NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
OF L.S.B. BANCSHARES, INC. OF SOUTH CAROLINA
TO BE HELD ON JUNE 14, 1994 AT 4:00 P.M.
To the Stockholders:
Notice is hereby given that a Special Meeting of Stockholders (the "Special
Meeting") of L.S.B. Bancshares, Inc. of South Carolina, a South Carolina
corporation ("LSB"), will be held in the Operations Center Meeting Room of The
Lexington State Bank, 113 Reed Avenue, Lexington, South Carolina, at 4:00 p.m.,
Lexington, South Carolina time, on June 14, 1994, for the following purposes:
(1) To consider and vote upon an Agreement and Plan of Reorganization,
dated as of December 7, 1993, as amended (the "Merger Agreement"), entered
into by and between LSB and BB&T Financial Corporation, Wilson, North
Carolina ("BB&T Financial"), and a related Plan of Merger, pursuant to
which LSB will be merged with and into BB&T Financial's wholly owned
subsidiary, BB&T Financial Corporation of South Carolina, and the
outstanding shares of LSB common stock will be converted into shares of
BB&T common stock in accordance with the ratio described in the enclosed
Proxy Statement/Prospectus; and
(2) To transact such other business as may properly come before the
Special Meeting or any adjournment thereof.
Only those record holders of common stock of LSB at the close of business on
April 25, 1994 are entitled to notice of and to vote at the Special Meeting or
any adjournment thereof.
You are cordially invited and urged to attend the Special Meeting in person.
Whether or not you plan to attend the Special Meeting, you are urged to date,
sign and promptly return the enclosed proxy in the enclosed, self-addressed,
stamped envelope. Your proxy may be revoked at any time before it is voted.
However, submitting a proxy will assure that your vote is counted if you are
unable to attend the Special Meeting.
Any stockholder entitled to vote at the Special Meeting shall have the right
to dissent from the Merger Agreement and to receive payment of the fair value
of his shares upon compliance with Chapter 13 of the South Carolina Business
Corporation Act of 1988, the full text of which is included as Appendix IV to
the Proxy Statement/Prospectus which is attached to this Notice of Special
Meeting. For a summary of the dissenters' rights of LSB stockholders, see "THE
MERGER--Dissenters' Rights."
By Order of the Board of Directors
Raymond S. Caughman, President and
Chief Executive Officer
James T. Brittingham, Chairman of
the Board
Lexington, South Carolina
May 13, 1994
Rule No. 424B3
Registration No. 33-53407
PROXY STATEMENT/PROSPECTUS
L.S.B. BANCSHARES, INC. OF SOUTH CAROLINA BB&T FINANCIAL CORPORATION
PROXY STATEMENT PROSPECTUS
FOR SPECIAL MEETING OF STOCKHOLDERS 3,985,703 SHARES OF COMMON STOCK
TO BE HELD ON JUNE 14, 1994 PAR VALUE $2.50 PER SHARE
(SUBJECT TO CERTAIN ADJUSTMENTS)
This Proxy Statement/Prospectus is furnished by the Board of Directors of
L.S.B. Bancshares, Inc. of South Carolina, Lexington, South Carolina ("LSB"),
in connection with the solicitation of proxies from the holders of shares of
LSB's outstanding common stock, $2.50 par value per share ("LSB Common Stock"),
for use at the special meeting of stockholders of LSB to be held on June 14,
1994 at 4:00 p.m. ("Special Meeting"), in the Operations Center Meeting Room of
The Lexington State Bank, 113 Reed Avenue, Lexington, South Carolina.
At the Special Meeting, stockholders will be asked to consider and vote upon
an Agreement and Plan of Reorganization, dated as of December 7, 1993 as
amended ("Reorganization Agreement"), entered into by and between LSB and BB&T
Financial Corporation, Wilson, North Carolina ("BB&T Financial"), and a related
Plan of Merger ("Plan of Merger"), pursuant to which LSB will be merged
("Merger") with and into BB&T Financial's wholly owned subsidiary, BB&T
Financial Corporation of South Carolina ("BB&T Financial-SC"). Following the
Merger and receipt of required regulatory approvals, Branch Banking and Trust
Company of South Carolina, BB&T Financial-SC's wholly-owned South Carolina
chartered commercial bank subsidiary ("BB&T-SC"), and The Community Bank of
South Carolina ("Community"), a wholly-owned South Carolina chartered
commercial bank subsidiary of LSB, will be merged ("Bank Mergers") with and
into The Lexington State Bank ("Lexington"), a wholly-owned South Carolina
chartered commercial bank subsidiary of LSB. Concurrently, Lexington will
change its name to "Branch Banking and Trust Company of South Carolina," and
amend its articles of incorporation and by-laws to conform to those of BB&T-SC.
The Reorganization Agreement and the Plan of Merger are referred to herein as
the Merger Agreements.
In the Merger, the stockholders of LSB will receive a number of shares of
BB&T Financial common stock, $2.50 par value per share ("BB&T Financial Common
Stock"), for each share of LSB Common Stock ("Exchange Ratio"), determined by
the book value of LSB at the end of the month preceding consummation of the
Merger and the average of the reported closing prices per share of BB&T
Financial Common Stock on the National Association of Securities Dealers
Automated Quotation System/National Market System ("Nasdaq/NMS") on the ten
trading days ending on the tenth business day prior to the effective date of
the Merger ("BB&T Financial Average Closing Price"). The Exchange Ratio will be
determined as follows:
--In the event that the BB&T Financial Average Closing Price is equal to or
less than $30.50 per share, the Exchange Ratio will be that number
(rounded to the nearest ten-thousandth) equal to 2.25 times the LSB Book
Value Per Share (defined below) (the "Adjustment Factor") divided by
$30.50. The LSB Book Value Per Share is defined in the Plan of Merger as
LSB's book value per share as of the last day of the calendar month
immediately preceding the effective date of the Merger, less any gain
attributable to such book value between September 30, 1993 and the closing
date of the Merger as a result of any extraordinary gain recognized by LSB
or The Dorn Banking Company ("Dorn") (which was merged into Lexington on
December 16, 1993);
--In the event that the BB&T Financial Average Closing Price is greater than
$30.50 and equal to or less than $36.00, the Exchange Ratio will be that
number (rounded to the nearest ten-thousandth) equal to the Adjustment
Factor divided by the BB&T Financial Average Closing Price; and
--In the event that the BB&T Financial Average Closing Price is greater than
$36.00, the Exchange Ratio will be that number (rounded to the nearest
ten-thousandth) equal to the Adjustment Factor divided by $36.00.
The Exchange Ratio also may be adjusted in the event that BB&T Financial
establishes a record date between December 7, 1993 and the time and date
specified for the Merger in the Articles of Merger that are delivered for
filing to the Secretary of State of South Carolina ("Effective Date") for a
special distribution to stockholders, a stock split, stock dividend or similar
change in capitalization. Cash will be paid in lieu of fractional shares.
On May 11, 1994, the closing price of a share of BB&T Financial Common Stock
was $29.13. If, for example, that were the BB&T Financial Average Closing
Price, and assuming an LSB Book Value Per Share of $17.31 (the actual LSB book
value per share on March 31, 1994), LSB's stockholders would receive, for each
share of LSB Common Stock, 1.2770 shares of BB&T Financial Common Stock. See
"THE MERGER--Conversion of LSB Common Stock." The foregoing is only an example
and the actual Exchange Ratio may be higher or lower.
THE LSB BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE TO
APPROVE THE MERGER AGREEMENTS. FAILURE TO VOTE IS EQUIVALENT TO VOTING AGAINST
THE MERGER AGREEMENTS.
This Proxy Statement/Prospectus also constitutes a prospectus of BB&T
Financial in connection with the shares of BB&T Financial Common Stock to be
issued to stockholders of LSB in connection with the Merger.
This Proxy Statement/Prospectus and the accompanying form of proxy are first
being sent to stockholders of LSB on or about May 13, 1994.
THE BB&T FINANCIAL COMMON STOCK TO BE ISSUED IN THE MERGER HAS NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION ("SEC"), THE
FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"), THE NORTH CAROLINA COMMISSIONER
OF BANKS ("COMMISSIONER"), THE SOUTH CAROLINA STATE BOARD OF FINANCIAL
INSTITUTIONS ("SOUTH CAROLINA BOARD"), ANY STATE SECURITIES AUTHORITY OR ANY
OTHER GOVERNMENT AGENCY, NOR HAS ANY OF THEM PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE SHARES OF BB&T FINANCIAL COMMON STOCK TO BE ISSUED IN THE MERGER ARE NOT
DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS MAY 13, 1994.
AVAILABLE INFORMATION
BB&T Financial has filed with the SEC a Registration Statement No. 33-53407
on Form S-4 under the Securities Act of 1933, as amended ("Securities Act"),
relating to the shares of BB&T Financial Common Stock that may be issued in
connection with the Merger. This Proxy Statement/Prospectus constitutes the
prospectus of BB&T Financial filed as part of the Registration Statement and
does not contain all the information set forth in the Registration Statement,
certain portions of which have been omitted pursuant to the rules and
regulations of the SEC. The information omitted may be obtained from the public
reference facilities of the SEC or inspected and copied at the principal or
regional offices of the SEC at the addresses listed in the next paragraph.
Information contained in this Proxy Statement/Prospectus regarding LSB and its
subsidiaries has been furnished by LSB and information herein regarding BB&T
Financial and its subsidiaries has been furnished by BB&T Financial.
BB&T Financial and LSB are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), and in accordance
therewith file reports, proxy statements and other information with the SEC.
Such reports, proxy statements and other information can be inspected and
copied at the public reference facilities maintained by the SEC at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its
regional offices at 500 West Madison St., Suite 1400, Chicago, Illinois 60621
and 7 World Trade Center, Suite 1300, New York, New York 11048. Copies of such
materials also can be obtained from the SEC's Public Reference Section, 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates.
The following BB&T Financial documents are enclosed with this Proxy
Statement/Prospectus: BB&T Financial's Form 10-K for the year ended December
31, 1993 and BB&T Financial's Proxy Statement for its 1994 annual meeting of
stockholders held on April 26, 1994. LSB STOCKHOLDERS DO NOT NEED TO TAKE ANY
ACTIONS REGARDING THESE BB&T FINANCIAL DOCUMENTS--THEY ARE PROVIDED SOLELY TO
PROVIDE ADDITIONAL INFORMATION ABOUT BB&T FINANCIAL.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed by BB&T Financial with the SEC are
hereby incorporated by reference in this Proxy Statement/Prospectus:
(i) BB&T Financial's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993; and
(ii) BB&T Financial's Current Reports on Form 8-K dated January 10, 1994
and February 4, 1994.
LSB's Annual Report on Form 10-K for the fiscal year ended December 31, 1993
is hereby incorporated by reference in this Proxy Statement/Prospectus.
All documents subsequently filed by BB&T Financial pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the consummation of the
Merger and issuance of the shares of BB&T Financial Common Stock offered hereby
are deemed to be incorporated by reference in this Proxy Statement/Prospectus
and are deemed to be a part hereof from the date of filing of such documents.
Any statement contained in a document filed by BB&T Financial and incorporated
or deemed to be incorporated by reference herein will be deemed to be modified
or superseded for purposes of this Proxy Statement/Prospectus to the extent
that a statement contained herein or in any subsequently filed document which
also is or is deemed to be incorporated herein modifies or supersedes such
statement. Any statement so modified or superseded will not be deemed to
constitute a part of this Proxy Statement/Prospectus, except as so modified or
superseded.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE OTHER DOCUMENTS
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. DOCUMENTS RELATING TO
BB&T FINANCIAL OR LSB (OTHER THAN EXHIBITS TO SUCH DOCUMENTS WHICH ARE NOT
SPECIFICALLY INCORPORATED BY REFERENCE IN SUCH DOCUMENTS) ARE AVAILABLE TO EACH
PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM A COPY OF THIS PROXY
STATEMENT/PROSPECTUS IS DELIVERED, WITHOUT CHARGE, UPON WRITTEN OR ORAL REQUEST
DIRECTED TO JERONE C. HERRING, BB&T FINANCIAL'S SECRETARY, 223 WEST NASH
STREET, WILSON, NORTH CAROLINA 27893, TELEPHONE (919) 399-4291, OR UPON WRITTEN
OR ORAL REQUEST DIRECTED TO CAROL R. METTS, LSB'S SECRETARY, 309 COLUMBIA
AVENUE, P.O. BOX 8, LEXINGTON, SOUTH CAROLINA 29071, TELEPHONE (803) 359-5111,
RESPECTIVELY. IN ORDER TO ENSURE TIMELY DELIVERY OF ANY REQUESTED DOCUMENTS,
THE REQUEST SHOULD BE MADE NO LATER THAN CLOSE OF BUSINESS ON JUNE 7, 1994.
PERSONS REQUESTING COPIES OF EXHIBITS TO DOCUMENTS WHICH ARE NOT SPECIFICALLY
INCORPORATED BY REFERENCE IN SUCH DOCUMENTS WILL BE CHARGED THE COST OF
REPRODUCTION AND MAILING.
2
This Proxy Statement/Prospectus does not cover any resales of the BB&T
Financial Common Stock offered hereby to be received by the stockholders deemed
to be "affiliates" of LSB or BB&T Financial upon consummation of the Merger. No
person is authorized to make use of this Proxy Statement/Prospectus in
connection with such resales, although such securities may be traded without
the use of this Proxy Statement/Prospectus by those stockholders of BB&T
Financial not deemed to be "affiliates" of BB&T Financial or LSB.
No person is authorized to give any information or make any representation
other than those contained or incorporated in this Proxy Statement/Prospectus,
and, if given or made, such information or representation should not be relied
upon as having been authorized. This Proxy Statement/Prospectus does not
constitute an offer to exchange or sell, or a solicitation of an offer to
exchange or purchase, the securities offered by this Proxy
Statement/Prospectus, or the solicitation of a proxy, in any jurisdiction in
which such offer or solicitation is not authorized or to or from any person to
whom it is unlawful to make such offer or solicitation. Neither the delivery of
this Proxy Statement/Prospectus nor any distribution of securities made
hereunder will, under any circumstances, create any implication that there has
been no change in the affairs of BB&T Financial or LSB since the date of this
Proxy Statement/Prospectus.
TABLE OF CONTENTS
PAGE
----
Available Information..................................................... 2
Incorporation of Certain Documents by Reference........................... 2
Summary................................................................... 4
Recent Financial Data..................................................... 11
Selected Financial Data................................................... 14
Comparative Per Share Data................................................ 16
Information Concerning the Special Meeting................................ 17
The Merger................................................................ 18
Fully Pro Forma Combined Condensed Financial Statements................... 43
Information About BB&T Financial.......................................... 47
Information About LSB..................................................... 48
Selected Consolidated Financial and Other Data of LSB..................... 49
LSB's Management's Discussion and Analysis of Financial Condition and Re-
sults of Operations...................................................... 50
Ownership of LSB Common Stock By Certain Beneficial Owners and Management. 71
Management of LSB......................................................... 72
Market Prices and Dividends............................................... 72
Description of BB&T Financial Common Stock To Be Issued in the Merger and
Comparison of Stockholders' Rights....................................... 74
Supervision and Regulation of BB&T Financial and LSB...................... 81
Experts................................................................... 89
Opinions.................................................................. 89
Stockholder Proposals..................................................... 89
Other Matters............................................................. 89
Consolidated Financial Statements of LSB.................................. F-1
Appendices:
Agreement and Plan of Reorganization and letter agreement dated April 26,
I. 1994
II. Plan of Merger
III. Option Agreement
IV. Sections 33-13-101, et seq. of the South Carolina Business Corporation
Act, as Amended, Concerning Dissenters' Rights
V. Opinion of the Carson Medlin Company
VI. Information About BB&T Financial Corporation of South Carolina
3
SUMMARY
This summary is not intended to be complete and should be read in conjunction
with, and is qualified in its entirety by reference to, more detailed
information contained in this Proxy Statement/Prospectus, the information
incorporated by reference herein, the text of the Appendices hereto and the
other documents referred to herein and therein.
As used in this Proxy Statement/Prospectus, the terms "BB&T Financial" and
"LSB" refer to such corporations respectively, and, unless the context
otherwise requires, to their respective subsidiaries.
TIME, PLACE, AND PURPOSE OF THE SPECIAL MEETING
The Special Meeting will be held on June 14, 1994 at 4:00 p.m., in the
Operations Center Meeting Room of Lexington, 113 Reed Avenue, Lexington, South
Carolina. At the Special Meeting, LSB's stockholders will vote upon a proposal
to approve the Merger Agreements, attached hereto as Appendices I and II. On
April 25, 1994, the record date ("Record Date") for the Special Meeting, there
were 2,435 holders of record of the 3,121,146 shares of LSB Common Stock then
outstanding and entitled to vote at the Special Meeting. Failure of a holder of
LSB Common Stock to vote such shares will have the same effect as a vote
"against" the Merger Agreements. See "INFORMATION CONCERNING THE SPECIAL
MEETING."
PARTIES TO THE MERGER
BB&T Financial
BB&T Financial, a North Carolina corporation headquartered in Wilson, North
Carolina, is a bank holding company registered under the Bank Holding Company
Act of 1956, as amended ("BHCA"). BB&T Financial also is registered as a
savings institution holding company under the savings institution holding
company laws of North Carolina. The principal executive offices of BB&T
Financial are located at 223 West Nash Street, Wilson, North Carolina 27893,
and its telephone number is (919) 399-4291.
As of December 31, 1993, BB&T Financial had total consolidated assets of
approximately $9.2 billion, total deposits through its depository institution
subsidiaries of approximately $7.0 billion and consolidated stockholders'
equity of approximately $743.5 million. See "INFORMATION ABOUT BB&T FINANCIAL."
BB&T Financial owns and operates two commercial bank subsidiaries: Branch
Banking and Trust Company ("BB&T"), a wholly owned North Carolina chartered
bank subsidiary, and, through BB&T Financial-SC (which is a wholly-owned
subsidiary of BB&T Financial), BB&T-SC, a South Carolina chartered banking
corporation headquartered in Greenville, South Carolina. As of December 31,
1993, BB&T had assets of $7.8 billion and deposit liabilities of $5.9 billion
and BB&T-SC had assets of $489.4 million and deposit liabilities of $437.3
million. The deposits of BB&T and BB&T-SC are insured by the FDIC.
BB&T Financial also owns and operates three North Carolina chartered savings
bank subsidiaries: Citizens Savings Bank, S.S.B., Inc., Newton, North Carolina
("Citizens-Newton"), Mutual Savings Bank of Rockingham County, S.S.B., Inc.,
Reidsville, North Carolina ("Mutual Savings") and Citizens Savings Bank of
Mooresville, S.S.B., Inc., Mooresville, North Carolina ("Citizens-
Mooresville"). The deposits of Citizens-Newton, Mutual Savings and Citizens-
Mooresville are insured by the FDIC. Together, the three savings bank
subsidiaries had assets of $405 million and deposit liabilities of $345 million
at December 31, 1993. These three institutions are expected to be merged or
otherwise consolidated into BB&T later in 1994.
BB&T Financial has pending as of the date of this Proxy Statement/Prospectus
(in addition to the pending acquisition of LSB) the acquisition, through so-
called "conversion merger" transactions, of two North Carolina chartered mutual
savings banks with aggregate assets of approximately $478 million at December
31, 1993. For additional information concerning these acquisitions, see
"INFORMATION ABOUT BB&T FINANCIAL--BB&T Financial's Acquisition Program."
4
BB&T Financial continues to evaluate the possibility of acquiring additional
mutual and stock savings institutions, commercial banks, insurance agencies and
other companies located in North Carolina, South Carolina and possibly
Virginia. BB&T Financial may enter into acquisition agreements with one or more
of such institutions after the date of this Proxy Statement/Prospectus.
BB&T Financial-SC
BB&T Financial-SC, a South Carolina corporation, is a wholly-owned subsidiary
of BB&T Financial and is registered as a bank holding company under the BHCA.
BB&T Financial-SC's only subsidiary is BB&T-SC. The principal executive offices
of BB&T Financial-SC are located at 223 West Nash Street, Wilson, North
Carolina 27893 and its telephone number is (919) 399-4291.
LSB
LSB, a South Carolina corporation headquartered in Lexington, South Carolina,
is a bank holding company registered under the BHCA. The principal executive
offices of LSB are located at 309 Columbia Avenue, Lexington, South Carolina
29071, and its telephone number is (803) 359-5111. As of December 31, 1993, LSB
had total consolidated assets of approximately $699.6 million, deposits through
its subsidiaries of approximately $570.9 million and consolidated stockholders'
equity of approximately $54.8 million. See "INFORMATION ABOUT LSB."
LSB owns and operates two South Carolina chartered commercial bank
subsidiaries: Lexington and Community. On December 16, 1993, LSB acquired Dorn,
located in McCormick, South Carolina, through the merger of Dorn into
Lexington. As of December 31, 1993, Lexington had assets of approximately
$595.1 million and deposit liabilities of approximately $478.1 million and
Community had assets of approximately $111.2 million and deposit liabilities of
approximately $95.5 million. The deposits of Lexington and Community are
insured by the FDIC. See "INFORMATION ABOUT LSB."
TERMS OF THE MERGER
Under the Merger Agreements, if all of the conditions to the Merger are
satisfied, LSB will be merged with and into BB&T Financial-SC, whereupon the
separate existence of LSB will cease. Pursuant to the Merger Agreements, the
stockholders of LSB (except stockholders who perfect their dissenters' rights
in accordance with South Carolina law) will receive a number of shares of BB&T
Financial Common Stock for each share of LSB Common Stock equal to the Exchange
Ratio, which will be determined by the LSB Book Value Per Share and the BB&T
Financial Average Closing Price. The Exchange Ratio will be determined as
follows:
-- In the event that the BB&T Financial Average Closing Price is equal to
or less than $30.50 per share, the Exchange Ratio will be that number
(rounded to the nearest ten-thousandth) equal to the Adjustment Factor
divided by $30.50;
-- In the event that the BB&T Financial Average Closing Price is greater
than $30.50 and equal to or less than $36.00, the Exchange Ratio will be
that number (rounded to the nearest ten-thousandth) equal to the
Adjustment Factor divided by the BB&T Financial Average Closing Price;
and
-- In the event that the BB&T Financial Average Closing Price is greater
than $36.00, the Exchange Ratio will be that number (rounded to the
nearest ten-thousandth) equal to the Adjustment Factor divided by
$36.00.
As defined in the Merger Agreements, "BB&T Financial Average Closing Price"
means the average of the reported closing prices per share of BB&T Financial
Common Stock on the Nasdaq/NMS on the ten trading days ending on the tenth
business day prior to the Effective Date; "LSB Book Value Per Share" means
LSB's book value per share as of the last day of the calendar month immediately
preceding the Effective
5
Date, less any gain attributable to such book value between September 30, 1993
and the closing date of the Merger as a result of any extraordinary gain
(including, but not limited to, a sale of securities or other assets not in the
ordinary course of business) recognized by LSB or Dorn; and "Adjustment Factor"
means 2.25 times the LSB Book Value Per Share.
The Exchange Ratio also may be adjusted in the event that BB&T Financial
establishes a record date between December 7, 1993 and the Effective Date for a
special distribution to stockholders, a stock split, stock dividend or similar
change in capitalization.
No fractional shares of BB&T Financial Common Stock will be issued in
connection with the Merger. Instead, cash will be paid in lieu of fractional
shares in an amount equal to the product of the fractional share multiplied by
the BB&T Financial Average Closing Price.
On May 11, 1994, the closing price of a share of BB&T Financial Common Stock
was $29.13. If, for example, that were the BB&T Financial Average Closing
Price, and assuming an LSB Book Value Per Share of $17.31 (the actual LSB book
value per share on March 31, 1994) the Exchange Ratio would be 1.2770 and LSB's
stockholders would receive, for each share of LSB Common Stock, 1.2770 shares
of BB&T Financial Common Stock. See "THE MERGER--Conversion of LSB Common
Stock." LSB stockholders are advised to obtain current market quotations for
BB&T Financial Common Stock. The market price of BB&T Financial Common Stock on
the Effective Date may be higher or lower than the market price at the time the
Merger Agreements were executed, at the date of mailing this Proxy
Statement/Prospectus or at the time of the Special Meeting. Fluctuations in the
market price of the BB&T Financial Common Stock might affect the Exchange Ratio
and, thus, the value received for each share of LSB Common Stock. Between the
date of the Reorganization Agreement and May 11, 1994, the closing price of
BB&T Financial Common Stock has ranged from a high of $33.88 per share to a low
of $28.63 per share.
BB&T Financial and LSB anticipate that following the Merger and receipt of
required regulatory approvals, BB&T-SC and Community will be merged into
Lexington in the Bank Mergers. Concurrently, Lexington will change its name to
"Branch Banking and Trust Company of South Carolina," and amend its articles of
incorporation and bylaws to conform to those of BB&T-SC. See "THE MERGER--
Regulatory Considerations."
EFFECTIVE DATE OF THE MERGER
The Effective Date of the Merger will be the time and date specified in the
Articles of Merger that are delivered for filing to the Secretary of State of
South Carolina. The Effective Date will occur as soon as practicable following
the date that all conditions specified in the Merger Agreements have been
satisfied or waived. The Effective Date currently is anticipated to be in the
third quarter of 1994, although delays in satisfaction of the conditions to
consummation of the Merger could result in a later Effective Date. See "THE
MERGER--Conditions to Consummation of the Merger."
INTERESTS OF CERTAIN PERSONS IN THE MERGER AND EFFECT OF THE MERGER ON
EMPLOYEES AND BENEFIT PLANS
As of the Effective Date of the Merger, BB&T Financial will enter into
employment/severance agreements with Raymond S. Caughman, Robert N. Hubbs,
Harold C. Amick, Jr., Charles A. Kirby, David S. Hipp, Robert C. Marshall,
Carol R. Metts, Sharon D. Hundley, Gary A. Areheart, R.W. McCormick, Jr.,
Steven P. Nivens, Kathy N. Felder, Marcia C. Wood and Cricket Scoggins, all of
whom are current officers of LSB or an LSB subsidiary (each, an "Officer"). The
agreements will provide for continued payment of salary in the event of certain
types of termination, employment terms of three or five years and for certain
other benefits. BB&T Financial will also enter into an employment/severance
agreement with Estes B. Howell, Jr. which will expire upon his retirement on
September 1, 1994. The agreements with Messrs. Caughman and Hubbs provide that
either of them may voluntarily terminate employment following the Merger and
continue to receive their annual base salary without reduction until the end of
the term of the agreement. Mr. Hubbs' agreement further provides that he may
continue his employment but significantly reduce his duties without reduction
in salary or non-salary benefits. It is anticipated that Mr. Hubbs will
6
significantly reduce his duties with BB&T Financial following the Merger. See
"THE MERGER--Interest of Certain Persons in the Merger and Effect of the Merger
on Employees and Benefit Plans--Effect of Severance and Related Provisions."
The Reorganization Agreement also contains provisions concerning the
continued employment of certain other LSB employees and with respect to
director and employee benefits after the Merger and the Bank Mergers.
Raymond S. Caughman and Albert J. Dooley, Sr., members of the LSB Board of
Directors, will become directors of BB&T Financial upon consummation of the
Merger. See "THE MERGER--Interests of Certain Persons in the Merger and Effect
of the Merger on Employees and Benefit Plans."
REGULATORY CONSIDERATIONS
The Merger cannot be consummated until all required approvals have been
received from the Board of Governors of the Federal Reserve System ("Federal
Reserve") and the South Carolina Board. BB&T Financial has submitted
applications to the Federal Reserve and the South Carolina Board for approval
to consummate the Merger and those applications currently are pending. The Bank
Mergers cannot be consummated until required approvals have been received from
the FDIC and the South Carolina Board. The required applications for such
approvals are expected to be filed in the near future. Although it is a
condition precedent to BB&T Financial's obligations to effect the Merger that
all regulatory approvals required in connection with the Bank Mergers shall
have been received, and that all notice periods and waiting periods required
after the granting of such approvals shall have passed, BB&T Financial may
waive compliance with this condition with respect to the regulatory approvals
of the Bank Mergers prior to consummation of the Merger. See "THE MERGER--
Regulatory Considerations."
STOCKHOLDER APPROVAL
The Merger Agreements must be approved by an affirmative vote of two-thirds
of the shares of LSB Common Stock entitled to vote at the Special Meeting. As
of March 8, 1994, the directors and executive officers of LSB and their
affiliates owned a total of 516,510 shares, or 16.58% of the LSB Common Stock,
all of which are expected to be voted in favor of the Merger Agreements. As of
the Record Date, one of the directors of BB&T Financial owned 3,155 shares of
LSB Common Stock, which is also expected to be voted in favor of the Merger
Agreements. See "INFORMATION CONCERNING THE SPECIAL MEETING--Record Date,
Voting Rights and Vote Required."
OPINION OF FINANCIAL ADVISER
The Carson Medlin Company ("Carson Medlin") has served as financial adviser
to LSB in connection with the Merger and has rendered an opinion to the LSB
Board of Directors that the Exchange Ratio of BB&T Financial Common Stock for
LSB Common Stock is fair from a financial point of view to LSB stockholders.
For additional information concerning Carson Medlin and its opinion, see "THE
MERGER--Opinion of Financial Adviser" and the opinion of Carson Medlin attached
as Appendix V to this Proxy Statement/Prospectus.
OTHER CONDITIONS TO THE MERGER
Consummation of the Merger is subject to the satisfaction of certain
conditions in addition to regulatory approvals and the approval of LSB's
stockholders. BB&T Financial's obligations under the Merger Agreements are
conditioned upon, among other things, a determination by BB&T Financial that
the Merger will qualify for pooling-of-interests accounting treatment and that
dissenters' rights pursuant to the South Carolina Business Corporation Act
("SCBCA") with respect to the Merger have not been exercised by the holders of
more than 10% of the outstanding LSB Common Stock. BB&T Financial and LSB may
waive certain of the conditions to their respective obligations to consummate
the Merger, other than (i) the approvals required of LSB's stockholders and of
proper regulatory authorities for the Merger, and (ii) after approval of the
Merger Agreements by LSB's stockholders, any reduction in the number of shares
of BB&T
7
Financial Common Stock into which each share of LSB Common Stock will be
converted in the Merger or the payment terms for fractional interests. See "THE
MERGER--Conditions to Consummation of the Merger."
TERMINATION
The Reorganization Agreement is subject to termination by, among other
things, the mutual consent in writing of the parties or, in case of certain
material breaches, by notice of termination given by the party not in default.
The Reorganization Agreement also is subject to termination by either party if
the BB&T Financial Average Closing Price is less than $26.00 or more than
$36.00. In addition, the Reorganization Agreement may be terminated if the
stockholders of LSB do not approve the Merger Agreements, or if a required
approval by any regulatory agency is denied and the time period for appeals and
requests for reconsideration of that denial has run. Unless extended by the
parties, the Reorganization Agreement may also be terminated by either party if
the Merger is not consummated before January 31, 1995. For other possible
termination events, see "THE MERGER--Termination."
AMENDMENT
The Merger Agreements may be amended or supplemented in writing by mutual
agreement of BB&T Financial and LSB. The amendment or supplement must be
approved by the respective Boards of Directors of BB&T Financial and LSB and no
amendment or supplement executed after approval of the Merger Agreements by
LSB's stockholders may reduce either the number of shares of BB&T Financial
Common Stock into which each share of LSB Common Stock will be converted in the
Merger or the payment terms for fractional interests. See "THE MERGER--
Amendment." The Merger Agreements were amended by the parties as of April 26,
1994 to change the structure of the Bank Mergers.
DISSENTERS' RIGHTS
Under the SCBCA, holders of LSB Common Stock outstanding and entitled to vote
at the Special Meeting who do not vote in favor of the Merger Agreements and
who comply with certain notice requirements and other procedures will have the
right to dissent from the Merger and to be paid cash for the fair value of
their shares. However, a vote in favor of the Merger cast by the holder of a
proxy solicited by LSB will not disqualify a stockholder granting such proxy
from exercising dissenters' rights. South Carolina law defines "fair value" to
mean the value of the shares immediately before the effectuation of the Merger,
excluding any appreciation or depreciation in anticipation of the Merger,
unless such exclusion would be inequitable. Under South Carolina law, the "fair
value" of the shares is to be determined by techniques that are acceptable
generally in the financial community. In order for a holder of LSB Common Stock
to perfect dissenters' rights, such holder must file with LSB, before the vote
is taken, a written notice of intent to demand payment for his shares. Neither
a delivery of a proxy appointment directing a vote against the Merger
Agreements nor a failure to vote for the Merger Agreements will constitute such
written notice. Certain additional procedures must be followed in order for an
LSB stockholder to exercise dissenters' rights. Any deviation from such
procedures may result in the forfeiture of dissenters' rights. The only rights
dissenting stockholders will have are those granted by the SCBCA. Accordingly,
stockholders wishing to dissent from the Merger are urged to read carefully
"THE MERGER--Dissenters' Rights," and the SCBCA sections included herewith as
Appendix IV.
CERTAIN INCOME TAX CONSEQUENCES
The following is a summary discussion of certain federal income tax
consequences of the Merger to stockholders of LSB. All stockholders should read
carefully the discussion in "THE MERGER--Certain Income Tax Consequences of the
Merger" and other sections of this Proxy Statement/Prospectus.
BB&T Financial and LSB have received an opinion of KPMG Peat Marwick, tax
advisors to BB&T Financial, to the effect that the Merger, when consummated in
accordance with the Reorganization
8
Agreement and the Plan of Merger, will constitute a reorganization within the
meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the
"Code"), and that the exchange of LSB Common Stock to the extent exchanged for
BB&T Financial Common Stock will not give rise to the recognition of gain or
loss for federal income tax purposes to LSB stockholders.
Gain or loss, if any, will be recognized by a holder of LSB Common Stock who
receives cash in lieu of any fractional share of BB&T Financial Common Stock or
who receives payment of the fair value of his shares upon perfecting
dissenters' rights. The amount and character of such gain or loss may vary in
accordance with each stockholder's individual circumstances. See "THE MERGER--
Certain Income Tax Consequences of the Merger."
BECAUSE OF THE COMPLEXITIES OF THE FEDERAL INCOME TAX LAWS AND BECAUSE THE
TAX CONSEQUENCES MAY VARY DEPENDING UPON A HOLDER'S INDIVIDUAL CIRCUMSTANCES OR
TAX STATUS, IT IS RECOMMENDED THAT EACH STOCKHOLDER OF LSB CONSULT HIS OR HER
TAX ADVISOR CONCERNING THE FEDERAL (AND ANY APPLICABLE STATE, LOCAL OR OTHER)
TAX CONSEQUENCES OF THE MERGER.
RESALES BY AFFILIATES
As a condition to BB&T Financial's obligation to consummate the Merger,
affiliates of LSB must deliver written agreements to BB&T Financial that they
will not dispose of any shares of BB&T Financial Common Stock received upon
consummation of the Merger except in compliance with Rule 145 under the
Securities Act or otherwise in compliance with the Securities Act and rules and
regulations promulgated thereunder. See "THE MERGER--Restrictions on Resales by
Affiliates."
OPTION AGREEMENT
As a condition of BB&T Financial's entering into the Reorganization Agreement
and to increase the probability that the Merger will be consummated, LSB and
BB&T Financial entered into an Option Agreement, dated as of December 7, 1993
("Option Agreement"). The Option Agreement provides for the purchase by BB&T
Financial of up to 771,894 shares of authorized but unissued shares of LSB
Common Stock (19.9% of the LSB Common Stock then issued and outstanding, giving
effect to the issuance of any LSB Common Stock under the Option Agreement),
subject to adjustment, at an exercise price of $30.00 per share ("LSB Option").
Exercise of the LSB Option is permitted only upon the occurrence of certain
"Purchase Events" as defined in the Option Agreement and subject to the
limitations specified in the Option Agreement. See "THE MERGER--The Option
Agreement."
MARKET PRICES AND DIVIDENDS
The information presented in the following table reflects the last reported
sales prices for BB&T Financial Common Stock and LSB Common Stock on December
7, 1993, the last trading day prior to the public announcement of the proposed
Merger, and the LSB Common Stock equivalent per share basis, calculated by
multiplying the closing price of BB&T Financial Common Stock on such date by
the Exchange Ratio, assuming that such closing price of BB&T Financial Common
Stock was the BB&T Financial Average Closing Price and that the LSB Book Value
Per Share was $17.31 (the actual LSB book value per share on March 31, 1994).
The table also reflects the last reported sales prices for BB&T Financial
Common Stock and LSB Common Stock on or prior to May 11, 1994:
MARKET VALUE
------------
HISTORICAL
----------
LSB EQUIVALENT
BB&T FINANCIAL LSB PER SHARE BASIS
-------------- ------ ---------------
December 7, 1993 $30.25 $28.75 $38.63
May 11, 1994 $29.13 $33.00
9
BB&T Financial Common Stock is traded in the over-the-counter market and the
shares are quoted on the Nasdaq/NMS. BB&T Financial has paid regular quarterly
cash dividends since 1921. Although BB&T Financial currently intends to
continue to pay quarterly cash dividends on the BB&T Financial Common Stock,
there can be no assurance that BB&T Financial's dividend policy will remain
unchanged after completion of the Merger. The declaration and payment of
dividends thereafter will depend upon business conditions, operating results,
capital and reserve requirements and the BB&T Financial Board of Directors'
consideration of other relevant factors.
LSB Common Stock is traded in the over-the-counter market and the shares are
quoted on the Nasdaq. LSB paid quarterly cash dividends per share totaling
$.60, $.61 and $.65 per year in fiscal years 1991, 1992 and 1993, respectively.
However, there can be no assurance that dividends would be paid in the future.
The declaration, payment and amount of any such future dividends would depend
upon business conditions, operating results, capital and reserve requirements,
regulatory authorizations and the consideration of other relevant factors by
the LSB Board of Directors. See "MARKET PRICES AND DIVIDENDS."
LSB stockholders are advised to obtain current market quotations for BB&T
Financial Common Stock. The market price of BB&T Financial Common Stock on the
Effective Date may be higher or lower than the market price at the time the
Merger Agreements were executed, at the date of mailing this Proxy
Statement/Prospectus or at the time of the Special Meeting. Fluctuations in the
market price of the BB&T Financial Common Stock might affect the Exchange Ratio
and, thus, the value received for each share of LSB Common Stock. Between the
date of the Reorganization Agreement and May 11, 1994, the closing price of
BB&T Financial Common Stock has ranged from a high of $33.88 per share to a low
of $28.63 per share.
CERTAIN DIFFERENCES IN RIGHTS OF STOCKHOLDERS
Upon completion of the Merger, stockholders of LSB will become stockholders
of BB&T Financial and their rights as such will be governed by North Carolina
law and BB&T Financial's Amended Articles of Incorporation and By-laws. The
rights of the stockholders of BB&T Financial are different in some respects
from the rights of stockholders of LSB. See "DESCRIPTION OF BB&T FINANCIAL
COMMON STOCK TO BE ISSUED IN THE MERGER AND COMPARISON OF STOCKHOLDERS'
RIGHTS."
THE SHARES OF BB&T FINANCIAL COMMON STOCK TO BE ISSUED IN THE MERGER ARE NOT
DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
10
RECENT FINANCIAL DATA
For the three months ended March 31, 1994, net income for BB&T Financial was
$25.7 million or $.79 per share (on a fully-diluted basis), compared with $22.9
million or $.73 per share for the same period in 1993. As of March 31, 1994 and
1993, BB&T Financial had total assets of $9.24 billion and $7.49 billion,
respectively. Total loans were $6.20 billion at March 31, 1994, compared with
$5.18 billion at March 31, 1993. Deposits totalled $6.84 billion and $6.06
billion, respectively, on March 31, 1994 and 1993.
For the three months ended March 31, 1994, net income for LSB was $1.35
million or $.43 per share (on a fully-diluted basis), compared with $1.69
million or $.55 per share for the same period in 1993. As of March 31, 1994 and
1993, LSB had total assets of $721.59 million and $660.74 million,
respectively. Total loans were $387.49 million and $371.86 million at March 31,
1994 and 1993, respectively, and deposits at such dates totalled $594.58
million and $562.58 million, respectively.
The following tables set forth certain unaudited financial data for BB&T
Financial and LSB, respectively. In the opinion of the respective managements
of BB&T Financial and LSB, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the financial position and
results of operations for such unaudited periods have been included. The
financial position and results of operations for the periods ended March 31,
1994 are not necessarily indicative of operations that may be expected in
future periods.
11
BB&T FINANCIAL
RECENT FINANCIAL HIGHLIGHTS(/1/)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
AT OR FOR THE
THREE MONTHS ENDED
MARCH 31,
----------------------
1994 1993
---------- ----------
SUMMARY OF OPERATIONS
Interest income......................................... $ 149,063 $ 131,033
Interest expense........................................ 62,727 55,074
---------- ----------
Net interest income................................... 86,336 75,959
Provision for loan losses............................... 3,350 5,303
Noninterest income...................................... 30,990 25,656
Noninterest expense..................................... 74,940 62,588
Income tax expense...................................... 13,308 10,872
---------- ----------
Net income............................................ $ 25,728 $ 22,852
========== ==========
PER SHARE DATA
Net income
Primary............................................... $ .79 $ .76
Fully diluted......................................... .79 .73
Cash dividends paid..................................... .27 .25
Book value.............................................. 23.02 21.82
Closing market price.................................... 29.13 33.88
SELECTED PERIOD END BALANCES
Assets.................................................. $9,238,534 $7,487,929
Securities(2)........................................... 2,377,483 1,743,457
Loans................................................... 6,204,662 5,178,850
Earning assets.......................................... 8,619,969 6,941,166
Deposits................................................ 6,838,184 6,057,227
Interest-bearing liabilities............................ 7,625,359 6,061,198
Shareholders' equity(3)................................. 741,002 647,555
RATIOS
Performance Ratios (Annualized)
Return on average assets.............................. 1.15% 1.27%
Return on average equity.............................. 14.03 14.75
Net interest margin, taxable equivalent............... 4.25 4.72
Capital Ratios
Risk-based capital ratios
Tier 1 capital...................................... 12.03% 12.72%
Total capital....................................... 13.29 15.44
Equity to assets...................................... 8.02 8.65
- --------
(1) BB&T Financial completed the acquisitions of First Fincorp, Inc., Kinston,
NC, Carolina Savings Bank, Wilmington, NC, Edenton Savings and Loan
Association, Edenton, NC, Mutual Savings, Old Stone Bank of North Carolina,
High Point, NC, and Citizens-Mooresville on February 24, 1993, May 18,
1993, May 18, 1993, October 29, 1993, November 24, 1993 and December 23,
1993, respectively, in transactions accounted for as purchases.
(2) Includes securities available for sale of $2,282,916 and $422,050 on March
31, 1994 and 1993, respectively.
(3) Includes net unrealized losses on securities available for sale of $8,744,
net of tax, on March 31,1994.
12
LSB
RECENT FINANCIAL HIGHLIGHTS(/1/)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
AT OR FOR THE
THREE MONTHS
ENDED MARCH 31,
------------------
1994 1993
-------- --------
SUMMARY OF OPERATIONS
Interest income............................................. $ 11,496 $ 11,566
Interest expense............................................ 4,549 4,484
-------- --------
Net interest income....................................... 6,947 7,082
Provision for loan losses................................... 380 440
Noninterest income.......................................... 2,066 1,563
Noninterest expense......................................... 6,712 5,826
Income tax expense.......................................... 569 682
-------- --------
Net income................................................ $ 1,352 $ 1,697
======== ========
PER SHARE DATA
Net income
Primary................................................... $ .43 $ .55
Fully diluted............................................. .43 .55
Cash dividends paid......................................... .17 .16
Book value.................................................. 17.31 15.89
Closing market price........................................ $ 33.00 $ 19.00
SELECTED PERIOD END BALANCES
Assets...................................................... 721,596 660,746
Securities(2)............................................... 252,962 203,229
Loans, net.................................................. 387,490 371,864
Earning assets.............................................. 645,052 601,343
Deposits.................................................... 594,584 562,587
Interest-bearing liabilities................................ 663,744 608,127
Shareholders' Equity(3)..................................... 54,034 49,067
RATIOS
Performance Ratios (Annualized)
Return on average assets.................................. .75% 1.04%
Return on average equity.................................. 9.99% 14.30%
Net interest margin, taxable equivalent................... 4.43% 5.00%
Capital Ratios
Equity to assets............................................ 7.49% 7.43%
- --------
(1) LSB acquired Dorn on December 16, 1993 in a transaction accounted for as a
pooling-of-interests.
(2) Includes securities available for sale.
(3) Includes net unrealized losses on securities available for sale of $481, net
of tax on March 31, 1994.
13
SELECTED FINANCIAL DATA
The following table presents selected historical financial information of
BB&T Financial and LSB and selected combined pro forma financial information
for BB&T Financial and LSB. This information is derived from the historical
financial statements of BB&T Financial and LSB. The information for BB&T
Financial and LSB set forth below should be read in conjunction with such
historical financial statements and the notes thereto either contained
elsewhere in this Proxy Statement/Prospectus or incorporated herein by
reference.
The selected combined pro forma financial information showing the combined
results of BB&T Financial and LSB is provided for informational purposes only.
It is not necessarily indicative of actual results that would have been
achieved had the Merger been consummated on the dates or at the beginning of
the periods presented, nor is it necessarily indicative of future results. For
additional pro forma information, including pro forma results of additional
acquisitions by BB&T Financial, see "FULLY PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS."
AT OR FOR THE FISCAL YEARS ENDED DECEMBER
31,
--------------------------------------------
1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
BB&T FINANCIAL
INCOME DATA
(thousands)
Total interest and noninterest
income......................... $670,660 $633,476 $648,520 $613,410 $606,528
Net income...................... 98,236 76,482 64,719 56,798 48,836
PERIOD-END BALANCE SHEET ITEMS
(millions)
Assets.......................... $ 9,173 $ 7,280 $ 6,830 $ 5,686 $ 5,721
Earning assets.................. 8,596 6,817 6,390 5,302 5,194
Deposits........................ 6,995 5,842 5,719 4,872 4,706
Long-term debt.................. 347 123 116 102 115
Stockholders' equity............ 744 606 533 417 370
PER SHARE DATA
Net income...................... $ 3.10 $ 2.65 $ 2.50 $ 2.36 $ 2.09
Fully diluted income............ 3.05 2.54 2.38 2.26 2.00
Cash dividend declared.......... 1.02 .91 .85 .81 .74
Book value, end of period....... 22.89 21.05 19.16 17.50 16.38
AVERAGE SHARES OUTSTANDING
(thousands)
Primary......................... 31,724 28,849 25,932 24,033 22,497
Fully diluted................... 32,293 30,885 27,928 25,971 24,441
Shares outstanding--ending...... 32,476 28,810 27,802 23,821 22,594
LSB
INCOME DATA
(thousands)
Total interest and noninterest
income......................... $ 54,143 $ 53,689 $ 53,867 $ 53,562 $ 48,386
Net income...................... 6,776 6,139 3,616 4,511 4,179
PERIOD-END BALANCE SHEET ITEMS
(millions)
Assets.......................... $ 700 $ 651 $ 561 $ 518 $ 483
Earning assets.................. 641 589 506 470 438
Deposits........................ 571 563 497 453 413
Long-term debt.................. 8 4 2 2 1
Stockholders' equity............ 55 48 43 40 37
14
SELECTED FINANCIAL DATA (CONTINUED)
AT OR FOR THE FISCAL YEARS ENDED DECEMBER 31,
--------------------------------------------
1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
LSB (CONTINUED)
PER SHARE DATA
Net income...................... $ 2.19 $ 2.00 $ 1.19 $ 1.49 $ 1.39
Fully diluted income............ 2.19 2.00 1.19 1.49 1.39
Cash dividend declared.......... .65 .61 .60 .60 .55
Book value, end of period....... 17.61 15.47 14.03 13.36 12.37
AVERAGE SHARES OUTSTANDING
(thousands)
Primary......................... 3,094 3,062 3,040 3,018 3,002
Fully diluted................... 3,094 3,062 3,040 3,018 3,002
Shares outstanding--ending...... 3,115 3,077 3,053 3,030 3,010
PRO FORMA COMBINED
INCOME DATA
(thousands)
Total interest and noninterest
income......................... $724,803 $687,165 $702,405 $666,972 $654,914
Net income...................... 105,012 82,621 68,335 61,309 53,015
PERIOD-END BALANCE SHEET ITEMS
(millions)
Assets.......................... $ 9,873 $ 7,931 $ 7,391 $ 6,204 $ 6,204
Earning assets.................. 9,233 7,406 6,896 5,772 5,632
Deposits........................ 7,566 6,405 6,216 5,325 5,119
Long-term debt.................. 351 127 118 104 116
Stockholders' equity............ 799 654 576 457 407
PER SHARE DATA
Net income...................... $ 2.94 $ 2.52 $ 2.29 $ 2.19 $ 2.01
Fully diluted income............ 2.90 2.42 2.20 2.12 1.94
Cash dividend declared.......... 1.02 .91 .85 .81 .74
Book value, end of period....... 20.34 18.93 16.18 15.67 14.72
AVERAGE SHARES OUTSTANDING
(thousands)
Primary......................... 35,743 32,825 29,881 27,952 26,396
Fully diluted................... 36,311 34,862 31,876 29,890 28,340
Shares outstanding--ending...... 36,522 32,806 31,767 27,756 26,503
15
COMPARATIVE PER SHARE DATA
The following table presents at the dates and for the periods indicated (i)
certain historical and pro forma combined per share data for BB&T Financial
Common Stock after giving effect to the Merger and (ii) certain historical and
pro forma data for LSB Common Stock. The pro forma financial data is presented
using the pooling-of-interests method of accounting and the application of the
assumed market price of $29.00 per share of BB&T Financial Common Stock and an
Exchange Ratio of 1.2987 shares of BB&T Financial Common Stock for each share
of LSB Common Stock. The data presented should be read in conjunction with the
historical financial statements and the related notes thereto included
elsewhere herein or incorporated herein by reference and in conjunction with
the pro forma combined condensed financial information included elsewhere
herein. The data is not necessarily indicative of actual results that would
have been achieved had the Merger been consummated at the beginning of the
periods presented and is not indicative of future results.
BB&T
HISTORICAL FINANCIAL LSB
--------------------- COMBINED EQUIVALENT
BB&T FINANCIAL LSB PRO FORMA PRO FORMA
-------------- ------ --------- ----------
PRIMARY EARNINGS PER SHARE
Years Ended
1993.............................. $ 3.10 $ 2.19 $ 2.94 $ 3.82
1992.............................. 2.65 2.00 2.52 3.27
1991.............................. 2.50 1.19 2.29 2.97
FULLY DILUTED EARNINGS PER SHARE
Years Ended
1993.............................. $ 3.05 $ 2.19 $ 2.90 $ 3.77
1992.............................. 2.54 2.00 2.42 3.14
1991.............................. 2.38 1.19 2.20 2.86
CASH DIVIDENDS DECLARED PER SHARE
Years Ended
1993.............................. $ 1.02 $ .65 $ 1.02 $ 1.32
1992.............................. .91 .61 .91 1.18
1991.............................. .85 .60 .85 1.10
BOOK VALUE PER SHARE
Years Ended
1993.............................. $22.89 $17.61 $20.34 $26.42
1992.............................. 21.05 15.47 18.93 24.58
1991.............................. 19.16 14.03 16.18 21.01
16
INFORMATION CONCERNING THE SPECIAL MEETING
GENERAL
This Proxy Statement/Prospectus is being furnished to the stockholders of LSB
as of the Record Date, April 25, 1994, and is accompanied by a form of proxy
which is solicited by the LSB Board of Directors for use at the Special Meeting
of LSB's stockholders to be held on June 14, 1994, at 4:00 p.m., in the
Operations Center Meeting Room of Lexington, 113 Reed Avenue, Lexington, South
Carolina, and any adjournment thereof. At the Special Meeting, stockholders
will vote on whether to approve the Merger Agreements. Proxies may be voted on
such other matters as may properly come before the Special Meeting, or any
adjournment thereof, in the best judgment of the proxy holders named therein.
Holders of LSB Common Stock are requested to complete, date and sign the
accompanying proxy and return it promptly to LSB in the enclosed postage-paid
envelope.
RECORD DATE, VOTING RIGHTS AND VOTE REQUIRED
Only the holders of LSB Common Stock on the Record Date are entitled to
receive notice of and to vote at the Special Meeting and at any adjournments
thereof. On the Record Date, there were 3,121,146 shares of LSB Common Stock
outstanding which were held by 2,435 holders of record. Each share of LSB
Common Stock outstanding on the Record Date is entitled to one vote as to each
of the matters submitted at the Special Meeting.
A majority of the shares entitled to be voted at the Special Meeting
constitutes a quorum. If a share is represented for any purpose at the Special
Meeting by the presence of the registered owner or a person holding a valid
proxy for the registered owner, it is deemed to be present for purposes of
establishing a quorum. Therefore, valid proxies which are marked "Abstain" or
"Withhold" or as to which no vote is marked, including proxies submitted by
brokers that are the record owners of shares (so-called "broker non-votes"),
will be included in determining the number of shares present or represented at
the Special Meeting.
APPROVAL OF THE MERGER AGREEMENTS REQUIRES THE AFFIRMATIVE VOTE OF TWO-THIRDS
OF THE OUTSTANDING SHARES OF LSB COMMON STOCK. ACCORDINGLY, PROXIES MARKED
"ABSTAIN" OR SHARES THAT ARE NOT VOTED WILL HAVE THE SAME EFFECT AS VOTES
AGAINST THE MERGER AGREEMENTS.
As of March 8, 1994, the directors and executive officers of LSB and their
affiliates owned a total of 516,510 shares, or 16.58% of LSB Common Stock, all
of which are expected to be voted in favor of the Merger Agreements. Also, as
of the Record Date, one of the directors of BB&T Financial owned 3,155 shares
of LSB Common Stock, all of which are expected to be voted in favor of the
Merger Agreements.
VOTING AND REVOCATION OF PROXIES
The shares of LSB Common Stock represented by properly completed proxies
received at or prior to the time for the Special Meeting will be voted as
directed by the stockholders, unless revoked as described below. If no
instructions are given, executed proxies will be voted "FOR" approval of the
Merger Agreements. If any other matters are properly presented at the Special
Meeting and may be properly voted on, the proxies solicited hereby will be
voted on such matters in accordance with the best judgment of the proxy holders
named therein. However, in such event, voting authority will only be exercised
to the extent permissible under the applicable federal securities laws.
Management is not aware of any other business to be presented at the Special
Meeting. This proxy is being solicited for the Special Meeting called to
consider the Merger Agreements and any adjournment(s) of the Special Meeting
and will not be used for any other meeting.
The presence of a stockholder at the Special Meeting will not automatically
revoke such stockholder's proxy. A stockholder may, however, revoke a proxy at
any time prior to its exercise by (a) giving written notice of revocation to
LSB, (b) by delivering to LSB a duly executed proxy bearing a later date, or
(c) by voting in person or by a proxy other than the management proxies at the
Special Meeting. Any written notice or proxy revoking a proxy should be sent to
the Secretary of LSB at LSB's main office address prior to the
17
Special Meeting, and will be effective upon receipt by LSB. A proxy will not be
revoked by the death or incapacity of the stockholder executing it unless,
before the shares are voted, notice of such death or incapacity is filed with
the Secretary of LSB or other person authorized to tabulate votes.
SOLICITATION OF PROXIES
LSB will bear the costs of soliciting proxies, except under certain
circumstances. In addition to use of the mails, proxies may be solicited
personally or by telephone or facsimile by directors, officers and other
employees of LSB, who will not be specially compensated for such solicitation
activities. Arrangements also will be made with brokerage houses and other
custodians, nominees and fiduciaries for the forwarding of solicitation
materials to the beneficial owners of shares held of record by such persons,
and such persons will be reimbursed for their reasonable expenses incurred in
that connection by LSB. LSB may utilize the services of a proxy soliciting firm
in connection with the solicitation of proxies in connection with the Special
Meeting but does not expect the fees relating to such services to exceed
$10,000.
No person is authorized to give any information or to make any representation
not contained or incorporated by reference in this Proxy Statement/Prospectus
and, if given or made, such information or representation should not be relied
upon as having been authorized by LSB, BB&T Financial or any other person. The
delivery of this Proxy Statement/Prospectus will not, under any circumstances,
create any implication that there has been no change in the affairs of LSB or
BB&T Financial since the date of this Proxy Statement/Prospectus.
RECOMMENDATION
THE LSB BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENTS AND
BELIEVES THAT THE PROPOSED TRANSACTION IS FAIR TO AND IN THE BEST INTERESTS OF
LSB AND ITS STOCKHOLDERS. THE LSB BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT LSB'S STOCKHOLDERS VOTE FOR APPROVAL OF THE MERGER AGREEMENTS.
THE MERGER
The following summary of certain terms and provisions of the Reorganization
Agreement and Plan of Merger is qualified in its entirety by reference to each
of the Merger Agreements, which are incorporated by reference herein and are
attached hereto as Appendices I and II.
BACKGROUND OF AND REASONS FOR THE REORGANIZATION AGREEMENT
Background. In the years following BB&T Financial's entry in 1987 into the
South Carolina market by the acquisition of Community Bank in Greenville, South
Carolina, executives of BB&T Financial and LSB from time to time had general
and informal conversations with each other regarding the possibility of a
business combination of BB&T Financial and LSB. During May and June 1991, John
A. Allison IV and Raymond S. Caughman, the Chief Executive Officers of BB&T
Financial and LSB, respectively, at Mr. Allison's initiative, more specifically
discussed their potential interest in exploring a possible merger. Such
discussions, however, were terminated by June 11, 1991.
Subsequently, in June 1992, Mr. Allison approached Mr. Caughman and began
discussion of a possible merger. These talks resulted in a proposal being made
to LSB by BB&T Financial in July 1992. LSB thereafter announced that it was
engaging in possible merger discussions and received proposals from other
potential merger partners as well. After reviewing the various proposals and
options open to LSB, the LSB Board of Directors concluded that, at that time,
it would be in the best interests of LSB and its stockholders not to enter into
a merger but rather to remain independent. Termination of merger discussions by
LSB was publicly announced in August 1992.
18
Following occasional contacts between the respective Chief Executive Officers
after August 1992, in July 1993, Mr. Caughman and Mr. Allison conferred by
telephone regarding the possibility of resuming merger discussions and Mr.
Caughman met with Mr. Allison and others in Wilson, North Carolina on July 28,
1993. Mr. Allison indicated that, although BB&T Financial had a general
interest in reopening discussions, it did not wish to do so at that time.
In August 1993, LSB requested that Carson Medlin identify for it potential
merger partners and estimate the exchange ratios or prices that each of those
partners could reasonably be expected to pay in a business combination with
LSB. Carson Medlin identified a number of potential partners based on its
experience and publicly available information.
In October 1993, Mr. Allison contacted Mr. Caughman specifically to reiterate
BB&T Financial's interest in exploring the possibility of resuming discussions
regarding a potential business combination between the two companies. In the
following weeks, preliminary discussions and exchanges of information between
the managements of LSB and BB&T Financial occurred. In early November 1993,
BB&T Financial made a proposal containing the major terms of the Reorganization
Agreement for the acquisition of LSB. The LSB Board of Directors concluded that
the proposal contained terms that might constitute an acceptable offer. LSB
then engaged Carson Medlin to contact other prospects to determine the
existence of other interests in a merger or acquisition transaction and provide
other financial advice. During the week of November 23, 1993, further
discussions regarding the potential terms and conditions of a possible
transaction with BB&T Financial were held. Carson Medlin reported that it did
not believe that another transaction with more favorable terms to LSB and its
stockholders could be obtained at that time. Intensive negotiations between the
managements of BB&T Financial and of LSB, with the assistance of their
respective legal advisers and LSB's financial adviser, were conducted from
November 30, 1993 through December 6, 1993.
On December 3, 1993 the Executive Committee of the LSB Board of Directors met
and considered, with the advice and assistance of LSB's management and legal
and financial advisers, the proposed transaction and voted to recommend the
transaction to the LSB Board of Directors. At a meeting of the LSB Board of
Directors on December 6, 1993, the management of LSB, as well as LSB's legal
and financial advisers, reviewed for the LSB Board of Directors, among other
things, a summary of management's due diligence findings and the terms of the
Merger Agreements and the Option Agreement. Based upon that review and after
receiving the advice of Carson Medlin and consideration of various other
factors, the LSB Board of Directors unanimously approved and authorized the
execution and adoption of the Merger Agreements and the Option Agreement. LSB
executed the Reorganization Agreement and the Option Agreement on December 7,
1993.
At a meeting of the BB&T Financial Board of Directors held on November 23,
1993, management of BB&T Financial reviewed for the BB&T Financial Board of
Directors a summary of the terms of the proposed agreements, among other
things. Based on those recommendations and consideration of various other
factors, the BB&T Financial Board of Directors unanimously approved and
authorized execution and adoption of the Merger Agreements and the Option
Agreement.
LSB Reasons. In reaching its determination that the Merger and Reorganization
Agreement are fair to, and in the best interests of, LSB and its stockholders,
the LSB Board of Directors consulted with its legal and financial advisers, as
well as with LSB management, and considered a number of factors, including,
without limitation, the following:
(i) the LSB Board of Directors' familiarity with and review, based in
part on the preliminary analysis of management consultants, of LSB's
business, operations, earnings, managerial requirements and resources,
prospects and financial condition;
(ii) the LSB Board of Directors' review, based in part on the analysis of
Carson Medlin and a presentation by LSB management regarding its due
diligence on BB&T Financial, of the business, operations, earnings and
financial condition of BB&T Financial on both an historical and a
prospective
19
basis, the enhanced opportunities for operating efficiencies (particularly
in terms of integration of operations and support functions) that could
result from the Merger, the enhanced opportunities for growth that the
Merger would make possible and the respective contributions the parties
would bring to a combined institution;
(iii) the commitments of BB&T Financial to retain LSB employees and to
make substantial contributions in the communities served by LSB;
(iv) the financial advice of Carson Medlin, LSB's financial adviser, and
the opinion of Carson Medlin that the Exchange Ratio of BB&T Financial
Common Stock for each share of LSB Common Stock set forth in the Merger
Agreements was fair to the LSB stockholders from a financial point of view;
(v) the LSB Board of Directors' belief that the terms of the Merger
Agreements are attractive in that the agreements allow LSB stockholders to
become stockholders in BB&T Financial, an institution which the LSB Board
of Directors determined was consistently ranked at or near the top of its
peer group of regional bank holding companies in terms of asset quality,
reserve coverage, capital adequacy and profitability;
(vi) the LSB Board of Directors' review, based in part on the advice of
Carson Medlin, of alternatives to the Merger, including the alternatives of
remaining independent and growing internally, remaining independent for a
period of time and then selling the company, and remaining independent and
growing through future acquisitions;
(vii) the LSB Board of Directors' review, based in part on the advice of
Carson Medlin, of possible affiliation partners for LSB other than BB&T
Financial, the prospects of such other possible affiliation partners, the
likelihood of any such affiliation, and the fact that none of the other
potential partners contacted by Carson Medlin expressed a present interest
in a transaction with terms as favorable as the BB&T Financial proposal;
(viii) the LSB Board of Directors' belief, based upon an analysis of the
anticipated financial effects of the Merger, that upon consummation of the
Merger, BB&T Financial and its bank subsidiaries would be well capitalized
institutions, the financial positions of which would be well in excess of
all applicable regulatory capital requirements;
(ix) the LSB Board of Directors' belief, based upon an analysis of the
anticipated financial effects of the Merger, that BB&T Financial would be
able to continue to pay dividends at its current rate which would, under
the projected Exchange Ratio, result in a substantial increase in dividend
income to LSB stockholders;
(x) the LSB Board of Directors' belief that, in light of the reasons
discussed above, the respective geographic areas in which LSB and BB&T
Financial operate and the similarity in business outlook and approach and
corporate cultures between BB&T Financial and LSB, BB&T Financial was the
most attractive choice as a long term affiliation partner for LSB;
(xi) the expectation that the Merger will generally be a tax-free
transaction to LSB and its stockholders and that the Merger will be
accounted for under the pooling-of-interests method of accounting (see "--
Certain Income Tax Consequences of the Merger" and "--Accounting
Treatment");
(xii) the current and prospective economic environment, competitive
constraints and regulatory burdens facing financial institutions, including
LSB; and
(xiii) the LSB Board of Directors' appraisal of the benefits of the
Merger to the employees of LSB and the communities served by LSB.
The LSB Board of Directors did not assign any specific or relative weight to
the factors in their consideration.
20
The LSB Board of Directors met on May 11, 1994, and after considering the
matter and receiving the advice of Carson Medlin, concluded that the Merger and
the Merger Agreements remained in the best interest of LSB and its stockholders
and recommended that LSB stockholders vote for approval of the Reorganization
Agreement.
OPINION OF FINANCIAL ADVISER
Carson Medlin has acted as financial adviser to LSB in connection with the
Merger, and has rendered its written opinion to the LSB Board of Directors that
the Exchange Ratio is fair, from a financial point of view, to the stockholders
of LSB. No limitations were imposed by the LSB Board of Directors upon Carson
Medlin with respect to the investigation made or procedures followed by it in
rendering its opinion. Carson Medlin initially delivered its opinion orally at
the December 6, 1993 meeting of the LSB Board of Directors. Thereafter, on
January 8, 1994, it delivered a written opinion, dated December 6, 1993, which
restated the oral opinion. Subsequently, Carson Medlin updated its written
opinion as of April 22, 1994. The full text of Carson Medlin's updated written
opinion is attached as Appendix V to this Proxy Statement/Prospectus and should
be read in its entirety with respect to the procedures followed, assumptions
made, matters considered and qualifications and limitations on the review
undertaken by Carson Medlin in connection therewith.
Carson Medlin's opinion is directed to the LSB Board of Directors only and
relates only to the Exchange Ratio and does not constitute a recommendation to
any LSB stockholder as to how such stockholder should vote at the Special
Meeting or as to any other matter. The summary of the opinion of Carson Medlin
set forth in this Proxy Statement/Prospectus is qualified in its entirety by
reference to the full text of such opinion attached as Appendix V.
In connection with rendering its opinion to the LSB Board of Directors,
Carson Medlin performed a variety of financial analyses. However, the
preparation of a fairness opinion involves various determinations as to the
most appropriate and relevant methods of financial analysis and the application
of those methods to the particular circumstances, and, therefore, such an
operation is not readily susceptible to partial analysis or summary
description. Carson Medlin believes that its analyses must be considered
together as a whole and that selecting portions of such analyses and the
factors considered therein, without considering all other factors and analyses,
could create an incomplete view of the analyses and the process underlying
Carson Medlin's opinion. In its analyses, Carson Medlin made numerous
assumptions with respect to industry performance, business and economic
conditions, and other matters, many of which are beyond LSB's or BB&T
Financial's control and which may not be realized. Any estimates contained in
Carson Medlin's analyses are not necessarily predictive of future results or
values, which may be significantly more or less favorable than such estimates.
Estimates of values of companies do not purport to be appraisals or necessarily
reflect the prices at which such companies or their securities may actually be
sold. None of the analyses performed by Carson Medlin were assigned a greater
significance by Carson Medlin than any other.
Carson Medlin has relied, without independent verification, upon the accuracy
and completeness of all of the financial and other information reviewed by it
for purposes of rendering its opinion. Carson Medlin assumed that the financial
forecasts reviewed by it, including without limitation, projected synergies and
savings resulting from the Merger, have been reasonably prepared on a basis
reflecting the best currently available judgments and estimates of the
management of LSB and that such projections will be realized in the amounts and
at the times contemplated thereby. Carson Medlin did not make an independent
evaluation or appraisal of the assets and liabilities of LSB or BB&T Financial
or any of their subsidiaries and has not been furnished with any such
evaluation of loan portfolios, underperforming or nonperforming assets, net
loan charge-offs, or the adequacy of allowances for losses with respect
thereto, has not reviewed any individual credit files, and has assumed that
such allowances of each of LSB and BB&T Financial are in the aggregate adequate
to cover such losses.
Carson Medlin assumed that the Merger will be recorded as a pooling-of-
interests under generally accepted accounting principles. Carson Medlin's
opinion is necessarily based on economic, market and other conditions as in
effect on, and the information made available to it as of, the date of its
analyses.
21
In connection with rendering its opinion, Carson Medlin reviewed (i) the
Merger Agreements; (ii) the Option Agreement; (iii) this Proxy
Statement/Prospectus; (iv) the Annual Reports to stockholders, including the
audited financial statements of LSB, and the Annual Reports on Form 10-K of
BB&T Financial, for the five years ended December 31, 1993; and (v) certain
financial and operating information with respect to the business, operations
and prospects of LSB and BB&T Financial. Carson Medlin also: (a) held
discussions with members of the senior managements of LSB and BB&T Financial
regarding the past and current business operations, financial condition and
future prospects of their respective companies; (b) reviewed the historical
market prices and trading activity for the common stocks of LSB and BB&T
Financial and compared them with those of certain publicly traded companies
which it deemed to be relevant; (c) compared the results of operations of LSB
and BB&T Financial with those of certain banking companies which it deemed to
be relevant; (d) compared the proposed financial terms of the Merger with the
financial terms, to the extent publicly available, of certain other recent
business combinations in the commercial banking industry; (e) analyzed the pro
forma financial impact of the Merger on BB&T Financial; and (f) conducted such
other studies, analyses, inquiries and examinations as Carson Medlin deemed
appropriate.
The following is a summary of selected analyses performed by Carson Medlin in
connection with its opinion.
1. Stock Trading History. Carson Medlin examined the history of the trading
prices and volume for LSB Common Stock and BB&T Financial Common Stock and the
relationship between movements of such common stock prices and movements in the
S&P 500 Index, the CMC Independent Bank Index maintained by Carson Medlin,
Carson Medlin's composites of twenty southeastern regional bank holding
companies ("CMC BHC20") and Carson Medlin's index of thirty-one southeastern
publicly-traded bank holding companies ("CMC BHC31").
This analysis showed that for the 5 year period ending December 31, 1993, the
increase in the market value of BB&T Financial Common Stock (including the
reinvestment of cash dividends) was 135% compared to an increase (including
dividend reinvestment) in the S&P 500 Index of 97%.
In the period from March 31, 1992 to December 31, 1993, BB&T Financial Common
Stock market value increased from 145% of book value to 147% of book value.
During that same period the average price of the companies in the CMC BHC20
increased from 151% of book value to 165% of book value. As of December 31,
1993 price-to-book ratios among those twenty companies ranged from 144% to 251%
of book value. BB&T Financial Common Stock, at 147% of book value, was priced
below average in the market for the major southeastern regional bank holding
companies at December 31, 1993.
As of December 31, 1993 the CMC BHC20 had an average market price of 10.3
times trailing 12 months earnings. The price/earnings multiple for BB&T
Financial Common Stock was 12.9 times. At that time the ratio of the indicated
annual dividend to market price (or dividend yield) for the CMC BHC20 was 3.3%.
BB&T Financial's dividend yield was 3.2%. BB&T Financial Common Stock was
trading at a higher price/earnings multiple but had a lower dividend yield
compared to the average in the market for the major southeastern regional bank
holding companies at December 31, 1993.
Carson Medlin also compared the recent changes in price of BB&T Financial
Common Stock to the changes in stock prices of a broader group of thirty-one
southeastern publicly-traded banking companies (CMC BHC31). From the period
December 31, 1991 through December 31, 1993, BB&T Financial Common Stock
(excluding dividends) increased 49.4%, from $22.25 per share to $33.25 per
share. During the same period the CMC BHC31 increased by 63.2% on average. BB&T
Financial Common Stock has increased significantly in market price in recent
periods, but at a rate less than the average southeastern publicly-traded bank.
22
Carson Medlin examined the recent trading volume in BB&T Financial Common
Stock, which trades on the Nasdaq/NMS. Carson Medlin considers BB&T Financial
Common Stock to be liquid and marketable in comparison with other major
regional bank holding companies.
Carson Medlin also examined the trading prices and volumes of LSB Common
Stock. That analysis showed that for the 5 year period ending December 31,
1993, the increase in the market value (including reinvestment of cash
dividends) of LSB Common Stock was 188%, more than the 135% increase in BB&T
Financial Common Stock and considerably more than the 66% increase in the CMC
Independent Bank Index, which includes 21 community banks in the Southeast. It
should be noted that in the second half of 1993, there was a significant
increase in LSB's Common Stock price that reflected speculation over a
potential acquisition of LSB and the announcement prior to the year-end of the
Merger. If the LSB Common Stock price had remained at the June 30 level through
year end, the increase in the price of LSB Common Stock over the five-year
period would have been somewhat less than the increase in the price of BB&T
Financial Common Stock over the same period.
Carson Medlin examined the recent trading volume in LSB Common Stock, which
trades on the Nasdaq/NMS. However, because of LSB's relatively small market
capitalization, LSB Common Stock has less liquidity than other major regional
bank holding companies but more liquidity than those community banks not traded
in the public markets. Carson Medlin therefore examined in more detail certain
data on the stock prices of independent banks in the Southeast ("SIBR Banks")
during the period 1991 to 1993. The data were obtained from Carson Medlin's
Southeastern Independent Bank Review (TM) (the "Bank Review"), a proprietary
research publication published quarterly since 1991.
During the four quarters ending December 31, 1993, the ratio of stock price
to latest year-to-date earnings (annualized) for SIBR banks in the six state
southeastern region was: low 10.5x, high 11.9x, mean 11.1x. For SIBR banks in
South Carolina only, the price to earnings ratio during the four quarters was:
low 10.5x, high 12.2x, mean 11.7x.
During the four quarters ending December 31, 1993, the stock prices as a
percentage of book value for SIBR banks in the Southeast was: low 136%, high
140%, mean 138%. For SIBR banks in South Carolina only, the price to book ratio
during the four quarters was: low 123%, high 139%, mean 131%.
During the four quarters ending December 31, 1993, the stock price as a
percentage of assets for SIBR banks in the Southeast was: low 12.4%, high
13.5%, mean 13.0%. For SIBR banks in South Carolina only, the price as a
percentage of assets during the four quarters was: low 8.0%, high 9.1%, mean
8.5%.
The price ratios described above provided Carson Medlin a basis for analyzing
the purchase price of LSB. Those ratios are considered reasonably close
approximations of the "trading value" of LSB. With that analysis, Carson Medlin
further considered the difference in acquisition prices to pre-announcement
stock prices in recent bank acquisitions. To derive this typical "control
premium," Carson Medlin analyzed announced merger transactions of commercial
banks in the Southeast of from $100 million to $1.5 billion in assets in the
period January 1, 1991 to December 31, 1993 and found that buyout prices were
on average approximately 30% above pre-announcement market prices.
The following LSB financial data are relevant in analyzing the purchase price
of LSB: tangible book value (before unrealized securities gains) and total
assets at December 31, 1993 and 1993 net income. Using the recent mean trading
price ratios for SIBR banks and a 30% control premium, which are described
above, LSB financial data indicate the following valuation conclusions about
LSB.
23
MEAN PRICE LSB
RATIOS RECENT CONTROL
LSB SIBR CONTROL DERIVED
12/31/93 BANKS PREMIUM VALUATION
--------------- ---------- ------- --------------
Tangible book value........... $53.472 million 138% 30% $ 95.9 million
Net Income, 1993.............. $ 6.776 million 11.1x 30% $ 97.8 million
Total Assets.................. $ 700 million 13.0% 30% $118.3 million
Carson Medlin's analysis using the application of a control premium to the
trading values of comparable community banks indicates a valuation range of
$95.9 to $118.3 million. The announced purchase price of LSB of $126.5 million
(assuming a BB&T Financial Average Closing Price of $30.50 per share or higher
and LSB stockholders' equity of $56.2 million as of the month ended prior to
the Effective Date) falls above the high end of this range.
2. Comparable Transaction Analysis. Carson Medlin reviewed a group of
transactions involving the acquisition of selected financial institutions with
characteristics comparable to LSB. In particular, Carson Medlin examined the
terms of the acquisition of 116 commercial banks in Alabama, Florida, Georgia,
North Carolina, South Carolina, Tennessee and Virginia announced in the period
from January 1, 1991 to December 31, 1993. Carson Medlin considered, among
other factors, the earnings, capital level, asset size and quality of assets of
the acquired banks. Carson Medlin compared the transaction prices to trailing
four quarters earnings, stated book value and total assets and compared the
core deposit premiums (the purchase premiums over stated book value to core
deposits).
Carson Medlin determined that of the 116 transactions considered, the
acquisitions of those 10 banks with total assets of from $100 to $1,500 million
in which high premiums (generally those exceeding 200% of book value) were paid
were the most comparable to the acquisition of LSB. In these particular
transactions, multiples of trailing four quarters earnings ranged from a low of
7.9x to a high of 22.1x, with a mean of 16.3x. The multiple of LSB's 1993
earnings implied by the terms of the Merger Agreements, assuming a market value
of BB&T Financial Common Stock of $30.50 per share or higher and LSB
stockholders' equity of $56.2 million as of the month ended prior to the
Effective Date, is 18.7x, well above the mean for the comparable group.
Carson Medlin calculated a range of purchase percentages of stated book value
for the comparable transactions from a low of 168% to a high of 258%, with a
mean of 218%. The multiple of LSB's December 31, 1993 stated book value implied
by the terms of the Merger Agreements, assuming a market value of BB&T
Financial Common Stock of $30.50 per share or higher is 237%, well above the
mean for the comparable group.
Carson Medlin also calculated a range of purchase prices as a percentage of
total assets for the comparable transactions of from a low of 12.3% to a high
of 27.0%, with a mean of 18.2%. The percentage of LSB's total assets at
December 31, 1993 implied by the terms of the Merger Agreements, assuming a
market value of BB&T Financial Common Stock of $30.50 per share or higher and
LSB stockholders' equity of $56.2 million as of the month ended prior to the
Effective Date, is 18.1%, just below the mean for the comparable group.
Finally, Carson Medlin calculated the core deposit premiums (the excess of
purchase price over stockholders' equity) paid in the comparable transactions
and found a range of from a low of 8.3% to a high of 20.0%, with a mean of
12.7%. The premium on LSB's December 31, 1993 core deposits implied by the
terms of the Merger Agreements, assuming a BB&T Financial Average Closing Price
of $30.50 per share or higher and LSB stockholders' equity of $56.2 million as
of the month ended prior to the Effective Date, is 13.9% of core deposits,
above the mean for the comparable group.
3. Comparable Company Analysis. In connection with rendering its opinion,
Carson Medlin compared selected operating and stock market results of LSB to 38
community commercial banks in Alabama, Florida, Georgia, North Carolina, South
Carolina and Virginia. The data were obtained from Carson Medlin's Bank Review.
Carson Medlin compared, among other factors, the profitability, capitalization
and asset quality of LSB to those measures for these financial institutions,
which Carson Medlin considered to be comparable.
24
Carson Medlin also compared selected operating and stock market results of
BB&T Financial to those of 19 regional bank holding companies, including
Barnett Banks, Inc., SunTrust Banks, Inc., First Union Corporation, NationsBank
Corporation, Wachovia Corporation, AmSouth Bancorporation, Compass Bancshares,
Inc., First Alabama Bancshares, Inc., SouthTrust Corporation, Bank South
Corporation, Southern National Corporation, Central Fidelity Banks, Inc.,
Crestar Financial Corp., First Virginia Banks, Inc., Signet Banking
Corporation, First American Corporation (Tennessee), First Tennessee National
Corporation, National Commerce Bancorporation and Union Planters Corporation.
Carson Medlin compared, among other factors, the profitability, capitalization
and asset quality of BB&T Financial to those measures for these bank holding
companies, which ranged in September 30, 1993 market capitalization of from
$460 million to $13,108 million. At the time, BB&T Financial's market
capitalization was $1,046 million.
No company or transaction used in the above Comparable Company or Comparable
Transaction Analyses as a comparison is identical to LSB, BB&T Financial or the
contemplated transaction. Accordingly, an analysis of the results of the
foregoing necessarily involves complex considerations and judgments concerning
differences in financial and operating characteristics of the companies and
other factors that could affect the public trading value of the companies to
which they are being compared. Mathematical analysis (such as determining the
average or median) is not, in itself, a meaningful method of using comparable
company data.
4. Review of Research on BB&T Financial. Carson Medlin reviewed certain
research reports concerning BB&T Financial published in 1993. The investment
firms originating these reports included UBS Securities, Inc., Wheat, First
Securities, Inc., Scott & Stringfellow, Inc., The Robinson-Humphrey Company,
Inc., Value Line, Inc., Alex. Brown & Sons Incorporated, Olde Discount
Corporation, Merrill Lynch & Co., Dean Witter Reynolds, Inc., Raymond James &
Associates, Inc., and Dillon, Read & Co. Inc. Information considered in these
reports by Carson Medlin included, but was not limited to, the authors'
qualitative assessments of BB&T Financial as well as estimates of BB&T
Financial's future profitability. Carson Medlin concluded that these research
reports, considered collectively, were positive regarding BB&T Financial's
operations and future prospects.
5. Pro Forma Merger Analysis. Carson Medlin analyzed certain pro forma
effects on BB&T Financial resulting from consummation of the Merger pursuant to
the terms of the Merger Agreements. The analysis considered the effects of the
consummation of the Merger (accounted for on a pooling-of-interests basis in
accordance with generally acceptable accounting principles); the effects of any
other announced or pending merger transactions, including, without limitation,
those described herein, involving BB&T Financial were not considered. In this
analysis, Carson Medlin assumed that LSB will perform in accordance with the
earnings forecast provided to Carson Medlin by LSB management. The analysis
considered the potential effects of restructuring charges, transaction costs
and cost savings resulting from the Merger.
At the time performed, this analysis indicated that the Merger would be
dilutive to BB&T Financial's estimated 1994 earnings per share, book value per
share as of December 31, 1993 and book value per share estimated as of June 30,
1994 on a pro forma basis. The pro forma merger analysis is based on data that
was available at the time the analysis was performed and should not be
considered as necessarily indicative of the actual impact of the Merger on BB&T
Financial when consummated.
6. Present Value Analysis. Carson Medlin calculated the present value of LSB
Common Stock on the basis of LSB remaining an independent bank, assuming LSB
management's estimate of future earnings and dividends and certain growth rates
in LSB assets and the implied return on assets. The analysis used discount
rates of 13% and 16% and assumed an exit point of 5 years at a price equivalent
to 225% of stockholders' equity. On the basis of these various assumptions,
Carson Medlin calculated a present value of LSB on a stand-alone basis ranging
from $106.3 to $120.8 million.
25
7. Contribution Analysis. According to the terms of the Merger Agreements and
assuming a BB&T Financial Average Closing Price of $30.50, LSB book value of
$56.2 million as of the month ended prior to the Effective Date and shares of
LSB Common Stock outstanding of 3,106,972 as of the Effective Date, the
stockholders of LSB would receive 4,148,572 shares of BB&T Financial Common
Stock. At December 31, 1993, there were 32,476,387 shares of BB&T Financial
Common Stock outstanding (excluding any effects of pending acquisitions, which
effects Carson Medlin considered immaterial). Accordingly, on a pro forma
basis, as of December 31, 1993, holders of LSB would hold 11.3% of the
outstanding shares of BB&T Financial subsequent to the Merger.
Carson Medlin analyzed the contribution of each of LSB and BB&T Financial to
the assets, liabilities and earnings of the pro forma combined company for the
twelve months ending December 31, 1993. During the twelve months ended December
31, 1993, LSB would have contributed 6% of estimated earnings. At December 31,
1993, LSB would have contributed 7% of total assets and stockholders' equity
and 8% of total deposits.
8. Stockholder Claims Analysis. Carson Medlin compared the ownership of one
share of LSB Common Stock to the ownership of 1.3352 shares of BB&T Financial
Common Stock (the Exchange Ratio at announcement, assuming a BB&T Financial
Average Closing Price of $30.50 per share and LSB book value of $56.2 million
as of the month ended prior to the Effective Date) from the perspective of
claims on various balance sheet and income statement accounts. In conducting
these comparisons, Carson Medlin found that LSB holders would, by exchanging
for BB&T Financial Common Stock pursuant to the terms of the Merger Agreements,
have a claim to more in the way of earnings, dividends, book value, market
value, and total assets.
Carson Medlin's opinion was one of many factors taken into consideration by
the LSB Board of Directors in making its determination to approve the Merger
Agreements. The opinion of Carson Medlin does not address the relative merits
of the Merger as compared to any alternative business strategies that might
exist for LSB or the effect of any other business combination in which LSB
might engage.
In a letter agreement dated November 17, 1993, LSB retained Carson Medlin to
act as its financial adviser with respect to the proposed acquisition of LSB by
BB&T Financial or some other third party and to render opinions as to the
fairness, from a financial point of view, of the consideration proposed to be
paid in an acquisition to the stockholders of LSB. Pursuant to such letter
agreement, LSB agreed to pay Carson Medlin $25,000 upon the rendering of its
fairness opinion concurrent with LSB's entering into an agreement to be
acquired and another $25,000 upon the rendering of an updated fairness opinion
for inclusion in LSB's proxy materials. Additionally, LSB agreed to pay Carson
Medlin: (a) an investment advisory fee of $40,000, of which $25,000 was due and
payable only upon acceptance by LSB of an offer, binding or nonbinding letter
of intent or similar expression of interest in effecting an acquisition; (b) a
success fee of 3% of the amount by which the price of an acquisition exceeded a
base price equal to the BB&T Financial proposal as it existed on November 17,
1993; and (c) reimbursement for its reasonable out-of-pocket expenses incurred
in connection with its services, including fees and expenses of its legal
counsel.
Pursuant to a separate letter agreement dated April 22, 1994, LSB has agreed
to indemnify Carson Medlin and its affiliates and their respective partners,
directors, officers, employees, agents and controlling persons against certain
expenses and liabilities, including liabilities under the federal securities
laws.
Carson Medlin is a southeastern regional investment banking firm which is a
member of the National Association of Securities Dealers, Inc., and is
regularly engaged in the valuation of financial institutions and their
securities in connection with mergers and acquisitions, negotiated
underwritings, private placements and valuations for estate, corporate and
other purposes. Carson Medlin has previously served as financial adviser to LSB
in matters other than the Merger. LSB selected Carson Medlin on the basis of
its historical relationship with LSB and its experience as a financial adviser
in mergers and acquisitions of community banks in the southeastern region of
the United States.
26
GENERAL DESCRIPTION OF THE TERMS OF THE MERGER
On the Effective Date of the Merger, holders of LSB Common Stock will receive
a certain number of shares of BB&T Financial Common Stock based upon the
Exchange Ratio, which will depend in turn on the book value of LSB and the BB&T
Financial Average Closing Price as described below. LSB will be merged with and
into BB&T Financial-SC, with BB&T Financial-SC as the surviving entity, and
Lexington and Community will become wholly owned subsidiaries of BB&T
Financial-SC. After the Merger and receipt of required regulatory approvals,
BB&T-SC and Community will be merged into or otherwise consolidated with
Lexington in the Bank Mergers.
All rights, franchises and interests of LSB in and to its property will be
held by BB&T Financial-SC as the surviving entity in the Merger.
Upon consummation of the Merger, BB&T Financial will cause each of the
members of the LSB Board of Directors to become members of the BB&T-SC Board of
Directors and will use its best efforts to cause such members to remain members
of such Board or the Board of the surviving bank of the Bank Mergers until they
reach the age of 70, subject to the fiduciary duties of the members of such
Board of Directors. In addition, BB&T Financial has agreed to cause two members
of the LSB Board of Directors designated by the LSB Board of Directors (the
"LSB Designees") to become members of the BB&T Financial Board of Directors
upon consummation of the Merger and, for a period of five years, subject to
fiduciary duties, to recommend to the nominating committee of the BB&T
Financial Board of Directors the nomination of the LSB Designees (or certain
replacements therefor) for reelection to the BB&T Financial Board of Directors.
The LSB Designees are Raymond S. Caughman and Albert J. Dooley, Sr. See
"MANAGEMENT OF LSB."
The Reorganization Agreement provides that LSB and BB&T Financial will each
bear and pay their own costs and expenses incurred in connection with the
transactions contemplated by the Reorganization Agreement, including fees and
expenses of each party's own financial consultants, accountants and counsel,
except that BB&T Financial and LSB will each bear and pay 50 percent for the
cost of printing this Proxy Statement/Prospectus. BB&T Financial will, however,
reimburse LSB for all reasonable out-of-pocket expenses incurred by LSB in
connection with the transactions contemplated by the Reorganization Agreement
if the Reorganization Agreement is terminated. However, the Reorganization
Agreement further provides that, without in any way limiting other remedies
BB&T Financial may have against LSB or any other person or entity, BB&T
Financial's obligation to reimburse LSB for such expenses will not apply if LSB
materially breaches any provision of the Merger Agreements, the Option
Agreement or the agreement by which the Bank Mergers are to be effected ("Bank
Merger Agreement").
CONVERSION OF LSB COMMON STOCK
At the Effective Date, each share of LSB Common Stock outstanding immediately
prior to the Effective Date will be converted into shares of BB&T Financial
Common Stock and cash in lieu of fractional interests. Stockholders of LSB will
receive a number of such shares equal to the Exchange Ratio multiplied by the
number of shares of LSB Common Stock owned by each LSB stockholder. The
Exchange Ratio will be determined as follows:
-- In the event that the BB&T Financial Average Closing Price is equal to
or less than $30.50 per share, the Exchange Ratio will be that number
(rounded to the nearest ten-thousandth) equal to the Adjustment Factor
divided by $30.50;
-- In the event that the BB&T Financial Average Closing Price is greater
than $30.50 and equal to or less than $36.00, the Exchange Ratio will be
that number (rounded to the nearest ten-thousandth) equal to the
Adjustment Factor divided by the BB&T Financial Average Closing Price;
and
-- In the event that the BB&T Financial Average Closing Price is greater
than $36.00, the Exchange Ratio will be that number (rounded to the
nearest ten-thousandth) equal to the Adjustment Factor divided by
$36.00.
27
The Exchange Ratio also may be adjusted in the event that BB&T Financial
establishes a record date between December 7, 1993 and the Effective Date for a
special distribution to stockholders, a stock split, stock dividend or similar
change in capitalization.
The following table shows the Exchange Ratios that would result for different
possible BB&T Financial Average Closing Prices if the LSB Book Value Per Share
were $17.31 (the actual amount at March 31, 1994). The table is for purposes of
illustration only. Any changes in the LSB Book Value Per Share would result in
a different Exchange Ratio for the BB&T Financial Average Closing Price shown.
Accordingly, this table should not be relied upon as predicting in any way the
Exchange Ratio that will actually be used.
BB&T FINANCIAL AVERAGE
CLOSING PRICE EXCHANGE RATIO
---------------------- --------------
$30.50 or less............................................. 1.2770
$32.00..................................................... 1.2171
$34.00..................................................... 1.1455
$36.00 or more............................................. 1.0819
On May 11, 1994, the closing price of a share of BB&T Financial Common Stock
was $29.13. If, for example, that were the BB&T Financial Average Closing
Price, and assuming an LSB Book Value Per Share of $17.31 (the actual LSB book
value per share on March 31, 1994) LSB's stockholders would receive, for each
share of LSB Common Stock, 1.2770 shares of BB&T Financial Common Stock, and a
total of approximately 3,985,703 shares of BB&T Financial Common Stock would be
issued to LSB's stockholders in the Merger.
No fractional shares of BB&T Financial Common Stock will be issued in
connection with the Merger. Instead, cash will be paid in lieu of fractional
shares in an amount equal to the product of the fractional share multiplied by
the BB&T Financial Average Closing Price.
The market price of BB&T Financial Common Stock following the completion of
the Merger will depend on the results of operations and the financial condition
of BB&T Financial, the general level of interest rates, the perception of the
banking industry generally, and other relevant factors that may affect the
price of BB&T Financial Common Stock and that may affect the securities markets
generally. Accordingly, BB&T Financial Common Stock could trade at prices
higher or lower than those trading prices that may have been considered by the
LSB Board of Directors in approving the Exchange Ratio, including the possible
adjustments in the Exchange Ratio.
EXCHANGE OF LSB COMMON STOCK CERTIFICATES
As soon as practical after the Effective Date, BB&T, as the transfer agent
for BB&T Financial Common Stock ("Transfer Agent"), will mail to each holder of
record of LSB Common Stock a letter of instruction regarding the procedures to
be followed in the exchange of certificates of LSB Common Stock for
certificates of BB&T Financial Common Stock. When it is received, holders of
LSB Common Stock should follow the instructions contained therein.
LSB's stockholders should not forward any certificates representing shares of
LSB Common Stock except in accordance with the letter of instruction from the
Transfer Agent to be sent after the Effective Date. LSB'S STOCKHOLDERS SHOULD
NOT SEND IN THEIR CERTIFICATES TO THE TRANSFER AGENT NOW.
Upon surrender of certificates representing shares of LSB Common Stock to the
Transfer Agent after the Effective Date, each holder of LSB Common Stock will
receive a certificate representing the number of shares of BB&T Financial
Common Stock to which such holder is entitled pursuant to the Exchange Ratio,
and each holder of LSB Common Stock entitled to receive a fraction of a share
of BB&T Financial Common
28
Stock also will receive cash in an amount equal to such fractional part of a
share of BB&T Financial Common Stock multiplied by the BB&T Financial Average
Closing Price.
A certificate for BB&T Financial Common Stock will be issued only in the name
in which the certificate for LSB Common Stock surrendered for exchange is
registered. BB&T Financial will issue a single certificate for shares of BB&T
Financial Common Stock to which an LSB stockholder is entitled. In no event
will the Transfer Agent, BB&T Financial or any party to the Merger be liable to
any person for any BB&T Financial Common Stock or dividends thereon or cash
delivered in good faith to a public official pursuant to any applicable
abandoned property, escheat or similar law.
After the Effective Date and until surrender of LSB Common Stock to the
Transfer Agent, each certificate that represented outstanding LSB Common Stock
immediately prior to the Effective Date will be deemed to evidence ownership of
the number of shares of BB&T Financial Common Stock into which the shares
represented by such certificates have been converted and any right to receive
cash in lieu of fractional shares into which such shares would have been
exchanged. No stockholder, however, will receive the dividends or other
distributions on BB&T Financial Common Stock, interest or cash payments in lieu
of fractional shares until the certificates representing LSB Common Stock are
surrendered for exchange. Upon surrender of certificates representing LSB
Common Stock, each such stockholder will receive the number of shares of BB&T
Financial Common Stock to which such stockholder is entitled under the Exchange
Ratio and cash in lieu of any fractional share, plus any dividends or other
distributions on BB&T Financial Common Stock which are payable to holders of
any record date following the Effective Date. No interest will be payable with
respect to withheld dividends or other distributions or cash payments in lieu
of fractional shares.
CONDITIONS TO CONSUMMATION OF THE MERGER
The respective obligations of BB&T Financial, BB&T Financial-SC and LSB to
consummate the Merger are subject to the satisfaction of certain conditions,
including, without limitation, the taking of all necessary corporate action
with respect to the Merger Agreements, the Option Agreement and the Bank Merger
Agreement, including the approval of the Merger Agreements by the stockholders
of LSB; the continuing effectiveness of the registration statement under the
Securities Act and applicable state securities or "Blue Sky" laws or exemptions
to those laws; the receipt of all necessary regulatory approvals for the Merger
and the Bank Mergers and expiration of all notice periods and waiting periods
required after the granting of any such approvals, without any condition or
requirement contained therein which, in the reasonable opinion of the BB&T
Financial Board of Directors, would so materially adversely affect the business
or economic benefits of the transactions contemplated by the Reorganization
Agreement as to render consummation of those transactions inadvisable or unduly
burdensome; the receipt of an opinion from BB&T Financial's tax advisor, in
form and substance satisfactory to LSB and BB&T Financial, substantially to the
effect that the Merger and the Bank Mergers will constitute one or more
reorganizations under Section 368 of the Code, and that the stockholders of LSB
will not recognize any gain or loss to the extent that such stockholders
exchange shares of LSB Common Stock for shares of BB&T Financial Common Stock;
the absence of any order, decree or injunction of a court or agency of
competent jurisdiction which enjoins or prohibits consummation of the
transactions contemplated by the Reorganization Agreement; the accuracy of the
representations and warranties set forth in the Reorganization Agreement in all
material respects as of the Effective Date as though made on and as of such
date; the performance by LSB and BB&T Financial in all material respects of all
material obligations and compliance with all material covenants required by the
Reorganization Agreement; and the receipt of certain opinions of counsel and
certificates from officers of LSB and BB&T Financial.
Consummation of the Merger also is subject to the condition that neither BB&T
Financial nor LSB reasonably determines in good faith that there has been a
material adverse change in the conditions, operations or prospects of the other
party since December 31, 1992. It is also a condition that BB&T Financial
29
will have determined that the Merger will qualify for the pooling-of-interests
method of accounting and received written agreements from the affiliates of LSB
that they will not sell any shares of BB&T Financial Common Stock received upon
consummation of the Merger except in compliance with Rule 145 under the
Securities Act or otherwise in compliance with the Securities Act and rules and
regulations promulgated thereunder. A further condition of the Merger is that
dissenters' rights pursuant to Section 33-13-210 of the SCBCA with respect to
the Merger will not have been exercised by the holders of more than 10% of the
outstanding LSB Common Stock. See "THE MERGER--Dissenters' Rights."
Either LSB or BB&T Financial may waive certain of the conditions imposed with
respect to its or their respective obligations to consummate the Merger, except
for (i) the requirements that the Merger be approved by LSB's stockholders and
that all required regulatory approvals for the Merger be received and (ii)
after approval of the Merger Agreements by LSB's stockholders, any reduction in
the number of shares of BB&T Financial Common Stock into which each share of
LSB Common Stock will be converted in the Merger or the payment terms for
fractional interests thereof.
TERMINATION
The Reorganization Agreement may be terminated at any time on or prior to the
Effective Date by the mutual consent in writing of the parties. Either party
may elect to terminate the Reorganization Agreement on the Effective Date if
the conditions precedent to the obligations of such party to consummate the
transactions contemplated by the Merger Agreements have not been satisfied or
fulfilled. The Reorganization Agreement also may be terminated by either party
if the LSB stockholder approval required to consummate the Merger is not
obtained, or if any of the regulatory applications for prior approval are
denied and the time period for appeals and requests for reconsideration of such
denial has run. In addition, the Reorganization Agreement may be terminated by
either party if the Effective Date has not occurred prior to the close of
business on January 31, 1995, or if the BB&T Financial Average Closing Price is
less than $26.00 or more than $36.00. Either party may elect to terminate the
Reorganization Agreement by notifying the other party in writing upon a breach
by the other party in any material respect of (i) any covenant or undertaking
contained in the Reorganization Agreement, the Plan of Merger, the Option
Agreement or the Bank Merger Agreement, or (ii) any representation or warranty
contained in the Reorganization Agreement, which breach has been materially
adverse. The Reorganization Agreement may only be terminated as a result of
such breach if such breach has not been cured by the earlier of 30 days after
the date on which written notice of such breach is given to the party
committing such breach or the Effective Date. The Reorganization Agreement may
also be terminated by either party if such party determines in good faith that
any condition precedent to such party's obligations would be impossible to
satisfy. The terminating party must, however, give the other party notice at
least ten days prior to such termination and provide the other party a
reasonable opportunity to discuss the matter with a view to achieving a
mutually acceptable resolution.
AMENDMENT
The Merger Agreements may be amended or supplemented in writing by mutual
agreement of BB&T Financial and LSB, provided that such amendment or supplement
must be approved by their respective Boards of Directors, and provided further
that no amendment or supplement executed after approval of the Merger
Agreements by LSB's stockholders may reduce either the number of shares of BB&T
Financial Common Stock into which each share of LSB Common Stock will be
converted in the Merger or the payment terms for fractional interests. The
Merger Agreements were amended as of April 26, 1994 to change the structure of
the Bank Mergers.
CONDUCT OF LSB'S AND BB&T FINANCIAL'S BUSINESS PRIOR TO THE EFFECTIVE DATE
Under the terms of the Reorganization Agreement, neither LSB nor any LSB
subsidiary may, without the prior written consent of BB&T Financial, which
consent may not be withheld on an arbitrary basis or basis inconsistent with
BB&T Financial's interests as an acquiror of LSB, among other things: (i) carry
on its business other than in the usual, regular and ordinary course in
substantially the same manner as theretofore conducted, or establish or acquire
any new subsidiary or cause or permit any subsidiary to engage in any new
activity or expand any existing activities; (ii) declare, set aside, make or
pay any dividend or other
30
distribution in respect of its capital stock that would cause the Merger not to
be accounted for as a pooling-of-interests, as determined by BB&T Financial;
(iii) issue any shares of its capital stock other than pursuant to the Option
Agreement, the merger of Lexington with Dorn (which was completed on December
16, 1993) or the LSB Dividend Reinvestment Plan; (iv) issue, grant or authorize
any rights other than pursuant to the Option Agreement or effect any
recapitalization, reclassification, stock dividend, stock split or like change
in capitalization; (v) amend its articles of incorporation or by-laws; impose,
or suffer the imposition, on any share of stock held by LSB in any LSB
subsidiary of any material lien, charge or encumbrance or permit any such lien
to exist; or waive or release any material right or cancel or compromise any
material debt or claim other than in the ordinary course of business; (vi)
other than completion of the merger with Dorn, merge with any other corporation
or bank or permit any other corporation, savings institution or bank to merge
into it or consolidate with any other corporation, savings institution or bank;
acquire control over any other firm, bank, corporation, savings institution or
organization; or liquidate, sell or otherwise dispose of any assets or acquire
any assets, other than in the ordinary course of its business; (vii) fail to
comply in any material respect with any laws, regulations, ordinances or
governmental actions applicable to it and to the conduct of its business except
where LSB or any LSB subsidiary is in good faith contesting the validity of any
of the foregoing; or where the failure to so comply will not have a material
adverse effect on the financial condition, results of operations, business or
prospects of LSB, Lexington and Community, taken as a whole; (viii) increase
the rate of compensation of any of its directors, officers or employees, or pay
or agree to pay any bonus to, or provide any other employee benefit or
incentive to, any of its directors, officers or employees, except in a manner
and amount consistent with past practice; (ix) enter into or substantially
modify (except as may be required by applicable law) any pension, retirement,
stock option, stock purchase, stock appreciation right, savings, profit
sharing, deferred compensation, consulting, bonus, group insurance or other
employee benefit, incentive or welfare contract, plan or arrangement, or any
trust agreement related thereto, in respect of any of its directors, officers
or other employees; (x) solicit or encourage inquiries or proposals with
respect to, furnish any information relating to, or participate in any
negotiations or discussions concerning, any acquisition or purchase of all or a
substantial portion of the assets of, or a substantial equity interest in, LSB
or any LSB subsidiary or any business combination with LSB or any LSB
subsidiary other than as contemplated by the Reorganization Agreement; or
authorize any officer, director, agent or affiliate of it to do any of the
above; or fail to notify BB&T Financial immediately if any such inquiries or
proposals are received by, any such information is required from, or any such
negotiations or discussions are sought to be initiated with, LSB or an LSB
subsidiary; (xi) enter into (a) any material agreement, arrangement or
commitment not made in the ordinary course of business, including, without
limitation, agreements or memoranda of understanding with regulatory
authorities, (b) any agreement, indenture or other instrument not made in the
ordinary course of business relating to the borrowing of money by LSB or an LSB
subsidiary or guarantee by LSB or an LSB subsidiary of any such obligation, (c)
any agreement, arrangement or commitment not cancellable by LSB without penalty
or cost within 30 days after the Effective Date relating to the employment or
severance of a consultant or the employment, severance, election or retention
in office of any present or former director, officer or employee, or (d) any
contract, agreement or understanding with a labor union; (xii) change its
lending, investment or asset liability management policies in any material
respect except as may be required by applicable law, regulation or directives,
and except that after approval of the Merger Agreements by its stockholders,
LSB shall, and shall cause the LSB subsidiaries to, cooperate in good faith
with BB&T Financial to adopt policies, practices and procedures consistent with
those used by BB&T Financial, effective on or before the Closing Date; (xiii)
change its methods of accounting in effect at December 31, 1992, except as
required by changes in generally accepted accounting principles concurred in by
its independent certified public accountants, or change any of its methods of
reporting income and deductions for federal income tax purposes from those
employed in the preparation of its federal income tax returns for the year
ended December 31, 1992, except as required by changes in law or regulation; or
(xiv) agree to do any of the foregoing.
Except with the prior written consent of LSB, which consent may not be
arbitrarily or unreasonably withheld, prior to the Effective Date, neither BB&T
Financial nor any of its subsidiaries may: (i) exercise the Option Agreement
other than in accordance with its terms, or dispose of the shares of LSB Common
Stock
31
issuable upon exercise of the option rights conferred thereby other than as
permitted or contemplated by the terms of the Option Agreement, see "THE
MERGER--The Option Agreement,"; (ii) enter into a merger or other business
combination transaction with any other corporation or person in which BB&T
Financial would not be the surviving or continuing entity after the
consummation thereof; (iii) sell or lease all or substantially all of the
assets and business of BB&T Financial; or (iv) declare an extraordinary or
special dividend or distribution on BB&T Financial Common Stock in an amount
equal to more than 10% of BB&T Financial's stockholders' equity as reflected on
the financial statements of BB&T Financial as of the three months ended prior
to such payment.
REGULATORY CONSIDERATIONS
The Merger is subject to certain regulatory approvals, as set forth below. To
the extent that the following information describes statutes and regulations,
it is qualified in its entirety by reference to the particular statutes and
regulations and the regulations promulgated under such statutes.
The Merger is subject to approval by the Federal Reserve under the BHCA,
which prohibits a bank holding company, such as BB&T Financial or BB&T
Financial-SC, from acquiring direct or indirect ownership or control of more
than five percent (5%) of the voting shares of any bank, such as Lexington or
Community, or to merge with a bank holding company such as LSB, unless the
Federal Reserve has approved the transaction. In considering an application for
approval of such an acquisition or merger, the Federal Reserve reviews the
financial and managerial resources and future prospects of the bank holding
companies and the banks concerned and the convenience and needs of the
communities to be served. See "SUPERVISION AND REGULATION OF BB&T FINANCIAL AND
LSB--General." The Federal Reserve also is required to evaluate whether the
Merger would result in a monopoly or would be in furtherance of any combination
or conspiracy or attempt to monopolize the business of banking in any part of
the United States or otherwise would substantially lessen competition or tend
to create a monopoly or which in any manner would be in restraint of trade,
unless it finds that the anticompetitive effects of the proposed transaction
are clearly outweighed in the public interest by the probable effect of the
transaction in meeting the convenience and needs of the communities to be
served. In addition, the Federal Reserve must take into account the records of
BB&T Financial and LSB in meeting the credit needs of the entire community,
including low- and moderate-income neighborhoods, served by such institutions.
The BHCA requires that any bank acquisition or merger may not be consummated
until the 30th day after approval, during which the United States Department of
Justice ("DOJ") may challenge the transaction on antitrust grounds. BB&T
Financial has submitted an application to the Federal Reserve for approval to
consummate the Merger, and that application currently is pending.
The Merger also is subject to approval by the South Carolina Board under
Section 34-24-30 of the South Carolina Bank Holding Company Act ("SCBHCA").
Under Section 34-24-50 of the SCBHCA, the South Carolina Board may approve the
Merger only after determining that the Merger would not create anticompetitive
or monopolistic effects on the South Carolina banking business. The South
Carolina Board also must take into consideration the financial and managerial
resources and future prospects of the companies and banks involved as well as
the communities to be served. In making this determination, the South Carolina
Board will wait until after the Federal Reserve makes its determination and
will deny the application only if the South Carolina Board finds that the
Federal Reserve's determination is not supported by evidence that is
substantial when viewed in light of the whole record considered by the Federal
Reserve. BB&T Financial has submitted an application to the South Carolina
Board for approval to consummate the Merger, and that application currently is
pending.
The Bank Mergers are subject to approval of the FDIC pursuant to the Bank
Merger Act. The Bank Merger Act requires that the FDIC take into consideration
the financial and managerial resources and future prospects of the existing and
proposed institutions and the convenience and needs of the communities to be
served. Further, the FDIC may not approve the Bank Mergers if they would result
in a monopoly or if they
32
would be in furtherance of any combination or conspiracy to monopolize or
attempt to monopolize the business of banking in any part of the United States,
or if their effect in any section of the country may be substantially to lessen
competition or to tend to create a monopoly, or if they would be in any other
manner in restraint of trade, unless the FDIC finds that the anticompetitive
effects of the Bank Mergers are clearly outweighed in the public interest by
the probable effect of the transactions in meeting the convenience and needs of
the communities to be served. In addition, the FDIC must take into account the
record of performance of the existing and proposed institutions under the
Community Reinvestment Act of 1977 ("CRA") in meeting the credit needs of the
entire community, including low- and moderate-income neighborhoods, served by
such institutions. Applicable regulations also require publication of notice of
the application for approval of the Bank Mergers and provide an opportunity for
the public to comment on the application in writing and to request a hearing.
The Bank Merger Act requires that any bank merger, including the Bank
Mergers, may not be consummated until the 30th day after approval, during which
time the DOJ may challenge the Bank Mergers on antitrust grounds.
The Bank Mergers will proceed under Section 34-3-850 of the Code of Laws of
South Carolina (1976) which allows bank mergers when all applicable laws
governing the mergers are complied with.
The Merger will not proceed in the absence of all required approvals for the
Merger, and the Bank Mergers will not proceed in the absence of all required
approvals for the Bank Mergers. There can be no assurance that such approvals
will be received and, if they are, there can be no assurance as to the date of
such approvals, that such approvals will not be conditioned upon matters that
could cause the BB&T Financial Board of Directors to abandon the Merger and the
Bank Mergers, or that no action will be brought by the DOJ challenging the
Merger or the Bank Mergers on antitrust grounds. If any condition or
requirement is imposed which, in the reasonable opinion of the BB&T Financial
Board of Directors, would so materially adversely affect the economic or
business benefits to BB&T Financial of the transactions contemplated by the
Reorganization Agreement as to render consummation of the transactions
inadvisable or unduly burdensome, the Reorganization Agreement permits BB&T
Financial to terminate the Reorganization Agreement.
BB&T Financial and LSB are not aware of any other governmental approvals or
actions that are required for consummation of the Merger or Bank Mergers except
as described above. Should any such approval or action be required, it is
presently contemplated that such approval or action would be sought or taken.
There can be no assurance that any such approval or action, if needed, could be
obtained, would not delay consummation of the Merger or Bank Mergers or would
not be conditioned in a manner that would cause BB&T Financial to abandon the
Merger or the Bank Mergers. The parties to the Merger currently expect to waive
the condition in the Reorganization Agreement that approvals required to effect
the Bank Mergers be received prior to the consummation of the Merger. See "--
Conditions to Consummation of the Merger."
INTERESTS OF CERTAIN PERSONS IN THE MERGER AND EFFECT OF THE MERGER ON
EMPLOYEES AND BENEFIT PLANS
Directors. Upon consummation of the Merger, BB&T Financial will cause each of
the members of the LSB Board of Directors to become members of the BB&T-SC
Board of Directors, and will use its best efforts to cause such members to
remain members of such Board or the Board of the surviving bank of the Bank
Mergers until they reach age 70, subject to the fiduciary duties of the members
of such Board of Directors. Each member's compensation will be the greater of
(a) $8,400 per year (plus $100 for each special meeting not held on the day of
a regular board meeting), plus reasonable travel expenses, or (b) the
compensation paid to the members of the BB&T-SC Board of Directors as of the
Effective Date. All benefits that were previously disclosed by LSB to BB&T
Financial which are presently provided or made available to such members as
members of the LSB Board of Directors will be continued.
33
Also upon consummation of the Merger, BB&T Financial will cause the two LSB
Designees to become members of the BB&T Financial Board of Directors.
Thereafter, for a period of at least five years, subject to the fiduciary
duties of the members of the BB&T Financial Board of Directors, BB&T Financial
has agreed that it will recommend to the nominating committee of the BB&T
Financial Board of Directors the nomination of the LSB Designees for reelection
and inclusion as part of the slate of directors recommended by the nominating
committee for the BB&T Financial Board of Directors. In the event that either
or both of the LSB Designees is unable or unwilling to serve as a director
during such five-year period, BB&T Financial has agreed that it will substitute
a person or persons who are presently members of the LSB Board of Directors.
After this five-year period, subject to the fiduciary duties of the members of
the BB&T Financial Board of Directors, BB&T Financial has agreed to continue to
use its best efforts to recommend to the nominating committee of the BB&T
Financial Board of Directors the nomination to the BB&T Financial Board of
Directors of at least one person who resides in the current LSB market area.
The LSB Designees are Raymond S. Caughman and Albert J. Dooley, Sr. See
"MANAGEMENT OF LSB."
Indemnification of Directors and Officers. BB&T Financial has agreed to
indemnify the directors and certain officers of LSB, Lexington and Community to
the fullest extent permitted by law, against reasonable expenses, including
attorney's fees, actually and necessarily incurred by him or her, and
reasonable payments made by him or her in satisfaction of any judgment, money
decree, fine or settlement in connection with any threatened, pending or
completed action, suit or proceeding arising out of or in connection with the
Reorganization Agreement, the Option Agreement and any of the transactions
contemplated thereby, except for liability or litigation expense incurred on
account of activities known or believed by such person to be clearly in
conflict with the best interest of LSB or BB&T Financial or activities such
person had reasonable cause to believe were criminal. In addition, BB&T
Financial has agreed to advance expenses to indemnified parties as provided in
the Reorganization Agreement.
Employment/Severance Agreements. Upon consummation of the Merger, Raymond S.
Caughman, Estes B. Howell, Jr., Robert N. Hubbs, Harold C. Amick, Jr., Charles
A. Kirby, David S. Hipp, Robert C. Marshall, Carol R. Metts, Sharon D. Hundley,
Gary A. Areheart, R.W. McCormick, Jr., Stephen P. Nivens, Kathy N. Felder,
Marcia C. Wood and Cricket Scoggins, Officers, will enter into agreements (each
an "Employment/Severance Agreement") with BB&T Financial and Lexington
providing for continued employment for a period of three or five years in
positions, initially with Lexington and upon consummation of the Bank Mergers,
with BB&T Financial or affiliates thereof. The only Officers whose base annual
salary pursuant to such an Employment/Severance Agreement will exceed $100,000
are Mr. Caughman, President and Chief Executive Officer of LSB, Mr. Howell,
Treasurer of LSB, and Mr. Hubbs, Vice President of LSB. Mr. Caughman's
Employment/Severance Agreement will have a term of five years and will provide
for a base annual salary of $225,000. Mr. Howell's Employment/Severance
Agreement will last only until his retirement on September 1, 1994 and will
provide for a base annual salary of $103,750. Mr. Hubbs' Employment/Severance
Agreement will have a term of five years and will provide for a base annual
salary of $175,000.
Subject to adjustment, as described below, each Officer will receive a
minimum annual salary. After the Effective Date, each Officer otherwise
eligible to participate in the BB&T Financial Executive Incentive Compensation
Plan and the BB&T Financial Long-Term Incentive Compensation Plan
(collectively, the "Plans") may on one occasion elect to participate in the
Plans. In the event that an Officer makes such an election, such Officer's base
salary will be reduced to reflect a base salary which, when added to the
"Target Award" (as defined in the BB&T Financial Executive Incentive
Compensation Plan) and the assumed value of options granted under the BB&T
Financial Long-Term Incentive Compensation Plan (pursuant to BB&T Financial's
standard practices for valuing such options) would result in compensation equal
to such Officer's base salary.
Each of the Officers other than Mr. Caughman and Mr. Hubbs, after the first
year following the Effective Date, will be entitled to a salary increase
determined in accordance with BB&T Financial's annual salary plan, and based on
BB&T Financial's performance and the performance of the Officer, but such
34
increase may not be less than the average increase paid to all BB&T Financial's
officers under BB&T Financial's salary plan. For as long as the Officer remains
employed by BB&T Financial during the term of the Employment/Severance
Agreement, each Officer will be entitled to receive, on the same basis as other
officers of BB&T Financial, group employee benefits such as sick leave,
vacation, retirement benefits, group disability and health, life and accident
insurance and similar indirect compensation which BB&T Financial may from time
to time extend to its officers.
BB&T Financial will have the right to terminate the Officer's employment at
any time for "Just Cause" (as defined in the Employment/Severance Agreement).
If BB&T Financial terminates an Officer's employment for Just Cause, such
Officer will have no right to receive compensation or other benefits under the
Employment/Severance Agreement for any period after such termination. In
addition, BB&T Financial may terminate an Officer's employment at any time for
reasons other than Just Cause, but termination for reasons other than Just
Cause will not prejudice the Officer's rights under the Employment/Severance
Agreement.
Effect of Severance and Related Provisions. If either Mr. Caughman or Mr.
Hubbs voluntarily terminates employment with BB&T Financial, his
Employment/Severance Agreement provides that he will be entitled to receive the
annual base salary then provided under the Employment/Severance Agreement
(which, in the event that an election has been made to participate in the
Plans, would mean his base salary as reduced to reflect such participation)
("Voluntary Termination Payments") until the end of the term of his
Employment/Severance Agreement. If Mr. Caughman or Mr. Hubbs terminates
employment with BB&T Financial at any time during the term of the
Employment/Severance Agreement, for so long as he elects to receive the
Voluntary Termination Payments through the fifth anniversary of the Effective
Date (except in the event of termination for Just Cause, in which case it will
be until the fifth anniversary date of the Effective Date in any event) he may
not, directly or indirectly, engage in the banking and financial services
business, or any other business in which BB&T Financial is engaged, in
Lexington, Richland, Beaufort, Hampton and McCormick Counties, South Carolina,
or in any county contiguous with such counties. In addition, he may not
solicit, or assist any other person in soliciting, any depositors or customers
of BB&T Financial or LSB or any of their respective subsidiaries or employ any
of the then or former employees of BB&T Financial or LSB, or induce any such
employees to terminate their employment with BB&T Financial.
In addition, Mr. Hubbs' Employment/Severance Agreement will provide that so
long as he remains employed by BB&T Financial, whether or not Mr. Hubbs' duties
change, he will be entitled to receive the compensation and group employee
benefits described above until the end of the term of the Employment/Severance
Agreement. This provision would substitute for a provision in Mr. Hubbs'
current employment agreement with LSB that guarantees Mr. Hubbs' salary at
current levels for five years following a merger transaction with certain
exceptions. Mr. Hubbs' existing employment agreement with LSB is a five year
contract, which automatically renews in each year and which would have a
guaranteed fixed term of five years following a merger transaction, with
certain exceptions. Under the terms of the proposed Employment/Severance
Agreement, Mr. Hubbs would continue to receive compensation and group employee
benefits for the term of the Agreement so long as he does not formally
terminate his employment with BB&T Financial, notwithstanding any reduction of
his duties for BB&T Financial.
As a result of these provisions, either Mr. Caughman or Mr. Hubbs may
terminate their employment voluntarily with BB&T Financial at any time after
the Merger and continue to receive their annual base salary without reduction
until the end of the fifth anniversary of the Effective Date. The provision in
Mr. Hubbs' agreement would permit him to reduce significantly his duties,
without formally terminating his services, and yet continue to receive both his
salary and the non-salary benefits provided under the Employment/Severance
Agreement without reduction until the fifth anniversary of the Effective Date.
It is anticipated that Mr. Hubbs will significantly reduce his duties with BB&T
Financial following the Merger. Mr. Hubbs' duties following the Merger have not
yet been finalized, but he is expected primarily to be involved in advising
BB&T Financial and BB&T-SC on a transitional basis following the Merger and to
continue to serve on the Board
35
of Directors of BB&T-SC and the surviving bank of the Bank Mergers. Under these
circumstances, Mr. Hubbs would continue to receive his current base salary and
benefits, without reduction, until the fifth anniversary of the Effective Date.
While Mr. Caughman currently has no plans to retire or otherwise voluntarily
terminate his services following the Merger, any such termination during the
period of the term of his Employment/Severance Agreement would permit him to
continue to receive his annual base salary until the fifth anniversary of the
Effective Date. Following the Merger, Mr. Caughman will become a member of the
Board of Directors of BB&T Financial and will continue in his capacity as
Chairman of the Board and Chief Executive Officer of Lexington and, following
the Bank Mergers, will become Chairman of the Board of the surviving bank of
the Bank Mergers.
None of the Employment/Severance Agreements for any of the Officers other
than Mr. Caughman and Mr. Hubbs will provide for any compensation or benefits
following voluntary termination by the Officer. The Employment/Severance
Agreements for the Officers other than Mr. Caughman and Mr. Hubbs will contain
non-competition and non-solicitation restrictions.
Stock Options. The Employment/Severance Agreements for Mr. Caughman and Mr.
Hubbs will provide that they also will receive options to acquire 25,000 shares
and 18,750 shares of BB&T Financial Common Stock, respectively, at an exercise
price equal to the market price of such stock on the Effective Date. These
options will have a term of ten years and one-fifth of the number of shares
will become exercisable at each of the first five anniversaries of the date of
grant, except: (i) if Mr. Hubbs' employment with BB&T Financial is terminated
(other than for Just Cause, as defined in the Employment/Severance Agreement),
the term of the options granted to Mr. Hubbs will expire at the later of (x)
one year after the date of termination or (y) the sixth anniversary of the date
of grant; (ii) in the event of termination of employment of either Mr. Caughman
or Mr. Hubbs for Just Cause (as defined in the Employment/Severance Agreement),
the term of the options granted to him will expire immediately upon the
termination and no longer be exercisable; (iii) on the death of either Mr.
Caughman or Mr. Hubbs, the options granted to him will become fully vested and
exercisable and the term of the options granted to him will expire one year
after the date of death.
Employees and Benefit Plans. The Reorganization Agreement provides that upon
the Effective Date, each person who is an employee of LSB or of any LSB
subsidiary as of the Effective Date (individually an "Employee") will
automatically become an employee of BB&T Financial-SC or, in the alternative,
BB&T-SC or the surviving bank of the Bank Mergers, upon substantially the same
terms and conditions of employment, including compensation and benefits, and
comparable responsibilities that each Employee had on the day before the
Effective Date. Each Employee will remain an Employee for a period of at least
two years following the Effective Date, subject to satisfactory performance of
duties. Notwithstanding this provision of the Reorganization Agreement, whether
before or after the two-year period, no Employee will be terminated or have his
or her salary reduced involuntarily as a result of the Merger. This provision
does not, however, confer any right upon or contract in favor of any Employee
of BB&T Financial-SC or BB&T-SC.
Notwithstanding the covenants described in the preceding paragraph, nothing
contained in the Reorganization Agreement restricts the ability of BB&T
Financial-SC or BB&T-SC to dismiss any Employee, if such dismissal is for "Just
Cause" as defined in the Reorganization Agreement.
No Employee may be terminated within the two-year period for any reason
unless such termination has been approved in writing by any two of Raymond S.
Caughman, Robert N. Hubbs and David S. Hipp, or, if less than two of them are
at the time employed by BB&T-SC (Lexington, as renamed following the Bank
Mergers), any two members of the Board of Directors of such bank who were, on
the Effective Date, directors of LSB.
Each Employee will be eligible to receive group hospitalization, medical,
life, disability and other benefits comparable to those provided to the present
employees of BB&T Financial without the imposition of any waiting period or
limitation on preexisting conditions. The benefits in the aggregate to all
Employees as a group will not be less in amount or value than those presently
provided by LSB and the LSB subsidiaries. Moreover, any Employee who is, on the
Effective Date, entitled to five weeks of paid vacation per year will continue
to be entitled to five weeks paid vacation per year for the duration of the
Employee's employment with BB&T Financial and BB&T Financial's subsidiaries.
36
Following the Bank Mergers, Lexington's pension plan and 401(k) plan will be
merged with the 401(k) plans maintained by BB&T Financial and BB&T Financial's
subsidiaries or be terminated, depending upon the mutual agreement of LSB and
BB&T Financial prior to the Merger. If the LSB plan is terminated, the rights
and interests of the employees of LSB and the LSB subsidiaries in such plans
will become fully vested, with each participating Employee having the right or
option either to receive the benefits to which he or she is entitled as a
result of the termination of the plan or to have such benefits "rolled" into
the 401(k) plan maintained by BB&T Financial and BB&T Financial's subsidiaries
for the benefit of their employees, and on the same basis and applying the same
eligibility standards as would apply to employees of BB&T Financial and BB&T
Financial's subsidiaries. Following the Bank Mergers, the Employees of LSB and
the LSB subsidiaries will be entitled to participate, to the same extent and on
the same terms as the employees of BB&T Financial, in any retirement, pension
or similar plans in effect for the benefit of the employees of BB&T Financial
(other than any employee stock ownership plan established for the benefit of
certain of BB&T Financial's employees in connection with certain of BB&T
Financial's savings institution acquisitions) which when considered as a whole
for all Employees considered as a group will be no less favorable in the
aggregate than the benefits currently provided to the Employees of LSB,
Lexington and Community. For the purposes of participating in all plans and
benefits of BB&T Financial, the Employees will receive credit for their period
of service to LSB and the LSB subsidiaries for participation and vesting
purposes only.
RESTRICTIONS ON RESALES BY AFFILIATES
Certain directors and officers of LSB may be deemed "affiliates" of LSB. Any
sale or other disposition by such affiliates of BB&T Financial Common Stock
received by them pursuant to the Merger may be made only in compliance with an
exemption from the registration requirements of the Securities Act and the
restrictions set forth below.
The Reorganization Agreement requires LSB to use its best efforts to cause
each affiliate of LSB to execute and deliver to BB&T Financial at least 30 days
prior to the Effective Date a letter to the effect that each such person will
not dispose of any shares of BB&T Financial Common Stock to be received
pursuant to the Merger in violation of Rule 145 of the Securities Act or the
applicable rules and regulations of the SEC.
This Proxy Statement/Prospectus may not be used by any such affiliate of LSB
for the resale of any shares of BB&T Financial Common Stock received pursuant
to the Merger.
CERTAIN INCOME TAX CONSEQUENCES OF THE MERGER
The following is a summary discussion of the material federal income tax
consequences of the Merger to stockholders of LSB. The summary is based on the
law as currently constituted and is subject to change in the event of changes
in the law, including amendments to applicable statutes or regulations or
changes in judicial or administrative rulings, some of which could be given
retroactive effect. The summary does not address any foreign, state or local
tax consequences, except for certain South Carolina income tax consequences,
nor does it address all aspects of federal income taxation that may apply to
the Merger. LSB stockholders are urged, therefore, to consult their own tax
advisors as to the specific tax consequences to them of the Merger and the
exchange of their LSB Common Stock for shares of BB&T Financial Common Stock,
including, without limitation, tax return reporting requirements, the
application and effect of federal, foreign, state and local and other tax laws
and the implications of any proposed changes in the tax laws.
BB&T Financial and LSB have received an opinion of KPMG Peat Marwick (the
"Tax Opinion"), tax advisors to BB&T Financial, which reaches certain
conclusions with respect to certain federal and South Carolina income tax
consequences of the Merger. Where appropriate or useful, this discussion will
refer to the Tax Opinion and particular conclusions expressed therein. However,
such an opinion represents only that advisor's best judgment as to the matters
expressed therein and has no binding effect on the Internal Revenue Service
("IRS") or official status of any kind. There can be no assurance that the IRS
could not successfully
37
contest in the courts an opinion expressed by the advisor as set forth in the
Tax Opinion or that legislative, administrative or judicial decisions or
interpretations may not be forthcoming that would significantly change the
opinions set forth in the Tax Opinion. The IRS will not currently issue private
letter rulings concerning a transaction's qualification under certain types of
reorganizations or certain federal income tax consequences resulting from such
qualification. Accordingly, no private letter ruling has been, nor is it
anticipated that such a ruling will be, requested from the IRS with respect to
the Merger.
The Tax Opinion concludes that provided the Merger qualifies as a statutory
merger under South Carolina law, (i) the Merger will constitute a
reorganization within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(D) of
the Code; (ii) no gain or loss will be recognized by BB&T Financial or LSB by
reason of the Merger; (iii) a stockholder of LSB will recognize no gain or loss
for federal income tax purposes to the extent BB&T Financial Common Stock is
received in the Merger in exchange for LSB Common Stock; (iv) the tax basis in
the BB&T Financial Common Stock received by a stockholder will be the same as
the tax basis in the LSB Common Stock surrendered in exchange therefor; (v) the
holding period for BB&T Financial Common Stock received in exchange for LSB
Common Stock will include the period during which the stockholder held the LSB
Common Stock surrendered in the exchange, provided that the LSB Common Stock
was held as a capital asset at the Effective Date; (vi) provided that the LSB
Common Stock was held as a capital asset at the Effective Date, the receipt of
cash in lieu of a fractional share of BB&T Financial Common Stock will give
rise to capital gain or loss measured by the difference, if any, between the
amount of cash received for such fractional share and a stockholder's basis in
the fractional share; and (vii) where an LSB stockholder receives cash by
exercising statutory dissenters' rights, such cash will be treated as having
been received by the stockholder as a distribution in redemption of his or her
LSB Common Stock subject to the provisions and limitations of Section 302 of
the Code.
The Tax Opinion also concludes that the Merger will be treated in
substantially the same manner for South Carolina income tax purposes as for
federal income tax purposes.
ACCOUNTING TREATMENT
BB&T Financial will use the pooling-of-interests method of accounting in
connection with the Merger. The pooling-of-interests method of accounting
combines assets and liabilities at their historical costs. It is a condition to
BB&T Financial's obligation to consummate the Merger that it determine that the
Merger will qualify for accounting treatment as a pooling-of-interests.
DISSENTERS' RIGHTS
Any stockholder of LSB entitled to vote on the Merger Agreements has the
right to receive payment of the fair value of his shares of LSB Common Stock
upon compliance with the applicable requirements of Chapter 13 of the SCBCA.
The SCBCA defines "fair value" with respect to a dissenter's shares as the
value of the shares immediately before the effectuation of the Merger,
excluding any appreciation or depreciation in anticipation of the Merger,
unless exclusion would be inequitable. The SCBCA provides that such value is to
be determined by techniques that are accepted generally in the financial
community. A stockholder may not dissent as to less than all of the shares that
he beneficially owns. A nominee or fiduciary may not dissent on behalf of any
beneficial owner as to less than all of the shares of such beneficial owner
held of record by such nominee or fiduciary. A beneficial owner asserting
dissenters' rights to shares held on his behalf must notify LSB in writing of
the name and address of the record holder of the shares, if known to him.
Any LSB stockholder intending to enforce dissenters' rights must not vote in
favor of the Merger Agreements and must file a written notice of intent to
demand payment for his shares (the "Objection Notice") with the Corporate
Secretary of LSB before the vote is taken at the Special Meeting. The Objection
Notice must state that the stockholder intends to demand payment for his or her
shares of LSB Common Stock if the Merger is effected. Although any LSB
stockholder who has filed an Objection Notice must not vote in favor of the
Merger Agreements, a vote in favor of the Merger Agreements cast by the holder
of a proxy solicited by LSB will not disqualify the stockholder from demanding
payment for his shares under the
38
SCBCA. A vote against approval of the Merger Agreements will not, in and of
itself, constitute an Objection Notice satisfying the requirements of Section
33-13-210 of the SCBCA.
If the Merger Agreements are approved by LSB's stockholders at the Special
Meeting, each stockholder who has complied with the requirements set forth in
the immediately preceding paragraph will be notified by LSB of such approval
not later than 10 days after consummation of the Merger (the "Dissenters'
Notice"). The Dissenters' Notice will: (i) state where dissenting stockholders
must (a) send the Payment Demand (as defined below) and (b) deposit their LSB
Common Stock certificates (the "Certificates"); (ii) inform holders of
uncertificated shares of LSB Common Stock of the extent of any restrictions on
the transferability of such shares after the Payment Demand (as defined below)
is received; (iii) be accompanied by a form for demanding payment that includes
the date of the first announcement to the news media or to stockholders of the
terms of the proposed Merger and requires the person asserting dissenters'
rights to certify whether he acquired beneficial ownership of the shares before
that date; (iv) set a date by which LSB must receive the Payment Demand (as
defined below), which may not be fewer than 30 nor more than 60 days after the
date the Dissenters' Notice is delivered, and set a date by which the
Certificates must be deposited as instructed in the Dissenters' Notice, which
may not be earlier than 20 days after the demand date; and (v) be accompanied
by a copy of Sections 33-13-101 through 33-13-310 of the SCBCA.
Within the time prescribed in the Dissenters' Notice, a stockholder electing
to dissent must make a demand for payment (the "Payment Demand"), certify
whether he (or the beneficial stockholder on whose behalf he is asserting
dissenters' rights) acquired beneficial ownership of the shares of LSB Common
Stock before December 8, 1993 (the date of the first public announcement of the
terms of the Merger Agreements) and deposit his Certificates in accordance with
the terms of the Dissenters' Notice. Upon filing the Payment Demand and
depositing the Certificates, the stockholder will retain all other rights of a
stockholder until these rights are cancelled or modified by consummation of the
Merger.
Failure to comply substantially with these procedures will cause the
stockholder to lose his dissenters' rights to payment for the shares.
Consequently, any LSB stockholder who desires to exercise his rights to payment
for his shares is urged to consult his legal advisor before attempting to
exercise such rights.
As soon as the Merger is consummated, or upon receipt of a Payment Demand,
BB&T Financial shall, pursuant to Section 33-13-250 of the SCBCA, pay to each
dissenting stockholder who has substantially complied with the requirements of
the SCBCA, the amount that BB&T Financial estimates to be the fair value of the
shares of LSB Common Stock, plus accrued interest. Section 33-13-250 of the
SCBCA requires that payment to be accompanied by (i) certain of LSB's financial
statements, (ii) a statement of BB&T Financial's estimate of fair value of the
shares and explanation of how BB&T Financial's estimate of fair value and the
interest were calculated, (iii) notification of rights to demand additional
payment, and (iv) a copy of Sections 33-13-101 through 33-13-310 of the SCBCA.
As authorized by Section 33-13-270, BB&T Financial intends to delay any
payments with respect to any shares (the "After-acquired Shares") held by a
dissenting stockholder which were not held by such stockholder on December 8,
1993, the date of the first public announcement of the terms of the Merger
Agreements, unless the beneficial ownership devolved upon him by operation of
law from a person who was the beneficial owner on such date. Where payments are
so withheld, Section 33-13-270(b) of the SCBCA will require BB&T Financial,
after the Merger, to send to the holder of the After-acquired Shares an offer
to pay the holder an amount equal to BB&T Financial's estimate of their fair
value plus accrued interest, together with an explanation of the calculation of
fair value and interest and a statement of the holder's right to demand
additional payment under Section 33-13-280 of the SCBCA.
If the Merger is not consummated within 60 days after the date set for
demanding payment and depositing Certificates, LSB, within the 60-day period,
shall return the deposited Certificates and release the transfer restrictions
imposed on uncertificated shares. If, after returning deposited Certificates
and releasing transfer restrictions, the Merger is consummated, LSB must send a
new Dissenters' Notice and repeat the payment demand procedure.
39
If the dissenting stockholder believes that the amount paid by BB&T Financial
pursuant to Section 33-13-250 of the SCBCA or offered under Section 33-13-270
of the SCBCA is less than the fair value of his shares or that the interest due
is calculated incorrectly, or if BB&T Financial fails to make payment or offer
payment within 60 days after the date set in the Dissenters' Notice for
demanding payment, or, if the Merger has not been consummated and LSB does not
return the deposited Certificates or release the transfer restrictions imposed
on uncertificated shares within 60 days after the date set for demanding
payment in the Dissenters' Notice, then the dissenting stockholder may notify
BB&T Financial in writing of his own estimate of the fair value of such shares
(including interest due) and demand payment of such estimate (less any payment
previously received), or reject BB&T Financial's offer of payment under Section
33-13-270 and demand payment of the fair value of his shares and interest due.
Failure to notify BB&T Financial in writing of any demand for additional
payment within 30 days after BB&T Financial made or offered payment for such
shares will constitute a waiver of the right to demand additional payment.
If BB&T Financial and the dissenting stockholder cannot agree on an
additional payment within 60 days after BB&T Financial receives a demand for
additional payment, the SCBCA provides that BB&T Financial will institute
judicial proceedings in the South Carolina Court of Common Pleas in Lexington
County (the "Court") to fix (i) the fair value of the shares, and (ii) the
accrued interest. The "fair value" of the LSB Common Stock could be more than,
the same as, or less than that produced by the Exchange Ratio set by the Merger
Agreements. BB&T Financial must make all dissenters whose demands for
additional payment remain unsettled parties to the proceeding and all such
parties must be served with a copy of the petition. The Court may, in its
discretion, appoint an appraiser to receive evidence and recommend a decision
on the question of fair value. The Court is required to issue a judgment for
the amount, if any, by which the fair value of the shares, as determined by the
Court, plus interest, exceeds the amount paid by BB&T Financial. If BB&T
Financial does not institute such proceeding within such 60-day period, BB&T
Financial shall pay each dissenting stockholder whose demand remains unsettled
the respective amount demanded by each stockholder.
The Court will assess the costs and expenses of such proceeding (including
reasonable compensation for and the expenses of the appraiser but excluding
fees and expenses of counsel and experts) against BB&T Financial, except that
the Court may assess such costs and expenses as it deems appropriate against
any or all of the dissenting stockholders if it finds that their demand for
additional payment was arbitrary, vexatious or otherwise not in good faith. The
Court may award fees and expenses of counsel and experts in amounts the Court
finds equitable: (i) against BB&T Financial and in favor of any or all
dissenters if the Court finds that BB&T Financial did not comply substantially
with the relevant requirements of the SCBCA or (ii) against either BB&T
Financial or any dissenting stockholder in favor of any other party if the
Court finds that the party against whom the fees and expenses are assessed
acted arbitrarily, vexatiously or not in good faith.
The foregoing summary of the applicable provisions of Sections 33-13-101
through 33-13-310 of the SCBCA is not intended to be a complete statement of
such provisions, and is qualified in its entirety by reference to such
sections, which are included as Appendix IV hereof. The only rights dissenting
stockholders will have are those granted by Sections 33-13-101 through 33-13-
310 of the SCBCA.
BB&T Financial's obligations under the Merger Agreements are conditioned upon
the fact that, among other things, dissenters' rights pursuant to the SCBCA
with respect to the Merger have not been exercised by the holders of more than
10% of the outstanding LSB Common Stock.
THE OPTION AGREEMENT
The Option Agreement was entered into as a condition to BB&T Financial's
entering into the Reorganization Agreement and is intended to increase the
probability that the Merger will be consummated. Exercise of the LSB Option
granted pursuant thereto may tend to make the acquisition of a controlling
interest in LSB more expensive to any prospective acquiror other than BB&T
Financial even if such an acquisition would be beneficial to LSB's
stockholders. The existence of the LSB Option is intended to make
40
it less likely that a prospective acquiror, other than BB&T Financial, will
seek a business combination with LSB. The following is a brief summary of the
LSB Option and is qualified in its entirety by reference to the Option
Agreement, a copy of which is attached to this Proxy Statement/Prospectus as
Appendix III and incorporated by reference herein.
The Option Agreement provides BB&T Financial with the option to purchase up
to 771,894 shares of authorized but unissued shares of LSB Common Stock at a
price of $30.00 per share, payable in cash, upon the occurrence of certain
events described below. The shares subject to the LSB Option would represent
approximately 19.9% (subject to adjustment as discussed below) of the LSB
Common Stock then issued and outstanding, giving effect to the issuance of any
LSB Common Stock subject to the LSB Option. The Option Agreement only allows
BB&T Financial to acquire shares of LSB Common Stock, not the value in cash of
the difference between the price of $30.00 per share and the market price of
LSB Common Stock at the time of exercise of the LSB Option.
BB&T Financial may exercise the LSB Option, in whole or in part, at any time
or from time to time, upon or after the occurrence of a "Purchase Event" which
must be continuing. As used in the Option Agreement, a Purchase Event would
occur when:
(i) either LSB or Lexington and/or Community enters into an agreement
with a person (other than BB&T Financial or its affiliates) to: (a)
acquire, merge or consolidate with, or enter into any similar transaction
with LSB, Lexington or Community, (b) purchase, lease or otherwise acquire
all or substantially all of the assets of LSB, Lexington or Community, or
(c) purchase or otherwise acquire (including by way of merger,
consolidation, share exchange or any similar transaction) securities
representing more than 10% of the voting power of LSB or any of its
subsidiaries;
(ii) any person who is an individual or a group consisting solely of
individuals acquires beneficial ownership of more than 20% of the
outstanding shares of LSB Common Stock; or any person (other than BB&T
Financial or its affiliates) consisting of any person not an individual or
a group any member of which is not an individual acquires beneficial
ownership of more than 10% of the outstanding LSB Common Stock; or any
person merges, consolidates with or consummates a similar transaction with
LSB or any person purchases, leases or otherwise acquires all or
substantially all of LSB's assets; or
(iii) a bona fide proposal is made by any person (other than by BB&T
Financial or its affiliates) by public announcement or written
communication that is or becomes the subject of public disclosure, or in an
application to any federal or state regulatory authority, to (a) acquire,
merge or consolidate with, or enter into any similar transaction with LSB,
Lexington or Community, (b) purchase, lease or otherwise acquire all or
substantially all the of the assets of LSB or (c) purchase or otherwise
acquire (including by way of merger, consolidation, share exchange, tender
or exchange offer or any similar transaction) securities representing more
than 25% of the voting power of LSB. The consummation of the merger of
Lexington with Dorn on December 16, 1993 did not, however, constitute a
Purchase Event.
LSB is required to notify BB&T Financial promptly in writing of the
occurrence of a transaction, offer or event giving rise to a Purchase Event. In
the event that BB&T Financial wishes to exercise the LSB Option, it must send
LSB written notice specifying (i) the total number of shares it will purchase,
and (ii) the place and date not earlier than three business days nor later than
20 business days after the date on which such notice is given for the closing
of such purchase. If prior notification to, or approval of, any federal or
state regulatory agency is required, BB&T Financial and/or LSB will promptly
file the required notice or application for approval and the period of time
that otherwise would run pursuant to such notice period will run instead from
the date on which the last required notification period has expired or has been
terminated or such approvals have been obtained and any requisite waiting
period has passed.
The Option Agreement will expire and terminate, to the extent not previously
exercised, upon the earlier of: (i) the Effective Date; (ii) the date on which
the Reorganization Agreement is terminated, other than a
41
termination based upon a material breach by LSB of certain specified covenants
in the Reorganization Agreement or the failure of LSB to obtain stockholder
approval of the transactions contemplated by the Reorganization Agreement by
the vote required under applicable law, in either case following the occurrence
of a Purchase Event; or (iii) 18 months after the Reorganization Agreement is
terminated based upon a material breach by LSB of certain specified covenants
or the failure of LSB to obtain stockholder approval of the transactions
contemplated by the Reorganization Agreement by the vote required under
applicable law, in either case following the occurrence of a Purchase Event.
Notwithstanding the foregoing, if BB&T Financial provides LSB with a notice
that it intends to exercise the LSB Option, and LSB tenders performance of its
obligations on the closing date of the LSB Option but BB&T Financial fails to
tender performance of its obligations on that date, then the LSB Option will
expire and terminate effective at 5:00 p.m., Eastern time, on such closing
date.
In the event that LSB's capitalization changes by reason of a stock dividend,
split-up, merger (except for the merger of Dorn with Lexington),
recapitalization, combination, exchange of shares or the like, the number of
shares subject to the LSB Option and the purchase price per share thereof will
be adjusted so that the economic value of the LSB Option remains unaltered.
BB&T Financial also has certain registration rights for LSB Common Stock
acquired pursuant to the LSB Option.
42
FULLY PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(INCLUDING ALL PENDING ACQUISITIONS OF BB&T FINANCIAL)
(UNAUDITED)
The following unaudited pro forma combined condensed balance sheet as of
December 31, 1993 and the unaudited pro forma combined condensed statement of
income for the year ended December 31, 1993 combine the historical financial
statements of BB&T Financial, LSB, Asheville Savings Bank, S.S.B., Asheville,
North Carolina ("Asheville Savings") and Home Savings Bank of Albemarle,
S.S.B., Albemarle, North Carolina ("Home Savings"). The two savings
institutions to be acquired by BB&T Financial had total assets of approximately
$478 million on December 31, 1993. Both of these institutions are mutual
associations (i.e., they currently have no stockholders) and are to be acquired
in so-called "conversion--acquisition transactions". BB&T Financial anticipates
issuing, based on the estimated appraised value of these associations, a total
of approximately 1,862,069 shares of BB&T Financial Common Stock in connection
with these acquisitions (assuming all shares offered by BB&T Financial are
purchased). The pro forma combined condensed statements give effect to the
affiliations of each institution with BB&T Financial as if the affiliation had
occurred on December 31, 1993 with respect to the balance sheet, and at the
beginning of 1993 for the income statement. The pro forma combined condensed
statements give effect to the expected Merger with LSB under the pooling-of-
interests method of accounting and give effect to the expected affiliation of
BB&T Financial with Asheville Savings and Home Savings under the purchase
method of accounting. The pooling-of-interests method of accounting combines
assets and liabilities at their historical bases and restates the results of
operations as if BB&T Financial and LSB had been combined at the beginning of
all reported periods. The purchase method of accounting requires that all
assets and liabilities be adjusted to their estimated fair market value as of
the date of acquisition.
The pro forma financial statements are provided for informational purposes.
The pro forma combined condensed statement of income is not necessarily
indicative of actual results that would have been achieved had the acquisitions
been consummated at the beginning of the period presented, and is not
indicative of future results. The pro forma financial statements should be read
in conjunction with the audited financial statements and the notes thereof of
BB&T Financial, incorporated by reference herein.
43
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
DECEMBER 31, 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
BB&T
FINANCIAL
PRO FORMA PURCHASE
BB&T POOLING WITH ASHEVILLE HOME CONVERSION ACCOUNTING
FINANCIAL LSB ADJUSTMENTS LSB SAVINGS SAVINGS COMBINED ADJUSTMENTS ADJUSTMENTS
---------- ------- ----------- --------- --------- ------- ---------- ----------- -----------
ASSETS
Cash and due from
banks,
noninterest-
bearing......... $ 318,922 36,897 355,819 8,395 3,532 367,746 (7,280)(d)
(299)(e)
Interest-bearing
bank balances... 79,663 79,663 22,733 7,038 109,434
Federal funds
sold............ 9,550 25,500 35,050 -- -- 35,050
Trading
securities...... 1,572 1,572 1,572
Securities
available for
sale............ 725,086 203,336 928,422 39,914 27,345 995,681
Securities held
to maturity..... 1,475,727 24,377 1,500,104 -- -- 1,500,104 40,350(a)
Loans............ 6,306,443 385,889 (4,000)(k) 6,688,332 233,468 117,199 7,038,999
Less allowance
for loan losses. 88,235 5,080 93,315 1,852 144 95,311
---------- ------- ------ --------- ------- ------- ---------- ------ -------
Net loans....... 6,218,208 380,809 (4,000) 6,595,017 231,616 117,055 6,943,688
Bank premises and
equipment....... 132,794 14,872 147,666 6,241 1,029 154,936 (7,270)(i)
Goodwill......... 35,233 35,233 -- -- 35,233
Other assets..... 177,934 12,279 190,213 11,551 1,910 203,674 (3,924)(g)
7,611 (h)
---------- ------- ------ --------- ------- ------- ---------- ------ -------
Total assets.... $9,173,117 699,642 (4,000) 9,868,759 320,450 157,909 10,347,118 40,350 (11,162)
========== ======= ====== ========= ======= ======= ========== ====== =======
LIABILITIES
Deposits
Noninterest-
bearing........ $ 782,777 79,009 861,786 -- 507 862,293
Interest-
bearing........ 6,212,344 491,810 6,704,154 273,770 139,178 7,117,102
---------- ------- ------ --------- ------- ------- ---------- ------ -------
Total deposits.. 6,995,121 570,819 7,565,940 273,770 139,685 7,979,395
Short-term
borrowed funds.. 984,325 62,464 1,046,789 2,000 -- 1,048,789
Long-term debt... 346,736 8,000 (4,000)(k) 350,736 15,058 -- 365,794
Negative
goodwill........ 43,910 43,910 -- -- 43,910 19,617 (i)
Other
liabilities..... 59,513 3,526 63,039 3,883 1,721 68,643 5,682 (b)
5,781 (f)
---------- ------- ------ --------- ------- ------- ---------- ------ -------
Total
liabilities.... 8,429,605 644,809 (4,000) 9,070,414 294,711 141,406 9,506,531 31,080
---------- ------- ------ --------- ------- ------- ---------- ------ -------
STOCKHOLDERS'
EQUITY
Common stock..... 81,191 7,786 2,326 (j) 91,303 -- -- 91,303 4,655(a) 271 (c)
Paid-in capital.. 266,822 21,972 (2,326)(j) 286,468 -- -- 286,468 39,101(a) 2,876 (c)
Retained
earnings........ 401,953 23,714 425,667 25,739 16,503 467,909 (42,242)(i)
Unrealized
holding gains on
securities
available for
sale............ -- 1,361 1,361 -- -- 1,361
Less loan to
employee stock
ownership plan.. (4,419) (4,419) -- -- (4,419) (3,406)(a)
Less reserve for
restricted
stock........... (2,035) (2,035) -- -- (2,035) (3,147)(c)
---------- ------- ------ --------- ------- ------- ---------- ------ -------
743,512 54,833 -- 798,345 25,739 16,503 840,587 40,350 (42,242)
---------- ------- ------ --------- ------- ------- ---------- ------ -------
Total
liabilities and
stockholders'
equity......... $9,173,117 699,642 (4,000) 9,868,759 320,450 157,909 10,347,118 40,350 (11,162)
========== ======= ====== ========= ======= ======= ========== ====== =======
BB&T
FINANCIAL
FULLY
PRO FORMA
COMBINED
-----------
ASSETS
Cash and due from
banks,
noninterest-
bearing......... 360,167
Interest-bearing
bank balances... 109,434
Federal funds
sold............ 35,050
Trading
securities...... 1,572
Securities
available for
sale............ 995,681
Securities held
to maturity..... 1,540,454
Loans............ 7,038,999
Less allowance
for loan losses. 95,311
-----------
Net loans....... 6,943,688
Bank premises and
equipment....... 147,666
Goodwill......... 35,233
Other assets..... 207,361
-----------
Total assets.... 10,376,306
===========
LIABILITIES
Deposits
Noninterest-
bearing........ 862,293
Interest-
bearing........ 7,117,102
-----------
Total deposits.. 7,979,395
Short-term
borrowed funds.. 1,048,789
Long-term debt... 365,794
Negative
goodwill........ 63,527
Other
liabilities..... 80,106
-----------
Total
liabilities.... 9,537,611
-----------
STOCKHOLDERS'
EQUITY
Common stock..... 96,229
Paid-in capital.. 328,445
Retained
earnings........ 425,667
Unrealized
holding gains on
securities
available for
sale............ 1,361
Less loan to
employee stock
ownership plan.. (7,825)
Less reserve for
restricted
stock........... (5,182)
-----------
838,695
-----------
Total
liabilities and
stockholders'
equity......... 10,376,306
===========
44
FOOTNOTES TO FULLY PRO FORMA BALANCE SHEET
(a) Investment of net proceeds of issuance of 1,034,483 and 827,586 shares of
BB&T Financial Common Stock in connection with the acquisitions of
Asheville Savings and Home Savings, respectively, based on appraised values
of $30,000,000 and $24,000,000, respectively. Assumes a Subscription Price
in each case of $24.65, and that all shares are sold in the Subscription
Offerings and that 75,883 and 62,300 shares are purchased by the BB&T
Financial Employee Stock Ownership Plan for Asheville Savings and Home
Savings, respectively.
(b) To record the estimated tax liabilities on the recapture of the tax bad
debt reserves.
(c) To record the issuance of 108,522 shares of restricted stock to key
employees and directors of acquired mutual savings institutions.
(d) To record the payment of funds, net of tax effect at BB&T Financial
combined Federal and North Carolina tax rate of 40.12%, to charitable trust
in which proceeds will be distributed at the discretion of directors of the
acquired savings institutions.
(e) To record cash bonuses, net of tax effect at BB&T Financial combined
Federal and North Carolina income tax rate of 40.12%, paid to employees of
acquired savings institutions.
(f) To record the pension liability for employees and directors of acquired
savings institutions.
(g) To reduce the purchased mortgage servicing rights of Asheville Savings to
zero.
(h) To adjust the deferred tax liabilities as a result of purchase accounting
adjustments at BB&T Financial combined Federal and North Carolina effective
tax rate of 40.12%.
(i) To record the excess of fair value of net assets acquired over cost
(negative goodwill) of thrifts acquired in merger conversions, after
reducing the adjusted basis in premises and equipment ($7,270) to zero. The
amount of negative goodwill will be added to earnings over a period of 10
years in accordance with Accounting Principles Board Opinion No. 16.
(j) To record the issuance of 4,044,948 shares of BB&T Financial Common Stock
for all of the 3,114,613 outstanding shares of LSB Common Stock assuming an
Exchange Ratio of 1.2987 BB&T Financial Common Shares for each outstanding
share of LSB Common Stock.
(k) To eliminate intercompany debt.
45
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1993(A)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BB&T
BB&T FINANCIAL
FINANCIAL PURCHASE FULLY
BB&T POOLING PRO FORMA ASHEVILLE HOME CONVERSION ACCOUNTING PRO FORMA
FINANCIAL LSB ADJUSTMENTS WITH LSB SAVINGS SAVINGS COMBINED ADJUSTMENTS ADJUSTMENTS COMBINED
--------- ------ ----------- --------- --------- ------- -------- ----------- ----------- ---------
Interest income.... $558,951 46,377 (160)(g) 605,168 22,977 12,972 641,117 1,917(b) 643,034
Interest expense... 230,408 18,132 (160)(g) 248,380 12,873 6,037 267,290 267,290
-------- ------ ---- ------- ------ ------ ------- ----- ----- -------
Net interest
income........... 328,543 28,245 356,788 10,104 6,935 373,827 1,917 375,744
Provision for loan
losses............ 17,500 1,548 19,048 590 -- 19,638 19,638
-------- ------ ---- ------- ------ ------ ------- ----- ----- -------
Net interest income
after provision
for loan losses... 311,043 26,697 337,740 9,514 6,935 354,189 1,917 356,106
Noninterest income. 111,709 7,766 119,475 2,585 278 122,338 1,962 (d) 124,300
Noninterest
expense........... 276,678 24,843 301,521 9,765 2,144 313,430 (642)(e) 313,417
629 (f)
-------- ------ ---- ------- ------ ------ ------- ----- ----- -------
Income before
income taxes...... 146,074 9,620 155,694 2,334 5,069 163,097 1,917 1,975 166,989
Income taxes....... 47,838 2,844 50,682 6 1,765 52,453 769(c) 5 (c) 53,227
-------- ------ ---- ------- ------ ------ ------- ----- ----- -------
Net income......... $ 98,236 6,776 105,012 2,328 3,304 110,644 1,148 1,970 113,762
======== ====== ==== ======= ====== ====== ======= ===== ===== =======
Earnings Per
Share(h):
Primary net
income........... $ 3.10 2.94 3.03
Fully diluted net
income........... 3.05 2.90 2.99
Average Common
Shares:
Primary........... 31,724 35,742 37,604
Fully diluted..... 32,293 36,311 38,173
(a) BB&T Financial, LSB and Asheville Savings have fiscal years ending
December 31. Home Savings has a fiscal year ending September 30. The
financial data included herein in each case is for the fiscal year ending
in 1993.
(b) Estimated interest income on the investible funds of Asheville Savings and
Home Savings provided from their conversions at an estimated rate of
4.75%, which is equal to the estimated investment yields at the beginning
of the period.
(c) Tax expense using BB&T Financial's 1993 combined Federal and North
Carolina effective income tax rate of 40.12%.
(d) Amortization of excess of fair value of net assets acquired over cost
(negative goodwill) of Asheville Savings and Home Savings over a ten-year
period using the straight-line method.
(e) Reduced depreciation from write-down of premises and equipment of
Asheville Savings and Home Savings.
(f) To record expense of restricted stock in ESOP Plans over a five-year
period.
(g) To eliminate intercompany interest income and expense.
(h) Pro forma share data and per share data is computed based on the
anticipated issuance of 1,034,483 shares and 827,586 shares of BB&T
Financial Common Stock to be issued in consummating the acquisitions of
Asheville Savings and Home Savings, respectively. Such data also assumes
the issuance of 4,044,948 shares of BB&T Financial Common Stock for all of
the 3,114,613 outstanding shares of LSB Common Stock assuming an Exchange
Ratio of 1.2987 shares of BB&T Financial Common Stock for each outstanding
share of LSB Common Stock.
46
INFORMATION ABOUT BB&T FINANCIAL
BB&T FINANCIAL CORPORATION
BB&T Financial is a bank holding company, the principal assets of which are
all of the outstanding shares of common stock of BB&T and BB&T Financial-SC
(which in turn owns all of the outstanding shares of capital stock of BB&T-SC).
BB&T Financial also includes among its assets the shares of three savings
institution subsidiaries and interest-bearing bank balances with and loans to
BB&T. BB&T Financial also is registered under the savings institution holding
company laws of North Carolina. BB&T Financial's principal sources of revenue
are interest, dividends and management fees received from its subsidiaries.
There are limitations on the subsidiaries' ability to supply funds to BB&T
Financial. See "MARKET PRICES AND DIVIDENDS" and "SUPERVISION AND REGULATION OF
BB&T FINANCIAL AND LSB--Regulation of BB&T Financial's and LSB's Bank
Subsidiaries." At December 31, 1993, BB&T Financial had consolidated assets of
approximately $9.2 billion, total deposits through its depository institution
subsidiaries of approximately $7.0 billion and total consolidated stockholders'
equity of approximately $743.5 million.
BRANCH BANKING AND TRUST COMPANY
BB&T is a North Carolina chartered commercial bank. As of December 31, 1993,
BB&T operated 215 offices in 118 cities and towns in North Carolina and had
3,882 full-time and part-time employees. BB&T provides a wide range of
commercial banking, consumer banking, trust and investment services primarily
through its branch network. BB&T also operates an insurance department and a
travel department and is a broker-dealer in government and municipal
securities. As of December 31, 1993, BB&T had total assets of approximately
$7.8 billion, consolidated deposit liabilities of approximately $5.9 billion
and consolidated stockholders' equity of approximately $675.9 million.
BRANCH BANKING AND TRUST COMPANY OF SOUTH CAROLINA
BB&T-SC, a South Carolina chartered commercial bank, is among the ten largest
banks in South Carolina. As of December 31, 1993, BB&T-SC operated 19 offices
in 8 cities in South Carolina and had approximately 190 employees. BB&T-SC
provides a full range of commercial banking, consumer banking, trust and
investment services through its branch network. As of December 31, 1993, BB&T-
SC had total assets of approximately $489.4 million, deposit liabilities of
approximately $437.3 million and stockholders' equity of approximately $43.9
million.
SAVINGS INSTITUTION SUBSIDIARIES
BB&T Financial owned four wholly owned savings institutions in North Carolina
at December 31, 1993: Citizens-Newton, with $254 million in assets; Mutual
Savings, with $87 million in assets; Old Stone Bank of North Carolina, FSB,
High Point, with $558 million in assets (which was merged with and into BB&T on
February 14, 1994); and Citizens-Mooresville, with $64 million in assets. The
savings institutions are engaged primarily in the business of attracting
deposits from the public and originating residential mortgage, commercial and
consumer loans. At December 31, 1993, the four savings institutions had 342
employees of whom 95 were officers, and operated 30 offices in 20 cities in
North Carolina.
BB&T FINANCIAL'S ACQUISITION PROGRAM
BB&T Financial primarily has focused its business strategy on meeting the
banking needs of the retail and small and middle market commercial customer
through an extensive bank branch network. To complement this strategy, since
1990, BB&T Financial has expanded its customer base through the acquisition of
fourteen North Carolina-based savings institutions with aggregate assets of
approximately $3.1 billion and branches of a fifteenth savings institution. All
the acquired savings institutions have been or will be merged into BB&T. BB&T
Financial also has pending agreements to acquire two additional mutual savings
institutions with aggregate assets of approximately $478 million as of December
31, 1993: Home Savings and Asheville Savings.
In the last three years, BB&T Financial also has acquired the assets and
liabilities of eleven insurance agencies with operations in several cities
throughout North Carolina. The agencies write commercial and personal insurance
policies as agents on behalf of various insurance underwriters. All insurance
operations are conducted through a department of BB&T in the communities where
the acquired agencies operated.
BB&T Financial continues to evaluate possible acquisitions of savings
institutions, commercial banks, insurance agencies and other companies in the
Carolinas and Virginia and may after the date of this Proxy
Statement/Prospectus enter into agreements to acquire one or more such
institutions.
Additional information about BB&T Financial's completed and pending
acquisitions is included in the BB&T Financial documents incorporated by
reference in this Proxy Statement/Prospectus. See "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE." See also "FULLY PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS" and "SUPERVISION AND REGULATION OF BB&T FINANCIAL AND LSB--
Legislative Proposals."
47
INFORMATION ABOUT LSB
BUSINESS
LSB is a South Carolina corporation which was incorporated March 2, 1984 to
become a bank holding company for Lexington. LSB acquired all of the
outstanding shares of Lexington in a share exchange transaction effective
October 1, 1984. LSB subsequently acquired all of the outstanding shares of
Community in a share exchange transaction effective November 16, 1990. Each
acquisition was accounted for as a pooling-of-interests. On December 16, 1993,
Dorn was merged into Lexington and all of the outstanding shares of Dorn
common stock were exchanged for LSB Common Stock.
LSB engages in no significant operations other than ownership of Lexington
and Community and Lexington's wholly-owned subsidiary, Carolina Securities
Corporation. Accordingly, LSB's principal sources of revenue are interest and
dividends on investment securities and dividends received from these
subsidiaries. There are, however, limitations on the bank subsidiaries'
ability to supply funds to LSB. See "MARKET PRICES AND DIVIDENDS" and
"SUPERVISION AND REGULATION OF BB&T FINANCIAL AND LSB--Regulation of BB&T
Financial's and LSB's Bank Subsidiaries." As of December 31, 1993 and March
31, 1994, LSB had consolidated assets of approximately $699.6 million and
$721.6 million, respectively, total deposits through its bank subsidiaries of
approximately $570.8 million and $594.6 million, respectively, and total
consolidated stockholders' equity of approximately $54.8 million and $54
million, respectively.
Lexington and Community are both South Carolina chartered commercial banks.
Lexington serves primarily Lexington, Richland and McCormick Counties, South
Carolina through 17 offices, and Community serves primarily Hampton and
Beaufort Counties, South Carolina through 8 offices. Both banks offer a full
range of commercial banking services, including checking accounts, NOW
accounts, savings and other time deposits; business, agricultural, real
estate, personal, home improvement and automobile loans; and credit cards,
letters of credit, investment services, trust services, safe deposit boxes,
bank money orders and wire transfer and electronic banking facilities.
Lexington and Community also offer discount brokerage services both directly
and through Carolina Securities Corporation. Carolina Securities Corporation
is a registered broker dealer and is a member firm of the National Association
of Securities Dealers. As of December 31, 1993, Lexington and Community had a
total of 382 full-time employees and 91 part-time employees. LSB considers its
relationship with its employees to be excellent.
As of December 31, 1993, Lexington had assets of approximately $595.1
million and deposit liabilities of approximately $478.1 million, and Community
had assets of approximately $111.2 million and deposit liabilities of
approximately $95.5 million.
COMPETITION
The banking laws of South Carolina allow statewide branching, and therefore,
commercial banking in the state is highly competitive. LSB competes in its
service areas with several larger banking organizations, which generally have
broader geographic markets and higher lending limits than Lexington and
Community and may, therefore, make more effective use of media advertising,
support services and electronic technology than can Lexington and Community.
Competition between commercial banks and thrift institutions has been
intensified significantly by the elimination of many previous distinctions
between the various types of financial institutions and the expanded powers
and increased activity of thrift institutions in areas of banking which
previously had been the sole domain of commercial banks. Legislation and
regulatory changes by the primary regulators of the various financial
institutions have resulted in the almost total elimination of practical
distinctions between a commercial bank and thrift institution. Consequently,
competition among financial institutions of all types is virtually unlimited
with respect to legal ability and authority to provide most financial
services. In most areas in which LSB's subsidiary banks operate, they face
increased competition from both federally-chartered and state-chartered thrift
institutions.
INFORMATION INCORPORATED BY REFERENCE
For additional information about LSB contained in documents incorporated by
reference in this Proxy Statement/Prospectus, see the documents referred to in
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
48
SELECTED CONSOLIDATED FINANCIAL
AND OTHER DATA OF LSB
The following table presents summary financial information for LSB. This
information is derived from the historical consolidated financial statements of
LSB. The information set forth below should be read in conjunction with such
historical financial statements and the notes contained herein.
YEARS ENDED DECEMBER 31
--------------------------------------------
1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE)
FINANCIAL CONDITION
Net Loans......................... $380,809 $373,694 $324,718 $303,422 $291,300
Securities........................ 229,285 150,646 148,699 141,213 120,448
Funds sold and resell agreements.. 25,500 39,125 19,500 16,200 17,450
Total assets...................... 699,642 651,231 560,868 518,203 483,326
Deposits
Noninterest bearing demand de-
posits......................... 79,009 68,297 50,399 50,181 52,799
Time deposits, savings and in-
terest bearing transaction ac-
counts......................... 491,810 495,127 446,898 402,689 359,976
-------- -------- -------- -------- --------
Total deposits................ 570,819 563,424 497,297 452,870 412,775
Long-term debt.................... 8,000 4,000 2,000 2,450 500
Stockholders' equity.............. 54,833 47,592 42,842 40,494 37,226
EARNINGS SUMMARY
Interest income................... $ 46,377 $ 47,725 $ 48,768 $ 49,178 $ 44,444
Interest expense.................. 18,132 21,111 27,543 29,887 27,501
-------- -------- -------- -------- --------
Net interest income............... 28,245 26,614 21,225 19,291 16,943
Provision for loan losses......... 1,548 2,528 3,608 2,121 1,742
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses........ 26,697 24,086 17,617 17,170 15,201
Gain on sale of investment
securities....................... 337 256 190 44 40
Other operating income............ 7,429 5,708 4,909 4,340 3,902
Other operating expenses.......... 24,843 21,477 18,163 16,194 13,773
Income tax expense................ 2,844 2,434 937 849 1,191
-------- -------- -------- -------- --------
Net income........................ $ 6,776 $ 6,139 $ 3,616 $ 4,511 $ 4,179
======== ======== ======== ======== ========
Weighted average common shares
outstanding...................... 3,094 3,062 3,040 3,018 3,002
Net income per share.............. $ 2.19 $ 2.00 $ 1.19 $ 1.49 $ 1.39
Cash dividends per share.......... $ .65 $ .61 $ .60 $ .60 $ .55
- --------
The financial summary has been restated to reflect the merger with Dorn in
1993.
49
LSB'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion is intended to assist in understanding the consolidated
financial condition and results of operations of LSB and its subsidiaries,
Lexington (including its subsidiary, Carolina Securities Corporation) and
Community, all collectively referred to as LSB. On December 16, 1993, LSB
acquired all of the outstanding shares of Dorn in a transaction accounted for
as a pooling-of-interests. Therefore, the amounts shown in this report have
been restated to include the results of operations and financial condition of
the combined companies for all periods presented. This commentary should be
reviewed in conjunction with the consolidated financial statements and notes
contained elsewhere herein.
EARNINGS PERFORMANCE
1993 COMPARED TO 1992. LSB focused its efforts in 1993 on improving its
ability to provide a superior return to its stockholders. Emphasis was directed
toward pricing products and services appropriately and improving the efficiency
of operations while maintaining a high level of customer service.
LSB's net income was $6,776,000, or $2.19 per share, for 1993. This
represents an increase of $637,000, or $.19 per share, over 1992 income of
$6,139,000, or $2.00 per share. The increase in income is attributable
primarily to lower interest costs, a reduction in the provision for loan
losses, and an increase in service charges on deposit accounts.
LSB's interest costs for 1993 declined by $2,979,000 from the 1992 amount,
primarily as a result of its reaction to the generally lower trend of interest
rates in the economy as a whole. Because a significant portion of its deposits
and short-term borrowings can be repriced immediately, LSB generally benefits
from such a period of declining interest rates.
The provision for loan losses for 1993 was $980,000 lower than in 1992 as a
result of continued improvements in loan loss experience. Net charge-offs
during 1993 were $1,272,000, or $522,000 less than in 1992, and there were no
significant increases in nonaccrual or past due loans. Service charges on
deposit accounts for 1993 increased by $1,095,000 over 1992 primarily due to
the implementation of revised service charge schedules.
1992 COMPARED TO 1991. LSB's net income was $6,139,000 or $2.00 per share,
representing an increase of $2,523,000, or $.81 per share, over 1991 net income
of $3,616,000. Improvements in net interest income and a significantly lower
provision for loan losses were responsible for the increase.
DISTRIBUTION OF ASSETS AND LIABILITIES
LSB seeks to maintain a conservative approach in determining the distribution
of its assets and liabilities. The following table sets forth the percentage
relationships of significant components of LSB's average balance sheets for the
last three fiscal years.
50
BALANCE SHEET CATEGORIES AS A PERCENT OF AVERAGE TOTAL ASSETS
YEARS ENDED DECEMBER 31,
----------------------------
1993 1992 1991
-------- -------- --------
ASSETS
Time deposits in other banks..................... .04%
Loans, net of unearned income.................... 56.41% 57.16% 59.03
Investment securities............................ 26.28 24.75 26.11
Federal funds sold and securities purchased under
agreements to resell............................ 3.05 4.40 4.00
Trading account securities....................... .30 .19
Other investments................................ 5.06 3.65 2.53
-------- -------- --------
Total interest earning assets................ 91.10 90.15 91.71
Cash and due from banks.......................... 5.16 5.72 4.75
Allowance for loan losses........................ (.73) (.73) (.73)
Premises and equipment........................... 2.19 1.99 2.13
Other assets..................................... 2.28 2.87 2.14
-------- -------- --------
Total assets................................. 100.00% 100.00% 100.00%
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing deposits
Savings........................................ 7.29% 6.12% 5.16%
Interest bearing transaction accounts.......... 29.93 30.86 27.50
Time deposits.................................. 36.46 39.84 44.87
-------- -------- --------
Total interest bearing deposits.............. 73.68 76.82 77.53
Federal funds purchased and securities sold under
agreements to repurchase........................ 6.29 4.34 4.43
Other short-term borrowings...................... .13 .25 .27
Long-term debt................................... .80 .53 .39
-------- -------- --------
Total interest bearing liabilities........... 80.90 81.94 82.62
Noninterest bearing demand deposits.............. 10.92 9.80 8.91
Other liabilities................................ .66 1.02 .73
-------- -------- --------
Total liabilities............................ 92.48 92.76 92.26
Stockholders' equity............................. 7.52 7.24 7.74
-------- -------- --------
Total liabilities and stockholders' equity... 100.00% 100.00% 100.00%
======== ======== ========
The following table presents the average balance sheets, the average yield
and the interest earned on interest earning assets, and the average rate and
the interest paid on interest bearing liabilities of LSB for the last three
fiscal years.
51
COMPARATIVE AVERAGE BALANCES, YIELDS AND RATES
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------
1993 1992 1991
------------------------------- ------------------------------- -------------------------------
INTEREST INTEREST INTEREST
AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/
BALANCES EXPENSE (1) RATES (1) BALANCES EXPENSE (1) RATES (1) BALANCES EXPENSE (1) RATES (1)
-------- ----------- --------- -------- ----------- --------- -------- ----------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Time deposits in other
banks.................. $ 37 $ 2 5.41% $ 209 $ 14 6.70%
Investment securities
Taxable................ $153,063 $ 9,086 5.94% 125,355 9,512 7.59% 111,568 9,285 8.32%
Tax exempt............. 24,603 2,448 9.95% 28,233 2,942 10.42% 29,896 3,252 10.88%
-------- ------- -------- ------- -------- -------
Total investment se-
curities............ 177,666 11,534 6.49% 153,588 12,454 8.11% 141,464 12,537 8.86%
Trading account securi-
ties................... 2,032 67 3.30% 1,164 49 4.21%
Federal funds sold and
securities purchased
under agreements to re-
sell................... 20,584 510 2.48% 27,281 962 3.53% 21,683 1,215 5.60%
Other investments....... 34,209 1,371 4.01% 22,627 1,073 4.74% 13,699 877 6.40%
Loans, net of unearned
income (2)............. 381,345 34,079 8.94% 354,716 34,420 9.70% 319,798 35,372 11.06%
-------- ------- -------- ------- -------- -------
Total interest earn-
ing assets.......... 615,836 47,561 7.72% 559,413 48,960 8.75% 496,853 50,015 10.07%
Cash and due from banks. 34,897 35,469 25,719
Allowance for loan loss-
es..................... (4,940) (4,542) (3,980)
Premises and equipment.. 14,830 12,332 11,576
Other assets............ 15,374 17,842 11,597
-------- -------- --------
Total assets......... $675,997 $620,514 $541,765
======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing
deposits
Savings............... $ 49,299 $ 1,438 2.92% $ 37,994 $ 1,330 3.50% $ 27,982 $ 1,377 4.92%
Interest bearing
transaction accounts.. 202,315 5,270 2.60% 191,489 5,967 3.12% 148,980 7,317 4.91%
Time deposits $100M
and over.............. 53,006 1,952 3.68% 52,442 2,450 4.67% 49,211 3,349 6.81%
Other time deposits.... 193,431 8,009 4.14% 194,788 10,239 5.26% 193,866 13,948 7.19%
-------- ------- -------- ------- -------- -------
Total interest
bearing deposits.... 498,051 16,669 3.35% 476,713 19,986 4.19% 420,039 25,991 6.19%
Federal funds purchased
and securities sold un-
der agreements to re-
purchase............... 42,494 1,118 2.63% 26,930 844 3.13% 24,015 1,285 5.35%
Other short-term
borrowings............. 906 27 2.98% 1,520 61 4.01% 1,469 75 5.11%
Long-term debt.......... 5,425 318 5.86% 3,311 220 6.64% 2,080 192 9.23%
-------- ------- -------- ------- -------- -------
Total interest
bearing liabilities. 546,876 18,132 3.32% 508,474 21,111 4.15% 447,603 27,543 6.15%
Noninterest bearing de-
mand deposits.......... 73,811 60,805 48,284
Other liabilities....... 4,490 6,297 3,927
Stockholders' equity.... 50,820 44,938 41,951
-------- -------- --------
Total liabilities and
stockholders' equi-
ty.................. $675,997 $620,514 $541,765
======== ======== ========
Interest rate spread
(3)................. 4.40% 4.60% 3.92%
Net interest income
and net yield on
earning assets (4).. $29,429 4.78% $27,849 4.98% $22,472 4.52%
Interest free funds sup-
porting earning assets
(5).................... $ 68,960 $ 50,939 $ 49,250
- --------
(1) Computed on a fully taxable equivalent basis using a federal income tax
rate of 34%.
(2) Nonaccruing loans are included in the average loan balances and income on
such loan is recognized on a cash basis.
(3) Total interest earning assets yield less the total interest bearing
liabilities rate.
(4) Net yield equals net interest income divided by total interest earning
assets.
(5) Total interest earning assets less total interest bearing liabilities.
52
NET INTEREST INCOME
Net interest income, the major component of LSB's income, is the amount by
which interest and fees on earning assets exceeds the interest paid on deposits
and other funds. For analysis purposes, interest income from tax-exempt
investments is adjusted to an amount which would have to be earned on taxable
investments to produce the same after-tax yields. This adjusted amount is
referred to as fully taxable equivalent ("FTE") interest income.
FTE net interest income was $29,429,000, $27,849,000 and $22,472,000 for
1993, 1992 and 1991, respectively. Improvements in net interest income during
1993 were the result of growth in earning assets, primarily loans and
investment securities, combined with somewhat slower growth in interest bearing
liabilities and the effects on interest expense of the extended period of
declining interest rates. Declining interest rate environments, such as the one
which culminated in 1993, generally have been favorable for LSB since a large
portion of its liabilities may be repriced immediately. However, when a period
of declining rates has continued for an extended period of time, more downward
pressure is exerted on the rates earned on the asset side of the balance sheet.
Existing loan customers seek to refinance their debts to take advantage of the
reduced rates and competition for quality loans leads to origination of new
loans at lower rates. Other earning asset yields are also affected by the lower
rate environment, as maturing securities are typically reinvested at lower
rates and rates earned on federal funds sold are reduced. While this downward
pressure was applied to earning asset yields, the relatively stable rate
environment of 1993 afforded fewer opportunities for downward adjustments to
rates paid on interest bearing liabilities. Therefore, during 1993, yields on
earning assets and rates paid on interest bearing liabilities both declined,
but earning asset yields declined by 103 basis points and rates paid on
interest bearing liabilities fell only 83 basis points. Consequently, interest
rate spread and net yield on earning assets both declined during the year.
Average earning asset growth of $56,423,000, or 10.09%, during 1993 offset
the negative effects of the contracting interest margin. Of this increase,
average loans were up $26,629,000 over the 1992 average and average investment
securities increased by $24,078,000. In comparison, average interest bearing
liabilities increased by only $38,402,000 or 7.55% in 1993 over 1992. Increases
in average interest bearing deposit liabilities were confined to the savings
and interest bearing transaction account categories which together increased
$22,131,000. Average federal funds purchased and securities sold under
agreements to repurchase for 1993 were $15,564,000 in excess of the 1992
amount.
The table "Volume and Rate Variance Analysis" provides a summary of changes
in FTE net interest income resulting from changes in volumes and rates. Because
the period of declining interest rates has subsided, further improvements in
net interest income will more likely be derived from changes in the volumes of
earning assets and interest bearing liabilities and from increases in the
relative percentages of higher yielding earning assets and lower cost interest
bearing liabilities. Management monitors various statistics regarding the
allocation of earning assets and the composition of funding sources, stays
abreast of changes and trends in market rates of interest, and makes changes in
its asset/liability management strategies and tactics when appropriate.
53
VOLUME AND RATE VARIANCE ANALYSIS
1993 COMPARED TO 1992 1992 COMPARED TO 1991
--------------------------- ---------------------------
VOLUME (1) RATE (1) TOTAL VOLUME (1) RATE (1) TOTAL
---------- -------- ------ ---------- -------- ------
(DOLLARS IN THOUSANDS)
Earning assets
Loans, net of unearned
income (2)............. $2,485 $(2,826) $ (341) $3,639 $(4,591) $ (952)
Investment securities
Taxable............... 1,871 (2,297) (426) 1,088 (861) 227
Tax exempt (2)........ (365) (129) (494) (176) (134) (310)
Trading account securi-
ties................... 31 (13) 18 49 49
Federal funds sold and
securities purchased
under agreements to
resell................. (204) (248) (452) 264 (517) (253)
Other investments....... 484 (186) 298 466 (270) 196
Time deposits in other
banks.................. (2) (2) (10) (2) (12)
------ ------- ------ ------ ------- ------
Interest income..... 4,300 (5,699) (1,399) 5,320 (6,375) (1,055)
------ ------- ------ ------ ------- ------
Interest bearing liabil-
ities
Savings................. 354 (246) 108 413 (460) (47)
Interest bearing trans-
action accounts........ 323 (1,020) (697) 1,754 (3,104) (1,350)
Time deposits $100M and
over................... 26 (524) (498) 208 (1,107) (899)
Other time deposits..... (71) (2,159) (2,230) 66 (3,775) (3,709)
Federal funds purchased
and securities sold un-
der agreements to re-
purchase............... 426 (152) 274 141 (582) (441)
Other short-term
borrowings............. (20) (14) (34) 3 (17) (14)
Long-term debt.......... 127 (29) 98 92 (64) 28
------ ------- ------ ------ ------- ------
Interest expense.... 1,165 (4,144) (2,979) 2,677 (9,109) (6,432)
------ ------- ------ ------ ------- ------
Net interest income..... $3,135 $(1,555) $1,580 $2,643 $ 2,734 $5,377
====== ======= ====== ====== ======= ======
- --------
(1) The rate/volume 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 absolute variances except in
cases of categories having balances in only one period. In such cases, the
entire variance is attributed to volume differences.
(2) Computed on a fully taxable equivalent basis using a federal income tax
rate of 34%.
INTEREST RATE SENSITIVITY
Interest rate sensitivity management is concerned with the management of both
the timing and the magnitude of the repricing characteristics of interest
earning assets and interest bearing liabilities and is an important part of
asset/liability management. The objectives of interest rate sensitivity
management are to ensure the adequacy of net interest income and to control the
risks to net interest income associated with movements in interest rates. The
table "Interest Sensitivity Analysis" indicates that, on a cumulative basis
through twelve months, rate sensitive liabilities exceeded rate sensitive
assets, resulting in a liability sensitive position at the end of 1993 of
$218,878,000. When interest sensitive assets exceed interest sensitive
liabilities for a specific repricing "horizon," a positive interest sensitivity
gap results. The gap is negative when interest sensitive liabilities exceed
interest sensitive assets, as was the case at the end of 1993 with respect to
the one-year "horizon." For a bank or a bank holding company with a negative
gap, falling interest rates would be expected to have a positive effect on net
interest income and rising rates would be expected to have the opposite effect.
54
The following table summarizes LSB's interest sensitivity position as of
December 31, 1993.
INTEREST SENSITIVITY ANALYSIS
WITHIN 4-6 7-12 OVER 1
3 MONTHS MONTHS MONTHS YEAR TOTAL
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Interest earning assets:
Securities................... $ 53,865 $ 8,904 $ 25,232 $141,284 $229,285
Federal funds sold and
securities purchased under
agreements to resell........ 25,500 25,500
Loans, net of unearned in-
come........................ 155,190 20,193 21,602 185,785 382,770
-------- -------- -------- -------- --------
Total interest earning as-
sets...................... $234,555 $ 29,097 $ 46,834 $327,069 $637,555
-------- -------- -------- ======== ========
Interest bearing liabilities:
Time deposits $100M and over. $ 26,796 $ 10,280 $ 6,963 $ 5,191 $ 49,230
Other time deposits.......... 85,384 49,285 34,115 24,005 192,789
Other interest bearing depos-
its......................... 249,791 249,791
Short-term borrowings........ 62,464 62,464
Long-term debt............... 4,143 143 3,714 8,000
-------- -------- -------- -------- --------
Total interest bearing lia-
bilities.................. $428,578 $ 59,565 $ 41,221 $ 32,910 $562,274
-------- -------- -------- ======== ========
Interest sensitivity gap....... (194,023) (30,468) 5,613
Cumulative interest sensitivity
gap........................... (194,023) (224,491) (218,878)
Gap ratio...................... .55 .49 1.14
Cumulative gap ratio........... .55 .54 .59
- --------
Loans are net of unearned income and nonaccrual loans totaling $3,119,000.
The above table reflects the balances of interest earning assets and interest
bearing liabilities at the earlier of their repricing or maturity dates. Debt
securities are reflected at each instrument's ultimate maturity or prerefunded
date. Equity securities, consisting of shares in mutual funds with principal
holdings of U.S. Treasury securities and government agency issued
collateralized mortgage obligations, are reflected in the earliest repricing
interval since LSB may redeem the shares at any time. Scheduled principal
payment amounts of amortizing fixed rate loans are reflected generally at each
scheduled principal payment date. Scheduled principal payment amounts for
variable rate amortizing loans are reflected at each scheduled principal
payment date until the loan may be repriced contractually; the unamortized
principal balance is shown at that point. Interest bearing liabilities with no
contractual maturity, such as savings deposits and interest bearing transaction
accounts, are reflected in the earliest repricing period due to contractual
arrangements which give the subsidiary banks the opportunity to vary the rates
paid on these deposits within a thirty-day or shorter period. However, the
banks are under no obligation to vary these rates within any particular thirty-
day period. Fixed rate time deposits, principally certificates of deposit, are
reflected at their contractual maturity dates. Variable rate time deposits,
principally Individual Retirement Accounts, are reflected at the earlier of
their next repricing or maturity dates. Short-term and fixed rate long-term
borrowings reflect contractual maturities or scheduled repayments; variable
rate borrowings are reflected at their next repricing dates.
Each of the subsidiary banks has an Asset/Liability Management Committee
whose responsibility is to establish parameters for various interest rate risk
measures, set strategies to control interest rate risk within those parameters,
to maintain adequate and stable net interest income, and to direct the
implementation of tactics to facilitate achieving their objectives. Although
interest rates during 1993 were relatively stable, maintaining and improving
net interest income was challenging. Because interest rates were at or near
historical lows throughout 1993, many loan customers were eager to refinance
their existing debts. This resulted in a much faster decrease in the yield on
loans than would have been expected given an interest
55
sensitivity analysis based on contractual terms, such as the one above. At the
same time, depositors and other funds providers have preferred to shorten the
maturity/repricing characteristics of their financial assets in anticipation of
a reversal of the trend toward lower rates or, alternatively, to lengthen those
characteristics in exchange for a higher rate. In pursuing this second option,
many customers have purchased annuity contracts or mutual funds, thereby moving
their funds out of the banking system.
PROVISION FOR LOAN LOSSES
The provision for loan losses is charged to earnings based on management's
continuing review and evaluation of the loan portfolio and general economic
conditions. Provisions for loan losses totaled $1,548,000, $2,528,000 and
$3,608,000 in 1993, 1992, and 1991, respectively. Since 1991, the downward
trend in provisions for loan losses is attributable to lower levels of net
charge-offs, improvement in the amounts of nonaccrual and past due loans and
the ratios of nonaccrual and past due loans to loans outstanding. LSB's market
areas and customer base contain a significant number of federal, state and
local governmental agencies and employees. These entities and individuals have
been less affected by slowdowns in economic activity and corporate "downsizing"
than has the economy as a whole. This has contributed to the improvement in
LSB's loan quality.
Net charge-offs in 1993 were $1,272,000, or 82.17% of the provision for loan
losses. The remainder of the provision increased the allowance for loan losses
to 1.32% of loans, net of unearned income at December 31, 1993 from its level
of 1.27% one year earlier. See "Summary of Loan Loss Experience" and
"Allocations of Allowance for Loan Losses" for a discussion of the factors
management considers in its review of the adequacy of the allowance and
provision for loan losses.
OTHER OPERATING INCOME
Other operating income for 1993 increased by $1,802,000, or 30.21%, over
1992. Approximately $1,095,000, or 60.77%, of this increase was due to higher
service charges on deposit accounts resulting from LSB's implementation of
revised service charge schedules during 1993. Merchant discounts and
interchange fees associated with the credit card operation increased by
$157,000 in 1993 and income from trust department activities increased by
$126,000.
YEARS ENDED DECEMBER 31,
--------------------------
1993 1992 1991
-------- -------- --------
(DOLLARS IN THOUSANDS)
Service charges on deposit accounts................. $ 4,276 $ 3,181 $ 3,088
Credit life insurance commissions................... 227 201 382
Gain on sale of investment securities............... 337 256 190
Other income........................................ 2,926 2,326 1,439
-------- -------- --------
Total............................................. $ 7,766 $ 5,964 $ 5,099
======== ======== ========
OTHER OPERATING EXPENSES
Other operating expenses for 1993 increased by $3,366,000, or 15.67%,
compared with an increase of $3,314,000, or 18.25%, for 1992. Salaries and
employee benefits, net occupancy expense and furniture and equipment expenses
for 1993 were all impacted by the inclusion, for the first time, of a full-
year's operating expenses associated with the three Beaufort area branches
purchased in July of 1992. Also affecting these expenses during 1993 was the
establishment of three de novo branches in the Columbia, South Carolina area.
In an effort to control growth in other operating expenses and to enhance
income opportunities, LSB engaged an independent consulting firm in 1993 to
review its operating practices and to recommend alternative methods for
management's consideration. As a result, LSB began in 1993 to emphasize the use
of part-time employees where practicable and to use computer and other
technologies more extensively to
56
improve work flow and enhance customer service. Consequently, LSB's full-time
equivalent employees decreased to 431 at the end of 1993 from 452 at the end of
1992.
In December 1990, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." This statement required the
implementation, no later than 1993, of new accounting and disclosure rules for
benefits other than pensions, such as postretirement health care programs. In
addition, SFAS No. 112, "Employers' Accounting for Postemployment Benefits,"
which was issued in November 1992, requires, no later than 1994, the
implementation of new accounting and disclosure rules for postemployment
benefits such as payments to employees for disability, layoff, or other event.
LSB and its subsidiaries do not sponsor any postretirement benefits other than
pensions, nor are any material postemployment benefits provided. Therefore, the
new requirements do not have, nor are they expected to have, any material
effect on the consolidated financial position or results of operations of LSB.
Other expenses for 1993 increased by $1,277,000, or 17.60%, compared with an
increase of $1,457,000, or 25.12%, in 1992. Factors affecting 1993 included
higher FDIC insurance assessments resulting from deposit growth, and increases
in supply and other ancillary expenses associated with the operation of a
larger branch network.
YEARS ENDED DECEMBER 31,
--------------------------
1993 1992 1991
-------- -------- --------
(DOLLARS IN THOUSANDS)
Salaries and employee benefits...................... $ 13,015 $ 11,388 $ 9,711
Net occupancy expense............................... 1,274 1,113 971
Furniture and equipment expense..................... 2,020 1,719 1,681
Other expense....................................... 8,534 7,257 5,800
-------- -------- --------
Total............................................. $ 24,843 $ 21,477 $ 18,163
======== ======== ========
INCOME TAXES
Income tax expense increased by $410,000 for 1993 primarily due to an
increased level of taxable income resulting from higher pre-tax earnings. LSB
continues to experience a decrease in the volume of non-taxable investments,
resulting in higher taxable income. Income taxes as a percentage of income
before income taxes were 29.56%, 28.39% and 20.58% for 1993, 1992 and 1991,
respectively.
In February 1992, the Financial Accounting Standards Board issued SFAS No.
109, "Accounting for Income Taxes," which required a change in the method of
accounting primarily for deferred income taxes. LSB adopted the new accounting
rule as of January 1, 1993, without restatement of prior periods. The effects
of adopting SFAS No. 109 had no material adverse or beneficial effect on
consolidated financial position or results of operations.
As of December 31, 1993, gross deferred income tax assets totaling $2,284,000
were computed in accordance with SFAS No. 109. Of the total gross deferred tax
assets, $1,873,000 was considered by management as likely to be realized
primarily based on anticipated reversals of temporary differences which could
be carried back against taxable income in prior years, $358,000 was considered
likely to be realized in the near term based on expected future taxable income,
and a valuation allowance of $53,000 was established on amounts not considered
likely to be realized. Deferred income tax credits totaled $1,643,000 at the
end of 1993.
SECURITIES
During the fourth quarter of 1993, management assessed the classification of
investment securities in anticipation of adopting SFAS No. 115, "Accounting for
Investments in Certain Debt and Equity Securities."
57
Issued by the Financial Accounting Standards Board in May 1993, SFAS No. 115
requires the classification of securities into held-to-maturity, available-for-
sale, and trading securities categories. LSB adopted the provisions of SFAS No.
115 effective December 31, 1993. Since no retroactive application of the
provisions of SFAS No. 115 are permissible, the effect of adopting the new
statement on the 1993 year end consolidated balance sheet was to adjust the
carrying value of certain debt securities and other investments to estimated
fair value from amortized cost for debt securities and from lower of cost or
market for equity securities. These debt and equity securities were
reclassified into the available-for-sale category in accordance with the
provisions of SFAS No. 115. Generally, the debt securities so reclassified
consist of obligations of the U.S. Treasury and U.S. government agencies and
mortgage-backed securities which management may sell in response to changes in
market rates of interest, liquidity needs, asset/liability management
strategies, regulatory mandate or capital requirements. In assessing the
allocation of securities into the available-for-sale category, management
considered that U.S. Treasury and U.S. government agency obligations are LSB's
most readily marketable securities. Because market interest rates are at
historic lows, management believes that, should the need arise to reposition
LSB's securities portfolio or in the event of a liquidity need, the government
securities market would afford the best opportunity for any necessary action.
Mortgage-backed securities are included in the available-for-sale category
since LSB may be required to divest such instruments in the event certain
regulatorily-determined conditions are not maintained and, as a result, the
securities become designated as "high-risk" investments. In addition, a
substantial portion of the securities classified in the available-for-sale
category are used to collateralize securities sold under agreements to
repurchase or are pledged to secure public deposits. Securities included in the
held-to-maturity category are limited to securities issued by states and their
political subdivisions, which generally are unencumbered and held in small
denominations. SFAS No. 115 required no change in the basis of accounting for
held-to-maturity securities.
To effect the adoption of SFAS No. 115, the consolidated balance sheet
carrying amount for securities reclassified as available-for-sale securities
was increased $2,123,000 and a separate component account included in total
consolidated stockholders' equity was credited with $1,361,000, which is net of
a $762,000 tax effect. Adopting SFAS No. 115 had no effect on the consolidated
statement of income for the year ended December 31, 1993.
On an ongoing basis, LSB and its subsidiaries will assign securities upon
purchase into one of the three designated categories based on management's
intent, taking into consideration other factors, including expectations for
changes in market rates of interest, liquidity needs, asset/liability
management strategies, and capital requirements.
As of December 31, 1993, unrealized gains and losses arising from available-
for-sale debt securities were excluded from capital for purposes of computing
regulatory risk-based capital ratios for LSB and its subsidiaries. However,
federal regulators have issued for comment a proposal to include this separate
component in the calculation of Tier 1 capital for leverage and risk-based
capital purposes. The regulators indicated in their proposal that a final rule
should be issued by the end of the first quarter of 1994.
58
The following table summarizes the carrying value amounts of securities held
by LSB at each of the dates indicated.
SECURITIES PORTFOLIO COMPOSITION
DECEMBER 31,
-----------------------------------------
1993 (1) 1992 (2) 1991 (2)
------------------- ---------- ----------
AVAILABLE- HELD-TO-
FOR-SALE MATURITY INVESTMENT SECURITIES
---------- -------- ---------------------
(DOLLARS IN THOUSANDS)
U.S. Treasury and U.S. Government
agencies............................ $149,709 $ 107,056 $ 109,390
States and political subdivisions.... $24,377 27,642 31,714
Mortgage-backed securities........... 17,536 15,948 7,595
Equity securities.................... 36,091
-------- ------- ---------- ----------
Total.............................. $203,336 $24,377 $ 150,646 $ 148,699
======== ======= ========== ==========
- --------
(1) Available-for-sale securities are stated at estimated fair value and held-
to-maturity securities are stated at amortized cost.
(2) Debt securities are stated at amortized cost and equity securities were
carried in other investments at lower of cost or market.
The following table presents maturities and weighted average yields of
securities at December 31, 1993.
SECURITIES PORTFOLIO MATURITIES AND YIELDS
DECEMBER 31, 1993
-----------------------------------------------
AVAILABLE-FOR- HELD-TO-
SALE MATURITY
CARRYING AMOUNT YIELD CARRYING AMOUNT YIELD
--------------- ----- --------------- -----
(DOLLARS IN THOUSANDS)
U.S. Treasury and U.S. Govern-
ment agencies
Within one year............. $ 43,994 5.36%
After one through five
years...................... 96,319 5.28%
After five through ten
years...................... 9,396 6.55%
--------
$149,709 5.38%
--------
States and political subdivi-
sions
Within one year............. $ 6,115 9.36%
After one through five
years...................... 11,034 9.85%
After five through ten
years...................... 6,898 8.73%
After ten years............. 330 8.41%
-------
$24,377 9.39%
-------
Mortgage-backed securities
After ten years............. 17,536 6.78%
--------
Equity securities
After ten years............. 36,091 4.18%(1)
--------
Total
Within one year............. 43,994 5.36% 6,115 9.36%
After one through five
years...................... 96,319 5.28% 11,034 9.85%
After five through ten
years...................... 9,396 6.55% 6,898 8.73%
After ten years............. 53,627 5.03% 330 8.41%
-------- -------
Total..................... $203,336 5.29% $24,377 9.39%
======== =======
- --------
(1) Equity securities yields reflect either the yields of the underlying assets
as of December 31, 1993, or the annualized yield derived from dividing the
most recent dividend received amount by the carrying amount at year end and
then multiplying that result by the frequency of dividend payments.
59
At December 31, 1993, LSB had concentrated $29,398,000 into shares of the
Federated ARMs Fund (Institutions Shares) mutual fund. These equity shares are
included in the available-for-sale category of securities and are carried in
the consolidated balance sheet at an estimated fair value of $29,270,000. The
fund's investments comprise primarily adjustable and floating rate mortgage
securities issued by or guaranteed as to payment of principal and interest by
the U.S. Government, its agencies or instrumentalities. Management constantly
reviews the published closing net asset values and periodically reviews other
financial information published by the mutual funds.
LOAN PORTFOLIO
Management believes the loan portfolio is adequately diversified. There are
no foreign loans and few agricultural loans. LSB's Mortgage Loan Department
originates mortgage loans for sale to others, but does not generally service
such loans. However, certain older mortgage loans and selected new loans with
acceptable rate schedules are held and serviced. Real estate loans are
primarily construction loans and other loans secured by real estate. There were
no significant concentrations in any particular individuals or industry or
group of related individuals or industries at the end of 1993. As of December
31, 1993, the ten largest loans (including lines of credit) accounted for
approximately 5.39% of outstanding loans. The table "Loan Portfolio
Composition" indicates the amounts of loans outstanding according to type of
loan at the dates indicated.
Because extending credit involves a certain degree of risk-taking, management
has established loan and credit policies designed to control both the types and
amounts of risks assumed and to minimize losses. Such policies include
limitations on loan-to-collateral values for various types of collateral,
requirements for appraisals of real estate collateral, problem loan management
practices and collection procedures, and nonaccrual and charge-off guidelines.
LOAN PORTFOLIO COMPOSITION
DECEMBER 31,
--------------------------------------------
1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Commercial, financial and agricul-
tural............................ $ 52,113 $ 57,395 $ 46,828 $ 42,889 $ 41,005
Real estate--construction......... 13,180 15,247 16,775 11,460 14,499
Real estate--mortgage............. 257,233 239,968 197,262 177,911 162,298
Consumer installment loans........ 64,544 68,534 72,801 81,812 85,051
-------- -------- -------- -------- --------
Total loans--gross.............. $387,070 $381,144 $333,666 $314,072 $302,853
======== ======== ======== ======== ========
Commercial, financial and agricultural loans, primarily representing loans
made to businesses and municipal governments, decreased by 9.20% in 1993. These
loans may be made on either a secured or an unsecured basis. When taken,
security consists of liens on inventories, receivables, equipment, and
furniture and fixtures. Unsecured business loans are generally short-term with
emphasis on repayment strengths and low debt-to-worth ratios. As of December
31, 1993, approximately $25,792,000 or 49.49% of commercial, financial and
agricultural loans were unsecured.
Real estate construction loans consist of financing to owners and contractors
for construction of 1-4 family dwellings. Generally, mortgages are obtained on
the properties, loan-to-cost ratios are limited to 75% and permanent financing
commitments are required prior to the advancement of funds. In 1993, LSB's
exposures in real estate development and construction loans decreased by
$2,067,000. Currently, loans for the construction of homes by contractors for
which there is no contract of sale are available only to the most creditworthy
contractors.
60
LOANS SECURED BY REAL ESTATE MORTGAGES
DECEMBER 31,
------------------------------
1993 1992
-------------- --------------
AMOUNT % AMOUNT %
-------- ----- -------- -----
(DOLLARS IN THOUSANDS)
Residential..................................... $142,376 55.3% $141,373 58.9%
Nonfarm, non-residential........................ 110,792 43.1% 96,311 40.1%
Farmland........................................ 4,065 1.6% 2,284 1.0%
-------- ----- -------- -----
Total......................................... $257,233 100.0% $239,968 100.0%
======== ===== ======== =====
Loans secured by real estate mortgages grew $17,265,000, or 7.19%, in 1993.
These loans represented the largest portion of LSB's outstanding loans,
representing 66.46% and 62.96% of total loans, respectively, as of December 31,
1993 and 1992. During 1993, loans secured by mortgages on residential property
increased by $1,003,000 and nonfarm, non-residential real estate loans
increased by $14,481,000. Residential real estate loans consist of first and
second mortgages on homes and multifamily apartments. Generally, loan-to-value
ratios for these loans are limited to 80%. Mortgage loans originated for sale
in the secondary market totaled $909,000 and $1,077,000 as of December 31, 1993
and 1992, respectively. Such loans are carried at the lower of cost or fair
value. Repayment of business real estate loans is dependent primarily on the
income and cash flows of the borrower; the real estate serves as a secondary,
or liquidation source of repayment.
Consumer installment loans have been declining both in dollar amount and as a
percentage of total loans since 1989. This category of loans as a percentage of
total loans has declined steadily from 28.08% at the end of 1989 to 16.68% at
the end of 1993. This trend is expected to continue. Because of changes in
federal income tax laws that excluded the deductibility of consumer loan
interest, the popularity of home equity loans grew and resulted in an increase
in residential real estate loans. In addition, aggressive financing programs by
affiliates of automobile manufacturers have reduced the volume of consumer
lending on automobiles.
The economies of LSB's local service areas are well diversified with no
predominance of industries or economic activities. Lexington and Richland
Counties, South Carolina, are home to state and local governments, industry, a
major military training base, and institutions of higher education. Hampton
County, South Carolina, is more rural in nature. Economic activity in this area
includes agriculture, timber and wood products, and plastics. Beaufort County,
located on the coast of South Carolina, is home to the Parris Island Marine
Depot and Training Center and also is increasingly attractive to retirees.
McCormick County, South Carolina, is mostly rural, with some light
manufacturing activity. As of December 31, 1993, approximately $314,872,000, or
81.35%, of loans outstanding were originated in the Lexington-Richland County
area. No particular loan category is expected to grow or contract
disproportionately in 1994. National economic trends affect local business
conditions; accordingly, loan growth in 1994 is expected to be only moderate.
MATURITY DISTRIBUTION OF LOANS
The following table sets forth the maturity distribution of LSB's loans, by
type, as of December 31, 1993, as well as the type of interest requirement on
such loans.
61
LOAN PORTFOLIO MATURITY SCHEDULE
DECEMBER 31,
---------------------------------------
ONE YEAR ONE TO FIVE YEARS
OR LESS FIVE YEARS OR MORE TOTAL
-------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
Commercial, financial and agricultural. $19,611 $ 14,289 $ 18,213 $ 52,113
Real estate--construction.............. 11,260 1,884 36 13,180
Real estate--mortgage.................. 25,830 55,111 176,292 257,233
Consumer installment loans............. 11,928 48,912 3,704 64,544
------- -------- -------- --------
Total loans--gross................... $68,629 $120,196 $198,245 $387,070
======= ======== ======== ========
Predetermined rate, maturity greater
than one year......................... $ 88,936 $ 93,940 $182,876
======== ======== ========
Variable rate or maturing within one
year.................................. $68,629 $ 31,260 $104,305 $204,194
======= ======== ======== ========
NONACCRUAL AND PAST DUE LOANS
The following is a summary of nonaccrual loans and loans 90 days or more past
due at each year end indicated.
DECEMBER 31,
--------------------------------------
1993 1992 1991 1990 1989
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
Nonaccrual loans....................... $3,119 $2,914 $3,544 $3,702 $3,554
Accruing loans 90 days or more past
due................................... 282 298 1,236 1,322 751
------ ------ ------ ------ ------
Total................................ $3,401 $3,212 $4,780 $5,024 $4,305
====== ====== ====== ====== ======
Percent of loans outstanding........... .88% .84% 1.43% 1.60% 1.42%
As of December 31, 1993, total nonaccrual loans and accruing loans 90 days or
more past due consisted of: $137,000, or 4.03%, commercial, financial and
agricultural; $2,776,000, or 81.62%, residential real estate mortgage;
$217,000, or 6.38%, nonfarm, nonresidential real estate mortgage; and $271,000,
or 7.97%, consumer installment loans.
A loan is generally placed on nonaccrual status when principal or interest is
90 days past due or when serious doubt exists as to collectibility. However,
accruals of interest income may continue on loans 90 days or more past due when
the loan is in the process of collection and the estimated net realizable value
of collateral is sufficient to assure collection of the principal balance and
accrued interest. Previously accrued interest on loans placed in a nonaccrual
status is reversed against current income, and subsequent interest income is
recognized when received. When the collectibility of a significant amount of
principal is in serious doubt, the principal balance is reduced to the
estimated net realizable value of collateral by charge-off to the allowance for
loan losses and any subsequent payments are credited to the outstanding
principal balance until the loan is repaid; then, such payments are credited to
the allowance for loan losses as recoveries. No portion of a nonaccrual loan is
returned to accrual status unless all principal and interest is current and the
borrower has demonstrated the ability to continue making payments as agreed.
Nonaccrual loans and accruing loans 90 days or more past due increased
slightly as of December 31, 1993, from the level at the end of 1992. Management
believes that the level of such loans will not increase materially in 1994.
Interest income that would have been recorded if nonaccrual loans had been
current in accordance with their original terms amounted to $272,000, $322,000
and $430,000 for the years ended December 31, 1993, 1992 and 1991,
respectively. Recognized interest income on these loans was $86,000, $102,000
and $252,000 for the years ended December 31, 1993, 1992 and 1991,
respectively. There were no outstanding commitments at December 31, 1993, to
lend additional funds to debtors owing nonaccrual loans.
62
In May, 1993, the Financial Accounting Standards Board issued SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," effective for fiscal years
beginning after December 15, 1994. This statement generally applies to all
loans, whether or not collateralized, including loans that are restructured in
a troubled debt restructuring involving a modification of terms. It does not
apply to large groups of smaller balance homogeneous loans that are
collectively evaluated for impairment, loans that are measured at fair value or
lower of cost or fair value, leases and debt securities. SFAS No. 114 requires
that impaired loans within its scope be measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate,
which is the contractual interest rate adjusted for any deferred loan fees or
costs, premium or discount existing at the inception or acquisition of the
loan. The statement also allows creditors, as a practical expedient, to measure
the loan at its observable market price or the fair value of the collateral if
the repayment of the loan is expected to be provided solely by the underlying
collateral. According to the statement, a loan is impaired when, based on
current information, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreement. In
addition, new disclosures are required including the recorded investment in the
loans for which impairment has been recognized, and the total allowance for
loan losses related to those impaired loans. While the new statement will
require some changes in the methodology used to account for nonperforming loans
that could possibly result in acceleration of the recognition of losses for
some loans, management does not expect either a material adverse or beneficial
effect on LSB's consolidated financial position or results of operations to
occur as a result of the provisions of SFAS No. 114.
POTENTIAL PROBLEM LOANS
At December 31, 1993, LSB's internal loan review procedures had identified
$8,185,000 in loans, not included in the above nonaccrual or past due loans,
where information about credit problems of borrowers has caused management to
have serious concerns about the ability of the borrowers to comply with
original repayment terms. The amount reflected above does not represent
management's estimate of the potential losses since a large proportion of these
loans is secured by real estate and other collateral.
As of December 31, 1993, potential problem loans consisted of $885,000 or
10.81% commercial, financial and agricultural, $6,463,000 or 78.96% real estate
mortgage, and $837,000 or 10.23% consumer installment loans.
OTHER REAL ESTATE
Other real estate, consisting primarily of foreclosed properties, increased
by $14,000 in 1993 to $1,969,000 as of December 31, 1993. The vast majority of
foreclosed properties held are located in the more active Lexington-Richland
County real estate market. Other real estate is initially recorded at the lower
of net loan principal balance or its estimated fair market value less estimated
selling costs. Estimated fair market value is based upon the assumption of a
sale in the normal course of business and not on a quick liquidation or
distress basis. Estimated fair market value is established by independent
appraisal at the time acquisition is completed. For properties classified as
in-substance foreclosures, estimated fair market value is determined by
internal appraisal until acquisition has been completed. As of December 31,
1993, LSB had recorded a valuation allowance for other real estate losses
subsequent to acquisition totaling $228,000. A Special Assets officer is
responsible for the prudent disposition of such properties. LSB has not been
informed of any potential environmental problems affecting any foreclosed
properties which would have a material adverse effect on financial position or
results of operations.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is increased by direct charges to operations.
Losses on loans are charged against the allowance in the period in which
management determines that such loans become uncollectible. Recoveries of
previously charged off loans are credited to the allowance.
63
SUMMARY OF LOAN LOSS EXPERIENCE
YEARS ENDED DECEMBER 31,
------------------------------------------------
1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Total loans outstanding at
the end of period, net of
unearned income............. $385,889 $378,498 $328,818 $307,329 $295,117
Average amount of loans
outstanding, net of unearned
income...................... 381,345 354,716 319,798 299,912 282,298
Balance of allowance for loan
losses at beginning of year. 4,804 4,100 3,907 3,639 3,211
-------- -------- -------- -------- --------
Loans charged off:
Commercial, financial and
agricultural.............. 653 1,069 1,785 1,148 773
Real estate--mortgage...... 514 495 701 117 136
Consumer installment loans. 419 554 1,152 792 550
-------- -------- -------- -------- --------
Total charge-offs........ 1,586 2,118 3,638 2,057 1,459
-------- -------- -------- -------- --------
Recoveries of loans previ-
ously charged-off:
Commercial, financial and
agricultural.............. 116 66 85 54 43
Real estate--mortgage...... 27 49 3 16 14
Consumer installment loans. 171 179 135 134 88
-------- -------- -------- -------- --------
Total recoveries......... 314 294 223 204 145
-------- -------- -------- -------- --------
Net charge-offs.......... 1,272 1,824 3,415 1,853 1,314
-------- -------- -------- -------- --------
Additions to allowance
charged to expenses......... 1,548 2,528 3,608 2,121 1,742
-------- -------- -------- -------- --------
Balance of allowance for loan
losses at end of period..... $ 5,080 $ 4,804 $ 4,100 $ 3,907 $ 3,639
======== ======== ======== ======== ========
Ratios:
Net charge-offs during year
to average loans outstand-
ing during year........... .33% .51% 1.07% .62% .47%
Net charge-offs to loans at
end of year............... .33% .48% 1.04% .60% .45%
Allowance for loan losses
to average loans.......... 1.33% 1.35% 1.28% 1.30% 1.29%
Allowance for loan losses
to loans at end of year... 1.32% 1.27% 1.25% 1.27% 1.23%
Net charge-offs to allow-
ance for losses........... 25.04% 37.97% 83.29% 47.43% 36.11%
Net charge-offs to provi-
sion for loan losses...... 82.17% 72.15% 94.65% 87.36% 75.43%
Based on the current levels of nonperforming and other problem loans,
management believes that the amounts of loan charge-offs in 1994 will be
similar to the amounts experienced in 1993. Management believes further that
the allowance for loan losses as of December 31, 1993, is sufficient to absorb
the expected charge-offs and provide adequately for the inherent losses that
remain in the loan portfolio. Management will continue to closely monitor the
levels of nonperforming and potential problem loans and will address the
weaknesses in these credits to enhance the amount of ultimate collection or
recovery of these assets. Should increases in the overall level of
nonperforming and potential problem loans accelerate from the current trend,
management will adjust the methodology for determining the allowance for loan
losses to increase the provision and allowance for loan losses. This would
likely decrease net income.
64
The following table presents the allocation of the allowance for loan losses,
at the end of each of the last five years, compared with the percent of loans
in the applicable categories to total loans.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
DECEMBER 31,
-------------------------------------------------------------------------
1993 1992 1991 1990 1989
------------- ------------- ------------- ------------- -------------
% OF % OF % OF % OF % OF
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
Commercial, financial
and agricultural....... $1,515 13.46% $ 795 15.06% $ 753 14.03% $ 824 13.66% $ 615 13.54%
Real estate--construc-
tion................... 845 3.40% 681 4.00% 483 5.03% 357 3.65% 341 4.79%
Real estate--mortgage... 1,163 66.46% 893 62.96% 734 59.12% 863 56.64% 941 53.59%
Consumer installment.... 511 16.68% 111 17.98% 212 21.82% 898 26.05% 1,063 28.08%
Unallocated............. 1,046 2,324 1,918 965 679
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total.................. $5,080 100.00% $4,804 100.00% $4,100 100.00% $3,907 100.00% $3,639 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
In reviewing the adequacy of the allowance for loan losses at the end of each
reporting period, management considers the historical loan loss experience,
current economic conditions affecting the borrowers' ability to repay, the
volume of loans outstanding, trends in delinquent, nonaccruing, and potential
problem loans, and the quality of collateral securing nonperforming and problem
loans. After charging off all known losses, management considers the allowance
for loan losses adequate to cover its estimate of possible future loan losses
inherent in the loan portfolio as of December 31, 1993.
DEPOSITS
The average amounts of deposits held by LSB for the years ended December 31,
1993, 1992 and 1991 are summarized below.
AVERAGE DEPOSITS
YEARS ENDED DECEMBER 31,
--------------------------
1993 1992 1991
-------- -------- --------
(DOLLARS IN THOUSANDS)
Noninterest bearing demand.......................... $ 73,811 $ 60,805 $ 48,284
Interest bearing transaction accounts............... 202,315 191,489 148,980
Savings............................................. 49,299 37,994 27,982
Time deposits $100M and over........................ 53,006 52,442 49,211
Other time deposits................................. 193,431 194,788 193,866
-------- -------- --------
Total deposits.................................... $571,862 $537,518 $468,323
======== ======== ========
As of December 31, 1993, LSB held $49,230,000 in time deposits $100,000 and
over with $26,796,000 maturing within three months, $10,280,000 maturing over
three through six months, $6,963,000 maturing over six through twelve months,
and $5,191,000 maturing after twelve months.
Interest bearing deposits are by far LSB's largest source of funds. Changes
in the mix of interest bearing deposits are shown in the table entitled
"Average Deposits." As indicated in that table, average time deposits $100,000
and over increased by $564,000 in 1993 compared with 1992, and increased by
$3,231,000 in 1992 compared with 1991. Acquisitions of time deposits $100,000
and over are in large part a function of the rates a financial institution is
willing to negotiate and, as such, these deposits have many of the
characteristics of shorter-term purchased funds.
65
SHORT-TERM BORROWINGS
The following table summarizes LSB's short-term borrowings, which consist of
federal funds purchased and securities sold under agreements to repurchase and
interest bearing demand notes issued to the U.S. Treasury.
DECEMBER 31,
-----------------------
1993 1992 1991
------- ------- -------
(DOLLARS IN THOUSANDS)
Federal funds purchased and securities sold under
agreements to repurchase.............................. $61,464 $31,628 $13,730
Interest bearing demand notes issued to the U.S. Trea-
sury.................................................. 1,000 1,000 1,000
------- ------- -------
Total................................................ $62,464 $32,628 $14,730
======= ======= =======
Federal funds purchased and securities sold under agreements to repurchase
generally mature on a one to thirty-one day basis. Such short-term borrowings
increased significantly in 1993 due to the movement of funds from a few deposit
accounts to an overnight repurchase agreement product. These relationships
typically have very large sums held with LSB for short periods of time. The
following table summarizes information concerning federal funds purchased and
securities sold under agreements to repurchase.
YEARS ENDED DECEMBER 31,
----------------------------
1993 1992 1991
-------- -------- --------
(DOLLARS IN THOUSANDS)
Maximum outstanding at any month end during the
period.......................................... $ 66,164 $ 36,780 $ 31,713
Average outstanding during the period............ 42,494 26,930 24,015
Average interest rate during the period.......... 2.63% 3.13% 5.35%
Average interest rate at end of period........... 2.83% 2.96% 3.75%
RETURN ON EQUITY AND ASSETS
The following table shows the return on assets (net income divided by average
total assets), return on equity (net income divided by average equity),
dividend payout ratio (dividends declared per share divided by net income per
share), and equity to assets ratio (average equity divided by average total
assets) for each period indicated.
YEARS ENDED DECEMBER 31,
----------------------------
1993 1992 1991
-------- -------- --------
Return on assets.................................. 1.00% .99% .67%
Return on equity.................................. 13.33% 13.66% 8.62%
Dividend payout ratio............................. 29.68% 30.50% 50.42%
Equity to assets ratio............................ 7.52% 7.24% 7.74%
Capital Commitments
LSB currently has no material commitments for capital expenditures for
construction, renovations, computer equipment or software for 1994.
LIQUIDITY
Liquidity is the ability to meet current and future obligations through
liquidation or maturity of existing assets or the acquisition of additional
liabilities. Adequate liquidity is necessary to meet the requirements of
customers for loans and deposit withdrawals in the most timely and economical
manner. Some liquidity is ensured by maintaining assets which may be
immediately converted into cash at minimal cost (amounts due from banks and
federal funds sold). However, the most manageable sources of liquidity are
composed of
66
liabilities, with the primary focus of liquidity management being on the
ability to obtain deposits within LSB's local service areas. Core deposits
(total deposits less time deposits $100,000 and over) provide a relatively
stable funding base. Time deposits $100,000 and over require a diversification
of sources to achieve an appropriate level of liquidity as these funds are
relatively more sensitive to interest rates than are other deposit sources.
LSB's banking subsidiaries have short-term lines of credit to purchase federal
funds available from unrelated correspondent banks totaling $24,500,000. These
lines of credit are available generally on a one to seven day basis for general
corporate purposes of the banks. All of the lenders reserve the right to
withdraw these lines at their option. Also, LSB's subsidiary, Lexington, has an
undrawn line of credit from the Federal Home Loan Bank of Atlanta ("FHLB")
totaling $28,000,000. Advances under this line may be drawn for terms up to one
year and are secured by a blanket lien on all 1-4 family residential first lien
mortgages held by that subsidiary, totaling approximately $57,401,000 as of
December 31, 1993, and FHLB capital stock with a carrying value of $1,551,000.
Asset liquidity is provided from several sources, including amounts due from
banks, federal funds sold and available-for-sale securities. In addition, funds
from maturing loans are a source of liquidity. Management believes that the
banking subsidiaries' overall liquidity sources are adequate to meet their
operating needs.
67
SOURCES AND USES OF CASH
INCREASE (DECREASE) DECEMBER 31,
-------------------------------------
1993 % 1992 %
--------- ------- --------- -------
(DOLLARS IN THOUSANDS)
SOURCES OF CASH
Deposits
Core deposits
Noninterest bearing demand.......... $ 10,712 15.06 % $ 5,915 7.73 %
Interest bearing transaction ac-
counts............................. (18,457) (25.94)% 26,303 34.38 %
Savings............................. 8,696 12.22 % 7,810 10.21 %
Time deposits under $100M........... 912 1.28 % (13,893) (18.16)%
-------- ------- -------- -------
Total core deposits................ 1,863 2.62 % 26,135 34.16 %
Time deposits $100M and over......... 5,532 7.77 % 255 .33 %
-------- ------- -------- -------
Total deposits..................... 7,395 10.39 % 26,390 34.49 %
-------- ------- -------- -------
Borrowings
Short-term borrowings................ 29,836 41.94 % 17,943 23.45 %
Long-term debt....................... 4,000 5.62 % 1,998 2.61 %
-------- ------- -------- -------
Total borrowings................... 33,836 47.56 % 19,941 26.06 %
-------- ------- -------- -------
Branch acquisitions................... 15,712 20.54 %
-------- ------- -------- -------
Earning assets
Time deposits in other banks......... 100 .13 %
Federal funds sold................... 13,625 19.15 %
-------- ------- -------- -------
Total earning assets............... 13,625 19.15 % 100 .13 %
-------- ------- -------- -------
Non-earning assets
Sales of other real estate........... 1,898 2.67 % 2,674 3.50 %
Cash and due from banks.............. 4,060 5.71 %
-------- ------- -------- -------
Total non-earning assets........... 5,958 8.38 % 2,674 3.50 %
-------- ------- -------- -------
Stockholders' equity
Operating activities................. 9,450 13.28 % 11,307 14.78 %
Sale of common stock................. 885 1.24 % 381 .50 %
-------- ------- -------- -------
Total stockholders' equity......... 10,335 14.52 % 11,688 15.28 %
-------- ------- -------- -------
Total sources of cash.............. $ 71,149 100.00 % $ 76,505 100.00 %
======== ======= ======== =======
USES OF CASH
Earning assets
Securities........................... $ 41,234 57.95 % $ 1,826 2.39 %
Funds sold........................... 19,625 25.65 %
Other investments.................... 14,148 19.89 % 11,150 14.57 %
Loans made to customers.............. 11,010 15.48 % 31,215 40.80 %
-------- ------- -------- -------
Total earning assets............... 66,392 93.32 % 63,816 83.41 %
-------- ------- -------- -------
Non-earning assets
Cash and due from banks.............. 7,620 9.96 %
Premises and equipment............... 2,919 4.10 % 3,356 4.39 %
-------- ------- -------- -------
Total non-earning assets........... 2,919 4.10 % 10,976 14.35 %
-------- ------- -------- -------
Stockholders' equity
Cash dividends paid.................. 1,838 2.58 % 1,713 2.24 %
-------- ------- -------- -------
Total uses of cash................. $ 71,149 100.00 % $ 76,505 100.00 %
======== ======= ======== =======
68
Understanding the changes in LSB's consolidated financial position and
liquidity is enhanced by analyzing the changes in the size and composition of
the various categories of earning and non-earning assets due to cash flows and
the sources of cash for those changes. The table, "Sources and Uses of Cash,"
is an analysis that is derived principally from the consolidated statement of
cash flows included in the consolidated financial statements and related notes
appearing elsewhere in this report. The information in this table focuses on
changes in year end balances between 1993 and 1992, and between 1992 and 1991
caused by cash flows. No material one-day transactions occurred at year end
1993, 1992 or 1991 that would materially distort the picture of funding sources
and uses.
As shown in the table, LSB's funding mix shifted during 1993, becoming more
dependent on short-term borrowing than on core deposit growth. This development
is not worrisome as it represents the movement of the funds derived from a few
stable customer relationships from deposit accounts to an overnight repurchase
agreement product. Demand deposit growth provided a significant funding source,
also. Business customers generally utilize "compensating balances" in the form
of funds left on deposit with the banks to offset some or all of the costs of
services they use. The amount of the compensating balances required to offset
the costs incurred vary directly with the volumes of services consumed and the
service charge schedules in effect, and inversely to changes in interest rates.
Since service charge schedules increased during 1993 and interest rates were
generally lower, compensating balance requirements and, consequently, demand
deposit balances were higher.
Loan demand was modest throughout 1993. As a result, uses of cash were
concentrated in purchases of investment securities. Sufficient liquidity in the
form of federal funds sold, investments in mutual funds and short-term
securities, and unused lines of credit are available to allow LSB to meet
increased loan demand or deposit withdrawals.
The banking subsidiaries are required by Federal Reserve regulations and
South Carolina banking law to maintain an average cash reserve balance based on
a percentage of deposits. The average amount of the required reserve balance as
of December 31, 1993, was approximately $12,656,000. Vault and teller cash
comprised $7,497,000, or 59.24%, of the cash reserve at December 31, 1993, and
$5,159,000 included in amounts due from banks accounted for the remainder of
the requirement.
During 1990, LSB entered into a subordinated capital note borrowing agreement
with a correspondent bank. The proceeds of this borrowing were used in 1990 to
increase LSB's equity investments in Lexington and Community by $800,000 and
$1,200,000, respectively. During 1992, management drew the remaining $2,000,000
to provide funds for the acquisition of branch offices. In 1993, this borrowing
was refinanced with a different lender on substantially the same terms as the
original note, with the exception that a total credit facility of $6,000,000
was provided. $2,000,000 of this arrangement remains undrawn and available for
LSB's general corporate needs.
As part of the agreement, LSB agreed to certain covenants including
maintenance of specified amounts of net worth; minimum ratios of capital
adequacy and income to average assets; and a maximum ratio of loans to
deposits. Other covenants contained in the loan agreement restrict the ability
of LSB to declare and pay cash dividends, to dispose of subsidiaries' common
stock, to pledge certain assets to secure indebtedness and to enter into
additional long-term borrowing agreements. As of December 31, 1993, $6,776,000
of consolidated retained earnings was available for distribution, provided that
such payments would not thereafter cause net worth and ratios of capital
adequacy to decrease below the specified levels. It is anticipated that these
covenants and restrictions will have no material effect on LSB's operations or
its ability to continue to pay dividends.
LSB's ability to pay dividends and meet its cash obligations is dependent
primarily upon the successful operation of its subsidiary banks. All of the
banking subsidiaries' dividend payments to LSB are subject to the prior
approval of the South Carolina Board and are payable only from the undivided
profits of the banks. The undivided profits of the subsidiary banks totaled
$25,223,000 as of December 31, 1993. Under Federal
69
Reserve regulations, the amounts of loans or advances from the banking
subsidiaries to the parent company are also restricted.
CAPITAL ADEQUACY
The equity capital of LSB increased $7,241,000 during 1993, largely as the
result of the $6,776,000 net income. However, cash dividends totaling
$1,838,000 were declared and paid in 1993, somewhat offsetting this source of
capital. Proceeds from the sale of 37,476 shares of common stock through LSB's
Dividend Reinvestment and Shareholder Stock Purchase Plan provided $885,000 in
additional capital. The effects of adopting SFAS No. 115, concerning the
accounting for certain securities (see "Securities" included elsewhere in this
discussion) increased stockholders' equity by a total of $1,418,000. Because
SFAS No. 115 requires the recording of changes in unrealized holding gains and
losses on available-for-sale securities as a separate component of
stockholders' equity, future fluctuations in the estimated fair value of such
securities could have a significant adverse or beneficial effect on total
stockholders' equity.
LSB and its subsidiary banks are subject to regulatory risk-based capital
adequacy standards (see "SUPERVISION AND REGULATION OF BB&T FINANCIAL AND
LSB"). Under these standards, bank holding companies and banks are required to
maintain certain minimum ratios of capital to risk-weighted assets and average
total assets. The following table sets forth the risk-based capital ratios of
LSB and its banking subsidiaries at December 31, 1993, compared with the
minimum levels prescribed by regulation:
TOTAL
TIER 1 CAPITAL LEVERAGE
------ ------- --------
LSB.................................................... 12.96% 15.16% 7.85%
Lexington.............................................. 13.65% 14.86% 7.95%
Community.............................................. 13.28% 14.53% 7.03%
Regulatory Minimum Requirement......................... 4.00% 8.00% 3.00%
INFLATION
The assets and liabilities of a bank are primarily monetary in nature
(payable in fixed determinable amounts). Consequently, the performance of a
bank is affected more by changes in interest rates than by inflation. Interest
rates generally increase as the rate of inflation increases, but the magnitude
of the change in rates may not be the same.
While the effect of inflation on banks is normally not as significant as is
its influence on those businesses which have large investments in plant and
inventories, it does have an effect. During periods of high inflation, there
are normally corresponding increases in the money supply, and banks will
normally experience above-average growth in assets, loans and deposits. Also,
general increases in the prices of goods and services will result in increased
operating expenses.
70
OWNERSHIP OF LSB COMMON STOCK BY
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS OF LSB
No stockholder is known to management of LSB to be a beneficial owner of more
than five percent of LSB Common Stock. Common stock is LSB's only class of
voting securities.
DIRECTORS AND OFFICERS OF LSB
The following table sets forth as of March 8, 1994, the number and percent of
total outstanding shares of LSB Common Stock beneficially owned by all
directors of LSB individually and by all directors and officers of LSB as a
group.
COMMON STOCK
BENEFICIALLY OWNED(1)(13)
---------------------------------
NAME NUMBER PERCENTAGE
---- -------------- --------------
James T. Brittingham......................... 31,710(2) 1.02%
Robert K. Bouknight.......................... 3,042 .10%
Vasa W. Cate, M.D............................ 2,912(3) .09%
Raymond S. Caughman.......................... 24,064(4) .77%
Albert J. Dooley, Sr......................... 30,362(5) .97%
Robert N. Hubbs.............................. 14,931(6) .40%
Albin S. Johnson............................. 90,009(7) 2.89%
Robert E. Livingston......................... 36,795(8) 1.18%
J. Harold Lown............................... 18,726(9) .60%
Frank A. McClure, Jr. ....................... 89,408(10) 2.87%
G. J. Sanders, Jr............................ 137,374(11) 4.41%
Francis M. Smith............................. 34,964(12) 1.12%
- --------
As of March 8, 1994, all executive officers and directors of LSB as a group (13
persons), owned 516,510 shares (16.58%) of the outstanding LSB Common Stock.
(1) Except as indicated below, each director of LSB has sole voting and
investment power with respect to all shares of LSB Common Stock owned by
such director.
(2) Includes 14,236 shares held by Evelyn S. Brittingham (wife).
(3) Includes 115 shares held by Dr. Vasa W. Cate, Custodian for Kimberly Ann
Cate (daughter) and 115 shares held by Dr. Vasa W. Cate, Custodian for
Catherine L. Cate (daughter).
(4) Includes 2,500 shares held by Elizabeth H. Caughman (wife).
(5) Includes 1,057 shares held by Connie S. Dooley (wife) and 283 shares held
by Connie S. Dooley, Custodian for Nancy E. Dooley (daughter).
(6) Includes 660 shares held by Gaynell S. Hubbs (wife) and 29 shares held by
Gaynell S. Hubbs, Custodian for Ginger D. Hubbs (daughter).
(7) Includes 23,800 shares held by Columbia Farms, Inc., 10,773 shares held by
Columbia Farms, 60,159 shares held by Columbia Farms of Georgia, 600 shares
held as custodian for Courtney Johnson, 600 shares held as custodian for
Shannon Johnson, and 600 shares held as custodian for Shelley Johnson.
(8) Includes 2,310 shares held by Raye H. Livingston (wife).
(9) Includes 778 shares held by Marjorie M. Lown (wife).
(10) Includes 23,752 shares held by Doris W. McClure (wife) and 2,704 shares
held by McClure Insurance Agency.
(11) Includes 27,992 shares held by a trust of which Mr. Sanders is trustee.
(12) Includes 1,155 shares held by Doris O. Smith (wife).
(13) Based on the number of shares of BB&T Financial Common Stock outstanding
on March 8, 1994 plus the shares of BB&T Financial Common Stock expected
to be issued in connection with the Merger, none of such persons will
receive more than one percent of the outstanding shares of BB&T Financial.
71
MANAGEMENT OF LSB
To the extent such information relates to Raymond S. Caughman or Albert J.
Dooley, Sr., each of whom will become a director of BB&T Financial upon
consummation of the Merger, the information set forth in LSB's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993, under the captions
"Directors and Executive Officers of the Registrant," "Executive Compensation"
and "Certain Relationships and Related Transactions" is hereby incorporated by
reference herein.
MARKET PRICES AND DIVIDENDS
BB&T Financial Common Stock is actively traded in the over-the-counter market
under the symbol "BBTF," and is quoted on the Nasdaq/NMS. LSB Common Stock is
traded in the over-the-counter market under the symbol "LBSC" and the shares
are quoted on the Nasdaq/NMS.
The following tables reflect the high and low closing sales prices for BB&T
Financial Common Stock as quoted on the Nasdaq/NMS and LSB Common Stock as
quoted on the Nasdaq for the periods indicated. Prices shown represent
interdealer prices without retail mark-up, mark-down or commissions, and may
not represent actual transactions.
BB&T Financial
TABLE OF CLOSING PRICES
-----------------------------------------
1994 1993 1992
------------- ------------- -------------
HIGH LOW HIGH LOW HIGH LOW
------ ------ ------ ------ ------ ------
1st Quarter..................... $33.63 $29.13 $35.38 $31.00 $27.75 $21.88
2nd Quarter (through May 11,
1994).......................... 29.75 28.63 35.88 30.25 30.13 25.50
3rd Quarter..................... 34.63 32.25 29.88 27.38
4th Quarter..................... 35.88 29.13 32.25 28.75
LSB
TABLE OF CLOSING PRICES
-----------------------------------------
1994 1993 1992
------------- ------------- -------------
HIGH LOW HIGH LOW HIGH LOW
------ ------ ------ ------ ------ ------
1st Quarter..................... $35.00 $33.00 $20.00 $17.00 $14.50 $14.00
2nd Quarter (through May 11,
1994).......................... 34.50 32.50 20.50 19.00 14.50 13.25
3rd Quarter..................... 27.25 20.50 24.00 14.50
4th Quarter..................... 34.50 27.25 17.50 16.00
Cash Dividends Paid Per Share
The following table reflects the cash dividends per share paid or declared on
the BB&T Financial Common Stock for the periods indicated:
1994 1993 1992
---- ---- ----
1st Quarter................................................. $.27 $.25 $.22
2nd Quarter................................................. .27 .25 .22
3rd Quarter................................................. .25 .22
4th Quarter................................................. .27 .25
72
The holders of BB&T Financial Common Stock are entitled to receive dividends
when and if declared by the BB&T Financial Board of Directors out of funds
legally available therefor. BB&T Financial has paid regular quarterly cash
dividends since 1921. Although BB&T Financial currently intends to continue to
pay quarterly cash dividends on the BB&T Financial Common Stock, there can be
no assurance that BB&T Financial's dividend policy will remain unchanged after
completion of the Merger. The declaration and payment of dividends thereafter
will depend upon business conditions, operating results, capital and reserve
requirements and the BB&T Financial Board of Directors' consideration of other
relevant factors.
BB&T Financial is a legal entity separate and distinct from its subsidiaries
and its revenues depend in significant part on the payment of dividends from
its subsidiary financial institutions, particularly BB&T. BB&T Financial's bank
subsidiaries are subject to certain legal restrictions on the amount of
dividends they are permitted to pay. See "SUPERVISION AND REGULATION OF BB&T
FINANCIAL AND LSB--Regulation of BB&T Financial's and LSB's Bank Subsidiaries."
There can be no assurance that dividends would be paid in the future. The
declaration, payment and amount of any such future dividends would depend upon
business conditions, operating results, capital, reserve requirements,
regulatory authorizations and the consideration of other relevant factors by
the BB&T Financial Board of Directors. See "SUPERVISION AND REGULATION OF BB&T
FINANCIAL AND LSB."
The following table reflects the cash dividends paid per share on the LSB
Common Stock for the periods indicated:
1994 1993 1992
---- ---- ----
1st Quarter................................................. $.17 $.16 $.15
2nd Quarter................................................. .16 .15
3rd Quarter................................................. .16 .15
4th Quarter................................................. .17 .16
The holders of LSB Common Stock are entitled to receive dividends when and if
declared by the LSB Board of Directors out of funds legally available therefor.
The declaration, payment and amount of any future dividends would depend upon
business conditions, operating results, capital reserve requirements,
regulatory authorizations and the consideration of other relevant factors by
the LSB Board of Directors. LSB is also a legal entity separate and distinct
from its subsidiaries and its revenues also depend in significant part on the
payment of dividends from its subsidiary financial institutions. LSB's bank
subsidiaries are subject to certain legal restrictions on the amount of
dividends they are permitted to pay. See "SUPERVISION AND REGULATION OF BB&T
FINANCIAL AND LSB--Regulation of BB&T Financial's and LSB's Bank Subsidiaries."
There can, therefore, be no assurance that any dividends would be paid in the
future.
73
DESCRIPTION OF BB&T FINANCIAL COMMON STOCK TO BE ISSUED IN THE MERGER AND
COMPARISON OF STOCKHOLDERS' RIGHTS
GENERAL
BB&T Financial's authorized capital stock consists of two classes,
represented by 100,000,000 shares of BB&T Financial Common Stock, $2.50 par
value, of which 32,195,746 shares were issued and outstanding and 3,083,199
shares were reserved for issuance as of March 31, 1994 and 4,000,000 shares of
nonvoting preferred stock, $2.50 par value, no shares of which are issued or
outstanding. BB&T Financial's Amended Articles of Incorporation authorize the
BB&T Financial Board of Directors, without stockholder approval, to fix the
preferences, limitations and relative rights of the preferred stock and to
establish series of such preferred stock and determine the variations between
each series. If any shares of preferred stock are issued, the rights of holders
of BB&T Financial Common Stock will be subject to the rights and preferences
conferred to holders of such preferred stock.
LSB's authorized capital stock consists of one class of 5,000,000 shares of
LSB Common Stock, $2.50 par value, of which 3,121,146 shares were issued and
outstanding and 143,572 shares were reserved for issuance as of the Record
Date. No other classes of capital stock of LSB are authorized.
DIVIDEND RIGHTS
The holders of BB&T Financial Common Stock are entitled to share ratably in
dividends when and as declared by the BB&T Financial Board of Directors out of
funds legally available therefor. One of the principal sources of income to
BB&T Financial is dividends from its subsidiaries. For a description of certain
restrictions on the payment of dividends by banks, see "SUPERVISION AND
REGULATION OF BB&T FINANCIAL AND LSB--Regulation of BB&T Financial's and LSB's
Bank Subsidiaries." BB&T Financial's Amended Articles of Incorporation permit
the BB&T Financial Board of Directors to issue non-voting preferred stock with
terms set by the BB&T Financial Board of Directors which terms may include the
right to receive dividends ahead of the holders of BB&T Financial Common Stock.
No shares of such preferred stock are presently outstanding.
The holders of LSB Common Stock also are entitled to share ratably in
dividends when and if declared by the LSB Board of Directors out of funds
legally available therefor. For a description of certain restrictions on the
payment of dividends by banks, see "SUPERVISION AND REGULATION OF BB&T
FINANCIAL AND LSB--Regulation of BB&T Financial's and LSB's Bank Subsidiaries."
VOTING RIGHTS
The holders of BB&T Financial Common Stock have one vote for each share held
on any matter presented for consideration by the stockholders. Under North
Carolina law, the right of cumulative voting in the election of directors is
denied to stockholders of publicly held corporations such as BB&T Financial.
The holders of LSB Common Stock have one vote for each share held on any
matter presented for consideration by the stockholders. Under South Carolina
law, the right of cumulative voting in the election of directors is available
to stockholders of publicly held corporations such as LSB unless the
corporation's articles of incorporation prohibit it. LSB's Amended Articles of
Incorporation prohibit cumulative voting in the election of its directors.
PREEMPTIVE RIGHTS
The holders of BB&T Financial Common Stock do not have any preemptive or
preferential rights to purchase or to subscribe for additional shares of BB&T
Financial Common Stock or any other securities that BB&T Financial may issue.
74
The holders of LSB Common Stock also do not have any preemptive or
preferential rights to purchase or to subscribe for additional shares of LSB
Common Stock or any other securities that LSB may issue.
ASSESSMENT AND REDEMPTION
The shares of BB&T Financial Common Stock presently outstanding are, and
those shares of BB&T Financial Common Stock issuable upon consummation of the
Merger will be when issued, fully paid and nonassessable. Such shares are not
convertible and do not have any redemption provisions.
The outstanding shares of LSB Common Stock have been duly issued and are
validly outstanding, fully paid and nonassessable. Such shares are not
convertible, do not have any redemption provisions and are not entitled to any
sinking fund.
LIQUIDATION RIGHTS
In the event of liquidation, dissolution or winding up of BB&T Financial,
whether voluntary or involuntary, the holders of BB&T Financial Common Stock
will be entitled to share ratably in any of its net assets or funds which are
available for distribution to its stockholders after the satisfaction of its
liabilities or after adequate provision is made therefor, subject to the rights
of the holders of any preferred stock outstanding at the time.
In the event of liquidation, dissolution or winding up of LSB, whether
voluntary or involuntary, the holders of LSB Common Stock will be entitled to
share ratably in any of the net assets or funds of LSB which are available for
distribution to its stockholders after the satisfaction of its liabilities or
after adequate provision is made therefor.
TRANSFER AGENT
The Transfer Agent and Registrar for BB&T Financial Common Stock is BB&T.
Lexington is the Transfer Agent and Registrar for LSB Common Stock.
CERTAIN PROVISIONS WHICH MAY HAVE AN ANTI-TAKEOVER EFFECT
Certain provisions of the By-laws and Amended Articles of Incorporation of
BB&T Financial, the By-laws and Amended Articles of Incorporation of LSB and
North Carolina and South Carolina law, and certain other arrangements, some of
which are described below, may discourage an attempt to acquire control of BB&T
Financial or LSB which a majority of the stockholders of BB&T Financial or LSB
might determine to be in their best interest or in which stockholders might
receive a premium over the current market price for their shares. These
provisions also may render the removal of a director or of the entire Board of
Directors of BB&T Financial or LSB more difficult and may deter or delay
corporate changes of control which have not received the requisite approval of
the Board of Directors of BB&T Financial or LSB, as applicable.
Election and Removal of Directors. All of BB&T Financial's directors are
elected each year. Under BB&T Financial's Amended Articles of Incorporation,
approval by the vote of at least two-thirds of the outstanding shares of BB&T
Financial Common Stock entitled to vote is required for the removal of any
director or the entire BB&T Financial Board of Directors. Under North Carolina
law, a director may be removed by stockholder vote only if the number of votes
cast to remove him exceeds the number of votes cast not to remove him.
LSB's Amended Articles of Incorporation provide that the number of directors
of LSB shall be fixed and may be altered from time to time as provided in the
by-laws. The by-laws provide that the number of directors shall be set by
resolution of the LSB Board of Directors or the stockholders. The articles
provide further that the LSB Board of Directors shall be divided into three
classes, each class to be as nearly equal in number as possible, with the term
of one class expiring each year. At each annual stockholders' meeting,
75
directors are chosen for a term of three years to succeed those directors whose
terms expire. A classified board makes it more difficult to effect a change in
control because it would require at least two elections to gain a majority
representation on the board, and three elections to change the entire board.
In accordance with South Carolina law, LSB's by-laws provide that a director
or the entire LSB Board of Directors may be removed, with cause, by the
affirmative vote of the holders of a majority of the shares entitled to vote on
the election of directors only at a meeting expressly called for removal and
the meeting notice must state that removal is the purpose or one of the
purposes of the meeting. The term "cause" is limited to fraudulent or dishonest
acts, or the gross abuse of authority in the discharge of a director's duties
to LSB and is established only after notice and an opportunity to refute the
charges. These requirements may make it more difficult for the stockholders of
LSB to remove a director or change the composition of the LSB Board of
Directors.
Authorized Preferred Stock. BB&T Financial's Amended Articles of
Incorporation authorize 4,000,000 shares of nonvoting preferred stock. The BB&T
Financial Board of Directors may, subject to applicable law and the rules of
the National Association of Securities Dealers for Nasdaq/NMS companies,
authorize the issuance of preferred stock at such times, for such purposes and
for such consideration as it may deem advisable without further stockholder
approval. The issuance of preferred stock under certain circumstances may have
the effect of discouraging an attempt by a third party to acquire control of
BB&T Financial by, for example, authorizing the issuance of a series of
preferred stock with rights and preferences designed to impede the proposed
transaction. A series of preferred stock also could be used for a stockholder
rights plan, which may be adopted without stockholder approval. Such a plan, if
adopted, could deter attempts by third parties to acquire a significant number
of shares of BB&T Financial Common Stock without the prior approval of the BB&T
Financial Board of Directors.
LSB's Amended Articles of Incorporation do not authorize the issuance of
preferred stock.
North Carolina and South Carolina Stockholder Protection Legislation. The
North Carolina Shareholder Protection Act and the North Carolina Control Share
Acquisition Act both apply to BB&T Financial. These Acts are designed to
protect stockholders against certain changes in control and to provide
stockholders with the opportunity to vote on whether to accord voting rights to
certain stockholders.
The North Carolina Shareholder Protection Act ("N.C. Shareholder Protection
Act") is a "fair price" statute that requires the affirmative vote of 95% of
the voting shares of a corporation for the adoption of a business combination
(including a merger) with another entity if the other entity beneficially owns
more than 20% of the voting shares of the corporation. This vote is not
required if the shareholders of the corporation receive a specified minimum
price for their shares as part of the business combination and the shareholders
receive a proxy statement for the purpose of soliciting their approval for the
business combination. The proxy statement must contain the opinion of those
directors not elected by the other entity as to the advisability of the
business combination and may include an opinion from an outside investment firm
as to the fairness of the transaction. A North Carolina corporation may opt out
of the provisions of the N.C. Shareholder Protection Act in its articles of
incorporation or by-laws.
The North Carolina Control Share Acquisition Act ("Share Acquisition Act")
requires the approval of a majority of a corporation's disinterested
shareholders before an acquiror of the corporation's shares who crosses one of
three voting thresholds (20%, 33 1/3% or 50%) may obtain voting control with
respect to those shares that exceed the threshold. The Share Acquisition Act
also provides disinterested shareholders with certain redemption rights if the
acquiror gains majority voting power for the election of the corporation's
directors as a result of the affirmative vote of the disinterested
shareholders. A merger pursuant to an agreement of merger with the corporation
does not fall under the purview of the Share Acquisition Act. A North Carolina
corporation may opt out of the provisions of the Shareholder Protection Act in
its articles of incorporation or by-laws.
76
BB&T Financial has not chosen to opt out of the N.C. Shareholder Protection
Act or the Share Acquisition Act. BB&T Financial's Amended Articles of
Incorporation and By-laws do not contain any provision that would prevent the
application of either of the Acts to BB&T Financial. As a result, the effect of
these Acts may be to deter or delay changes in control which are opposed by the
BB&T Financial Board of Directors or stockholders.
South Carolina law regulates business combinations such as mergers,
consolidations and asset purchases where the business acquired was, or the
assets belonged to, a public corporation, such as LSB, and where the acquiror
became an "interested shareholder" of the public corporation before either (i)
the purchase resulting in such acquiror becoming an "interested shareholder,"
or (ii) the business combination received the prior approval of a majority of
the disinterested members of the board of directors of the public corporation.
In the context of this law, an "interested shareholder" is any person who
directly or indirectly, alone or in concert with others, beneficially owns or
controls 10% or more of the voting stock of the public corporation and a
"disinterested" board member is a person who is neither a present or former
officer or employee of the corporation. The law prohibits business combinations
with an unapproved interested shareholder for a period of two years after the
date on which the person became an interested shareholder and requires that any
business combination with an unapproved interested shareholder after such two
year period be approved by a majority vote of outstanding shares held by
persons other than the interested shareholder or meet certain requirements that
other stockholders receive at least a specified price for their shares. The law
is very broad in its scope and is designed to inhibit unfriendly acquisitions,
but it does not apply to corporations whose articles of incorporation contain a
provision electing not to be covered by the law. LSB's articles of
incorporation do not contain such a provision. An amendment of the articles of
incorporation to that effect would permit a business combination with an
interested shareholder even though that status was obtained prior to the
amendment.
South Carolina law also contains provisions that, under certain
circumstances, would preclude an acquiror of the shares of a South Carolina
corporation who crosses one of three voting thresholds (20%, 33 1/3% or 50%)
from obtaining voting control with respect to such shares unless a majority in
interest of the disinterested shareholders of the corporation votes to accord
voting power to such shares. South Carolina law provides that, if authorized by
the articles of incorporation or by-laws prior to the occurrence of a control
share acquisition, the corporation may redeem the control shares if the
acquiring person has not complied with certain procedural requirements
(including the filing of an "acquiring person statement" with the corporation
within 60 days after the control share acquisition) or if the control shares
are not accorded full voting rights by the shareholders. LSB is not authorized
by its articles or by-laws to redeem control shares. Neither the provisions of
South Carolina law relating to business combinations with interested
shareholders nor those relating to the acquisition of control shares will
affect the proposed Merger because (i) the LSB Board of Directors approved both
the proposed Merger and BB&T Financial's becoming an interested shareholder
before BB&T Financial became an interested shareholder, and (ii) BB&T Financial
has not acquired, and will not acquire as a result of the Merger, control
shares of LSB.
Supermajority Voting Provisions. BB&T Financial's Amended Articles of
Incorporation require the affirmative vote of two-thirds of the outstanding
shares entitled to vote to approve a merger, consolidation, or other business
combination, unless the transaction is approved, prior to consummation, by two-
thirds of the members of the BB&T Financial Board of Directors. This provision
could tend to make the acquisition of BB&T Financial more difficult to
accomplish without the cooperation or favorable recommendation of the BB&T
Financial Board of Directors.
South Carolina law provides that two-thirds of the outstanding shares of the
corporation entitled to vote must vote in the affirmative to approve a merger,
unless the articles of incorporation require a different vote. Except in the
case of an acquisition by a Major Stockholder, as discussed below, LSB's
Amended Articles of Incorporation defer to this applicable law. This
supermajority requirement may make it more difficult for the consummation of a
merger between LSB and another corporation.
77
Certain provisions of LSB's Amended Articles of Incorporation (the "Anti-
takeover Provisions") limit the ability of a "Major Stockholder" to effect
certain transactions involving LSB. A "Major Stockholder" is defined as any
Person which, together with its "Affiliates" and "Associates" (as defined in
Rule 12b-2 under the Exchange Act) and any Person acting in concert therewith,
is the beneficial owner of 10% or more of the
votes held by the holders of the outstanding shares entitled to vote, and any
Affiliate or Associate of a Major Stockholder, including a Person acting in
concert therewith. The term Major Stockholder does not include LSB or an LSB
subsidiary.
For purposes of the Anti-takeover Provisions, "Person" is defined as any
individual, corporation, partnership or other person, group or entity (other
than LSB, an LSB subsidiary or a trustee holding stock for the benefit of
employees of the LSB or its subsidiaries, or any one of them, pursuant to one
or more employee benefit plans or arrangements). When two or more Persons act
as a partnership, limited partnership, syndicate, association or other group
for the purpose of acquiring, holding or disposing of shares of stock, such
partnerships, syndicate, association or group will be deemed a "Person." The
term "beneficial owner" has the meaning set forth in Rule 13d-3 under the
Exchange Act, and in addition, any shares of LSB Common Stock which any Major
Stockholder has the right to vote or to acquire (i) pursuant to any agreement,
(ii) by reason of tenders of shares by LSB's stockholders in connection with or
pursuant to a tender offer made by such Major Stockholder (whether or not any
tenders have been accepted, but excluding tenders which have been rejected), or
(iii) upon the exercise of conversion rights, warrants, options or otherwise,
are deemed "beneficially owned" by such Major Stockholder.
Under the Anti-takeover Provisions, neither LSB nor any LSB subsidiary can be
a party to a Business Combination unless:
(1) The Business Combination was approved by the LSB Board of Directors
prior to the Major Stockholder involved in the Business Combination
becoming a Major Stockholder; or
(2) The Major Stockholder involved in the Business Combination sought and
obtained the unanimous prior approval of the LSB Board of Directors to
become a Major Stockholder and the Business Combination was approved by the
LSB Board of Directors which includes at least three Continuing Directors
and such resolution is approved by a majority of the Continuing Directors
(defined as (i) members of the LSB Board of Directors immediately prior to
the time that any existing Major Stockholder became a Major Stockholder or
(ii) a person designated (before initially becoming a director) as a
Continuing Director by a majority of the then Continuing Directors); or
(3) The Business Combination was approved by the LSB Board of Directors
which includes at least three Continuing Directors and such resolution is
approved by at least 80% of the Continuing Directors of LSB; or
(4) The Business Combination was approved by at least 80% of the
outstanding voting stock of LSB and by at least 80% of the outstanding
voting stock beneficially owned by stockholders other than any Major
Stockholder.
"Business Combination" is defined as:
(i) any merger or consolidation (whether in a single transaction or a
series of related transactions, including a series of separate
transactions with a Major Stockholder, any Affiliate or Associate
thereof or any Person acting in concert therewith) of LSB or any LSB
subsidiary with or into a Major Stockholder or of a Major Stockholder
into LSB or any LSB subsidiary;
(ii) any sale, lease, exchange, transfer, distribution to
stockholders or other disposition, including without limitation, a
mortgage, pledge or any other security device, to or with a Major
Stockholder by LSB or any LSB subsidiary (in a single transaction or a
series of related transactions) of all, or substantially all of the
assets of LSB or any LSB subsidiary (including, without limitation, any
securities of a subsidiary);
78
(iii) the purchase, exchange, lease or other acquisition by LSB or
any LSB subsidiary (in a single transaction or a series of related
transactions) of all, or substantially all of the assets or business of
a Major Stockholder;
(iv) the issuance of any securities, or of any rights, warrants or
options to acquire any securities, of LSB or any LSB subsidiary to a
Major Stockholder or the acquisition by LSB or any LSB subsidiary of
any securities, or of any rights, warrants or options to acquire any
securities of a Major Stockholder;
(v) any reclassification of stock, recapitalization or other
transaction (other than a redemption in accordance with the terms of
the security redeemed) which has the effect, directly or indirectly, of
increasing the proportionate amount of LSB Common Stock or of the
voting stock of any LSB subsidiary which is beneficially owned by a
Major Stockholder, or any partial or complete liquidation, spin off,
split off or split up of LSB or any LSB subsidiary; provided, however,
that this does not relate to any transaction of the types specified
that has been approved by a majority of the Continuing Directors; and
(vi) any agreement, contract or other arrangement providing for any
of the foregoing transactions.
For purposes of the definition of the term "Business Combination," the term
"Major Stockholder" means the Major Stockholder, each Person comprising the
Major Stockholder and each Affiliate or Associate of a Major Stockholder or any
such Person, including any Person acting in concert therewith.
The Anti-takeover Provisions also provide that while a Major Stockholder
exists, a resolution to voluntarily dissolve LSB will be adopted only if:
(1) the LSB Board of Directors includes at least three Continuing
Directors and the resolution is approved by at least 80% of the Continuing
Directors of LSB; or
(2) the resolution is approved by at least 80% of the outstanding shares
entitled to vote and by at least 80% of the outstanding shares entitled to
vote beneficially owned by stockholders other than any Major Stockholder.
The Continuing Directors are given wide discretion in LSB's Amended Articles
of Incorporation to determine if certain conditions which would trigger the
operation of the Anti-takeover Provisions have been fulfilled.
The Anti-takeover Provisions are designed to discourage attempts to acquire
LSB in non-negotiated transactions utilizing two-tier pricing tactics, which
typically involve the accumulation of a substantial block of the target
corporation's stock followed by a merger or other reorganization of the
acquired company on terms determined by the purchaser. In such two-step
takeover attempts, the purchaser generally pays cash to acquire a controlling
interest in the company and acquires the remaining equity interest by paying
the remaining stockholders a price lower than that paid to acquire the
controlling interest, often utilizing non-cash consideration.
Although federal and state securities laws and regulations require that
disclosure be made to such stockholders of the terms of such a transaction,
these laws provide no assurance that the financial terms of such a transaction
will be fair to stockholders or that the stockholders can effectively prevent
its consummation. The Anti-takeover Provisions are intended to address some of
the effects of these gaps in federal and state securities law and to prevent
some of the potential inequities of two-step takeover attempts by encouraging
negotiations with directors. Negotiated transactions may result in more
favorable terms to LSB's stockholders because of such factors as the timing of
the transaction, tax effects on the stockholders, and the fact that the nature
and amount of the consideration paid to all stockholders will be negotiated by
the parties at arm's-length rather than dictated by the purchaser.
79
Interests to be Considered in Evaluating A Major Corporate Transaction. LSB's
Amended Articles of Incorporation provide that when evaluating any proposed
plan of merger, consolidation, exchange or sale of all, or substantially all,
of the assets of the corporation, the LSB Board of Directors shall consider the
interests of the employees of LSB and the community or communities in which LSB
and its subsidiaries, if any, do business in addition to the interests of LSB's
stockholders.
BB&T Financial's Amended Articles of Incorporation and By-laws do not contain
a similar provision.
Amendments to Articles of Incorporation. BB&T Financial's Amended Articles of
Incorporation require approval by holders of at least two-thirds of the
outstanding shares entitled to vote in order to amend certain provisions of
BB&T Financial's Amended Articles of Incorporation. Those provisions require
holders of at least two-thirds of its outstanding shares to approve (i) the
removal of a director or the entire BB&T Financial Board of Directors, (ii) a
merger, consolidation or other business combination not approved by two-thirds
of the BB&T Financial Board of Directors, and (iii) an amendment or repeal of
the By-laws. Any other amendment of the Amended Articles of Incorporation
requires the affirmative vote of the holders of a majority of the shares
entitled to vote on such amendment.
LSB's Amended Articles of Incorporation provide that the Anti-takeover
Provisions of the Amended Articles of Incorporation may not be amended,
changed, or repealed without an affirmative vote of 80% of the outstanding
shares entitled to vote and 80% of the outstanding shares entitled to vote
beneficially owned by stockholders other than any Major Stockholder. Any other
amendment to the Amended Articles of Incorporation is required to be made in
accordance with Section 33-10-103 of the SCBCA which requires an affirmative
vote of two-thirds of the outstanding shares eligible to vote to approve an
amendment to the Amended Articles of Incorporation.
Amendments to By-laws. BB&T Financial's By-laws may be amended by either the
vote of a majority of the BB&T Financial Board of Directors or by the
affirmative vote of the holders of at least two-thirds of the outstanding BB&T
Financial Common Stock entitled to vote.
LSB's By-laws may be amended at any time by the LSB Board of Directors or by
LSB's stockholders, except as otherwise required by law, the Amended Articles
of Incorporation or the By-laws. The stockholders may repeal the authority of
the LSB Board of Directors to amend the By-laws or adopt new By-laws.
Employee Stock Plans. BB&T Financial established employee stock ownership
plans for the benefit of the employees of certain savings institutions upon
their acquisitions by BB&T Financial. These plans, which hold 255,906 shares of
BB&T Financial Common Stock as of March 31, 1994, are subparts of BB&T
Financial's Savings and Thrift Plan, which holds an additional 1,830,917 shares
of BB&T Financial Common Stock as of March 31, 1994. Under plan terms,
participants in BB&T Financial's Savings and Thrift Plan have the right to
direct the trustee as to the voting of the shares held in their accounts on all
matters, including the election of directors. Under these plans, including each
employee stock ownership plan, the trustee is required, subject to applicable
law, to vote the shares as to which participant directions are not received and
as to shares not allocated to participant accounts in the same proportion as
the allocated shares as to which directions are received. Plan terms also would
require the trustee of each plan to follow participant instructions as to the
tendering of any shares held in participant accounts in the event of a tender
offer. Shares allocated to participant accounts as to which instructions are
not received and unallocated shares are, again subject to applicable law,
tendered pursuant to the same procedures as to which shares would be voted. As
a result of these so-called "pass-through" provisions, any third-party attempt
to acquire control of BB&T Financial by means of a proxy contest or tender
offer may require the support of the plan participants. The BB&T Financial
employee stock plans established thus may tend to discourage such attempts to
the extent that participants oppose third-party attempts to acquire control and
stockholder approval or support is required for such attempts.
LSB has not established an employee stock ownership or similar plan.
80
THE SHARES OF BB&T FINANCIAL COMMON STOCK TO BE ISSUED IN THE MERGER ARE NOT
DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
SUPERVISION AND REGULATION OF BB&T FINANCIAL AND LSB
The following description briefly discusses certain provisions of federal and
state laws and certain adopted and proposed regulations and the potential
impact of such provisions on BB&T Financial and its subsidiaries and LSB and
its subsidiaries. The discussion is only a summary and does not purport to be a
complete description of the applicable laws and regulations, and summarizes
only the laws and regulations as currently in effect (and, in certain cases,
regulations as currently proposed).
GENERAL
As a bank holding company registered under the BHCA, each of BB&T Financial
and LSB is subject to the regulation and supervision of the Federal Reserve.
Under the BHCA, BB&T Financial's and LSB's activities and those of their
subsidiaries are limited to banking, managing or controlling banks, furnishing
services to or performing services for its subsidiaries or engaging in any
other activity which the Federal Reserve determines to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
The BHCA prohibits BB&T Financial and LSB from acquiring direct or indirect
control of more than 5% of the outstanding voting stock or substantially all of
the assets of any bank or merging or consolidating with another bank holding
company without the prior approval of the Federal Reserve. The BHCA also
prohibits BB&T Financial and LSB from acquiring control of any bank operating
outside each company's home state (which in the case of BB&T Financial is North
Carolina and in the case of LSB is South Carolina) unless such action is
specifically authorized by the statutes of the state in which the bank to be
acquired is located. In the case of the Merger, South Carolina law specifically
authorizes a bank holding company located in, among other southeastern states,
North Carolina, to acquire a commercial bank located in South Carolina,
provided that, among other things, a bank holding company located in South
Carolina may acquire banks in North Carolina (which is permitted under North
Carolina law).
Additionally, the BHCA prohibits BB&T Financial and LSB from engaging in, or
acquiring ownership or control of, more than 5% of the outstanding voting stock
of any company engaged in a nonbanking business, unless such business is
determined by the Federal Reserve to be so closely related to banking as to be
a proper incident thereto. The BHCA generally does not place geographic
restrictions on the activities of such nonbanking entities.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by federal law and
regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance funds in
the event the depository institution becomes in danger of default or in
default. For example, to reduce the likelihood of receivership of an insured
depository institution subsidiary, a bank holding company may be required to
guarantee the compliance of any insured depository institution subsidiary that
may become "undercapitalized" with the terms of any capital restoration plan
filed by such subsidiary with its appropriate federal banking agency up to the
lesser of (i) an amount equal to 5% of the subsidiary institution's total
assets at the time the institution became undercapitalized or (ii) the amount
which is necessary (or would have been necessary) to bring the institution into
compliance with all applicable capital standards as of the time such
institution fails to comply with such capital restoration plan. Under a policy
of the Federal Reserve with respect to bank holding company operations, a bank
holding company is required to serve as a source of financial strength to its
subsidiary depository institutions and to commit resources to support such
institutions in circumstances where it might not do so absent such policy. The
Federal Reserve also has the authority under the BHCA to require a bank holding
company to terminate any activity or to relinquish control of a nonbank
subsidiary (other than a nonbank subsidiary of a bank) upon the Federal
Reserve's determination
81
that such activity or control constitutes a serious risk to the financial
soundness and stability of any bank subsidiary of the bank holding company.
In addition, the "cross-guarantee" provisions of the Federal Deposit
Insurance Act, as amended ("FDIA"), require insured depository institutions
under common control to reimburse the FDIC for any loss suffered or reasonably
anticipated by either the Savings Association Insurance Fund ("SAIF") or the
Bank Insurance Fund ("BIF") of the FDIC as a result of the default of a
commonly controlled insured depository institution or for any assistance
provided by the FDIC to a commonly controlled insured depository institution in
danger of default. The FDIC may decline to enforce the cross-guarantee
provisions if it determines that a waiver is in the best interest of the SAIF
or the BIF or both. The FDIC's claim for damages is superior to claims of
stockholders of the insured depository institution or its holding company but
is subordinate to claims of depositors, secured creditors and holders of
subordinated debt (other than affiliates) of the commonly controlled insured
depository institutions.
The FDIA also provides that amounts received from the liquidation or other
resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or stockholder. This
provision would give depositors a preference over general and subordinated
creditors and stockholders in the event a receiver is appointed to distribute
the assets of any of BB&T Financial's or LSB's depository institution
subsidiaries.
BB&T Financial and LSB are subject to the obligations and restrictions
described above, and BB&T, BB&T-SC, Mutual Savings, Citizens-Newton, Citizens-
Mooresville, Lexington and Community are subject to the cross-guarantee
provisions of the FDIA. However, the managements of BB&T Financial and LSB
currently do not expect that any of these provisions will have any impact on
the operations of their depository institution subsidiaries.
As a result of BB&T Financial's ownership of BB&T and its indirect ownership
of BB&T-SC, BB&T Financial is registered under the bank holding company laws of
North Carolina and South Carolina, respectively. LSB also is registered under
the bank holding company laws of South Carolina as a result of its ownership of
Lexington and Community. Accordingly, BB&T Financial and its subsidiaries are
subject to regulation and supervision by the Commissioner and both BB&T
Financial and LSB are subject to regulation and supervision by the South
Carolina Board. As a result of BB&T Financial's ownership of Citizens-Newton,
Mutual Savings and Citizens-Mooresville, BB&T Financial also is registered (and
will remain registered as long as BB&T Financial owns any North Carolina
chartered savings banks) under the savings institution holding company laws of
North Carolina and thereby is subject to regulation and supervision by the
Administrator of the Savings Institutions Division of the North Carolina
Department of Commerce.
A registered South Carolina bank holding company, such as LSB and BB&T
Financial-SC, must provide the South Carolina Board with information with
respect to the financial condition, operations, management and inter-company
relationships of the holding company and its subsidiaries. The South Carolina
Board also may require such other information as is necessary to keep itself
informed about whether the provisions of South Carolina law and the regulations
and orders issued thereunder by the South Carolina Board have been complied
with, and the South Carolina Board may examine any bank holding company and its
subsidiaries.
Under the SCBHCA, it is unlawful without the prior approval of the South
Carolina Board for any South Carolina bank holding company (i) to acquire
direct or indirect ownership or control of more than 5% of the voting shares of
any bank or any other bank holding company, (ii) to acquire all or
substantially all of the assets of a bank or any other bank holding company, or
(iii) to merge or consolidate with any other bank holding company.
The SCBHCA allows regional interstate banking by permitting banking
organizations in certain southeastern states to acquire South Carolina banking
organizations if South Carolina banking associations are allowed to acquire
banking organizations in their states and if, in the case of a banking
organization which
82
does not yet control a South Carolina banking organization, the South Carolina
banking organization to be acquired has been in existence and continuously
operated as a bank for a period of at least five years. As a result of this
provision of the SCBHCA, which became effective in 1984, banking organizations
in other states, most significantly North Carolina, have entered the South
Carolina market through acquisitions of South Carolina institutions.
CAPITAL ADEQUACY GUIDELINES FOR BANK HOLDING COMPANIES
The Federal Reserve has adopted risk-based capital guidelines for bank
holding companies. Under these guidelines, the minimum ratio of total capital
to risk-weighted assets (including certain off-balance sheet activities, such
as standby letters of credit) is 8%. At least half of the total capital is
required to be "Tier 1 capital," principally consisting of common stockholders'
equity, noncumulative perpetual preferred stock and a limited amount of
cumulative perpetual preferred stock, less certain goodwill items. The
remainder ("Tier 2 capital") may consist of a limited amount of subordinated
debt, certain hybrid capital instruments and other debt securities, perpetual
preferred stock and a limited amount of the general loan loss allowance. In
addition to the risk-based capital guidelines, the Federal Reserve has adopted
a minimum Tier 1 (leverage) capital ratio, under which a bank holding company
must maintain a minimum level of Tier 1 capital to average total consolidated
assets of at least 3% in the case of a bank holding company which has the
highest regulatory examination rating and is not contemplating significant
growth or expansion. All other bank holding companies are expected to maintain
a ratio of at least 100 to 200 basis points above the stated minimum.
The following table sets forth BB&T Financial's regulatory capital position
at December 31, 1993 on a historical basis as well as a pro forma basis
assuming consummation of the Merger. See "PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS." For a discussion of BB&T's historical capital position
and BB&T-SC's historical and pro forma capital positions as of December 31,
1993, see "--Regulation of BB&T Financial's and LSB's Bank Subsidiaries."
AT DECEMBER 31, 1993
------------------------------
HISTORICAL PRO FORMA
-------------- --------------
(DOLLARS IN THOUSANDS)
Stockholders' Equity............................ $743,512 $796,753
======== ========
REGULATORY CAPITAL
Tier 1 risk-based:
Actual........................................ $702,000 11.85% $753,625 11.92%
Required...................................... 236,929 4.00 252,862 4.00
-------- ----- -------- -----
Excess........................................ $465,071 7.85% $500,763 7.92%
======== ===== ======== =====
Total risk-based:
Actual........................................ $806,216 13.61% $862,820 13.65%
Required...................................... 473,858 8.00 505,723 8.00
-------- ----- -------- -----
Excess........................................ $332,358 5.61% $357,097 5.65%
======== ===== ======== =====
Leverage:
Actual........................................ $702,000 8.08% $753,625 8.06%
Required...................................... 260,734 3.00 280,465 3.00
-------- ----- -------- -----
Excess........................................ $441,266 5.08% $473,160 5.06%
======== ===== ======== =====
The following table sets forth LSB's regulatory capital position at December
31, 1993 on a historical basis. For a discussion of Lexington and Community's
historical capital positions as of December 31, 1993, see "--Regulation of BB&T
Financial's and LSB's Bank Subsidiaries."
83
AT DECEMBER 31,
1993
---------------
HISTORICAL
---------------
(DOLLARS IN
THOUSANDS)
Stockholders' Equity....................................... $54,833
REGULATORY CAPITAL
Tier 1 risk-based:
Actual................................................... 12.96%
Required................................................. 4.00
-------
Excess................................................... 8.96%
=======
Total risk-based:
Actual................................................... 15.16%
Required................................................. 8.00
-------
Excess................................................... 7.16%
=======
Leverage:
Actual................................................... 7.85%
Required................................................. 3.00
-------
Excess................................................... 4.85%
=======
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the "1991
Banking Law") requires each federal banking agency, including the Federal
Reserve, to revise its risk-based capital standards to ensure that those
standards take adequate account of interest rate risk, concentration of credit
risk and the risks of non-traditional activities, as well as reflect the actual
performance and expected risk of loss on multi-family mortgages. The Federal
Reserve, the FDIC and the Office of the Comptroller of the Currency ("OCC")
have issued a joint notice of proposed rulemaking, and have issued a revised
proposal, soliciting comments on a proposed framework for implementing the
interest rate risk component of the risk-based capital guidelines. Under the
proposal, an institution's assets, liabilities and off-balance sheet positions
would be weighed by risk factors that approximate the instruments' price
sensitivity to a 100 basis point change in interest rates. Institutions with
interest rate risk exposure in excess of a threshold level would be required to
hold additional capital proportional to that risk. The Federal Reserve, the
FDIC, the OCC and the Office of Thrift Supervision ("OTS") also have issued a
joint notice of proposed rulemaking soliciting comments on a proposed revision
to the risk-based capital guidelines to take account of concentration of credit
risk and the risk of non-traditional activities. The proposal would amend each
agency's risk-based capital standards by explicitly identifying concentration
of credit risk and the risk arising from non-traditional activities, as well as
an institution's ability to manage these risks, as important factors to be
taken into account by the agency in assessing an institution's overall capital
adequacy. Due to the preliminary nature of the proposal, BB&T Financial and LSB
cannot assess at this point the impact the proposal would have on the capital
requirements of each respective company or its subsidiary banks.
REGULATION OF BB&T FINANCIAL'S AND LSB'S BANK SUBSIDIARIES
BB&T is organized as a North Carolina chartered banking corporation and is
subject to various statutory requirements and to rules and regulations
promulgated and enforced by the Commissioner and the FDIC. BB&T-SC, Lexington
and Community each is organized as a South Carolina chartered banking
corporation and is subject to various statutory requirements and to rules and
regulations promulgated and enforced by the South Carolina Board and the FDIC.
North Carolina chartered banks, such as BB&T, are subject to legal
limitations on the amount of dividends they are permitted to pay. Prior
approval of the Commissioner is required if the total of all dividends declared
by BB&T in any calendar year exceeds its net profits (as defined by statute)
for that year
84
combined with its retained net profits (as defined by statute) for the
preceding two calendar years, less any required transfers to surplus. South
Carolina chartered banks, such as BB&T-SC, Lexington and Community, are
required by regulation to obtain the prior written approval of the South
Carolina Board to pay any cash dividend.
Under the FDIA, insured depository institutions, such as BB&T, BB&T-SC,
Lexington and Community, are prohibited from making capital distributions,
including the payment of dividends, if, after making such distribution, the
institution would become "undercapitalized" (as such term is used in the
statute). Based on its subsidiaries' current financial condition, neither BB&T
Financial nor LSB expects that this provision will have any impact on its
ability to obtain dividends from its insured depository institution
subsidiaries.
As state-chartered, FDIC-insured institutions which are not members of the
Federal Reserve System, BB&T, BB&T-SC, Lexington and Community are subject to
capital requirements imposed by the FDIC. The FDIC requires state-chartered
banks to comply with risk-based capital standards substantially similar to
those required by the Federal Reserve. See "--Capital Adequacy Guidelines for
Bank Holding Companies." The FDIC also requires state-chartered banks to
maintain a minimum leverage ratio similar to that adopted by the Federal
Reserve. Under the FDIC's leverage capital requirement, state nonmember banks
such as BB&T, BB&T-SC, Lexington and Community that (i) receive the highest
rating during the examination process and (ii) are not anticipating or
experiencing any significant growth are required to maintain a minimum leverage
ratio of 3% of Tier 1 capital to total assets; all other banks are required to
maintain a minimum ratio of 100 to 200 basis points above the stated minimum,
with an absolute minimum leverage ratio of not less than 4%. As of December 31,
1993, the Tier 1 and total risk-based capital ratios of BB&T were 13.06% and
14.66%, respectively, and its leverage ratio was 8.56%. As of December 31,
1993, the Tier 1 and total risk-based capital ratios of Lexington were 13.65%
and 14.86%, respectively, and its leverage capital ratio was 7.95%, and the
Tier 1 and total risk-based capital ratios of Community were 13.28% and 14.53%,
respectively, and its leverage ratio was 7.03%.
The following table sets forth BB&T-SC's regulatory capital position as of
December 31, 1993 on a historical basis as well as a pro forma basis assuming
consummation of the Merger and the Bank Mergers. See "FULLY PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS." For a discussion of the historical and pro
forma regulatory capital positions of BB&T Financial, see "--Capital Adequacy
Guidelines for Bank Holding Companies."
DECEMBER 31, 1993
-----------------------------
HISTORICAL PRO FORMA
------------- --------------
(DOLLARS IN THOUSANDS)
Stockholders' Equity............................. $43,927 $ 97,552
======= ========
Regulatory Capital Tier I Risk-Based:
Actual......................................... $43,927 11.04% $ 95,552 12.00%
Required....................................... 15,914 4.00 31,847 4.00
------- ----- -------- -----
Excess........................................... $28,013 7.04% $ 63,705 8.00%
======= ===== ======== =====
Total Risk-Based
Actual......................................... $48,910 12.29% $105,514 13.25%
Required....................................... 31,828 8.00 63,693 8.00
------- ----- -------- -----
Excess........................................... $17,082 4.29% $ 41,821 5.25%
======= ===== ======== =====
Leverage:
Actual......................................... $43,927 8.77% $ 95,552 8.25%
Required....................................... 15,031 3.00 34,762 3.00
------- ----- -------- -----
Excess........................................... $28,896 5.77% $ 60,790 5.25%
======= ===== ======== =====
85
As institutions with deposits insured by the BIF, BB&T, BB&T-SC, Lexington
and Community also are subject to insurance assessments imposed by the FDIC.
Under current law, the insurance assessment to be paid by BIF-insured
institutions is as specified in a schedule issued by the FDIC that specifies,
at semiannual intervals, target reserve ratios designed to increase the FDIC
insurance funds' reserve ratios to 1.25% of estimated insured deposits (or such
higher ratio as the FDIC may determine in accordance with the statute) in 15
years. Further, the FDIC is authorized to impose one or more special
assessments in any amount deemed necessary to enable repayment of amounts
borrowed by the FDIC from the United States Department of the Treasury
("Treasury Department"). The FDIC has implemented a risk-based assessment
schedule, imposing assessments ranging from 0.23% to 0.31% of an institution's
average assessment base. The actual assessment to be paid by each BIF member is
based on the institution's assessment risk classification, which is determined
based on whether the institution is considered "well capitalized," "adequately
capitalized" or "undercapitalized," as such terms have been defined in
applicable federal regulations adopted to implement the prompt corrective
action provisions of the 1991 Banking Law (see "--Other Safety and Soundness
Regulations"), and whether such institution is considered by its supervisory
agency to be financially sound or to have supervisory concerns. Based on the
current financial condition and capital levels of BB&T Financial's and LSB's
bank subsidiaries, BB&T Financial and LSB, respectively, do not expect that the
current BIF risk-based assessment schedule will have a material adverse effect
on the earnings of its bank subsidiaries. Because a portion of BB&T's deposits
are treated as being insured by the SAIF, however, BB&T Financial's future
deposit insurance premium expenses may be affected by changes in the SAIF
assessment rate. Under current law, the SAIF assessment is determined pursuant
to the same risk-based assessment system that applies to BIF-insured
institutions. In addition, current federal law provides that the SAIF
assessment rate may not be less than 0.18% from January 1, 1994 through
December 31, 1997. After December 31, 1997, the SAIF assessment rate must be a
rate determined by the FDIC to be appropriate to increase the SAIF's reserve
ratio to 1.25% of insured deposits or such higher percentage as the FDIC
determines to be appropriate, but the assessment rate may not be less than
0.15%.
BB&T, BB&T-SC, Lexington and Community also are subject to examination by the
FDIC and state bank examiners. In addition, BB&T, BB&T-SC, Lexington and
Community are subject to various other state and federal laws and regulations,
including state usury laws, laws relating to fiduciaries, consumer credit and
laws relating to branch banking. The banks' loan operations also are subject to
certain federal consumer credit laws and regulations promulgated thereunder,
including, but not limited to: the federal Truth-In-Lending Act, governing
disclosures of credit terms to consumer borrowers; the Home Mortgage Disclosure
Act, requiring financial institutions to provide certain information concerning
their mortgage lending; the Equal Credit Opportunity Act and the Fair Housing
Act, prohibiting discrimination on the basis of certain prohibited factors in
extending credit; the Fair Credit Reporting Act, governing the use and
provision of information to credit reporting agencies; the Bank Secrecy Act,
dealing with, among other things, the reporting of certain currency
transactions; and the Fair Debt Collection Act, governing the manner in which
consumer debts may be collected by collection agencies. The deposit operations
of the banks also are subject to the Right to Financial Privacy Act, which
imposes a duty to maintain confidentiality of consumer financial records and
the Electronic Funds Transfer Act and regulations promulgated thereunder, which
govern automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services. Further, FDIC-insured state-
chartered banks are prohibited from engaging as a principal in activities that
are not permitted for national banks, unless: (i) the FDIC determines that the
activity would pose no significant risk to the appropriate deposit insurance
fund, and (ii) the bank is, and continues to be, in compliance with all
applicable capital standards. Neither BB&T Financial nor LSB believe that these
latter restrictions have or will have in the future a material adverse effect
on their operations.
BB&T, BB&T-SC, Lexington and Community also are subject to the requirements
of the CRA. The CRA imposes on financial institutions an affirmative and
ongoing obligation to meet the credit needs of their local communities,
including low- and moderate-income neighborhoods, consistent with the safe and
sound operation of those institutions. Each financial institution's efforts in
meeting community credit needs
86
currently are evaluated as part of the examination process pursuant to twelve
assessment factors. These factors also are considered in evaluating mergers,
acquisitions and applications to open a branch or facility.
As a result of a Presidential initiative, each of the federal banking
agencies, including the FDIC, has issued a notice of proposed rulemaking that
would replace the current CRA assessment system with a new evaluation system
that would rate institutions based on their actual performance (rather than
efforts) in meeting community credit needs. Under the proposal, each
institution would be evaluated based on the degree to which it is providing
loans (the lending test), branches and other services (the service test) and
investments to low- and moderate-income areas (the investment test). Under the
lending test, as proposed, an institution would be evaluated on the basis of
its market share of reportable loans in low- and moderate-income areas in
comparison to other lenders subject to the CRA in its service area, and in
comparison with the institution's market share of reportable loans in other
service areas. An institution would be evaluated under the investment test
based on the amount of investments made that have had a demonstrable impact on
low- and moderate-income areas or persons as compared to its risk-based
capital. The service test would evaluate a retail institution primarily based
on the percentage of its branches located in, or that are readily accessible
to, low- and moderate-income areas. Each depository institution would have to
report to its federal supervisory agency and make available to the public data
on the geographic distribution of its loan applications, denials, originations
and purchases. Small institutions could elect to be evaluated under a
streamlined method that would not require them to report this data. All
institutions, however, would receive one of five composite ratings based on
their performance: Outstanding, High Satisfactory, Low Satisfactory, Needs to
Improve or Substantial Noncompliance. An institution that received a composite
rating of Substantial Noncompliance would be subject to enforcement action.
BB&T Financial and LSB each are currently studying the proposal and determining
whether the regulation, if enacted, would require changes to the CRA action
plans of each company's subsidiary banks.
OTHER SAFETY AND SOUNDNESS REGULATIONS
Prompt Corrective Action. The federal banking agencies have broad powers
under current federal law to take prompt corrective action to resolve problems
of insured depository institutions. The extent of these powers depends upon
whether the institutions in question are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized." Under uniform regulations defining such capital
levels issued by each of the federal banking agencies, a bank is considered
"well capitalized" if it has (i) a total risk-based capital ratio of 10% or
greater, (ii) a Tier 1 risk-based capital ratio of 6% or greater, (iii) a
leverage ratio of 5% or greater and (iv) is not subject to any order or written
directive to meet and maintain a specific capital level. An "adequately
capitalized" bank is defined as one that has (i) a total risk-based capital
ratio of 8% or greater, (ii) a Tier 1 risk-based capital ratio of 4% or greater
and (iii) a leverage ratio of 4% or greater (or 3% or greater in the case of a
bank with a composite CAMEL rating of 1). A bank is considered (A)
"undercapitalized" if it has (i) a total risk-based capital ratio of less than
8%, (ii) a Tier 2 risk-based capital ratio of less than 4% or (iii) a leverage
ratio of less than 4% (or 3% in the case of a bank with a composite CAMEL
rating of 1); (B) "significantly undercapitalized" if the bank has (i) a total
risk-based capital ratio of less than 6%, or (ii) a Tier 1 risk-based capital
ratio of less than 3% or (iii) a leverage ratio of less than 3% and (C)
"critically undercapitalized" if the bank has a ratio of tangible equity to
total assets equal to or less than 2%.
Brokered Deposits. Under current FDIC regulations, "well capitalized" banks
may accept brokered deposits without restriction, "adequately capitalized"
banks may accept brokered deposits with a waiver from the FDIC (subject to
certain restrictions on payments of rates), while "undercapitalized" banks may
not accept brokered deposits. The regulations provide that the definitions of
"well capitalized," "adequately capitalized" and "undercapitalized" are the
same as the definitions adopted by the agencies to implement the prompt
corrective action provisions of the 1991 Banking Law (described in the previous
paragraph). Neither BB&T Financial nor LSB believe that these regulations have
a material adverse effect on their operations.
87
Other Regulations. As a result of the requirements of the 1991 Banking Law,
FDIC regulations require that management report on its institution's
responsibility for preparing financial statements, and establishing and
maintaining an internal control structure and procedures for financial
reporting and compliance with designated laws and regulations concerning safety
and soundness; and that independent auditors attest to and report separately on
assertions in management's reports concerning compliance with such laws and
regulations, using FDIC-approved audit procedures.
The 1991 Banking Law also required each of the federal banking agencies to
develop regulations addressing certain safety and soundness standards for
insured depository institutions (such as BB&T, BB&T-SC, Citizens-Newton, Mutual
Savings, Citizens-Mooresville, Lexington and Community) and depository
institution holding companies (such as the BB&T Financial and LSB), including
operational and managerial standards, asset quality, earnings and stock
valuation standards, as well as compensation standards (but not dollar levels
of compensation). Each of the federal banking agencies have issued a joint
notice of proposed rulemaking, which requested comment on the implementation of
these standards. The proposed rule sets forth general operational and
managerial standards in the areas of internal controls, information systems and
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth and compensation, fees and benefits. The proposed rule
also establishes a maximum ratio of classified assets to capital, and requires
institutions to meet minimum capital standards as a measure of whether such
institutions have minimum earnings sufficient to absorb losses without
impairing capital. Finally, the proposed rule would define compensation as
excessive if it is unreasonable or disproportionate to the services actually
performed. Bank holding companies would not be subject to the standards on
compensation. The proposal contemplates that each federal agency would
determine compliance with these standards through the examination process, and
if necessary to correct weaknesses, require an institution to file a written
safety and soundness compliance plan. BB&T Financial and LSB have not yet
determined the effect that the proposed rule would have on their respective
operations and the operations of their depository institution subsidiaries if
it is enacted substantially as proposed.
LEGISLATIVE PROPOSALS
The Treasury Department has issued a proposal to consolidate the federal bank
regulatory agencies. Under this proposal, most of the supervisory and
regulatory oversight authority of the FDIC, the OCC, the OTS and the Federal
Reserve would be transferred to a new independent federal banking agency. The
FDIC would continue to have oversight over the deposit insurance funds and the
Federal Reserve would continue to carry out monetary and fiscal policy,
discount window operations and payments system functions. The Treasury
Department is expected to seek to introduce a bill in Congress providing for
such consolidation in the near future. However, the plan already is opposed by
the Federal Reserve, which has proposed a competing consolidation plan that
would preserve its regulatory oversight authority. Due to the preliminary
nature of the proposal and opposition by industry groups and others, BB&T
Financial and LSB cannot determine at this time the effect of any regulatory
consolidation.
Legislation also is pending in Congress that would require all transactions
involving mutual to stock conversions of savings institutions, including
conversion merger transactions involving the acquisition of the converting
institution by a bank holding company, to comply with federal standards and
regulations. In addition, the FDIC has issued interim regulations requiring
savings banks under its supervision to file a notice of intent to convert to
stock form, and to not consummate any transaction unless the agency objects to
the transaction, issues a notice of no objection, or if no objection is issued
during a 60-day time period, beginning the date of acceptance of the notice.
The OTS also has issued interim regulations amending its rules governing mutual
to stock conversions. The legislation was introduced and the interim
regulations were enacted reportedly, among other things, to limit the amount of
benefits being provided to the officers and directors of converting savings
institutions. The FDIC regulations apply to BB&T Financial's pending
acquisitions of Asheville Savings and Home Savings, and the parties have made
the required filings with the agency. It is not known at this time the effect
the regulations or the proposed legislation, if enacted, may have on these
proposed transactions. See "INFORMATION ABOUT BB&T FINANCIAL--BB&T Financial's
Acquisition Program."
88
EXPERTS
The consolidated financial statements of BB&T Financial and its subsidiaries
as of December 31, 1993 and 1992 and for each of the years in the three-year
period ended December 31, 1993, incorporated by reference herein have been
incorporated by reference herein in reliance upon the report of KPMG Peat
Marwick, independent certified public accountants, incorporated by reference
herein, and upon the authority of said firm as experts in accounting and
auditing.
The consolidated financial statements of LSB as of December 31, 1993 and 1992
and for each of the three years in the period ended December 31, 1993,
incorporated by reference herein have been incorporated by reference herein in
reliance upon the report of Donald G. Jones and Company, P.A., independent
certified public accountants, as indicated in their report, and have been
included in reliance upon the authority of that firm as experts in auditing and
accounting.
OPINIONS
The validity of the shares of BB&T Financial Common Stock offered hereby is
being passed upon for BB&T Financial by Jerone C. Herring, Esquire, Vice
President and Secretary of BB&T Financial. As of the date of this Prospectus,
Mr. Herring beneficially owned 13,245 shares of BB&T Financial Common Stock and
held options exercisable within 60 days of such date to acquire 13,233 shares
of BB&T Financial Common Stock. Certain other matters with regard to federal
law will be passed upon for BB&T Financial by Arnold & Porter, Washington,
D.C., special counsel to BB&T Financial. Certain matters with regard to the
federal and South Carolina income tax consequences of the Merger have been
passed upon for BB&T Financial by KPMG Peat Marwick. Certain legal matters will
be passed upon for LSB by Sinkler & Boyd, P.A., Columbia, South Carolina,
special counsel to LSB.
STOCKHOLDER PROPOSALS
It is not anticipated that LSB will hold a 1995 annual meeting of
stockholders unless the Merger is not consummated prior to January 1995. If the
Merger is not consummated prior to that time, any stockholder proposal intended
for inclusion in LSB's proxy materials for the 1995 annual meeting of
stockholders must be received at LSB's main office at 309 Columbia Avenue,
Lexington, South Carolina 29071 no later than November 30, 1994. Any such
proposal will be subject to the requirements of the proxy rules adopted under
the Exchange Act.
OTHER MATTERS
The LSB Board of Directors does not intend to bring any matter before the
Special Meeting other than as specifically set forth in the Notice of Special
Meeting of Stockholders, nor does it know of any matter to be brought before
the Special Meeting by others. If, however, any other matters properly come
before the Special Meeting, it is the intention of each of the proxyholders to
vote such proxy in accordance with the decision of a majority of the LSB Board
of Directors.
89
CONSOLIDATED FINANCIAL STATEMENTS OF LSB
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
of L.S.B. Bancshares, Inc. of South Carolina
We have audited the consolidated balance sheet of L.S.B. Bancshares, Inc. of
South Carolina and subsidiaries as of December 31, 1993 and 1992, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1993.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of L.S.B. Bancshares, Inc. of
South Carolina and subsidiaries as of December 31, 1993 and 1992, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1993, in conformity with generally accepted
accounting principles.
As described in Note 4 to the consolidated financial statements, the Company
changed, effective December 31, 1993, its method of accounting for certain
investments in debt securities and equity securities that have a readily
determinable market value.
Donald G. Jones and Company, P.A.
Columbia, South Carolina
March 16, 1994
F-1
L.S.B. BANCSHARES, INC. OF SOUTH CAROLINA
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
DECEMBER 31,
------------------
1993 1992
-------- --------
ASSETS
Cash and due from banks (Note 3)......................... $ 36,897 $ 40,957
Securities (Note 4)
Trading................................................ 1,572
Available-for-sale..................................... 203,336
Held-to-maturity (estimated fair value--$25,229)....... 24,377
Investment (estimated fair value--$154,456)............ 150,646
Other investments (Note 4)............................... 20,567
Federal funds sold and securities purchased under
agreements to resell.................................... 25,500 39,125
Loans (Notes 5 and 19)................................... 387,070 381,144
Unearned income........................................ (1,181) (2,646)
Allowance for loan losses.............................. (5,080) (4,804)
-------- --------
Loans--net........................................... 380,809 373,694
Premises and equipment--net (Note 6)..................... 14,872 13,479
Other assets (Note 7).................................... 12,279 12,853
-------- --------
Total assets......................................... $699,642 $651,321
======== ========
LIABILITIES
Deposits (Note 8)
Noninterest bearing.................................... $ 79,009 $ 68,297
Interest bearing....................................... 491,810 495,127
-------- --------
Total deposits....................................... 570,819 563,424
Short-term borrowings (Note 9)........................... 62,464 32,628
Long-term debt (Note 10)................................. 8,000 4,000
Other liabilities........................................ 3,526 3,677
-------- --------
Total liabilities.................................... 644,809 603,729
-------- --------
Commitments and contingent liabilities (Note 16)
STOCKHOLDERS' EQUITY (Note 11)
Common stock--$2.50 par value; 5,000,000 shares
authorized; issued and outstanding 3,114,613 for 1993
and 3,077,137 for 1992.................................. 7,786 7,693
Capital surplus.......................................... 21,972 21,180
Retained earnings........................................ 23,714 18,776
Net unrealized loss on marketable equity securities...... (57)
Unrealized holding gains and losses on available-for-sale
securities.............................................. 1,361
-------- --------
Total stockholders' equity........................... 54,833 47,592
-------- --------
Total liabilities and stockholders' equity........... $699,642 $651,321
======== ========
See notes to consolidated financial statements.
F-2
L.S.B. BANCSHARES, INC. OF SOUTH CAROLINA
CONSOLIDATED STATEMENT OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE)
YEARS ENDED DECEMBER 31,
--------------------------
1993 1992 1991
-------- -------- --------
INTEREST INCOME
Loans, including fees............................. $33,731 $34,185 $35,230
Investment securities
Taxable......................................... 9,086 9,512 9,285
Tax-exempt...................................... 1,616 1,942 2,147
Trading account interest.......................... 63 49
Federal funds sold and securities purchased under
agreements to resell............................. 510 962 1,215
Time deposits in other banks...................... 2 14
Other dividends and interest...................... 1,371 1,073 877
-------- -------- --------
Total interest income......................... 46,377 47,725 48,768
-------- -------- --------
INTEREST EXPENSE
Deposits.......................................... 16,669 19,986 25,991
Short-term borrowings............................. 1,145 905 1,360
Long-term debt.................................... 318 220 192
-------- -------- --------
Total interest expense........................ 18,132 21,111 27,543
-------- -------- --------
NET INTEREST INCOME................................. 28,245 26,614 21,225
Provision for loan losses (Note 5).................. 1,548 2,528 3,608
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION................. 26,697 24,086 17,617
-------- -------- --------
OTHER OPERATING INCOME
Service charges on deposit accounts............... 4,276 3,181 3,088
Credit life insurance commissions................. 227 201 382
Gain on sale of investment securities............. 337 256 190
Other income...................................... 2,926 2,326 1,439
-------- -------- --------
Total other operating income.................. 7,766 5,964 5,099
-------- -------- --------
OTHER OPERATING EXPENSES (Note 12)
Salaries and employee benefits.................... 13,015 11,388 9,711
Net occupancy expense............................. 1,274 1,113 971
Furniture and equipment expense................... 2,020 1,719 1,681
Other expense..................................... 8,534 7,257 5,800
-------- -------- --------
Total other operating expenses................ 24,843 21,477 18,163
-------- -------- --------
INCOME BEFORE INCOME TAXES.......................... 9,620 8,573 4,553
Income tax expense (Note 14)........................ 2,844 2,434 937
-------- -------- --------
NET INCOME.......................................... $ 6,776 $ 6,139 $ 3,616
======== ======== ========
Average shares outstanding.......................... 3,094 3,062 3,040
Net income per common share......................... $ 2.19 $ 2.00 $ 1.19
See notes to consolidated financial statements.
F-3
L.S.B. BANCSHARES, INC. OF SOUTH CAROLINA
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
UNREALIZED
NET HOLDING
UNREALIZED GAINS AND
COMMON STOCK LOSS ON LOSSES ON
---------------- MARKETABLE AVAILABLE-
NUMBER CAPITAL RETAINED EQUITY FOR-SALE
OF SHARES AMOUNT SURPLUS EARNINGS SECURITIES SECURITIES TOTAL
--------- ------ ------- -------- ---------- ---------- -------
Balance January 1, 1991,
as previously reported. 2,611,508 $6,529 $18,272 $ 9,619 $(113) $34,307
Merger of The Dorn Bank-
ing Company accounted
for using the pooling-
of-interests method
(Note 2)............... 418,918 100 3,300 2,787 6,187
Reclassification to re-
flect merger........... 947 (947)
--------- ------ ------- ------- ----- ------ -------
BALANCE JANUARY 1, 1991,
AS RESTATED............ 3,030,426 7,576 20,625 12,406 (113) 40,494
Net income.............. 3,616 3,616
Cash dividends declared
by merged bank......... (100) (100)
Cash dividends declared
by L.S.B. Bancshares,
Inc. of South Carolina
("LSB")--$.60 per
share.................. (1,572) (1,572)
Sale of common stock.... 22,549 56 235 291
Valuation adjustment on
marketable equity secu-
rities................. 113 113
--------- ------ ------- ------- ----- ------ -------
BALANCE DECEMBER 31,
1991................... 3,052,975 7,632 20,860 14,350 42,842
Net income.............. 6,139 6,139
Cash dividends declared
by merged bank......... (100) (100)
Cash dividends declared
by LSB--$.61 per share. (1,613) (1,613)
Sale of common stock.... 24,162 61 320 381
Valuation adjustment on
marketable equity secu-
rities................. (57) (57)
--------- ------ ------- ------- ----- ------ -------
BALANCE DECEMBER 31,
1992................... 3,077,137 7,693 21,180 18,776 (57) 47,592
Net income.............. 6,776 6,776
Cash dividends declared
by merged bank......... (100) (100)
Cash dividends declared
by LSB--$.65 per share. (1,738) (1,738)
Sale of common stock.... 37,476 93 792 885
Valuation adjustment on
marketable equity secu-
rities................. 57 57
Change in unrealized
holding gains and
losses on available-
for-sale securities
(Note 4)............... 1,361 1,361
--------- ------ ------- ------- ----- ------ -------
BALANCE DECEMBER 31,
1993................... 3,114,613 $7,786 $21,972 $23,714 $ $1,361 $54,833
========= ====== ======= ======= ===== ====== =======
See notes to consolidated financial statements.
F-4
L.S.B. BANCSHARES, INC. OF SOUTH CAROLINA
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
----------------------------
1993 1992 1991
-------- -------- --------
OPERATING ACTIVITIES
Net income..................................... $ 6,776 $ 6,139 $ 3,616
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses.................... 1,548 2,528 3,608
Depreciation and amortization................ 1,526 1,230 1,042
Writedowns of other real estate.............. 273 282 244
Deferred income taxes........................ (116) (430) (39)
Amortization of intangibles.................. 359 183 51
Amortization of net loan fees and costs...... 210 216 291
Accretion and premium amortization........... 894 135 171
Gain on sale of investment securities........ (337) (256) (190)
(Gain) loss on sale of other investments..... (126) 3
Gain on trading account securities........... (105) (15)
Purchase of trading account securities....... (179,615) (47,867)
Sales of trading account securities.......... 178,653 47,882
Gain on sales of mortgage loans.............. (409) (383) (160)
Mortgage loans originated for sale........... (33,892) (30,870) (13,240)
Sales of mortgage loans...................... 34,251 31,836 12,857
Loss on sale of other real estate............ 17 253 90
Decrease in interest receivable.............. 316 919 364
Decrease in interest payable................. (361) (583) (293)
(Increase) decrease in prepaid expenses and
other receivables........................... (646) 700 (914)
Increase (decrease) in other accrued
expenses.................................... 108 117 (124)
-------- -------- --------
Net cash provided by operating activities.. 9,450 11,890 7,377
-------- -------- --------
INVESTING ACTIVITIES
Net decrease in time deposits in other banks... 100 100
Sales of investment securities................. 7,665 29,773 10,836
Maturities of investment securities............ 72,870 88,832 44,470
Purchases of investment securities............. (121,769) (120,431) (62,773)
Sales of other investments..................... 3,052 57,980 5,043
Purchases of other investments................. (17,200) (69,130) (9,348)
Net increase in loans made to customers........ (11,010) (31,798) (28,286)
Purchases of premises and equipment............ (2,919) (3,356) (698)
Sales of other real estate..................... 1,898 2,674 1,719
Branch office acquisitions (Note 2)............ 15,712
-------- -------- --------
Net cash used by investing activities...... (67,413) (29,644) (38,937)
-------- -------- --------
FINANCING ACTIVITIES
Net increase in demand deposits, interest
checking and savings accounts................. 951 40,028 40,462
Net increase (decrease) in time deposits....... 6,444 (13,638) 3,965
Net increase (decrease) in short-term
borrowings.................................... 29,836 17,943 (3,243)
Proceeds from long-term debt................... 8,000 2,000
Repayment of long-term debt.................... (4,000) (2) (450)
Sale of common stock........................... 885 381 291
Cash dividends paid............................ (1,838) (1,713) (1,672)
-------- -------- --------
Net cash provided by financing activities.. 40,278 44,999 39,353
-------- -------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS. (17,685) 27,245 7,793
CASH AND CASH EQUIVALENTS, BEGINNING............. 80,082 52,837 45,044
-------- -------- --------
CASH AND CASH EQUIVALENTS, ENDING................ $ 62,397 $ 80,082 $ 52,837
======== ======== ========
See notes to consolidated financial statements.
F-5
L.S.B. BANCSHARES, INC. OF SOUTH CAROLINA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation--L.S.B. Bancshares,
Inc. of South Carolina (LSB), a bank holding company, and its wholly-owned
subsidiaries, The Lexington State Bank (including its wholly-owned subsidiary,
Carolina Securities Corporation), and The Community Bank of South Carolina,
provide banking services to domestic markets principally in Lexington,
Richland, McCormick, Beaufort, and Hampton Counties of South Carolina. The
consolidated financial statements include the accounts of the parent company
and its subsidiaries after elimination of all significant intercompany balances
and transactions. The accounting and reporting policies of LSB and its
subsidiaries are in conformity with generally accepted accounting principles
and general practices within the banking industry. Certain amounts for 1992 and
1991 were reclassified to conform with the consolidated financial statement
presentation for 1993. The reclassifications have no effect on consolidated
stockholders' equity or net income as previously reported.
Securities--Effective December 31, 1993, LSB adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Under the provisions of
SFAS No. 115, equity securities that have readily determinable fair values and
all debt securities are classified generally at the time of purchase into one
of three categories; held-to-maturity, trading and available-for-sale. Debt
securities which LSB has the positive intent and ability to hold to ultimate
maturity are classified as held-to-maturity and accounted for at amortized
cost. Debt and equity securities that are bought and held primarily for sale in
the near term are classified as trading and are accounted for on an estimated
fair value basis, with unrealized gains and losses included in other operating
income. Securities not classified as either held-to-maturity or trading are
classified as available-for-sale and are accounted for at estimated fair value.
Unrealized holding gains and losses on available-for-sale securities are
excluded from earnings and recorded in a separate account included in
consolidated stockholders' equity, net of applicable income tax effects.
Dividend and interest income, including amortization of any premium or
accretion of discount arising at acquisition, is included in earnings for all
three categories of securities. Realized gains and losses on all categories of
securities are included in other operating income, based on the amortized cost
of the specific certificate on a trade date basis. Reference is made to Note 4
to the consolidated financial statements for additional information. Prior to
December 31, 1993, investment securities were stated at cost, increased by
accretion of discount and decreased by amortization of premiums. Realized gains
and losses on the sale of an investment security were included in other
operating income based on the adjusted cost of the specific certificate on a
trade date basis. Also included in other operating income were realized and
unrealized gains and losses resulting from adjusting trading securities to
estimated fair value and from recording the effects of sales of trading
securities on a trade date basis. Other investments consisted of investments in
shares of mutual funds accounted for at the lower of aggregate cost or
estimated fair value. Net unrealized losses on mutual funds were excluded from
earnings and recorded directly in a separate consolidated stockholders' equity
account. Realized gains or losses on sales of these other investments were
based on the specific identification method and included in other operating
income on a trade date basis.
Interest and Fees on Loans--Interest income on installment loans is
recognized using the sum-of-the-months digits method. The results of using this
method are not materially different from those obtained by using the interest
method. Interest income on the majority of installment loans and all other
loans is recognized using the interest method based upon the principal amounts
outstanding. Loan origination and commitment fees and certain direct loan
origination costs (principally salaries and employee benefits) are being
deferred and amortized as an adjustment of the related loan yields. Generally,
these amounts are being amortized over the contractual life of the related
loans or commitments.
When a loan is 90 days past due as to interest or principal or there is
serious doubt as to collectibility, the accrual of interest income is generally
discontinued. However, accruals of interest income may continue
F-6
L.S.B. BANCSHARES, INC. OF SOUTH CAROLINA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
on loans 90 days or more past due when the loan is in the process of collection
and the estimated net realizable value of collateral is sufficient to assure
collection of the principal balance and accrued interest. Previously accrued
interest on loans placed in a nonaccrual status is reversed against current
income, and subsequent interest income is recognized when received. When the
collectibility of a significant amount of principal is in serious doubt, the
principal balance is reduced to the estimated net realizable value of
collateral by charge-off to the allowance for loan losses and any subsequent
payments are credited to the outstanding principal balance until the loan is
repaid; then, such payments are credited to the allowance for loan losses as
recoveries. No portion of a nonaccrual loan is returned to accrual status
unless all principal and interest is current and the borrower has demonstrated
the ability to continue making payments as agreed.
Allowance for Loan Losses--An allowance for possible loan losses is
maintained at a level deemed appropriate by management to provide adequately
for known and inherent risks in the loan portfolio. The allowance is based upon
a continuing review of past loan loss experience, current economic conditions
which may affect the borrowers' ability to pay and the underlying collateral
value of the loans. When it is determined that a loan will not perform
substantially as agreed, a review of the loan is initiated to ascertain whether
it is more likely than not that a loss has occurred. If it is determined that a
loss is likely, the estimated loss amount is charged off and deducted from the
allowance. The provision for possible loan losses and recoveries on loans
previously charged off are added to the allowance.
Premises and Equipment--Premises and equipment are stated at cost, less
accumulated depreciation and amortization. The provision for depreciation and
amortization is computed by using the straight-line method. Rates of
depreciation are generally based on the following estimated useful lives:
buildings--33 to 40 years; furniture and equipment--3 to 15 years; leasehold
improvements--3 to 10 years.
Other Real Estate--Other real estate includes properties acquired through
foreclosure or acceptance of a deed in lieu of foreclosure, and loans accounted
for as in-substance foreclosures. Collateral is considered foreclosed in
substance when the borrower has little or no equity in its current fair value,
proceeds for repayment of the related loan can be expected to come only from
the operation or sale of the collateral, and the borrower has either formally
or effectively abandoned control of the collateral to LSB or has retained
control but it is doubtful that the borrower can rebuild equity or otherwise
repay the loan in the foreseeable future. Other real estate is initially
recorded at the lower of cost or the estimated fair market value less estimated
selling costs. Loan losses arising from the acquisition of such property and in
recognition of in-substance foreclosures are charged to the allowance for loan
losses. An allowance for losses on other real estate is maintained for
subsequent downward valuation adjustments. Holding or operating costs are
charged to expense as incurred, and the cost of significant improvements is
capitalized.
Employee Benefit Plans--LSB sponsors a trusteed non-contributory defined
benefit pension plan covering substantially all officers and employees meeting
certain age and service requirements. The benefits are based on years of
service and compensation during the five consecutive calendar years that
produce the highest average level of annual compensation within the last ten
years of participation. It is LSB's policy to fund an amount between the
minimum funding amount required by ERISA and the maximum tax deductible
contribution. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned in the
future.
LSB also provides a trusteed profit-sharing plan which provides retirement
benefits to substantially all officers and employees who meet certain age and
service requirements. The plan includes a "salary reduction" feature pursuant
to Section 401(k) of the Internal Revenue Code. Under the plan and present
policies, participants are permitted to make discretionary contributions up to
10% of annual compensation. LSB
F-7
L.S.B. BANCSHARES, INC. OF SOUTH CAROLINA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
makes matching contributions of 50% of each participant's contributions until
the participant's contributions reach 6% of annual compensation.
In December 1990, the Financial Accounting Standards Board issued SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
This statement required the implementation, no later than 1993, of new
accounting and disclosure rules for benefits other than pensions, such as
postretirement health care programs. In addition, SFAS No. 112, "Employers'
Accounting for Postemployment Benefits," was issued in November 1992, by the
Financial Accounting Standards Board. This statement requires, no later than
1994, the implementation of new accounting and disclosure rules for
postemployment benefits such as payments to employees for disability, layoff,
or other event. LSB and its subsidiaries do not sponsor any postretirement
benefits, nor are any material postemployment benefits provided. Therefore, the
new requirements do not have, nor are they expected to have any material effect
on the consolidated financial position or results of operations of LSB.
Income Taxes--As of January 1, 1993, LSB adopted SFAS No. 109, "Accounting
for Income Taxes." The statement requires the use of an asset and liability
approach for financial accounting and reporting for income taxes. If it is more
likely than not that some portion of all of a deferred tax asset will not be
realized, a valuation allowance is recognized. For the periods preceding 1993,
the Bank used the deferred method, where deferred income taxes were provided
for timing differences between the period in which certain income and expense
items were recognized for financial reporting purposes and the period in which
they affect taxable income as measured by the tax rate in effect for the year
the timing differences occurred. Reference is made to Note 14 to the
consolidated financial statements for further information.
Earnings Per Share--Earnings per share is calculated by dividing net income
by the weighted average number of shares outstanding during the year.
Statement of Cash Flows--The statement of cash flows reports net cash
provided or used by operating, investing and financing activities and the net
effect of those flows on cash and cash equivalents. Cash equivalents include
amounts due from banks and federal funds sold and securities purchased under
agreements to resell.
During 1993, 1992 and 1991, interest paid on deposits, short-term borrowings
and long-term debt amounted to $18,493,000, $21,694,000, and $27,836,000,
respectively. Income tax payments of $3,027,000, $2,273,000, and $1,628,000
were made in 1993, 1992 and 1991, respectively. During 1993, 1992 and 1991,
noncash transfers of $2,202,000, $1,768,000 and $3,829,000, respectively, were
made from loans to other real estate. On December 31, 1993, noncash transfers
were made from investment securities totaling $191,049,000, and from other
investments totaling $34,541,000. These transfers were made to securities
available-for-sale totaling $201,213,000 and to securities held-to-maturity
totaling $24,377,000. Noncash valuation adjustments totaling $2,180,000 were
made increasing available-for-sale securities, with related stockholders'
equity accounts increasing a total of $1,418,000, and deferred income tax
assets decreasing $762,000. In 1993, noncash transfers totaling $505,000 were
made from investment securities to trading securities.
Fair Value Estimates--Fair value estimates are made at a specific point in
time based on relevant market information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time LSB's entire holdings of a particular financial
instrument. Because no active trading market exists for a significant portion
of LSB's financial instruments, fair value estimates are based on management's
judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
F-8
L.S.B. BANCSHARES, INC. OF SOUTH CAROLINA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Fair value estimates are based on existing on-and-off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. For example, LSB has a substantial trust department that
contributes net fee income annually. The trust department is not a financial
instrument, and its value has not been considered in the fair value estimates.
Other significant assets and liabilities that are not considered financial
assets or liabilities include net deferred tax assets, premises and equipment
and intangible assets. In addition, the income tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in the estimates.
For cash and due from banks, federal funds sold and securities purchased
under agreements to resell, accrued interest receivable and payable and short-
term borrowings, the carrying amount approximates fair value because these
instruments generally mature in 90 days or less and do not present
unanticipated credit concerns.
NOTE 2--ACQUISITIONS
The Dorn Banking Company Merger
On December 16, 1993, LSB issued 418,918 shares of its common stock for all
of the 20,000 outstanding shares of The Dorn Banking Company ("Dorn"),
McCormick, South Carolina. Dorn, a state chartered bank, was merged into and
became a branch office of LSB's subsidiary, The Lexington State Bank. The
merger was accounted for as a pooling-of-interests and, accordingly, all prior
period consolidated financial statements of LSB have been restated to include
the consolidated financial position, results of operations and cash flows of
Dorn.
Separate results of operations of the combined entities prior to the merger
are as follows:
PERIOD FROM
JANUARY 1 TO YEARS ENDED DECEMBER 31,
DECEMBER 16, 1993 -------------------------
(UNAUDITED) 1992 1991
----------------- ------------ ------------
(DOLLARS IN THOUSANDS)
Net interest income
LSB............................... $25,390 $25,530 $20,230
Dorn.............................. 1,121 1,084 995
------- ------------ ------------
Restated.......................... $26,511 $26,614 $21,225
======= ============ ============
Net income
LSB............................... $ 5,932 $ 5,769 $ 3,213
Dorn.............................. 366 370 403
------- ------------ ------------
Restated.......................... $ 6,298 $ 6,139 $ 3,616
======= ============ ============
The following table sets forth net income as previously reported and as
restated, on a per share basis:
YEARS ENDED
DECEMBER 31,
-------------
1992 1991
------ ------
Net income
Previously reported for LSB..................................... $2.18 $1.23
Restated........................................................ 2.00 1.19
F-9
L.S.B. BANCSHARES, INC. OF SOUTH CAROLINA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Branches Purchased
On May 7, 1992, LSB's subsidiary, The Community Bank of South Carolina,
acquired substantially all of the assets and assumed substantially all of the
liabilities of three branch offices in Beaufort, South Carolina, which formerly
belonged to NationsBank of South Carolina, NA. The transaction was accounted
for using the purchase method. Accordingly, the consolidated financial
statements reflect the results of operations and the assets and liabilities of
the acquired offices since the date of acquisition. The pro forma effect of
this transaction on the consolidated operations of LSB was not material.
The principal assets acquired and liabilities assumed in the purchase are
summarized below.
(DOLLARS IN THOUSANDS)
----------------------
Loans, net......................................... $ 22,477
Premises, equipment and other assets............... 111
Intangible core deposit premium.................... 1,537
Deposits and other liabilities..................... (39,837)
--------
Cash received for net liabilities assumed.......... $(15,712)
========
The intangible value of core deposits represented the estimated net present
value of the future economic benefits related to use of the deposits purchased.
Such amount is being amortized in proportion to the estimated annual benefit to
be derived over a period not to exceed fifteen years.
NOTE 3--CASH AND DUE FROM BANKS
The banking subsidiaries are required by regulation to maintain average cash
reserve balances based on a percentage of deposits. The average amounts of the
cash reserve balances at December 31, 1993 and 1992, were approximately
$12,656,000 and $13,000,000, respectively.
NOTE 4--SECURITIES
Securities available-for-sale and held-to-maturity consisted of the following
at December 31, 1993:
DECEMBER 31, 1993
-----------------------------------------------------------------------------------
AVAILABLE-FOR-SALE HELD-TO-MATURITY
----------------------------------------- -----------------------------------------
GROSS GROSS GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED UNREALIZED UNREALIZED ESTIMATED
AMORTIZED HOLDING HOLDING FAIR AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
--------- ---------- ---------- --------- --------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
U.S. Treasury and U.S.
Government agencies.... $147,295 $2,484 $ 70 $149,709
Obligations of states
and political
subdivisions........... $24,377 $1,231 $379 $25,229
Mortgage-backed
securities............. 17,596 64 124 17,536
Equity securities....... 36,322 231 36,091
-------- ------ ---- -------- ------- ------ ---- -------
Total.................. $201,213 $2,548 $425 $203,336 $24,377 $1,231 $379 $25,229
======== ====== ==== ======== ======= ====== ==== =======
F-10
L.S.B. BANCSHARES, INC. OF SOUTH CAROLINA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993
-----------------------------------------
AVAILABLE-FOR-SALE HELD-TO-MATURITY
-------------------- --------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
--------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
Due in one year or less............... $ 43,678 $ 43,994 $ 6,115 $ 6,164
Due after one through five years...... 94,902 96,319 11,034 11,281
Due after five through ten years...... 8,715 9,396 6,898 7,442
Due after ten years................... 330 342
-------- -------- ------- -------
147,295 149,709 24,377 25,229
Mortgage-backed securities............ 17,596 17,536
Equity securities..................... 36,322 36,091
-------- -------- ------- -------
Total............................... $201,213 $203,336 $24,377 $25,229
======== ======== ======= =======
At December 31, 1992, investment securities consisted of the following:
DECEMBER 31, 1992
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
U.S. Treasury and U.S. Government
agencies............................ $107,056 $2,900 $ 65 $109,891
Obligations of states and political
subdivisions........................ 27,642 956 32 28,566
Mortgage-backed securities........... 15,948 220 169 15,999
-------- ------ ---- --------
Total.............................. $150,646 $4,076 $266 $154,456
======== ====== ==== ========
The aggregate carrying amount and estimated fair value of investment
securities by maturity date were as follows at December 31, 1992:
DECEMBER 31, 1992
-------------------
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
(DOLLARS IN
THOUSANDS)
Due in one year or less.................................. $ 34,420 $ 35,121
Due after one through five years......................... 82,139 84,485
Due after five through ten years......................... 18,139 18,851
-------- --------
134,698 138,457
Mortgage-backed securities............................... 15,948 15,999
-------- --------
Total.................................................. $150,646 $154,456
======== ========
Other investments at December 31, 1992, consisting of equity investments in
mutual funds, were presented as follows:
(DOLLARS IN THOUSANDS)
----------------------
Cost................................................. $20,624
Less gross unrealized losses......................... (57)
-------
Estimated fair value............................... $20,567
=======
F-11
L.S.B. BANCSHARES, INC. OF SOUTH CAROLINA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," was issued by the Financial Accounting Standards Board in May,
1993. As permitted, LSB elected to adopt the provisions of this statement
effective December 31, 1993. As required, the provisions of the statement have
not been retroactively applied to either prior years' consolidated financial
statements or to any interim consolidated financial statements for the year
ended December 31, 1993. The effect of adopting the new statement on the year-
end 1993 consolidated balance sheet was to adjust the carrying value of certain
debt securities and other investments to estimated fair value from amortized
cost for debt securities and from lower of cost or market for equity
securities. These debt and equity securities were reclassified into an
available-for-sale category in accordance with the criteria established by SFAS
No. 115. As a result of the adjustment to estimated fair value as of the end of
1993, the consolidated balance sheet carrying amounts of securities
reclassified as available-for-sale was increased $2,123,000. A separate
component account included in total consolidated stockholders' equity was
credited with $1,361,000, which is net of a $762,000 tax effect. Adopting SFAS
No. 115 had no effect on the consolidated statements of income for the year
ended December 31, 1993.
The fair value of U.S. Treasury and U.S. Government agencies debt securities
is estimated based on published closing quotations. The fair value of
obligations of states and political subdivisions is generally not available
from published quotations; consequently, their fair value estimates are based
on matrix pricing or quoted market prices of similar instruments adjusted for
credit quality differences between the quoted instruments and the instruments
being valued. Fair value for mortgage-backed securities is estimated primarily
using dealers' quotes, and fair value for equity securities is based on
published closing quotations.
The proceeds from sales of investment securities and the gross realized gains
and gross realized losses on such sales were as follows:
YEARS ENDED DECEMBER 31,
-------------------------
1993 1992 1991
---------------- --------
(DOLLARS IN THOUSANDS)
Proceeds from sales
Investment securities................................ $7,665 $29,773 $10,836
Other investments.................................... 3,052 57,980 5,043
Gross realized gains
Investment securities................................ 337 256 190
Other investments.................................... 126
Gross realized losses
Other investments.................................... 3
The change in net unrealized holding gains or losses on trading securities
included in income for the year ended December 31, 1993, was immaterial. Since
the provisions of SFAS No. 115 were adopted at year-end 1993, there were no
sale or transfer transactions during 1993 affecting the available-for-sale or
held-to-maturity categories of securities.
At December 31, 1993, LSB had concentrated $29,398,000 into shares of the
Federated ARMs Fund (Institutional Shares) mutual fund. These equity shares are
included in the available-for-sale category of securities and carried in the
consolidated balance sheet at an estimated fair value of $29,207,000. The
majority of this fund's investments are in adjustable and floating rate
mortgage securities which are issued or guaranteed as to payment of principal
and interest by the U.S. Government, its agencies or instrumentalities. As of
December 31, 1992, shares of this mutual fund with a cost of $12,198,000 and an
estimated fair value of $12,157,000 were included in other investments at
estimated fair value.
F-12
L.S.B. BANCSHARES, INC. OF SOUTH CAROLINA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1993 and 1992, securities with an amortized cost of
$147,772,000 and $126,723,000, respectively, were pledged as collateral to
secure public deposits, securities sold under agreements to repurchase, and for
other purposes.
NOTE 5--LOANS
Loans consisted of the following:
DECEMBER 31,
---------------------------------------
1993 1992
------------------- -------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
Commercial, financial and
agricultural............. $ 52,113 $ 52,103 $ 57,395 $ 57,478
Real estate--construction. 13,180 13,188 15,247 15,231
Real estate--mortgage..... 257,233 263,822 239,968 241,049
Consumer installment
loans.................... 64,544 65,288 68,534 69,225
-------- -------- -------- --------
Total loans............. $387,070 $394,401 $381,144 $382,983
======== ======== ======== ========
Included in the above carrying amounts were nonperforming loans as follows:
DECEMBER 31,
-----------------------
1993 1992
----------- -----------
(DOLLARS IN THOUSANDS)
Nonaccrual loans..................................... $ 3,119 $ 2,914
Accruing loans 90 days or more past due.............. 282 298
----------- -----------
Total.............................................. $ 3,401 $ 3,212
=========== ===========
Interest income that would have been recorded if nonaccrual loans had been
current in accordance with their original terms amounted to $272,000, $322,000
and $430,000 for the years ended December 31, 1993, 1992 and 1991,
respectively. Recognized interest income on these loans was $86,000, $102,000
and $252,000 for the years ended December 31, 1993, 1992 and 1991,
respectively. There were no outstanding commitments at December 31, 1993, to
lend additional funds to debtors owing nonaccrual loans.
Fair values are estimated for loan categories with similar financial
characteristics. Within each category, the fair value of loans is calculated by
discounting estimated cash flows through the estimated maturity using estimated
market discount rates that reflect the credit and interest rate risk inherent
in the loan. For certain categories of loans, such as variable rate loans,
credit card receivables, and other lines of credit, the carrying amount,
adjusted for credit risk, is a reasonable estimate of fair value because there
is no contractual maturity or because LSB has the ability to reprice the loans
as interest rate shifts occur. Since the discount rates are based on current
loan rates offered as well as management's estimates, the fair values presented
may not necessarily be indicative of the value negotiated in an actual sale.
F-13
L.S.B. BANCSHARES, INC. OF SOUTH CAROLINA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
TRANSACTIONS IN THE ALLOWANCE FOR LOAN LOSSES ARE SUMMARIZED BELOW:
YEARS ENDED DECEMBER 31,
----------------------------
1993 1992 1991
-------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at January 1.............................. $ 4,804 $ 4,100 $ 3,907
Provision charged to expense...................... 1,548 2,528 3,608
Recoveries........................................ 325 294 223
Charge-offs....................................... (1,597) (2,118) (3,638)
-------- -------- --------
Balance at December 31............................ $ 5,080 $ 4,804 $ 4,100
======== ======== ========
As of December 31, 1993 and 1992, there were no significant concentrations of
credit risk in any single borrower or groups of borrowers. The loan portfolio
consists of extensions of credit to businesses and individuals principally in
Lexington, Richland, Beaufort, Hampton and McCormick Counties of South
Carolina. The vast majority of LSB's loans were made in the Lexington-Richland
County area. The economy of the Lexington-Richland County area is diversified
and the area is a major center of state and county government, banking,
insurance, manufacturing, service industries and higher education. LSB's
management has established loan policies and practices that include set
limitations on loan-to-collateral value for various types of collateral,
requirements for appraisals, obtaining and maintaining current credit and
financial information on borrowers, and credit approvals.
In May, 1993, the Financial Accounting Standards Board issued SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," effective for fiscal years
beginning after December 15, 1994. This statement generally applies to all
loans, whether or not collateralized, and to all loans that are restructured in
a troubled debt restructuring involving a modification of terms. It does not
apply to large groups of smaller balance homogeneous loans that are
collectively evaluated for impairment, loans that are measured at fair value or
lower of cost or fair value, leases and debt securities. SFAS No. 114 requires
that impaired loans within its scope be measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate,
which is the contractual interest rate adjusted for any deferred loan fees or
costs, premium or discount existing at the inception or acquisition of the
loan. The statement also allows creditors, as a practical expedient, to measure
the loan at its observable market price or the fair value of the collateral if
the repayment of the loan is expected to be provided solely by the underlying
collateral. According to the statement, a loan is impaired when, based on
current information, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreement. In
addition, new disclosures are required including the recorded investment in the
loans for which impairment has been recognized, and the total allowance for
loan losses related to those impaired loans. While the new statement will
require some changes in the methodology used to account for nonperforming loans
that could possibly result in acceleration of the recognition of losses for
some loans, management does not expect either a material adverse or beneficial
effect on LSB's consolidated financial position or results of operations to
occur as a result of the provisions of SFAS No. 114.
F-14
L.S.B. BANCSHARES, INC. OF SOUTH CAROLINA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
DECEMBER 31,
------------------------
1993 1992
----------- -----------
(DOLLARS IN THOUSANDS)
Land.................................................. $ 3,234 $ 2,682
Buildings............................................. 10,054 9,637
Leasehold improvements................................ 514 229
Furniture and equipment............................... 10,716 9,863
----------- -----------
Total............................................... 24,518 22,411
Accumulated depreciation and amortization............. (9,646) (8,932)
----------- -----------
Premises and equipment--net......................... $14,872 $13,479
=========== ===========
Depreciation and amortization expense for the years ended December 31, 1993,
1992 and 1991, was $1,526,000, $1,230,000 and $1,042,000, respectively.
NOTE 7--OTHER REAL ESTATE
Other real estate totaling $1,969,000 and $1,955,000, is included in other
assets at December 31, 1993 and 1992, respectively. At December 31, 1993, an
allowance of $228,000 for other real estate losses subsequent to acquisition
has been established by charges to the net cost of holding and operating other
real estate.
NOTE 8--DEPOSITS
DECEMBER 31,
---------------------------------------
1993 1992
------------------- -------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
Noninterest bearing demand.............. $ 79,009 $ 79,009 $ 68,297 $ 68,297
Interest bearing transaction accounts... 198,214 198,214 216,671 216,671
Savings................................. 51,577 51,577 42,881 42,881
Time deposits $100M and over............ 49,230 49,696 44,216 44,704
Other time deposits..................... 192,789 193,785 191,359 192,559
-------- -------- -------- --------
Total deposits........................ $570,819 $572,281 $563,424 $565,112
======== ======== ======== ========
The fair value of deposits with no stated maturity (noninterest bearing
demand, interest bearing transaction accounts and savings) is equal to the
amount payable on demand, or carrying amount, as of December 31, 1993 and 1992.
The fair value of time deposits is estimated based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates
currently offered as of December 31, 1993 and 1992 for deposits of similar
remaining maturities.
F-15
L.S.B. BANCSHARES, INC. OF SOUTH CAROLINA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--SHORT-TERM BORROWINGS
Short-term borrowings payable were:
DECEMBER 31,
-----------------------
1993 1992
----------- -----------
(DOLLARS IN THOUSANDS)
Federal funds purchased and securities sold under
agreements to repurchase.............................. $61,464 $31,628
Interest bearing demand notes issued to the U.S. Trea-
sury.................................................. 1,000 1,000
----------- -----------
Total................................................ $62,464 $32,628
=========== ===========
Federal funds purchased and securities sold under agreements to repurchase
generally mature on a one to thirty-one day basis. At December 31, 1993 and
1992, the combined weighted average interest rates related to federal funds
purchased and securities sold under agreements to repurchase were 2.83% and
2.96%, respectively. At December 31, 1993 and 1992, the interest rates on
interest bearing demand notes issued to the U.S. Treasury were 2.76% and 2.85%,
respectively.
In April, 1993, LSB's subsidiary, The Lexington State Bank, entered into a
line of credit agreement with the Federal Home Loan Bank of Atlanta ("FHLB").
Under the terms of the agreement, LSB's subsidiary may borrow up to $28,000,000
for a period up to one year for general corporate purposes. Borrowings under
the line may bear interest at either a variable or fixed rate established by
the FHLB. The line is secured by FHLB capital stock with a carrying value of
$1,551,000, and a blanket lien on all 1-4 family residential first lien
mortgage loans held by The Lexington State Bank. The carrying value of such
loans at December 31, 1993, totaled approximately $57,401,000. The line of
credit, which was unused during 1993, expires on April 8, 1994.
At December 31, 1993, the banking subsidiaries had unused short-term lines of
credit to purchase federal funds from unrelated banks totaling $24,500,000.
These lines of credit are available generally on a one to seven day basis for
general corporate purposes of the banks. All of the lenders have reserved the
right to withdraw these lines at their option.
NOTE 10--LONG-TERM DEBT
DECEMBER 31,
---------------------------------------
1993 1992
------------------- -------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
Issued by the parent company
Floating rate subordinated capital
note due in annual installments of
$1,000,000 beginning in 1996......... $4,000 $4,000 $4,000 $4,000
Issued by subsidiary
6.06% note, due August 24, 2000...... 2,000 2,023
5.37% note, due August 24, 2000...... 2,000 2,012
------ ------ ------ ------
$8,000 $8,035 $4,000 $4,000
====== ====== ====== ======
The fair value of fixed-rate long-term debt is estimated based on the current
rates offered to LSB for debt of the same remaining maturities. The fair value
of floating rate debt is estimated at the carrying amount
F-16
L.S.B. BANCSHARES, INC. OF SOUTH CAROLINA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
because the interest rate associated with such debt reprices immediately with
changes in the lender's prime rate, and management is not aware of any
significant change in the credit risk associated with the debt.
Interest on the parent company's subordinated note fluctuates at 97% of the
lender's prime rate with the parent company having certain options to fix the
interest rate. The note is subordinate to the claims of depositors. In a
related loan agreement, LSB has agreed to certain covenants including:
maintenance of specified amounts of net worth; minimum ratios of capital
adequacy, and income to average assets; and a maximum ratio of loans to
deposits. The loan agreement also restricts the disposition of subsidiaries'
common stock, the pledging of certain assets to secure indebtedness, additional
long-term borrowings, and the payment of cash dividends. Under the provisions
of the loan agreement, $6,776,000 of consolidated retained earnings are
available for cash dividends after December 31, 1993, provided that such
payments would not thereafter cause net worth and ratios of capital adequacy to
decrease below the specified levels.
The 6.06% note issued by The Lexington State Bank to the FHLB contains
options to repay all or any portion of the indebtedness at semi-annual option
dates beginning in 1996. Any amount not repaid at the option dates will be
payable at maturity. Prepayments prior to 1996 and at dates other than the
semi-annual option dates are subject to penalties. The 5.37% note issued to the
FHLB by The Lexington State Bank is payable in semi-annual installments of
$143,000 each beginning in 1994. This note contains options for prepayment of
specified additional amounts at certain scheduled repayment dates. All other
prepayments are subject to penalties. These notes are collateralized by the
same assets securing a short-term line of credit from the FHLB referred to in
Note 9 to the consolidated financial statements.
Future debt maturities are as follows:
YEARS ENDED DECEMBER 31, (DOLLARS IN THOUSANDS)
------------------------ ----------------------
1994............................................. $ 286
1995............................................. 286
1996............................................. 1,286
1997............................................. 1,286
1998............................................. 1,286
Thereafter....................................... 3,570
------
Total.......................................... $8,000
======
NOTE 11--STOCKHOLDERS' EQUITY
Sale of Common Stock--As of July 14, 1992, LSB registered 200,000 shares of
its authorized but unissued common stock for sale through its Dividend
Reinvestment and Shareholder Stock Purchase Plan. Under this plan, LSB is
offering all holders of its common stock the opportunity to reinvest
automatically their cash dividends in shares of common stock, and to invest up
to $1,000 in cash contributions per calendar quarter to purchase additional
shares. The price paid for shares purchased through the plan is the bid price
of the common stock reported on the NASDAQ over-the-counter market on the
trading day preceeding the date an investment is made. Prior to this plan, a
dividend reinvestment plan was in effect that permitted only the reinvestment
of cash dividends to purchase shares. Shares issued under the Dividend
Reinvestment and Shareholder Stock Purchase Plan generally are newly issued
shares. However, LSB may purchase shares for participants in the open market.
F-17
L.S.B. BANCSHARES, INC. OF SOUTH CAROLINA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Following is a summary of the activity in the aforementioned plans:
YEARS ENDED DECEMBER 31,
--------------------------
1993 1992 1991
-------- -------- --------
Shares reserved for Dividend Reinvestment and
Shareholder Stock Purchase Plans--beginning......... 187,581 11,743 34,292
-------- -------- -------
Registration of additional shares.................... 200,000
--------
Shares issued to participants:
First quarter...................................... 10,875 5,371 6,274
Second quarter..................................... 9,361 5,269 5,551
Third quarter...................................... 9,573 4,607 5,407
Fourth quarter..................................... 7,667 8,915 5,317
-------- -------- -------
Total shares issued.............................. 37,476 24,162 22,549
-------- -------- -------
Shares reserved for Dividend Reinvestment and Share-
holder Stock Purchase Plans--ending................. 150,105 187,581 11,743
======== ======== =======
Regulatory Capital--LSB and its banking subsidiaries are subject to
regulatory risk-based capital adequacy standards. Under these standards, bank
holding companies and banks are required to maintain various minimum ratios of
capital to risk-weighted assets and average assets.
The following table sets forth the risk-based capital ratios of LSB and its
banking subsidiaries at December 31, 1993, compared to the minimum levels
prescribed by regulation:
TIER 1 TOTAL CAPITAL LEVERAGE
------ ------------- --------
LSB............................................... 12.96% 15.16% 7.85%
The Lexington State Bank.......................... 13.65% 14.86% 7.95%
The Community Bank of South Carolina.............. 13.28% 15.53% 7.03%
Minimum required.................................. 4.00% 8.00% 3.00%
NOTE 12--OTHER OPERATING EXPENSES
Other operating expenses are summarized as follows:
YEARS ENDED DECEMBER 31,
--------------------------
1993 1992 1991
-------- -------- --------
(DOLLARS IN THOUSANDS)
Salaries and employee benefits...................... $13,015 $11,388 $ 9,711
Net occupancy expense............................... 1,274 1,113 971
Furniture and equipment expense..................... 2,020 1,719 1,681
Other expense
Stationery, printing and supplies................. 975 927 771
Postage........................................... 695 612 546
Telephone......................................... 433 368 264
Advertising....................................... 498 427 377
Net cost of holding and operation of other real
estate........................................... 477 509 522
Amortization of intangibles....................... 359 183 51
FDIC insurance assessment......................... 1,256 1,160 951
Other............................................. 3,841 3,071 2,318
-------- -------- --------
Total........................................... $24,843 $21,477 $18,163
======== ======== ========
F-18
L.S.B. BANCSHARES, INC. OF SOUTH CAROLINA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13--RETIREMENT PLANS
The following table sets forth the funded status of LSB's pension plan and
amounts recognized in the consolidated balance sheet:
DECEMBER 31,
----------------
1993 1992
------- -------
(DOLLARS IN
THOUSANDS)
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested benefits
of $2,571 for 1993 and $2,272 for 1992..................... $ 2,632 $ 2,354
======= =======
Projected benefit obligation for service rendered to date .... $(5,108) $(4,074)
Plan assets at fair value, primarily listed stocks and bonds.. 2,291 2,026
------- -------
Projected benefit obligation greater than plan assets......... (2,817) (2,048)
Unrecognized prior service cost............................... 1,837 1,400
Unrecognized net loss......................................... 1,066 818
Adjustment required to recognize minimum liability............ (340) (327)
------- -------
Accrued pension cost included in other liabilities............ $ (254) $ (157)
======= =======
In accordance with SFAS No. 87, LSB has recorded an adjustment, as shown in
the table above, to recognize a minimum pension liability for 1993 and 1992. A
corresponding offsetting asset, "Deferred pension costs," has been recorded and
included in other assets in the consolidated balance sheet.
Net pension cost consisted of the following components:
YEARS ENDED DECEMBER 31,
---------------------------
1993 1992 1991
-------- -------- --------
(DOLLARS IN THOUSANDS)
Service cost........................................ $ 342 $282 $376
Interest cost....................................... 336 228 90
Actual return on plan assets........................ (104) (69) (42)
Net amortization and deferral....................... 101 41 (38)
-------- ------- -------
Net periodic pension cost......................... $ 675 $482 $386
======== ======= =======
Assumptions used in accounting for the plan were:
YEARS ENDED DECEMBER 31,
-------------------------
1993 1992
------------ ------------
Weighted average discount rate....................... 7.25% 6.75%
Average rate of increase in future compensation
levels.............................................. 5.50% 5.50%
Expected long-term rate of return on assets.......... 8.00% 8.00%
Included in expenses were contributions to the banking subsidiaries' profit-
sharing plan of $181,000, $154,000 and $151,000 for the years ended December
31, 1993, 1992 and 1991, respectively.
F-19
L.S.B. BANCSHARES, INC. OF SOUTH CAROLINA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14--INCOME TAXES
LSB adopted, effective January 1, 1993, SFAS No. 109 "Accounting for Income
Taxes," which was issued in February, 1992. Under the liability method
specified by SFAS No. 109, deferred tax assets and liabilities are determined
based on the difference between the financial statement and income tax bases of
assets and liabilities as measured by the currently enacted tax rates which are
assumed will be in effect when these differences reverse. Deferred tax expense
is the result of changes in deferred tax assets and liabilities. The deferred
method, used in years prior to 1993, required LSB to provide for deferred
income tax expense based on certain items of income and expense which were
reported in different years in the financial statements and the tax returns, as
measured by the tax rate in effect for the year in which the difference
occurred. As permitted under the statement, prior years' consolidated financial
statements have not been restated. The cumulative effect of adopting SFAS No.
109 as of January 1, 1993, was immaterial to LSB's consolidated financial
position or results of operations.
Income before income taxes presented in the consolidated statement of income
for the years ended December 31, 1993, 1992 and 1991, included no foreign
component. Income tax expense consisted of:
LIABILITY
METHOD DEFERRED METHOD
----------- -----------------
YEARS ENDED DECEMBER 31,
-----------------------------
1993 1992 1991
----------- -------- -------
(DOLLARS IN THOUSANDS)
Current
Federal (net of $10 tax benefit of AMT credit
carryforward for 1993)........................ $ 2,617 $2,565 $ 811
State.......................................... 343 299 165
--------- -------- ------
Total current................................ 2,960 2,864 976
--------- -------- ------
Deferred
Federal........................................ (110) (404) (39)
State.......................................... (6) (26)
--------- -------- ------
Total deferred............................... (116) (430) (39)
--------- -------- ------
Total........................................ $ 2,844 $2,434 $ 937
========= ======== ======
The principal components of the deferred portion of income tax expenses were:
LIABILITY
METHOD DEFERRED METHOD
----------- -----------------
YEARS ENDED DECEMBER 31,
-----------------------------
1993 1992 1991
----------- -------- -------
(DOLLARS IN THOUSANDS)
Provision for loan losses........................ $ (248) $ (478) $ 65
Accelerated depreciation......................... 84 44 62
Deferred net loan costs.......................... 12 (14) (64)
Pension plan expense............................. 45 13 (3)
Other, net....................................... (9) 5 (99)
--------- -------- ------
Total.......................................... $ (116) $ (430) $ (39)
========= ======== ======
F-20
L.S.B. BANCSHARES, INC. OF SOUTH CAROLINA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation between the income tax expense and the amount computed by
applying the federal statutory rate of 34% to income before income taxes
follows:
LIABILITY
METHOD DEFERRED METHOD
---------------------------
YEARS ENDED DECEMBER 31,
---------------------------
1993 1992 1991
-------- -------- -------
(DOLLARS IN THOUSANDS)
Tax expense at statutory rate..................... $ 3,271 $2,915 $1,548
State income tax, net of federal income tax
benefit.......................................... 223 176 117
Tax-exempt interest income........................ (776) (815) (824)
Non-deductible interest expense to carry tax-
exempt instruments............................... 70 89 105
Non-deductible merger expenses.................... 38
Other, net........................................ 18 69 (9)
-------- ------- -------
Total........................................... $ 2,844 $2,434 $ 937
======== ======= =======
Deferred tax assets and liabilities included in the consolidated balance
sheet at December 31, 1993 consisted of the following:
(DOLLARS IN THOUSANDS)
----------------------
Deferred tax assets
Allowance for loan losses............................. $1,614
Alternative minimum tax credit carryforward........... 358
Accrued deferred compensation......................... 246
State net operating loss carryforward................. 53
Other................................................. 13
------
Gross deferred tax assets........................... 2,284
Valuation allowance................................... (53)
------
Total............................................... 2,231
------
Deferred tax liabilities
Accelerated depreciation.............................. 671
Unrealized holding gains and losses on available-for-
sale securities...................................... 762
Deferred net loan costs............................... 69
Pension plan expense.................................. 61
Securities discount accretion......................... 53
Other................................................. 27
------
Gross deferred tax liabilities...................... 1,643
------
Net deferred income tax assets.......................... $ 588
======
Deferred income taxes of $1,234,000 at December 31, 1992 were included in
other assets.
The valuation allowance of $53,000 was established in 1993 to offset deferred
tax assets arising from state net operating loss carryforwards of the parent
company and the securities brokerage subsidiary which are not considered by
management likely to be realizable. These state net operating loss
carryforwards at December 31, 1993 total $1,056,000 and expire in the years as
follows: 2001--$17,000; 2006--$161,000; 2007--$462,000; 2008--$416,000. The
$358,000 alternative minimum tax ("AMT") credit carryforward which arose during
1993 as the result of the merger with Dorn has no expiration date and may be
F-21
L.S.B. BANCSHARES, INC. OF SOUTH CAROLINA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
carried forward indefinitely. Under Internal Revenue Code Sections 382 and 383,
the utilization of the AMT credit carryforward by LSB is limited to $243,000 in
any one tax year.
During 1993, $762,000 of deferred income taxes were charged directly against
unrealized holding gains and losses on available-for-sale securities, which
appears as a component of stockholders' equity in the consolidated balance
sheet.
Income tax expense related to investment securities gains was $121,000,
$92,000 and $68,000 for 1993, 1992, and 1991, respectively.
NOTE 15--L.S.B. BANCSHARES, INC. OF SOUTH CAROLINA (PARENT COMPANY ONLY)
DECEMBER 31,
-----------------------
1993 1992
----------- -----------
(DOLLARS IN THOUSANDS)
BALANCE SHEET
Assets
Cash............................................... $ 536 $ 171
Securities available-for-sale...................... 595
Other investments.................................. 452
Investment in banking subsidiaries................. 57,488 50,763
Land............................................... 75 75
Other assets....................................... 523 416
----------- -----------
Total assets..................................... $59,217 $51,877
=========== ===========
Liabilities
Long-term debt..................................... $ 4,000 $ 4,000
Other liabilities.................................. 384 285
Stockholders' equity................................. 54,833 47,592
----------- -----------
Total liabilities and stockholders' equity....... $59,217 $51,877
=========== ===========
YEARS ENDED DECEMBER
31,
----------------------
1993 1992 1991
------ ------ ------
(DOLLARS IN
THOUSANDS)
STATEMENT OF INCOME
Income
Dividends from banking subsidiaries.................. $1,827 $1,707 $1,674
Other dividends and interest......................... 20 39 98
Other income......................................... 9 2
------ ------ ------
Total income....................................... 1,856 1,746 1,774
------ ------ ------
Expenses
Interest expense..................................... 237 202 167
Other expense........................................ 284 286 94
------ ------ ------
Total expenses..................................... 521 488 261
------ ------ ------
Income before income taxes and equity in undistributed
earnings of banking subsidiaries...................... 1,335 1,258 1,513
Income tax expense (credit)............................ (136) (153) (55)
Equity in undistributed earnings of banking subsidiar-
ies................................................... 5,305 4,728 2,048
------ ------ ------
Net income............................................. $6,776 $6,139 $3,616
====== ====== ======
F-22
L.S.B. BANCSHARES, INC. OF SOUTH CAROLINA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31,
----------------------------
1993 1992 1991
-------- -------- --------
(DOLLARS IN THOUSANDS)
STATEMENT OF CASH FLOWS
Operating activities
Net income..................................... $ 6,776 $ 6,139 $ 3,616
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed earnings of banking
subsidiaries................................ (5,305) (4,728) (2,048)
(Gain) loss on sale of other investments..... 2 (2)
Decrease in interest receivable.............. 2 4
Increase (decrease) in interest payable...... (37) 14 1
Increase in prepaid expenses and receivables. (102) (303) (109)
Increase in other accrued expenses and
payables.................................... 136 190 49
-------- -------- --------
Net cash provided by operating activities.. 1,468 1,316 1,511
-------- -------- --------
Investing activities
Net decrease in time deposits in other banks... 100 50
Sales of other investments..................... 50 951 997
Purchases of other investments................. (200) (100) (1,307)
Investment in banking subsidiaries............. (2,900)
Sales of land.................................. 95 1
-------- -------- --------
Net cash used by investing activities...... (150) (1,854) (259)
-------- -------- --------
Financing activities
Sale of common stock........................... 885 381 291
Proceeds from long-term debt................... 4,000 2,000
Repayment of long-term debt.................... (4,000)
Cash dividends paid............................ (1,838) (1,713) (1,672)
-------- -------- --------
Net cash provided (used) by financing
activities................................ (953) 668 (1,381)
-------- -------- --------
Increase (decrease) in cash and cash equivalents. 365 130 (129)
Cash and cash equivalents, beginning............. 171 41 170
-------- -------- --------
Cash and cash equivalents, ending................ $ 536 $ 171 $ 41
======== ======== ========
NOTE 16--COMMITMENTS AND CONTINGENT LIABILITIES
Commitments--In the normal course of business, LSB's banking subsidiaries are
parties to financial instruments with off-balance-sheet risk. These financial
instruments include commitments to extend credit, standby letters of credit and
securities lent, and have elements of credit risk in excess of the amount
recognized in the consolidated balance sheet. The exposure to credit loss in
the event of nonperformance by the other parties to these financial instruments
is represented by the contractual notional amount of those instruments.
Generally, the same credit policies used for on-balance-sheet instruments, such
as loans, are used in extending loan commitments, standby letters of credit and
securities lent.
F-23
L.S.B. BANCSHARES, INC. OF SOUTH CAROLINA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Following are the off-balance-sheet financial instruments whose contract
amounts represent credit risk:
DECEMBER 31,
---------------
1993 1992
------- -------
(DOLLARS IN
THOUSANDS)
Loan commitments................................................ $75,592 $60,291
Standby letters of credit....................................... 2,654 1,751
Securities lent................................................. 8,335 8,059
Loan commitments involve agreements to lend to a customer as long as there is
no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and some
involve payment of a fee. Many of the commitments are expected to expire
without being fully drawn; therefore, the total amount of loan commitments does
not necessarily represent future cash requirements. Each customer's
creditworthiness is evaluated on a case-by-case basis. The amount of collateral
obtained, if any, upon extension of credit is based on management's credit
evaluation of the borrower. Collateral held varies but may include commercial
and residential real properties, accounts receivable, inventory and equipment.
Standby letters of credit are conditional commitments to guarantee the
performance of a customer to a third party. All of the standby letters of
credit expire within 1994. The credit risk involved in issuing standby letters
of credit is the same as that involved in making loan commitments to customers.
As of December 31, 1993 and 1992, approximately $142,000 and $499,000,
respectively, of the standby letters of credit were unsecured. Collateral for
secured standby letters of credit varies but may include commercial and
residential real properties, accounts receivable, inventory, equipment,
marketable securities and certificates of deposit. Since most of the letters of
credit are expected to expire without being drawn upon, the contract amounts do
not necessarily represent future cash requirements.
Securities lent represent customer securities lent to third parties. LSB
assumes credit risk on these instruments by indemnifying the customer against
the borrower's failure to return the securities. To minimize this risk, LSB
evaluates the creditworthiness of the borrower on a case-by-case basis, and
collateral with a market value exceeding 100% of the contract amount of
securities lent is obtained.
SFAS No. 107 requires the disclosure of the estimated fair values of off-
balance-sheet financial instruments for which it is practicable to estimate
fair value. The estimated fair values of such off-balance-sheet financial
instruments are generally based upon fees charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' creditworthiness. The vast majority of LSB's loan commitments
do not involve the charging of a fee, and the fees associated with outstanding
standby letters of credit and securities lent are not material. Therefore, as
of December 31, 1993 and 1992, the estimated fair value of LSB's off-balance-
sheet financial instruments is nominal. For loan commitments and standby
letters of credit, the committed interest rates are either variable or
approximate current interest rates offered for similar commitments. Management
is not aware of any significant change in the credit risk associated with these
commitments. Securities lent positions mature on a demand basis and do not
present unanticipated credit concerns.
Contingent Liabilities--LSB and its subsidiaries are, from time to time,
involved as defendants in various legal proceedings arising in the normal
course of business. As of December 31, 1993, management and legal counsel are
not aware of any pending or threatened litigation, or unasserted claims or
assessments that are expected to result in losses, if any, that would be
material to the consolidated financial statements.
F-24
L.S.B. BANCSHARES, INC. OF SOUTH CAROLINA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 17--RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES
South Carolina banking regulations restrict the amount of dividends that can
be paid to stockholders. All of the banking subsidiaries' dividends to LSB are
subject to the prior approval of the Commissioner of Banking and are payable
only from their undivided profits. At December 31, 1993, the banking
subsidiaries' undivided profits totaled $25,223,000. Under Federal Reserve
Board regulations, the amounts of loans or advances from the banking
subsidiaries to the parent company are also restricted.
NOTE 18--LEASING
The annual minimum rental commitments under the terms of noncancelable
operating leases as of December 31, 1993, are as follows:
(DOLLARS IN THOUSANDS)
----------------------
1994............................................... $ 95
1995............................................... 88
1996............................................... 56
1997............................................... 51
1998............................................... 51
Thereafter......................................... 475
----
Total minimum lease payments....................... $816
====
Rental expense for all operating leases was $64,000, $63,000, and $265,000,
for the years ended December 31, 1993, 1992 and 1991, respectively. Some leases
provide for the payment of executory costs and contain options to renew.
NOTE 19--LOANS TO RELATED PARTIES
Certain executive officers and directors of the consolidated companies, their
immediate families and business interests were loan customers of, and had other
transactions in the normal course of business with, the banking subsidiaries.
Related party loans are made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than normal risk of
collectibility. The aggregate dollar amount of these loans was $3,697,000 and
$2,894,000 at December 31, 1993 and 1992, respectively. During 1993, $2,060,000
of new loans were made and repayments totaled $1,257,000.
NOTE 20--PENDING TRANSACTION
On December 7, 1993, LSB entered into an Agreement and Plan of Reorganization
("Reorganization Agreement") with BB&T Financial Corporation ("BB&T
Financial"), Wilson, North Carolina, whereby LSB's stockholders will exchange
all of their outstanding common shares of LSB for common stock of BB&T
Financial. According to the provisions of the Reorganization Agreement, LSB and
its subsidiaries will be merged into BB&T Financial and certain of its
subsidiaries and will cease to operate as separate corporations. The proposed
merger is expected to be accounted for as a pooling-of-interests. At December
31, 1993, BB&T Financial had assets totaling approximately $9.2 billion.
The number of common shares of BB&T Financial to be exchanged for each common
share of LSB is to be determined by a formula as follows: the ending book value
per share of LSB (subject to certain adjustments) as of the last day of the
calendar month immediately preceding the effective date of the merger
multiplied by a factor 2.25, divided by the average of the closing price of
BB&T Financial common stock as
F-25
L.S.B. BANCSHARES, INC. OF SOUTH CAROLINA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
reported on the NASDAQ/National Market System on the ten trading days ending on
the tenth business day prior to the effective date of the merger. However, if
the average closing price of BB&T Financial common shares is greater than
$36.00 per share or less than $30.50 per share, then the denominator in the
formula will be fixed at $36.00 and $30.50, respectively.
The Reorganization Agreement is subject to approval by the stockholders of
LSB and by regulatory authorities. At any time prior to the effective date of
the merger, the Reorganization Agreement may be terminated by the mutual
consent of the boards of directors of LSB and BB&T Financial or by either party
should material adverse changes occur in the business of the other party. In
addition, either party may terminate the Reorganization Agreement if the above-
described average closing price of BB&T Financial common stock is less than
$26.00 or more than $36.00 per share.
Subject to regulatory approval and limitations consistent with business
combinations accounted for as poolings-of-interests, the Reorganization
Agreement provides that LSB is to increase its cash dividends to stockholders
to an amount requested by BB&T Financial. At the time the Reorganization
Agreement with BB&T Financial was entered into, LSB also granted BB&T Financial
an option to purchase up to 771,894 shares of LSB's authorized but unissued
common stock at a price of $30.00 per share. The option may be exercised upon
the occurrence of certain specified events including a change in control of LSB
or an offer being made for LSB's common stock by a competing bidder.
NOTE 21--QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited quarterly results of operations for 1993 and 1992 are presented
below:
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
--------------- --------------- --------------- ---------------
1993 1992 1993 1992 1993 1992 1993 1992
------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
Interest income......... $11,566 $11,578 $11,827 $12,047 $11,511 $12,107 $11,473 $11,993
Interest expense........ 4,484 5,755 4,637 5,491 4,553 5,135 4,458 4,730
------- ------- ------- ------- ------- ------- ------- -------
Net interest income..... 7,082 5,823 7,190 6,556 6,958 6,972 7,015 7,263
Provision for loan
losses................. 440 501 362 632 360 780 386 615
------- ------- ------- ------- ------- ------- ------- -------
Net interest income
after provision for
loan losses............ 6,642 5,322 6,828 5,924 6,598 6,192 6,629 6,648
Gain on sale of
investment securities.. 1 4 132 188 204 64
Other operating income.. 1,562 1,269 1,699 1,445 2,030 1,498 2,138 1,496
Other operating
expenses............... 5,826 4,683 6,232 5,401 6,249 5,669 6,536 5,724
------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................. 2,379 1,908 2,295 1,972 2,511 2,209 2,435 2,484
Income taxes............ 682 503 612 517 717 641 833 773
------- ------- ------- ------- ------- ------- ------- -------
Net income.............. $ 1,697 $ 1,405 $ 1,683 $ 1,455 $ 1,794 $ 1,568 $ 1,602 $ 1,711
======= ======= ======= ======= ======= ======= ======= =======
Net income per share.... $ .55 $ .46 $ .54 $ .48 $ .58 $ .51 $ .52 $ .55
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APPENDIX I
AGREEMENT AND PLAN OF REORGANIZATION
Agreement and Plan of Reorganization ("Reorganization Agreement" or
"Agreement"), dated as of December 7, 1993, between L.S.B. BANCSHARES, INC. OF
SOUTH CAROLINA ("LSB"), a South Carolina corporation having its home office at
309 Columbia Avenue, P.O. Box 8, Lexington, South Carolina 29071, and BB&T
FINANCIAL CORPORATION ("BB&T"), a North Carolina corporation having its home
office at 223 West Nash Street, Wilson, North Carolina 27893.
WITNESSETH
Whereas, the parties hereto desire that LSB shall be merged with and into
BB&T Financial Corporation of South Carolina ("BB&T-SC"), a South Carolina
corporation which is a wholly owned subsidiary of BB&T (said transaction being
hereinafter referred to as the "Merger") pursuant to a plan of merger in the
form attached hereto as Annex A ("Plan of Merger");
Whereas, the parties hereto desire that The Lexington State Bank
("Lexington") and The Community Bank of South Carolina ("Community"), each
wholly owned South Carolina chartered bank subsidiaries of LSB, shall be merged
("Bank Mergers") with and into Branch Banking and Trust Company of South
Carolina, BB&T-SC's wholly owned South Carolina chartered bank subsidiary
("Branch Bank-SC") pursuant to one or more Plans of Merger, in form or forms to
be specified by BB&T and agreeable to LSB ("Bank Merger Agreement"); and
Whereas, the parties desire to provide for certain undertakings, conditions,
representations, warranties and covenants in connection with the transactions
contemplated hereby;
Now, Therefore, in consideration of the premises and of the mutual
representations, warranties, covenants and agreements herein contained and
intending to be legally bound hereby, the parties hereto do hereby agree as
follows:
ARTICLE I
DEFINITIONS
"Bank Holding Company Act" shall mean the Bank Holding Company Act of 1956,
as amended.
"BB&T Common Stock" shall mean the shares of common stock, par value $2.50
per share, of BB&T.
"BB&T Average Closing Price" shall mean the average per share closing price
of BB&T Common Stock as reported on the Nasdaq/National Market System for the
ten consecutive trading days ending on the tenth business day prior to the
Closing Date.
"BB&T Subsidiary" shall mean each of BB&T-SC, Branch Bank-SC and Branch
Banking and Trust Company, a North Carolina chartered bank subsidiary of BB&T.
"Closing Date" shall mean the date specified pursuant to Section 4.11 hereof
as the date on which the parties hereto shall close the transactions
contemplated herein.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Commission" shall mean the Securities and Exchange Commission.
"CRA" shall mean the Community Reinvestment Act of 1977, as amended.
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"Effective Date" shall mean the date specified pursuant to Section 4.11
hereof as the effective date of the Merger.
"Environmental Claim" means any written notice from any governmental
authority or third party alleging potential liability (including, without
limitation, potential liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damages, property damages,
personal injuries or penalties) arising out of, based upon, or resulting from
the presence, or release into the environment, of any Materials of
Environmental Concern.
"Environmental Laws" means all applicable federal, state and local laws and
regulations, including the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended, that relate to pollution or protection
of human health or the environment.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"FDIA" shall mean the Federal Deposit Insurance Act, as amended.
"FDIC" shall mean the Federal Deposit Insurance Corporation.
"Federal Reserve Board" shall mean the Board of Governors of the Federal
Reserve System.
"Financial Statements" shall mean (a) with respect to BB&T, (i) the
consolidated balance sheets (including related notes and schedules, if any) of
BB&T as of December 31, 1992 and 1991 and the related consolidated statements
of income, shareholders' equity and cash flows (including related notes and
schedules, if any) for each of the three years ended December 31, 1992, 1991
and 1990 as filed by BB&T in Securities Documents and (ii) the consolidated
balance sheets of BB&T (including related notes and schedules, if any) and
related statements of income, shareholders' equity and cash flows (including
related notes and schedules, if any) included in Securities Documents filed by
BB&T with respect to periods ended subsequent to December 31, 1992, and (b)
with respect to LSB, (i) the consolidated balance sheets (including related
notes and schedules, if any) of LSB as of December 31, 1992 and 1991 and the
related consolidated statements of income, changes in shareholders' equity and
cash flows (including related notes and schedules, if any) for each of the
three years ended December 31, 1992, 1991 and 1990 as filed by LSB in
Securities Documents and (ii) the consolidated balance sheets of LSB (including
related notes and schedules, if any) and related statements of income, changes
in shareholders' equity and cash flows (including related notes and schedules,
if any) included in Securities Documents filed by LSB with respect to periods
ended subsequent to December 31, 1992.
"LSB Subsidiaries" shall mean Lexington, Community and any other corporation,
bank, savings association, partnership, Joint Venture, or other organization
more than 10% of the stock or ownership interest of which is owned, directly or
indirectly, by LSB, as Previously Disclosed.
"Joint Venture" shall mean any joint venture, partnership or similar
arrangement in which LSB or any LSB Subsidiary is a member, party to or partner
(whether general or limited), as Previously Disclosed.
"Material Adverse Effect" shall mean a material adverse effect on the
financial condition, results of operations, business or prospects of LSB,
Lexington and Community, taken as a whole.
"Materials of Environmental Concern" means pollutants, contaminants, wastes,
toxic substances, petroleum and petroleum products and any other materials
regulated under Environmental Laws.
"Option Agreement" shall mean the Option Agreement dated as of even date
herewith between LSB and BB&T, which shall be executed immediately following
execution of this Reorganization Agreement.
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"Previously Disclosed" shall mean disclosed in (i) a Securities Document
delivered by one party to the other on or prior to the execution of this
Reorganization Agreement or (ii) a letter from the party delivered and dated
not later than December 14, 1993 making such disclosure specifically referring
to this Agreement and delivered to the other party, provided that such letter
is not materially inconsistent with a draft of such letter delivered to the
other party and dated on or prior to the date of this Agreement. Any matter
included, whether aggregated or not, in Financial Statements shall be deemed to
be Previously Disclosed.
"Proxy Statement" shall mean the proxy statement together with any
supplements thereto sent to shareholders of LSB to solicit their votes in
connection with this Agreement and the Plan of Merger.
"Registration Statement" shall mean the registration statement with respect
to the BB&T Common Stock to be issued in the Merger as declared effective by
the Commission under the Securities Act.
"Rights" shall mean warrants, options, rights, convertible securities and
other arrangements or commitments which obligate an entity to issue or dispose
of any of its capital stock or other ownership interests, and stock
appreciation rights, performance units and similar stock-based rights whether
or not they obligate the issuer thereof to issue stock or other securities or
to pay cash.
"SCBCA" shall mean the South Carolina Business Corporation Act, as amended.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Securities Documents" shall mean all reports, proxy statements, registration
statements and all similar documents filed, or required to be filed, pursuant
to the Securities Laws.
"Securities Laws" shall mean the Securities Act; the Exchange Act; the
Investment Company Act of 1940, as amended; the Investment Advisers Act of
1940, as amended; the Trust Indenture Act of 1939, as amended; and the rules
and regulations of the Commission promulgated thereunder.
"State Board" shall mean the South Carolina State Board of Financial
Institutions.
"TILA" shall mean the Truth in Lending Act, as amended.
Other terms used herein are defined in the preamble and elsewhere in this
Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF LSB
LSB represents and warrants to BB&T as follows:
2.1 CAPITAL STRUCTURE
The authorized capital stock of LSB consists of 5,000,000 shares of common
stock, par value $2.50 per share ("LSB Common Stock"). As of the date hereof,
there were 2,688,028 shares of LSB Common Stock issued and outstanding and
1,390,838 shares of LSB Common Stock reserved for issuance in connection with
the pending acquisition of The Dorn Banking Company, LSB Dividend Reinvestment
Plan and the Option Agreement. All outstanding shares of LSB Common Stock have
been duly issued and are validly outstanding, fully paid and nonassessable. No
other classes of capital stock of LSB are authorized. There are no Rights
authorized, issued or outstanding with respect to the capital stock of LSB.
Shareholders of LSB do not have preemptive rights.
2.2 ORGANIZATION, STANDING AND AUTHORITY
LSB is a corporation duly organized, validly existing and in good standing
under the laws of the State of South Carolina with full corporate power and
authority to carry on its business as now conducted and does
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not do business in any other states of the United States and foreign
jurisdictions where its ownership or leasing of property or the conduct of its
business requires qualification to do business. LSB is registered as a bank
holding company with the Federal Reserve Board under the Bank Holding Company
Act.
2.3 OWNERSHIP OF LSB SUBSIDIARIES
LSB does not own, directly or indirectly, any outstanding capital stock or
other voting securities or ownership interests of any corporation, bank,
savings association, partnership, Joint Venture, or other organization, except
for the LSB Subsidiaries. The outstanding shares of capital stock or other
ownership interests of the LSB Subsidiaries are validly issued and outstanding,
fully paid and nonassessable and all such shares are directly or indirectly
owned by LSB free and clear of all liens, claims and encumbrances or preemptive
rights of any person. No Rights are authorized, issued or outstanding with
respect to the capital stock or other ownership interests of any LSB
Subsidiaries and there are no agreements, understandings or commitments
relating to the right of LSB to vote or to dispose of said shares or other
ownership interests. None of the shares of capital stock of any LSB Subsidiary
has been issued in violation of the preemptive rights of any person.
2.4 ORGANIZATION, STANDING AND AUTHORITY OF THE LSB SUBSIDIARIES
Each of the LSB Subsidiaries is a corporation or partnership duly organized,
validly existing and in good standing under the laws of South Carolina.
Lexington and Community each are duly organized South Carolina chartered banks.
Each of the LSB Subsidiaries: (i) has full corporate power and authority to
carry on its business as now conducted; (ii) is duly qualified to do business
in the states of the United States and foreign jurisdictions where its
ownership or leasing of property or the conduct of its business requires such
qualification, except where failure to so qualify would not have a Material
Adverse Effect; and (iii) is not engaged in any activities that have not been
Previously Disclosed.
2.5 AUTHORIZED AND EFFECTIVE AGREEMENT
a. LSB has all requisite corporate power and authority to enter into and
(subject to receipt of all necessary governmental approvals and the receipt of
approval of shareholders of LSB of the Plan of Merger) to perform all of its
obligations under this Reorganization Agreement, the Plan of Merger, the Bank
Merger Agreement and the Option Agreement. The execution and delivery of this
Reorganization Agreement, the Plan of Merger, the Bank Merger Agreement and the
Option Agreement and consummation of the transactions contemplated hereby and
thereby, have been duly and validly authorized by all necessary corporate
action in respect thereof on the part of LSB, and in the case of the Bank
Merger Agreement, Lexington and Community, except, in the case of this
Reorganization Agreement and the Plan of Merger, the approval of LSB
shareholders pursuant to and to the extent required by applicable law. This
Reorganization Agreement, the Plan of Merger and the Option Agreement
constitute legal, valid and binding obligations of LSB, each of which is
enforceable against LSB in accordance with its respective terms, in each such
case subject to (i) bankruptcy, fraudulent transfer, insolvency, moratorium,
reorganization, conservatorship, receivership, or other similar laws from time
to time in effect relating to or affecting the enforcement of rights of
creditors of FDIC-insured institutions or the enforcement of creditors' rights
generally, (ii) laws relating to the safety and soundness of depository
institutions and their holding companies, and (iii) general principles of
equity, and except that the availability of equitable remedies or injunctive
relief is within the discretion of the appropriate court.
b. Neither the execution and delivery of this Reorganization Agreement, the
Plan of Merger and the Option Agreement in the case of LSB, or the Bank Merger
Agreement in the case of Lexington and Community, nor consummation of the
transactions contemplated hereby or thereby, nor compliance by LSB or Lexington
or Community with any of the provisions hereof or thereof shall (i) conflict
with or result in a breach of any provision of the articles of incorporation,
charter or by-laws of LSB or any LSB Subsidiary, (ii) constitute or result in a
breach of any term, condition or provision of, or constitute a default under,
or
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give rise to any right of termination, cancellation or acceleration with
respect to, or result in the creation of any lien, charge or encumbrance upon
any material property or asset of LSB or any LSB Subsidiary pursuant to, any
note, bond, mortgage, indenture, license, agreement or other instrument or
obligation, which breach, default, right, lien, charge, or encumbrance would
have a Material Adverse Effect, or, (iii) subject to receipt of all required
governmental approvals, violate any order, writ, injunction, decree, statute,
rule or regulation applicable to LSB or any LSB Subsidiary.
2.6 SECURITIES DOCUMENTS AND REPORTS
LSB has timely filed all Securities Documents required by the Securities
Laws since December 31, 1987, and such Securities Documents complied in all
material respects with the Securities Laws as in effect at the times of such
filings. LSB and the LSB Subsidiaries have in all material respects timely
filed all reports required to be filed with the Federal Reserve Board, the
FDIC and the State Board and such reports complied in all material respects
with applicable law and regulations as in effect at the times of such filings.
2.7 FINANCIAL STATEMENTS; MINUTE BOOKS
The Financial Statements of LSB fairly present or will fairly present, as
the case may be, the consolidated financial position of LSB and the LSB
Subsidiaries as of the dates indicated and the consolidated results of
operations, changes in shareholders' equity and statements of cash flows for
the periods then ended (subject, in the case of unaudited interim statements,
to normal year-end audit adjustments that are not material in amount or
effect) in conformity with generally accepted accounting principles applicable
to financial institutions applied on a consistent basis (except as stated
therein). The minute books of LSB and the LSB Subsidiaries contain legally
sufficient records of all meetings and other corporate actions of its
shareholders and Board of Directors (including committees of its Board of
Directors).
2.8 MATERIAL ADVERSE CHANGE
LSB has not, on a consolidated basis, suffered any material adverse change
in its business, financial condition, results of operations or prospects since
December 31, 1992.
2.9 ABSENCE OF UNDISCLOSED LIABILITIES
Neither LSB nor any LSB Subsidiary has any liability (contingent or
otherwise) that is material to LSB on a consolidated basis or that, when
combined with all similar liabilities, would be material to LSB on a
consolidated basis, except as has been Previously Disclosed and except for
liabilities made in the ordinary course of its business consistent with past
practices since the date of LSB's most recent Financial Statements.
2.10 PROPERTIES
a. LSB and the LSB Subsidiaries have good and marketable title free and
clear of all liens, encumbrances, charges, defaults or equitable interests to
all of the properties and assets, real and personal, reflected on the
consolidated balance sheet included in the Financial Statements of LSB as of
December 31, 1992 or acquired after such date, except (i) liens for current
taxes not yet due and payable, (ii) pledges to secure deposits and other liens
incurred in the ordinary course of banking business, (iii) such imperfections
of title, easements and encumbrances, if any, as are not material in
character, amount or extent, (iv) dispositions and encumbrances for adequate
consideration in the ordinary course of business, or (v) as Previously
Disclosed.
b. All material leases pursuant to which LSB or any LSB Subsidiary, as
lessee, leases real or personal property, are, with respect to LSB or the LSB
Subsidiary, valid and enforceable in accordance with their respective terms,
in each such case subject to (i) bankruptcy, fraudulent transfer, insolvency,
moratorium, reorganization, conservatorship, receivership, or other similar
laws from time to time in effect relating to or affecting the enforcement of
rights of creditors of FDIC-insured institutions or the enforcement of
creditors' rights generally, (ii) laws relating to the safety and soundness of
depository institutions and their holding
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companies, and (iii) general principles of equity, and except that the
availability of equitable remedies or injunctive relief is within the
discretion of the appropriate court.
2.11 ENVIRONMENTAL MATTERS
a. LSB and the LSB Subsidiaries are in substantial compliance with all
Environmental Laws. Neither LSB nor any LSB Subsidiary has received any
communication alleging that LSB or any LSB Subsidiary is not in such compliance
and, to the best knowledge of LSB, there are no present circumstances that
would prevent or interfere with the continuation of such compliance.
b. LSB has not received notice of any pending, and is not aware of any
threatened, legal, administrative, arbitral or other proceedings, asserting
Environmental Claims or other claims, causes of action or governmental
investigations of any nature, seeking to impose, or that could result in the
imposition, on LSB or any LSB Subsidiary of any liability arising under any
Environmental Laws upon (i) LSB or any LSB Subsidiary, (ii) any person or
entity whose liability for any Environmental Claim LSB or any LSB Subsidiary
has or may have retained either contractually or by operation of law, (iii) any
real or personal property owned or leased by LSB or any LSB Subsidiary, or any
real or personal property which LSB or any LSB Subsidiary has been, or is,
judged to have managed or to have supervised or to have participated in the
management of, or (iv) any real or personal property in which LSB or any LSB
Subsidiary holds a security interest securing a loan recorded on the books of
LSB or any LSB Subsidiary. Neither LSB nor any LSB Subsidiary is subject to any
agreement, order, judgment, decree or memorandum by or with any court,
governmental authority, regulatory agency or third party imposing any such
liability.
c. With respect to all real and personal property owned or leased by LSB or
any LSB Subsidiary, or all real and personal property which LSB or any LSB
Subsidiary has been, or is, judged to have managed or to have supervised or to
have participated in the management of, LSB has provided BB&T with access to
copies of any environmental audits, analyses and surveys that have been
prepared relating to such properties (a list of all of which has been
Previously Disclosed). To the best of LSB's knowledge, LSB and the LSB
Subsidiaries are in compliance in all material respects with all
recommendations contained in any such environmental audits, analyses and
surveys.
d. There are no past or present actions, activities, circumstances,
conditions, events or incidents that could reasonably form the basis of any
Environmental Claim or other claim or action or governmental investigation that
could result in the imposition of any liability arising under any Environmental
Laws against LSB or any LSB Subsidiary or against any person or entity whose
liability for any Environmental Claim LSB or any LSB Subsidiary has or may have
retained or assumed either contractually or by operation of law.
2.12 ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses reflected on the consolidated balance sheets
included in the Financial Statements of LSB is or will be adequate in the
opinion of LSB's management in all material respects as of their respective
dates under the requirements of generally accepted accounting principles
applicable to banks and bank holding companies to provide for reasonably
anticipated losses on outstanding loans net of recoveries.
2.13 TAX MATTERS
a. LSB and the LSB Subsidiaries, and each of their predecessors, have timely
filed (or requests for extensions have been timely filed and any such
extensions have been granted and have not expired) all federal, state and
material local (and, if applicable, foreign) tax returns required by applicable
law to be filed by them (including, without limitation, estimated tax returns,
income tax returns, information returns, and withholding and employment tax
returns) and have paid, or where payment is not required to have been made,
have set up an adequate reserve or accrual for the payment of, all taxes
required to be paid in respect
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of the periods covered by such returns and, as of the Effective Date, will have
paid, or where payment is not required to have been made, will have set up an
adequate reserve or accrual for the payment of, all taxes for any subsequent
periods ending on or prior to the Effective Date. Neither LSB nor any of the
LSB Subsidiaries will have any material liability for any such taxes in excess
of the amounts so paid or reserves or accruals so established.
b. All federal, state and local (and, if applicable, foreign) tax returns
filed by LSB and the LSB Subsidiaries are complete and accurate in all material
respects. Neither LSB nor any of the LSB Subsidiaries is delinquent in the
payment of any material tax, assessment or governmental charge. No deficiencies
for any tax, assessment or governmental charge have been proposed, asserted or
assessed (tentatively or otherwise) against LSB or any LSB Subsidiary which
have not been settled and paid. There are currently no agreements in effect
with respect to LSB or any LSB Subsidiary to extend the period of limitations
for the assessment or collection of any tax. No audit examination or deficiency
or refund litigation with respect to such returns are pending.
2.14 EMPLOYEE BENEFIT PLANS
a. LSB has Previously Disclosed true and complete copies of all stock option,
employee stock purchase and stock bonus plans, qualified pension or profit-
sharing plans, deferred compensation, bonus or group insurance contracts and
any other incentive, welfare or employee benefit plans or agreements maintained
for the benefit of employees or former employees of LSB or any LSB Subsidiary
together with (i) the most recent actuarial and financial reports prepared with
respect to any qualified plans, (ii) the most recent annual reports filed with
any government agency, and (iii) all rulings and determination letters and any
open requests for rulings or letters that pertain to any qualified plan.
b. Neither LSB nor any other LSB Subsidiary (or any pension plan maintained
by any of them) has incurred any material liability to the Pension Benefit
Guaranty Corporation or the Internal Revenue Service with respect to any
pension plan qualified under Section 401 of the Code except liabilities to the
Pension Benefit Guaranty Corporation pursuant to Section 4007 of ERISA, all of
which have been fully paid. No reportable event under Section 4043(b) of ERISA
has occurred with respect to any such pension plan.
c. Neither LSB nor any LSB Subsidiary participates in, or has incurred any
liability under Section 4201 of ERISA for a complete or partial withdrawal
from, a multiemployer plan (as such term is defined in ERISA).
d. A favorable determination letter has been issued by the Internal Revenue
Service with respect to each "employee pension plan" (as defined in Section
3(2) of ERISA) of LSB or any LSB Subsidiary to the effect that such plan is
qualified under Section 401 of the Code and tax exempt under Section 501 of the
Code. No such letter has been revoked or, to LSB's knowledge, threatened to be
revoked and LSB does not know of any ground on which such revocation may be
based. Neither LSB nor any LSB Subsidiary has a material liability under any
such plan that is not reflected on the consolidated balance sheet included in
the Financial Statements of LSB as of December 31, 1992.
e. Except as Previously Disclosed, no prohibited transaction (which shall
mean any transaction prohibited by Section 406 of ERISA and not exempt under
Section 408 of ERISA or Section 4975 of the Code) has occurred with respect to
any employee benefit plan maintained by LSB or any LSB Subsidiary (i) which
would result in the imposition, directly or indirectly, of a material excise
tax under Section 4975 of the Code, or (ii) the correction of which would have
a Material Adverse Effect.
2.15 CERTAIN CONTRACTS
a. Except as Previously Disclosed, neither LSB nor any LSB Subsidiary is a
party to, is bound or affected by, or receives benefits under (i) any material
agreement, arrangement or commitment whether or not made
I-7
in the ordinary course of business (other than loans or loan commitments or
certificates of deposit made in the ordinary course of banking business by
Lexington or Community), or any agreement materially restricting its business
activities, including, without limitation, agreements or memoranda of
understanding with regulatory authorities, (ii) any agreement, indenture or
other instrument relating to the borrowing of money by LSB or any LSB
Subsidiary or the guarantee by LSB or any LSB Subsidiary of any such
obligation, which cannot be terminated within less than 30 days after the
Closing Date by LSB or the LSB Subsidiaries (without payment of any penalty or
cost by LSB or an LSB Subsidiary), (iii) any agreement, arrangement or
commitment relating to the employment of a consultant or the employment,
election or retention in office of any present or former director or officer,
which cannot be terminated within less than 30 days after the Closing Date by
LSB or the LSB Subsidiaries (without payment of any penalty or cost by LSB or
an LSB Subsidiary), or (iv) any contract, agreement or understanding with a
labor union, in each case whether written or oral.
b. Neither LSB nor any LSB Subsidiary is in default, which default would have
a material adverse effect on LSB on a consolidated basis or the transactions
contemplated herein, under any material agreement, commitment, arrangement,
lease, insurance policy, or other instrument whether entered into in the
ordinary course of business or otherwise and whether written or oral, and there
has not occurred any event that, with the lapse of time or giving of notice or
both, would constitute such a default.
2.16 LEGAL PROCEEDINGS; REGULATORY APPROVALS
Except as Previously Disclosed, at the date hereof, there are no actions,
suits, claims, governmental investigations or proceedings instituted, pending
or, to the best knowledge of LSB, threatened (or unasserted but considered by
LSB to be probable of assertion and which, if asserted, would have at least a
reasonable probability of an unfavorable outcome) against LSB or any LSB
Subsidiary or against any asset, interest, or right of LSB or any LSB
Subsidiary, or against any officer, director or employee of any of them that in
any such case, if decided adversely, might have a Material Adverse Effect (or,
in the case of threatened actions, suits, claims, governmental investigations
or proceedings, is likely, in the reasonable judgment of LSB's Chief Executive
Officer, after due inquiry of such other persons as may be necessary to make
such a judgment, to have a Material Adverse Effect). Except as Previously
Disclosed, there are no actions, suits or proceedings instituted, pending or,
to the knowledge of LSB and each of the directors and executive officers of LSB
and each LSB Subsidiary, threatened (or unasserted but considered probable of
assertion and which if asserted would have at least a reasonable probability of
an unfavorable outcome) against any present or former director or officer of
LSB or any LSB Subsidiary that might give rise to a claim for indemnification
as contemplated by Section 4.13(a) hereof, and to the best of the knowledge of
LSB and each of its directors and executive officers and each of the directors
and executive officers of each LSB Subsidiary, there is no reasonable basis for
any such action, suit or proceeding. To the knowledge of LSB, there are no
actual or threatened actions, suits or proceedings which present a claim to
restrain or prohibit the transactions contemplated herein, in the Plan of
Merger, the Option Agreement, or the Bank Merger Agreement. No fact or
condition (including but not limited to compliance with the CRA) relating to
LSB or any LSB Subsidiary known to LSB exists that would prevent LSB or BB&T
from obtaining all of the federal and state regulatory approvals contemplated
herein.
2.17 COMPLIANCE WITH LAWS
Except as Previously Disclosed, each of LSB and the LSB Subsidiaries is in
compliance in all material respects with all statutes and regulations
(including, but not limited to, the CRA and regulations promulgated thereunder,
the TILA and regulations promulgated thereunder and other consumer banking
laws) applicable and material to the conduct of its business (except for any
violations not material to the business, operations or financial condition of
LSB and the LSB Subsidiaries on a consolidated basis), and neither LSB nor any
LSB Subsidiary has received notification that has not elapsed, been withdrawn
or abandoned by any agency or department of federal, state or local government
(i) asserting a violation or possible violation of any such statute or
regulation and which violation would have a Material Adverse Effect on a
consolidated basis,
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(ii) threatening to revoke any license, franchise, permit or government
authorization, or (iii) restricting or in any way limiting its operations.
Neither LSB nor any LSB Subsidiary is subject to any regulatory or supervisory
cease and desist order, agreement, directive, memorandum of understanding or
commitment, and none of them has received any communication requesting that
they enter into any of the foregoing. Without limiting the generality of the
foregoing, each LSB Subsidiary has timely filed all currency transaction
reports required to be filed and taken all other actions required under the
Currency and Foreign Transactions Reporting Act, as amended, codified at 31
U.S.C. (S) 5301 et seq., and its implementing regulations.
2.18 BROKERS AND FINDERS
Neither LSB nor any LSB Subsidiary nor any of their respective officers,
directors or employees has employed any broker, finder or financial advisor or
incurred any liability of LSB or the LSB Subsidiaries for any fees or
commissions in connection with the transactions contemplated herein, in the
Plan of Merger or in the Option Agreement (except for fees to accountants and
lawyers and The Carson Medlin Company).
2.19 INSURANCE
LSB and the LSB Subsidiaries each currently maintain insurance in the amounts
and for the coverages Previously Disclosed. Except as Previously Disclosed,
neither LSB nor any LSB Subsidiary has received any notice of a premium
increase or cancellation or a failure to renew with respect to any insurance
policy or bond, and within the last three years, neither LSB nor any LSB
Subsidiary has been refused any insurance coverage sought or applied for, and
neither LSB nor any LSB Subsidiary has any reason to believe that existing
insurance coverage cannot be renewed as and when the same shall expire, upon
terms and conditions as favorable as those presently in effect, other than
possible increases in premiums or unavailability of coverage that do not result
from any extraordinary loss experience on the part of LSB or any LSB
Subsidiary.
2.20 REPURCHASE AGREEMENTS
Except as Previously Disclosed, or where no Material Adverse Effect would
result: (i) with respect to all agreements currently outstanding pursuant to
which LSB or any LSB Subsidiary has purchased securities subject to an
agreement to resell, LSB and the LSB Subsidiary have a valid, perfected first
lien or security interest in the securities or other collateral securing such
agreement, and the value of such collateral equals or exceeds the amount of the
debt secured thereby; and (ii) with respect to all agreements currently
outstanding pursuant to which LSB or any LSB Subsidiary has sold securities
subject to an agreement to repurchase, LSB and the LSB Subsidiary have not
pledged collateral materially in excess of the amount of the debt secured
thereby. Neither LSB nor any LSB Subsidiary has pledged collateral materially
in excess of the amount required under any interest rate swap or other similar
agreement currently outstanding.
2.21 DEPOSIT ACCOUNTS OF LEXINGTON AND COMMUNITY
The deposit accounts of Lexington and Community are insured by the Bank
Insurance Fund of the FDIC to the maximum extent permitted by federal law, and
Lexington and Community have paid all premiums and assessments and filed all
reports required to have been paid or filed under the FDIA.
2.22 LOANS
a. With respect to each loan on the books and records of LSB or any LSB
Subsidiary, including unfunded portions of outstanding lines of credit and loan
commitments: (i) such loan is a valid loan; (ii) its principal balance as shown
on the books and records of LSB or any LSB Subsidiary is true and correct as of
the last date shown thereon; (iii) all purported signatures on and executions
of any document in connection with such loan are genuine; (iv) all related
documentation has been signed or executed by all necessary parties; (v) LSB and
the LSB Subsidiaries have custody of all documents or microfilm records thereof
related to such loan (as such documents relate to the matters described in
clauses (i)-(iv) and (vi)-(vii) hereof); (vi) to the extent secured, such loan
has been secured by valid liens and security interests which have been
perfected;
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and (vii) such loan is the legal, valid and binding obligation of the obligor
named therein, subject to bankruptcy, insolvency, fraudulent conveyance and
other laws of general applicability relating to or affecting creditors' rights
and to general equity principles. All loans on the books and records of LSB or
any LSB Subsidiary have been originated and administered in accordance with the
terms of the underlying notes related thereto. Neither the terms of such loans,
nor any of the loan documentation, nor the manner in which such loans have been
administered and serviced, violates any federal, state or local law, rule,
regulation or ordinance applicable thereto, including, without limitation,
Regulation O of the Federal Reserve Board, 12 C.F.R. (S) 563.43, the TILA,
Regulation Z of the Federal Reserve Board, the Equal Credit Opportunity Act, as
amended, and state laws, rules and regulations relating to consumer protection,
installment sales and usury. Notwithstanding anything else contained in this
Section 2.22(a), the representations and warranties contained in this Section
shall be considered to have been made only to the extent that nonconformance
with such representation or warranty as to any loan or group of loans would (i)
after giving effect to LSB's reserve for loan losses, have a Material Adverse
Effect, or (ii) except to the extent Previously Disclosed, cause BB&T
reasonably to conclude that the loan documentation and records maintained by
LSB and the LSB Subsidiaries are not maintained in accordance with BB&T's
lending procedures and requirements.
b. LSB has Previously Disclosed all investments and loans, including loan
guarantees, to which LSB or any LSB Subsidiary is a party with any director,
executive, officer or 5% shareholder of LSB or any person, corporation, or
enterprise controlling, controlled by or under common control with any of the
foregoing.
2.23 CERTAIN INFORMATION
When the Proxy Statement is mailed, and at the time of the meeting of
shareholders of LSB to vote upon the Plan of Merger, the Proxy Statement and
all amendments or supplements thereto, with respect to all information set
forth therein furnished by LSB relating to LSB and the LSB Subsidiaries, (i)
shall comply in all material respects with the applicable provisions of the
Securities Laws, and (ii) shall not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements contained therein, in light of the
circumstances in which they were made, not misleading.
2.24 EFFECT OF REPRESENTATIONS AND WARRANTIES
The representations and warranties contained in this Article II are made for
the purpose of assigning to LSB the economic risk of the material falsity or
inaccuracy of those representations and warranties, or nonconformance of the
facts related thereto. Any non-material falsity, nonconformity or inaccuracy in
any representation or warranty (except for those expressed as being within the
actual knowledge of LSB or any LSB Subsidiaries or an officer thereof where
such representation or warranty is made falsely) shall not form the basis for
any claim by BB&T against LSB, any LSB Subsidiary, or any of their respective
officers, directors or agents, that LSB, any LSB Subsidiary, or such officers,
directors or agents, have made a willful, reckless or negligent
misrepresentation or otherwise engaged in deceitful conduct. Nothing in this
Section shall otherwise limit the right of BB&T to terminate this Agreement in
accordance with Section 6.1 or take such other actions as are permitted by this
Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BB&T
BB&T represents and warrants to LSB as follows:
3.1 CAPITAL STRUCTURE OF BB&T AND BB&T-SC
The authorized capital stock of BB&T consists of (i) 4,000,000 shares of
preferred stock, par value $2.50 per share, and (ii) 50,000,000 shares of BB&T
Common Stock, of which 32,246,028 shares are issued and
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outstanding. All outstanding shares of BB&T Common Stock have been duly issued
and are validly outstanding, fully paid and nonassessable. As of the date of
this Agreement, BB&T has reserved 3,367,843 shares of BB&T Common Stock for
issuance under its benefit plans, convertible securities and Dividend
Reinvestment Plan. Except as set forth herein, there are no Rights authorized,
issued or outstanding with respect to the capital stock of BB&T. None of the
shares of capital stock of BB&T has been issued in violation of the preemptive
rights of any person.
The authorized capital stock of BB&T-SC consists of 20,000,000 shares of
common stock, of which 1,427,188 shares are issued and outstanding, and all of
such shares are owned by BB&T. All outstanding shares of BB&T-SC Common Stock
have been duly issued and are validly outstanding, fully paid and
nonassessable. There are no Rights authorized, issued or outstanding with
respect to the capital stock of BB&T-SC. None of the shares of capital stock of
BB&T-SC has been issued in violation of the preemptive rights of any person.
3.2 ORGANIZATION, STANDING AND AUTHORITY OF BB&T
BB&T is a corporation duly organized, validly existing and in good standing
under the laws of the state of North Carolina, with full corporate power and
authority to carry on its business as now conducted and is duly qualified to do
business in the states of the United States and foreign jurisdictions where its
ownership or leasing of property or the conduct of its business requires such
qualification and where failure to so qualify would have a material adverse
effect on the financial condition, results of operation, or business of BB&T on
a consolidated basis. BB&T is registered as a bank holding company under the
Bank Holding Company Act.
3.3 AUTHORIZED AND EFFECTIVE AGREEMENT
a. BB&T has all requisite corporate power and authority to enter into and
perform all of its obligations under this Reorganization Agreement and the
Option Agreement. The execution and delivery of this Reorganization Agreement
and the Option Agreement and consummation of the transactions contemplated
hereby and thereby have been duly and validly authorized by all necessary
corporate action in respect thereof on the part of BB&T. This Reorganization
Agreement and the Option Agreement constitute legal, valid and binding
obligations of BB&T, in each such case enforceable against it in accordance
with their respective terms subject to (i) bankruptcy, insolvency, moratorium,
reorganization, conservatorship, receivership or other similar laws in effect
from time to time relating to or affecting the enforcement of the rights of
creditors of FDIC-insured institutions or the enforcement of creditors' rights
generally, (ii) laws relating to the safety and soundness of depository
institutions and their holding companies, and (iii) general principles of
equity, and except that the availability of remedies or injunctive relief is
within the discretion of the appropriate court.
b. Neither the execution and delivery of this Reorganization Agreement nor
the Option Agreement, in the case of BB&T, nor the Plan of Merger in the case
of BB&T and BB&T-SC, nor the Bank Merger Agreement in the case of Branch Bank-
SC, nor consummation of the transactions contemplated hereby or thereby, nor
compliance by BB&T, BB&T-SC and Branch Bank-SC with any of the provisions
hereof or thereof shall (i) conflict with or result in a breach of any
provision of the articles of incorporation or by-laws of BB&T or any BB&T
Subsidiary, (ii) constitute or result in a breach of any term, condition or
provision of, or constitute a default under, or give rise to any right of
termination, cancellation or acceleration with respect to, or result in the
creation of any lien, charge or encumbrance upon any property or asset of BB&T
or any BB&T Subsidiary pursuant to any note, bond, mortgage, indenture,
license, agreement or other instrument or obligation which would have a
material adverse effect on the business, operations or financial conditions of
BB&T and the BB&T Subsidiaries taken as a whole, or (iii) violate any order,
writ, injunction, decree, statute, rule or regulation applicable to BB&T or any
BB&T Subsidiary.
3.4 ORGANIZATION, STANDING AND AUTHORITY OF BB&T SUBSIDIARIES
Each BB&T Subsidiary is a duly organized corporation, validly existing and in
good standing under applicable laws. Each BB&T Subsidiary (i) has full power
and authority to carry on its business as now
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conducted and (ii) is duly qualified to do business in the states of the United
States and foreign jurisdictions where its ownership or leasing of property or
the conduct of its business requires such qualification and where failure to so
qualify would have a material adverse effect on the financial condition,
results of operations, business or prospects of BB&T on a consolidated basis.
BB&T-SC is registered as a bank holding company under the Bank Holding Company
Act.
3.5 SECURITIES DOCUMENTS
BB&T has timely filed all Securities Documents required by the Securities
Laws since December 31, 1987 and such Securities Documents complied in all
material respects with the Securities Laws as in effect at the times of such
filings.
3.6 FINANCIAL STATEMENTS
The Financial Statements of BB&T fairly present or will fairly present, as
the case may be, the consolidated financial position of BB&T and the BB&T
Subsidiaries as of the dates indicated and the consolidated results of
operations, changes in shareholders' equity and changes in cash flows for the
periods then ended in conformity with generally accepted accounting principles
applicable to financial institutions applied on a consistent basis.
3.7 MATERIAL ADVERSE CHANGE
BB&T has not, on a consolidated basis, suffered any material adverse change
in its business, financial condition, results of operations or prospects since
December 31, 1992.
3.8 LEGAL PROCEEDINGS; REGULATORY APPROVALS
At the date hereof, there are no actions, suits, claims, governmental
investigations or proceedings instituted, pending or, to the best knowledge of
BB&T, threatened against BB&T or any BB&T Subsidiary or against any asset,
interest or right of BB&T or any BB&T Subsidiary, or against any officer,
director or employee of any of them that, if decided adversely, might have a
material adverse effect on the financial condition, results of operations,
business or prospects of BB&T on a consolidated basis. To the knowledge of
BB&T, there are no actual or threatened actions, suits or proceedings which
present a claim to restrain or prohibit the transactions contemplated herein or
in the Plan of Merger. No fact or condition (including but not limited to CRA
compliance) relating to BB&T or any BB&T Subsidiary known to BB&T exists that
would prevent BB&T from obtaining all of the federal and state regulatory
approvals contemplated herein.
3.9 OWNERSHIP OF BB&T SUBSIDIARIES
The outstanding shares of capital stock or other ownership interests of the
BB&T Subsidiaries are validly issued and outstanding, fully paid and
nonassessable, and all such shares are directly or indirectly owned by BB&T
free and clear of all liens, claims and encumbrances or preemptive rights of
any person. No Rights are authorized, issued or outstanding with respect to the
capital stock or other ownership interests of any BB&T Subsidiary and there are
no agreements, understandings or commitments relating to the right of BB&T to
vote or to dispose of said shares or other ownership interests.
3.10 ABSENCE OF UNDISCLOSED LIABILITIES
Neither BB&T nor any BB&T Subsidiary has any liability (contingent or
otherwise) that is material to BB&T on a consolidated basis or that, when
combined with all similar liabilities, would be material to BB&T on a
consolidated basis, except as disclosed in the Financial Statements of BB&T and
except for liabilities made in the ordinary course of its business consistent
with past practices since the date of BB&T's most recent Financial Statements.
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3.11 ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses reflected on the consolidated balance sheets
included in the Financial Statements of BB&T is or will be in the opinion of
BB&T's management adequate in all material respects as of their respective
dates under the requirements of generally accepted accounting principles
applicable to banks and bank holding companies to provide for reasonably
anticipated losses on outstanding loans net of recoveries.
3.12 TAX MATTERS
a. BB&T and the BB&T Subsidiaries, and each of their predecessors, have
timely filed all federal, state and local (and, if applicable, foreign) tax
returns required by applicable law to be filed by them (including, without
limitation, estimated tax returns, income tax returns, information returns, and
withholding and employment tax returns) and have paid, or where payment is not
required to have been made, are contesting payment thereof in good faith, or
have set up an adequate reserve or accrual for the payment of, all taxes
required to be paid in respect of the periods covered by such returns and, as
of the Effective Date, will have paid, or where payment is not required to have
been made, will have set up an adequate reserve or accrual for the payment of,
all taxes for any subsequent periods ending on or prior to the Effective Date
which are not being contested in good faith. Neither BB&T nor any of the BB&T
Subsidiaries will to BB&T's knowledge have any material liability for any such
taxes in excess of the amounts so paid or reserves or accruals so established.
b. All federal, state and local (and, if applicable, foreign) tax returns
filed by BB&T and the BB&T Subsidiaries are complete and accurate in all
material respects. Neither BB&T nor any of the BB&T Subsidiaries is delinquent
in the payment of any tax, assessment or governmental charge, and none of them
has requested any extension of time within which to file any tax returns in
respect of any fiscal year or portion thereof which have not since been filed.
No deficiencies for any tax, assessment or governmental charge have been
proposed, asserted or assessed (tentatively or otherwise) against BB&T or any
BB&T Subsidiary which have not been settled and paid. There currently are no
agreements in effect with respect to BB&T or any BB&T Subsidiary to extend the
period of limitations for the assessment or collection of any tax.
3.13 COMPLIANCE WITH LAWS
Each of BB&T and the BB&T Subsidiaries is in material compliance with all
statutes and regulations (including, but not limited to, CRA and regulations
promulgated thereunder, TILA and regulations promulgated thereunder and other
consumer banking laws) applicable and material to the conduct of its business
(except for any violations not material to the business, operations or
financial condition of BB&T and its subsidiaries taken as a whole), and neither
BB&T nor any BB&T Subsidiary has received notification that has not elapsed,
been withdrawn or abandoned from any agency or department of federal, state or
local government (i) asserting a violation or possible violation of any such
statute or regulation, and which violations would have a material adverse
effect on the business, operations or financial condition of BB&T and the BB&T
Subsidiaries taken as a whole, (ii) threatening to revoke any license,
franchise, permit or government authorization, or (iii) restricting or in any
way limiting its operations. Neither BB&T nor any BB&T Subsidiary is subject to
any regulatory or supervisory cease and desist order, agreement, directive,
memorandum of understanding or commitment, and none of them has received any
communication requesting that they enter into any of the foregoing. Without
limiting the generality of the foregoing, each BB&T Subsidiary has timely filed
all currency transaction reports required to be filed and taken all other
actions required under the Currency and Foreign Transactions Reporting Act as
amended, codified at 31 U.S.C. (S) 5301 et seq., and its implementing
regulations.
3.14 CERTAIN INFORMATION
When the Proxy Statement is mailed, and at all times subsequent to such
mailing up to and including the time of the meeting of shareholders of LSB to
vote on the Merger, the Proxy Statement and all
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amendments or supplements thereto, with respect to all information set forth
therein furnished by BB&T relating to BB&T, including pro forma information
insofar as it relates to BB&T and entities other than LSB and the LSB
Subsidiaries, (i) shall comply in all material respects with the applicable
provisions of the Securities Laws, and (ii) shall not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements contained therein, in light
of the circumstances in which they were made, not misleading.
3.15 EMPLOYEE BENEFIT PLANS
a. BB&T has Previously Disclosed a list of and provided LSB with access to
true and complete copies of all stock option, employee stock purchase and stock
bonus plans, qualified pension or profit-sharing plans, deferred compensation,
bonus or group insurance contracts and any other incentive, welfare or employee
benefit plans or agreements maintained for the benefit of employees or former
employees of BB&T or any BB&T Subsidiary together with (i) the most recent
actuarial and financial reports prepared with respect to any qualified plans,
(ii) the most recent annual reports filed with any government agency, and (iii)
all rulings and determination letters and any open requests for rulings or
letters that pertain to any qualified plan.
b. Neither BB&T nor any other BB&T Subsidiary (or any pension plan maintained
by any of them) has incurred any material liability to the Pension Benefit
Guaranty Corporation or the Internal Revenue Service with respect to any
pension plan qualified under Section 401 of the Code except liabilities to the
Pension Benefit Guaranty Corporation pursuant to Section 4007 of ERISA, all of
which have been fully paid. No reportable event under Section 4043(b) of ERISA
has occurred with respect to any such pension plan.
c. Neither BB&T nor any BB&T Subsidiary participates in, or has incurred any
liability under Section 4201 of ERISA for a complete or partial withdrawal
from, a multiemployer plan (as such term is defined in ERISA).
d. Except as Previously Disclosed, a favorable determination letter has been
issued by the Internal Revenue Service with respect to each "employee pension
plan" (as defined in Section 3(2) of ERISA) of BB&T or any BB&T Subsidiary to
the effect that such plan is qualified under Section 401 of the Code and tax
exempt under Section 501 of the Code. No such letter has been revoked or, to
BB&T's knowledge, threatened to be revoked and BB&T does not know of any ground
on which such revocation may be based. Neither BB&T nor any BB&T Subsidiary has
a material liability under any such plan that is not reflected on the
consolidated balance sheet included in the Financial Statements of BB&T as of
December 31, 1992.
e. No prohibited transaction (which shall mean any transaction prohibited by
Section 406 of ERISA and not exempt under Section 408 of ERISA or Section 4975
of the Code) has occurred with respect to any employee benefit plan maintained
by BB&T or any BB&T Subsidiary (i) which would result in the imposition,
directly or indirectly, of a material excise tax under Section 4975 of the
Code, or (ii) the correction of which would have a material adverse effect on
the business, operations or financial condition of BB&T and the BB&T
Subsidiaries taken as a whole.
ARTICLE IV
COVENANTS
4.1 SHAREHOLDERS' MEETING
LSB shall submit this Reorganization Agreement and the Plan of Merger to its
shareholders for approval at a special meeting to be held as soon as
practicable, and the Board of Directors of LSB shall recommend that the
shareholders vote for such approval.
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4.2 PROXY STATEMENT; REGISTRATION STATEMENT
BB&T and LSB shall cooperate in the timely preparation and filing of the
Registration Statement with the Commission and BB&T shall use its best efforts
to cause such Registration Statement to be declared effective under the
Securities Act, which Registration Statement, at the time it becomes effective,
and on the Effective Date, shall in all material respects conform to the
requirements of the Securities Act and the general rules and regulations of the
Commission under the Securities Act. The Registration Statement shall include
the form of Proxy Statement for the meeting of LSB's shareholders to be held
for the purpose of having such shareholders vote upon approval of this
Reorganization Agreement and the Plan of Merger. LSB shall cause the Proxy
Statement to be mailed to its shareholders. LSB will furnish to BB&T the
information required to be included in the Registration Statement with respect
to its business and affairs before it is filed with the Commission and again
before any amendments are filed, and shall have the right to review and consult
with BB&T on the form of, and any characterizations of such information
included in, the Registration Statement prior to the filing with the
Commission. BB&T shall take all actions required to register or obtain
exemptions from such registration for the BB&T Common Stock to be issued in
connection with the transactions contemplated by this Agreement and the Plan of
Merger under applicable state "Blue Sky" securities laws, as appropriate.
4.3 BANK MERGER AGREEMENT; APPLICATIONS
a. LSB shall cause Lexington and Community to execute and deliver the Bank
Merger Agreement as soon as practicable following BB&T's request therefor and
BB&T shall cause Branch Bank-SC to execute and deliver the Bank Merger
Agreement at substantially the same time.
b. LSB further agrees to approve, execute and deliver, and to cause
appropriate LSB Subsidiaries to approve, execute and deliver, any amendment to
this Agreement, the Plan of Merger and the Bank Merger Agreement and any
additional plans and agreements requested by BB&T to modify the structure of,
or to substitute parties to, the transactions contemplated hereby, provided
that such modifications do not adversely affect the economic benefits of such
transactions or otherwise abrogate the covenants and other agreements contained
in this Agreement.
c. As promptly as practicable after the date hereof, BB&T and LSB shall
submit applications for prior approval of the transactions contemplated herein
to the Federal Reserve Board, the FDIC and the State Board, and/or any other
federal, state or local government agency, department or body the approval of
which is required for consummation of the Merger, the Bank Mergers and the
other transactions contemplated hereby and thereby. BB&T shall permit LSB to
review in advance all such applications and will consult with LSB on all
characterizations of the information relating to LSB or the LSB Subsidiaries;
provided, however, that any such advance review by LSB shall be reasonably
prompt. BB&T promptly shall furnish LSB with copies after filing of
applications with these or any other regulatory agencies filed by BB&T or any
BB&T Subsidiary. LSB and BB&T each represent and warrant to the other that all
information concerning it and its directors, officers and shareholders and
concerning its subsidiaries included (or submitted for inclusion) in any such
application shall be true, correct and complete in all material respects as of
the date presented.
4.4 BEST EFFORTS
BB&T and LSB shall each use its best efforts in good faith, and each of them
shall cause its subsidiaries to use their best efforts in good faith, to (i)
furnish such information as may be required in connection with and otherwise
cooperate in the preparation and filing of the documents referred to in
Sections 4.2 and 4.3 above or elsewhere herein, and (ii) take or cause to be
taken all action necessary or desirable on its part so as to permit
consummation of the Merger and the Bank Mergers, at the earliest possible date,
including, without limitation, (a) obtaining the consent or approval of each
individual, partnership, corporation, association or other business or
professional entity whose consent or approval is required for consummation of
the
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transactions contemplated hereby, provided that neither LSB nor any LSB
Subsidiary shall agree to make any payments or modifications to agreements in
connection therewith without the prior written consent of BB&T, and (b)
requesting the delivery of appropriate opinions, consents and letters from its
counsel and independent auditors. Neither BB&T nor LSB shall take, or cause or
to the best of its ability permit to be taken, any action that would
substantially delay or impair the prospects of completing the Merger pursuant
to this Agreement and the Plan of Merger, or the Bank Mergers, provided that
nothing herein contained shall preclude BB&T from exercising its rights under
the Option Agreement.
4.5 CERTAIN ACCOUNTING MATTERS
a. LSB and BB&T shall consult and cooperate with each other concerning such
accounting and financial matters as may be necessary or appropriate to
facilitate the Merger and the Bank Mergers (taking into account BB&T's
policies, practices and procedures), including without limitation issues
arising in connection with record keeping, loan classification, valuation
adjustments, levels of loan loss reserves and other accounting practices.
b. LSB shall between the date hereof and the Closing Date maintain (i) the
ratio of total loan loss reserves to non-performing assets at not less than
1.00; and (ii) its total loan loss reserves at not less than 1.25% of total
loans.
c. LSB agrees, subject to its Board of Directors' fiduciary duties and the
limitations of federal and state law, to increase its dividend to an amount
consistent with the amount requested by BB&T and the limitation contained in
Section 4.8(b).
4.6 INVESTIGATION AND CONFIDENTIALITY
LSB will keep BB&T advised of all material developments relevant to its
business and to consummation of the Merger and the Bank Mergers, and BB&T will
advise LSB of any material adverse change in its financial condition or
operations and all material developments that are likely adversely to affect
consummation of the Merger or the Bank Mergers. BB&T and LSB each may make or
cause to be made such investigation of the financial and legal condition of the
other as such party reasonably deems necessary or advisable in connection with
the transactions contemplated herein, provided, however, that such
investigation shall be reasonably related to such transactions and shall not
interfere unnecessarily with normal operations. BB&T and LSB agree to furnish
the other and the other's advisors with such financial data and other
information with respect to its business and properties as such other party
shall from time to time reasonably request. No investigation pursuant to this
Section 4.6 shall affect or be deemed to modify any representation or warranty
made by, or the conditions to the obligations hereunder of, either party
hereto. Each party hereto shall, and shall cause each of its directors,
officers, attorneys and advisors to, maintain the confidentiality of all
information obtained in such investigation which is not otherwise publicly
disclosed by the other party, said undertaking with respect to confidentiality
to survive any termination of this Agreement pursuant to Section 6.1 hereof. In
the event of the termination of this Agreement, each party shall return to the
furnishing party or, at the request of the furnishing party, destroy and
certify the destruction of all confidential information previously furnished in
connection with the transactions contemplated by this Agreement.
4.7 PRESS RELEASES
BB&T and LSB shall agree with each other as to the form and substance of any
press release related to this Reorganization Agreement and the Plan of Merger
or the transactions contemplated hereby and thereby, and consult with each
other as to the form and substance of other public disclosures related thereto,
provided, however, that nothing contained herein shall prohibit either party,
following notification to the other party, from making any disclosure which its
counsel deems necessary.
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4.8 FORBEARANCES OF LSB
Except with the prior written consent of BB&T, which consent shall not be
withheld on an arbitrary basis or on a basis inconsistent with BB&T's interests
as an acquiror of LSB, between the date hereof and the Effective Date, LSB
shall not, and shall cause each LSB Subsidiary not to:
(a) carry on its business other than in the usual, regular and ordinary
course in substantially the same manner as heretofore conducted, or
establish or acquire any new subsidiary or cause or permit any subsidiary
to engage in any new activity or expand any existing activities;
(b) declare, set aside, make or pay any dividend or other distribution in
respect of its capital stock that would cause the business combination
contemplated hereby not to be accounted for as a pooling of interests, as
determined by BB&T;
(c) issue any shares of its capital stock other than pursuant to the
Option Agreement or the merger of Lexington with The Dorn Banking Company
or the LSB Dividend Reinvestment Plan;
(d) issue, grant or authorize any Rights other than pursuant to the
Option Agreement or effect any recapitalization, reclassification, stock
dividend, stock split or like change in capitalization;
(e) amend its articles of incorporation or by-laws; impose, or suffer the
imposition, on any share of stock held by LSB in any LSB Subsidiary of any
material lien, charge or encumbrance or permit any such lien to exist; or
waive or release any material right or cancel or compromise any material
debt or claim other than in the ordinary course of business;
(f) other than completion of the merger with The Dorn Banking Company,
merge with any other corporation or bank or permit any other corporation,
savings institution or bank to merge into it or consolidate with any other
corporation, savings institution or bank; acquire control over any other
firm, bank, corporation, savings institution or organization; or liquidate,
sell or otherwise dispose of any assets or acquire any assets, other than
in the ordinary course of its business;
(g) fail to comply in any material respect with any laws, regulations,
ordinances or governmental actions applicable to it and to the conduct of
its business except where LSB or any LSB Subsidiary is in good faith
contesting the validity of any of the foregoing; or where the failure to so
comply will not have a Material Adverse Effect;
(h) increase the rate of compensation of any of its directors, officers
or employees, or pay or agree to pay any bonus to, or provide any other
employee benefit or incentive to, any of its directors, officers or
employees, except in a manner and amount consistent with past practice;
(i) enter into or substantially modify (except as may be required by
applicable law) any pension, retirement, stock option, stock purchase,
stock appreciation right, savings, profit sharing, deferred compensation,
consulting, bonus, group insurance or other employee benefit, incentive or
welfare contract, plan or arrangement, or any trust agreement related
thereto, in respect of any of its directors, officers or other employees;
provided, however, that this subparagraph shall not prevent renewals of any
of the foregoing consistent with past practice;
(j) solicit or encourage inquiries or proposals with respect to, furnish
any information relating to, or participate in any negotiations or
discussions concerning, any acquisition or purchase of all or a substantial
portion of the assets of, or a substantial equity interest in, LSB or any
LSB Subsidiary or any business combination with LSB or any LSB Subsidiary
other than as contemplated by this Agreement; or authorize any officer,
director, agent or affiliate of it to do any of the above; or fail to
notify BB&T immediately if any such inquiries or proposals are received by,
any such information is required from, or any such negotiations or
discussions are sought to be initiated with, LSB or any LSB Subsidiary;
(k) enter into (i) any material agreement, arrangement or commitment not
made in the ordinary course of business, including, without limitation,
agreements or memoranda of understanding with regulatory authorities, (ii)
any agreement, indenture or other instrument not made in the ordinary
course
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of business relating to the borrowing of money by LSB or any LSB Subsidiary
or guarantee by LSB or any LSB Subsidiary of any such obligation, (iii) any
agreement, arrangement or commitment not cancellable by LSB without penalty
or cost within 30 days after the Effective Date relating to the employment
or severance of a consultant or the employment, severance, election or
retention in office of any present or former director, officer or employee
(this clause shall not apply to the normal election of directors by
shareholders and the election of officers by directors not pursuant to a
specific agreement, arrangement or commitment not Previously Disclosed); or
(iv) any contract, agreement or understanding with a labor union;
(l) change its lending, investment or asset liability management policies
in any material respect except as may be required by applicable law,
regulation, or directives, and except that after approval of the Plan of
Merger by its shareholders LSB shall, and shall cause the LSB Subsidiaries
to, cooperate in good faith with BB&T to adopt policies, practices and
procedures consistent with those utilized by BB&T, effective on or before
the Closing Date;
(m) change its methods of accounting in effect at December 31, 1992,
except as required by changes in generally accepted accounting principles
concurred in by its independent certified public accountants, or change any
of its methods of reporting income and deductions for federal income tax
purposes from those employed in the preparation of its federal income tax
returns for the year ended December 31, 1992, except as required by changes
in law or regulation; or
(n) agree to do any of the foregoing.
4.9 PLAN OF MERGER; RESERVATION OF SHARES
a. On the Effective Date, the Merger shall be effected in accordance with the
Plan of Merger attached hereto as Annex A. In this connection, BB&T undertakes
and agrees (i) to adopt and to cause BB&T-SC to adopt the Plan of Merger; (ii)
to vote the shares of BB&T-SC Common Stock for approval of the Plan of Merger;
and (iii) to pay or cause to be paid when due the number of shares of BB&T
Common Stock to be distributed pursuant to Article V of the Plan of Merger and
any cash required to be paid for fractional shares pursuant to Article V,
Paragraph 9 of the Plan of Merger.
b. BB&T shall reserve for issuance such number of shares of BB&T Common Stock
as shall be necessary to pay the consideration to be distributed to LSB's
stockholders as contemplated in Article V, Paragraph 1 of the Plan of Merger.
If at any time the aggregate number of shares of BB&T Common Stock remaining
unissued (or in treasury) shall not be sufficient to effect the Merger, BB&T
shall take all appropriate action to increase the amount of the authorized BB&T
Common Stock.
4.10 CERTAIN AGREEMENTS
BB&T shall enter into employment agreements with those LSB Employees as have
been Previously Disclosed on the terms Previously Disclosed.
4.11 CLOSING; ARTICLES OF MERGER
The transactions contemplated by this Agreement, the Plan of Merger and the
Bank Merger Agreement shall be consummated at one or more closings to be held
at the executive offices of BB&T, or such other place as shall be agreed to by
BB&T and LSB, on the first business day following satisfaction of the
conditions to consummation of the Merger and the Bank Mergers set forth in
Article V hereof, such later date within 30 days thereafter as may be specified
by BB&T, or such later date as the parties may otherwise agree. The Merger
shall become effective upon the Effective Date, which shall be the time and
date specified in the Articles of Merger evidencing the Merger, as filed with
the Secretary of State of South Carolina. The Bank Mergers may be consummated
as of the Effective Date or such later date as BB&T shall specify.
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4.12 AFFILIATES
LSB and BB&T shall cooperate and use their best efforts to identify those
persons who may be deemed to be "affiliates" of LSB within the meaning of Rule
145 promulgated by the Commission under the Securities Act. LSB shall use its
best efforts to cause each person so identified to deliver to BB&T at least 30
days prior to the Effective Date a written agreement providing that such person
will not dispose of BB&T Common Stock received in the Merger except in
compliance with the Securities Act and the rules and regulations promulgated
thereunder.
4.13 INDEMNIFICATION AND INSURANCE
a. Prior to the Effective Date, each director of LSB, Lexington and Community
and each officer of LSB, Lexington and Community who is currently entitled to
indemnification pursuant to South Carolina Law shall be indemnified in
connection with any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, arising
out of or in connection with this Agreement, the Option Agreement or any of the
transactions contemplated hereby or thereby, by BB&T to the fullest extent
permitted by law in effect at the time the act was committed against (a)
reasonable expenses, including attorney's fees, actually and necessarily
incurred by him or her in connection therewith, and (b) reasonable payments
made by him in satisfaction of any judgment, money decree, fine, penalty or
settlement for which he may have become liable in any such action, suit or
proceeding; provided, however, that BB&T will not indemnify any person against
liability or litigation expense such person may incur on account of activities
which were at the time taken known or believed by such person to be clearly in
conflict with the best interest of LSB or BB&T or, with respect to any criminal
action or proceeding, activities which the indemnitee had reasonable cause to
believe were unlawful. To the fullest extent permitted by law, for all sums for
which there is a right of indemnification, BB&T shall pay said sums from time
to time in advance of the final disposition of the action, suit or proceedings;
provided, however, that the payment of expenses incurred by a director or
officer in his capacity as a director or officer (and not in any other capacity
in which service was or is rendered by such person while a director or officer)
in advance of the final disposition of a proceeding shall be made only upon
delivery to BB&T of an undertaking, by or on behalf of such director or
officer, to repay all amounts so advanced if it shall ultimately be determined
that the director or officer is not entitled to be indemnified under this
Section or otherwise. BB&T agrees to take all actions as may be necessary and
appropriate to authorize BB&T to pay the indemnification required by this
Section, including without limitation, to the extent needed, making a good
faith evaluation of the manner in which the claimant for indemnity acted and of
the reasonable amount of indemnity due him and given notice to, and obtaining
approval by, the shareholders of BB&T to the extent required by law.
b. Following the Effective Date, each director of LSB, Lexington and
Community and each officer of LSB, Lexington and Community who is currently
entitled to indemnification pursuant to South Carolina law shall be
indemnified, in accordance with BB&T-SC's by-law provisions, to the maximum
extent permitted under South Carolina and federal law, if applicable.
c. B&T agrees to purchase and to keep in force directors' and officers'
liability insurance to provide coverage for actions or omissions by directors
and officers of LSB, Lexington and Community for claims made for the period
commencing with and after the Effective Date; provided, however, that such
insurance will be provided only if, and to the extent that, any similarly
situated officer or director of BB&T is insured from time to time.
4.14 EMPLOYEES AND EMPLOYEE BENEFIT PLANS
a. (i) Upon the Effective Date, each person who is an employee of LSB or the
LSB Subsidiaries as of such Effective Date (individually an "Employee") shall
automatically become an employee of the Surviving Corporation (as defined in
the Plan of Merger) or Branch Bank-SC, as the case may be, upon substantially
the same terms and conditions of employment, including compensation and
benefits, and comparable responsibilities that each Employee had on the day
before the Effective Date.
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(ii) Each such Employee shall remain an Employee for a period of at least two
years following the Effective Date, subject to satisfactory performance of
duties.
(iii) Notwithstanding Section 4.14(ii), whether before or after the two year
period described in such section, no Employee shall be terminated or have his
or her salary reduced involuntarily as a result of the Merger. This Section
4.14(a)(iii) is not intended to confer, and should not be construed to confer,
any right upon or contract in favor of any Employee of the Surviving
Corporation.
(iv) Notwithstanding Sections 4.14(a)(i)-(iii), nothing contained herein
shall restrict the ability of the Surviving Corporation or Branch Bank-SC to
dismiss any Employee, if such dismissal is for "Just Cause." For purposes of
this provision, termination for "Just Cause" shall include personal dishonesty
or willful violation of any federal, state or local law, rule or regulation
(other than traffic violations or similar offenses) or a final cease and desist
order, conviction of a felony or of a misdemeanor involving moral turpitude,
unethical business practices in connection with the Surviving Corporation's
business, misappropriation of the Surviving Corporation's assets, incompetence,
or intentional failure to perform stated duties. In addition to the foregoing,
if any Employee is terminated within the two-year period for any reason and at
any time, such termination shall be effected only if such termination shall
have been approved in writing by any two of Raymond S. Caughman, Robert N.
Hubbs and David S. Hipp, or, if less than two of them are at the time employed
by Branch Bank-SC, any two members of the Board of Directors of Branch Bank-SC
who were, on the Effective Date, directors of LSB.
b. Each Employee shall be eligible to receive group hospitalization, medical,
life, disability and other benefits comparable to those provided to the present
employees of BB&T without the imposition of any waiting period or limitation on
pre-existing conditions; provided, however, such benefits shall not in the
aggregate to all Employees as a group be less in amount or value than those
presently provided by LSB and the LSB Subsidiaries; and provided, further, that
any Employee who is, on the Effective Date, entitled to 5 weeks of paid
vacation per year shall continue to be entitled to 5 weeks paid vacation per
year for the duration of the Employee's employment with BB&T and the BB&T
Subsidiaries.
c. Following the Bank Mergers, LSB shall cause Lexington's pension plan and
401(k) plan to be merged with the 401(k) plans maintained by BB&T and the BB&T
Subsidiaries or be terminated. The parties shall reach agreement as to the
appropriate method of accomplishing this result (either termination or merger)
as soon as practicable. If the LSB Plan is terminated, the rights and interests
of the employees of LSB and the LSB Subsidiaries in such plans shall become
fully vested, with each participating Employee having the right or option
either to receive the benefits to which they are entitled as a result of the
termination of the Plan or to have such benefits "rolled" into the 401(k) Plan
maintained by BB&T and the BB&T Subsidiaries for the benefit of their
employees, and on the same basis and applying the same eligibility standards as
would apply to employees of BB&T and the BB&T subsidiaries. Following the Bank
Mergers, the Employees of LSB and the LSB Subsidiaries shall be entitled to
participate, to the same extent and on the same terms as the employees of BB&T,
in any retirement, pension or similar plans in effect for the benefit of the
employees of BB&T (other than any employee stock ownership plan established for
the benefit of certain of BB&T's employees) which when considered as a whole
for all Employees considered as a group shall be no less favorable in the
aggregate than the benefits currently provided to the Employees of LSB,
Lexington and Community.
d. For purposes of participating in all plans and benefits of BB&T, such
Employees shall receive credit for their period of service to LSB and the LSB
Subsidiaries for participation and vesting purposes only.
e. Nothing in this Agreement shall detract from any rights of any Employee
under any Previously Disclosed written employment agreement, except as may
otherwise be agreed to by any Employee.
f. To the extent that this Section 4.14 contemplates or requires the taking
of action or forbearance by any subsidiary of BB&T, BB&T shall cause such
subsidiary to take such action or to so forbear.
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4.15 FORBEARANCES OF BB&T
Except with the prior written consent of LSB, which consent shall not be
arbitrarily or unreasonably withheld, between the date hereof and the Effective
Date, neither BB&T nor any BB&T Subsidiary shall:
a. exercise the Option Agreement other than in accordance with its terms,
or dispose of the shares of LSB Common Stock issuable upon exercise of the
option rights conferred thereby other than as permitted or contemplated by
the terms thereof;
b. enter into a merger or other business combination transaction with any
other corporation or person in which BB&T would not be the surviving or
continuing entity after the consummation thereof;
c. sell or lease all or substantially all of the assets and business of
BB&T; or
d. declare an extraordinary or special dividend or distribution on its
common stock in an amount equal to more than 10% of BB&T's stockholders'
equity as reflected on the Financial Statements of BB&T as of the three
months ended prior to such payment.
4.16 MEMBERSHIP ON THE BOARD OF DIRECTORS
a. Upon consummation of the Merger, BB&T shall cause each of the members of
the Board of Directors of LSB to become members of the Board of Directors of
Branch Bank-SC and shall use its best efforts to cause such members to remain
members of such board until they reach age 70, subject to the fiduciary duties
of the members of the Board of Directors of Branch Bank-SC. Further, BB&T shall
cause (i) each such member's compensation to be the greater of (a) $8,400 per
year (plus $100 for each special meeting not held on the day of a regular board
meeting), plus reasonable travel expenses, or (b) the compensation paid to the
members of the Branch Bank-SC Board of Directors as of the Effective Date; and
(ii) all benefits as have been Previously Disclosed which are presently
provided to or made available to such members to be continued.
b. Upon consummation of the Merger, BB&T shall cause two members of the board
of directors of LSB designated by the board of directors of LSB (the "LSB
Designees") to become members of the Board of Directors of BB&T. Thereafter,
for a period of at least five years, subject to the fiduciary duties of the
members of the Board of Directors of BB&T, BB&T agrees to recommend to the
Nominating Committee of the BB&T Board of Directors the nomination of the LSB
Designees for reelection and inclusion as part of the slate of directors
recommended by the Nominating Committee for the Board of Directors of BB&T. In
the event that either or both of the LSB Designees is unable or unwilling to
serve as a director during such five-year period, BB&T shall substitute, to the
extent practicable and consistent with the limitations described in this
subparagraph, a person or persons who as of the date hereof are members of the
Board of Directors of LSB. BB&T further agrees that after such five year
period, subject to the fiduciary duties of the members of the BB&T Board of
Directors, BB&T will continue to use its best efforts to recommend to the
Nominating Committee of the BB&T Board of Directors the nomination to the BB&T
Board of Directors of at least one person who resides in the current LSB market
area.
4.17 COMMUNITY BENEFITS
a. BB&T will maintain an operations center in Lexington for at least two
years after the Effective Date. BB&T will also consider locating facilities and
expanding employment opportunities in LSB's current market area when doing so
would not impose an economic burden on BB&T or be inconsistent with BB&T's
business plans.
b. BB&T will make, or cause to be made, charitable and civic contributions,
consistent with its philosophy in making charitable or civic contributions, in
the communities served by the LSB Subsidiaries in amounts of not less than $1
million between the date hereof and December 31, 1996. Larger contributions may
be made in the form of five-year pledges. BB&T will consult with the persons
who are directors of LSB on the Effective Date to determine which organizations
will receive such contributions.
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4.18 DISSENTERS' RIGHTS
LSB shall give BB&T prompt notice of any purported exercise of dissenters'
rights and BB&T shall have the right to participate in all negotiations and
proceedings with respect to any such demands. LSB shall not, without the prior
written consent of BB&T, voluntarily make any payment with respect to, or
settle or offer or agree to settle, any such demand for payment.
ARTICLE V
CONDITIONS PRECEDENT
5.1 CONDITIONS PRECEDENT--BB&T AND LSB
The respective obligations of BB&T and LSB to effect the transactions
contemplated by this Agreement shall be subject to satisfaction or waiver of
the following conditions at or prior to the Effective Date:
(a) All corporate action necessary to authorize the execution, delivery
and performance of this Reorganization Agreement, the Plan of Merger, the
Option Agreement and the Bank Merger Agreement and consummation of the
transactions contemplated hereby and thereby shall have been duly and
validly taken, including without limitation the approval of the
shareholders of LSB;
(b) The Registration Statement (including any post-effective amendments
thereto) shall be effective under the Securities Act, and BB&T and LSB
shall have received all state securities or "Blue Sky" permits or other
authorizations, or confirmations as to the availability of an exemption
from registration requirements as may be necessary and no proceedings shall
be pending or to the knowledge of BB&T threatened by the Commission or any
state "Blue Sky" securities administration to suspend the effectiveness of
such Registration Statement; and the BB&T Common Stock to be issued as
contemplated in the Plan of Merger shall have either been registered or be
subject to exemption from registration under applicable state securities
laws;
(c) Neither BB&T, any BB&T Subsidiary, LSB nor any LSB Subsidiary shall
be subject to any order, decree or injunction of a court or agency of
competent jurisdiction which enjoins or prohibits consummation of the
transactions contemplated by this Reorganization Agreement; and
(d) LSB and BB&T shall have received an opinion of BB&T's counsel or tax
advisor in form and substance satisfactory to LSB and BB&T substantially to
the effect that the Merger and the Bank Mergers will constitute one or more
reorganizations under Section 368 of the Code and that the shareholders of
LSB will not recognize any gain or loss to the extent that such
shareholders exchange shares of LSB Common Stock for shares of BB&T Common
Stock.
5.2 CONDITIONS PRECEDENT--LSB
The obligations of LSB to effect the transactions contemplated by this
Agreement shall be subject to satisfaction of the following additional
conditions at or prior to the Effective Date unless waived by LSB pursuant to
Section 6.4 hereof:
(a) The representations and warranties of BB&T set forth in Article III
hereof shall be true and correct in all material respects as of the date of
this Agreement and as of the Effective Date as though made on and as of the
Effective Date (or on the date when made in the case of any representation
and warranty which specifically relates to an earlier date), except as
otherwise contemplated by this Reorganization Agreement or consented to in
writing by LSB (which consent may not be unreasonably withheld);
(b) BB&T shall have in all material respects performed all material
obligations and complied with all material covenants required by this
Agreement;
(c) BB&T shall have delivered to LSB a certificate, dated the Effective
Date and signed by its Chairman or President, to the effect that the
conditions set forth in Sections 5.1(a), 5.1(b), 5.1(e), 5.2(a), 5.2(c) and
5.2(f), to the extent applicable to BB&T, have been satisfied and that
there are no actions,
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suits, claims, governmental investigations or procedures instituted,
pending or, to the best of his knowledge, threatened that reasonably may be
expected to have a material adverse effect on BB&T or that present a claim
to restrain or prohibit the transactions contemplated herein or in the Plan
of Merger or in the Bank Merger Agreement;
(d) LSB shall have received such opinions of the General Counsel to BB&T
as to matters of North Carolina, and other counsel as to matters of federal
law, as it shall reasonably request;
(e) All approvals of the transactions contemplated herein from the
Federal Reserve Board, the FDIC, the State Board and any other state or
federal government agency, department or body, the approval of which is
required for the consummation of the Merger (but not the Bank Mergers),
shall have been received and all waiting periods with respect to such
approvals shall have expired; and
(f) LSB shall not have reasonably determined in good faith that there has
been a material adverse change in the condition, operations or prospects of
BB&T since December 31, 1992.
5.3 CONDITIONS PRECEDENT--BB&T
The obligations of BB&T to effect the transactions contemplated by this
Agreement shall be subject to satisfaction of the following additional
conditions at or prior to the Effective Date, unless waived by BB&T pursuant to
Section 6.4 hereof:
(a) The representations and warranties of LSB set forth in Article II
hereof shall be true and correct in all material respects as of the date of
this Agreement and as of the Effective Date as though made on and as of the
Effective Date (or on the date when made in the case of any representation
and warranty which specifically relates to an earlier date), except as
otherwise contemplated by this Agreement or consented to in writing by BB&T
(which consent may not be unreasonably withheld);
(b) The parties hereto shall have received all regulatory approvals
required in connection with the transactions contemplated by this
Reorganization Agreement, all notice periods and waiting periods required
after the granting of any such approvals shall have passed, and all such
approvals shall be in effect; provided, however, that no such approval
shall have imposed any condition or requirement which, in the reasonable
opinion of the Board of Directors of BB&T, would so materially adversely
affect the business or economic benefits of the transactions contemplated
by this Agreement as to render consummation of such transactions
inadvisable or unduly burdensome;
(c) LSB shall have in all material respects performed all material
obligations and complied with all material covenants required by this
Agreement;
(d) LSB shall have delivered to BB&T a certificate, dated the Effective
Date and signed by its Chairman or President, to the effect that the
conditions set forth in Sections 5.1(a), 5.1(b), 5.3(a), 5.3(b) and 5.3(c),
to the extent applicable to LSB, have been satisfied and that there are no
actions, suits, claims, governmental investigations or procedures
instituted, pending or, to the best of his knowledge, threatened that
reasonably may be expected to have a Material Adverse Effect on LSB or that
present a claim to restrain or prohibit the transactions contemplated
herein or in the Plan of Merger;
(e) BB&T shall have received such opinions of counsel as it shall
reasonably request;
(f) BB&T shall not have reasonably determined in good faith that there
has been a material adverse change in the condition, operations or
prospects of LSB, Lexington or Community since December 31, 1992;
(g) BB&T shall have received the written agreements from affiliates as
specified in Section 4.12 hereof;
(h) BB&T shall have determined that the transactions contemplated herein
qualify for accounting treatment as a pooling of interests; and
(i) Dissenters' rights pursuant to Section 33-13-210 of the SCBCA with
respect to the Merger shall not have been exercised by the holders of more
than 10% of the outstanding LSB common stock.
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ARTICLE VI
TERMINATION, WAIVER AND AMENDMENT
6.1 TERMINATION
This Agreement may be terminated:
(a) at any time on or prior to the Effective Date, by the mutual consent
in writing of the parties hereto;
(b) at any time on or prior to the Effective Date, by BB&T in writing if
LSB has, or by LSB in writing if BB&T has, in any material respect,
breached (i) any covenant or undertaking contained herein, in the Plan of
Merger, in the Option Agreement or the Bank Merger Agreement, or (ii) any
representation or warranty contained herein, which breach has been
materially adverse, and, in the case of (i) or (ii), if such breach has not
been cured by the earlier of 30 days after the date on which written notice
of such breach is given to the party committing such breach or the
Effective Date;
(c) on the Effective Date, by either party hereto in writing, if any of
the conditions precedent to the obligations of such party to consummate the
transactions contemplated hereby have not been satisfied or fulfilled;
(d) at any time, by either party hereto in writing, if any of the
applications for prior approval referred to in Section 4.3 hereof are
denied, and the time period for appeals and requests for reconsideration
has run;
(e) at any time, by either party hereto in writing, if the shareholders
of LSB do not approve the transactions contemplated herein;
(f) by either party hereto in writing, if the Effective Date has not
occurred by the close of business on January 31, 1995;
(g) at any time, by either party hereto in writing if the BB&T Average
Closing Price is less than $26.00 or higher than $36.00;
(h) at any time prior to April 30, 1994, by BB&T in writing, if BB&T
determines in its sole good faith judgment that the financial condition,
business or prospects of LSB are materially adversely different from what
was reasonably expected by BB&T after the performance of its due diligence
prior to the execution of this Agreement; provided that BB&T shall inform
LSB upon such termination as to the reasons for BB&T's determination; and,
provided further, that this Section 6.1(h) shall not limit in any way the
due diligence investigation of LSB which BB&T may perform or otherwise
affect any other rights which BB&T has after the date hereof and after
April 30, 1994, under the terms of this Agreement; and
(i) at any time prior to April 30, 1994, by LSB in writing, if LSB
determines in its sole good faith judgment that the financial condition,
business or prospects of BB&T (as such condition, business or prospects may
affect the market price of BB&T Common Stock) are materially different from
what was reasonably expected by LSB after the performance of its due
diligence prior to the execution of this Agreement; provided that LSB shall
inform BB&T upon such determination as to the reasons for LSB's
determination; and provided, further, that this Section 6.1(i) shall not
limit in any way the due diligence investigation of BB&T which LSB may
perform or otherwise affect any other rights which LSB has after the date
hereof and after April 30, 1994, under the terms of this Agreement; and
(j) at any time, by either party hereto in writing, if such party
determines in good faith that any condition precedent to such party's
obligations to consummate the Merger and/or the Bank Mergers is or would be
impossible to satisfy, provided that the terminating party has given the
other party notice with respect thereto at least ten days prior to such
termination and has given the other party a reasonable opportunity to
discuss the matter with a view to achieving a mutually acceptable
resolution.
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6.2 EFFECT OF TERMINATION
In the event this Agreement or the Plan of Merger is terminated pursuant to
Section 6.1 hereof, both this Agreement and the Plan of Merger shall become
void and have no effect, except that (i) the provisions hereof relating to
confidentiality and expenses set forth in Sections 4.6 and 7.1, respectively,
shall survive any such termination and (ii) a termination pursuant to Section
6.1(b) hereof shall not relieve the breaching party from liability for an
uncured breach of the covenant or agreement giving rise to such termination.
6.3 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS
All representations, warranties and covenants in this Agreement or the Plan
of Merger or in any instrument delivered pursuant hereto or thereto shall
expire on, and be terminated and extinguished at, the Effective Date other
than covenants that by their terms are to be performed after the Effective
Date, provided that no such representations, warranties or covenants shall be
deemed to be terminated or extinguished so as to deprive BB&T or LSB (or any
director, officer or controlling person thereof) of any defense at law or in
equity which otherwise would be available against the claims of any person,
including, without limitation, any shareholder or former shareholder of either
BB&T or LSB, the aforesaid representations, warranties and covenants being
material inducements to consummation by BB&T and LSB of the transactions
contemplated herein.
6.4 WAIVER
Except with respect to any required regulatory approval, each party hereto
by written instrument signed by an executive officer of such party, may at any
time (whether before or after approval of the Agreement and the Plan of Merger
by the shareholders of LSB) extend the time for the performance of any of the
obligations or other acts of the other party hereto and may waive (i) any
inaccuracies of the other party in the representations or warranties contained
in this Agreement, the Plan of Merger or any document delivered pursuant
hereto or thereto, (ii) compliance with any of the covenants, undertakings or
agreements of the other party, or satisfaction of any of the conditions
precedent to its obligations, contained herein or in the Plan of Merger, or
(iii) the performance by the other party of any of its obligations set out
herein or therein; provided that no such waiver or amendment or supplement
pursuant to Section 6.5 hereof executed after approval of this Agreement and
the Plan of Merger by the shareholders of LSB shall reduce either the number
of shares of BB&T Common Stock into which each share of LSB Common Stock shall
be converted in the Merger or the payment terms for fractional interests.
6.5 AMENDMENT OR SUPPLEMENT
This Agreement and the Plan of Merger may be amended or supplemented at any
time by mutual agreement of BB&T and LSB subject to the proviso to Section 6.4
hereof. Any such amendment or supplement must be in writing and approved by
their respective boards of directors.
ARTICLE VII
MISCELLANEOUS
7.1 EXPENSES
Each party hereto shall bear and pay all costs and expenses incurred by it
in connection with the transactions contemplated by this Reorganization
Agreement, including fees and expenses of its own financial consultants,
accountants and counsel, except that BB&T and LSB shall each bear and pay 50
percent for the cost of printing the Proxy Statement. Notwithstanding the
foregoing, BB&T shall reimburse LSB for all reasonable out-of-pocket expenses
incurred by LSB in connection with the transactions contemplated by this
Agreement if this Agreement is terminated; provided, however, that BB&T's
obligation to reimburse LSB for such expenses shall not apply if LSB
materially breaches any provision of this Agreement, the Plan of Merger, the
Bank Merger Agreement or the Option Agreement.
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7.2 ENTIRE AGREEMENT
This Agreement, the Plan of Merger, the Option Agreement and the Bank Merger
Agreement contain the entire agreement between the parties with respect to the
transactions contemplated hereunder and thereunder and supersedes all prior
arrangements or understandings with respect thereto, written or oral, other
than documents referred to herein or therein. The terms and conditions of this
Agreement, the Plan of Merger, the Option Agreement and the Bank Merger
Agreement shall inure to the benefit of and be binding upon the parties hereto
and thereto and their respective successors. Nothing in this Agreement, the
Plan of Merger, the Option Agreement and the Bank Merger Agreement, expressed
or implied, is intended to confer upon any party, other than the parties hereto
and thereto, and their respective successors, any rights, remedies, obligations
or liabilities other than as set forth in Sections 4.10, 4.13, 4.14 and 4.16
hereof.
7.3 NO ASSIGNMENT
Neither of the parties hereto may assign any of its rights or obligations
under this Reorganization Agreement to any other person.
7.4 NOTICES
All notices or other communications which are required or permitted hereunder
shall be in writing and sufficient if delivered personally or sent by overnight
express or by registered or certified mail, postage prepaid, addressed as
follows:
If to LSB:
L.S.B. Bancshares, Inc. of South Carolina
309 Columbia Avenue
P.O. Box 8
Lexington, South Carolina 29071
Attention: Raymond S. Caughman
With a required copy to:
Sinkler & Boyd, P.A.
Suite 1200, The Palmetto Center
1426 Main Street
Columbia, South Carolina 29201
Attention: George S. King, Jr.
If to BB&T:
BB&T Financial Corporation
223 West Nash Street
Wilson, North Carolina 27893
Attention: John A. Allison IV
With a required copy to:
Arnold & Porter
1200 New Hampshire Avenue, N.W.
Washington, D.C. 20036
Attention: L. Stevenson Parker
7.5 CAPTIONS
The captions contained in this Reorganization Agreement are for reference
purposes only and are not part of this Agreement.
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7.6 COUNTERPARTS
This Reorganization Agreement may be executed in any number of counterparts,
and each such counterpart shall be deemed to be an original instrument, but all
such counterparts together shall constitute but one agreement.
7.7 GOVERNING LAW
This Reorganization Agreement shall be governed by and construed in
accordance with the laws of the State of South Carolina applicable to
agreements made and entirely to be performed within such jurisdiction except to
the extent federal law may be applicable.
In Witness Whereof, the parties hereto, intending to be legally bound hereby,
have caused this Reorganization Agreement to be executed in counterparts by
their duly authorized officers and their corporate seal to be hereunto affixed
and attested by their officers thereunto duly authorized, all as of the day and
year first above written.
Attest BB&T Financial Corporation
By __________________________________
(Seal)
Attest L.S.B. Bancshares, Inc. of South
Carolina
By __________________________________
(Seal)
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April 26, 1994
Board of Directors
L.S.B. Bancshares, Inc. of South Carolina
309 Columbia Avenue
P.O. Box 8
Lexington, South Carolina 27893
Re: Interpretation of the Agreement and Plan of Reorganization dated as of
December 7, 1993 between L.S.B. Bancshares, Inc. of South Carolina and
BB&T Financial Corporation
Dear Sirs:
As you know, the Reorganization Agreement between our two companies
contemplates not only the merger of LSB with and into a wholly owned subsidiary
of BB&T ("Merger") pursuant to a Plan of Merger attached thereto, but also the
merger ("Bank Mergers") of The Lexington State Bank ("Lexington") and The
Community Bank of South Carolina ("Community") with and into Branch Banking and
Trust Company of South Carolina ("BB&T-SC"), with BB&T-SC as the surviving
institution.
BB&T's tax advisor, KPMG Peat Marwick, has suggested that it would be
preferable to structure the Bank Mergers so that each of BB&T-SC and Community
are merged with and into Lexington, with Lexington as the surviving
institution, with the name "Branch Banking and Trust Company of South Carolina"
and with its charter and bylaws amended to conform to those of BB&T-SC.
Accordingly, we propose to move forward by structuring the Bank Mergers in this
fashion and to consider the Reorganization Agreement amended to the extent
necessary to provide for this restructuring.
We consider this to be a change in form only and not a change of any
substantive provision of the Reorganization Agreement. Thus, provisions of the
Reorganization Agreement referring to BB&T-SC after the Bank Mergers would be
deemed to refer to Lexington, as renamed.
We would appreciate your signing this letter and returning it to us as an
indication of your assent to the matters discussed above and considering this
letter to constitute an amendment to the Reorganization Agreement in the manner
described herein.
Very truly yours,
BB&T Financial Corporation
/s/ Scott E. Reed
By: _________________________________
Scott E. Reed
Agreed to and Accepted:
L.S.B. Bancshares, Inc. of South Carolina
/s/ Raymond S. Caughman
By: _________________________________
Dated as of April 26, 1994
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APPENDIX II
PLAN OF MERGER OF L.S.B. BANCSHARES, INC.
OF SOUTH CAROLINA WITH AND INTO
BB&T FINANCIAL CORPORATION OF SOUTH CAROLINA
Plan of Merger ("Plan of Merger") dated as of December 7, 1993, by and
between L.S.B. BANCSHARES, INC. OF SOUTH CAROLINA ("LSB"), a South Carolina
corporation having its principal office at 309 Columbia Avenue, P.O. Box 8,
Lexington, South Carolina 29071 and BB&T FINANCIAL CORPORATION OF SOUTH
CAROLINA ("BB&T-SC"), a South Carolina corporation having its principal office
at 416 East North Street, Greenville, South Carolina, and joined in by BB&T
FINANCIAL CORPORATION ("BB&T"), a North Carolina corporation having its
principal office at 223 West Nash Street, Wilson, North Carolina 27893.
WITNESSETH
Whereas, LSB is a bank holding company incorporated under the laws of South
Carolina, the authorized capital stock of which consists of 5,000,000 shares of
common stock, par value $2.50 per share ("LSB Common Stock") of which, at the
date hereof, 2,688,028 shares are issued and outstanding; and
Whereas, BB&T-SC is a bank holding company incorporated under the laws of
South Carolina, the authorized capital stock of which consists of 20,000,000
shares of common stock, par value $2.50 per share, 1,427,188 of which are
issued and outstanding at the date hereof; and
Whereas, BB&T is a bank holding company incorporated under the laws of North
Carolina, the authorized capital stock of which consists of 50,000,000 shares
of common stock, par value $2.50 per share ("BB&T Common Stock"), 32,246,028 of
which are issued and outstanding at the date hereof, and 4,000,000 shares of
preferred stock, par value $2.50 per share, none of which are issued or
outstanding; and
Whereas, the respective Boards of Directors of LSB, BB&T-SC and BB&T deem the
merger of LSB with and into BB&T-SC, under and pursuant to the terms and
conditions herein set forth or referred to, desirable and in the best interests
of the respective corporations and their respective shareholders, and the
respective Boards of Directors of LSB, BB&T-SC and BB&T have adopted
resolutions approving this Plan of Merger and, in the case of BB&T and LSB, an
Agreement and Plan of Reorganization dated as of December 7, 1993
("Reorganization Agreement"); and
Whereas, the Board of Directors of LSB has directed that this Plan of Merger
and the Reorganization Agreement be submitted to its shareholders for approval;
Now, Therefore, in consideration of the premises and of the mutual agreements
herein contained, the parties hereto do hereby agree that the Plan of Merger
shall be as follows:
ARTICLE I
MERGER AND NAME OF SURVIVING CORPORATION
Subject to the terms and conditions of this Plan of Merger, on the Effective
Date (as hereinafter defined), LSB shall be merged with and into BB&T-SC
pursuant to the provisions of, and with the effect provided in, Chapter 11 of
the South Carolina Business Corporation Act ("SCBCA") (said transaction being
hereinafter referred to as the "Merger"). On the Effective Date, the separate
existence of LSB shall cease and BB&T-SC, as the surviving corporation, shall
continue unaffected and unimpaired by the Merger (BB&T-SC as existing on and
after the Effective Date being hereinafter sometimes referred to as the
"Surviving Corporation"). The name of the Surviving Corporation shall remain
"BB&T Financial Corporation of South Carolina."
II-1
ARTICLE II
ARTICLES OF INCORPORATION AND BY-LAWS
The Articles of Incorporation and the By-laws of BB&T-SC in effect
immediately prior to the Effective Date shall be the Articles of Incorporation
and the By-laws of the Surviving Corporation, in each case until amended in
accordance with applicable law.
ARTICLE III
BOARD OF DIRECTORS
On the Effective Date, the Board of Directors of the Surviving Corporation
shall consist of those persons serving as directors of BB&T-SC immediately
prior to the Effective Date.
ARTICLE IV
CAPITAL
Each share of capital stock of BB&T-SC issued and outstanding immediately
prior to the Effective Date shall, on the Effective Date, continue to be issued
and outstanding, and shall be an identical outstanding share of the Surviving
Corporation.
ARTICLE V
CONVERSION AND EXCHANGE OF LSB COMMON STOCK; FRACTIONAL SHARE INTERESTS
On the Effective Date, except as provided in paragraphs 5, 8, 9 and 11 of
this Article, each share of LSB Common Stock outstanding immediately prior to
the Effective Date shall by virtue of the Merger be converted into and
exchanged for the following number of shares of BB&T Common Stock (the
"Exchange Ratio"):
(a) in the event that the BB&T Average Closing Price is equal to or less
than $30.50 per share, that number (rounded to the nearest ten-thousandth)
equal to the Adjustment Factor divided by $30.50;
(b) in the event that the BB&T Average Closing Price is greater than
$30.50 and equal to or less than $36.00, that number (rounded to the
nearest ten-thousandth) equal to the Adjustment Factor divided by the BB&T
Average Closing Price; and
(c) in the event that the BB&T Average Closing Price is greater than
$36.00, that number (rounded to the nearest ten-thousandth) equal to the
Adjustment Factor divided by 36.00.
In the event that BB&T shall have a record date between December 7, 1993 and
the Effective Date for a special distribution to stockholders, a stock split,
stock dividend or similar change in capitalization, an equitable and
appropriate adjustment shall be made to Paragraph 1(a) and 1(c) hereof to
reflect the effect of such distribution or change.
The "BB&T Average Closing Price," as used herein, shall refer to the average
of the reported closing price of BB&T Common Stock on the Nasdaq/National
Market System on the ten trading days ("Computation Days") ending on the tenth
business day prior to the Effective Date.
The "Adjustment Factor," as used herein, shall refer to that number equal to
2.25 times the LSB Book Value Per Share.
The "LSB Book Value Per Share," as used herein, shall mean LSB's book value
per share as of the last day of the calendar month immediately preceding the
Effective Date, as determined by Donald G. Jones &
II-2
Company, P.A., less any gain attributable to such book value between September
30, 1993 and the Closing Date as a result of any extraordinary gain (including,
but not limited to, a sale of securities or other assets not in the ordinary
course of business) recognized by LSB or The Dorn Banking Company.
On the Effective Date, all shares of LSB Common Stock owned beneficially by
LSB or any subsidiary of LSB other than in a fiduciary capacity or in
connection with a debt previously contracted and all shares of LSB Common Stock
owned by BB&T or owned beneficially by any subsidiary of BB&T other than in a
fiduciary capacity or in connection with a debt previously contracted shall be
cancelled and no cash, stock or other property shall be delivered in exchange
therefor.
On and after the Effective Date, each holder of a certificate or certificates
theretofore representing outstanding shares of LSB Common Stock (any such
certificate being hereinafter referred to as a "Certificate") may surrender the
same to BB&T or its agent for cancellation and each such holder shall be
entitled upon such surrender to receive in exchange therefor certificate(s)
representing the number of whole shares of BB&T Common Stock to which such
holder is entitled as provided herein and a check in an amount equal to the
amount of cash, without interest, to which such holder is entitled for any
fraction of share under paragraph 9 of this Article. Until so surrendered, each
Certificate shall be deemed for all purposes to evidence ownership of the
number of shares of BB&T Common Stock into which the shares represented by such
Certificates have been changed or converted as aforesaid. No dividend or other
distribution payable with respect to the shares of BB&T Common Stock shall be
paid to an entitled former shareholder of LSB until such shareholder surrenders
his Certificate or Certificates representing LSB Common Stock for exchange as
provided in this paragraph 6. Certificates surrendered for exchange by any
person constituting an "affiliate" of LSB for purposes of Rule 145(c) under the
Securities Act of 1933, as amended, shall not be exchanged for certificates
representing whole shares of BB&T Common Stock until BB&T has received from
such person the written agreement contemplated by Section 4.12 of the
Reorganization Agreement.
Upon the Effective Date, the stock transfer books of LSB shall be closed and
no transfer of LSB Common Stock by such holder shall thereafter be made or
recognized.
In the event that prior to the Effective Date the outstanding shares of LSB
Common Stock shall have been increased (other than upon consummation of the
merger with The Dorn Banking Company or sales through the LSB Dividend
Reinvestment Plan), decreased, or changed into or exchanged for a different
number or kind of shares or securities by reorganization, recapitalization,
reclassification, stock dividend, stock split, or other like change in
capitalization, all without BB&T receiving consideration therefor, then an
appropriate and proportionate adjustment shall be made in the number and kind
of shares of BB&T Common Stock to be thereafter delivered pursuant to this Plan
of Merger and the Reorganization Agreement.
Notwithstanding any other provision hereof, each holder of shares of LSB
Common Stock who would otherwise have been entitled to receive a fraction of a
share of BB&T Common Stock shall receive, in lieu thereof, cash in an amount
equal to such fractional part of a share of BB&T Common Stock multiplied by the
BB&T Average Closing Price. No such holder shall be entitled to dividends,
voting rights or any other shareholder right in respect of any fractional
share. All fractional share interests of each holder shall be aggregated, and
no such holder shall receive a cash payment equal to, or greater than, the BB&T
Average Closing Price.
Promptly after the Effective Date, shares of LSB Common Stock held by holders
who did not vote in favor of the Merger and who otherwise perfect dissenters'
rights under Section 33-13-210 and 33-13-230 of the SCBCA shall not be
converted into or become shares of BB&T Common Stock, but such shares of LSB
Common Stock shall represent only the right to receive the "fair value" of such
shares as provided in Section 33-13-250 of the SCBCA. If any such holder shall
have failed to perfect or shall have effectively withdrawn or lost such
dissenters' rights, such shares of LSB Common Stock shall thereupon be deemed
to have been converted and become the applicable number of shares of BB&T
Common Stock as of the Effective Date without any interest thereon.
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Any other provision in this Plan of Merger or the Reorganization Agreement
notwithstanding, no party hereto or agent thereof shall be liable to a holder
of LSB Common Stock for any amount paid or property delivered in good faith to
a public official pursuant to any applicable abandoned property, escheat, or
similar law.
ARTICLE VI
EFFECTIVE DATE OF THE MERGER
Articles of Merger evidencing the transactions contemplated herein shall be
delivered for filing to the Secretary of State of South Carolina. The Merger
shall be effective at the time and on the date specified in such Articles of
Merger (such date and time being herein referred to as the "Effective Date").
ARTICLE VII
FURTHER ASSURANCES
If at any time the Surviving Corporation shall consider or be advised that
any further assignments, conveyances or assurances are necessary or desirable
to vest, perfect or confirm in the Surviving Corporation title to any property
or rights of LSB, or otherwise carry out the provisions hereof, the proper
officers and directors of LSB, as of the Effective Date, and thereafter the
officers of the Surviving Corporation, acting on behalf of LSB, shall execute
and deliver any and all property or assignments, conveyances and assurances,
and do all things necessary or desirable to vest, perfect or confirm title to
such property or rights in the Surviving Corporation and otherwise carry out
the provisions hereof.
ARTICLE VIII
CONDITIONS PRECEDENT
The obligations of BB&T, BB&T-SC and LSB to effect the Merger as herein
provided shall be subject to satisfaction, unless duly waived, of the
conditions set forth in the Reorganization Agreement.
ARTICLE IX
ABANDONMENT AND TERMINATION
Anything contained in this Plan of Merger to the contrary notwithstanding,
and notwithstanding adoption hereof by the shareholders of LSB, this Plan of
Merger may be terminated and the Merger abandoned as provided in the
Reorganization Agreement.
ARTICLE X
MISCELLANEOUS
1. This Plan of Merger may be amended or supplemented at any time by mutual
agreement of BB&T, BB&T-SC and LSB. Any such amendment or supplement must be in
writing and approved by their respective Boards of Directors and shall be
subject to the proviso in Section 6.5 of the Reorganization Agreement.
2. Any notice or other communication required or permitted under this Plan of
Merger shall be given, and shall be effective, in accordance with the
provisions of the Reorganization Agreement.
3. The headings of the several Articles herein are inserted for convenience
of reference only and are not intended to be a part of or to affect the meaning
or interpretation of this Plan of Merger.
4. This Plan of Merger shall be governed by and construed in accordance with
the laws of the State of South Carolina applicable to agreements made and
entirely to be performed in such jurisdiction, except to the extent federal law
may be applicable.
II-4
APPENDIX III
THE TRANSFER OF THIS AGREEMENT IS SUBJECT TO CERTAIN RESTRICTIONS CONTAINED
HEREIN AND TO RESALE RESTRICTIONS ARISING UNDER THE SECURITIES ACT OF 1933, AS
AMENDED.
OPTION AGREEMENT
This AGREEMENT dated as of December 7, 1993, between BB&T Financial
Corporation, a North Carolina corporation ("BB&T"), and L.S.B. Bancshares, Inc.
of South Carolina, a South Carolina corporation ("LSB").
WITNESSETH:
Whereas, the Boards of Directors of BB&T and LSB have approved an Agreement
and Plan of Reorganization (the "Reorganization Agreement"), dated as of
December 7, 1993 between BB&T and LSB, providing for the merger of LSB with and
into a subsidiary of BB&T (the "Merger"), which Reorganization Agreement has
been executed by the parties immediately prior to this Agreement;
Whereas, as a condition to BB&T's entry into the Reorganization Agreement and
in consideration of such entry, LSB has agreed to grant to BB&T the option set
forth herein;
Now, Therefore, in consideration of the premises herein contained, the
parties agree as follows:
Definitions. Capitalized terms defined in the Reorganization Agreement and
used herein shall have the same meanings as in the Reorganization Agreement.
Grant of Option. LSB hereby grants to BB&T an option (the "Option") to
purchase up to 771,894 shares of authorized but unissued shares of LSB Common
Stock at a price of $30.00 per share (the "Exercise Price") payable in cash as
provided in Section 4 hereof; provided, however, that such number of shares
shall be reduced if and to the extent necessary so that the number of shares
for which this Option is exercisable shall not exceed 19.9% of the issued and
outstanding LSB Common Stock, after giving effect to the exercise of the
Option. The number of shares of LSB Common Stock that may be received upon the
exercise of the Option are subject to adjustment as set forth herein.
Exercise of Option. (a) Subject to compliance with applicable law and
regulation, BB&T may exercise the Option, in whole or part, at any time or from
time to time if a Purchase Event (as defined below) shall have occurred and be
continuing.
(b) LSB shall notify BB&T promptly in writing of the occurrence of any
transaction, offer or event giving rise to a Purchase Event. If more than one
of the transactions, offers or events giving rise to a Purchase Event is
undertaken or effected by the same person or occurs at the same time, then all
such transactions, offers and events shall give rise only to one Purchase
Event, which Purchase Event shall be deemed continuing for all purposes hereof
until all such transactions are terminated or abandoned by such person and all
such events have ceased or ended.
(c) In the event BB&T wishes to exercise the Option, it shall send to LSB a
written notice (an "Exercise Notice," the date of which being herein referred
to as the "Notice Date") specifying (i) the total number of shares it will
purchase, pursuant to such exercise, and (ii) a place and date not earlier than
three business days nor later than 20 business days from the Notice Date for
the closing of such purchase with respect to such exercise (the "Option Closing
Date"); provided that if prior notification to or approval of any federal or
state regulatory agency is required in connection with such purchase, BB&T,
and/or if required by applicable law, LSB, shall promptly file the required
notice or application for approval and shall expeditiously process the same and
the period of time that otherwise would run pursuant to this sentence shall run
instead from
III-1
the date on which the last required notification period has expired or been
terminated or such approvals have been obtained and any requisite waiting
periods shall have passed.
(d) The Option shall expire and terminate, to the extent not previously
exercised, upon the earlier of:
(i) the Effective Date of the Merger;
(ii) the date on which the Reorganization Agreement is terminated, other
than a termination based upon, following or in connection with either (A) a
material breach by LSB of a Specified Covenant (as hereinafter defined) or
(B) the failure of LSB to obtain shareholder approval of the transactions
contemplated by the Reorganization Agreement by the vote required under
applicable law, in the case that either (A) or (B) follow the occurrence of
a Purchase Event; or
(iii) 18 months after the Reorganization Agreement is terminated based
upon a material breach by LSB of a Specified Covenant or the failure of LSB
to obtain shareholder approval of the transactions contemplated by the
Reorganization Agreement by the vote required under applicable law, in
either case following the occurrence of a Purchase Event.
(e) Notwithstanding the foregoing, if BB&T provides LSB with an Exercise
Notice relating to all or part of such Option, and LSB tenders performance of
its obligations hereunder on the Option Closing Date specified herein but BB&T
fails to tender performance of its obligations hereunder on such Option Closing
Date, then the Option shall expire and terminate effective at 5:00 p.m.,
Eastern time on such Option Closing Date.
(f)(i) As used herein, "Purchase Event" shall mean when:
(A) either LSB or The Lexington State Bank and/or The Community Bank of
South Carolina, LSB's wholly owned subsidiaries (the latter two entities,
the "LSB Subsidiaries" for purposes of this Option Agreement) shall have
entered into an agreement with a person (other than BB&T or its affiliates)
to: (a) acquire, merge or consolidate with, or enter into any similar
transaction with LSB or either of the LSB Subsidiaries, (b) purchase, lease
or otherwise acquire all or substantially all of the assets of LSB or
either of the LSB Subsidiaries, or (c) purchase or otherwise acquire
(including by way of merger, consolidation, share exchange or any similar
transaction) securities representing more than 10 percent of the voting
power of LSB or any of its subsidiaries; or
(B) any person who is an individual or a group consisting solely of
individuals shall have acquired beneficial ownership of more than 20
percent of the outstanding shares of LSB Common Stock; or any person (other
than BB&T or its affiliates) consisting of any person not an individual or
a group any member of which is not an individual shall have acquired
beneficial ownership of more than 10 percent of the outstanding LSB Common
Stock; or any person shall have merged, consolidated with or consummated a
similar transaction with LSB or any person shall have purchased, leased or
otherwise acquired all or substantially all of LSB's assets; or
(C) a bona fide proposal is made by any person (other than BB&T or its
affiliates) by public announcement or written communication that is or
becomes the subject of public disclosure, or in an application to any
federal or state regulatory authority, to (a) acquire, merge or consolidate
with, or enter into any similar transaction with LSB of either of the LSB
Subsidiaries, (b) purchase, lease or otherwise acquire all or substantially
all of the assets of LSB, or (c) purchase or otherwise acquire (including
by way of merger, consolidation, share exchange, tender or exchange offer
or any similar transaction) securities representing more than 25 percent of
the voting power of LSB; provided, however, that consummation of the merger
with The Dorn Banking Company and the transactions contemplated thereby
shall not constitute a "Purchase Event."
(ii) A "Specified Covenant" shall mean any of LSB's covenants or agreements
provided in the Reorganization Agreement.
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(iii) The term "person" shall have the meaning specified in Section 3(a)(9),
and "beneficial ownership" shall have the meaning specified under Section
13(d)(3), of the Exchange Act.
4. Payment and Delivery of Certificates. (a) At the closing referred to in
Section 3 hereof, BB&T shall pay to LSB the aggregate purchase price for the
shares purchased pursuant to the exercise of the Option in immediately
available funds by a wire transfer to a financial institution designated by
LSB.
(b) At any closing relating to an exercise of the Option, simultaneously with
the delivery of cash by BB&T as provided in subsection (a) with respect to the
Option, LSB shall deliver to BB&T a certificate or certificates representing
the number of shares purchased by BB&T, and BB&T shall deliver to LSB a letter
agreeing that BB&T will not offer to sell or otherwise dispose of such shares
in violation of applicable law or the provisions of this Option Agreement.
(c) Certificates for LSB Common Stock delivered at a closing hereunder may be
endorsed with a restrictive legend which shall read substantially as follows:
"The transfer of the shares represented by this certificate is subject to
certain provisions of an agreement between the registered holder hereof and
L.S.B. Bancshares, Inc. of South Carolina and to resale restrictions
arising under the Securities Act of 1933, as amended, a copy of which
agreement is on file at the principal office of L.S.B. Bancshares, Inc. of
South Carolina. A copy of such agreement will be provided to the holder
hereof without charge upon receipt by L.S.B. Bancshares, Inc. of South
Carolina of a written request."
It is understood and agreed that the above legend shall be removed by delivery
of substitute certificate(s) without such legend if BB&T shall have delivered
to LSB a copy of a letter from the staff of the Commission, or an opinion of
counsel, in form and substance reasonably satisfactory to LSB, to the effect
that such legend is not required for purposes of the Securities Act.
5. Representations. LSB hereby represents and warrants to, and covenants
with, BB&T as follows:
(a) LSB has taken all necessary corporate action to authorize and reserve
for issuance the full number of shares of LSB Common Stock issuable upon
exercise of the Option, and shall continue to reserve such shares until
this Agreement is terminated as provided herein.
(b) The shares to be issued upon due exercise, in whole or in part, of
the Option, when paid for as provided herein, will be duly authorized,
validly issued, fully paid and nonassessable.
6. Adjustment upon Changes in Capitalization. In the event of any change in
LSB Common Stock by reason of stock dividends, split-ups, mergers (except for
the merger with the Dorn Banking Company), recapitalizations, combinations,
exchanges of shares or the like, the number of shares subject to the Option and
its purchase price per share shall be adjusted appropriately so that the
economic value of the Option is unaltered. In the event that any shares of
Common Stock of LSB are issued after the date of this Agreement other than in a
transaction described in the first sentence of this Section 6 or pursuant to
the exercise of the Option, the number of shares subject to the Option shall be
adjusted so that, immediately after such issuance, the number of shares
(together with the number of shares previously issued under the Option) equals
19.9 percent (subject to reduction as provided in Section 2 hereof) of the sum
of (a) the then-outstanding shares of LSB Common Stock plus (b) the number of
shares subject to the Option after the adjustment provided in this sentence.
Nothing contained in this Section 6 shall be deemed to authorize LSB to breach
any provision of the Reorganization Agreement, the Plan of Merger or the Bank
Merger Agreement.
7. Registration Rights. LSB shall, if requested by BB&T, as expeditiously as
possible file a registration statement on a form of general use under the
Securities Act, if necessary in order to permit the sale or other disposition
of the shares of LSB Common Stock that have been acquired upon exercise of the
Option in accordance with the intended method of sale or other disposition
requested by BB&T. BB&T shall provide all information reasonably requested by
LSB for inclusion in any registration statement to be filed hereunder.
III-3
LSB will use its best efforts to cause such registration statement first to
become effective and then to remain effective for such period not in excess of
270 days from the day such registration statement first becomes effective as
may be reasonably necessary to effect such sales or other dispositions. The
first registration effected under this Section 7 shall be at LSB's expense
except for underwriting commissions and the fees and expenses of BB&T's counsel
attributable to the registration of such LSB Common Stock. A second
registration may be requested hereunder at BB&T's expense. The filing of any
registration statement hereunder may be delayed for such period of time, not to
exceed 180 days, as may reasonably be required to facilitate any public
distribution by LSB of its Common Stock. If requested by BB&T, in connection
with any such registration, LSB will become a party to any underwriting
agreement relating to the sale of such shares, but only to the extent of
obligating itself in respect of representations, warranties, indemnities and
other agreements customarily included in such underwriting agreements. In any
such registration LSB and BB&T will also agree to indemnify each other on
customary terms with respect to any information provided by such party.
8. Severability
If any term, provision, covenant or restriction contained in this Option
Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions contained in this Option
Agreement shall remain in full force and effect, and shall in no way be
affected, impaired or invalidated. If for any reason such court or regulatory
agency determines that the Option will not permit the holder to acquire the
full number of shares of LSB Common Stock provided in Section 2 hereof (as
adjusted pursuant to Section 6 hereof), it is the express intention of LSB to
allow the holder to acquire such lesser number of shares as may be permissible,
without any amendment or modification hereof.
9. Miscellaneous.
(a) Expenses. Except as otherwise provided herein, each of the parties hereto
shall bear and pay all costs and expenses incurred by it or on its behalf in
connection with the transactions contemplated hereunder, including fees and
expenses of its own financial consultants, investment bankers, accountants and
counsel.
(b) Entire Agreement. Except as otherwise expressly provided herein, this
Agreement contains the entire agreement between the parties with respect to the
transactions contemplated hereunder and supersedes all prior arrangements or
understandings with respect thereto, written or oral. The terms and conditions
of this Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective successors. Nothing in this Agreement, expressed or
implied, is intended to confer upon any party, other than the parties hereto,
and their respective successors and assigns, any rights, remedies, obligations
or liabilities under or by reason of this Agreement, except as expressly
provided herein.
(c) Assignment. Neither of the parties hereto may assign any of its rights or
obligations under this Agreement to any other person, without the express
written consent of the other party, except that BB&T may assign in whole or in
part the Option and other benefits and obligations hereunder without limitation
to any of its wholly owned subsidiaries and BB&T may assign in whole or in part
the Option and other benefits and obligations hereunder without limitation if a
Purchase Event has occurred and BB&T shall have delivered to LSB a copy of a
letter from the staff of the Commission, or an opinion of counsel, in form and
substance reasonably satisfactory to LSB, to the effect that such assignment
will not violate the requirements of the Securities Act; provided that prior to
any such assignment, BB&T shall give written notice of the proposed assignment
to LSB, and within 24 hours of receipt of such notice of a bona fide proposed
assignment, LSB may purchase the Option at a price and on other terms at least
as favorable to BB&T as that set forth in the notice of assignment.
(d) Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered personally
or sent by Federal Express, Express Mail, another service which provides
overnight delivery, telegram or telex or other facsimile transmission addressed
as follows:
III-4
If to LSB:
L.S.B. Bancshares, Inc. of South Carolina
309 Columbia Avenue
P.O. Box 8
Lexington, South Carolina 29071
Attention: Raymond S. Caughman
Facsimile: 803-359-6683
With a required copy to:
Sinkler & Boyd, P.A.
Suite 1200, The Palmetto Center
1426 Main Street
Columbia, South Carolina 29211
Attention: George S. King, Jr.
Facsimile: (803) 765-1243
If to BB&T:
BB&T Financial Corporation
223 West Nash Street
Wilson, North Carolina 27893
Attention: John A. Allison, IV
Facsimile: (919) 399-4871
With a required copy to:
Arnold & Porter
1200 New Hampshire Avenue, N.W.
Washington, D.C. 20036
Attention: L. Stevenson Parker
Facsimile: (202) 872-6720
Any notice hereunder shall be deemed delivered when received at the address
of such party set forth above (or to such other address as such party hereto
shall advise the other in writing).
(e) Counterparts.This Agreement may be executed in any number of
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
(f) Specific Performance. The parties agree that damages would be an
inadequate remedy for a breach of the provisions of this Agreement by LSB and
that this Agreement may be enforced by BB&T through injunctive or other
equitable relief.
(g) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of South Carolina without regard to
principles of conflicts of laws thereof.
III-5
In Witness Whereof, each of the parties hereto has executed this Agreement as
of the day and year first written above.
BB&T FINANCIAL CORPORATION
By: _________________________________
Title: ______________________________
L.S.B. BANCSHARES, INC.OF SOUTH
CAROLINA
By: _________________________________
Title: ______________________________
III-6
APPENDIX IV
SECTIONS 33-13-101, ET SEQ. OF THE SOUTH CAROLINA
BUSINESS CORPORATION ACT, AS AMENDED, CONCERNING DISSENTERS' RIGHTS
(S) 33-13-101. Definitions.
In this chapter:
"Corporation" means the issuer of the shares held by a dissenter before
the corporate action, or the surviving or acquiring corporation by merger
or share exchange of that issuer.
"Dissenter" means a shareholder who is entitled to dissent from corporate
action under Section 33-13-102 and who exercises that right when and in the
manner required by Sections 33-13-200 through 33-13-280.
"Fair value", with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action to which the dissenter objects,
excluding any appreciation or depreciation in anticipation of the corporate
action unless exclusion would be inequitable. The value of the shares is to
be determined by techniques that are accepted generally in the financial
community.
"Interest" means interest from the effective date of the corporate action
until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair
and equitable under all the circumstances.
"Record shareholder" means the person in whose name shares are registered
in the records of a corporation or the beneficial owner of shares to the
extent of the rights granted by a nominee certificate on file with a
corporation.
"Beneficial shareholder" means the person who is a beneficial owner of
shares held by a nominee as the record shareholder.
"Shareholder" means the record shareholder or the beneficial shareholder.
(S) 33-13-102. Right to Dissent.
A shareholder is entitled to dissent from, and obtain payment of the fair
value of, his shares in the event of any of the following corporate actions:
(1) consummation of a plan of merger to which the corporation is a party
(i) if shareholder approval is required for the merger by Section 33-11-103
or the articles of incorporation and the shareholder is entitled to vote on
the merger or (ii) if the corporation is a subsidiary that is merged with
its parent under Section 33-11-104 or 33-11-108 or if the corporation is a
parent that is merged with its subsidiary under Section 33-11-108;
(2) consummation of a plan of share exchange to which the corporation is
a party as the corporation whose shares are to be acquired, if the
shareholder is entitled to vote on the plan;
(3) consummation of a sale or exchange of all, or substantially all, of
the property of the corporation other than in the usual and regular course
of business, if the shareholder is entitled to vote on the sale or
exchange, including a sale in dissolution, but not including a sale
pursuant to court order or a sale for cash pursuant to a plan by which all
or substantially all of the net proceeds of the sale must be distributed to
the shareholders within one year after the date of sale;
(4) an amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it:
(i) alters or abolishes a preferential right of the shares;
(ii) creates, alters, or abolishes a right in respect of redemption,
including a provision respecting a sinking fund for the redemption or
repurchase, of the shares;
IV-1
(iii) alters or abolishes a preemptive right of the holder of the
shares to acquire shares or other securities;
(iv) excludes or limits the right of the shares to vote on any
matter, or to cumulate votes, other than a limitation by dilution
through issuance of shares or other securities with similar voting
rights; or
(v) reduces the number of shares owned by the shareholder to a
fraction of a share if the fractional share so created is to be
acquired for cash under Section 33-6-104; or
(5) the approval of a control share acquisition under Article 1 of
Chapter 2 of Title 35;
(6) any corporate action to the extent the articles of incorporation,
bylaws, or a resolution of the board of directors provides that voting or
nonvoting shareholders are entitled to dissent and obtain payment for their
shares.
(S) 33-13-103. Dissent by Nominees and Beneficial Owners.
(a) A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in his name only if he dissents with respect to all
shares beneficially owned by any one person and notifies the corporation in
writing of the name and address of each person on whose behalf he asserts
dissenters' rights. The rights of a partial dissenter under this subsection are
determined as if the shares to which he dissents and his other shares were
registered in the names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares held
on his behalf only if he dissents with respect to all shares of which he is the
beneficial shareholder or over which he has power to direct the vote. A
beneficial shareholder asserting dissenters' rights to shares held on his
behalf shall notify the corporation in writing of the name and address of the
record shareholder of the shares, if known to him.
(S) 33-13-200. Notice of Dissenters' Rights.
(a) If proposed corporate action creating dissenters' rights under Section
33-13-102 is submitted to a vote at a shareholders' meeting, the meeting notice
must state that shareholders are or may be entitled to assert dissenters'
rights under this chapter and be accompanied by a copy of this chapter.
(b) If corporate action creating dissenters' rights under Section 33-13-102
is taken without a vote of shareholders, the corporation shall notify in
writing all shareholders entitled to assert dissenters' rights that the action
was taken and send them the dissenters' notice described in Section 33-13-220.
(S) 33-13-210. Notice of Intent to Demand Payment.
(a) If proposed corporate action creating dissenters' rights under Section
33-13-102 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights (1) must give to the corporation before the
vote is taken written notice of his intent to demand payment for his shares if
the proposed action is effectuated and (2) must not vote his shares in favor of
the proposed action. A vote in favor of the proposed action cast by the holder
of a proxy solicited by the corporation shall not disqualify a shareholder from
demanding payment for his shares under this chapter.
(b) A shareholder who does not satisfy the requirements of subsection (a) is
not entitled to payment for his shares under this chapter.
IV-2
(S) 33-13-220. Dissenters' Notice.
(a) If proposed corporate action creating dissenters' rights under Section
33-13-102 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenter's notice to all shareholders who satisfied the
requirements of Section 33-13-210(a).
(b) The dissenters' notice must be delivered no later than ten days after the
corporate action was taken and must:
(1) state where the payment demand must be sent and where certificates
for certificated shares must be deposited;
(2) inform holders of uncertificated shares to what extent transfer of
the shares is to be restricted after the payment demand is perceived;
(3) supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the
proposed corporate action and requires that the person asserting
dissenters' rights certify whether or not he or, if he is a nominee
asserting dissenters' rights on behalf of a beneficial shareholder, the
beneficial shareholder acquired beneficial ownership of the shares before
that date;
(4) set a date by which the corporation must receive the payment demand,
which may not be fewer than thirty nor more than sixty days after the date
the subsection (a) notice is delivered and set a date by which certificates
for certificated shares must be deposited, which may not be earlier than
twenty days after the demand date; and
(5) be accompanied by a copy of this chapter.
(S) 33-13-230. Shareholders' Payment Demand.
(a) A shareholder sent a dissenters' notice described in Section 33-13-220
must demand payment, certify whether he (or the beneficial shareholder on whose
behalf he is asserting dissenters rights) acquired beneficial ownership of the
shares before the date set forth in the dissenters' notice pursuant to Section
33-13-220(b)(3), and deposit his certificates in accordance with the terms of
the notice.
(b) The shareholder who demands payment and deposits his share certificates
under subsection (a) retains all other rights of a shareholder until these
rights are canceled or modified by the taking of the proposed corporate action.
(c) A shareholder who does not comply substantially with the requirements
that he demand payment and deposit his share certificates where required, each
by the date set in the dissenters' notice, is not entitled to payment for his
shares under this chapter.
(S) 33-13-240. Share Restrictions.
(a) The corporation may restrict the transfer of uncertificated shares from
the date the demand for payment for them is received until the proposed
corporate action is taken or the restrictions are released under Section 33-13-
260.
(b) The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder until these rights are
canceled or modified by the taking of the proposed corporate action.
IV-3
(S) 33-13-250. Payment.
(a) Except as provided in Section 33-13-270, as soon as the proposed
corporate action is taken, or upon receipt of a payment demand, the corporation
shall pay each dissenter who substantially complied with Section 33-13-230 the
amount the corporation estimates to be the fair value of his shares, plus
accrued interest.
(b) The payment must be accompanied by:
(1) the corporation's balance sheet as of the end of a fiscal year ending
not more than sixteen months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for
that year, and the latest available interim financial statements, if any;
(2) a statement of the corporation's estimate of the fair value of the
shares and an explanation of how the fair value was calculated;
(3) an explanation of how the interest was calculated;
(4) a statement of the dissenter's right to demand additional payment
under Section 33-13-280; and
(5) a copy of this chapter.
(S) 33-13-260. Failure to Take Action.
(a) If the corporation does not take the proposed action within sixty days
after the date set for demanding payment and depositing share certificates, the
corporation, within the same sixty-day period, shall return the deposited
certificates and release the transfer restrictions imposed on uncertificated
shares.
(b) If, after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under Section 33-13-220 and repeat the payment demand
procedure.
(S) 33-13-270. After-Acquired Shares.
(a) A corporation may elect to withhold payment required by section 33-13-250
from a dissenter as to any shares of which he (or the beneficial owner on whose
behalf he is asserting dissenters' rights) was not the beneficial owner on the
date set forth in the dissenters' notice as the date of the first announcement
to news media or to shareholders of the terms of the proposed corporate action,
unless the beneficial ownership of the shares devolved upon him by operation of
law from a person who was the beneficial owner on the date of the first
announcement.
(b) To the extent the corporation elects to withhold payment under subsection
(a), after taking the proposed corporate action, it shall estimate the fair
value of the shares, plus accrued interest, and shall pay this amount to each
dissenter who agrees to accept it in full satisfaction of his demand. The
corporation shall send with its offer a statement of its estimate of the fair
value of the shares, an explanation of how the fair value and interest were
calculated, and a statement of the dissenter's right to demand additional
payment under Section 33-13-280.
(S) 33-13-280. Procedure if Shareholder Dissatisfied with Payment or Offer.
(a) A dissenter may notify the corporation in writing of his own estimate of
the fair value of his shares and amount of interest due and demand payment of
his estimate (less any payment under Section 33-13-250) or reject the
corporation's offer under Section 33-13-270 and demand payment of the fair
value of his shares and interest due, if the:
IV-4
(1) dissenter believes that the amount paid under Section 33-13-250 or
offered under Section 33-13-270 is less than the fair value of his shares
or that the interest due is calculated incorrectly;
(2) corporation fails to make payment under Section 33-13-250 or to offer
payment under Section 33-13-270 within sixty days after the date set for
demanding payment; or
(3) corporation, having failed to take the proposed action, does not
return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within sixty days after the date set for
demanding payment.
(b) A dissenter waives his right to demand additional payment under this
section unless he notifies the corporation of his demand in writing under
subsection (a) within thirty days after the corporation made or offered payment
for his shares.
(S) 33-13-300. Court Action.
(a) If a demand for additional payment under Section 33-13-280 remains
unsettled, the corporation shall commence a proceeding within sixty days after
receiving the demand for additional payment and petition the court to determine
the fair value of the shares and accrued interest. If the corporation does not
commence the proceeding within the sixty-day period, it shall pay each
dissenter whose demand remains unsettled the amount demanded.
(b) The corporation shall commence the proceeding in the circuit court of the
county where the corporation's principal office (or, if none in this State, its
registered office) is located. If the corporation is a foreign corporation
without a registered office in this State, it shall commence the proceeding in
the county in this State where the principal office (or, if none in this State,
the registered office) of the domestic corporation merged with or whose shares
were acquired by the foreign corporation was located.
(c) The corporation shall make all dissenters (whether or not residents of
this State) whose demands remain unsettled parties to the proceeding as in an
action against their shares and all parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication, as provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced under
subsection (b) is plenary and exclusive. The court may appoint persons as
appraisers to receive evidence and recommend decisions on the question of fair
value. The appraisers have the powers described in the order appointing them or
in any amendment to it. The dissenters are entitled to the same discovery
rights as parties in other civil proceedings.
(e) Each dissenter made a party to the proceeding is entitled to judgment for
the amount, if any, by which the court finds the fair value of his shares, plus
interest, exceeds the amount paid by the corporation.
(S) 33-13-310. Court Costs and Counsel Fees.
(a) The court in an appraisal proceeding commenced under Section 33-13-300
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court shall
assess the costs against the corporation, except that the court may assess
costs against all or some of the dissenters, in amounts the court finds
equitable, to the extent the court finds the dissenters acted arbitrarily,
vexatiously, or not in good faith in demanding payment under Section 33-13-280.
(b) The court also may assess the fees and expenses of counsel and experts
for the respective parties, in amounts the courts finds equitable:
(1) against the corporation and in favor of any or all dissenters if the
court finds the corporation did not comply substantially with the
requirements of Section 33-13-200 through 33-13-280; or
IV-5
(2) against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses
are assessed acted arbitrarily, vexatiously, or not in good faith and with
respect to the rights provided by this chapter.
(c) If the court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court
may award to these counsel reasonable fees to be paid out of the amounts
awarded the dissenters who were benefited.
(d) In a proceeding commenced by dissenters to enforce the liability under
Section 33-13-300(a) of a corporation that has failed to commence an appraisal
proceeding within the sixty-day period, the court shall assess the costs of the
proceeding and the fees and expenses of dissenters' counsel against the
corporation and in favor of the dissenters.
IV-6
APPENDIX V
The Carson Medlin Company
- --------------------------------------------------------------------------------
Investment Bankers
April 22, 1994
The Board of Directors
L.S.B. Bancshares, Inc. of South Carolina
309 Columbia Avenue
Lexington, SC 29071
Gentlemen:
You have requested our opinion as to the fairness, from a
financial point of view, of the Exchange Ratio (as defined below)
to the shareholders of L.S.B. Bancshares, Inc. of South Carolina
("L.S.B." or the "Company") under the terms of the Agreement and
Plan of Reorganization dated as of December 7, 1993 (the
"Reorganization Agreement"), by and between the Company and BB&T
Financial Corporation, a North Carolina corporation ("BB&T"), a
related Plan of Merger dated as of December 7, 1993 (the "Plan of
Merger") between the Company and BB&T Financial Corporation of
South Carolina, and the Option Agreement dated December 7, 1993
(the "Option Agreement") between the Company and BB&T (the
Reorganization Agreement, the Plan of Merger and the Option
Agreement being referred to collectively herein as the
"Agreements") pursuant to which the Company will be merged with
and into BB&T's wholly-owned subsidiary, BB&T Financial
Corporation of South Carolina (the "Merger") and each share of
common stock, par value $2.50 per share, of the Company (the
"Common Stock") issued and outstanding immediately prior to the
Effective Time (as defined in the Agreements) shall be converted
into the right to receive that number of shares of BB&T common
stock (the "Exchange Ratio") to be calculated as (i) the product
of 2.25 and L.S.B.'s book value per share immediately prior to the
Effective Time; divided by (ii) the average reported closing price
of BB&T common stock on the ten trading days ending on the tenth
business day prior to the Effective Time (the "BB&T Market
Price"); subject to certain adjustments should the BB&T Market
Price be less than $30.50 or greater than $36.00 per share. The
foregoing summary of the Merger is qualified in its entirety by
reference to the Agreements.
The Carson Medlin Company is a National Association of Securities
Dealers, Inc. (NASD) member investment banking firm which
specializes in the securities of southeastern United States
financial institutions. As part of our investment banking
activities, we are continually engaged in the valuation of
southeastern United States financial institutions and transactions
relating to their securities. We regularly publish our research on
independent community banks regarding their financial and stock
price performance. We are familiar with the commercial banking
industry in South Carolina and the major commercial banks
operating in that market. We have been retained by the Company in
a financial advisory capacity to render our opinion hereunder, for
which we will receive compensation.
In connection with rendering our opinion, we have analyzed the
respective financial positions, both current and historical, of
the Company and BB&T. We have reviewed (i) the Agreements; (ii)
drafts of the Proxy Statement/Prospectus of the Company and BB&T
to be used in connection with the Merger; (iii) the Annual Reports
to shareholders, including the audited financial statements, and
the Annual Reports on Form 10-K of L.S.B. and BB&T for the five
years ended December 31, 1993; and (iv) certain additional
financial and operating information with respect to the business,
operations and prospects of L.S.B. and BB&T as we deemed
appropriate.
V-1
We also (a) held discussions with members of the senior
managements of L.S.B. and BB&T regarding the historical and
current business operations, financial condition and future
prospects of their respective companies; (b) reviewed the
historical market prices and trading activity for the common
stocks of L.S.B. and BB&T and compared them with those of certain
publicly traded companies which we deemed to be relevant; (c)
compared the results of operations of L.S.B. and BB&T with those
of certain banking companies which we deemed to be relevant; (d)
analyzed the pro forma financial impact of the Merger on BB&T; (e)
compared the proposed financial terms of the Merger with the
financial terms, to the extent publicly available, of certain
other recent business combinations of commercial banking
organizations; and (f) conducted such other studies, analyses,
inquiries and examinations as we deemed appropriate.
We have relied upon and assumed without independent verification
the accuracy and completeness of all information provided to us.
We have not performed or considered any independent appraisal or
evaluation of the assets of the Company or BB&T. The opinion we
express herein is necessarily based upon market, economic and
other relevant considerations as they exist and can be evaluated
as of the date of this letter.
Based upon the foregoing, it is our opinion that the Exchange
Ratio provided for in the Agreements is fair, from a financial
point of view, to the shareholders of L.S.B. Bancshares, Inc. of
South Carolina.
Very truly yours,
The Carson Medlin Company
V-2
APPENDIX VI
INFORMATION ABOUT BB&T FINANCIAL
CORPORATION OF SOUTH CAROLINA
The South Carolina Business Corporation Act ("SCBCA") requires that the
notice of the stockholders' meeting at which approval of a merger will be
considered must be accompanied by certain balance sheets and income statements
of each corporation participating in the proposed merger. The corporations
participating in this proposed merger are BB&T Financial Corporation ("BB&T
Financial"), L.S.B. Bancshares, Inc. of South Carolina ("LSB") and BB&T
Financial Corporation of South Carolina ("BB&T Financial-SC"). The financial
statements of BB&T Financial are contained in pages 24-44 of BB&T Financial's
Annual Report on Form 10-K for the fiscal year ended December 31, 1993, which
is incorporated by reference into this Proxy Statement/Prospectus and a copy of
which is enclosed with the Proxy Statement/Prospectus, and the financial
statements of LSB are included in this Proxy Statement/Prospectus under the
heading "CONSOLIDATED FINANCIAL STATEMENTS OF LSB." The purpose of this
Appendix VI is to furnish the required balance sheets and income statements for
BB&T Financial-SC. The required balance sheets and income statements for BB&T
Financial and LSB are included in the financial statements of BB&T Financial
and LSB which accompany and are incorporated by reference in the Proxy
Statement/Prospectus. The following balance sheets and income statements of
BB&T Financial-SC are unaudited and should be read in conjunction with the
audited financial statements of BB&T Financial.
VI-1
CONSOLIDATED BALANCE SHEETS
UNAUDITED
BB&T FINANCIAL CORPORATION OF SOUTH CAROLINA AND SUBSIDIARY
DECEMBER 31,
-----------------
1993 1992
-------- --------
($ IN THOUSANDS,
EXCEPT PER SHARE)
ASSETS
Cash and due from banks, noninterest-bearing................. $ 16,912 $ 20,310
Federal funds sold........................................... 11,825 0
Investment securities (market value of $86,390 in 1993, and
$83,235 in 1992)............................................ 83,769 80,662
Loans........................................................ 368,796 348,378
Less allowance for loan losses............................... 5,790 5,500
-------- --------
Net loans................................................ 363,006 342,878
Bank premises and equipment.................................. 8,040 5,663
Accrued interest receivable.................................. 3,532 3,561
Other assets................................................. 1,821 1,794
-------- --------
Total assets............................................. $488,905 $454,868
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing........................................ $ 72,263 $ 62,181
Interest-bearing........................................... 365,045 334,243
-------- --------
Total deposits........................................... 437,308 396,424
Short-term borrowed funds.................................... 4,065 17,123
Long-term debt............................................... 0 0
Other liabilities............................................ 3,556 3,081
-------- --------
Total liabilities........................................ 444,929 416,628
-------- --------
Shareholders' equity:
Common stock $2.50 par value, 5,000,000 shares authorized;
shares issued of 1,427,188 in 1993 and 1992................. 3,568 3,568
Paid-in capital.............................................. 13,482 13,482
Retained earnings............................................ 26,926 21,190
-------- --------
Total shareholders' equity............................... 43,976 38,240
-------- --------
Total liabilities and shareholders' equity............... $488,905 $454,868
======== ========
VI-2
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
BB&T FINANCIAL CORPORATION OF SOUTH CAROLINA AND SUBSIDIARY
YEAR ENDED DECEMBER 31,
-----------------------------------
1993 1992 1991
----------- ----------- -----------
($ IN THOUSANDS, EXCEPT PER SHARE)
INTEREST INCOME
Interest on loans......................... $ 29,034 $27,897 $30,074
Interest and dividends on investment
securities:
Taxable................................. 3,030 3,723 4,630
Tax exempt.............................. 1,771 1,737 1,955
Interest on short-term investments........ 568 273 257
----------- ----------- -----------
Total interest income................. 34,403 33,630 36,916
----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits...................... 12,011 14,048 18,845
Interest on short-term borrowed funds..... 153 315 1,022
Interest on long-term debt................ 0 0 0
----------- ----------- -----------
Total interest expense................ 12,164 14,363 19,867
----------- ----------- -----------
NET INTEREST INCOME....................... 22,239 19,267 17,049
PROVISION FOR LOAN LOSSES................. 1,272 2,760 2,511
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES.............................. 20,967 16,507 14,538
----------- ----------- -----------
NONINTEREST INCOME
Service charges on deposit accounts....... 2,583 2,157 1,904
Other service charges, commissions and
fees..................................... 3,444 2,527 1,242
Gains (losses) on sales of securities..... 0 73 (148)
Trust income.............................. 407 231 109
Other operating income.................... 700 594 613
----------- ----------- -----------
Total noninterest income.............. 7,134 5,582 3,720
----------- ----------- -----------
NONINTEREST EXPENSE
Salaries and wages........................ 4,886 4,124 3,688
Other personnel expense................... 1,113 973 812
Net occupancy expense..................... 1,532 1,303 941
Furniture and equipment expense........... 1,022 746 606
Other operating expense................... 7,618 6,816 5,978
----------- ----------- -----------
Total noninterest expense............. 16,171 13,962 12,025
----------- ----------- -----------
INCOME BEFORE INCOME TAXES................ 11,930 8,127 6,233
Income taxes.............................. 3,821 2,422 1,678
----------- ----------- -----------
NET INCOME................................ $ 8,109 $ 5,705 $ 4,555
=========== =========== ===========
VI-3
L.S.B. BANCSHARES, INC. OF SOUTH CAROLINA
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Robert K. Bouknight and David S. Hipp, or
either of them, the attorney or attorneys and proxy or proxies of the
undersigned, with full power of substitution, to attend the Special Meeting of
Shareholders of L.S.B. Bancshares, Inc. of South Carolina ("LSB") to be held
June 14, 1994, at 4:00 p.m., in the Operations Center Meeting Room of The
Lexington State Bank, 113 Reed Avenue, Lexington, South Carolina, and at any
adjournment thereof, and to vote all shares of stock of LSB that the
undersigned shall be entitled to vote at such meeting. Said proxies are
instructed to vote on the matter set forth in the proxy statement as specified
below.
1. To approve an Agreement and Plan of Reorganization, dated December 7,
1993, as amended, providing for the merger of L.S.B. Bancshares, Inc. of
South Carolina ("LSB") with and into BB&T Financial Corporation of South
Carolina, a wholly-owned subsidiary of BB&T Financial Corporation
("BB&T"), and, in connection therewith, the conversion of each
outstanding share of common stock of LSB into the right to receive the
number of shares of common stock of BB&T determined in accordance with
the Exchange Ratio described in the Proxy Statement/Prospectus of LSB and
BB&T, dated May 13, 1994.
FOR [_] AGAINST [_] ABSTAIN [_]
(HAS SAME EFFECT AS AGAINST)
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
THIS PROXY WHEN PROPERLY SIGNED AND DATED WILL BE VOTED IN THE MANNER
DIRECTED HEREIN. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL
NUMBER 1 AS SPECIFIED ABOVE.
Dated: ______________, 1994
___________________________(L.S.)
___________________________(L.S.)
PLEASE SIGN EXACTLY AS NAME
APPEARS ON STOCK CERTIFICATE.
WHEN SIGNING AS ATTORNEY,
EXECUTOR, ADMINISTRATOR, TRUSTEE
OR GUARANTOR, PLEASE GIVE FULL
TITLE. IF MORE THAN ONE TRUSTEE,
ALL SHOULD SIGN. THIS PROXY MAY
BE REVOKED ANY TIME PRIOR TO ITS
EXERCISE.
RULE 424(b)(3)
REGISTRATION NO. 33-53407
May 11, 1994
Dear L.S.B. Bancshares, Inc. of South Carolina Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of
L.S.B. Bancshares, Inc. of South Carolina ("LSB") which will be held on
Tuesday, June 14, 1994 at 4:00 p.m. at the Operations Center Meeting Room of
The Lexington State Bank, 113 Reed Avenue, Lexington, South Carolina. At this
meeting you will be asked to consider and vote upon a proposal to approve a
merger agreement pursuant to which LSB will be acquired by BB&T Financial
Corporation ("BB&T Financial") and your shares of LSB Common Stock will be
converted in a tax free exchange into shares of BB&T Financial Common Stock.
Specific information regarding the Special Meeting and the proposed merger is
enclosed in the enclosed Notice of Special Meeting and Proxy Statement/
Prospectus. Please read these materials carefully.
Your Board of Directors has determined that the proposed merger is in the
best interest of LSB and its shareholders and unanimously recommends that you
vote FOR approval of the merger agreement.
It is very important that your shares be represented at this Special
Meeting, whether or not you plan to attend in person. The affirmative vote of
two-thirds of all of the outstanding shares of LSB Common Stock is required to
approve the merger agreement. Thus, not voting will have the same effect as a
vote against the merger agreement. Therefore, I urge you to sign, date and
return the enclosed Proxy in the enclosed postage-paid envelope as soon as
possible to be sure that your shares will be voted at the Special Meeting.
On behalf of the Board of Directors, I thank you for your support and
urge you to vote FOR approval of the merger agreement.
Sincerely,
Raymond S. Caughman
President and Chief Executive Officer