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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 29549
FORM 10-K
- --------------------------------------------------------------------------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
Commission File Number 0-11448
- --------------------------------------------------------------------------------
LSB BANCSHARES, INC.
One LSB Plaza
Lexington, North Carolina 27292
(336) 248-6500
Incorporated in the State of North Carolina
IRS Employer Identification No. 56-1348147
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g)OF THE ACT:
Common Stock, Par Value $5.00 Per Share
LSB Bancshares, Inc. has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports)
and has been subject to such filing requirements for the past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
The aggregate market value (average of the bid and asked prices) of the voting
stock held by nonaffiliates of the registrant as of January 31, 1999 was
$164,680,011 and the number of shares outstanding was 8,667,369.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the year ended
December 31, 1998 are incorporated by reference into Parts I and II of this
report. Portions of the registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held April 21, 1999 are incorporated by reference into Part
III of this report.
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STATEMENT OF MANAGEMENT RESPONSIBILITY
The management of LSB Bancshares, Inc. and subsidiaries is responsible for the
preparation of the financial statements, related financial data and other
information in this annual report. The financial statements are prepared in
accordance with generally accepted accounting principles and include amounts
that are based on management's estimates and judgment where appropriate. Other
information in the annual report is consistent with that contained in the
financial statements. In fulfilling its responsibility for the integrity and
fairness of these statements and information, management relies on the
accounting system and related internal controls that are designed to provide
reasonable assurances that transactions are authorized and recorded in
accordance with established procedures, assets are safeguarded, and proper and
reliable records are maintained.
The Corporation maintains a professional staff of internal auditors who
independently assess the effectiveness of the internal controls and recommend
possible improvements thereto. The Audit Committee of the Board of Directors is
composed solely of outside directors who are responsible for overseeing the
accounting policies employed by management and that the system of internal
controls is adequately reviewed and maintained. The independent auditors,
internal auditors and banking regulators have direct access to the Audit
Committee with or without management present.
The financial statements have been audited by Turlington and Company, L.L.P.,
independent auditors, who render an independent, professional opinion on
management's financial statements. Their report expresses an opinion as to the
fairness of the financial position and results of operations of LSB Bancshares,
Inc. and subsidiaries based on their audit conducted in accordance with
generally accepted auditing standards.
LSB Bancshares, Inc.
February 1, 1999
INDEPENDENT AUDITORS REPORT
To The Board of Directors and Shareholders
LSB Bancshares, Inc.
Lexington, North Carolina
We have audited the accompanying consolidated balance sheets of LSB Bancshares,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
The consolidated statements of income, changes in shareholders' equity, and cash
flows for the year ended December 31, 1996, have been restated to reflect the
pooling of interests with Old North State Bank as described in Note 14 to the
consolidated financial statements. We did not audit the 1996 financial
statements of Old North State Bank, which reflect total assets of $130,244,607
as of December 31, 1996 and total revenues of $10,610,397 for the year then
ended. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for Old North State Bank as of December 31, 1996 and for the year then ended, is
based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits and
the report of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to in the first paragraph present
fairly, in all material respects, the financial position of LSB Bancshares, Inc.
and subsidiaries as of December 31, 1998 and 1997, and the consolidated results
of their operations, and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
Turlington and Company, L.L.P.
Lexington, North Carolina
February 1, 1999
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FORM 10-K CROSS-REFERENCE INDEX
This 1998 Annual Report and Form 10-K of the registrant incorporates into a
single document the 1998 Annual Report to Shareholders and the Annual Report on
Form 10-K for the year ended December 31, 1998 filed by the registrant with the
Securities and Exchange Commission. This Form 10-K Annual Report incorporates by
reference certain information contained in the Annual Report to Shareholders and
portions of the registrant's Proxy Statement relating to the 1999 Annual Meeting
of Shareholders as is reflected in the following Cross-Reference Index.
INCORPORATED BY REFERENCE INTO THE FOLLOWING ITEMS INFORMATION APPEARING ON
OF FORM 10-K THE FOLLOWING PAGES OF THE:
-------------------------------------------------- -------------------------------------
ANNUAL REPORT PROXY STATEMENT
PART I
Item 1. Business........................................................... 12, 15-24........................
Item 2. Properties......................................................... 12, 31, 35 (Notes 5 and 16)......
Item 3. Legal Proceedings.................................................. 32 (Note 8)......................
Item 4. Submission of Matters to a Vote of Security Holders (None).........
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters................................................ 45...............................
Item 6. Selected Financial Data............................................ 13...............................
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 15-24............................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......... 16-20, 33 (Note 13)..............
Item 8. Financial Statements and Supplementary Data........................ 25-36
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure (None)....................................
PART III
Item 10. Directors and Executive Officers of the Registrant................. 41, 42...........................
Item 11. Executive Compensation............................................. ............................. 7-9
Item 12. Security Ownership of Certain Beneficial Owners and
Management......................................................... ..............................4-5
Item 13. Certain Relationships and Related Transactions..................... .............................. 16
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K:
(a) The following documents to be filed as part of the Form 10-K:
(1) Financial Statements:
Independent Accountants' Audit Report........................ 37...............................
Consolidated Balance Sheets - December 31, 1998 and 1997..... 25...............................
Consolidated Statements of Income - Years Ended
December 31, 1998, 1997 and 1996............................ 26...............................
Consolidated Statements of Changes in Shareholders' Equity
Years Ended December 31, 1998, 1997 and 1996................ 27...............................
Consolidated Statements of Cash Flows - Years Ended
December 31, 1998, 1997 and 1996............................ 28...............................
Notes to Consolidated Financial Statements................... 29-36............................
(2) Financial Statement Schedules (None).........................
(3) Exhibits:....................................................
3.1 Articles of Incorporation of LSB Bancshares, Inc., as
amended, which are incorporated by reference to Exhibit 4.2
of the registrant's Registration Statement on Form S-8 filed
with the Securities and Exchange Commission on November 17,
1992 (File No. 33-54610).
3.2 Bylaws of LSB Bancshares, Inc., as amended, which are
incorporated by reference to Exhibit 3.2 of the registrant's
Annual Report on Form 10-K for the year ended December 31,
1995.
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FORM 10-K CROSS-REFERENCE INDEX (CONT'D)
Incorporated by Reference into the Following Items
of Form 10-K
- -------------------------------------------------------------------------------
PART IV
Item 14. 4.1 Specimen certificate of common stock, $5.00 par value,
(cont'd) which is incorporated by reference to Exhibit 4 of the
registrant's Registration Statement on Form S-1
(File No. 2-99312).
4.2 Rights Agreement dated as of February 10, 1998 by and
between LSB Bancshares, Inc. and Wachovia Bank, N.A., as
Rights Agent, which is incorporated by reference to Exhibit
1 of the Registrant's Registration Statement on Form 8-A
filed with the Securities and Exchange Commission on March
6, 1998.
10.1 1986 Employee Incentive Stock Option Plan of LSB
Bancshares, Inc., as amended, which is incorporated by
reference to the registrant's Registration Statement on
Form S-8 filed with the Securities and Exchange Commission
on November 17, 1992 (File No. 33-54610).
10.2 1996 Omnibus Stock Incentive Plan, which is incorporated by
reference to Exhibit 10.2 of the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1995.
10.3 1996 Management Plan, which is incorporated by reference to
Exhibit 10.3 of the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1995.
10.4 1994 Director Stock Option Plan of LSB Bancshares, Inc.,
which is incorporated by reference to Exhibit 4 of the
registrant's Registration Statement on Form S-8 filed with
the Securities and Exchange Commission on July 15, 1994
(File No. 33-81664).
10.5 Old North State Bank 1990 Incentive Stock Option Plan, as
assumed by LSB, which is incorporated by reference to the
registrant's Registration Statement on Form S-8 with the
Securities and Exchange Commission on November 19, 1997
(File No. 333-27021).
10.6 Piedmont Bancshares Corp. Stock Option Plan, which is
incorporated by reference to the registrant's Registration
Statement on Form S-8 filed with the Securities and
Exchange Commission on November 19, 1997 (File No.
33-54610).
Exhibits 10.1 through 10.10 are management
contracts or compensatory plans and arrangements required
to be filed as an exhibit to this Form 10-K pursuant to
Item 14(c).
10.7 Employment Continuity Agreement effective as of December
24, 1997 between LSB Bancshares, Inc. and Nicholas A.
Daves, which is incorporated by reference to Exhibit 10.7
of the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.
10.8 Employment Continuity Agreement effective as of June 9,
1998 between LSB Bancshares, Inc. and Robert F. Lowe.
10.9 Employment Continuity Agreement effective as of June 9,
1998 between LSB Bancshares, Inc. and H. Franklin Sherron.
10.10 Employment Continuity Agreement effective as of June 9,
1998 between LSB Bancshares, Inc. and Monty J. Oliver.
10.11 Employment Continuity Agreement effective as of June 9,
1998 between LSB Bancshares, Inc. and Robin A. Huneycutt.
10.12 Employment Continuity Agreement effective as of June 9,
1998 between LSB Bancshares, Inc. and Ronald W. Sink.
10.13 Employment Continuity Agreement effective as of June 9,
1998 between LSB Bancshares, Inc. and Ronald E. Coleman.
10.14 Employment Continuity Agreement effective as of June 9,
1998 between LSB Bancshares, Inc. and D. Gerald Sink.
10.15 Employment Continuity Agreement effective as of June 9,
1998 between LSB Bancshares, Inc. and Joe W. Carroll.
10.16 Employment Continuity Agreement effective as of June 9,
1998 between LSB Bancshares, Inc. and Suzanne J. Bullotta.
13 1998 Annual Report to Shareholders.
21. List of Subsidiaries at December 31, 1998.
23. Consent of Turlington and Company, L.L.P.
27. Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K: No reports on Form 8-K were filed by the
registrant during the last quarter covered by this report.
40
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 9th day of February,
1999.
LSB BANCSHARES, INC.
Registrant
Robert F. Lowe
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed on February 9, 1999 by the following persons in the capacities
indicated:
Robert F. Lowe
Chairman, President and Chief Executive Officer
Monty J. Oliver
Secretary and Treasurer
Chief Financial Officer
A majority of the Directors of the registrant,
whose names appear on page 42.
EXECUTIVE OFFICERS OF THE
REGISTRANT
Robert F. Lowe (56) Chairman, President and Chief Executive Officer and a
Director of Bancshares and the Bank, joined the Bank in 1970 and was elected
Vice President in 1973. He was elected Senior Vice President in 1980 and
Executive Vice President of the Bank and Bancshares in 1982. In 1983, Mr. Lowe
was elected a Director of Bancshares and the Bank. On January 1, 1984, he was
elected President and Chief Executive Officer of Bancshares and the Bank, and on
January 1, 1990, Mr. Lowe was elected Chairman of both Bancshares and the Bank.
Mr. Lowe also serves as Chairman, President and a Director of Peoples Finance
Company of Lexington, Inc., a subsidiary of the Bank and President and a
Director of LSB Financial Services, Inc., a subsidiary of the Bank.
H. Franklin Sherron, Jr. (43), Vice President of Bancshares, joined the Bank in
1990 as Senior Vice President. He was elected Executive Vice President of the
Bank in 1996. Mr. Sherron is also Vice President and a Director of Peoples
Finance Company of Lexington, Inc., a subsidiary of the Bank, and Senior Vice
President of LSB Financial Services, Inc., a subsidiary of the Bank.
Monty J. Oliver (57), Secretary and Treasurer of Bancshares, joined the Bank as
Vice President in 1978. He was elected Cashier of the Bank in 1980; and in 1986,
he was elected Senior Vice President of the Bank and in 1996 elected Executive
Vice President. Mr. Oliver is also Secretary and a Director of Peoples Finance
Company of Lexington, Inc., a subsidiary of the Bank, and Secretary and
Assistant Treasurer of LSB Financial Services, Inc., a subsidiary of the Bank.
41
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DIRECTORS OF LSB BANCSHARES, INC. AND LEXINGTON STATE BANK
[PHOTO: PEOPLE STANDING]
Executive Committee, seated, left to right: Robert B. Smith, Jr.; Burr W.
Sullivan; Robert F. Lowe, Chairman of the Board, President & Chief Executive
Officer; David A. Smith and; Julius S. Young, Jr.
Directors, standing, left to right: Margaret Lee W. Crowell, Emeritus; Walter A.
Hill, Sr.; Roberts E. Timberlake; Clifford A. Erickson, Emeritus; Dothan D.
Reece, Emeritus; Samuel R. Harris; L. Klynt Ripple, Emeritus; Archie M. Sink,
Emeritus; Lloyd G. Walter, Jr.; Marvin D. Gentry; Michael S. Albert; L. Ardell
Lanier, Emeritus; Leonard H. Beck; Archie L. Hodges, Emeritus; Peggy B.
Barnhardt; A. Lonnie Davis, Emeritus and; Sue H. Hunter (Not present; Russell J.
Gabrielson, Emeritus and; J. Smith Young, Emeritus)
MICHAEL S. ALBERT DAVID A. SMITH
President, CEO and Director of Billings Freight Owner, Red Acres Dairy Farm
Systems, Inc.; Treasurer of Cargo Carriers, Inc.;
Vice President of Metro Motor Express, Inc.
ROBERT B. SMITH, JR.
PEGGY B. BARNHARDT Attorney
Retired since 1996; former Deputy Superintendent,
Davidson County Schools BURR W. SULLIVAN
President, Dorsett Printing and Lithograph Corporation
LEONARD H. BECK
President, Green Printing Company; Director of the ROBERTS E. TIMBERLAKE
National Association of Printers and Lithographers Artist/Designer; Chairman, Bob Timberlake, Inc.
MARVIN D. GENTRY LLOYD G. WALTER, JR., FAIA
President and Chief Executive Officer, The New Fortis Vice President & Chairman, Walter, Robbs, Callahan and
Corporation, a wholly-owned subsidiary of K. Pierce, Architects, P.A.
Hovnanian Enterprises
JULIUS S. YOUNG, JR.
SAMUEL R. HARRIS, M.D. President, Jay Young Management, Inc.
Physician
(*) Elected to fill the unexpired term of Margaret Lee W. Crowell.
WALTER A. HILL, SR.
President, Hill Oil Company, Inc.; Vice President and DIRECTORS EMERITI
Secretary, NorthCo, Inc. (construction development)
Margaret Lee W. Crowell(**)
SUE H. HUNTER(*) A. Lonnie Davis
President, Thomasville Emporium, Inc.; Clifford A. Erickson
Vice President, Sidestreet Cafe, Inc.; former Davidson Russell J. Gabrielson
County Commissioner & Vice Chairperson Archie L. Hodges
L. Ardell Lanier
ROBERT F. LOWE Dothan D. Reece
Chairman, President and CEO of Bancshares, the L. Klynt Ripple
Bank and Peoples Finance Company of Lexington, Archie M. Sink
Inc., a subsidiary of the Bank; President and a J. Smith Young
director of LSB Financial Services, Inc., a subsidiary
of the Bank (**) Retired from active directorship December 31, 1998.
42
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SUMMARY OF
SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31
(In thousands, expect per share data and ratios) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Interest income $ 49,657 $ 45,467 $ 40,192 $ 32,333 $ 27,338
Interest expense 21,682 19,547 16,536 13,426 9,858
-------- -------- -------- -------- --------
Net interest income 27,975 25,920 23,656 18,907 17,480
Provision for loan losses 770 785 805 367 282
-------- -------- -------- -------- -------
Net interest income
after provision for loan losses 27,205 25,135 22,851 18,540 17,198
Noninterest income 6,585 5,389 4,639 3,599 2,851
Noninterest expense 21,151 20,426 17,907 15,091 13,710
-------- -------- -------- -------- --------
Income before income taxes 12,639 10,098 9,583 7,048 6,339
Income taxes 3,959 3,336 2,718 1,888 1,578
-------- -------- -------- -------- --------
Net income $ 8,680 $ 6,762 $ 6,865 $ 5,160 $ 4,761
-------- -------- -------- -------- --------
Cash dividends declared $ 3,658 $ 2,712 $ 2,158 $ 2,061 $ 1,905
======== ======== ======== ======== ========
SELECTED YEAR-END ASSETS AND LIABILITIES
Investment securities $143,843 $105,616 $128,101 $144,639 $125,417
Loans, net of unearned income 436,014 396,991 355,893 297,264 232,632
Assets 679,006 616,265 551,845 493,433 403,840
Deposits 567,327 503,025 464,921 428,032 351,587
Shareholders' equity 73,430 67,527 62,862 58,355 48,437
RATIOS (AVERAGES)
Net income to total assets 1.35% 1.16% 1.32% 1.23% 1.22%
Net income to shareholders' equity 12.30 10.31 11.36 10.19 10.11
Dividend payout 42.14 40.11 31.43 39.94 40.01
Shareholders' equity to total assets 10.96 11.21 11.62 12.05 12.04
PER SHARE DATA
Earnings Per Share:
Basic $ 1.00 $ .78 $ .80 $ .66 $ .61
Diluted .98 .77 .79 .65 .60
Cash dividends declared .42 .35 .25 .24 .24
Book value at end of year 8.42 7.79 7.29 6.80 6.23
13
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AVERAGE BALANCES AND
NET INTEREST INCOME ANALYSIS
Table 1
Fully taxable equivalent basis(1) (In thousands)
1998 1997 1996
INTEREST Interest Interest
AVERAGE INCOME/ AVERAGE Average Income/ Average Average Income/ Average
BALANCE EXPENSE YIELD/RATE Balance Expense Yield/Rate Balance Expense Yield/Rate
--------------------------------- ----------------------------- -----------------------------
Earning assets:
Loans and leases
receivable, net(2)............ $415,463 $39,112 9.41% $379,672 $35,692 9.40% $324,195 $30,576 9.43%
Taxable securities............. 96,486 5,544 5.75 83,133 5,077 6.11 106,870 6,512 6.09
Tax exempt securities.......... 33,116 2,550 7.70 31,202 2,498 8.01 30,753 2,668 8.68
Federal Home Loan
Bank.......................... 2,228 165 7.41 2,464 179 7.26 1,678 122 7.27
Interest-Bearing Bank
Balances...................... 21,876 1,087 4.97 1,760 95 5.40 850 48 5.65
Federal funds sold and
securities purchased under
resale agreements............. 33,956 1,903 5.60 48,279 2,639 5.47 19,620 1,033 5.27
-------- ------- -------- ------- -------- -------
Total earning assets.......... 603,125 50,361 8.35 546,510 46,180 8.45 483,966 40,959 8.46
Non-earning assets:
Cash and due from banks 25,322 22,657 19,790
Premises and equipment 11,516 11,333 11,277
Other assets................... 9,103 9,016 8,678
Reserve for loan losses........ (4,799) (4,468) (3,812)
-------- ------- -------- ------- -------- -------
Total assets.................. $644,267 $50,361 $585,048 $46,180 $519,899 $40,959
======== ======= ======== ======= ======== =======
Interest-bearing liabilities:
Savings and time
deposits...................... $466,874 $19,727 4.23% $425,489 $17,917 4.21% $387,072 $15,831 4.09%
Securities sold under
agreements to
repurchase................... 6,027 234 3.88 5,637 234 4.15 3,269 168 5.14
Borrowings from Federal
Home Loan Bank............... 30,731 1,721 5.60 23,303 1,396 5.99 9,300 537 5.77
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities.................. 503,632 21,682 4.31 454,429 19,547 4.30 399,641 16,536 4.14
Other liabilities and
shareholders' equity:
Demand deposits................ 65,271 61,148 56,559
Other liabilities.............. 4,779 3,900 3,264
Shareholders' equity........... 70,585 65,571 60,435
-------- ------- -------- ------- -------- -------
Total liabilities and
shareholders'
equity....................... $644,267 $21,682 $585,048 $19,547 $519,899 $16,536
======== ======= ======== ======= ======== =======
Net interest income and
net interest margin(3)......... $28,679 4.76% $26,633 4.87% $24,423 5.05%
======= ==== ======= ==== ======= =====
Interest rate spread(4)........ 4.04% 4.15% 4.32%
==== ==== =====
(1) Income related to securities and loans exempt from federal income taxes
is stated on a fully taxable-equivalent basis, assuming a federal
income tax rate of 34%, and is then reduced by the non-deductible
portion of interest expense.
(2) The average loans and leases receivable balances include non-accruing
loans. Loan fees of $1,606, $1,382 and $1,145 for 1998, 1997 and 1996,
respectively, are included in interest income.
(3) Net interest margin is computed by dividing net interest income by
average earning assets.
(4) Earning assets yield minus interest-bearing liability rate.
14
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MANAGEMENT'S DISCUSSION AND
ANALYSIS OF OPERATIONS AND
FINANCIAL CONDITION
Management's discussion as presented herein provides an overview of the changes
in financial condition and results of operations for LSB Bancshares, Inc.
("Bancshares") and its wholly-owned subsidiary, Lexington State Bank ("LSB") for
the years 1998, 1997 and 1996. The consolidated financial statements also
include the accounts and results of operations of LSB's wholly-owned
subsidiaries, Peoples Finance Company of Lexington, Inc. ("Peoples Finance") and
LSB Financial Services, Inc. ("LSB Financial Services"). This discussion and
analysis is intended to provide pertinent information in the areas of liquidity,
capital resources, results of operation, financial position, asset quality and
interest sensitivity. It should be read in conjunction with the audited
financial statements, notes and supplemental tables provided herein.
SUMMARY
With the completion of the Old North State Bank merger in 1997, Bancshares
expanded its franchise in the central Piedmont area of North Carolina to cover
Davidson, Forsyth and Stokes counties. This expanded customer base served by
twenty-one offices, along with Bancshares' emphasis on increasing revenues while
controlling non-interest expense, increased Bancshares' 1998 net income 28.4%
over 1997's results. Net income for the year ended December 31, 1998 was
$8,680,000, or $.98 per diluted share, compared to $6,762,000 in 1997, or $.77
per diluted share, and $6,865,000 in 1996, or $.79 per diluted share.
Return on average assets for 1998 was 1.35%, compared to 1.16% for 1997 and
1.32% for 1996. Return on average share-holders' equity was 12.30% for 1998
compared to 10.31% for 1997 and 11.36% for 1996.
Interest rates remained relatively steady during 1998 until the fourth quarter.
In October 1998 the prime interest rate made two adjustments of 25 basis points
each followed by a third decline of 25 basis points in November. The prime
interest rate ended 1998 at 7.75% while remaining steady at 8.50% in 1997 and
8.25% in 1996.
Bancshares' increase in net interest income in 1998 was $2,055,000 or 7.9%
compared to $2,264,000 or 9.6% in 1997. The loan loss provision necessary to
maintain an adequate reserve in 1998 was sustained at nearly the same level as
1997, reflecting a strong loan portfolio quality. Noninterest income in 1998
increased $1,196,000 or 22.2% compared to 1997, which was up $750,000 or 16.2%
over 1996. Noninterest expense in 1998 increased $725,000 or 3.5% compared to
$2,519,000 or 14.1% in 1997.
Asset growth for 1998 was $62,741,000 or 10.2% compared to an increase of
$64,420,000 or 11.7% in 1997. Total loans for 1998 increased $39,023,000 or 9.8%
compared to $41,098,000 or 11.5% in 1997. In 1998, deposit growth outpaced loan
growth by posting a gain of $64,302,000 or 12.8% compared to 1997. Deposit
growth in 1997 was $38,104,000 or 8.2% compared to 1996.
VOLUME AND RATE VARIANCE ANALYSIS
1998 1997
Table 2 VOLUME RATE TOTAL Volume Rate Total
Fully taxable equivalent basis(1) (In thousands) VARIANCE(2) VARIANCE(2) VARIANCE Variance(2) Variance(2) Variance
---------- ---------- --------- ----------- ----------- ---------
Interest income:
Loans receivable.................................. $ 3,382 $ 38 $ 3,420 $ 5,214 $ (98) $ 5,116
Taxable investment securities..................... 780 (313) 467 (1,456) 21 (1,435)
Tax exempt investment securities.................. 150 (98) 52 39 (209) (170)
Federal funds sold................................ (798) 62 (736) 1,565 41 1,606
Federal Home Loan Bank............................ (18) 4 (14) 57 0 57
Interest-Bearing Bank Balances.................... 1,000 (8) 992 49 (2) 47
---------------------------------------------------------------------------
Total interest income.......................... 4,496 (315) 4,181 5,468 (247) 5,221
---------------------------------------------------------------------------
Interest expense:
Savings and time deposits......................... 1,726 84 1,810 1,610 476 2,086
Securities sold under agreements to repurchase.... 16 (16) 0 103 (37) 66
Borrowings from Federal Home Loan Bank............ 421 (96) 325 838 21 859
---------------------------------------------------------------------------
Total interest expense......................... 2,163 (28) 2,135 2,551 460 3,011
---------------------------------------------------------------------------
Increase (decrease) in net interest income........ $ 2,333 $ (287) $ 2,046 $ 2,917 $ (707) $ 2,210
===========================================================================
(1) Income related to securities and loans exempt from federal income taxes
is stated on a fully taxable-equivalent basis, assuming a federal
income tax rate of 34%, and is then reduced by the non-deductible
portion of interest expense.
(2) The volume/rate variance for each category has been allocated on a
consistent basis between rate and volume variances, based on the
percentage of rate, or volume, variance to the sum of the two absolute
variances.
15
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MARKET RISK MANAGEMENT
The objectives of market risk management are to ensure long-range profitability
performance and minimize risk, adhere to proper liquidity and maintain sound
capital. To meet these goals, the process of asset/liability management monitors
the exposure to interest rate risk, balance sheet trends, pricing policies and
liquidity position.
Profitability and performance are affected by balance sheet composition and
interest rate movements. Management responsibility for both liquidity and
interest sensitivity reside with a designated Asset/Liability Management
Committee ("ALCO"). The ALCO Committee as a part of its asset/liability
management decision-making process evaluates all market conditions, interest
rate trends and the economic environment. Based upon its view of existing and
expected market conditions, the ALCO Committee adopts balance sheet strategies
intended to optimize net interest income to the extent possible while minimizing
the risk associated with unanticipated changes in interest rates.
Cash and cash equivalents, maturing investments and loans, and securities
available for sale are principal sources of liquidity for LSB. Correspondent
relationships are also maintained with several large banks in order to have
access to federal funds purchases as a secondary source of liquidity. At
December 31, 1998, LSB also had available credit from the Federal Home Loan Bank
of Atlanta ("FHLB") totaling $60,000,000, of which $31,158,000 remained
available. This credit is collateralized by a blanket lien on qualifying loans
secured by first mortgages on 1-4 family residences. These funds could be drawn
upon to satisfy liquidity needs or for other purposes deemed appropriate.
During 1998, management's balance sheet strategy was to emphasize deposit growth
to fund projected loan demand. Borrowings from the FHLB were reduced through
regularly scheduled repayments to a balance at year-end of $28,842,000. This
strategy met management's objectives of growth and profitability.
The asset/liability management process also seeks to match maturities and
repricing opportunities of interest-sensitive assets and liabilities to minimize
risk of interest rate movements. Full discussion of the effects of these
respective portfolios on 1998's performance can be found under the headings of
earning assets and interest-bearing liabilities. The interest sensitivity
schedule analyzing the interest rate risk as of December 31, 1998 is presented
in Table 3. As interest sensitivity is continually changing, the table reflects
LSB's balance sheet position at one point in time and is not necessarily
indicative of its position on other dates. On December 31, 1998, the one-year
cumulative interest sensitivity gap was a negative $196,285,000, for a ratio of
interest-sensitive assets to interest-sensitive liabilities of .58.
Asset/liability management also addresses liquidity positioning. Liquidity
management is required in order to fund current and future extensions of credit,
meet deposit withdrawals, maintain reserve requirements and otherwise sustain
operations. As such, it is related to interest rate sensitivity management, in
that each
INTEREST SENSITIVITY ANALYSIS (1)
DECEMBER 31, 1998
Table 3 TOTAL
(In thousands) 1 - 90 91 - 180 181-365 SENSITIVE 1 - 5 OVER
DAY DAY DAY WITHIN YEAR 5-YEAR
SENSITIVE SENSITIVE SENSITIVE ONE YEAR SENSITIVE SENSITIVE TOTAL
---------------------------------------------------------------------------------
Interest-earning assets:
Loans, net of unearned income.................... $ 128,044 $ 26,378 $ 52,660 $ 207,082 $183,707 $ 45,225 $ 436,014
U.S. Treasury securities......................... 4,784 2,001 2,998 9,783 27,671 37,454
U.S. government agencies obligations............. 2,284 549 2,833 64,696 67,529
Obligations of states and political subdivisions. 650 901 1,551 6,839 28,301 36,691
Federal Home Loan Bank........................... 2,169 2,169 2,169
Interest-Bearing Bank Balances .................. 9,862 9,862 9,862
Federal funds sold............................... 40,595 40,595 40,595
--------- -------- -------- --------- -------- -------- ---------
Total interest-earning assets................. $ 188,388 $ 29,829 $ 55,658 $ 273,875 $282,913 $ 73,526 $ 630,314
========= ======== ======== ========= ======== ======== =========
Interest-bearing liabilities:
N.O.W. account deposits.......................... $ 107,593 $ 107,593 $ 107,593
Money market deposits............................ 143,039 143,039 143,039
Regular savings deposits......................... 36,683 36,683 36,683
Time deposits.................................... 75,361 $ 52,496 $ 45,760 173,617 $ 34,754 208,371
Securities sold under agreements to repurchase... 5,536 5,536 5,536
Borrowing from Federal Home Loan Bank ........... 1,975 834 883 3,692 20,150 $ 5,000 28,842
--------- -------- -------- --------- -------- -------- ---------
Total interest-bearing liabilities............ $ 370,187 $ 53,330 $ 46,643 $ 470,160 $ 54,904 $ 5,000 $ 530,064
========= ======== ======== ========= ======== ======== =========
Interest sensitivity gap......................... $(181,799) $(23,501) $ 9,015 $(196,285)
Ratio of interest-sensitive assets/
interest-sensitive liabilities................. .51 .56 1.19 .58
(1) Interest sensitivity is computed using assets and liabilities having
interest rates that can be adjusted during the period indicated.
16
11
SUMMARY OF INVESTMENT SECURITIES PORTFOLIO
Table 4
(In thousands)
DECEMBER 31, 1998 December 31, 1997 December 31, 1996
CARRYING MARKET Carrying Market Carrying Market
VALUE VALUE Value Value Value Value
-------------------- -------------------- ----------------------
U.S. Treasury securities......................... $ 36,668 $ 37,510 $ 35,308 $ 35,328 $ 36,809 $ 36,772
U.S. government agencies obligations............. 66,558 66,683 35,109 35,084 47,401 47,330
Mortgage-backed obligations...................... 716 713 1,017 1,017 8,888 8,856
Obligations of state and political subdivisions.. 36,642 38,247 31,769 33,092 30,486 31,584
Other............................................ 0 0 0 0 2,804 2,790
Federal Home Loan Bank........................... 2,169 2,169 2,413 2,413 1,713 1,713
--------- --------- -------- -------- --------- --------
Total securities............................... $ 142,753 $ 145,322 $105,616 $106,934 $ 128,101 $129,045
========= ========= ======== ======== ========= ========
As of the latest reported period, the registrant is not aware of any issuer, and
the aggregate book value and aggregate market value of the securities of such
issuer, when the aggregate book value of such securities exceeds 10% of the
registrant's shareholders' equity.
is affected by maturing assets and liabilities. While interest sensitivity
management is concerned with repricing intervals of assets and liabilities,
liquidity management is concerned with the maturities of those respective
balances. An appropriate liquidity position is further accomplished through
deposit growth and access to sources of funds other than deposits, such as the
federal funds market. Traditionally, LSB has been a seller of excess investable
funds in the federal funds market and uses these funds as a part of its
liquidity management. Net cash provided by operating activities, a primary
source of liquidity, was $3,137,000 in 1998 compared to $8,307,000 in 1997 and
$5,549,000 in 1996. Details of cash flows for the years 1998, 1997 and 1996 are
provided in the Consolidated Statements of Cash Flows.
NET INTEREST INCOME
Net interest income, on a fully taxable basis, amounted to $28,679,000 in 1998
compared to $26,633,000 in 1997 and $24,423,000 in 1996. Tax-equivalent net
interest income as a percentage of average earning assets, or net interest
margin, amounted to 4.76% in 1998, 4.87% in 1997 and 5.05% in 1996. The net
interest margin is computed by dividing net interest income by average earning
assets. The major components of tax-equivalent net interest income for the three
years ended December 31, 1998, are shown in Table 1.
Interest rates began to decline in the fourth quarter of 1998 following a
relatively stable interest rate environment during the two previous years. The
decline in interest rates in the fourth quarter of 1998 primarily affected
securities and short-term investments, while the average loan yield for 1998 was
up one basis point from 1997. Overall, the average yield on earning assets
declined ten basis points in 1998 while the average rate on interest-bearing
liabilities increased one basis point. This placed the interest rate spread at
4.04% for 1998 compared to 4.15% for 1997 and 4.32% for 1996.
Average loan yield in 1998 remained comparable to that of 1997, while loan
volume increased producing favorable results for Bancshares' net interest
income. Average total earning assets in 1998 increased $56,615,000 or 10.4%
compared to 1997, while average total interest-bearing liabilities increased
$49,203,000 or 10.8% during the same period. The decrease in the net interest
margin in 1998 was principally due to a more rapid decline in the average yield
on earning assets than that experienced on the average rate paid on
interest-bearing liabilities. A more detailed discussion of the volume and rate
variance is held under the sections of Earning Assets and Interest-Bearing
liabilities. An analysis of volume and rate changes is presented in Table 2.
EARNING ASSETS
As reported in Table 1 the gain in average earning assets for 1998 was
$56,615,000 or 10.4% compared to $62,544,000 or 12.9% for 1997. The average
balance of the loan portfolio for 1998 increased $35,791,000 or 9.4% compared to
1997, which posted a gain of $55,477,000 or 17.1% over 1996.
As shown in Table 2, the 1998 increase in loan balances accounted for a volume
related income increase of $3,382,000 compared to 1997's gain of $5,214,000. As
the average yield on loans for 1998 was 9.41% compared to 9.40% for 1997, the
rate variance accounted for only $38,000 of the total loan variance.
The average balance of the taxable investment securities portfolio in 1998 was
$96,486,000, which was an increase of $13,353,000 or 16.1% compared to 1997. The
tax-exempt investment securities portfolio has grown modestly during 1998, 1997
and 1996. At December 31, 1998, total investment securities available-for-sale
was $83,936,000, an increase of $33,211,000 or 65.5% from 1997. Investment
securities held-to-maturity at December 31, 1998 totaled $59,907,000, an
increase of $5,016,000 or 9.1%. As shown in the Volume and Rate Variance
Analysis, Table 2, these gains produced a positive volume variance of $780,000
for taxable investment securities. Yields on taxable investment securities
decreased 36 basis points in 1998, creating a negative rate variance of
$313,000. The increase in average tax-exempt investment securities in 1998 of
$1,914,000 or 6.1% over 1997 produced a positive volume variance of $150,000.
The decline in average yield on tax-exempt investment securities of 31 basis
points in 1998 produced a negative rate variance of $98,000.
17
12
In 1998 some short-term investments were made in interest bearing accounts with
bank approved institutions. These investments were used along with federal funds
sold to maintain LSB's liquidity position. The average balance of these
short-term investments was increased $5,557,000 or 10.6% in 1998 primarily for
management of the bank's liquidity position.
As of the latest reported period, the registrant is not aware of any issuer, and
the aggregate book value and aggregate market value of the securities of such
issuer, when the aggregate book value of such securities exceeds ten percent of
the registrant's shareholders' equity.
INTEREST BEARING LIABILITIES
The gain in average interest-bearing liabilities for 1998 was $49,203,000 or
10.8% compared to $54,788,000 or 13.7% in 1997. Interest rates paid on
liabilities increased one basis point in 1998 compared to an increase of 16
basis points in 1997.
The majority of LSB's interest-bearing liabilities consist of savings and time
deposits. The increase in these deposits for 1998 was $41,385,000 or 9.7%
compared to $38,417,000 or 9.9% for 1997. The increase in interest-bearing
deposits for 1998 resulted in a volume variance of $1,726,000, while a one basis
point increase in average rates paid added an $84,000 rate variance. The
schedule for average deposits is presented in Table 6 for years 1998, 1997 and
1996. Average interest rates paid on money market deposits increased 44 basis
points in 1998 compared to 1997. Average balances for money market deposits in
1998 increased $29,024,000 or 34.2% over 1997. Time deposit average interest
rates increased 15 basis points in 1998 compared to 1997, while the average
balances remained relatively flat year to year. N.O.W. account average interest
rates declined 14 basis points in 1998 compared to 1997, while N.O.W. account
balances experienced a gain of $7,169,000 or 8.0%. Average interest rates paid
on regular savings deposits decreased 42 basis points in 1998 as average
balances increased $5,838,000 or 15.2%.
Securities sold under agreements to repurchase account for a small proportion of
total interest-bearing liabilities. The average volume of these liabilities
increased $390,000 in 1998 and $2,368,000 in 1997. Average borrowed funds from
the FHLB in 1998 was $30,731,000, an increase of $7,428,800 or 31.9% over 1997.
As shown in the Volume and Rate Variance Analysis, Table 2, this produced a
volume variance of $421,000. A decrease of 39 basis points in the average
interest rate paid on borrowings from the FHLB produced a negative rate variance
of $96,000.
INVESTMENT SECURITIES
PORTFOLIO MATURITY SCHEDULE
DECEMBER 31, 1998
Table 5 WEIGHTED
(In thousands) CARRYING AVERAGE
VALUE YIELD (1)
--------- ---------
U.S. Treasury securities:
Within one year...................................... $ 8,996 6.21%
One to five years.................................... 27,672 5.84
--------
Total............................................... 36,668 5.93
--------
U.S. government agencies obligations:
Within one year...................................... 1,862 5.98
One to five years.................................... 64,696 5.63
--------
Total............................................... 66,558 5.64
--------
Mortgage-backed obligations........................... 716 5.50
--------
Obligations of states and political subdivisions:
Within one year...................................... 1,551 9.32
One to five years.................................... 6,839 10.52
Five to ten years.................................... 14,849 8.82
After ten years...................................... 13,403 7.76
--------
Total............................................... 36,642 8.76
--------
Federal Home Loan Bank................................ 2,169 7.43
--------
Total securities...................................... $142,753 6.53
--------
(1) Income related to securities and loans exempt from federal income taxes
is stated on a fully taxable-equivalent basis, assuming a federal
income tax rate of 34%, and is then reduced by the non-deductible
portion of interest expense.
CAPITAL RESOURCES AND SHAREHOLDERS' EQUITY
At December 31, 1998, shareholder's equity was $73,430,000, an increase of 8.7%
compared to December 31, 1997, following an increase of 7.4% over 1996. Average
shareholders' equity as a percentage of average total assets amounted to 10.96%
in 1998, 11.21% in 1997, and 11.62% in 1996.
Regulatory guidelines require minimum levels of capital based on a risk
weighting of each asset category and off balance sheet contingencies. Regulatory
agencies divide capital into Tier 1 or core capital and total capital. Tier 1
capital, as defined by regulatory agencies, consists primarily of common
shareholders' equity less goodwill and certain other intangible assets. Total
capital consists of Tier 1 capital plus the allowable portion of the reserve for
loan losses and certain long-term debt. At December 31, 1998, based on these
measures, Bancshares' had a Tier 1 capital ratio of 16.94% compared to the
regulatory requirement of 4% and a total capital ratio of 18.13% compared to an
8% regulatory requirement.
Additional regulatory capital measures include the Tier 1 leverage ratio. Tier 1
leverage ratio is defined as Tier 1 capital divided by average total assets less
goodwill and certain other intangibles and has a regulatory minimum of 3.0%,
with most institutions required to maintain a ratio of at least 4.0% to 5.0%,
depending primarily upon risk profiles. At December 31, 1998, Bancshares' Tier 1
leverage ratio was 11.15%.
In November of 1998, the Board of Directors ("Board") approved a stock
repurchase program for up to 300,000 shares of its common stock, or
approximately 3.4% of its outstanding shares. The Board authorized the
repurchase of shares of common stock in the open market or privately negotiated
transactions on a time-to-time and ongoing basis, depending upon market
conditions and subject to compliance with all applicable
18
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AVERAGE TOTAL DEPOSITS
Table 6
(In thousands)
1998 1997 1996
AVERAGE AVERAGE Average Average Average Average
BALANCE RATE Balance Rate Balance Rate
------------------- -------------------- ----------------------
Demand deposits............................... $ 65,271 $ 61,148 $ 56,559
N.O.W. account deposits....................... 96,809 2.44% 89,640 2.58% 80,840 2.50%
Money market deposits......................... 113,798 4.05 84,774 3.61 72,539 3.35
Regular savings deposits...................... 44,285 1.77 38,447 2.19 39,024 2.27
Time deposits................................. 211,982 5.65 212,628 5.50 194,669 5.39
--------- --------- --------
Total deposits(1)............................ $ 532,145 $ 486,637 $443,631
========= ========= ========
DECEMBER 31, 1998
OVER 3 OVER 6
3 MONTHS THROUGH THROUGH OVER 12
OR LESS 6 MONTHS 12 MONTHS MONTHS TOTAL
--------------------------------------------------------------------------
Time deposit maturity schedule:(2)
Time deposits of $100,000 or more........... $29,449 $11,542 $7,631 $859 $49,481
(1) The bank has no deposits in foreign offices.
(2) The bank has no other time deposits of $100,000 or more issued by
domestic offices.
securities laws and regulations. The repurchase plan is intended to help
Bancshares achieve its goal of building shareholder value and maintaining
appropriate capital levels.
The number of shareholders holding Bancshares stock totaled approximately 6,240
at December 31, 1998. Participants in Bancshares' dividend reinvestment plan
total 1,565 representing 25.1% of total shareholders.
NONINTEREST INCOME
Noninterest income for 1998 increased $1,196,000 or 22.2% compared to an
increase of $750,000 or 16.2% in 1997 and an increase of $1,040,000 or 28.9% in
1996. Service charges on deposit accounts for 1998 increased $166,000 or 6.5%
compared to 1997, which was virtually unchanged compared to 1996. The gain
realized from the sales of mortgage loans in 1998 totaled $328,000 compared to
$186,000 in 1997 and $119,000 in 1996. Other operating income increased $856,000
or 31.9% in 1998 compared to increases of $629,000 or 30.6% in 1997 and $590,000
or 40.2% in 1996. Financial statement Note 9 details material items contained in
other operating income. Bankcard income generated in 1998 increased $319,000 or
57.1% compared to $183,000 or 48.7% in 1997 and $89,000 or 31.0% in 1996. Fee
income generated from the servicing of sold mortgage loans and customer related
service fees increased $148,000 or 25.7% in 1998, $162,000 or 39.1% in 1997 and
$166,000 or 66.9% in 1996. Commissions generated by LSB Financial Services
attained the largest percentage and dollar increase in 1998. Commissions from
the subsidiary for 1998 increased $364,000 or 79.6% compared to $146,000 or
46.9% in 1997 and $219,000 or 238.0% in 1996. Trust income for 1998 increased
$56,000 or 12.6% compared to $35,000 or 8.6% in 1997 and $93,000 or 29.5% in
1996.
NONINTEREST EXPENSE
Total noninterest expense, excluding merger-related costs and restructuring
charges, totaled $20,991,000 in 1998, $18,932,000 in 1997 and $17,385,000 in
1996. These amounts represent increases of $2,059,000 or 10.9% in 1998 over 1997
and $1,547,000 or 8.9% in 1997 over 1996.
Personnel expense represented the largest dollar increase of non-interest
expense. Personnel expense, consisting of both employee salaries and benefits,
increased $785,000 or 7.6% in 1998 compared to $284,000 or 2.8% in 1997. These
increases are attributable to normal increases in compensation and increases in
the number of full-time equivalent employees. In 1998, full-time equivalent
employees totaled 328 compared to 315 in 1997.
Occupancy expense increased $36,000 or 2.9% in 1998 compared to a decrease of
$20,000 or 1.6% in 1997. Equipment depreciation and maintenance expense for 1998
increased $41,000 or 3.5% following an increase of $190,000 or 19.1% in 1997.
The increase in 1997 is attributable to enhancement of LSB's technological
capabilities. Other operating expenses in 1998 increased $1,197,000 or 19.5%
compared to an increase of $1,093,000 or 21.7% in 1997. Financial statement Note
9 details the material items contained in other operating expenses. Automated
services expense in 1998 increased $133,000 or 10.0% compared to increases of
$211,000 or 18.9% in 1997 and $156,000 or 16.3% in 1996. These increases are the
result of LSB's expanding automation program to enhance customer service and
improve operating efficiencies. Bankcard expense increased $256,000 or 57.3% in
1998 compared to $152,000 or 51.5% in 1997 and $63,000 or 27.7% in 1996. These
increases are attributable to growth in the bankcard portfolio. Legal and
professional expense increased $307,000 or 42.4% in 1998 over 1997, which was up
$26,000 or 3.7% from 1996. The 1998 increase in legal and professional expense
is primarily due to additional regulatory compliance attributable to asset
growth of the company. As a normal course of business, other expenses increased
$465,000 or 22.6% in 1998 compared to $348,000 or 20.3% in 1997 and $237,000 or
16.1% in 1996.
19
14
ASSET QUALITY AND PROVISION FOR LOAN LOSSES
The reserve for loan losses was $5,048,000 or 1.16% of loans outstanding at
December 31, 1998 compared to $4,601,000 or 1.16% of loans outstanding at
December 31, 1997. Net charge offs for 1998 were $323,000 or .08% of average
loans outstanding, compared to 1997 net charge offs of $259,000 or .07% of
average loans outstanding. Net charge offs in 1996 were $441,000 or .14% of
average loans outstanding. The 1998 provision for loan losses was slightly less
than that of the previous year, reflecting the total coverage of the reserve in
relation to outstanding loans and the quality of the loan portfolio. Additional
information regarding the reserve for loan losses is contained in Table 8,
"Analysis of Reserve for Loan Losses".
Nonperforming assets, which include nonaccrual loans, restructured loans, other
real estate acquired through foreclosed properties and accruing loans ninety
days or more past due, totaled $1,912,000 at December 31, 1998, $2,155,000 at
December 31, 1997, and $2,390,000 at December 31, 1996. Nonperforming assets as
a percentage of loans outstanding at the end of the year amounted to .44% in
1998, .54% in 1997, and .67% in 1996. Bancshares had no nonaccrual loans at
December 31, 1998 compared to $127,000 at December 31, 1997 and $611,000 at
December 31, 1996. Accruing loans past due 90 days totaled $759,000 at December
31, 1998 compared to $334,000 at December 31, 1997 and $369,000 at December 31,
1996. The accrual of interest is generally discontinued on all loans that become
90 days past due as to principal or interest unless collection of both principal
and interest is assured by way of collateralization, guarantees or other
security and the loan is considered to be in the process of collection. Table 9,
"Nonperforming Assets", discloses the components of nonperforming assets. At
December 31, 1998, the reserve for loan losses was 2.64 times nonperforming
loans compared to 2.14 times nonperforming loans at December 31, 1997. Based on
the current loan portfolio and levels of current problem assets and potential
problem loans, management believes the provision for loan losses to be adequate.
In management's judgment, the allocation of the reserve for loan losses for 1998
shown in Table 10, accurately reflects the inherent risks associated with each
of the various lending categories.
As a part of credit administration, management regularly reviews and grades its
loan portfolio for purposes of determining asset quality and the need to make
additional provisions for loan losses. The review process is performed both
internally and externally, through the employment of independent credit review
professionals. The reserve for loan losses represents
SUMMARY OF LOAN PORTFOLIO
Table 7
(In thousands)
1998 1997 1996 1995 1994
--------------------------------------------------------------
Commercial, financial and agricultural.................... $144,955 $132,181 $131,235 $129,972 $ 98,471
Real estate - construction................................ 19,131 12,978 10,493 9,319 6,760
Real estate - mortgage.................................... 206,068 185,384 145,845 96,690 71,520
Installment loans to individuals.......................... 62,747 62,909 60,181 53,753 48,451
Lease financing........................................... 978 792 678 0 0
Other..................................................... 2,135 2,747 7,461 7,530 7,430
-------- -------- -------- -------- --------
Total loans, net of unearned income....................... $436,014 $396,991 $355,893 $297,264 $232,632
======== ======== ======== ======== ========
(*) The bank has no foreign loan activity.
MATURITIES AND SENSITIVITIES OF
LOANS TO CHANGES IN INTEREST RATES
DECEMBER 31, 1998
COMMERCIAL,
FINANCIAL REAL ESTATE -
AND AGRICULTURAL CONSTRUCTION TOTAL
-------------------------------------------------
Due in 1 year or less.............. $ 32,986 $19,131 $ 52,117
Due after 1 year through
5 years:
Fixed interest rates............. 55,468 55,468
Floating interest rates.......... 11,033 11,033
Due after 5 years:
Fixed interest rates............. 20,119 20,119
Floating interest rates.......... 25,349 25,349
--------- ------- --------
Total........................... $ 144,955 $19,131 $164,086
========= ======= ========
20
15
ANALYSIS OF RESERVE FOR LOAN LOSSES
Table 8
AS OF OR FOR THE YEARS ENDED
(In thousands) DECEMBER 31
1998 1997 1996 1995 1994
--------------------------------------------------------
Average amount of loans outstanding, net of unearned income ... $415,463 $379,672 $324,195 $245,032 $227,666
Amount of loans outstanding, net of unearned income ........... 436,014 396,991 355,893 297,264 232,632
Reserve for loan losses:
Balance on January 1 .......................................... $ 4,601 $ 4,075 $ 3,711 $ 3,013 $ 3,096
-------- -------- -------- -------- --------
Loans charged off:
Secured by real estate ........................................ 0 0 57 49 0
Commercial and industrial ..................................... 65 382 225 169 299
Installment ................................................... 285 330 197 147 127
Credit card ................................................... 101 139 93 58 28
-------- -------- -------- -------- --------
Total charge-offs ........................................... 451 851 572 423 454
-------- -------- -------- -------- --------
Recoveries of loans previously charged off:
Secured by real estate ........................................ 0 0 0 11 7
Commercial and industrial ..................................... 9 486 20 28 10
Installment ................................................... 91 89 86 78 56
Credit card ................................................... 28 17 25 17 15
-------- -------- -------- -------- --------
Total recoveries ............................................ 128 592 131 134 88
-------- -------- -------- -------- --------
Net loans charged off ........................................... 323 259 441 289 366
-------- -------- -------- -------- --------
Provision for loan losses ....................................... 770 785 805 367 283
-------- -------- -------- -------- --------
Acquired bank's allowance at date of acquisition ................ 0 0 0 620 0
-------- -------- -------- -------- --------
Balance on December 31 ........................................ $ 5,048 $ 4,601 $ 4,075 $ 3,711 $ 3,013
======== ======== ======== ======== ========
Ratio of net charge-offs of loans to average loans outstanding
during the year ............................................. .08% .07% .14% .12% .16%
management's estimate of an amount adequate to provide for the risk of future
losses inherent in the loan portfolio. In its on-going analysis of the reserve
for loan losses and its adequacy, management considers LSB's historic loan loss
experience, economic risks associated with each of the lending categories,
amount of past due and nonperforming loans, underlying collateral values
securing loans, credit concentrations and other factors which might affect
potential credit losses.
LSB is also subject to regulatory examinations and determinations as to the
adequacy of its reserve for loan losses, which may take into account such
factors as the methodology used to calculate the reserve and the size of the
reserve in comparison to peer banks identified by the regulatory agencies.
During 1998, all credit relationships of $50,000 or more were reviewed as a part
of LSB's credit administration. A review of large credits was conducted by a
regulatory agency examination revealing that there were no material problem
credits that had not been previously identified by management.
There are, however, additional risks of future losses which cannot be quantified
precisely or attributed to particular loans or classes of loans. Because these
risks include the state of the economy and factors affecting particular
borrowers, management's judgment as to the adequacy of the reserve for loan
losses is necessarily approximate and imprecise. In its oversight of the credit
review process, management has not identified any undue economic risks
associated with the various lending categories, nor any significant credit
concentrations within these categories.
Loans classified for regulatory purposes as loss, doubtful, substandard or
special mention that have not been disclosed in Table 9, "Nonperforming Assets",
do not represent or result from trends or uncertainties which management
reasonably expects will materially impact future operating results, liquidity,
or capital resources, or represent material credits about which management is
aware of any information which causes management to have serious doubts as to
the ability of such borrowers to comply with the loan repayment terms.
INCOME TAXES
Bancshares' effective tax rate decreased to 31.3% in 1998 from 33.0% in 1997
compared to 28.4% in 1996. Financial statement Note 10 provides a reconciliation
between the amount of taxes computed using the statutory tax rate and the actual
tax expense. The decrease in Bancshares' effective tax rate for 1998 was
primarily the result of fewer non-deductible merger expenses.
INFLATION
For financial institutions, the effects of inflation and governmental programs
to control it tend to vary from non-bank companies. The impact is more likely to
be felt by banking institutions in the interest rate associated with earning
assets and interest bearing liabilities. Reduced inflation tends to improve
interest margins associated with interest-bearing assets and liabilities.
Broad-ranged economic conditions such as inflation, and governmental efforts to
spur economic growth, are difficult for
21
16
individual companies to respond to effectively. Consistent long-term management
is the key to dealing with such conditions. The objective of management in such
times is to remain positioned for growth when the economy rebounds. Management
seeks to do this through its long-range budget and profit-planning process.
ACCOUNTING AND REGULATORY ISSUES
In March 1997, FASB issued Statement No. 129 ("SFAS 129"), "Disclosure of
Information about Capital Structure". SFAS 129 establishes standards for
disclosing information about a company's capital structure. It consolidates the
disclosure requirements that were previously covered in APB-10 "Omnibus
Opinion-1996". APB-15 "Earnings per Share", and SFAS 47, "Disclosure of
Long-Term Obligations". SFAS 129 requires that information about an entity's
capital structure be disclosed in three separate categories of securities,
liquidation preference of preferred stock, and redeemable stock. Further, SFAS
129 specifies that the entity shall provide within its financial statements a
summary explanation of the pertinent rights and privileges of the various
securities that are outstanding. SFAS 129 is effective for financial statements
for periods ending after December 15, 1997. Bancshares has adopted SFAS 129 for
its financial statements beginning after December 31, 1997, with no material
effect on its financial position and operating results.
In June 1997, FASB issued Statement No. 130 ("SFAS 130"), "Reporting of
Comprehensive Income", which requires entities to report comprehensive income in
their basic financial statements. As such, SFAS 130 establishes standards of
disclosure and financial statement display for reporting total comprehensive
income. Comprehensive income is defined as the change in equity of a business
during a period from transactions and other events and circumstances from
non-owner sources inclusive of net income. Under SFAS 130, financial statement
presentation of comprehensive income may be presented in a separate statement of
comprehensive income, in the statement of changes in equity, or below the total
of net income in the income statement. SFAS 130 is effective for fiscal years
beginning after December 15, 1997. The Statement must be adopted as of the
beginning of the entity's fiscal year with any prior period financial statements
presented for comparative purposes to be reclassified to reflect the provisions
of SFAS 130. Bancshares has adopted SFAS 130 for its financial statements
beginning January 1, 1998. No material effect on its financial position and
operating results is anticipated.
Statement No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and
Related Information" was issued by FASB in June 1997. It replaces SFAS 14
"Financial Reporting for Segments of a Business Enterprise" and its amendments.
SFAS 131 requires entities to report certain information about their operating
segments in a complete set of financial statements to shareholders. Further,
SFAS 131 requires that certain entity-wide information about products and
services, activities in different geographic areas, and reliance on major
customers to be disclosed. Separate disclosure of information is required about
an operating segment that meets any of the following thresholds: a) its reported
revenue, including both sales to external customers and inter-segment sales or
transfers, is 10% or more of the combined internal and external revenue of all
reported operating segments; b) the absolute amount of its reported profit or
loss is 10% or more of the greater, in absolute amount, or (i) the combined
reported profit of all operating segments that do not report a loss or (ii) the
combined reported loss of all
NONPERFORMING ASSETS
Table 9
(In thousands) DECEMBER 31
1998 1997 1996 1995 1994
----------------------------------------------
Nonaccrual loans:
Secured by real estate .......................................... $ 0 $ 0 $ 424 $ 990 $ 0
Commercial and industrial ....................................... 0 127 187 390 0
Restructured loans ............................................... 232 502 259 289 0
Other real estate acquired through foreclosed properties ......... 921 1,192 1,151 988 1,059
Accruing loans which are contractually past due 90 days or more... 759 334 369 206 1,108
------ ------ ------ ------ ------
Total nonperforming assets ....................................... $1,912 $2,155 $2,390 $2,863 $2,167
====== ====== ====== ====== ======
Nonperforming assets to:
Loans outstanding at end of year ................................ .44% .54% .67% .96% .93%
Total assets at end of year ..................................... .28 .35 .43 .58 .54
Loss of interest income associated with nonperforming loans at
December 31:
YEARS ENDED DECEMBER 31
1998 1997 1996 1995 1994
----------------------------------------------
Interest income that would have been recorded in accordance
with original terms ............................................. $ 0 $ 1 $ 52 $ 34 $ 71
Less interest income actually recorded ........................... 0 0 3 7 0
------ ------ ------ ------ ------
Loss of interest income .......................................... $ 0 $ 1 $ 49 $ 27 $ 71
====== ====== ====== ====== ======
22
17
ALLOCATION OF RESERVE FOR LOAN LOSSES (*)
Table 10 1998 1997 1996 1995 1994
LOANS LOANS LOANS LOANS LOANS
(In thousands) % % % % %
TOTAL TOTAL TOTAL TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
--------------- --------------- --------------- --------------- ---------------
Commercial, financial
and agricultural ..... $1,330 33.2% $1,212 33.3% $1,075 36.9% $1,100 43.7% $ 780 42.3%
Real estate -
construction ......... 555 4.4 506 3.3% 450 2.9 346 3.1 251 2.9
Real estate -
mortgage ............. 2,000 47.4 1,815 46.7% 1,529 41.0 1,390 32.5 1,130 30.8
Installment loans to
individuals .......... 913 14.3 828 15.8% 766 16.9 675 18.2 652 20.8
Lease financing ....... 60 .2 55 .2% 55 .2 0 .0 0 .0
Other ................. 90 .5 85 .7% 110 2.1 110 2.5 110 3.2
Unallocated ........... 100 .0 100 .0% 90 .0 90 .0 90 .0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total ................ $5,048 100.0% $4,601 100.0% $4,075 100.0% $3,711 100.0% $3,013 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
(*) The reserve for loan losses has been allocated only on an approximate basis.
The entire amount of the reserve is available to absorb losses occurring in
any category. The allocation is not necessarily indicative of future losses.
operating segments that did report a loss; c) its assets are 10% or more of the
combined assets of all operating segments. Bancshares operates in a single
industry segment and therefore does not meet any of the threshold requirements
of SFAS 131.
Statement No. 132 ("SFAS 132"), "Employers' Disclosures about Pensions and Other
Postretirement Benefits" was issued by FASB effective for fiscal years beginning
after December 15, 1997. SFAS 132 supersedes disclosure requirements contained
in SFAS 87 "Employers' Accounting for Pensions", SFAS 88 "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits", and SFAS 106 "Employers' Accounting for Postretirement
Benefits Other Than Pensions". SFAS 132 standardizes disclosure requirements and
requires additional information concerning changes in benefit obligations and
the fair value of plan assets. Bancshares has adopted SFAS 132 for its financial
statements beginning January 1, 1998, with no material effect on its financial
position and operating results.
In June 1998, FASB issued Statement No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities". SFAS 133 establishes accounting
and reporting standards for derivative instruments, including derivative
instruments that are embedded in other contracts and for hedging activities.
SFAS 133 requires that all derivatives be recognized as either assets or
liabilities on the balance sheet at their fair value. Requirements of SFAS 133
could affect the amount of an institution's recorded assets, liabilities, equity
as well as its regulatory capital levels. As defined under SFAS 133 derivatives
carry a designation of (a) no hedge designation, (b) fair value hedge, (c) cash
flow hedge, or (d) foreign currency hedge. SFAS 133 is effective for fiscal
periods, both years and quarters, beginning after June 15, 1999. Bancshares does
not presently have any derivative instruments within the definition of SFAS 133
and, as such, does not anticipate any material effect on its financial position
and operating results from adoption of the standard.
In May 1997, the Federal Financial Institutions Examination Council (FFIEC)
issued an Interagency Statement "Year 2000 Project Management Awareness" to
emphasize the critical issues that need to be addressed to implement an
effective Year 2000 project management plan. The FFIEC Statement identified five
phases of the Year 2000 project management process. In the awareness phase, the
corporation defines the issues and potential challenges associated with the Year
2000 problem. In the assessment phase, an evaluation is conducted to determine
the size and complexity of ensuring Year 2000 readiness. During the renovation
phase, required system upgrades would be made. In the validation phase, testing
of all computer systems and software would be done to meet the corporation's Y2K
compatibility standards. The final step is the implementation phase, which
incorporates Year 2000 ready systems into day-to-day operations.
The "Year 2000 problem" stems from the inability of computer systems to identify
the change from the years of the 1900's to the years 2000. This comes about
because most computer hardware and software systems have historically used only
two digits to identify the applicable year. Hence, as the turn of the century
approaches, these systems could be unable to distinguish between 1900 and 2000
resulting in possible errors and system failures causing wide spread disruption
to business operations.
Bancshares has acknowledged the importance of this issue and established a Year
2000 Project Team (Y2K) to ensure Year 2000 compliance. Bancshares' Year 2000
Plan follows the guidelines outlined by the Federal Financial Institutions
Examination Council. The Y2K Team consists of senior officers within the
company's operations area, information systems area, audit department, corporate
area and senior management. Senior management, with Board of Directors' approval
and oversight, establishes the commitment of resources and prioritization.
Bancshares has completed the awareness phase and the assessment phase of both
its information technology (computer
23
18
QUARTERLY FINANCIAL DATA
Table 11
(In thousands except per share data) 1998 1997
4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR. 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR.
------------------------------------- -------------------------------------
Interest income .............. $12,657 $12,732 $12,351 $11,917 $11,985 $11,510 $11,177 $10,795
Interest expense ............. 5,525 5,441 5,426 5,290 5,114 5,084 4,810 4,539
------- ------- ------- ------- ------- ------- ------- -------
Net interest income .......... 7,132 7,291 6,925 6,627 6,871 6,426 6,367 6,256
Provision for loan losses .... 250 180 175 165 318 159 190 118
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses... 6,882 7,111 6,750 6,462 6,553 6,267 6,177 6,138
------- ------- ------- ------- ------- ------- ------- -------
Noninterest income ........... 1,751 1,667 1,671 1,496 1,356 1,407 1,358 1,268
------- ------- ------- ------- ------- ------- ------- -------
Noninterest expense .......... 5,121 5,268 5,317 5,445 5,110 6,075 4,747 4,494
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes 3,512 3,510 3,104 2,513 2,799 1,599 2,788 2,912
Income taxes ................. 1,126 1,122 935 776 808 765 863 900
------- ------- ------- ------- ------- ------- ------- -------
Net income ................... $ 2,386 $ 2,388 $ 2,169 $ 1,737 $ 1,991 $ 834 $ 1,925 $ 2,012
======= ======= ======= ======= ======= ======= ======= =======
Earnings per share:
Basic ....................... $ .27 $ .27 $ .25 $ .21 $ .23 $ .10 $ .22 $ .23
Diluted ..................... .27 .27 .24 .20 .23 .09 .22 .23
systems) and non-information technology systems (heating, air condition systems,
elevator systems, calculators, etc.). Testing strategies and plans have been
completed and put in place. These first two phases were completed on schedule in
April of 1998.
Bancshares is presently on schedule with the renovation phase and validation
phase of its internal software with completion projected for mid 1999. Software
programs from the National Software Testing Laboratories (NSTL) are being
utilized to test all personal computers and computer servers for compliance.
Data processing of Bancshares is through Fiserv in an RJE environment. As such,
the bank is participating with Fiserv's Testing Acceptance Group and the Client
Advisory Board in Year 2000 testing. The renovation phase and validation phase
of the Fiserv system has been completed and the implementation phase is in
progress.
Third party audits have been requested from all major vendors and suppliers to
assist in determining their ability to be Year 2000 compliant. Bancshares has
also conducted due diligence inquiries concerning vendors' Y2K readiness and
implemented appropriate internal testing and verification of vendors' products
and services. Major loan and deposit customers have also been identified to
assess the extent to which Bancshares is vulnerable to those third parties
should they fail to be Year 2000 ready. However, there can be no guarantee that
the systems of other organizations on which Bancshares operations rely will be
converted timely, or that a failure to convert by another organization, or a
conversion that is incompatible with Bancshares' systems, will not have an
adverse effect on Bancshares.
The estimated cost of Bancshares' Year 2000 project is currently $400,000 and is
being funded through operating cash flows. As of December 31, 1998, a cumulative
total of $94,000 has been expensed as it relates to the awareness and assessment
phases and preparation for the validation and implementation phases. The costs
of the Year 2000 project and the date on which Bancshares plans to complete Year
2000 modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third-party modification plans and other
factors. However, there can be no assurance that these estimates will be
achieved and actual results could differ materially from those plans.
Bancshares is currently developing contingency plans that outline emergency
response procedures that adhere to regulatory guidelines. The contingency plans
represent an enhancement of Bancshares' business resumption plans and have as
their goal the resumption of business in the event there is a disruption of
critical systems necessary to operate. The contingency plans include the use of
alternative service providers, off-site processing, consolidation of customer
services, alternative communications support and other contingency service
suppliers. Federal regulatory agencies periodically review Bancshares' Year 2000
conversion efforts and have had no adverse criticism on the progress to date or
its schedule to complete the Year 2000 project.
Although the Year 2000 project has been given management's top priority, there
have been no serious delays to other information technology projects. To a great
extent this is due to Bancshares third party processing by Fiserv, which has
provided added support in meeting Year 2000 project goals as well as ongoing
information technology projects. As such, there are no anticipated delays in
information technology projects that would have an adverse effect on Bancshares'
financial condition and results of operations.
Bancshares presently believes that with its Year 2000 project schedule and
contingency plan development, the Year 2000 issue can be mitigated. However, if
its Year 2000 project goals are not met or completed on a timely basis, or if
mission critical third-parties do not meet their own Year 2000 issues,
disruptions in operations could occur and could have a material adverse impact
on the financial position of Bancshares.
24
19
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
(In thousands, except for shares) 1998 1997
- ----------------------------------------------------------------------------------------------
ASSETS
Cash and Due from Banks (Note 2) ......................... $ 33,292 $ 25,368
Interest-Bearing Bank Balances ........................... 9,862 12,127
Federal Funds Sold and Securities Purchased
Under Resale Agreements ................................. 40,595 60,340
Investment Securities (Note 3):
Held to Maturity, Market Value $61,386 and $56,209 ...... 59,907 54,891
Available for Sale ...................................... 83,936 50,725
Loans (Notes 4 and 11) ................................... 436,014 396,991
Less, Reserve for Loan Losses (Note 4) ................... (5,048) (4,601)
--------- ---------
Net Loans ............................................. 430,966 392,390
Premises and Equipment (Note 5) .......................... 11,528 11,261
Other Assets ............................................. 8,920 9,163
--------- ---------
Total Assets .......................................... $ 679,006 $ 616,265
========= =========
LIABILITIES
Deposits:
Demand ................................................... $ 71,867 $ 67,256
Savings, N.O.W. and Money Market Accounts ................ 287,315 227,239
Certificates of Deposit of less than $100,000 (Note 6).... 158,664 154,566
Certificates of Deposit of $100,000 or more (Note 6) ..... 49,481 53,964
--------- ---------
Total Deposits ........................................ 567,327 503,025
Securities Sold Under Agreements to Repurchase (Note 6)... 5,537 8,263
Borrowings from the Federal Home Loan Bank (Note 7) ...... 28,842 33,758
Other Liabilities ........................................ 3,870 3,692
--------- ---------
Total Liabilities ..................................... 605,576 548,738
--------- ---------
SHAREHOLDERS' EQUITY
Preferred Stock, Par Value $.01 Per Share:
Authorized 10,000,000 shares; none issued ............. 0 0
Common Stock, Par Value $5 Per Share:
Authorized 50,000,000 Shares; Issued 8,722,895
Shares in 1998 and 8,667,426 Shares in 1997 ........... 43,614 34,665
Paid-In Capital .......................................... 14,903 14,772
Retained Earnings ........................................ 14,248 17,916
Accumulated Other Comprehensive Income ................... 665 174
--------- ---------
Total Shareholders' Equity ............................... 73,430 67,527
--------- ---------
Total Liabilities and Shareholders' Equity ........... $ 679,006 $ 616,265
========= =========
Commitments and Contingencies (Note 8)
Notes to consolidated financial statements are an integral part hereof.
25
20
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
(In thousands, except for shares and per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and Fees on Loans ................................ $ 39,112 $ 35,692 $ 30,576
Interest on Investment Securities:
Taxable .................................................. 5,544 5,077 6,512
Tax Exempt ............................................... 1,846 1,785 1,901
Interest-Bearing Bank Balances ............................ 1,252 274 170
Federal Funds Sold and Securities Purchased Under
Resale Agreements ....................................... 1,903 2,639 1,033
---------- ---------- ----------
Total Interest Income ................................... 49,657 45,467 40,192
---------- ---------- ----------
INTEREST EXPENSE
Deposits .................................................. 19,727 17,917 15,831
Securities Sold Under Agreements to Repurchase ............ 234 234 168
Borrowings from the Federal Home Loan Bank ................ 1,721 1,396 537
---------- ---------- ----------
Total Interest Expense .................................. 21,682 19,547 16,536
---------- ---------- ----------
Net Interest Income .......................................... 27,975 25,920 23,656
Provision for Loan Losses (Note 4) ........................... 770 785 805
---------- ---------- ----------
Net Interest Income after Provision for Loan Losses .......... 27,205 25,135 22,851
---------- ---------- ----------
NONINTEREST INCOME
Service Charges on Deposit Accounts ....................... 2,716 2,550 2,501
Gains on Sales of Mortgages ............................... 328 186 119
Losses on Sales of Investment Securities .................. 0 (32) (37)
Other Operating Income (Note 9) ........................... 3,541 2,685 2,056
---------- ---------- ----------
Total Noninterest Income ................................ 6,585 5,389 4,639
---------- ---------- ----------
NONINTEREST EXPENSE
Personnel Expense ......................................... 11,172 10,387 10,103
Occupancy Expense ......................................... 1,259 1,223 1,243
Equipment Depreciation and Maintenance .................... 1,226 1,185 995
Other Operating Expense (Note 9) .......................... 7,334 6,137 5,044
Restructuring Charges and Merger Related Costs (Note 14)... 160 1,494 522
---------- ---------- ----------
Total Noninterest Expense ................................ 21,151 20,426 17,907
---------- ---------- ----------
Income Before Income Taxes ................................... 12,639 10,098 9,583
Income Taxes (Note 10) ....................................... 3,959 3,336 2,718
---------- ---------- ----------
Net Income ................................................... $ 8,680 $ 6,762 $ 6,865
========== ========== ==========
Earnings Per Share:
Basic ..................................................... $ 1.00 $ .78 $ .80
Diluted ................................................... .98 .77 .79
Weighted Average Shares Outstanding:
Basic ..................................................... 8,703,274 8,637,394 8,607,627
Diluted ................................................... 8,887,631 8,815,878 8,713,705
Notes to consolidated financial statements are an integral part hereof.
26
21
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ACCUMULATED
COMMON STOCK OTHER TOTAL
------------ PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
(In thousands, except for shares) SHARES AMOUNT CAPITAL EARNINGS INCOME EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1995................... 5,773,770 $28,869 $13,588 $15,551 $346 $58,354
Net income...................................... 6,865 6,865
Change in unrealized loss on securities
available for sale, net of deferred
income taxes................................... (453) (453)
----------
Comprehensive income ....................... 6,412
Cash dividends declared on common
stock......................................... (2,158) (2,158)
Common stock issued for stock
options exercised............................. 36,765 183 83 266
Common stock issued in five-for-four
stock split, including cash for
fractional shares............................. 1,075,961 5,380 (5,392) (12)
Transfer of capital............................. 1,000 (1,000)
----------------------------------------------------------------------------------
Balances at December 31, 1996................... 6,886,496 34,432 14,671 13,866 (107) 62,862
Net income...................................... 6,762 6,762
Change in unrealized gain on securities
available for sale, net of deferred
income taxes.................................. 281 281
----------
Comprehensive income........................ 7,043
Cash dividends declared on common
stock......................................... (2,712) (2,712)
Common stock issued for stock
options exercised............................. 47,215 233 114 347
Fractional shares purchased..................... (676) (13) (13)
----------------------------------------------------------------------------------
Balances at December 31, 1997................... 6,933,035 34,665 14,772 17,916 174 67,527
Net income...................................... 8,680 8,680
Change in unrealized gain on securities
available for sale, net of deferred
income taxes.................................. 491 491
----------
Comprehensive income........................ 9,171
Cash dividends declared on common
stock......................................... (3,658) (3,658)
Common stock issued for stock
options exercised............................. 60,468 302 199 501
Common stock issued in five-for-four
stock split, including cash for
fractional shares............................. 1,734,392 8,672 (8,690) (18)
Common stock acquired........................... (5,000) (25) (68) (93)
----------------------------------------------------------------------------------
Balances at December 31, 1998................... 8,722,895 $43,614 $14,903 $14,248 $665 $73,430
==================================================================================
Notes to consolidated financial statements are an integral part hereof.
27
22
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES
Net Income ...................................................................... $ 8,680 $ 6,762 $ 6,865
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................ 1,241 1,217 1,150
Securities premium amortization and discount accretion, net .................. (104) (21) 6
Increase in loans held for sale .............................................. (7,276) (237) (3,594)
Deferred income taxes ........................................................ 180 115 (30)
Income taxes payable ......................................................... 81 (117) 56
(Increase) decrease in income earned but not received ........................ (463) (12) 131
Increase (decrease) in interest accrued but not paid ......................... (16) (367) 132
Provision for loan losses .................................................... 770 785 805
Loss on sale of investment securities ........................................ 0 116 37
(Gain) loss on sale of premises and equipment ................................ 44 66 (9)
-------- -------- --------
Net cash provided by operating activities .................................. 3,137 8,307 5,549
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of securities held to maturity ........................................ (24,983) (1,184) (4,854)
Proceeds from maturities of securities held to maturity ......................... 20,005 15,454 18,898
Proceeds from sales of securities held to maturity .............................. 0 1,954 0
Purchases of securities available for sale ...................................... (64,650) (17,453) (32,348)
Proceeds from ma