Interest expense:
Savings and time deposits ........................ 2,187 3,163 5,350 2,030 (1,443) 587
Securities sold under agreements to repurchase ... 757 97 854 (87) 7 (80)
Borrowings from Federal Home Loan Bank ........... 347 278 625 222 (38) 184
------- ------- ------- ------- ------- -------
Total interest expense ........................ 3,291 3,538 6,829 2,165 (1,474) 691
------- ------- ------- ------- ------- -------
Increase (decrease) in net interest income ....... $ 3,184 $(1,615) $ 1,569 $ 2,894 $ (801) $ 2,093
======= ======= ======= ======= ======= =======
(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.
4
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Return on average assets for 2000 was 1.13%, compared to 1.35% for 1999 and
1998. Return on average shareholders' equity was 12.04% for 2000 compared to
13.14% for 1999 and 12.30% for 1998.
For 2000, net interest income increased $1.673 million or 5.6% compared to
$2.093 million or 7.5% in 1999 and $2.055 million or 7.9% in 1998. Noninterest
income in 2000 increased $876,000 or 12.2% compared to $602,000 or 9.1% in 1999
and $1.196 million or 22.2% in 1998. Noninterest expense for 2000 increased
$1.472 million or 6.4% while increasing $1.917 million or 9.1% in 1999 and
$725,000 or 3.5% in 1998.
Total assets grew $67.811 million or 9.3% in 2000 compared to 1999, which was up
$48.753 million or 7.2% from 1998. Asset growth for 1998 was $62.741 million or
10.2%. Loan growth for 2000 was $42.987 million or 8.5% compared to $70.064
million or 16.1% for 1999 and $39.023 million or 9.8% for 1998. Deposit growth
in 2000 posted a gain of $66.554 million or 11.0% compared to gains of $38.095
million or 6.7% in 1999 and $64.302 million or 12.8% in 1998.
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 which can be used for funding and/or liquidity needs. This credit is
collateralized by a blanket lien on qualifying loans
INTEREST SENSITIVITY ANALYSIS(1)
December 31, 2000
TABLE 3
Total
(In thousands) 1 - 90 91 - 180 181-365 Sensitive 1 - 5 Over
Day Day Day Within Year 5-Year
Sensitive Sensitive Sensitive One Year Sensitive Sensitive Total
-------------------------------------------------------------------------------
Interest-earning assets:
Loans, net of unearned income ..................... $ 150,899 $ 37,777 $ 73,241 $ 261,917 $234,395 $ 52,753 $549,065
U.S. Treasury securities .......................... 999 2,005 4,022 7,026 14,156 21,182
U.S. government agencies obligations .............. 1,999 1,498 9,569 13,066 53,422 2,000 68,488
Obligations of states and political subdivisions .. 707 2,370 3,077 5,830 24,278 33,185
Federal Home Loan Bank ............................ 2,477 2,477 2,477
Interest-Bearing Bank Balances .................... 7,757 7,757 7,757
Federal funds sold ................................ 69,555 69,555 69,555
--------- --------- -------- --------- -------- -------- --------
Total interest-earning assets .................. $ 234,393 $ 43,650 $ 86,832 $ 364,875 $307,803 $ 79,031 $751,709
========= ========= ======== ========= ======== ======== ========
Interest-bearing liabilities:
N.O.W. account deposits ........................... $ 110,987 $ 110,987 $110,987
Money market deposits(2) .......................... 52,573 52,573 $122,234 174,807
Regular savings deposits(2) ....................... 5,086 5,086 27,746 32,832
Time deposits ..................................... 83,024 $ 90,400 $ 74,623 248,047 29,715 277,762
Securities sold under agreements to repurchase .... 3,002 3,002 3,002
Borrowing from Federal Home Loan Bank ............. 2,150 2,150 20,300 $ 18,000 40,450
--------- --------- -------- --------- -------- -------- --------
Total interest-bearing liabilities ............. $ 256,822 $ 90,400 $ 74,623 $ 421,845 $199,995 $ 18,000 $639,840
========= ========= ======== ========= ======== ======== ========
Interest sensitivity gap .......................... $ (22,429) $ (46,750) $ 12,209 $ (56,970)
Ratio of interest-sensitive assets/
interest-sensitive liabilities .................. .91 .48 1.16 .86
(1) Interest sensitivity is computed using assets and liabilities having
interest rates that can be adjusted during the period indicated.
(2) Maturity of deposits without a contractual maturity date was computed using
an asset/liability simulation model.
5
9
SUMMARY OF INVESTMENT SECURITIES PORTFOLIO
Table 4 December 31, 2000 December 31, 1999 December 31, 1998
(In thousands) Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
--------------------- -------------------- ---------------------
U.S. Treasury securities......................... $ 21,076 $ 21,188 $ 27,622 $ 27,405 $ 36,668 $ 37,510
U.S. government agencies obligations............. 68,592 68,440 64,630 62,577 66,558 66,683
Mortgage-backed obligations...................... 0 0 436 430 716 713
Obligations of state and political subdivisions.. 33,154 33,956 34,848 34,482 36,642 38,247
Federal Home Loan Bank........................... 2,477 2,477 2,258 2,258 2,169 2,169
-------- -------- -------- -------- -------- --------
Total securities............................... $125,299 $126,061 $129,794 $127,152 $142,753 $145,322
======== ======== ======== ======== ======== ========
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.
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 LSB's performance
for 2000 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, 2000 is presented in Table 3. Within this analysis, projected
runoff of deposits that do not have a contractual maturity date was computed
using the bank's asset/liability simulation model. As interest sensitivity is
continually changing, Table 3 reflects LSB's balance sheet position at one point
in time and is not necessarily indicative of its position on other dates. On
December 31, 2000 the one-year cumulative interest sensitivity gap was a
negative $56.970 million for a ratio of interest-sensitive assets to
interest-sensitive liabilities of .86.
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 $13.961 million in 2000 compared to $13.658 million in
1999 and $3.462 million in 1998. Details of cash flows for the years 2000, 1999
and 1998 are provided in the Consolidated Statements of Cash Flows.
NET INTEREST INCOME
Net interest income represents the dollar amount by which interest generated
from earning assets exceeds the cost of funds and is the primary source of
revenue for LSB. Earning assets for LSB consist primarily of loans and
investment securities while its cost of funds is the interest paid on
interest-bearing deposits and borrowed funds. Net interest income is affected by
various factors, among which are the volume of interest-earning assets and
interest-bearing liabilities and the interest rates earned and paid on those
assets and liabilities. Table 1 provides an analysis of average volumes, yields
and rates and net interest income on a tax-equivalent basis for the three years
ended December 31, 2000, 1999 and 1998. Tax-exempt income has been adjusted so
that it will be comparable to taxable income.
For 2000, tax-equivalent net interest income totaled $32.341 million compared to
$30.772 million for 1999 and $28.679 million for 1998. The increase in net
interest income during 2000 resulted from increased interest income on loans,
which was up $6.920 million; taxable securities were up $903,000 and Federal
funds sold which were up $800,000. During the same period, higher interest rates
on deposits and borrowed funds, along with increased volumes, resulted in an
increase of $6.829 million in total cost of funds.
The net interest margin is calculated on a tax-equivalent basis by dividing net
interest income by average earning assets. For 2000, the tax-equivalent net
interest margin was 4.43% compared to 4.70% for 1999 and 4.76% for 1998.
Interest rates began to increase the second half of 1999 as the Federal Reserve
attempted to slow the economy. These increases continued through the first half
of 2000. While this interest rate environment increased the overall yield on
earning assets, it dramatically
6
10
affected LSB's cost of funds. The average yield on earning assets increased 31
basis points in 2000 while the average rate on interest-bearing liabilities
increased 63 basis points. This placed the interest rate spread at 3.76% for
2000 compared to 4.08% for 1999 and 4.04% for 1998.
Average loan volume and yield increased in 2000 producing favorable results for
LSB's net interest income. Total average earning assets in 2000 increased
$75.383 million or 11.5% compared to $52.287 million or 8.7% in 1999. Total
average interest-bearing liabilities increased $72.067 million or 13.0% compared
to $51.356 million or 10.2% in 1999. The decrease in the net interest margin in
2000 was principally due to a more rapid increase 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
Average earning assets gained $75.383 million or 11.5% in 2000 compared to
$52.287 million or 8.7% in 1999 and $56.615 million or 10.4% in 1998. The loan
portfolio accounted for the majority of this gain with an increase of $61.956
million or 13.1% in 2000 compared to increases of $58.212 million or 14.0% in
1999 and $35.791 million or 9.4% in 1998.
INVESTMENT SECURITIES
PORTFOLIO MATURITY SCHEDULE
December 31, 2000
Table 5
Weighted
(In thousands) Carrying Average
Value Yield(1)
----------------------
U.S. Treasury securities:
Within one year .................................... $ 6,999 6.78%
One to five years .................................. 14,077 6.20
--------
Total ............................................. 21,076 6.39
--------
U.S. government agencies obligations:
Within one year .................................... 13,109 5.79
One to five years .................................. 53,483 6.38
Five to ten years .................................. 2,000 7.61
--------
Total ............................................. 68,592 6.31
--------
Obligations of states and political subdivisions:
Within one year .................................... 3,078 10.32
One to five years .................................. 5,821 8.71
Five to ten years .................................. 12,871 8.35
After ten years .................................... 11,384 7.65
--------
Total ............................................. 33,154 8.35
--------
Federal Home Loan Bank .............................. 2,477 7.75
--------
Total securities .................................... $125,299 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.
Table 2, Volume and Rate Variance Analysis, distinguishes between the changes in
average outstanding balances of interest-earning assets and interest-bearing
liabilities (volume variance) and changes in average interest rates (rate
variance). Any changes attributable to both volume and rate have been allocated
proportionately.
Increasing interest rates and continued loan demand in 2000 resulted in a
positive variance for loans receivable in both volume and rate. With a 13.1%
increase in average loans outstanding in 2000 compared to 1999, the variance
related to volume was $5.706 million. The average yield on loans receivable
increased 25 basis points in 2000 creating a rate variance of $1.214 million.
The total average balance of the investment securities portfolio in 2000 was
$142.064 million, up $11.257 million or 8.6% from 1999. Investment securities
held-to-maturity at December 31, 2000 was $72.828 million compared to $68.551
million at December 31, 1999. The investment portfolio of available-for-sale
securities at December 31, 2000 was $52.504 million compared to $60.268 million
at December 31, 1999.
The average balance of the taxable investment securities portfolio in 2000
increased $12.579 million or 13.2% over 1999 and resulted in a positive volume
variance of $737,000. Yields on the portfolio increased 17 basis points in 2000
producing a rate variance of $166,000. The total earnings variance for taxable
securities was $903,000. The average balance of the tax-exempt securities
portfolio declined $1.322 million or 3.7% from 1999 levels, while yields dropped
36 basis points in 2000 producing a negative total variance of $221,000.
Funds maintained with the Federal Home Loan Bank, on average, increased slightly
in 2000 producing a positive volume variance of $24,000, while an increase of 31
basis points in the yield resulted in a positive $7,000 rate variance.
Balances of short-term investments in interest bearing accounts with bank
approved institutions were reduced during 2000 creating a negative volume
variance of $154,000. Average yields on these investments increased 144 basis
points in 2000 producing a positive rate variance of $119,000.
Overnight investments in federal funds sold and securities purchased under
resale agreements increased in average balances during 2000 by $4.700 million or
12.0% compared to 1999. This resulted in a positive volume variance of $257,000.
Yields on these overnight investments increased 128 basis points in 2000
resulting in a positive rate variance of $543,000.
As of the latest reported period, LSB is not aware of any issuer (and the
aggregate book value and aggregate market value of the securities of such
issuer), where the aggregate book value
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11
AVERAGE TOTAL DEPOSITS
Table 6 2000 1999 1998
(In thousands) Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
--------------------- --------------------- ----------------------
Demand deposits .............. $ 70,937 $ 70,904 $ 65,271
N.O.W. account deposits ...... 110,556 2.02% 103,411 2.09% 96,809 2.44%
Money market deposits ........ 168,160 4.65 156,144 4.00 113,798 4.05
Regular savings deposits ..... 34,307 1.83 36,592 1.66 44,285 1.77
Time deposits ................ 256,015 5.86 220,199 5.07 211,982 5.65
-------- -------- --------
Total deposits(1) ........... $639,975 $587,250 $532,145
======== ======== ========
December 31, 2000
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 ........... $35,900 $27,134 $16,378 $311 $79,723
(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.
of such securities exceeds ten percent of the registrant's shareholders' equity.
INTEREST BEARING LIABILITIES
Average interest-bearing liabilities gained $72.067 million or 13.0% in 2000
compared to $51.356 million or 10.2% in 1999 and $49.203 million or 10.8% in
1998. The average rate paid on interest-bearing liabilities increased 63 basis
points in 2000 following a decline of 28 basis points in 1999.
The majority of LSB's interest-bearing liabilities consist of savings and time
deposits. In 2000, average deposits increased $52.692 million or 10.2% compared
to $49.472 million or 10.6% in 1999 and $41.385 million or 9.7% in 1998. The
average interest rate paid on these deposits increased 58 basis points in 2000
following a 30 basis point decrease in 1999. The total variance for 2000 for
savings and time deposits was $5.350 million with $2.187 million attributable to
volume variance and $3.163 million attributable to rate variance.
The schedule for average deposits is presented in Table 6 for years 2000, 1999
and 1998. Time deposits had the largest increase in average balances for 2000
with a gain of $35.816 million or 16.3% over 1999. The average rate paid on
these deposits increased 79 basis points compared to 1999. Money market deposits
increased $12.016 million in 2000 with the average rate paid increasing 65 basis
points. In 2000, N.O.W. account deposits gained $7.145 million or 6.9% over
1999. The average rate paid on these deposits dropped seven basis points in
2000. Regular savings deposits decreased in average balances in 2000 by $2.285
million or 6.2% while the average rate paid these depositors increased 17 basis
points.
Securities sold under agreements to repurchase account for a relatively small
portion of total interest-bearing liabilities for LSB. In 2000, however, the
average balance of securities sold under agreements to repurchase increased
$13.515 million with the influx of short-term funds. The interest rates paid on
these short-term funds also rose in 2000 to be 180 basis points over those paid
in 1999. Total variance for 2000 for these liabilities was $854,000, with
$757,000 attributable to volume variance and $97,000 attributable to rate
variance.
Average borrowed funds from the Federal Home Loan Bank in 2000 were $40.650
million, an increase of $5.860 million or 16.8% over 1999. As shown in the
Volume and Rate Variance Analysis, Table 2, this produced a volume variance of
$347,000, while the 74 basis point increase in the 2000 rate paid on these
borrowings created a $278,000 rate variance.
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 out-
8
12
standing shares. In calendar year 2000, Bancshares repurchased 57,283 shares
under the Plan at an average cost of $13.15. Total repurchase of shares under
the Plan, as of December 31, 2000 has been 423,781 shares at an average cost of
$18.43 per share. Shareholders' equity at December 31, 2000, was $74.243
million, an increase of 5.0% compared to December 31, 1999. Average
shareholders' equity as a percentage of average total assets at December 31 was
9.41% in 2000 compared to 10.28% in 1999 and 10.96% in 1998.
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, 2000, based on these
measures, Bancshares' had a Tier 1 capital ratio of 13.98% compared to the
regulatory requirement of 4% and a total capital ratio of 15.11% 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, 2000, Bancshares' Tier 1
leverage ratio was 9.21%.
The number of shareholders holding Bancshares stock totaled approximately 6,100
at December 31, 2000. Participants in Bancshares' dividend reinvestment plan
total 1,572 representing 25.8% of total shareholders and held a total of 721,509
shares.
NONINTEREST INCOME
Noninterest income for 2000 increased $876,000 or 12.2% compared to an increase
of $602,000 or 9.1% in 1999 and an increase of $1.196 million or 22.2% in 1998.
Service charges on deposit accounts for 2000 increased $445,000 or 14.0%
compared to increases of $455,000 or 16.8% in 1999 and $166,000 or 6.5% in 1998.
The realized gains from the sale of mortgage loans in 2000 totaled $145,000
compared to $273,000 in 1999 and $328,000 in 1998. Other operating income
increased $372,000 or 9.9% in 2000 compared to increases of $202,000 or 5.7% in
1999 and $856,000 or 31.9% in 1998. Financial statement Note 9 details material
items contained in other operating income. Bankcard income generated
SUMMARY OF LOAN PORTFOLIO
Table 7
(In thousands)
2000 1999 1998 1997 1996
----------------------------------------------------------------
Commercial, financial and agricultural ...... $172,058 $153,252 $144,955 $132,181 $131,235
Real estate - construction .................. 36,058 28,130 19,131 12,978 10,493
Real estate - mortgage ...................... 267,735 250,173 206,068 185,384 145,845
Installment loans to individuals ............ 64,161 65,882 62,747 62,909 60,181
Lease financing ............................. 168 820 978 792 678
Other ....................................... 8,885 7,821 2,135 2,747 7,461
-------- -------- -------- -------- --------
Total loans, net of unearned income ......... $549,065 $506,078 $436,014 $396,991 $355,893
======== ======== ======== ======== ========
(*) The bank has no foreign loan activity.
MATURITIES AND SENSITIVITIES OF
LOANS TO CHANGES IN INTEREST RATES
December 31, 2000
Commercial,
financial Real estate -
and agricultural construction Total
--------------------------------------------------
Due in 1 year or less ........ $ 67,528 $36,058 $103,586
Due after 1 year through
5 years:
Fixed interest rates ....... 73,436 73,436
Floating interest rates .... 8,095 8,095
Due after 5 years:
Fixed interest rates ....... 19,162 19,162
Floating interest rates .... 3,837 3,837
-------- ------- --------
Total ..................... $172,058 $36,058 $208,116
======== ======= ========
9
13
ANALYSIS OF RESERVE FOR LOAN LOSSES
Table 8 As of Or For the Years Ended
December 31
(In thousands)
2000 1999 1998 1997 1996
------------------------------------------------------------
Average amount of loans outstanding, net of unearned income .. $535,631 $473,675 $415,463 $379,672 $ 324,195
Amount of loans outstanding, net of unearned income .......... 549,065 506,078 436,014 396,991 355,893
Reserve for loan losses:
BALANCE ON JANUARY 1 ......................................... $ 5,246 $ 5,048 $ 4,601 $ 4,075 $ 3,711
-------- -------- -------- -------- ---------
Loans charged off:
Secured by real estate ....................................... 0 0 0 0 57
Commercial and industrial .................................... 1,403 259 65 382 225
Installment .................................................. 343 291 285 330 197
Credit card .................................................. 300 198 101 139 93
-------- -------- -------- -------- ---------
Total charge-offs .......................................... 2,046 748 451 851 572
-------- -------- -------- -------- ---------
Recoveries of loans previously charged off:
Secured by real estate ....................................... 0 6 0 0 0
Commercial and industrial .................................... 21 16 9 486 20
Installment .................................................. 128 108 91 89 86
Credit card .................................................. 60 36 28 17 25
-------- -------- -------- -------- ---------
Total recoveries ........................................... 209 166 128 592 131
-------- -------- -------- -------- ---------
Net loans charged off .......................................... 1,837 582 323 259 441
-------- -------- -------- -------- ---------
Provision for loan losses ...................................... 2,550 780 770 785 805
-------- -------- -------- -------- ---------
BALANCE ON DECEMBER 31 ....................................... $ 5,959 $ 5,246 $ 5,048 $ 4,601 $ 4,075
======== ======== ======== ======== =========
Ratio of net charge-offs of loans to average loans
outstanding during the year ................................ .34% .12% .08% .07% .14%
in 2000 increased $313,000 or 26.1% compared to $319,000 or 36.3% in 1999 and
$319,000 or 57.1% in 1998. Fee income generated from the servicing of mortgage
loans sold and customer related service fees increased $126,000 or 15.7% in
2000, $78,000 or 10.8% in 1999 and $148,000 or 25.7% in 1998. Financial services
commissions generated by LSB's subsidiary, LSB Investment Services, increased in
2000 by $291,000 or 48.1% following 1999's decline due to staff attrition.
Proper staffing was accomplished during 1999 and an expansion of the Investment
Services' market began. Commissions from the subsidiary had decreased in 1999 by
$216,000 or 26.3% compared to 1998's increase of $364,000 or 79.6%. Trust income
for 2000 increased $6,000 or 1.1% compared to $33,000 or 6.6% in 1999 and
$56,000 or 12.6% in 1998.
NONINTEREST EXPENSE
Total noninterest expense, excluding merger-related costs and restructuring
charges, was $24.540 million in 2000 compared to $23.068 million in 1999 and
$20.991 million in 1998. These amounts represent increases of $1.472 million or
6.4% for 2000 compared to $2.077 million or 9.9% for 1999 and $2.059 or 10.9%
for 1998.
Personnel expense, which consists of employee salaries and benefits,
represented the majority of the total noninterest expense increase for 2000. The
provision for employee health insurance was increased $355,000 in 2000 to
maintain adequate reserves. Personnel expense increased a total of $1.291
million or 10.5% in 2000 compared to increases of $1.153 million or 10.3% for
1999 and $785,000 or 7.6% for 1998. With the exception of the additional
provision for employee health insurance, these increases are attributable to
normal increases in compensation and increases in the number of full-time
equivalent employees. In 2000, full-time equivalent employees totaled 352
compared to 340 in 1999.
Occupancy expense increased a modest $13,000 or 1.0% in 2000 compared to
increases of $23,000 or 1.8% in 1999 and $36,000 or 2.9% in 1998. Equipment
depreciation and maintenance expense for 2000 was up $132,000 or 10.1% from
1999, which increased $76,000, or 6.2% over 1998. Other operating expenses in
2000 increased a modest $36,000 or 0.4% compared to a 1999 increase of $825,000
or 11.3%. Financial statement Note 9 details the material items contained in
other operating expenses. In 2000, renewed emphasis was placed on LSB's
automation program resulting in an increase in automated services expense of
$190,000 or 13.1% compared to 1999. LSB's expanded automation program is
designed to enhance customer service and improve operating efficiencies.
Bankcard expense for 2000 increased $157,000 or 16.1% compared to $272,000 or
38.7% in 1999. The increase is attributable to increased volume and growth in
the bankcard portfolio. Legal and professional expense for 2000 decreased
$236,000 or 20.7% compared to an increase in 1999 of $104,000 or 10.1%.
10
14
Other expenses were also down in 2000 by $100,000 or 3.5% following increases of
$293,000 or 11.3% in 1999 and $465,000 or 22.6% in 1998.
ASSET QUALITY AND PROVISION FOR LOAN LOSSES
Increased interest rates over the last half of 1999 and the first half of 2000
resulted in a slowing of the economy during the last half of 2000. While LSB's
overall credit quality and underwriting standards remain sound, specific
credit concerns were identified and addressed in the third and fourth quarters
of 2000. During this period the reserve for loan losses was raised to $5.959
million at December 31, 2000 compared to $5.246 million at December 31 1999.
The slowing economy also had an effect on nonperforming assets, and in
particular accruing loans ninety days or more past due. Nonperforming assets are
defined as nonaccrual loans, restructured loans, other real estate acquired
through foreclosed properties and accruing loans ninety days or more past due.
At December 31, 2000 nonperforming assets were $2.984 million, compared to
$2.090 million at December 31, 1999 and $1.912 million at December 31, 1998.
Accruing loans past due ninety days or more increased to $1.316 million at
December 31, 2000 from $821,000 at December 31, 1999. Nonaccrual loans at
December 31, 2000 decreased to $57,000 from $96,000 at December 31, 1999. The
accrual of interest is generally discontinued on all loans that become ninety
days past due as to principal or interest unless collection of both principal
and interest is assured by way of collateralization, guarantees or other
security and the loan is considered to be in the process of collection. Total
nonperforming assets as a percentage of loans outstanding at the end of the year
amounted to 0.54% in 2000, 0.41% in 1999 and 0.44% in 1998.
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. At December 31, 2000,
the reserve for loan losses of $5.959 million was 1.09% of loans outstanding
compared to $5.246 million or 1.04% of loans outstanding at December 31, 1999.
Net charge offs for 2000 were $1.837 million or .34% of average loans
outstanding, compared to 1999 net charge offs of $582,000 or .12%.
The provision for loan losses charged to operations was increased to $2.550
million during 2000 to address specific third and fourth quarter credit
concerns, compared to a 1999 provision of $780,000. The reserve for loan losses
was at 2.00 times nonperforming loans at December 31, 2000 compared to 2.51
times nonperforming loans at December 31, 1999. 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 2000
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
NONPERFORMING ASSETS
Table 9
(In thousands) December 31
2000 1999 1998 1997 1996
----------------------------------------------------------
Nonaccrual loans:
Secured by real estate ........................................... $ 0 $ 0 $ 0 $ 0 $ 424
Commercial and industrial ........................................ 57 96 0 127 187
Restructured loans ................................................ 338 137 232 502 259
Other real estate acquired through foreclosed properties .......... 1,273 1,036 921 1,192 1,151
Accruing loans which are contractually past due 90 days or more ... 1,316 821 759 334 369
------ ------ ------ ------ ------
Total nonperforming assets ........................................ $2,984 $2,090 $1,912 $2,155 $2,390
====== ====== ====== ====== ======
Nonperforming assets to:
Loans outstanding at end of year ................................. .54% .41% .44% .54% .67%
Total assets at end of year ...................................... .38 .29 .28 .35 .43
Years Ended December 31
2000 1999 1998 1997 1996
----------------------------------------------------------
Loss of interest income associated with nonperforming loans at
December 31:
Interest income that would have been recorded in accordance
with original terms .............................................. $ 11 $ 15 $ 0 $ 1 $ 52
Less interest income actually recorded ............................ 0 0 0 0 3
------ ------ ------ ------ ------
Loss of interest income ........................................... $ 11 $ 15 $ 0 $ 1 $ 49
====== ====== ====== ====== ======
11
15
ALLOCATION OF RESERVE FOR LOAN LOSSES (*)
Table 10 2000 1999 1998 1997 1996
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 ...... $1,680 31.3% $1,420 30.3% $1,330 33.2% $1,212 33.3% $1,075 36.9%
Real estate -
construction .......... 643 6.6 566 5.6 555 4.4 506 3.3 450 2.9
Real estate -
mortgage .............. 2,385 48.8 2,100 49.4 2,000 47.4 1,815 46.7 1,529 41.0
Installment loans to
individuals ........... 1,000 11.7 908 13.0 913 14.3 828 15.8 766 16.9
Lease financing ........ 41 .0 60 .2 60 .2 55 .2 55 .2
Other .................. 110 1.6 92 1.5 90 .5 85 .7 110 2.1
Unallocated ............ 100 .0 100 .0 100 .0 100 .0 90 .0
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total ................. $5,959 100.0% $5,246 100.0% $5,048 100.0% $4,601 100.0% $4,075 100.0%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
(*) 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.
loan losses. The review process is performed both internally and externally,
through the employment of independent credit review professionals. As a part of
the external credit review for 2000, samples were reviewed of consumer loans,
small-business loans and commercial loans with balances of $200,000 and over.
All loans on the bank's watch list were reviewed as well. A review of large
credits was conducted by a regulatory agency examination revealing that there
were no material problem credits that had not been previously identified by
management.
The reserve for loan losses represents management's estimate of an amount
adequate to provide for the risk of future losses inherent in the loan
portfolio. In its on-going analysis of the reserve for loan losses and its
adequacy, management considers historic loan loss experience, economic risks
associated with each of the lending categories, amount of past due and
non-performing loans, underlying collateral values securing loans and credit
concentrations and other factors which might affect potential credit losses. LSB
is also subject to regulatory examinations and determinations as to the adequacy
of its reserve for loan losses, which may take into account such factors as the
methodology used to calculate the reserve and the size of the reserve in
comparison to peer banks identified by the regulatory agencies.
There are, however, additional risks of future losses that cannot be quantified
precisely or attributed to particular loans or classes of loans. Because these
risks include the state of the economy and factors affecting particular
borrowers, management's judgment as to the adequacy of the reserve for loan
losses is necessarily approximate and imprecise. In its oversight of the credit
review process, management has not identified any undue economic risks
associated with the various lending categories, nor any significant credit
concentrations within these categories.
Loans classified for regulatory purposes as loss, doubtful, sub-standard or
special mention that have not been disclosed in Table 9, "Nonperforming Assets",
do not represent or result from trends or uncertainties which management
reasonably expects will materially impact future operating results, liquidity,
or capital resources, or represent material credits about which management is
aware of any information which causes management to have serious doubts as to
the ability of such borrowers to comply with the loan repayment terms.
INCOME TAXES
Income tax expense is recorded based on amounts currently payable. Income tax
expense was $3.919 million in 2000 compared to $3.927 million in 1999 and
$3.959 million in 1998. Bancshares' effective tax rate increased to 30.8% in
2000 from 29.3% in 1999 compared to 31.3% in 1998. Financial statement Note 10
provides a reconciliation between the amount of taxes computed using the
statutory tax rate and the actual tax expense.
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
12
16
QUARTERLY FINANCIAL DATA
Table 11
(In thousands except per share data) 2000 1999
4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
-------------------------------------------------------------------------------------
Interest income .................. $16,111 $15,647 $15,057 $14,128 $13,578 $13,338 $12,993 $12,532
Interest expense ................. 7,974 7,751 7,042 6,435 5,962 5,668 5,422 5,321
------- ------- ------- ------- ------- ------- ------- -------
Net interest income .............. 8,137 7,896 8,015 7,693 7,616 7,670 7,571 7,211
Provision for loan losses ........ 1,155 815 385 195 165 215 235 165
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses ...... 6,982 7,081 7,630 7,498 7,451 7,455 7,336 7,046
------- ------- ------- ------- ------- ------- ------- -------
Noninterest income ............... 2,096 2,060 1,945 1,962 1,890 1,704 1,862 1,731
------- ------- ------- ------- ------- ------- ------- -------
Noninterest expense .............. 6,107 6,202 6,201 6,030 5,914 5,874 5,773 5,507
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes ....... 2,971 2,939 3,374 3,430 3,427 3,285 3,425 3,270
Income taxes ..................... 935 913 1,044 1,027 1,080 884 951 1,012
------- ------- ------- ------- ------- ------- ------- -------
Net income ....................... $ 2,036 $ 2,026 $ 2,330 $ 2,403 $ 2,347 $ 2,401 $ 2,474 $ 2,258
======= ======= ======= ======= ======= ======= ======= =======
Earnings per share:
Basic ........................... $ .24 $ .24 $ .28 $ .28 $ .28 $ .28 $ .29 $ .26
Diluted ......................... .24 .24 .27 .28 .27 .28 .28 .26
positioned for growth when the economy rebounds. Management seeks to do this
through its long-range budget and profit-planning process.
ACCOUNTING AND REGULATORY ISSUES
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
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 by SFAS 137 to June 15, 2000. SFAS 133 has also been amended by SFAS
138, which provides additional guidance in implementing the original
pronouncement. The effective date of SFAS 138 is the same as SFAS 133 for
entities that have not adopted SFAS 133 before 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.
Statement No. 125 ("SFAS 125"), "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" was issued by FASB in June
1996 with an effective date of January 1, 1997. Bancshares adopted SFAS 125 with
no affect on its financial position and operation results. In October 2000, FASB
issued Statement No. 140 ("SFAS 140"), "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" as a replacement of SFAS
125. SFAS 140 contains all of the main provisions of SFAS 125 but also covers
issues not previously addressed in Statement 125 concerning transfers and
servicing of financial assets. With certain exceptions, SFAS 140 is effective
for transfers and servicing of financial assets occurring after March 31, 2001.
Bancshares does not anticipate any material effect on its financial position and
operating results from adoption of the standard.
13
17
CONSOLIDATED BALANCE SHEETS
December 31
(In thousands, except for shares) 2000 1999
- ------------------------------------------------------------------------------------------------------------
ASSETS
Cash and Due from Banks (Note 2) ............................... $ 26,916 $ 33,971
Interest-Bearing Bank Balances ................................. 7,757 14,527
Federal Funds Sold and Securities Purchased
Under Resale Agreements ....................................... 69,555 27,270
Investment Securities (Note 3):
Held to Maturity, Market Value $73,557 and $66,884 ............ 72,828 68,551
Available for Sale ............................................ 52,504 60,268
Loans (Notes 4 and 11) ......................................... 549,065 506,078
Less, Reserve for Loan Losses (Note 4) ......................... (5,959) (5,246)
--------- ---------
Net Loans ................................................... 543,106 500,832
Premises and Equipment (Note 5) ................................ 11,609 11,215
Other Assets ................................................... 11,295 11,125
--------- ---------
Total Assets ................................................ $ 795,570 $ 727,759
========= =========
LIABILITIES
Deposits:
Demand ......................................................... $ 75,588 $ 73,916
Savings, N.O.W. and Money Market Accounts ...................... 318,626 297,966
Certificates of Deposit of less than $100,000 (Note 6) ......... 198,039 172,453
Certificates of Deposit of $100,000 or more (Note 6) ........... 79,723 61,087
--------- ---------
Total Deposits .............................................. 671,976 605,422
Securities Sold Under Agreements to Repurchase (Note 6) ........ 3,002 1,299
Borrowings from the Federal Home Loan Bank (Note 7) ............ 40,450 45,150
Other Liabilities .............................................. 5,899 5,164
--------- ---------
Total Liabilities ........................................... 721,327 657,035
========= =========
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 8,432,824
Shares in 2000 and 8,442,918 Shares in 1999 ................. 42,164 42,215
Paid-In Capital ................................................ 9,837 10,151
Directors' Deferred Plan ....................................... (797) 0
Retained Earnings .............................................. 23,019 18,953
Accumulated Other Comprehensive Income ......................... 20 (595)
--------- ---------
Total Shareholders' Equity .................................... 74,243 70,724
--------- ---------
Total Liabilities and Shareholders' Equity ................. $ 795,570 $ 727,759
========= =========
Commitments and Contingencies (Note 8)
Notes to consolidated financial statements are an integral part hereof.
14
18
CONSOLIDATED STATEMENTS
OF INCOME
Years Ended December 31
(In thousands, except for shares and per share amounts) 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and Fees on Loans ..................................... $ 49,440 $ 42,520 $ 39,112
Interest on Investment Securities:
Taxable ....................................................... 6,358 5,455 5,544
Tax Exempt .................................................... 1,758 1,875 1,846
Interest-Bearing Bank Balances ................................. 612 616 1,252
Federal Funds Sold and Securities Purchased Under
Resale Agreements ............................................. 2,775 1,975 1,903
---------- ---------- ----------
Total Interest Income ........................................ 60,943 52,441 49,657
---------- ---------- ----------
INTEREST EXPENSE
Deposits ....................................................... 25,664 20,314 19,727
Securities Sold Under Agreements to Repurchase ................. 1,008 154 234
Borrowings from the Federal Home Loan Bank ..................... 2,530 1,905 1,721
---------- ---------- ----------
Total Interest Expense ....................................... 29,202 22,373 21,682
---------- ---------- ----------
Net Interest Income .............................................. 31,741 30,068 27,975
Provision for Loan Losses (Note 4) ............................... 2,550 780 770
---------- ---------- ----------
Net Interest Income after Provision for Loan Losses .............. 29,191 29,288 27,205
---------- ---------- ----------
NONINTEREST INCOME
Service Charges on Deposit Accounts .............................. 3,616 3,171 2,716
Gains on Sales of Mortgages .................................... 145 273 328
Gains on Sales of Investment Securities ........................ 187 0 0
Other Operating Income (Note 9) ................................ 4,115 3,743 3,541
---------- ---------- ----------
Total Noninterest Income ..................................... 8,063 7,187 6,585
---------- ---------- ----------
NONINTEREST EXPENSE
Personnel Expense .............................................. 13,616 12,325 11,172
Occupancy Expense .............................................. 1,295 1,282 1,259
Equipment Depreciation and Maintenance ......................... 1,434 1,302 1,226
Other Operating Expense (Note 9) ............................... 8,195 8,159 7,334
Merger Related Costs ........................................... 0 0 160
---------- ---------- ----------
Total Noninterest Expense .................................... 24,540 23,068 21,151
---------- ---------- ----------
Income Before Income Taxes ....................................... 12,714 13,407 12,639
Income Taxes (Note 10) ........................................... 3,919 3,927 3,959
---------- ---------- ----------
Net Income ....................................................... $ 8,795 $ 9,480 $ 8,680
========== ========== ==========
Earnings Per Share:
Basic .......................................................... $ 1.04 $ 1.11 $ 1.00
Diluted ........................................................ 1.03 1.09 .98
Weighted Average Shares Outstanding:
Basic ......................................................... 8,448,433 8,547,905 8,703,274
Diluted ....................................................... 8,501,523 8,693,801 8,887,631
Notes to consolidated financial statements are an integral part hereof.
15
19
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
Accumulated
Common Stock Directors' Other Total
---------------------- Paid-In Deferred Retained Comprehensive Shareholders'
(In thousands, except for shares) Shares Amount Capital Plan Earnings Income Equity
- ----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 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
NET INCOME ............................... 8,795 8,795
CHANGE IN UNREALIZED GAIN ON SECURITIES
AVAILABLE FOR SALE, NET OF DEFERRED
INCOME TAXES .......................... 615 615
-------
COMPREHENSIVE INCOME 9,410
CASH DIVIDENDS DECLARED ON COMMON
STOCK ................................. (4,729) (4,729)
COMMON STOCK ISSUED FOR STOCK
OPTIONS EXERCISED ..................... 47,189 236 152 388
COMMON STOCK ACQUIRED .................... (57,283) (287) (466) $(797) (1,550)
--------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 2000 ............ 8,432,824 $42,164 $ 9,837 $(797) $23,019 $ 20 $ 74,243
================================================================================
Notes to consolidated financial statements are an integral part hereof.
16
20
CONSOLIDATED STATEMENTS
OF CASH FLOWS
Years Ended December 31
(In thousands) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES
Net Income .......................................................................... $ 8,795 $ 9,480 $ 8,680
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization .................................................... 1,371 1,319 1,241
Securities premium amortization and discount accretion, net ...................... (282) 58 (104)
(Increase) decrease in loans held for sale ....................................... 1,546 2,191 (7,276)
Deferred income taxes ............................................................ (255) 14 180
Income taxes payable ............................................................. (65) 127 81
Increase in income earned but not received ....................................... (447) (99) (463)
Increase (decrease) in interest accrued but not paid ............................. 883 253 (16)
Net (increase) decrease in other assets .......................................... (141) (544) 280
Net increase in other liabilities ................................................ 196 143 45
Provision for loan losses ........................................................ 2,550 780 770
Gain on sale of investment securities ............................................ (187) 0 0
(Gain) loss on sale of premises and equipment .................................... (3) (64) 44
-------- -------- --------
Net cash provided by operating activities ...................................... 13,961 13,658 3,462
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of securities held to maturity ......................................... (15,132) (15,520) (24,983)
Proceeds from maturities of securities held to maturity .......................... 10,879 6,869 20,005
Purchases of securities available for sale ....................................... (90,375) (223) (64,650)
Proceeds from maturities of securities available for sale ........................ 99,403 21,776 32,311
Proceeds from sales of securities available for sale ............................. 189 0 0
Net increase in loans made to customers .......................................... (46,369) (72,838) (32,071)
Purchases of premises and equipment .............................................. (1,780) (1,057) (1,604)
Proceeds from sale of premises and equipment ..................................... 18 115 52
Net (increase) decrease in federal funds sold .................................... (42,285) 13,325 19,745
-------- -------- --------
Net cash used by investing activities .......................................... (85,452) (47,553) (51,195)
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Net increase in demand deposits, N.O.W.,
money market and savings accounts .............................................. 22,332 12,700 64,687
Net increase (decrease) in time deposits ......................................... 44,222 25,395 (385)
Net increase (decrease) in securities sold under agreements to repurchase ........ 1,703 (4,238) (2,726)
Proceeds from long-term debt ..................................................... 8,000 30,000 0
Payments on long-term debt ....................................................... (12,700) (13,692) (4,916)
Dividends paid ................................................................... (4,729) (4,775) (3,658)
Proceeds from issuance of common stock ........................................... 388 715 501
Common stock acquired ............................................................ (1,550) (6,866) (93)
Fractional shares purchased ...................................................... 0 0 (18)
-------- -------- --------
Net cash provided by financing activities ...................................... 57,666 39,239 53,392
-------- -------- --------
Increase (decrease) in cash and cash equivalents ................................. (13,825) 5,344 5,659
Cash and cash equivalents at the beginning of the years .......................... 48,498 43,154 37,495
-------- -------- --------
Cash and cash equivalents at the end of the years ................................ $ 34,673 $ 48,498 $ 43,154
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during the years for:
Interest ....................................................................... $ 28,319 $ 22,121 $ 21,712
Income taxes ................................................................... 4,248 4,214 3,803
SUPPLEMENTAL DISCLOSURE OF
NONCASH TRANSACTIONS
Transfer of loans to other real estate owned ..................................... $ 644 $ 412 $ 100
Unrealized gain (loss) on securities available for sale:
Change in securities available for sale ........................................ 1,008 (2,064) 805
Change in deferred income taxes ................................................ (393) 804 (314)
Change in shareholders' equity ................................................. 615 (1,260) 491
Notes to consolidated financial statements are an integral part hereof.
17
21
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
AS OF OR FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
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 Investment Services, Inc. Bancshares serves
customers primarily in Davidson, Forsyth, and Stokes Counties, North
Carolina.
Consolidation
The consolidated financial statements include the accounts of
Bancshares and its wholly-owned subsidiaries, after eliminating
intercompany balances and transactions. Securities and other property
held in a fiduciary or agency capacity are not included in the
consolidated balance sheets since these are not assets or liabilities
of Bancshares. Certain prior year amounts have been reclassified to
conform to current year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents
Bancshares considers cash and due from banks and interest-bearing bank
balances as cash and cash equivalents for purposes of the consolidated
statements of cash flows. Due from bank balances and interest-bearing
bank balances are maintained in other financial institutions.
Securities Purchased Under Resale Agreements
Bancshares' policy is that securities purchased under resale agreements
will be collateralized by U.S. Treasury and other U.S. Government
agency obligations.
Investment Securities
Management determines the appropriate classification of investment
securities at the time of purchase. Securities that may be sold in
response to or in anticipation of changes in interest rates or other
factors are classified as available for sale and carried at market
value. The unrealized gains and losses on these securities are reported
net of applicable taxes as a separate component of shareholders'
equity. Securities that Bancshares has the positive intent and ability
to hold to maturity are carried at amortized cost. Bancshares does not
have any securities held for trading. Interest income on securities,
including amortization of premiums and accretion of discounts, is
recognized using the interest method. Gains and losses on the sale of
securities are recognized on a specific identification basis.
Loans
Loans are generally carried at the principal amount outstanding, net of
deferred loan fees and certain direct origination costs on originated
loans and unamortized discounts and premiums on purchased loans.
Mortgage loans held for sale are carried at the lower of cost or market
value, as determined by outstanding commitments from investors. Loan
origination fees are capitalized and recognized as an adjustment of the
yield of the related loan. Discounts and premiums on any purchased
residential real estate loans are amortized to income using the
interest method over the remaining period to contractual maturity,
adjusted for anticipated prepayments. Discounts and premiums on any
purchased consumer loans are recognized over the expected lives of the
loans using methods that approximate the interest method. Interest is
accrued and credited to income based on the principal amount
outstanding. The accrual of interest on impaired loans is discontinued
when, in management's opinion, the borrower may be unable to meet
payments of principal and interest as they become due.
Reserve for Loan Losses
The reserve for loan losses is that amount which is considered adequate
to provide for potential losses in the portfolio. Management's
evaluation of the adequacy of the reserve is based on several factors,
including an analysis of the loss experience in relation to outstanding
amounts, a review of impaired loans, regular examinations and
appraisals of the portfolio, and current conditions.
Foreclosed Real Estate
Foreclosed real estate only includes formally foreclosed property. At
the time of foreclosure, foreclosed real estate is recorded at the
lower of the Bank's cost or the asset's fair value less costs to sell,
which becomes the property's new basis. Any write-downs based on the
asset's fair value at the date of acquisition are charged to the
reserve for loan losses. After foreclosure, these assets are carried at
the lower of their new cost basis or fair value less 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 co